Capsule: Wired distribution needs a new revenue stream, as well as a consumer-friendly mechanism for resolving network capacity issues. Ditto for wireless, as AT&T and Verizon achieve near saturation on customer growth and a new Deutsche Telekom Sprint alliance threatens to stop handing post-paid customers over without a fight. Both wired and wireless distribution need to anticipate content companies going directly to their customers, as well as the market entry of superior navigators Google and Apple. What's big distribution to do?
Advertising Age
Newser.com
TV Everywhere, the cable distribution effort to make broadcast and cable programming online free with a cable TV and broadband subscription, is planning a 2010 launch. It should be a value-creator for wired cable distribution, as well as for satellite and telco TV companies whose participation has been suggested.
What TV Everywhere will do for distribution is enable PC screens to become additional TV sets for customers who have both TV and broadband subscriptions. It will also encourage both TV and broadband subscription sales. And, it will give the distribution universe some say in how TV content is presented online. Given distribution's network capacity concerns, having a hand in the structure-setting mix for how TV shows up on a TV Everywhere screen will be important.
What TV Everywhere will do for content companies is provide measurable viewership information integrated with online TV viewing. A serious concern has emerged regarding set-top box viewership data on DVR's. Current data extraction methods don't provide for DVR's and their dual tuning capacity, meaning that the most TV-centric households using DVR's are not included in set-top box viewing samples. As TV Everywhere moves content online, the hope is that it will be rated through a universal standard like Nielson or an equivalent alternative.
Moving content ratings competitions from the living room TV to the bedroom PC screen will likely change the world. By de-emphasizing the common cultural TV viewing experience built on the linear progression of network programming, a new two-screen viewing system that collects ratings based mostly on the PC screen will require content to become PC friendly.
The most significant example of what seems like PC friendly content today is the VOD-like episodic sampling navigation offered by every network website, by Google's YouTube and by Hulu and other aggregators. Tying small slices of this content revenue machine into a meaningful financial system with room for growth will be a real challenge. The music business sliced its content down to singles for increased customer satisfaction but has failed to create a revenue-generating infrastructure with expansion capabilities outside of Apple's iTunes, whose ingenious revenue build is directed towards the sale of Apple's devices, including its iPhone.
Distribution has not carved out a clear role for itself and its money-making needs in its Apple partnership. AT&T has a few years of US iPhone exclusivity, which included a mildly glitchy launch period; but that will end as the iPhone smartly pursues its revenue expansion by opening up to more wireless carriers, from Verizon to a potential future combination of T-Mobile and Sprint. The wireless bedrock of revenue development--expensive calling plans tied into long-term contracts, with a la carte texting and data plans on top--doesn't easily accommodate charging for music outside ringtones or TV content. It should.
The likelihood that both Google and Apple are about to do battle over content navigation and, ultimately, content sales is great. Google just introduced a greatly enhanced music search engine that invites sampling. What is sampling for, if not to sell? Complex partnerships with potential advertisers will contribute some revenue growth, but we're growing past the idea that the advertising ocean is big enough to be endlessly fished without consequences. Google and Apple are creating virtual and real marketplaces where products, services and content will be sold without a plan for media distribution beyond themselves.
At the same time, Disney's Bob Iger is exhorting his company to develop enabling architecture for moving content from Disney's Keychest servers to multiple viewing platforms, including smartphones and game consoles like Microsoft's Xbox. No one is talking publicly about what share wired and wireless distribution will have in this digital mix, although it's clear that content companies are finally on the move. TV Everywhere will help, but it won't guarantee dominance over alternative content viewing, selling and sharing unless its participants break down some business and technology walls to favor the consumer.
Cable distribution has already passed through an important wall in its development of advertising and commerce applications. A cable system knows who its customers are. It has the best possible information on subscribers' home addresses, as well as on their broadband and digital TV modems' IP addresses. Cable also knows the score on its customers' ability to pay for services since it bills directly with infrequent credit card accommodation and tight accounts receivable and collections procedures.
As a handful of interesting and potentially revenue bearing interactive TV and advertising applications are being brought to market, cable distribution should grab the remote and the mouse in the house by introducing a simple product that will improve TV viewers' choosing, viewing and buying experiences. The significant legions of TV tune-in spots run across the very old commercial insertion status quo should be moved to a short-form VOD serving infrastructure. This way, TV promos produced by the content networks to enhance ratings and subsquently left for dead inside an old-fashioned one-way distribution system can be brought to life.
Enter a new world where :30 promos are "samples" of longer-form paid and free-advertising-sponsored-content that can be ordered and stored while you watch. Using the passive TV viewing system where viewers are charmed and relaxed to activate the two-way world where content can be used online for watching, learning, shopping and buying seems like the right combination.
If every TV promo spot had a tag that enabled the interactive experience of storing the show promoted on the TV Everywhere system for later online or TV VOD viewing, cable customers could exercise their substantial immediate gratification impulses, now sitting stunted from retail shopping budget cuts. Think of the bonus in-store for PBS: the next time you see an enticing ad for Frontline, you'll be able to click on an icon and store it online and on TV. We'd all like to be high-minded, if properly enabled.
And for viewers who are already firmly in the two-screen camp, clickable on demand online sampling, viewing and sharing will be magic. When you see a promo for something you like, you'll be able to click on the promo with your remote and start watching it with a mouse-click online while you're still watching regular TV. Because regular TV will be better-than-regular, you'll be able to program your week's viewing while watching The World Series or Sunday Football.
As important, you'll be able to click on TV and online advertising to sample, to get more information and to make a purchase. TV Everywhere should make a clear and aggressive claim on both the tagging of TV and online promos for the best of their content, and the tagging of advertising for the best future opportunities for TV-linked commerce. Big distribution has a chance to take a piece of commercial sales for its platform's contribution in bringing the TV programming to the buyer that makes the commercial more attractive. If they can find it in their imaginations, distribution might also strike small slices of credit relationships with financial institutions that can provide an e-and-t-credit platform like PayPal, making purchasing from TV ads easy without credit card numbers and security codes.
Content companies, starting with QVC and HSN, should be all over this execution, as superior to their current interactive presence. Home shopping was huge in its original cable implementation. If home shopping networks shift course to become network background services with short tagged TV and online segments in the foreground, a shopping renaissance could ensue. Shopping networks have few better alternatives than a new viewing and buying system that enables their claim to some of the revenue that is being pulled into online systems led by online distributors like Google and Apple, as well as online commerce aggregators like Amazon and eBay.
But the best part of a new clickable TV promotions and advertising capability will be better TV navigation. Some of the latest examples of navigation progress include mosaic screens offering multiple picture-in-a-picture experiences separated by genre. A news mosaic in an octa-box gives the viewer eight live screens of eight news networks simultaneously. The big simple win on the elegant mosaic is a somewhat enhanced ability to see what's on and help changing channels. There's more out there inside the wired distribution toolbox that can bring new life to the TV experience.
Wireless distribution can take a piece of the new clickable storable sampling, viewing and buying future. By engaging wired distribution partners and enabling their applications on wireless phones, Verizon and AT&T can work with their own Fios and U-verse TV product as well as Comcast and Time Warner to enable remote viewing of saved content online. If Verizon and AT&T don't move in this direction, they risk handing over their future capabilities to the iPhone and the Android. That progression has already begun.
TV and advertising navigation won't be complete without some distribution combination of wired and wireless systems. Moving content between the TV screen and the PC in the home will be great, but carrying it or a facsimile on your mobile devices will be greater still. Print brands who already have libraries of video content that helps tell their stories will have a substantial place and revenue opportunity in a world where short form videos--the art-form formerly known as "commercials"--are the key to every kind of online and mobile content, including newspapers and magazines.
An inter-locking secure system for moving content online, on TV and on mobile devices will be a guaranteed draw for the content community. It will likely be better than the current online viewing choices, where every ad shares some revenue generating potential with Google. Short of doing it themselves, big distribution will see alternative providers develop similar systems and credit facilities that are less expansive and potentially more expensive. That could be bad news for the consumer and the media, tossing TV in all of its potential interactivity to an online world currently defined by flat display advertising, flattening search values and YouTube.
Friday, October 30, 2009
Wednesday, October 28, 2009
Easy Money
Capsule: What new media products, pricing and packaging will initiate the next wave of sustainable growth and profits? In preparation for the next big thing, big distribution should go hunting for quarters in the sofa cushions by carefully reviewing their current pricing execution. At the same time, the media can strengthen its core customer relationships by packaging up alternative content, including new home and business services, looking for relationship-based marketing and advertising opportunities.
The Financial Times
Where's the next vein of easy money in the media goldmine? It's possible, but unlikely, that nothing will ever be easy again. Rather than admitting defeat, content and distribution should commit their minds to developing the next big thing in the unsexy world of pricing and packaging.
To start, it's worth a look at the current structure of TV subscription pricing and promotions. Today's cable, satellite and telco TV pricing accommodates three players in a market where it must and two--cable and satellite--where it can. With this small competitive field, as long as all two-to-three players are pricing comparably, the consumer surpluses--measured as the difference between a discounted package rate and its mature price after a timed promotional discount expires--are comparable. Said differently: consumers feel that all subscription TV services are over-priced, except for those delicious introductory discounts for new subscribers. Predictably, new discount-heavy entrants always look better than the old hat.
A consumer surplus is the difference between the price a customer is willing to pay for goods or services and the price that they actually do pay. A producer surplus in pricing parlance is the increased revenue available by shrinking the discounts and bringing the price paid for a service up to or just over the peak of consumer willingness.
Take as an example the mature or rate card $115 monthly price for a cable, satellite or telco TV package including: a digital version of expanded basic service (100+ channels, with the most highly rated ad-supported networks) and one network, like HBO or Showtime, as well as the standard high-speed data service. The introductory offer price for this service for new customer installations might be $75 per month for the first year of service.
Let's assume that the mature rate card $115 price captures the fullness of what consumers are willing to pay for this package once they've formed a habit. Let's also assume that newly installed or upgrading customers paying the reduced $75 monthly price need a discount to buy, as an inducement to choose one service provider over another or to upgrade their services and deliver more profit to the incumbent.
Newly installed or discounted customers in this pricing scenario are enjoying a consumer surplus of $40 per month or $480 for their first year. The service provider has a strong incentive to increase its producer surplus by bringing the $40 consumer surplus group up to either the full rate card price of $115 ($0 consumer surplus) or up to an intermediate price point between $75 and $115, deflecting churn risk and reflecting what these originally discounted customers as a behavioral segment are truly willing to pay.
The service provider is not using uniform pricing in making these distinctions. Although rate cards will carry the $115 published price and promotional marketing to new and upgrade prospects will carry the $75 discounted price, a growing number of customers past their first year of service will be paying something between these two price points. This reflects the service provider's pricing sophistication, aimed at maximizing profit by tailoring package prices to the price sensitivity of individual segments. Said differently, the service provider knows that uniform pricing will preclude access to certain market segments who are unwilling to pay the mature price because of economic or competitive reasons but are willing to pay a lower price with a larger consumer surplus if they can get one.
If the newly installed discounted group is only willing to pay $100 for the digital TV and broadband package after their first subscription year, the service provider might bring them confidently up to the $100 level through a $25 rate increase after Year One and subsequently lift their price point to the $115+ full-price level. New price points above $115 will be inevitable over time as rate increases are taken on the mature base that keep the mature price moving up. This upward price momentum occurs according to the service provider's need to maximize profit and often reflects a substantial margin surplus over the service provider's revenue-related and operating cost increases each year.
A major pricing challenge in this common scenario is the delta between $115+, as it rises over time, and the heavily promoted $75 offer price, which most service providers are unwilling to raise for fear of missing out on customer growth and upgrades. On the pricing theory that there is a maximum effective price that each customer segment is willing to pay, this cable-satellite-telco-TV pricing approach introduces an increasing number of price points between $75 and $115+ over time assuming that growth and profits have been maximized by hitting the exact maximum price point for each group with discipline.
Price discount offers like the $75 used in this example come into the market with a new product introduction or to overcome a new competitor. The service provider introduces a new product, the benefits and efficiencies of which can only be realized if the new product penetration is maximized. The new product is bundled with a popular traditional product, heavily discounted and heavily marketed. For cable distributors, the arrival of broadband a decade ago and voice, on a scaled basis, five years ago marked the death of uniform pricing. Double-play and triple-play bundles launched a pricing sophistication for cable that drove profitable customer growth and competitive pre-emption for many years.
Today, though, there are more than a few quarters in the sofa cushions of cable pricing--as well as satellite and telco pricing--that can be picked up by applying a simple and regular discipline to surplus measurement over time. If the cable operator in our pricing example above was dealing with a simple, time-frozen delta of $40 between the full $115 digital TV and broadband package and a $75 discounted offer price, a comparison of the actual package ARPU (or monthly average revenue per package unit) and the mature full price will be revealing.
If the package ARPU being realized in this example is $105, the subscription mix between full price customers paying $115 and discount customers paying $75 is 75% at $115 and 25% at $75. By looking at overall churn versus Year One churn over an average period, a service provider can comfortably set subscription price-ratio targets for full-price versus discounted prices that will maximize growth and profit. If the package ARPU is less than $105, the service provider is not maximizing growth and profit because too many customers are likely paying an introductory price. This happens, particularly in decentralized operating environments, because of an unwillingness to risk churn increases through consistent rate increase execution.
Another potential cause for a large mature price versus real ARPU delta is a flawed pricing plan that has lifted the most loyal, longest-tenured customers up to extreme price points (e.g., well over $115 over time,) while continuing to use the low $75 discounted price for everyone new. As the distance between mature price and offer price grows, individual customer segments will break out of their pricing plans, registering dissatisfaction by disconnecting or downgrading service. Often, this type of churn goes un-noticed on a package-by-package basis until the elasticity problems are fairly advanced.
A simple model that compares real ARPU by package to the desired business mix of discounted versus mature pricing will reveal the state of each customer segment in terms of price sensitivity, as well as the efficiency of each operation in setting price targets and reaching them. The best rate increase judgements--which are really pricing judgements in a sophisticated business--will be made knowing what's at risk according to what's performing well and what's under-performing. An optimal result comes from capturing profit increases by making sure planned rate increases actually take place. If the whole pricing system is working as intended, high rate increases on the mature price might not be necessary, decreasing churn and maximizing profit in the healthiest competitive way.
While quarters in the sofa cushions can be thrilling, they're not enough to hold onto the house. For TV and broadband distributors to unleash new powerful growth engines, new products will be required. The current practice of offering only home-grown internally billed products beyond TV programming over which the distributor has virtually complete pricing control should be modernized. Netflix has just reach 11.1 million US customers, a 28% growth rate over 2008 and a 5% growth rate in the third quarter of 2009. It's time to bring Netflix into the cable, satellite and telco TV fold by offering its interesting mix of products and services with a superior local service connection.
Netflix pricing begins with a $4.99 per month package for the rental of two new release DVD's per month delivered to home within 1-2 days of an order. Successive pricing of $8.99 to $16.99 per month brings more monthly DVD's and the flexibility of renting one-two-or-three DVD's at a time. In addition, the $8.99 to $16.99 packages include streaming video with unlimited viewing of classic movies, selected TV and a small number of new releases through Netflix enabled devices. The enabled device list is increasing from Sony Playstation 3's to Microsoft X-Box 360's to Samsung and LG BluRay DVD players to Tivo DVR's to Sony and Vizio internet TV's.
If traditional digital TV distribution collaborates with Netflix to enable customers to decide how they want to watch their movies--through their combined choice of ad-supported or premium networks, VOD or DVD rentals or streaming Netflix video--an economic system could likely be created that maximizes profits by befriending the market's leading competitors. As long as the Netflix service offered by the local distributor is better than Netflix solo--a goal easily achieved through content and local service advantages--the addition of Netflix could jump-start premium IPTV economically. Even if only a cross-section of the rights for Netflix streamed video were legally available for multi-channel service providers, the cable or satellite or telco TV store would be stocked with the best alternatives for TV viewing. And pricing could be managed to reflect a slight increase in service costs for transfering customer calls and arranging web service for the new Netflix content.
Netflix pricing fits well into the traditional distribution price-point schema just as satellite and telco TV pricing was built looking at cable price points. The most important fit that a Netflix or similar alternative might bring would be new value through new products and traditional products in new forms. New value creation well-packaged should increase the elasticity of the current gray box of cable pricing in all of its complexity and increasing vulnerability.
Similar distribution advances that create the best pricing and packaging platform for internet video of every stripe can pay dividends, especially to current broadband pricing. Consumption-based pricing for broadband gives all of the power and control to the service provider who is measuring consumption and billing for it. This model works for utilities but runs afoul of the customer loyalty TV distribution requires in a competitive field with high content variation. Placing the pricing pressure onto added internet video services sitting on top of both standard broadband and the TV Everywhere combination can enable distributors to charge more for internet video while sharing revenue with the internet video content providers, who will be many of the same companies currently producing digital TV.
As long as video alternatives, whether they're streamed, gamed (in a good way,) sold or rented, are available independent of cable, satellite and telco TV providers, there will be a strong competitive incentive to bring them inside traditional distribution's packaging and pricing model. Distributors will need a new perspective to get comfortable embracing the competition, especially since traditional multi-channel competition involves virtually identical core products. A new model can expand the elasticity of the status quo by bringing different content and services--ultimately including home and business monitoring and energy management as well as health care record storage and more--into a tight pricing constellation that will benefit by addition.
In order to prepare for more products with better economics, media content companies might bring to market two versions of their online products--one to be bought outside the multichannel distribution sphere and one to be packaged into it. And distribution should tighten up their pricing and packaging, identifying easy money along the way, in preparation for an internet and service expansion aimed at powering profitable growth for years to come.
The Financial Times
Where's the next vein of easy money in the media goldmine? It's possible, but unlikely, that nothing will ever be easy again. Rather than admitting defeat, content and distribution should commit their minds to developing the next big thing in the unsexy world of pricing and packaging.
To start, it's worth a look at the current structure of TV subscription pricing and promotions. Today's cable, satellite and telco TV pricing accommodates three players in a market where it must and two--cable and satellite--where it can. With this small competitive field, as long as all two-to-three players are pricing comparably, the consumer surpluses--measured as the difference between a discounted package rate and its mature price after a timed promotional discount expires--are comparable. Said differently: consumers feel that all subscription TV services are over-priced, except for those delicious introductory discounts for new subscribers. Predictably, new discount-heavy entrants always look better than the old hat.
A consumer surplus is the difference between the price a customer is willing to pay for goods or services and the price that they actually do pay. A producer surplus in pricing parlance is the increased revenue available by shrinking the discounts and bringing the price paid for a service up to or just over the peak of consumer willingness.
Take as an example the mature or rate card $115 monthly price for a cable, satellite or telco TV package including: a digital version of expanded basic service (100+ channels, with the most highly rated ad-supported networks) and one network, like HBO or Showtime, as well as the standard high-speed data service. The introductory offer price for this service for new customer installations might be $75 per month for the first year of service.
Let's assume that the mature rate card $115 price captures the fullness of what consumers are willing to pay for this package once they've formed a habit. Let's also assume that newly installed or upgrading customers paying the reduced $75 monthly price need a discount to buy, as an inducement to choose one service provider over another or to upgrade their services and deliver more profit to the incumbent.
Newly installed or discounted customers in this pricing scenario are enjoying a consumer surplus of $40 per month or $480 for their first year. The service provider has a strong incentive to increase its producer surplus by bringing the $40 consumer surplus group up to either the full rate card price of $115 ($0 consumer surplus) or up to an intermediate price point between $75 and $115, deflecting churn risk and reflecting what these originally discounted customers as a behavioral segment are truly willing to pay.
The service provider is not using uniform pricing in making these distinctions. Although rate cards will carry the $115 published price and promotional marketing to new and upgrade prospects will carry the $75 discounted price, a growing number of customers past their first year of service will be paying something between these two price points. This reflects the service provider's pricing sophistication, aimed at maximizing profit by tailoring package prices to the price sensitivity of individual segments. Said differently, the service provider knows that uniform pricing will preclude access to certain market segments who are unwilling to pay the mature price because of economic or competitive reasons but are willing to pay a lower price with a larger consumer surplus if they can get one.
If the newly installed discounted group is only willing to pay $100 for the digital TV and broadband package after their first subscription year, the service provider might bring them confidently up to the $100 level through a $25 rate increase after Year One and subsequently lift their price point to the $115+ full-price level. New price points above $115 will be inevitable over time as rate increases are taken on the mature base that keep the mature price moving up. This upward price momentum occurs according to the service provider's need to maximize profit and often reflects a substantial margin surplus over the service provider's revenue-related and operating cost increases each year.
A major pricing challenge in this common scenario is the delta between $115+, as it rises over time, and the heavily promoted $75 offer price, which most service providers are unwilling to raise for fear of missing out on customer growth and upgrades. On the pricing theory that there is a maximum effective price that each customer segment is willing to pay, this cable-satellite-telco-TV pricing approach introduces an increasing number of price points between $75 and $115+ over time assuming that growth and profits have been maximized by hitting the exact maximum price point for each group with discipline.
Price discount offers like the $75 used in this example come into the market with a new product introduction or to overcome a new competitor. The service provider introduces a new product, the benefits and efficiencies of which can only be realized if the new product penetration is maximized. The new product is bundled with a popular traditional product, heavily discounted and heavily marketed. For cable distributors, the arrival of broadband a decade ago and voice, on a scaled basis, five years ago marked the death of uniform pricing. Double-play and triple-play bundles launched a pricing sophistication for cable that drove profitable customer growth and competitive pre-emption for many years.
Today, though, there are more than a few quarters in the sofa cushions of cable pricing--as well as satellite and telco pricing--that can be picked up by applying a simple and regular discipline to surplus measurement over time. If the cable operator in our pricing example above was dealing with a simple, time-frozen delta of $40 between the full $115 digital TV and broadband package and a $75 discounted offer price, a comparison of the actual package ARPU (or monthly average revenue per package unit) and the mature full price will be revealing.
If the package ARPU being realized in this example is $105, the subscription mix between full price customers paying $115 and discount customers paying $75 is 75% at $115 and 25% at $75. By looking at overall churn versus Year One churn over an average period, a service provider can comfortably set subscription price-ratio targets for full-price versus discounted prices that will maximize growth and profit. If the package ARPU is less than $105, the service provider is not maximizing growth and profit because too many customers are likely paying an introductory price. This happens, particularly in decentralized operating environments, because of an unwillingness to risk churn increases through consistent rate increase execution.
Another potential cause for a large mature price versus real ARPU delta is a flawed pricing plan that has lifted the most loyal, longest-tenured customers up to extreme price points (e.g., well over $115 over time,) while continuing to use the low $75 discounted price for everyone new. As the distance between mature price and offer price grows, individual customer segments will break out of their pricing plans, registering dissatisfaction by disconnecting or downgrading service. Often, this type of churn goes un-noticed on a package-by-package basis until the elasticity problems are fairly advanced.
A simple model that compares real ARPU by package to the desired business mix of discounted versus mature pricing will reveal the state of each customer segment in terms of price sensitivity, as well as the efficiency of each operation in setting price targets and reaching them. The best rate increase judgements--which are really pricing judgements in a sophisticated business--will be made knowing what's at risk according to what's performing well and what's under-performing. An optimal result comes from capturing profit increases by making sure planned rate increases actually take place. If the whole pricing system is working as intended, high rate increases on the mature price might not be necessary, decreasing churn and maximizing profit in the healthiest competitive way.
While quarters in the sofa cushions can be thrilling, they're not enough to hold onto the house. For TV and broadband distributors to unleash new powerful growth engines, new products will be required. The current practice of offering only home-grown internally billed products beyond TV programming over which the distributor has virtually complete pricing control should be modernized. Netflix has just reach 11.1 million US customers, a 28% growth rate over 2008 and a 5% growth rate in the third quarter of 2009. It's time to bring Netflix into the cable, satellite and telco TV fold by offering its interesting mix of products and services with a superior local service connection.
Netflix pricing begins with a $4.99 per month package for the rental of two new release DVD's per month delivered to home within 1-2 days of an order. Successive pricing of $8.99 to $16.99 per month brings more monthly DVD's and the flexibility of renting one-two-or-three DVD's at a time. In addition, the $8.99 to $16.99 packages include streaming video with unlimited viewing of classic movies, selected TV and a small number of new releases through Netflix enabled devices. The enabled device list is increasing from Sony Playstation 3's to Microsoft X-Box 360's to Samsung and LG BluRay DVD players to Tivo DVR's to Sony and Vizio internet TV's.
If traditional digital TV distribution collaborates with Netflix to enable customers to decide how they want to watch their movies--through their combined choice of ad-supported or premium networks, VOD or DVD rentals or streaming Netflix video--an economic system could likely be created that maximizes profits by befriending the market's leading competitors. As long as the Netflix service offered by the local distributor is better than Netflix solo--a goal easily achieved through content and local service advantages--the addition of Netflix could jump-start premium IPTV economically. Even if only a cross-section of the rights for Netflix streamed video were legally available for multi-channel service providers, the cable or satellite or telco TV store would be stocked with the best alternatives for TV viewing. And pricing could be managed to reflect a slight increase in service costs for transfering customer calls and arranging web service for the new Netflix content.
Netflix pricing fits well into the traditional distribution price-point schema just as satellite and telco TV pricing was built looking at cable price points. The most important fit that a Netflix or similar alternative might bring would be new value through new products and traditional products in new forms. New value creation well-packaged should increase the elasticity of the current gray box of cable pricing in all of its complexity and increasing vulnerability.
Similar distribution advances that create the best pricing and packaging platform for internet video of every stripe can pay dividends, especially to current broadband pricing. Consumption-based pricing for broadband gives all of the power and control to the service provider who is measuring consumption and billing for it. This model works for utilities but runs afoul of the customer loyalty TV distribution requires in a competitive field with high content variation. Placing the pricing pressure onto added internet video services sitting on top of both standard broadband and the TV Everywhere combination can enable distributors to charge more for internet video while sharing revenue with the internet video content providers, who will be many of the same companies currently producing digital TV.
As long as video alternatives, whether they're streamed, gamed (in a good way,) sold or rented, are available independent of cable, satellite and telco TV providers, there will be a strong competitive incentive to bring them inside traditional distribution's packaging and pricing model. Distributors will need a new perspective to get comfortable embracing the competition, especially since traditional multi-channel competition involves virtually identical core products. A new model can expand the elasticity of the status quo by bringing different content and services--ultimately including home and business monitoring and energy management as well as health care record storage and more--into a tight pricing constellation that will benefit by addition.
In order to prepare for more products with better economics, media content companies might bring to market two versions of their online products--one to be bought outside the multichannel distribution sphere and one to be packaged into it. And distribution should tighten up their pricing and packaging, identifying easy money along the way, in preparation for an internet and service expansion aimed at powering profitable growth for years to come.
Monday, October 26, 2009
First, Impressions
Capsule: How much scale will a profitable deployment of interactive advertising require? At the CTAM Summit's "Future of Advertising" Panel, Starcom Mediavest Group CEO Laura Desmond shared a view: "We need to have (the addressable advertising) platform rolled out (to) encompass all of the TV world, not just cable and a few networks." (Broadcasting & Cable.) While this may be true of targeted one-way advertising, two-way interactive advertising may use impressions math as a scaling alchemy for gradually phased deployments that turn TV, broadband and mobile avails into solid gold.
Broadcasting & Cable
In the last two weeks, AT&T and Verizon announced earnings, the centerpiece of which were the counts of their wireless subscriber additions. AT&T added 2 million wireless subscribers during 2009's third quarter, bringing its full count to 81.6 million. Verizon added 1.2 million wireless subscribers for a total of 89 million.
The force behind AT&T's highest wireless additions count in company history was Apple's iPhone; it was the device of choice for over half of all new customers. Of 3.2 million new iPhone activations in the period, 40% were new AT&T customers, translating into 1.28 million new AT&T wireless additions out of 2 million total brought by the iPhone.
Despite the seeming marital harmony between AT&T and Apple, the iPhone is a purveyor of Big Love, intending more marriages in the near future. In an anticipatory moment, AT&T's Mobility & Consumer Markets CEO Ralph de la Vega addressed the issue during his earnings call: "We have a legacy of having a great portfolio...that will continue after the iPhone is no longer exclusive to us."
The portfolio may be great, as is the aggregated scale and history of its owner. But the voice business is morphing into something new, increasingly more wholesale in orientation than retail. In staking so significant a share of its growth and profit-making on Apple's stellar device, AT&T is moving from a transport business that runs the tables to a transport wholesale partnership company, dependant on devices, distribution and content partners that are media-rich, complex and out of the former phone company's control.
At the same time, Verizon has turned for partnership to a star big enough to rival the sun. Google and its Android mobile operating system will be featured in several new Verizon mobile phones, promising to give the iPhone something to think about as it opens its AT&T marriage en route to polygamy. Verizon has introduced competitive advertising that pounds on the message of the reliability and superior coverage of its network, gently mocking the iPhone and its 85,000 "apps" as being less important than Verizon's coverage "maps." Verizon's message is right on its core strategy of binding customers through superior wireless service. It also keeps the focus on Verizon itself, rather than sharing advertising and marketing benefits with its Google operating system partner.
What is the AT&T/Apple versus Verizon/Google competition bringing the market? Some good wireless advertising: Verizon's maps are a visual relief in a sea of wireless minutes, monthly prices and "G"'s that blur the meaning of numbers and numb comprehension.
A bigger result: the beginning of the end of the wireless voice-and-text business as we know it. The numbers inside both AT&T's and Verizon's earnings reveal continued losses in the wired voice businesses--the parts of the business that are entirely controlled by telecom distribution with government participation. The growth business continues to be consumer wireless; but in order to grow that business to the detriment of each other, AT&T and Verizon have changed the nature of their economics by changing the products they sell.
As the new economics of each customer addition reflect new allies demanding their share of the bounty in the wireless wars, a new wireless product definition has begun to colonialize the voice business as if it were an extension of the internet. This is a very different result from the "You Will" strategic intention AT&T expressed in the early 1990's. During its famous ad campaign, AT&T convinced its audience and itself that it would lead the course of innovation in consumer, business and public markets. Having grown horizontally but not appreciably vertically, AT&T and Verizon now use their tremendous scale to court friends of similar comparable size but more obvious future prospects.
In order to strengthen their prospects, AT&T and Verizon should think seriously about the share of advertising revenue they'll keep once the definition of wireless voice morphs into wireless media. In order to protect their future economics, telecom distribution should imagine the healthy growth of the advertising trees in their own backyards and all of their nourishing fruit. Because both companies moved into TV via wired distribution, with AT&T's U-verse and Verizon's Fios, they may have inherited the view of advertising coming from their fierce wired distribution forebears and rivals: cable and satellite. They should do more.
The money-making distribution leaders of the cable and satellite business view their relationship with content as their primary economic driver, leaving advertising for cable networks, broadcasters and print content/distribution hybrids to figure out. Retail is one off of advertising and it's the rare media distributor, outside of print, that gives the actual buying and selling of goods as well as services a second thought.
Adding complexity, the future of TV advertising is likely to be a brand promotion, direct marketing, direct sales and fulfillment hybrid. Adding opportunity, each distribution business will have a strong influence over how much of each revenue component drives their profits as that future develops.
TV advertising today is still an impressions business. In the dreamy haze of setting advertising rates mating vague client expectations with rough viewership estimates, impressions are the currency. Impressions mean the number of times an ad campaign can be seen according to network ratings multiplied by available viewers multiplied by viewing opportunities determined by available ad inventory. As more inventory opens up with more available channels to be viewed, as well as alternative TV distribution forms (like wireless,) individual network ratings fall pressured by the possibilities.
TV content companies struggle with ratings accuracy but the broad realities of audience measurement persist. The more types of incumbent TV content available to US viewers, the lower the audience numbers will be for each incumbent type. The force that can smash this reality is the emergence of a new medium. Cable TV smashed the ratings realities of the broadcast networks, sharing advertising impressions and taking a serious and growing bite out of broadcast TV ad revenue. Mobile TV and IPTV, whatever they come to mean, will add inventory and impressions to the incumbent TV universe. They'll divide audiences and change the revenue model again.
Even if content incumbents expand their viewership seamlessly from broadcast and cable to wireless and IPTV, they will, at best, hold onto their current revenue in the aggregate by spreading it over larger and smaller bits of advertising inventory. These new TV ad forms, according to their small size and complexity, will require greater and more costly oversight. In other words, keeping revenue up in a complex distribution environment where total TV viewership is not increasing significantly is a profit-shrinking task.
How can the media raise advertising profits? By making the increased availability of advertising inventory into something more than one-way impressions or passive viewing opportunities. The value of an impression--the one shot an ad has to grip a viewer into a purchase--will increase when even a small percentage--say 5%--of TV advertising inventory can make a direct sale. If one-in-20 TV avails holds a spot that can be clicked on with a cell phone or a mouse or a TV remote to activate a real or potential sale, impressions math becomes a beautiful sight to behold. Smashed into an explosion of commercial opportunity, the TV ratings and impressions currency value will rise on an interactive tide of new buying and selling direct to the consumer.
If click-to-purchase is so worthwhile, why are online advertising rates stagnant? Because the nature of the internet today precludes a direct purchase more often than enabling one. We click most often through a search engine to (or on our way to) a commercial website that has buried within it a commerce engine to facilitate our purchase. There are too many steps.
Most important, the first step, the identification of a seller via search, presents the seller and his products in the most antiseptic of terms--as a Google or Yahoo! uniform search listing. The advertising magic for search comes from taking a highly motivated comparison shopper and turning him into a potential buyer by showing him the stores. The advertising magic for interactive TV will be taking a passive viewer (or millions of them) and inspire them to make an impulse purchase or to act on a latent desire that can be linked to the art of advertising and its context inside relevant TV content. If this experience is portable, the advertiser has that many more opportunities to turn desire into action--on the couch, in the car, while shopping, while bored at a holiday party.
Verizon, AT&T, Comcast, Time Warner Cable and all of their media distribution brethren will inevitably take more control of their platforms by developing interactive advertising on a small practicable scale. Even a handful of TV impressions can turn into a small goldmine for the distribution platform that connects buyer and seller most powerfully. There may even be an opportunity to run the new advertising tables by running the models that determine the value of interactive TV fulfillment at home and on the go.
Surely Google has this ambition in its Android operating system and its Verizon partnership. Apple has already begun. It projects it will complete its 10-billionth global iTunes fulfillment at the end of this year. Now, Apple has a phone that sings and access to a multimedia collection of platforms that can knock the stuffing out of the TV advertising economy. Let's hope they'll create a high tide, by inspiring competition, along the way.
Broadcasting & Cable
In the last two weeks, AT&T and Verizon announced earnings, the centerpiece of which were the counts of their wireless subscriber additions. AT&T added 2 million wireless subscribers during 2009's third quarter, bringing its full count to 81.6 million. Verizon added 1.2 million wireless subscribers for a total of 89 million.
The force behind AT&T's highest wireless additions count in company history was Apple's iPhone; it was the device of choice for over half of all new customers. Of 3.2 million new iPhone activations in the period, 40% were new AT&T customers, translating into 1.28 million new AT&T wireless additions out of 2 million total brought by the iPhone.
Despite the seeming marital harmony between AT&T and Apple, the iPhone is a purveyor of Big Love, intending more marriages in the near future. In an anticipatory moment, AT&T's Mobility & Consumer Markets CEO Ralph de la Vega addressed the issue during his earnings call: "We have a legacy of having a great portfolio...that will continue after the iPhone is no longer exclusive to us."
The portfolio may be great, as is the aggregated scale and history of its owner. But the voice business is morphing into something new, increasingly more wholesale in orientation than retail. In staking so significant a share of its growth and profit-making on Apple's stellar device, AT&T is moving from a transport business that runs the tables to a transport wholesale partnership company, dependant on devices, distribution and content partners that are media-rich, complex and out of the former phone company's control.
At the same time, Verizon has turned for partnership to a star big enough to rival the sun. Google and its Android mobile operating system will be featured in several new Verizon mobile phones, promising to give the iPhone something to think about as it opens its AT&T marriage en route to polygamy. Verizon has introduced competitive advertising that pounds on the message of the reliability and superior coverage of its network, gently mocking the iPhone and its 85,000 "apps" as being less important than Verizon's coverage "maps." Verizon's message is right on its core strategy of binding customers through superior wireless service. It also keeps the focus on Verizon itself, rather than sharing advertising and marketing benefits with its Google operating system partner.
What is the AT&T/Apple versus Verizon/Google competition bringing the market? Some good wireless advertising: Verizon's maps are a visual relief in a sea of wireless minutes, monthly prices and "G"'s that blur the meaning of numbers and numb comprehension.
A bigger result: the beginning of the end of the wireless voice-and-text business as we know it. The numbers inside both AT&T's and Verizon's earnings reveal continued losses in the wired voice businesses--the parts of the business that are entirely controlled by telecom distribution with government participation. The growth business continues to be consumer wireless; but in order to grow that business to the detriment of each other, AT&T and Verizon have changed the nature of their economics by changing the products they sell.
As the new economics of each customer addition reflect new allies demanding their share of the bounty in the wireless wars, a new wireless product definition has begun to colonialize the voice business as if it were an extension of the internet. This is a very different result from the "You Will" strategic intention AT&T expressed in the early 1990's. During its famous ad campaign, AT&T convinced its audience and itself that it would lead the course of innovation in consumer, business and public markets. Having grown horizontally but not appreciably vertically, AT&T and Verizon now use their tremendous scale to court friends of similar comparable size but more obvious future prospects.
In order to strengthen their prospects, AT&T and Verizon should think seriously about the share of advertising revenue they'll keep once the definition of wireless voice morphs into wireless media. In order to protect their future economics, telecom distribution should imagine the healthy growth of the advertising trees in their own backyards and all of their nourishing fruit. Because both companies moved into TV via wired distribution, with AT&T's U-verse and Verizon's Fios, they may have inherited the view of advertising coming from their fierce wired distribution forebears and rivals: cable and satellite. They should do more.
The money-making distribution leaders of the cable and satellite business view their relationship with content as their primary economic driver, leaving advertising for cable networks, broadcasters and print content/distribution hybrids to figure out. Retail is one off of advertising and it's the rare media distributor, outside of print, that gives the actual buying and selling of goods as well as services a second thought.
Adding complexity, the future of TV advertising is likely to be a brand promotion, direct marketing, direct sales and fulfillment hybrid. Adding opportunity, each distribution business will have a strong influence over how much of each revenue component drives their profits as that future develops.
TV advertising today is still an impressions business. In the dreamy haze of setting advertising rates mating vague client expectations with rough viewership estimates, impressions are the currency. Impressions mean the number of times an ad campaign can be seen according to network ratings multiplied by available viewers multiplied by viewing opportunities determined by available ad inventory. As more inventory opens up with more available channels to be viewed, as well as alternative TV distribution forms (like wireless,) individual network ratings fall pressured by the possibilities.
TV content companies struggle with ratings accuracy but the broad realities of audience measurement persist. The more types of incumbent TV content available to US viewers, the lower the audience numbers will be for each incumbent type. The force that can smash this reality is the emergence of a new medium. Cable TV smashed the ratings realities of the broadcast networks, sharing advertising impressions and taking a serious and growing bite out of broadcast TV ad revenue. Mobile TV and IPTV, whatever they come to mean, will add inventory and impressions to the incumbent TV universe. They'll divide audiences and change the revenue model again.
Even if content incumbents expand their viewership seamlessly from broadcast and cable to wireless and IPTV, they will, at best, hold onto their current revenue in the aggregate by spreading it over larger and smaller bits of advertising inventory. These new TV ad forms, according to their small size and complexity, will require greater and more costly oversight. In other words, keeping revenue up in a complex distribution environment where total TV viewership is not increasing significantly is a profit-shrinking task.
How can the media raise advertising profits? By making the increased availability of advertising inventory into something more than one-way impressions or passive viewing opportunities. The value of an impression--the one shot an ad has to grip a viewer into a purchase--will increase when even a small percentage--say 5%--of TV advertising inventory can make a direct sale. If one-in-20 TV avails holds a spot that can be clicked on with a cell phone or a mouse or a TV remote to activate a real or potential sale, impressions math becomes a beautiful sight to behold. Smashed into an explosion of commercial opportunity, the TV ratings and impressions currency value will rise on an interactive tide of new buying and selling direct to the consumer.
If click-to-purchase is so worthwhile, why are online advertising rates stagnant? Because the nature of the internet today precludes a direct purchase more often than enabling one. We click most often through a search engine to (or on our way to) a commercial website that has buried within it a commerce engine to facilitate our purchase. There are too many steps.
Most important, the first step, the identification of a seller via search, presents the seller and his products in the most antiseptic of terms--as a Google or Yahoo! uniform search listing. The advertising magic for search comes from taking a highly motivated comparison shopper and turning him into a potential buyer by showing him the stores. The advertising magic for interactive TV will be taking a passive viewer (or millions of them) and inspire them to make an impulse purchase or to act on a latent desire that can be linked to the art of advertising and its context inside relevant TV content. If this experience is portable, the advertiser has that many more opportunities to turn desire into action--on the couch, in the car, while shopping, while bored at a holiday party.
Verizon, AT&T, Comcast, Time Warner Cable and all of their media distribution brethren will inevitably take more control of their platforms by developing interactive advertising on a small practicable scale. Even a handful of TV impressions can turn into a small goldmine for the distribution platform that connects buyer and seller most powerfully. There may even be an opportunity to run the new advertising tables by running the models that determine the value of interactive TV fulfillment at home and on the go.
Surely Google has this ambition in its Android operating system and its Verizon partnership. Apple has already begun. It projects it will complete its 10-billionth global iTunes fulfillment at the end of this year. Now, Apple has a phone that sings and access to a multimedia collection of platforms that can knock the stuffing out of the TV advertising economy. Let's hope they'll create a high tide, by inspiring competition, along the way.
Friday, October 23, 2009
No Stars, Only Talent
Capsule: Can a new Comcast shine by turning a merger with NBC Universal into a celebration of profit-making innovation and efficiency? After the merger transaction and before the spin-offs, new strategic moves towards greater media profitability will be required. Comcast is a capable chess player on competitive strategy in distribution. Heavy with rich content possibilities, can it maintain focus without becoming star-struck?
Movies Unlimited
Comcast
NBCU
In Robert Altman's 1991 film, "The Player," studio executive Griffin Mill green-lights a loser of a high-concept film named "Habeas Corpus" to toy with his studio bosses as they attempt to cut costs in non-traditional ways. "No Stars, Only Talent" is the film's earnest and prideful slogan, used by the high-minded director pitching Mill a movie whose realism is intended to shine brightest for its lack of luminous celebrity. Predictably, because change is hard, "The Player" ends with "Habeas Corpus" produced, filled with stars and fantasy by a talented studio team that eats its young in the process.
Should Comcast secure NBC Universal and its stable of stars, the object shining brightest is likely to be the stop-watch counting the seconds until the first CNBC-reported profit increase. Profit is king, particularly in a broken economy, and corporate synergy for its own sake is a dysfunctional concept on the American media scene. Most merged companies demand that each individual business continue to maximize its own profits. The axe will fall where duplicated efforts and sluggish growth prospects become clear.
Comcast's bottom-line orientation presages a media combination that will look for equanimity and painless cost-savings early. Comcast's talent for absorbing cable system acquisitions, including the original TCI/AT&T cable properties, is legendary. It should give both management teams confidence that individual business unit performance in a federated corporate system--albeit one smaller than General Electric--will be a priority.
But the strongest influence Comcast can bring to NBC Universal is its sense of strategy as a take-no-prisoners game of competitive dominance. Comcast gets the concept of building barriers to competitive entry in every pore of its law-abiding body and soul. This should make for a good combination with NBC Universal--or at least those parts of NBCU that are, first and foremost, a federation of the NBC broadcast network and its over 200 broadcast stations, as well as Telemundo and its 45 broadcast affiliates and 800 cable outlets.
Broadcast and cable distribution understand the advantages of competitive barriers and government support. And it's likely just in time for some new technology-based barriers, given that both the broadcast and cable models of compounded growth are breaking down. An opt-in audience measurement system that translates viewership data into value-rich navigation and advertising relevancy might be just the ticket.
How will Comcast play with the rest of NBCU? The portfolio of cable TV channels included with the broadcasters in the $15 billion NBCU revenue business--Bravo, CNBC, MSNBC, mun2, SciFi, USA Network and more--should merge companionably with Comcast's E!, The Style Network, G4, TV One, PBS Kids Sprout, VERSUS and the Comcast Sports Group. A culture shift is likely as highly rated news-oriented and general entertainment TV merges with a cable stable that accounts for well under 10% of the MSO's current revenue. New products might help. News Corp. may sell off more of its Dow Jones assets, paving the way for an even stronger CNBC office and consumer product suite a la Bloomberg, should the merged company be inclined to dabble more aggressively in real-time data.
Comcast's sports properties have the most potency potential in combination with NBC and its substantial sports rights. Sports business journalists are already warning Disney/ABC/ESPN to "look out for the Comcast NBC Sports Juggernaut," (per BusinessWeek) including NBC's Sunday Night Football (tied up through 2013 for $600 million each year) and Comcast's 11 regional sports channels.
Reaching equivalency with an award-winning institution like ESPN/ESPN.com won't just happen by virtue of the two media companies' complementary sports rights. What virtue exists in sports stands in front of the cameras; behind them, everything gets squeezed on the way to the sports media business. The executives in charge of the combination need to keep their multiple layers of sports fans as much in mind as all of the possible harvested opportunities. Unfortunately, it's the rare remarried group of attractive entertainment assets that finds new Brady Bunch harmony as a whole bigger than the sum of its parts.
The ingredients of merged success are somewhere in the strategy of competitive barrier building beyond content rights and its execution. Look at the brilliance of Google, who, while not being evil, has managed to erect competitive barriers around their new profitability higher than the Rockies. When looking at their combination of networks, Comcast and NBCU should move like a tic-tac-toe virtuoso: vertically, collapsing content types into one another for habit-forming customer captivity, and horizontally, linking separate brands into a new collection of revenue-yielding customer experiences. They've got scale; so, they've got game. But they've also got a lot to prove, including their ability to strengthen the money-making links between Comcast's cable distribution and its Comcast NBCU content.
Past is prologue. In the Time Warner AOL merger, every business unit seemed intent on maintaining internal barriers to one another. Rather than leveraging Time Warner Cable's extraordinary distribution business to build broadband subscription muscle into AOL, the merged company seemed to make all of the external walls once separating its tenants into new internal ones. Many unsuccessful attempts at negotiating or even breaking down those walls were made, but without a centralized view on how each unit could increase the value of its fellow business, nothing changed. Oddly, AOL may have stood a better chance of profitable negotiation with Time Warner's cable properties when it was its own fully individuated company. Forced into merged isolation, AOL foundered, taking its incredible customer assets into temporary suspended animation with it.
The speed of integration on this merger of very different companies--really a company and a conglomerate--must be faster and more unified than Comcast's past operational absorption of cable systems. Comcast will be well-served by creating a common cultural atmosphere with real benefits amongst its new federated properties--inside and out. Content and distribution play together well when both sides do more than complement one another and do less than battle. Real business arrangements that increase competitiveness and profit will be required between exemplary pieces of the new combined company.
Full carriage with improved in-house multiple-screen promotion of Comcast NBCU content on cable systems is an obvious step one. Step two might start with a new self-image manifest in a new internet-based news, entertainment and sports content presence that expands Comcast's franchise from virtually half of America to the entire United States and selected international markets. Comcast gets the internet, especially since much of the audience advertisers want to reach is reaching the internet through broadband. Now, Comcast the ISP will have real content beyond rights-restricted sports to push out through its broadband doors onto a much larger stage.
Comcast NBCU could ultimately compete with all other internet based entertainment--including NBCU's own beautifully conceived Hulu partnership with News Corp, Disney, et al. Where a la carte short TV segments become the new TV, they should be promotion for a larger business, linked for value and protection to the purchase of a larger network. Slicing content into tinier pieces than today's networks will mean less ARPU and may mean, a la the music business, a serious lack of distribution control. While building out new distribution opportunities, Comcast NBCU might keep an equally important goal--one often forgotten by big distribution--in mind. The very best customer experience with Comcast NBCU, on TV and online everywhere, should begin with a Comcast connection.
To complete its transformation, the new Comcast NBCU should also be a destination for potential employees. If they are to succeed where others have failed, the combined company must put as many financial, IT and internal marketing resources as prudent into attracting the best talent away from its global competitors. For benchmarking purposes, Comcast NBCU will be stepping out with a competitive field that includes Google, Microsoft, Apple, Amazon and the rest of the global media A-list. New management muscles will be required with the kind of discipline this field represents. Anything less and it doesn't make sense to show up.
In the end, spin-offs are likely. Between now--when a merger may occur--and then, Comcast and NBCU will have the opportunity to rewrite media history by living their beliefs about value-creation in marriage. With this hope and few ready alternatives for expansion or safety, both companies are likely to continue their flight into each other's arms before sailing headlong down the isle. And while some will be plotting their break-up, most content and distribution companies and virtually all of Wall Street will be throwing rice and eating cake.
Movies Unlimited
Comcast
NBCU
In Robert Altman's 1991 film, "The Player," studio executive Griffin Mill green-lights a loser of a high-concept film named "Habeas Corpus" to toy with his studio bosses as they attempt to cut costs in non-traditional ways. "No Stars, Only Talent" is the film's earnest and prideful slogan, used by the high-minded director pitching Mill a movie whose realism is intended to shine brightest for its lack of luminous celebrity. Predictably, because change is hard, "The Player" ends with "Habeas Corpus" produced, filled with stars and fantasy by a talented studio team that eats its young in the process.
Should Comcast secure NBC Universal and its stable of stars, the object shining brightest is likely to be the stop-watch counting the seconds until the first CNBC-reported profit increase. Profit is king, particularly in a broken economy, and corporate synergy for its own sake is a dysfunctional concept on the American media scene. Most merged companies demand that each individual business continue to maximize its own profits. The axe will fall where duplicated efforts and sluggish growth prospects become clear.
Comcast's bottom-line orientation presages a media combination that will look for equanimity and painless cost-savings early. Comcast's talent for absorbing cable system acquisitions, including the original TCI/AT&T cable properties, is legendary. It should give both management teams confidence that individual business unit performance in a federated corporate system--albeit one smaller than General Electric--will be a priority.
But the strongest influence Comcast can bring to NBC Universal is its sense of strategy as a take-no-prisoners game of competitive dominance. Comcast gets the concept of building barriers to competitive entry in every pore of its law-abiding body and soul. This should make for a good combination with NBC Universal--or at least those parts of NBCU that are, first and foremost, a federation of the NBC broadcast network and its over 200 broadcast stations, as well as Telemundo and its 45 broadcast affiliates and 800 cable outlets.
Broadcast and cable distribution understand the advantages of competitive barriers and government support. And it's likely just in time for some new technology-based barriers, given that both the broadcast and cable models of compounded growth are breaking down. An opt-in audience measurement system that translates viewership data into value-rich navigation and advertising relevancy might be just the ticket.
How will Comcast play with the rest of NBCU? The portfolio of cable TV channels included with the broadcasters in the $15 billion NBCU revenue business--Bravo, CNBC, MSNBC, mun2, SciFi, USA Network and more--should merge companionably with Comcast's E!, The Style Network, G4, TV One, PBS Kids Sprout, VERSUS and the Comcast Sports Group. A culture shift is likely as highly rated news-oriented and general entertainment TV merges with a cable stable that accounts for well under 10% of the MSO's current revenue. New products might help. News Corp. may sell off more of its Dow Jones assets, paving the way for an even stronger CNBC office and consumer product suite a la Bloomberg, should the merged company be inclined to dabble more aggressively in real-time data.
Comcast's sports properties have the most potency potential in combination with NBC and its substantial sports rights. Sports business journalists are already warning Disney/ABC/ESPN to "look out for the Comcast NBC Sports Juggernaut," (per BusinessWeek) including NBC's Sunday Night Football (tied up through 2013 for $600 million each year) and Comcast's 11 regional sports channels.
Reaching equivalency with an award-winning institution like ESPN/ESPN.com won't just happen by virtue of the two media companies' complementary sports rights. What virtue exists in sports stands in front of the cameras; behind them, everything gets squeezed on the way to the sports media business. The executives in charge of the combination need to keep their multiple layers of sports fans as much in mind as all of the possible harvested opportunities. Unfortunately, it's the rare remarried group of attractive entertainment assets that finds new Brady Bunch harmony as a whole bigger than the sum of its parts.
The ingredients of merged success are somewhere in the strategy of competitive barrier building beyond content rights and its execution. Look at the brilliance of Google, who, while not being evil, has managed to erect competitive barriers around their new profitability higher than the Rockies. When looking at their combination of networks, Comcast and NBCU should move like a tic-tac-toe virtuoso: vertically, collapsing content types into one another for habit-forming customer captivity, and horizontally, linking separate brands into a new collection of revenue-yielding customer experiences. They've got scale; so, they've got game. But they've also got a lot to prove, including their ability to strengthen the money-making links between Comcast's cable distribution and its Comcast NBCU content.
Past is prologue. In the Time Warner AOL merger, every business unit seemed intent on maintaining internal barriers to one another. Rather than leveraging Time Warner Cable's extraordinary distribution business to build broadband subscription muscle into AOL, the merged company seemed to make all of the external walls once separating its tenants into new internal ones. Many unsuccessful attempts at negotiating or even breaking down those walls were made, but without a centralized view on how each unit could increase the value of its fellow business, nothing changed. Oddly, AOL may have stood a better chance of profitable negotiation with Time Warner's cable properties when it was its own fully individuated company. Forced into merged isolation, AOL foundered, taking its incredible customer assets into temporary suspended animation with it.
The speed of integration on this merger of very different companies--really a company and a conglomerate--must be faster and more unified than Comcast's past operational absorption of cable systems. Comcast will be well-served by creating a common cultural atmosphere with real benefits amongst its new federated properties--inside and out. Content and distribution play together well when both sides do more than complement one another and do less than battle. Real business arrangements that increase competitiveness and profit will be required between exemplary pieces of the new combined company.
Full carriage with improved in-house multiple-screen promotion of Comcast NBCU content on cable systems is an obvious step one. Step two might start with a new self-image manifest in a new internet-based news, entertainment and sports content presence that expands Comcast's franchise from virtually half of America to the entire United States and selected international markets. Comcast gets the internet, especially since much of the audience advertisers want to reach is reaching the internet through broadband. Now, Comcast the ISP will have real content beyond rights-restricted sports to push out through its broadband doors onto a much larger stage.
Comcast NBCU could ultimately compete with all other internet based entertainment--including NBCU's own beautifully conceived Hulu partnership with News Corp, Disney, et al. Where a la carte short TV segments become the new TV, they should be promotion for a larger business, linked for value and protection to the purchase of a larger network. Slicing content into tinier pieces than today's networks will mean less ARPU and may mean, a la the music business, a serious lack of distribution control. While building out new distribution opportunities, Comcast NBCU might keep an equally important goal--one often forgotten by big distribution--in mind. The very best customer experience with Comcast NBCU, on TV and online everywhere, should begin with a Comcast connection.
To complete its transformation, the new Comcast NBCU should also be a destination for potential employees. If they are to succeed where others have failed, the combined company must put as many financial, IT and internal marketing resources as prudent into attracting the best talent away from its global competitors. For benchmarking purposes, Comcast NBCU will be stepping out with a competitive field that includes Google, Microsoft, Apple, Amazon and the rest of the global media A-list. New management muscles will be required with the kind of discipline this field represents. Anything less and it doesn't make sense to show up.
In the end, spin-offs are likely. Between now--when a merger may occur--and then, Comcast and NBCU will have the opportunity to rewrite media history by living their beliefs about value-creation in marriage. With this hope and few ready alternatives for expansion or safety, both companies are likely to continue their flight into each other's arms before sailing headlong down the isle. And while some will be plotting their break-up, most content and distribution companies and virtually all of Wall Street will be throwing rice and eating cake.
Wednesday, October 21, 2009
New Rules
Capsule: What has the media been missing in its mad dash to a digital future? A new book out of the Columbia Business School reveals which media content and distribution forms work and why. The post-apocalyptic wisdom: everything old is new again.
The Curse of the Mogul
"The Curse of the Mogul: What's Wrong with the World's Leading Media Companies" by Jonathan Knee, Bruce Greenwald and Ava Seave promotes new rules for media success based on traditional B-school wisdom. The book grew out of a Columbia Business School course called The Strategic Management of Media and its authors quickly reveal that most media considerations have nothing to do with strategy.
Strategy, says Knee et al, is the exclusive provenance of media businesses with clear barriers to competitive entry. The only direct way to enhance the long term value of a business is "by establishing or reinforcing barriers to entry."
Short term business value can be enhanced by striving for greater efficiency, preferably by spreading the fixed costs of a business over increasing numbers of revenue-producing customers (short of the point where unrestrained growth actually opens the market for new entrants.) The authors also celebrate disciplined management teams who continue to improve their business operations and who manage revenue production to consistent standards of profitable growth.
Knee is clear about how rigorous the standards for true competitive advantage and profitable growth must be. For a media company to qualify as possessing competitive advantages, it must stand alone in its field, protected by a moat of high fixed cost barriers, scale, customer captivity--the kind that is borne of high switching costs or the networking effects of an ingenious product model like Google--or government protection (ah, Ma Bell.) If a media company does not have a unique enough moat, it may be one of a very small group of industry peers with a cooperative moat, shared amongst industry leaders without violating antitrust laws, where the right balance of cooperation and independent operation avoids value destruction.
For everybody else not moat inclined, efficiency is the course to pursue. Per Knee, efficiency is the mark of operational excellence and is never the result of the efforts of any single gifted executive, but instead achieved by successive management teams working with rules and processes that create efficient products and well maintained profit margins over time.
Using this framework, "The Curse of the Mogul" evaluates media businesses as diverse as Bloomberg (loud applause,) Google (fainting and cheering,) and a collection of cable networks (reserved appreciation) against pure content plays without unique competitive packaging (like movies and music performance.) The problem with "disjoint" content businesses is their over-reliance on a creative result that is not replicable, as well as dysfunctional economics that distribute revenue to talent and lawyers rather than making consistent profits.
The book's title is reinforced by the authors' theory that Media Moguls get so carried away by narcissism, their devotion to their own genius insights (as well as those of a small group of insiders on whom they believe their businesses are staked) and media popularity that they disregard the rules of successful business performance--namely, build a moat and operate your castle efficiently.
Significant examples in every media category are trotted out shame-faced. Those examples of media businesses that have consistently under-performed the S&P 500 over time were easy to find, given that the media--in part because of a tendency to see growth as God and to pursue deal-making growth through big and generally disjointed acquisitions--under-performs the market reliably.
So who cares about profit anyway? The authors maintain that if you want to operate a sustainable business, you must. And flash in the pan profits are not sustainable anymore than CDO's were--even though they deliver disproportionate cash and glory to a small sector before they knock the lights out.
Knee is not a big internet lover when it comes to growing businesses, although he acknowledges the huge value represented to consumers. Knee writes in a chapter called "The Internet is Not Your Friend": "The Internet may be somebody's friend--most notably the consumers of media--but it is not the friend of incumbent media companies. For the incumbent, any benefits from the Internet on either the cost or new revenue opportunity side are overwhelmed by the damage done by the lowering of barriers to entry."
Surely there are a few friends of the Internet--Google, Amazon, eBay, Facebook, Apple and Microsoft/Yahoo! amongst them. In even these cases, Knee walks each company through his competitive barrier and efficiency framework demonstrating how unique and beyond replication these examples are for the mere mortal (and, especially, he believes, for the mere mogul.)
There are many important media lessons in this book that are not obvious and yet don't require a Columbia degree. Amongst them is a clear preference for distribution businesses that--like cable, satellite, broadcast and telecom--have built virtually impenetrable structures with fixed capital investment, local franchises and Federal government cooperation. Even as these businesses slow down and threaten to be overtaken by what appear to be digital comparables, their unique advantages distinguish them and support sustainable profits. Nothing lasts forever and big distribution will ultimately be overtaken by either itself or other media forms, but forever is a long time and many profitable dollars away.
Also important: Knee's debunking of the idea of Content as King. (Knee doesn't seem to like the whole King idea however it's served up.) He points to pure content play media businesses--which he divides into creative and packaging examples--as amongst the least consistently profitable of the media field. The more creative or talent-based these businesses are, the less sure their profitability will be.
The packaging side of content provides some barriers to protect it in the form of network structures that demand a continuous supply of content, making them difficult to duplicate. One of Knee's favorite forms of continuous content businesses are database businesses, including Bloomberg. The huge costs associated with building a continuous media service that includes original content as well as continuous data and other borrowed innovations that are habit-forming, like instant messaging, keep competitors away.
Conversely, the more dependent a continuous content business like a cable network is on a single hit series--that, no matter how popular, is unlikely to maintain profit-growing capabilities because of the nature of TV hit economics--the more vulnerable it becomes. The idea: better to build an expensive niche network around a small collection of first or re-run hits. (Big applause here for Discovery.)
Once again, score one for the ingenuity of the cable industry's founders. Unfortunately, the niche continuous content enterprise may be falling for big ratings plays in today's cable world, just as advertising rates--the only way to monetize ratings--are under significant market pressure. Knee also celebrates the past potential of newspapers and magazines--especially niche magazines--to generate profits with the network effects of highly motivated niche audiences, local franchises, high fixed costs and continuous content. Their collective downfall--from which a few niche publications may be saved--has come from a mad embrace of the unfriendly internet.
What is it with "The Curse of the Mogul" and the internet? Because success in the highly efficient digital structure of the web requires very little initial capital investment, only the strong infrastructure plays--like unique habit-forming search and marketplace commerce that leverage a growing loyal audience--survive. Newspapers are the most obvious example of media companies that moved away from their essential strategic advantages believing that their intelligence and the star quality of their content, leaders and brands would translate.
Here, Knee and his colleagues make another important point about media futures. Looking at the near-collapse of the music business--only recently rejuvenated by Apple's tenacity in focusing not on the music itself, which is talent inexpensively sold, but on its devices and its digitally networked system as sustainable competitive advantages--"Curse of the Moguls" points out the critical revenue and profit-reducing tide that lowered all ships. When the music business turned from albums and CD's to singles, it reduced its revenue-per-unit in accordance with its digitally enabled lower per-unit production costs. What it failed to anticipate was that this made it possible for every company in creation to enter the field without barriers, along with a profligate counterfeiting audience.
Is there a TV corollary? Did VOD open the door to You Tube? How much sense does it make for the media to parse and resell individual programs to consumers hoping for profitable sales and repeat devotion? If we're following the Knee framework, the best way to sell VOD is in a bundle with a continuous content network, as well as other unique benefits that can be assembled out of the wild west of digital technology and the internet. The harder it is for competitors to replicate a secret sauce packaged from high fixed cost/viral audience-building ingredients--like cable networks--mixed with efficient digital content elements to enhance profits (but only to enhance profits, as opposed to becoming the product itself,) the more sustainable TV content and the collaborative partners who distribute it will be.
"The Curse of the Moguls" is pretty old-school in the end, favoring groups, traditional business standards, discipline and hard work over individuals and magic. It's interesting that, in these days after the deluge, the old rules seem both certain and somehow new.
The Curse of the Mogul
"The Curse of the Mogul: What's Wrong with the World's Leading Media Companies" by Jonathan Knee, Bruce Greenwald and Ava Seave promotes new rules for media success based on traditional B-school wisdom. The book grew out of a Columbia Business School course called The Strategic Management of Media and its authors quickly reveal that most media considerations have nothing to do with strategy.
Strategy, says Knee et al, is the exclusive provenance of media businesses with clear barriers to competitive entry. The only direct way to enhance the long term value of a business is "by establishing or reinforcing barriers to entry."
Short term business value can be enhanced by striving for greater efficiency, preferably by spreading the fixed costs of a business over increasing numbers of revenue-producing customers (short of the point where unrestrained growth actually opens the market for new entrants.) The authors also celebrate disciplined management teams who continue to improve their business operations and who manage revenue production to consistent standards of profitable growth.
Knee is clear about how rigorous the standards for true competitive advantage and profitable growth must be. For a media company to qualify as possessing competitive advantages, it must stand alone in its field, protected by a moat of high fixed cost barriers, scale, customer captivity--the kind that is borne of high switching costs or the networking effects of an ingenious product model like Google--or government protection (ah, Ma Bell.) If a media company does not have a unique enough moat, it may be one of a very small group of industry peers with a cooperative moat, shared amongst industry leaders without violating antitrust laws, where the right balance of cooperation and independent operation avoids value destruction.
For everybody else not moat inclined, efficiency is the course to pursue. Per Knee, efficiency is the mark of operational excellence and is never the result of the efforts of any single gifted executive, but instead achieved by successive management teams working with rules and processes that create efficient products and well maintained profit margins over time.
Using this framework, "The Curse of the Mogul" evaluates media businesses as diverse as Bloomberg (loud applause,) Google (fainting and cheering,) and a collection of cable networks (reserved appreciation) against pure content plays without unique competitive packaging (like movies and music performance.) The problem with "disjoint" content businesses is their over-reliance on a creative result that is not replicable, as well as dysfunctional economics that distribute revenue to talent and lawyers rather than making consistent profits.
The book's title is reinforced by the authors' theory that Media Moguls get so carried away by narcissism, their devotion to their own genius insights (as well as those of a small group of insiders on whom they believe their businesses are staked) and media popularity that they disregard the rules of successful business performance--namely, build a moat and operate your castle efficiently.
Significant examples in every media category are trotted out shame-faced. Those examples of media businesses that have consistently under-performed the S&P 500 over time were easy to find, given that the media--in part because of a tendency to see growth as God and to pursue deal-making growth through big and generally disjointed acquisitions--under-performs the market reliably.
So who cares about profit anyway? The authors maintain that if you want to operate a sustainable business, you must. And flash in the pan profits are not sustainable anymore than CDO's were--even though they deliver disproportionate cash and glory to a small sector before they knock the lights out.
Knee is not a big internet lover when it comes to growing businesses, although he acknowledges the huge value represented to consumers. Knee writes in a chapter called "The Internet is Not Your Friend": "The Internet may be somebody's friend--most notably the consumers of media--but it is not the friend of incumbent media companies. For the incumbent, any benefits from the Internet on either the cost or new revenue opportunity side are overwhelmed by the damage done by the lowering of barriers to entry."
Surely there are a few friends of the Internet--Google, Amazon, eBay, Facebook, Apple and Microsoft/Yahoo! amongst them. In even these cases, Knee walks each company through his competitive barrier and efficiency framework demonstrating how unique and beyond replication these examples are for the mere mortal (and, especially, he believes, for the mere mogul.)
There are many important media lessons in this book that are not obvious and yet don't require a Columbia degree. Amongst them is a clear preference for distribution businesses that--like cable, satellite, broadcast and telecom--have built virtually impenetrable structures with fixed capital investment, local franchises and Federal government cooperation. Even as these businesses slow down and threaten to be overtaken by what appear to be digital comparables, their unique advantages distinguish them and support sustainable profits. Nothing lasts forever and big distribution will ultimately be overtaken by either itself or other media forms, but forever is a long time and many profitable dollars away.
Also important: Knee's debunking of the idea of Content as King. (Knee doesn't seem to like the whole King idea however it's served up.) He points to pure content play media businesses--which he divides into creative and packaging examples--as amongst the least consistently profitable of the media field. The more creative or talent-based these businesses are, the less sure their profitability will be.
The packaging side of content provides some barriers to protect it in the form of network structures that demand a continuous supply of content, making them difficult to duplicate. One of Knee's favorite forms of continuous content businesses are database businesses, including Bloomberg. The huge costs associated with building a continuous media service that includes original content as well as continuous data and other borrowed innovations that are habit-forming, like instant messaging, keep competitors away.
Conversely, the more dependent a continuous content business like a cable network is on a single hit series--that, no matter how popular, is unlikely to maintain profit-growing capabilities because of the nature of TV hit economics--the more vulnerable it becomes. The idea: better to build an expensive niche network around a small collection of first or re-run hits. (Big applause here for Discovery.)
Once again, score one for the ingenuity of the cable industry's founders. Unfortunately, the niche continuous content enterprise may be falling for big ratings plays in today's cable world, just as advertising rates--the only way to monetize ratings--are under significant market pressure. Knee also celebrates the past potential of newspapers and magazines--especially niche magazines--to generate profits with the network effects of highly motivated niche audiences, local franchises, high fixed costs and continuous content. Their collective downfall--from which a few niche publications may be saved--has come from a mad embrace of the unfriendly internet.
What is it with "The Curse of the Mogul" and the internet? Because success in the highly efficient digital structure of the web requires very little initial capital investment, only the strong infrastructure plays--like unique habit-forming search and marketplace commerce that leverage a growing loyal audience--survive. Newspapers are the most obvious example of media companies that moved away from their essential strategic advantages believing that their intelligence and the star quality of their content, leaders and brands would translate.
Here, Knee and his colleagues make another important point about media futures. Looking at the near-collapse of the music business--only recently rejuvenated by Apple's tenacity in focusing not on the music itself, which is talent inexpensively sold, but on its devices and its digitally networked system as sustainable competitive advantages--"Curse of the Moguls" points out the critical revenue and profit-reducing tide that lowered all ships. When the music business turned from albums and CD's to singles, it reduced its revenue-per-unit in accordance with its digitally enabled lower per-unit production costs. What it failed to anticipate was that this made it possible for every company in creation to enter the field without barriers, along with a profligate counterfeiting audience.
Is there a TV corollary? Did VOD open the door to You Tube? How much sense does it make for the media to parse and resell individual programs to consumers hoping for profitable sales and repeat devotion? If we're following the Knee framework, the best way to sell VOD is in a bundle with a continuous content network, as well as other unique benefits that can be assembled out of the wild west of digital technology and the internet. The harder it is for competitors to replicate a secret sauce packaged from high fixed cost/viral audience-building ingredients--like cable networks--mixed with efficient digital content elements to enhance profits (but only to enhance profits, as opposed to becoming the product itself,) the more sustainable TV content and the collaborative partners who distribute it will be.
"The Curse of the Moguls" is pretty old-school in the end, favoring groups, traditional business standards, discipline and hard work over individuals and magic. It's interesting that, in these days after the deluge, the old rules seem both certain and somehow new.
Monday, October 19, 2009
Stormy Weather
Capsule: Will Google, Amazon, Microsoft/Yahoo! and Apple compete with Comcast, Time Warner Cable, Verizon and AT&T on media distribution? As the new content/distribution hybrids get serious about cloud computing, will they rain on cable and telecom's parade?
Google.com
Google's Cloud Looms Large
Despite its dominance, Google is a master of understatement. It doesn't talk much about its next innovation--like leveraging cloud computing--until it's already under our noses. It stands out from its competitors who announce their plans before launching their products. On the far end of the spectrum, cable MSO's and telecom providers announce their innovations weeks, months or years before they're brought to market.
The issues separating ready-to-launch new cable and telecom businesses from their early publicity may be less about appearance than the reluctance of mature money-making industries to develop new products for little or no reward. The equity markets and its analysts play a big hand in this preference for press over forward-looking product investment. Cable and telco stock prices halt or falter based on capital spending despite its essential role in paving new growth roads and shoring up existing growth engines.
Verizon, a standout exception at the head of the capital spending honor roll with its Fios products, has spent years selling its cable overbuilds to the investment community, finally justifying the necessity of Fios in terms of competitive game theory and fill-in revenue for its declining wired service businesses. Even with its substantial size, Verizon stands on the foundation of its exceptional partly-owned CDMA/EV-DO wireless business to reach the higher shelves of Wall Street sanctioned capital investment.
AT&T, a skillful combination of many wired voice businesses and a crowd-pleasing GSM/HSPA-protocol wireless product, has been cable-careful on capital. Setting the course after being discounted for years of low or no profits, the cable MSO's have fallen off the other side of the horse. Cable's conversion to free cash flow reverence has been absolute, even though the rewards have been limited because cable came to profitable maturity when everybody else was looking elsewhere.
Ironically, all investment eyes have been trained on an imaginary distribution train wreck that might be stopped with more diverse growth-related capital investment. For the last five years, fears of slowing growth in the telecom and cable businesses have punished the translation of exceptional results into equity value. Rumors of the inevitable decline of wired TV, broadband and voice have been greatly exaggerated.
True--after reaching market share for digital TV, broadband and voice products of anywhere from 15% to 75%--cable and telecom are starting to hit a revenue peak for their existing product lines. Likely, the intelligence of the cable and Fios platforms will allow for new products and revenue streams on the way to the next Mother Lode. But for these new products to be built, advance work on product definition, market strategy and operating execution would have to be far along--which would compromise free cash flow growth and dividend confidence.
At the same time, alternative distribution forms that include a new version of content as well as massive distribution capabilities are viewed from the southern tip of New York with a softer eye. Google is profitable--an event the equity markets were comfortable waiting for since the late 1990's even though the capital and operating requirements of Google's businesses are inherently lighter when it comes to adding customers than traditional distribution. In fact, most of Google's recent capital spending has been capital investment in highly distributed server capacity that will enable a new range of businesses with new customers inside "the cloud."
Cloud computing is not new. The idea of reducing cost and increasing distributed reliability by processing information through the Internet and its protocols powered the third revenue rush for cable and telecom in the form of VoIP and voice-over-cable services. Cable created a hybrid structure for its voice products that used its own platform to supplement or replace the cloud, ensuring call quality within regional service areas before competing with the traditional five-nines service reputation of circuit switched telephony.
Cable has also announced plans to use its platform as a cloud in network DVR applications, moving the emphasis inside cable viewing from the set-top box to servers that can be located and backed up virtually anywhere. Similarly, the cable Project Canoe would benefit from a reconsolidated broadband platform and server links that could enable national content players to sell, book and execute targeted interactive advertising to any TV set in the US. But both of these post-voice-over-cable concepts are lingering in the post-announcement pre-execution phase for need of a product and market strategy as well as a business plan.
A new influence on these plans is the tangible convergence of video and broadband into a single merged product with a potentially robust business model or two behind it. Cable is used to these mash ups, having converged voice and broadband into a single cable broadband product with a voice extension to great acclaim and real success.
The telecom businesses, including Verizon, AT&T and other wired businesses of size like Qwest, have viewed convergence with great suspicion gained from running both wired and wireless businesses that cannot easily converge profitably. Similarly, the convergence of TV and broadband challenges Verizon and Qwest with potentially huge content-related costs and the need for a new business model; while AT&T continues to plug away at its home-made converged broadband service about which it's still too early to tell.
These great ships of the media generate revenue and profits in the billions and are appropriately loathe to invite the next set of challenges that might reset their multi-faceted clocks. The fact that their product and revenue futures will likely depend on a broadband core is understood. But the unique approach to the market that will be required to make new broadband products and services profitable has not yet been announced, which means it may be years away from launch. Big ships take a while to turn.
Also, the tendency for both cable and telecom distribution to favor products bordered by some restrictive friction to deter competition may make the types of competitive collaboration required in these new sometimes stormy seas seem less than navigable. Regardless of how unsettled they appear, cable and telecom will have to stake a position and prepare the equity and credit markets for the investment required to make it work. Otherwise, Google, Microsoft/Yahoo!, Apple and Amazon will introduce a new set of content and distribution relationships that are guaranteed game changers for the traditionalist.
Could cloud computing lead major internet based competitors to new distribution platforms capable of storing both TV and data content, as well as the personalized navigation and advertising to bring it all home? In some ways, we're already there. But, of seminal importance, internet content/distribution hybrids lack physical service and billing relationships with their customers. Their ability to monetize a collection of personalized services without an earth-based way of placing customers in their real homes and businesses to establish service and billing care is a serious future challenge not to be minimized.
Also huge are the content relationships and costs that make TV distribution a business. Unlike a major book publishing aggregated rights deal--or maybe just like it--the complexity of the content business cannot be wished away.
Will it be easier for internet media hybrids to create the tangible basis for profitable customer relationships or for media distribution to become product development prodigies sailing through the broadband-linked clouds? Most likely, a hybrid-hybrid that combines TV, internet and wireless products to the best advantage of their broadband-served customers will set tomorrow's media models. Which means that everyone will have to learn to swim with the competition without crashing into the rocks or floating away.
Google.com
Google's Cloud Looms Large
Despite its dominance, Google is a master of understatement. It doesn't talk much about its next innovation--like leveraging cloud computing--until it's already under our noses. It stands out from its competitors who announce their plans before launching their products. On the far end of the spectrum, cable MSO's and telecom providers announce their innovations weeks, months or years before they're brought to market.
The issues separating ready-to-launch new cable and telecom businesses from their early publicity may be less about appearance than the reluctance of mature money-making industries to develop new products for little or no reward. The equity markets and its analysts play a big hand in this preference for press over forward-looking product investment. Cable and telco stock prices halt or falter based on capital spending despite its essential role in paving new growth roads and shoring up existing growth engines.
Verizon, a standout exception at the head of the capital spending honor roll with its Fios products, has spent years selling its cable overbuilds to the investment community, finally justifying the necessity of Fios in terms of competitive game theory and fill-in revenue for its declining wired service businesses. Even with its substantial size, Verizon stands on the foundation of its exceptional partly-owned CDMA/EV-DO wireless business to reach the higher shelves of Wall Street sanctioned capital investment.
AT&T, a skillful combination of many wired voice businesses and a crowd-pleasing GSM/HSPA-protocol wireless product, has been cable-careful on capital. Setting the course after being discounted for years of low or no profits, the cable MSO's have fallen off the other side of the horse. Cable's conversion to free cash flow reverence has been absolute, even though the rewards have been limited because cable came to profitable maturity when everybody else was looking elsewhere.
Ironically, all investment eyes have been trained on an imaginary distribution train wreck that might be stopped with more diverse growth-related capital investment. For the last five years, fears of slowing growth in the telecom and cable businesses have punished the translation of exceptional results into equity value. Rumors of the inevitable decline of wired TV, broadband and voice have been greatly exaggerated.
True--after reaching market share for digital TV, broadband and voice products of anywhere from 15% to 75%--cable and telecom are starting to hit a revenue peak for their existing product lines. Likely, the intelligence of the cable and Fios platforms will allow for new products and revenue streams on the way to the next Mother Lode. But for these new products to be built, advance work on product definition, market strategy and operating execution would have to be far along--which would compromise free cash flow growth and dividend confidence.
At the same time, alternative distribution forms that include a new version of content as well as massive distribution capabilities are viewed from the southern tip of New York with a softer eye. Google is profitable--an event the equity markets were comfortable waiting for since the late 1990's even though the capital and operating requirements of Google's businesses are inherently lighter when it comes to adding customers than traditional distribution. In fact, most of Google's recent capital spending has been capital investment in highly distributed server capacity that will enable a new range of businesses with new customers inside "the cloud."
Cloud computing is not new. The idea of reducing cost and increasing distributed reliability by processing information through the Internet and its protocols powered the third revenue rush for cable and telecom in the form of VoIP and voice-over-cable services. Cable created a hybrid structure for its voice products that used its own platform to supplement or replace the cloud, ensuring call quality within regional service areas before competing with the traditional five-nines service reputation of circuit switched telephony.
Cable has also announced plans to use its platform as a cloud in network DVR applications, moving the emphasis inside cable viewing from the set-top box to servers that can be located and backed up virtually anywhere. Similarly, the cable Project Canoe would benefit from a reconsolidated broadband platform and server links that could enable national content players to sell, book and execute targeted interactive advertising to any TV set in the US. But both of these post-voice-over-cable concepts are lingering in the post-announcement pre-execution phase for need of a product and market strategy as well as a business plan.
A new influence on these plans is the tangible convergence of video and broadband into a single merged product with a potentially robust business model or two behind it. Cable is used to these mash ups, having converged voice and broadband into a single cable broadband product with a voice extension to great acclaim and real success.
The telecom businesses, including Verizon, AT&T and other wired businesses of size like Qwest, have viewed convergence with great suspicion gained from running both wired and wireless businesses that cannot easily converge profitably. Similarly, the convergence of TV and broadband challenges Verizon and Qwest with potentially huge content-related costs and the need for a new business model; while AT&T continues to plug away at its home-made converged broadband service about which it's still too early to tell.
These great ships of the media generate revenue and profits in the billions and are appropriately loathe to invite the next set of challenges that might reset their multi-faceted clocks. The fact that their product and revenue futures will likely depend on a broadband core is understood. But the unique approach to the market that will be required to make new broadband products and services profitable has not yet been announced, which means it may be years away from launch. Big ships take a while to turn.
Also, the tendency for both cable and telecom distribution to favor products bordered by some restrictive friction to deter competition may make the types of competitive collaboration required in these new sometimes stormy seas seem less than navigable. Regardless of how unsettled they appear, cable and telecom will have to stake a position and prepare the equity and credit markets for the investment required to make it work. Otherwise, Google, Microsoft/Yahoo!, Apple and Amazon will introduce a new set of content and distribution relationships that are guaranteed game changers for the traditionalist.
Could cloud computing lead major internet based competitors to new distribution platforms capable of storing both TV and data content, as well as the personalized navigation and advertising to bring it all home? In some ways, we're already there. But, of seminal importance, internet content/distribution hybrids lack physical service and billing relationships with their customers. Their ability to monetize a collection of personalized services without an earth-based way of placing customers in their real homes and businesses to establish service and billing care is a serious future challenge not to be minimized.
Also huge are the content relationships and costs that make TV distribution a business. Unlike a major book publishing aggregated rights deal--or maybe just like it--the complexity of the content business cannot be wished away.
Will it be easier for internet media hybrids to create the tangible basis for profitable customer relationships or for media distribution to become product development prodigies sailing through the broadband-linked clouds? Most likely, a hybrid-hybrid that combines TV, internet and wireless products to the best advantage of their broadband-served customers will set tomorrow's media models. Which means that everyone will have to learn to swim with the competition without crashing into the rocks or floating away.
Thursday, October 15, 2009
Just Rewards
Capsule: As business leaders reexamine their results against the economic collapse and its aftermath, what can we say about media lessons learned? Content and distribution were both victims of the economic tsunami that withdrew $11 trillion in American wealth. What have we learned? Equity market penalties are inescapable, so you might as well do what you think is right.
Forbes
Forbes just released the "Thinkers 50" ranking of today's "Most Influential Business Leaders." The "Thinkers 50" process employs leadership consulting firm CrainerDearlove to survey 3,500 people around the world who identify a pool of the 100 top business thinkers which is then groomed by a panel of business experts to rank the top 50.
The academicians, business wunderkinds and economists who've traditionally made the ranking have been shuffled a bit because of what Forbes refers to as "economic turbulence." While a University of Michigan Business School professor named C.K. Prahalad--the management guru who first used the term "core competencies"--heads the list for his second year, 13 new thinkers are in the top 50, including Mohammad Yunus, the Nobel laureate, founder of the Grameen Bank and the author of "Banker to the Poor." Yunus is the new Number Six. And Number One Prahalad's work is cited through the example of "The Fortune at the Bottom of the Pyramid" showing how business can play a role in overcoming world poverty.
At the same time, Michael Sandel, a political philosophy Professor at Harvard University, has seen global participation in his "Justice" course flourish through streaming videos and podcasts as well as a book. "Justice" examines current events, including the global economic collapse and its aftermath, against ideals of fairness using the construct of how societies distribute the things we prize: income and wealth, duties and rights, powers and opportunities, offices and honors.
It may be that ethics and morality are becoming more relevant in our thinking during work and after hours. Is it possible that doing things that are good for others can also be good for real long-term business gains? We might hope so, because the sentiment pendulum has swung.
What role might the media play in spreading the new information age wealth beyond the American plutonomy? Here are five ideas for stronger media participation in the global debate on lessons learned.
Innovate. When the broadcast and cable television industries first formed, they knew how to expand through invention as well as replication. Broadcasting innovation brought us radio station formats that varied according to music, news and sports tastes. TV broadcasting brought us media forms as integral to our expanding knowledge base as Walter Cronkite and as whimsically important as The Twilight Zone and Star Trek.
Cable exploded the myth of broadcast centrality and split our focus with new TV networks, from CNN to MTV to Comedy Central, Bravo and HBO. Regional sports expanded dynamically with whole channels devoted to local teams. National sports expanded beyond broadcast to ESPN. Rather than forced confusion, cable's ingenious business system of distribution supported by differentiated content expanded our minds and our TV enjoyment.
Where is today's content innovation? While increasing the number of networks, we seem to have reduced our choices. More and more, each cable network is aiming at the same thing: big ratings. Is this natural selection leading to greater media efficiency? Is that good for the media's health?
Cable TV networks are duplicating each other's mission with TV entertainment and news. This competition may introduce good original programming and great reruns, but the value of each individual network is compromised when it hangs its shingle on one or two series (or less) of note. The value of our news networks are compromised when they descend into hyperbolic commentary and incomplete analysis in order to win ratings wars. How inefficient can 24-hours of narrowcast programming get when we keep broadcasting the same messages?
Is there a new content form that cuts through the clutter? The combination of internet and VOD content with traditional network programming may be the future, but it must be the right combination--not the extra footage and out-takes that should have been permanently excised in the original edit.
The new content form may require a new distribution format. Look to Bloomberg TV for a clue. Bloomberg Enterprise Services just introduced "Bloomberg on Display," programmed via Stratacache: a "digital out-of-home news content and advertising service for retail financial clients." Bloomberg will combine Bloomberg TV segments--the products of a highly valued cable business news enterprise--with new live and on demand content and advertising.
Given that a substantial portion of the Bloomberg business is programming business data terminals, upgrading some cross-section of local office screens to video and, ultimately, programming directly via the internet to home and office TV's can't be far behind. In the light of this potential, it's a worthwhile exercise to imagine the hundreds of TV channels and VOD choices on the cable "dial" becoming the background of cable content, with a foreground dominated by a handful of new networks that combine IPTV and traditional TV on demand. For the innovator, working on a new network form could be a fertile endeavor while the rest of the world is sleeping off the economic collapse. It would be nice to innovate like it's 1981.
Expand. It's time for big TV distribution to innovate like the cable franchising era (yes, circa 1981.) Since all of the US and most of the international franchises have been awarded, this means expanding service areas through portable technology.
Whatever happened to SlingMedia? Why can't the core Slingbox concept be re-imagined in a format and with media backers that can make transportable TV work? The attractiveness of being able to take your TV and internet brands with you, encased in a local cable operator's service skin--or perhaps in a competitive skin--runs deep. There's an IPTV product in this early idea waiting to be born (and syndicated to planes, trains, automobiles, hotels and offices.)
If we have to wait for portable TV, why can't we at least have a pure wireless facsimile? Telecom distribution is working on this with AT&T and Verizon having the most to gain. Yet, the boldest example of future promise may come from Clearwire and its investors, Comcast, Time Warner, Bright House, Intel and Google. Their promised 4G networks will deliver "broadband on the go." While the technology is developed, the products are designed and the brand promise perfected, we can only hope that wireless TV will be something more than a clone of its house brand counterpart. Once again, a handful of original content and distribution forms will resonate with audiences and create the next media windfall.
Compete. Compete with Google. No one, including Google itself, should cede ground to a single search engine execution. Distribution and content companies can create better navigation companions to Google with real opt-in personalization. Cable companies and phone companies have the customer relationships and the service experience to make new personalized navigation work. They can also make new retail relationships work, particularly those relating to local and regional retailers inside their service areas.
With Google, the genius has been the originality of their design and their business savvy in replicating the same design with only slight quality alterations over time. With cable and telecom distribution, the genius can come from customer relationships, which are face-to-face personal for these industries because of their local service connection. Add the wealth of information that service companies can mine--now virtually flushed for the lack of a will and a way--and new opt-in advertising and retail businesses can be born.
Integrate. Integration requires the discipline of collaboration. Most media companies are independent spirits who believe in working hard on their own. How do we create a multimedia news service that has the reporting and analytical depth of The New York Times, NPR, PBS and the BBC? What about a business news service that combines Bloomberg with the FT, Barron's and The Wall Street Journal? Wouldn't it be great to tune into a single TV and broadband navigation system that interwove these incredible content brands--or others that you chose to combine--into a symphony just for you?
On distribution, how can we create new advertising forms, combining e-mail (and eventually many different internet content sources,) advertising partnerships and the DVR? Would you be interested in receiving an e-mail that included links to relevant videos that you could click on and that automatically were programmed by your cable or telecom or satellite provider into your DVR? Wouldn't that be easier on a single internet screen than paging through your interactive program guide to find the shows you want on TV?
Why not do both and more? Could Gourmet magazine have been saved if it had used a rich marketing campaign to email its distribution list with upcoming features and suggested videos from advertising partners like the Food Network that could be clicked from laptops into DVR library status? These product integrations don't require a complete business integration. They do require a passion for creating new revenue streams out of the common ingredients of modern media.
Ideas as simple as rich content that include multiple brands sharing advertisers as well as enjoying their own advertising exclusives require content companies to work together and to pool resources. Today, that's barely done within the same horizontally integrated companies.
Even richer rewards may come when competitors collaborate. The media stands the best chance of making these combinations happen because of the mashed up way its consumers use media already. Making a better mash may also rescue some cherished brands being pushed into obsolescence before the end of their useful lives.
Reward. Media companies can celebrate business innovation, integration, expansion and competitive wins by acknowledging them inside their financial rewards structures. Resetting executive compensation in the short and long term to focus on more than compounded free cash flow growth might bring about beneficial long-term results.
Media companies can establish their core principles (as opposed to their core competencies) by expanding their minds and reinventing their pay schemes. How many leaders in the modern management team actually have the power, from budgeting to execution, to deliver profit? There may be a better way to reach those in the media management pyramid who can attend to tomorrow's profit opportunities. And there may be a third way to rekindle media growth by smashing some of the traditional boundaries between ideas that have served us well and ideas that can extend our future.
Forbes
Forbes just released the "Thinkers 50" ranking of today's "Most Influential Business Leaders." The "Thinkers 50" process employs leadership consulting firm CrainerDearlove to survey 3,500 people around the world who identify a pool of the 100 top business thinkers which is then groomed by a panel of business experts to rank the top 50.
The academicians, business wunderkinds and economists who've traditionally made the ranking have been shuffled a bit because of what Forbes refers to as "economic turbulence." While a University of Michigan Business School professor named C.K. Prahalad--the management guru who first used the term "core competencies"--heads the list for his second year, 13 new thinkers are in the top 50, including Mohammad Yunus, the Nobel laureate, founder of the Grameen Bank and the author of "Banker to the Poor." Yunus is the new Number Six. And Number One Prahalad's work is cited through the example of "The Fortune at the Bottom of the Pyramid" showing how business can play a role in overcoming world poverty.
At the same time, Michael Sandel, a political philosophy Professor at Harvard University, has seen global participation in his "Justice" course flourish through streaming videos and podcasts as well as a book. "Justice" examines current events, including the global economic collapse and its aftermath, against ideals of fairness using the construct of how societies distribute the things we prize: income and wealth, duties and rights, powers and opportunities, offices and honors.
It may be that ethics and morality are becoming more relevant in our thinking during work and after hours. Is it possible that doing things that are good for others can also be good for real long-term business gains? We might hope so, because the sentiment pendulum has swung.
What role might the media play in spreading the new information age wealth beyond the American plutonomy? Here are five ideas for stronger media participation in the global debate on lessons learned.
Innovate. When the broadcast and cable television industries first formed, they knew how to expand through invention as well as replication. Broadcasting innovation brought us radio station formats that varied according to music, news and sports tastes. TV broadcasting brought us media forms as integral to our expanding knowledge base as Walter Cronkite and as whimsically important as The Twilight Zone and Star Trek.
Cable exploded the myth of broadcast centrality and split our focus with new TV networks, from CNN to MTV to Comedy Central, Bravo and HBO. Regional sports expanded dynamically with whole channels devoted to local teams. National sports expanded beyond broadcast to ESPN. Rather than forced confusion, cable's ingenious business system of distribution supported by differentiated content expanded our minds and our TV enjoyment.
Where is today's content innovation? While increasing the number of networks, we seem to have reduced our choices. More and more, each cable network is aiming at the same thing: big ratings. Is this natural selection leading to greater media efficiency? Is that good for the media's health?
Cable TV networks are duplicating each other's mission with TV entertainment and news. This competition may introduce good original programming and great reruns, but the value of each individual network is compromised when it hangs its shingle on one or two series (or less) of note. The value of our news networks are compromised when they descend into hyperbolic commentary and incomplete analysis in order to win ratings wars. How inefficient can 24-hours of narrowcast programming get when we keep broadcasting the same messages?
Is there a new content form that cuts through the clutter? The combination of internet and VOD content with traditional network programming may be the future, but it must be the right combination--not the extra footage and out-takes that should have been permanently excised in the original edit.
The new content form may require a new distribution format. Look to Bloomberg TV for a clue. Bloomberg Enterprise Services just introduced "Bloomberg on Display," programmed via Stratacache: a "digital out-of-home news content and advertising service for retail financial clients." Bloomberg will combine Bloomberg TV segments--the products of a highly valued cable business news enterprise--with new live and on demand content and advertising.
Given that a substantial portion of the Bloomberg business is programming business data terminals, upgrading some cross-section of local office screens to video and, ultimately, programming directly via the internet to home and office TV's can't be far behind. In the light of this potential, it's a worthwhile exercise to imagine the hundreds of TV channels and VOD choices on the cable "dial" becoming the background of cable content, with a foreground dominated by a handful of new networks that combine IPTV and traditional TV on demand. For the innovator, working on a new network form could be a fertile endeavor while the rest of the world is sleeping off the economic collapse. It would be nice to innovate like it's 1981.
Expand. It's time for big TV distribution to innovate like the cable franchising era (yes, circa 1981.) Since all of the US and most of the international franchises have been awarded, this means expanding service areas through portable technology.
Whatever happened to SlingMedia? Why can't the core Slingbox concept be re-imagined in a format and with media backers that can make transportable TV work? The attractiveness of being able to take your TV and internet brands with you, encased in a local cable operator's service skin--or perhaps in a competitive skin--runs deep. There's an IPTV product in this early idea waiting to be born (and syndicated to planes, trains, automobiles, hotels and offices.)
If we have to wait for portable TV, why can't we at least have a pure wireless facsimile? Telecom distribution is working on this with AT&T and Verizon having the most to gain. Yet, the boldest example of future promise may come from Clearwire and its investors, Comcast, Time Warner, Bright House, Intel and Google. Their promised 4G networks will deliver "broadband on the go." While the technology is developed, the products are designed and the brand promise perfected, we can only hope that wireless TV will be something more than a clone of its house brand counterpart. Once again, a handful of original content and distribution forms will resonate with audiences and create the next media windfall.
Compete. Compete with Google. No one, including Google itself, should cede ground to a single search engine execution. Distribution and content companies can create better navigation companions to Google with real opt-in personalization. Cable companies and phone companies have the customer relationships and the service experience to make new personalized navigation work. They can also make new retail relationships work, particularly those relating to local and regional retailers inside their service areas.
With Google, the genius has been the originality of their design and their business savvy in replicating the same design with only slight quality alterations over time. With cable and telecom distribution, the genius can come from customer relationships, which are face-to-face personal for these industries because of their local service connection. Add the wealth of information that service companies can mine--now virtually flushed for the lack of a will and a way--and new opt-in advertising and retail businesses can be born.
Integrate. Integration requires the discipline of collaboration. Most media companies are independent spirits who believe in working hard on their own. How do we create a multimedia news service that has the reporting and analytical depth of The New York Times, NPR, PBS and the BBC? What about a business news service that combines Bloomberg with the FT, Barron's and The Wall Street Journal? Wouldn't it be great to tune into a single TV and broadband navigation system that interwove these incredible content brands--or others that you chose to combine--into a symphony just for you?
On distribution, how can we create new advertising forms, combining e-mail (and eventually many different internet content sources,) advertising partnerships and the DVR? Would you be interested in receiving an e-mail that included links to relevant videos that you could click on and that automatically were programmed by your cable or telecom or satellite provider into your DVR? Wouldn't that be easier on a single internet screen than paging through your interactive program guide to find the shows you want on TV?
Why not do both and more? Could Gourmet magazine have been saved if it had used a rich marketing campaign to email its distribution list with upcoming features and suggested videos from advertising partners like the Food Network that could be clicked from laptops into DVR library status? These product integrations don't require a complete business integration. They do require a passion for creating new revenue streams out of the common ingredients of modern media.
Ideas as simple as rich content that include multiple brands sharing advertisers as well as enjoying their own advertising exclusives require content companies to work together and to pool resources. Today, that's barely done within the same horizontally integrated companies.
Even richer rewards may come when competitors collaborate. The media stands the best chance of making these combinations happen because of the mashed up way its consumers use media already. Making a better mash may also rescue some cherished brands being pushed into obsolescence before the end of their useful lives.
Reward. Media companies can celebrate business innovation, integration, expansion and competitive wins by acknowledging them inside their financial rewards structures. Resetting executive compensation in the short and long term to focus on more than compounded free cash flow growth might bring about beneficial long-term results.
Media companies can establish their core principles (as opposed to their core competencies) by expanding their minds and reinventing their pay schemes. How many leaders in the modern management team actually have the power, from budgeting to execution, to deliver profit? There may be a better way to reach those in the media management pyramid who can attend to tomorrow's profit opportunities. And there may be a third way to rekindle media growth by smashing some of the traditional boundaries between ideas that have served us well and ideas that can extend our future.
Monday, October 12, 2009
Wag the Dog
Capsule: Dynamic pricing is the most hopeful and the least practical idea for managing energy consumption through electrical smart grids. The concept involves charging more for electricity during peak consumption periods and offering consumers the opportunity to manage their consumption or have it managed for them to peak efficiency. Is there a similar pricing plan in broadband's future?
The Economist
This week's Economist gives the skinny on "wiser wires" with the latest commercial thinking on smart grids. Local and state governments are being offered Federal stimulus to invest in smart energy management. Companies, detecting a brass ring in our energy management aspirations, are flocking to smart network construction, meter-making and in-home products that will enable their fulfillment. This can be good news for all last mile media distribution companies who might be far-sighted enough to invest in new partner economics.
Start-up companies like Grid-Point and Silver Spring Networks have recently raised close to $400 million to develop systems where sensors on electrical plant will talk to smart meters in the home to rate, route and perhaps price electricity consumption. Google and Microsoft are joining Cisco and IBM at the smart table with web-based energy management services, called PowerMeter and Hohm.
And think tanks are debating whether consumers will play along with pricing plans that reward energy efficiency. Unfortunately, an early effort by Seattle's Puget Sound Energy (PSE) was cancelled within 18 months of its 2002 launch when the flaw in the pricing scheme turned out to be charging the most energy efficient customers a counter-intuitive premium for their participation.
Is there an opportunity in all this smart thinking for smarter products and smarter pricing in the media? Bandwidth management for cable and telecom distribution is a major economic issue with few sympathizers. To start, cable and telecom companies don't easily admit, for competitive reasons, that they have capacity issues. Recently, on threat of wireless net neutrality regulation, telecoms registered their wireless bandwidth concerns. Governments seem to understand, yet persist in thinking about media bandwidth only in terms of voter desires and the new media ambitions of Google and others for unlimited broadband capacity for their own profit-making use.
The bottom line on wired cable and telecom network capacity is that overcoming limitations will require investment and ingenious strategic thought. It may also require a better dynamic partnership between content and distribution to reinforce the gig that pays the bills.
Today, if an average cable bill can be set at $113 per month, the largest piece of that bill--$70--is going to digital TV; $32 is going to broadband (80%--the estimated percentage of video customers taking broadband--of a $40 online RPS;) and, $11 (45% of a $25 RPS) is going to voice. On an operating income basis, the economics change, with digital TV contributing $21; broadband making the largest contribution of $23.50; and voice contributing just over $5.50.
The biggest cost inside the distribution business is content. The biggest cost inside the broadband business is bandwidth. The biggest cost inside the voice business is call completion. Content costs, assessed only on the TV part of the business continue to rise, as does content consumption--slightly for digital TV and expansively for broadband. Call completion costs are variable and decreasing, as unfortunately are paid wired voice calls as customers cut the cord in favor of wireless-only calling and very low cost internet plans. The value of wired voice service will likely stabilize at a very low premium--below $5 a month, bringing in just under half in profit.
What's to come for digital tv and broadband economics? Fewer digital TV customers along with reduced broadband growth and higher broadband content consumption. Everyone will eventually lose in this scenario unchecked. As the digital TV business loses value to internet based content alternatives, every digital TV player, from cable to satellite to telco TV will lose customers and growth opportunities as the broadband business grows fastest in terms of consumption and cost. Wired distribution may keep pace by raising broadband prices but there is a serious incentive in not allowing the tail to wag the dog.
In 2009, TV viewing through a wired digital TV system increased, with cable networks and broadcast stations all playing a part. But the proliferation of TV alternatives online suggest that younger viewers will soon replace high revenue digital TV packages with heavier broadband use, increased wireless dependence, home media hubs and IPTV. Distribution losses are big in this vision of a possible future. Content, ambivalent about internet distribution dollars for fear of losing the sure bet of cable and satellite revenue share, will likely feel some pain as the markets weed out the least serious players in a competitive race that includes multiple distribution alternatives from Hulu to Google TV to Apple.
The best news in these evolving economics is how long evolution takes. The digital evolutionary course will likely unfold over a decade or two, separating consumers into consumption patterns. Older customers and major sports fans used to the convenience of cable and satellite TV on their HD home theaters will continue their digital TV ways for the foreseeable future. Younger less established consumers will join the ranks of early adopters and vary their triple play consumption--first, cutting it down to a double play by losing the wired voice service and next by reducing or eliminating their digital TV packages.
Both content and distribution have real opportunities to turn evolution into profit transformation as life unfolds. One confident move might be to introduce a new tier of online service that includes TV. TV Online (or Roadrunner TV or Comcast High Speed TV or Optimum Online TV, etc.) might be an outgrowth of the TV Everywhere content efforts, now aimed at creating a scaleable authentication system that will approve TV consumption online according to the wired TV services purchased through cable, satellite or telecom.
If the media aims at the younger, early adopter audience in its wise recognition that things change, authentication should evolve to become a two-way concept, meaning it will initiate with a broadband only subscription as well as with a traditional TV service. Two-way here should also mean that depending on whether TV content is bought first online or on TV, either or both content and distribution can bill.
TV Online's pricing might begin with the full price of a broadband subscription. Layered on: premium content brands to be purchased a la carte, in packages or through online content aggregators including cable-friendly Hulu and cable-agnostic Netflix. If customers sign up for content purchases online, their billing relationship for just that content might be with the content store run by the content brand. In exchange for broadband platform access and the managed services of the cable or telecom distributor, the content brand or aggregator might pay the distributor via a premium subscription revenue share.
The a la carte content subscriptions layered onto the TV Online distribution service would cost less individually than their digital TV counterparts, but only on a network by network basis. TV Online content subscriptions would not be bundled into basic and expanded basic formats like they are inside of our historically constructed and regulated multichannel world. The bundles that would be carried through content aggregators would be built on an a la carte content pricing foundation that would be initiated on a practical level with TV Online. Traditional wired media would negotiate into their programming contracts broad terms on how the TV Online content subscriptions would be priced and bundled in exchange for maintaining the healthy core economics of wired carriage.
When purchased in volume, TV Online would cost more than traditional digital TV, maintaining cable, satellite and telecom for now as the value rich choice, leading lower and middle income families as well as older more traditional consumers to maintain their TV status quo. Why is the status quo important? Because today's distribution businesses are the foundation of the media, having proven their subscription model economics superior in the near term to any comers. These businesses support a robust content industry, while providing local jobs as well as paying taxes and franchise fees to local government. Creative disruption doesn't have to become creative destruction if the underlying business remains productive.
In this model, when TV Online content choices are light, the combination of a TV Online subscription and online subscription content might be competitive with or less than today's TV and broadband double play. Retained customer economics can quickly demonstrate the revenue advantages to a strategy like this for even the most successful cable bundler. There are cost advantages too: by putting a la carte subscription costs back into TV consumption when its done online, customers will share in the cost of bandwidth. And the eroding margins inside the cable, satellite and telco TV businesses may have a shot at stabilizing, while revenues and margins in the broadband business continue to increase. Only satellite is challenged in this scenario for not having a broadband business, although broadband partnerships help.
There may be a new future for the media business that involves a healthier system of dynamic pricing than the energy business has been able to effect. By thinking about media distribution platforms as a scarce resource to be renewed, government may contribute to productive media partnerships that will benefit consumers with more choice and greater value. There might also be a wireless or even an energy management idea or two in a wired media distribution and content relationship that works.
The Economist
This week's Economist gives the skinny on "wiser wires" with the latest commercial thinking on smart grids. Local and state governments are being offered Federal stimulus to invest in smart energy management. Companies, detecting a brass ring in our energy management aspirations, are flocking to smart network construction, meter-making and in-home products that will enable their fulfillment. This can be good news for all last mile media distribution companies who might be far-sighted enough to invest in new partner economics.
Start-up companies like Grid-Point and Silver Spring Networks have recently raised close to $400 million to develop systems where sensors on electrical plant will talk to smart meters in the home to rate, route and perhaps price electricity consumption. Google and Microsoft are joining Cisco and IBM at the smart table with web-based energy management services, called PowerMeter and Hohm.
And think tanks are debating whether consumers will play along with pricing plans that reward energy efficiency. Unfortunately, an early effort by Seattle's Puget Sound Energy (PSE) was cancelled within 18 months of its 2002 launch when the flaw in the pricing scheme turned out to be charging the most energy efficient customers a counter-intuitive premium for their participation.
Is there an opportunity in all this smart thinking for smarter products and smarter pricing in the media? Bandwidth management for cable and telecom distribution is a major economic issue with few sympathizers. To start, cable and telecom companies don't easily admit, for competitive reasons, that they have capacity issues. Recently, on threat of wireless net neutrality regulation, telecoms registered their wireless bandwidth concerns. Governments seem to understand, yet persist in thinking about media bandwidth only in terms of voter desires and the new media ambitions of Google and others for unlimited broadband capacity for their own profit-making use.
The bottom line on wired cable and telecom network capacity is that overcoming limitations will require investment and ingenious strategic thought. It may also require a better dynamic partnership between content and distribution to reinforce the gig that pays the bills.
Today, if an average cable bill can be set at $113 per month, the largest piece of that bill--$70--is going to digital TV; $32 is going to broadband (80%--the estimated percentage of video customers taking broadband--of a $40 online RPS;) and, $11 (45% of a $25 RPS) is going to voice. On an operating income basis, the economics change, with digital TV contributing $21; broadband making the largest contribution of $23.50; and voice contributing just over $5.50.
The biggest cost inside the distribution business is content. The biggest cost inside the broadband business is bandwidth. The biggest cost inside the voice business is call completion. Content costs, assessed only on the TV part of the business continue to rise, as does content consumption--slightly for digital TV and expansively for broadband. Call completion costs are variable and decreasing, as unfortunately are paid wired voice calls as customers cut the cord in favor of wireless-only calling and very low cost internet plans. The value of wired voice service will likely stabilize at a very low premium--below $5 a month, bringing in just under half in profit.
What's to come for digital tv and broadband economics? Fewer digital TV customers along with reduced broadband growth and higher broadband content consumption. Everyone will eventually lose in this scenario unchecked. As the digital TV business loses value to internet based content alternatives, every digital TV player, from cable to satellite to telco TV will lose customers and growth opportunities as the broadband business grows fastest in terms of consumption and cost. Wired distribution may keep pace by raising broadband prices but there is a serious incentive in not allowing the tail to wag the dog.
In 2009, TV viewing through a wired digital TV system increased, with cable networks and broadcast stations all playing a part. But the proliferation of TV alternatives online suggest that younger viewers will soon replace high revenue digital TV packages with heavier broadband use, increased wireless dependence, home media hubs and IPTV. Distribution losses are big in this vision of a possible future. Content, ambivalent about internet distribution dollars for fear of losing the sure bet of cable and satellite revenue share, will likely feel some pain as the markets weed out the least serious players in a competitive race that includes multiple distribution alternatives from Hulu to Google TV to Apple.
The best news in these evolving economics is how long evolution takes. The digital evolutionary course will likely unfold over a decade or two, separating consumers into consumption patterns. Older customers and major sports fans used to the convenience of cable and satellite TV on their HD home theaters will continue their digital TV ways for the foreseeable future. Younger less established consumers will join the ranks of early adopters and vary their triple play consumption--first, cutting it down to a double play by losing the wired voice service and next by reducing or eliminating their digital TV packages.
Both content and distribution have real opportunities to turn evolution into profit transformation as life unfolds. One confident move might be to introduce a new tier of online service that includes TV. TV Online (or Roadrunner TV or Comcast High Speed TV or Optimum Online TV, etc.) might be an outgrowth of the TV Everywhere content efforts, now aimed at creating a scaleable authentication system that will approve TV consumption online according to the wired TV services purchased through cable, satellite or telecom.
If the media aims at the younger, early adopter audience in its wise recognition that things change, authentication should evolve to become a two-way concept, meaning it will initiate with a broadband only subscription as well as with a traditional TV service. Two-way here should also mean that depending on whether TV content is bought first online or on TV, either or both content and distribution can bill.
TV Online's pricing might begin with the full price of a broadband subscription. Layered on: premium content brands to be purchased a la carte, in packages or through online content aggregators including cable-friendly Hulu and cable-agnostic Netflix. If customers sign up for content purchases online, their billing relationship for just that content might be with the content store run by the content brand. In exchange for broadband platform access and the managed services of the cable or telecom distributor, the content brand or aggregator might pay the distributor via a premium subscription revenue share.
The a la carte content subscriptions layered onto the TV Online distribution service would cost less individually than their digital TV counterparts, but only on a network by network basis. TV Online content subscriptions would not be bundled into basic and expanded basic formats like they are inside of our historically constructed and regulated multichannel world. The bundles that would be carried through content aggregators would be built on an a la carte content pricing foundation that would be initiated on a practical level with TV Online. Traditional wired media would negotiate into their programming contracts broad terms on how the TV Online content subscriptions would be priced and bundled in exchange for maintaining the healthy core economics of wired carriage.
When purchased in volume, TV Online would cost more than traditional digital TV, maintaining cable, satellite and telecom for now as the value rich choice, leading lower and middle income families as well as older more traditional consumers to maintain their TV status quo. Why is the status quo important? Because today's distribution businesses are the foundation of the media, having proven their subscription model economics superior in the near term to any comers. These businesses support a robust content industry, while providing local jobs as well as paying taxes and franchise fees to local government. Creative disruption doesn't have to become creative destruction if the underlying business remains productive.
In this model, when TV Online content choices are light, the combination of a TV Online subscription and online subscription content might be competitive with or less than today's TV and broadband double play. Retained customer economics can quickly demonstrate the revenue advantages to a strategy like this for even the most successful cable bundler. There are cost advantages too: by putting a la carte subscription costs back into TV consumption when its done online, customers will share in the cost of bandwidth. And the eroding margins inside the cable, satellite and telco TV businesses may have a shot at stabilizing, while revenues and margins in the broadband business continue to increase. Only satellite is challenged in this scenario for not having a broadband business, although broadband partnerships help.
There may be a new future for the media business that involves a healthier system of dynamic pricing than the energy business has been able to effect. By thinking about media distribution platforms as a scarce resource to be renewed, government may contribute to productive media partnerships that will benefit consumers with more choice and greater value. There might also be a wireless or even an energy management idea or two in a wired media distribution and content relationship that works.
Subscribe to:
Posts (Atom)
