Freeconomics

Capsule:  Of all the strange 2009 developments in our sideways media world, Rupert Murdoch may save the day for the advertising business.  First, he'll try to save the day for newspapers, starting with his own.  Murdoch's threat to de-list The Wall Street Journal from Google in favor of paid access through Microsoft's Bing should start a gold rush of expensive content to search engines willing to pay something for the privilege. How will the new world order assemble when there are 32 flavors of free and all of them cost something?


Silicon Valley Insider 
The Financial Times   
FreeSat    

The tenet of basic economics that teaches that any price drop or give-away of a product forces prices down across the entire relevant business sector appears to have been forgotten in the mad rush to internet freedom. Free-conomics--not to be confused with Steven Levitt's and Stephen Dubner's two-book marvel with a similar-sounding name--has taken the media world by storm over the last five years and more's the pity.

As if our global economic crisis wasn't enough to destroy media value on a catastrophic scale, we had to help it along by forgetting about economics in the fanciful world of free. The collapse of the media's advertising value followed the introduction of free online newspaper content, promoted by internet search that isn't free in fact even if it appears free to the reader.  

Search engines like Google siphon off advertising revenue from every internet listed source and operate in a new marketplace where they own over 70% of the land.  What's more: they decide how much all of the land--or online advertising space--costs to a degree that infects advertising rates across the distribution landscape and around the world.  Your exposure to search advertising is what you pay to find The New York Times on Google.  What you're about to pay for The New York Times as it struggles to rebuild its economics on a solid paid foundation will also include a premium for all of those free online reads of yesteryear.

Bubble economics unite the housing and credit crises we're still surviving with the online content bubble created by Google's extraordinary ingenuity.  A bubble occurs when there is surplus capacity in the marketplace, like too many houses, too much low-cost credit and too many free news stories.  Like most bubbles, there isn't a single burst, but a series of blow-outs that presage value destruction beyond the bubble's primary participants.

Google's true genius surpasses even the majestic source of its bubble creation: its search algorithm and supporting process.  In its quest to catalogue the world's information, Google invented a new airplane.  The fact that no search competitors have been able to catch up tells you how much we've all aided Google's rise, kind of like everyone who bought or built a second home by borrowing heavily on the value of the first.  

We took cash out of the publishing business in order to put it into online search and we bear some responsibility for the gum on our face that used to be our online bubble. We'll bear more than embarrassment to put things right.  We'll bear the subsequent cost of saving an ailing news business that contributes substantially to our quality of life and perspective in an increasingly complex global environment.

But hasn't free news content exposed a broader world audience to the best of America's fourth estate?  The broad exposure argument in favor of free only works if there are no costs associated with making the products that are then turned into the marketplace, their value compressed, for free.  

Beyond losing money, freeconomics sacrifices context.  A paid newspaper or magazine, for all of its flaws, provides a contextual economic model along with the editorial context that adds value to information.  Reading the news from a group of free headlines and condensed online digests navigable only through free search and free e-mail solicitation is a context-free friction-free experience.  No one realizes the true value or the true cost of what they're taking in with online news.  That could be fine if we were all toddlers in the hands of brilliant caring parents (or Glenda, the good witch in The Wizard of Oz) who could supervise our growth into sophisticated adults before turning us loose (or sending us back to Kansas.) 

It isn't only newspaper and magazine content that has become free.  Everywhere, media distribution is hawking a free or two-fer deal in the hopes of talking consumers into buying something more.  Cable distribution keeps running towards free phone service offers, knowing full well that there's a scaling piper waiting to be paid. Right now, the cost of a free phone is showing up on consumers' broadband and wired TV bills.  As free internet and mobile video move to prominence, their costs will show up in higher broadband fees and, potentially, international calling charges, reinforcing a rich and poor divide that limits access to the best information to the monied classes and communication to the local neighborhood.  

A potential savior with a delightfully unexpected saving grace, Rupert Murdoch is contemplating a structural moat around his news properties, separating them from the free frontier.  There's something very smart and grown-up about the choice.  It's consistent that News Corp. executives were the first to speak to the media about charging for Hulu content at some near term point.  While everyone gasped, News Corp. boldly began providing context for online video services that, like online print, appear free but carry the potentially destructive lagging thrust of all of the costs associated with making movies and TV.

The harshest criticism to date of Murdoch's quest has been dismissive.  Google can live without The Wall Street Journal, sniff the free marketeers.  Maybe.  But if Google's real goal of cataloguing the world's information is to be believed, a Google without News Corp. will be a wildly different creature.  

A likely scenario predicts Google will join Microsoft's Bing to determine a sustainable structure for paid online content.  The major TV and movie distributors should crash the party and demand a seat at the design table right away.  As Google and Microsoft start to design the passage of products that were born free into a healthy paid adulthood in the new media world, Comcast, NBCU, Verizon, Time Warner, AT&T, Disney and the rest should join the grown-up table and set a sustainable example for a better future. 

You've Got Mail

Capsule:  How drastic a transformation will most media companies make to grow again?  As AOL announces 2,500 planned lay-offs on a base of 6,900 employees pre-December-9th spin-off, what's the message inside the medium? Will an ailing media and advertising world once warned unveil dramatic new business plans or return to its fundamentals or both?  How about broadband distribution giving some thought to graduated mail delivery charges as a start?  (http://www.thewrap.com/article/bloodbath-aol-2500-cuts-announced-10409) 


AOL is in the news again along with its new Google-harvested leader Tim Armstrong. Within the past few weeks, AOL has chosen a new post-spin-off Board that includes the usual media luminary suspects while announcing its massive lay-off plans to skinny down the company as a new independent investment prospect. While skinny-ing down will help the new AOL throw off cash, it won't guarantee its ability to improve its top-line financials quarter after quarter as Wall Street ultimately requires.
 
Control Video Corporation and Quantum Computer Services were AOL's earliest screen names, circa 1983-1985. AOL didn't become American Online until 1989, only eleven years before the fateful 2000 merger with Time Warner that spurred many a story, book, modern investment crisis and good old-fashioned ulcer.
 
Within four years of the AOL Time Warner marriage, AOL had 20,000 employees. More important, it had close to 27 million subscribers in the 2002-2004 timeframe. A whole "You've Got Mail" generation, today's 20-somethings, was formatively raised on the iconic blue triangle, the running man, the killer IM app and the transformation that consumer-friendly brilliantly designed dial-up internet brought to American mass media.
 
Looking back, everyone knows that the AOL Time Warner merger was a barn-burner of a mistake. What made it a mistake is judged differently according to which tour guide of the American media landscape you use. The structure of the deal and the valuations of the principals were clearly flawed: AOL's future potential was grossly over-stated and Time Warner's potential was judged roughly as rich as it has turned out to be, but only as a media company benefiting from its opportunistic mating with an internet juggernaut.
 
In spite of its AOL marriage, Time Warner and its spin-off Time Warner Cable have turned out to be tremendous assets on a fundamental level. Time Warner has understood the necessity of content innovation through its cable networks to a level unmet by any other US content company with the possible exception of Disney. It's still struggling to get its magazine properties to a point of either fundamentally solid growth or radical innovation within the internet and mobile space. But Time Warner's magazines have the benefit of time and financial support from their wealthy cable network partners.
 
Time Warner Cable has continued to grow both organically and through savvy M&A transactions. Since AOL was knee-high-to-a-grasshopper, Time Warner Cable has been a US growth leader through well-conceived and managed mergers and through a fundamental understanding of the core cable distribution business that is arguably superior to the entire cable field, with the possible exception of Comcast.
 
Why couldn't Time Warner and Time Warner Cable save AOL from its shrinking fate? Since 2002, in seven years, AOL has lost 21.3 million subscribers, bringing its customer base from 26.7 million down to 5.4 million today. Most of these customers upgraded from AOL's dial-up service, most memorably priced at just under $25 per month, to cable broadband service, priced on offer roughly $5 above AOL and over time at least $15 higher, and marketed, sold and serviced by Time Warner Cable and Comcast. The next best alternative during the period of AOL's troubles was telco DSL, priced as low as $15 a month, but without the fast track expansion capability or the speed of its cable competition.
 
What's the lesson here?  It may be that you have to respect fundamentals even while you're worshiping at the altar of change. AOL was a subscription business with an ingenious design and a high respect for quality service as long as it was inside its comfort zone of dial-up internet connectivity. With the emergence of cable distribution exemplified by partner Time Warner Cable and pals, AOL seems to have sustained a broadband meteor hit that left it at least partially frozen in time.  
 
There are hundreds of examples of media and service companies on ice past the point of having been bested by the competition. Broadcasting got iced with cable's expansion, particularly because of the advertising competition offered by cable content. Rather than sit on ice, broadcasters started leveraging their government-support fundamentals early to force their way onto the competitive cable menu.  
 
What makes AOL excruciating is that it wouldn't transform itself into a true broadband service that competed on content while partnering on distribution. AOL's original genius was in understanding its symbiotic reliance on dial-up internet. Once mastered, AOL refused to understand its new symbiotic reliance on cable.  
 
The stumbling block: the broadband conquerors' requirement that AOL surrender a piece of its subscription profit to its cable benefactors. To make this happen, AOL would have had to increase its capacity to include a new revenue source based on either better content or better product attributes in a cable broadband world. You would think that a company with at its height 27,000 US employees--many of whom brought the internet from a science experiment to a mass media marvel by, of all things, inventing a better game of post office--would have been able to take its game to the next level.
 
How much of AOL's intransigence was its own hubris versus its merger-magnified hubris once inside the legendary warrior walls of Time Warner is open to debate. The most important takeaway is not for AOL; it's already setting its course as a smaller cash distributor that, once transformed, may live to fight another day.  
      
AOL's larger lessons can benefit the whole media content universe as well as monster distributors Google and Yahoo/Microsoft, Time Warner Cable, Comcast, Verizon and AT&T. When your business models fail, you need to fix what's broken in traditional capitalist terms (the fundamentals part); and, you need to introduce new products and business models that will siphon off revenue and cash flow from alternative sources. Cable siphoned off revenue from dial-up internet by undoing AOL as dial-up's brand face. Emboldened in victory, cable went on to undo most of its subsequent telco DSL competition. In doing so, it played more than a few crucial hands in determining the extent of Google's growth.
 
Despite their transformational power proven over media generations, today's cable distributors are moping around a bit about their inability to claim the revenue they believe they deserve as an offset to increasingly costly bandwidth utilization by their customers. Capping bandwidth won't work and shaping utilization will only work to a point. More vexing, cable has an AOL problem. It needs to develop a new business model that presages the transformation of its video business from a small oligopoly with a very small number of cable, satellite and telco tv players to an open frontier business where customers can get TV from twice the number of distributors in market today.
 
Maybe part of the answer can be gained by playing post office, just like AOL did when it jumped on top of telephony distribution to claim its fortune. Today's US Postal Service is upside down, threatening to go belly-up by increments, beginning with the elimination of Saturday mail. As traditional mail deteriorates,  cable and telco broadband are becoming our new post office. As if the global warming effects of all those retail catalogues aren't enough to herald a transformation, AOL's existential irony may be enough to inspire a new business model for something as basic and high-utilization as e-mail.  
 
What if broadband charged for the transmission of certain types of mail--mail with large attachments, mail delivered over long distances, mail from commercial sources, mail with heavy bandwidth links? It would have to offer something more in the transformation in order to protect its customer relationship fundamentals. But, if broadband internet could make more and ultimately increase its delivery capacity and quality by taking on a very fundamental model--paying for the delivery of a message of varying weight across varying distances--it might accomplish a great future transformation for itself, as well as potentially for the government apparatus it's replacing, in the process.

Get Serious

Capsule:  The culmination of a major 2008 media merger, SiriusXM had a tough 2009, particularly on growth.  The satellite music, sports and talk radio service must find a way to balance falling new car sales, rising subscription fees and customer growth requirements. Can advertising revenue make a difference with a changed product design that places ads into even the ad-less music channels?  Where can a one-way entertainment service for your car take you on today's two-way media streets?  (http://www.siriusradio.com/) 


It's been a tough 2009 for advertising-based media.  Even when advertising has been supported by subscription revenue, growth for many media businesses has been anemic.  Because the advertising business has lost its rate-setting floor in favor of an aspirational web-based currency still missing a few zeros, tons of pressure and pride have been placed onto subscription revenue models.  
 

When subscription revenue forms the core of a dual-stream revenue business, customer growth must be strong and predictable, up to the hundreds, the thousands and the millions of potential subscriber-delivered dollars.  There's a delicate balance between rates and customer growth that can get unglued when growth machinery sputters; or, when there's too much promotional discounting complete with churn-inducing rate increases when the promos expire. It's hard for businesses without a lot of prior subscription experience to get that balance right.
 

SiriusXM lost customers this year, moving from 19 million down to 18.5 million since December, 2008.   The merged satellite radio company points to the collapsed US auto business which is its main sales channel and dramatically reduced new car sales, just as most advertising-dependent media businesses have.  But for SiriusXM, a decline in new US auto sales means more than lost advertising opportunity.  It means a serious dent in new customer additions. SiriusXM, carrying at least two points of monthly churn throughout 2009, needs a healthy annual crop of car buyers to maintain customer counts, no less to grow.
 

The satellite monolith also needs an alternative to entry price discounting, an offer policy that up-ends predictable customer growth performances with serious Year One churn.  The discontinuity of first year promotional churn can be absorbed by a business with a majority of seasoned customers, but not by a relatively new business with a long growth road ahead and few feeder paths.  
  
Today, most SiriusXM customers buy the service along with a new car lease or purchase, enjoying a first free year as a bounty courtesy of BMW, Volvo, Chrysler or any of the participating dealers in the Sirius and XM crowd.  Once that first free year ends, customers who can't afford the service or who don't see its value in a tough economic climate move on.  The attractive satellite radio growth that comes with new car purchases can be bumped by a bad economy into unrecoverable loss territory, forcing a need for even more aggressive growth among the next prospects in the new car buying universe to create the right fundamentals for SiriusXM's growth and health.
  

Since loyalty from the car buying behavioral segment is the linchpin for SiriusXM, one would expect the company to be setting the standard for product marketing and sales inside the new car buying experience.  Given the amount of convincing, informing and educating involved in the typical new car purchase, the sale of SiriusXM is difficult to place.  Satellite radio doesn't have a direct sales presence inside the auto dealership, forcing it to rely on brand and product superiority to justify its price and make and keep its customers.
 

But SiriusXM's large growth objectives seem to anticipate an acquisition machine akin to that of big distribution generally, including cable, satellite, telco tv, broadband and VoIP.  Unfortunately for satellite radio, the model doesn't hold.  The growth cycles of these fundamental subscription businesses have been built on product disruption that competes vigorously with entertainment alternatives.  As attractive a product as satellite radio has been, its disruptive bona fides have been stronger in the world of promotion--where radio rules and Howard Stern holds court--than in its marketing or product definition. 

Perhaps the biggest distinction between SiriusXM and its distribution brethren is a key dedication on the part of the TV and broadband set to sales and marketing machinery and support costs.  Since SiriusXM is embedded in so many high-end new car sales, the company is already paying a premium for acquisition, forcing it to control SAC by being more conservative on marketing and sales than most distribution companies. Without a consistent and major commitment to the operational work that feeds customers into a business at a rate surpassing churn, satellite radio suffers from a non-productive growth cycle, as well as from competition from preferred alternative media.
 

According to SiriusXM's pitch around its earnings reports, its worst economic challenges are ending.  Expenses have been pared and the economic efficiencies of the Sirius XM merger will begin to bloom within the next two quarters.  But SiriusXM's debt load is so substantial as to risk distracting the company from creating the necessary environment for organic growth.  Early in 2009, Liberty Media bailed the satellite radio giant out of its second major debt crisis following the 2008 merger.  Whether Liberty ends up maintaining its substantial stake in SiriusXM or permanently diluting current shareholders in some alternative transaction, the company's growth needs are substantial, requiring dedicated investment to be met.  How can SiriusXM surmount these structural limitations to create the growth stability they need to last?
  

Today's reconstituted SiriusXM products include two sturdy satellite radio line-ups, backseat TV for the kids, an online streaming service that can be played on an iPhone or alternative MP3 player and the portability to move from dealer-equipped cars to any car and to the home through a variety of mobile devices.  It has hundreds of entertainment choices, including major league sports coverage from XM, major celebrities like Howard Stern from Sirius--at least until his contract expires in the 2010-2011 timeframe--and enough alternative news, talk and music formats to fill out a monthly ARPU of just under $11.  Spread across over 18 million customers nationwide, SiriusXM's revenue base is substantial.
  

But to compete in a new digital media universe, SiriusXM will need even more. A complete sales, marketing and service infrastructure akin to the media distribution companies whose growth it hopes to imitate will be a new requirement for a product and service approaching maturity.  The one-year free promotional offers that shoveled customers into the business at its inception might be rethought in favor of an upfront cost and reduced monthly rates for the first 12 to 24 months.  

And, Sirius XM's products will need to evolve as a demonstration of its ability to sustain a growing business beyond its original premise.  To support the operational infrastructure of a thriving business, SiriusXM will have to introduce new ancillary revenue streams beyond its current subscription and advertising loads.  A likely opportunity source: distribution collaboration with satellite, cable and telco broadband services that can take elements of SiriusXM's products and bring them to life inside the home in a way that placing the service on the internet or an iPod alone will not.  
 

Even the most robust new products and improved marketing and sales will have to carry a lot of water to help re-restructure SiriusXM's serious debt load. In today's economy, the company may struggle to rationalize the set-up expenses necessary for a product, marketing and sales transformation.  But there are few good alternatives. We could all wait for the US auto business to fix itself, aided by tax dollars.  It could be a long wait as each major US car brand has steeled us for reduced production and consumption.  It's unlikely that even the healthiest Ford Motors will return to its former numbers anytime soon.  Unless SiriusXM finds the structural resources to support a new product development and organic growth process, the once assumed inevitability of satellite radio may fizzle against the backdrop of a radically transformed media future.

Comes With

Capsule:  In tough times, margin compromises are necessary in the interest of future growth.  In retail and advertising, a new multi-product-and-brand-mash is taking shape as compatible businesses search for competitive advantage.  "Two-fer" product and pricing combinations from different business units and different companies are being tested in the marketplace--including streaming movies from CinemaNow inside Best Buy's consumer electronics and Newsday.com inside a Cablevision Optimum Online subscription.  Which of these new arrangements and their progeny will power the media forward?
(http://paidcontent.org/article/419-most-of-cablevisions-newsday.com-goes-exclusive-for-print-optimum-onlin/; http://www.cinemanow.com/ )


Cablevision's bundling of its Newsday daily newspaper and Newsday.com online content as part of a two-fer product combination with its award-winning Optimum Online broadband service opens the media mind to a lot of possibilities for alternative distribution.

Newspapers can be global, but are generally local first.  Cable and telco distribution systems are national in scale, regional in approach and local in their franchised service relationships.  The local-to-local blend of a broadband and newspaper online combination may have great appeal, properly marketed and priced. 

The core elements to keep in mind in pricing and packaging are those that contribute to the health and growth of each of the bundled products.  Unless the rationale behind a "two-fer" is to prop up an ailing product by effectively giving it away with a stronger brand, bundled products succeed based on their individual strengths.  Customers are drawn to an ingenious combination--as opposed to a cheap combination, which will always be outperformed by the next "free" offer.  The best bundles create a new value logic in their combined customer experience that's better than the individual products on their own.  Think of cable, telco and satellite packages--including the cable Triple Play--versus a la carte distribution.

Bringing journalism online into a paid format with broadband distribution makes sense, mostly because newspapers will have to survive some rough subscription sledding if they go it alone.  No matter how intelligent the new forms of paid online content from newspapers and magazines will be, their marketing mojo will come from the internet, which means their main marketing engines will be Google et al.  It's probably naive to leave paid subscription marketing for publications as august as The New York Times, The FT and The Wall Street Journal, as well as The New Yorker and the rest of the best in the magazine crowd, to online search.  Since internet marketing is essentially search optimization, with expensive support from all the usual advertising suspects, it will likely be tougher to sell scale in internet subscriptions than it is to sell print.

The ability of journalism online to flourish without big marketing and sales budgets is questionable.  Outside of what can be leveraged through the editorial strength of each brand, the marketing strength of most newspapers has depended on the cross-hatched local and regional advertising relationships it has struck with its most important customers.  Retail and classified advertisers want you to know that they're featured inside the daily newspaper and their marketing collaboration increases newspaper sales. 

The traditional distribution infrastructure around newspapers is another agent of promotional strength.  The newsstand, the news truck, the newspaper delivery guy and the print newspaper itself all brand and sell.  Take these distribution elements away--as faulty and uneconomic as they may be--and newspapers online are left in the cold and crowded world of internet search and too much choice.  Building up big online marketing and sales budgets when the traditional newspaper infrastructure and its cash needs are still on the stage is asking for profit risk.

Enter the cable guys and their big distribution brethren, skilled in marketing and selling subscriptions as a regular process akin to breathing.  Since many newspapers and magazines use video on their sites, an online, print and TV combination of each brand can be marketed as a cable brand enhancement adding value for some to their monthly broadband and TV service.  As long as something is being charged and independently billed for each of the products inside, this type of cross-media bundle could be successful, making it easier for customers of both products to enjoy the brands they love.  And the value of each component will be clear as long as you can buy your newspaper one of at least two ways: as an online and print brand, or as the enhanced online and print version that comes with cable.

The Cablevision Newsday combination has a few unique walls built around it, the most obvious of which is common ownership.  Because Optimum Online and Newsday.com are products of the same company, they're being bundled in the most aggressive way possible--as a single product for customers of either Optimum Online or the print version of Newsday.  Newsday.com will command a $5 weekly subscription fee for those who want to go it alone. 

From the standpoint of competitive strength, this new online bundle may turn into a strategic stand-out for its brands.  From the standpoint of growth beyond its local market walls, Newsday.com will sacrifice the development of new and some mobile audiences as a trade-off for promotion through the cable promotions factory.  Given that Newsday is already behind a local market wall since its exclusive Long Island market is actually an island--no less an island dominantly served by Cablevision with its family of Optimum products--there's likely little growth risk.  But for newspapers without this structure and with online ambitions that include significant growth through both new advertising revenue and new subscriptions, a more basic version of brand bundling will be preferred.

At the same time, staggering retail giant Best Buy has announced a bundle-to-be between many of its consumer electronics devices that are powered by internet connections and CinemaNow internet movies and TV.  Best Buy is appropriating the identity of a media distributor by announcing its "cloud movie" service, to be powered by Sonic Solutions, CinemaNow's owner.  The core concepts Best Buy will sell include "openness and flexibility" as all of the internet content purchased to play on one cloud movie device will be available for streaming on every cloud movie device a customer buys from the retail cloud people.  Best Buy is already talking cloud distribution talk, referring to "completing the ecosystem" of internet powered digital entertainment.

Pricing on Best Buy's cloud movies has yet to be announced, but it's fair to guess that if this service and retail combination stands a chance in the heavens of success, it will carve out visible profit margins for each of its business partners.  The most likely low-risk partnership will see Best Buy sell CinemaNow with a short-term promotional offer that moves to full price quickly. The retailer's substantial contribution will be marketing, selling and educating the consumer on internet streamed product that can be enjoyed as soon as the customer gets home.

As the economy continues to challenge consumers and advertisers, low-risk marketing and distribution partnerships will be an attractive new growth strategy for online TV, movie and print brands.  Each new bundle will include a new margin contribution required from the online business to pay for being part of a new media infrastructure. 

At the same time, the rates for even wireless phone service are being driven down by internet technology substitution, as evidenced by monthly ARPU drops in brands as strong as Verizon.  Why pay for wireless minutes when low-cost and free internet calling can contain your monthly budget?  Could it be, once again, that the internet's vast product superiority and cost efficiency is forcing a wholesale haircut on the media? 

Our current economic challenges are suggesting a renaissance of the traditional distribution businesses, now expanded to include new online products from in-house and out-of-house in their multifaceted bundles. Of course, big distribution for online products will require elevated online prices to pay their marketing fare.  Otherwise, even the most attractive online content may find itself all dressed up with no place to go.

Separation Anxiety

Capsule:  On the threshold of a likely consolidation of Comcast and NBCU, some members of the press are questioning the wisdom of another content and distribution alliance.  At the same time, one media company after another is increasing its Google dependence in hopes of being delivered to a virtual promised land.  And, giant Cisco Systems has formed a vertically integrated cloud consortium called the Virtual Computing Environment.  Why do we mind the consolidation of traditional media companies without giving online media combinations a second thought?  (http://intelligencesquaredus.org/)

Intelligence Squared US produces debates featuring luminaries from government, business, politics, non-profit and the media on issues of national interest.  Their October 27th debate presented arguments for and against a motion called "Good Riddance to Mainstream Media."  Award-winning new and old media journalists from WNYC/PRI, Politico, Vanity Fair, ABC News Nightline, the Nation, the New York Times and the San Francisco Examiner debated whether traditional media models should stay or go, culminating in an audience vote that bid them stay.

A debate on whether or not mainstream media is dying is like a debate on climate change.  It would be wacky to pit scientists and academics against one another on an issue that unites most of the scientific community.  Just imagine a televised debate called "Good Riddance Mother Earth."

Yet, we insist on conjuring up the death of newspapers, broadcast TV, radio, magazines and cable with fierce certainty, aided by precipitous declines in advertising revenue, especially the classified form, that have undermined traditional media revenue models.  When classified advertising began its move to superior online products, where were the replacement revenue plans in the newspaper business?  The classified shift didn't merit a debate; it merited a new plan, including the kinds of intelligent risks that building alternative revenue streams generally require.   Did newspapers refuse to see the inevitability of their own ill health by failing to recognize an urgent need to change direction?  Other than consolidating classified sales through newspaper consortia, not a lot was done to change the course of newspaper advertising revenue.

The same may be happening today with an insistence on over-fishing the online advertising revenue waters.  Some media thinkers are advocating increased commercial insertion inside lightly-loaded online TV content.  The argument for more advertising assumes a replacement need--in this case, the replacement of traditional TV broadcast and cable advertising with online TV content and advertising.  Did somebody die and nobody reported it?  Are broadcast and cable distribution companies going somewhere that will require online TV to assume complete ad revenue replacement responsibility?  We better hope not.

Instead of learning from what happened with the early stages of decline in classified newspaper revenue, some in the media seem intent on snuffing themselves out.  With classified, new superior advertising products and firms arose online that created an important intersection between local markets and aggregated online commerce communities.  Because online became better at telling the classified advertising story, it achieved a natural dominance.  The problem was newspapers' failure to respond with an alternative revenue and product plan.

This type of media failure has been widespread and oft-repeated.  When Google attained traction for its brilliant search business, the mainstream media either fawned--the "Google is God" school of media evangelism still practicing today--or yawned.  Again, print media took a special hit in retail advertising revenue as well as in the appropriation of their content resources.  Did anyone complain about the fact that there was an over-correlation towards Google's business model spreading like a contagion through the media advertising world?   Google couldn't say much--not while its stock price and user base were multiplying.  What was at the heart of the matter?  Traditional media's failure to see that an important part of its foundation was once again being overtaken by the online environment.

Google's mildly cranky book deal and its advocacy of Open ID as the single sign-on linking all US websites are two examples of traditional media challenges in the making; yet, there's a dearth of quality business and media reporting on where Google's giant ambitions might lead and which business segments it might overtake as an outcome.  Google continues to do what it's supposed to be doing: expanding, making money, hiring people, supporting its employee base, supporting other businesses and innovating in a way that will create new revenue lines for itself and others.  In the meantime, some players in traditional media are doing a lot of the same: expanding, making money, supporting their employee bases and supporting other businesses.  What very few in traditional media are doing is innovating and hiring people.

Some combination of masochism and market capitalization math mastery has resulted in a media mind that thinks growth is all about M&A activity that extracts surplus equity value from the markets.  Growth is about innovation that creates new or expanded revenue lines for a business as well as jobs.  The worry over Comcast and NBCU reconsolidating content and distribution has a serious basis in the historic challenges faced by Time Warner and AOL.  But the real issues inside the Time Warner AOL marriage came from a prolonged failure to seek true consolidated value amongst the diverse interests inside. It's unlikely that Comcast will make the same mistake given the chance. 

Media consolidation is inevitable, particularly in a tough economy that can only support a small number of leaders at the top.  Creative destruction is a part of creative business development, accelerated in the media because of its critical reliance on the latest technology for compounded efficiency and growth.  Neither of these inevitable forces presages the death of traditional media.  But traditional media can cause its own ill health by refusing to replace the segments of the business it has lost with new money-making initiatives (beyond rate increases.)  Over-consolidation is most dangerous when just being big seems like enough protection in a technology world that has started coming apart.

Consolidation isn't the problem.  Just like divorce, eventual corporate separation through spin-offs are inevitable aided by economic cycles.  As long as there are enough fractional new upstart alternatives to a fully consolidated media view, we won't wake up in an Orwellian media nightmare--all extreme progressive arguments to the contrary.  

The real insult to traditional media has been too much separation, beginning with superior online products that separated classified and retail advertising from print vehicles of great social value hard pressed to come up with revenue replacement products.  Superior online search has supplanted many traditional advertising forms, separating Madison Avenue from its wallet.  Urgent burdens sit on the media pressing the consolidation of traditional and new media businesses en route to new profit lines.  The first handful of traditional media companies that can produce new products that take the quality of traditional content and duplicate it through place-based traditional and mobile online distribution will change the trend.  The great challenge is to perfect addition by addition in an environment that seems to prefer addition by subtraction to the continued detriment of whole segments of the US economy.

Second Life

Capsule:  Will the media go bravely and opportunistically into an embedded internet access future that brings cyberspace into the real environments in which we work and play?  Future growth for both content and distribution may depend on new products that use authentication for more than extending cable programming from the TV to the PC.  Internet Everywhere should follow TV Everywhere into a new phase of technological development that blends wired and wireless communication into a single mobile infrastructure.

BBC
SUNY Stony Brook on Wireless Networks
Nomadix

 
This week, the BBC World Service and PRI, which includes its US WGBH-Boston partner, celebrated one of the Internet's 40th birthdays with a Leonard Kleinrock interview.  Kleinrock originated the Internet predecessor ARPANET, a first-of-its-kind packet-switched computer data-sharing system for which Kleinrock's UCLA-and-SRI based computers formed the first four-node network in 1969.  In addition to his substantial UCLA stewardship, Kleinrock went on in the most recent decade to chair Nomadix--a company focused on "providing solutions for the public access market to create multi-use, multi-revenue networks that require zero configuration for end user access"--now part of Japan's NTT DoCoMo.

In the BBC interview, Kleinrock is asked "what comes next?"  His enthusiastic response: the internet will change most dramatically in the next 40 years in how it appears to the user.  Kleinrock insists that the infrastructure for internet access and navigation will change dramatically, moving content--including data, voice and video--between embedded screens, physical sensors, microphones, speakers, applied nanotechnology and virtual imagery that will "release (personalized versions of) cyberspace into our physical space." 

One of the clearest hints that Kleinrock's vision is closer than some may think is the enveloping hush of virtual publishing moving hard physical books, textbooks, newspapers and magazines onto soft mobile Kindles, upcoming tablets and Google-aided search.  The originator of Amazon's Kindle "WhisperNet"--through which Kindle readers can buy and have a book, newspaper or magazine of their choice within a minute of ordering it--was Sprint.  The wireless contract has now moved to AT&T, where scale will support the seamless spreading of an application destined for the masses.

Kleinrock also sees improvements in store for personal authentication, necessary to provide authenticity and security within the increasingly global and mobile internet environment.  As the cable industry's TV Everywhere initiative increasingly is known by the informal shorthand of "authentication," it seems right that the industry develop a view of authentication's broader future applications in the home and workplace.

Cisco's John Chambers, an advanced media thinker as well as a major cable industry equipment supplier of both set-top boxes and modems, is an avid user of videoconferencing in his home and office.  Chambers is reputed to believe that top quality videoconferencing will replace some portion of our personal and professional travel in the near future.  Seeing embedded personalized communication as a benefit that derives some value from travel cost-and-convenience savings makes sense and may lead to pricing and offer logic inside the cyber-home/office.  Cisco is an infrastructure partner to NTT DoCoMo's Nomadix--which Kleinrock led until 2006--along with 3Com, Arrowspan, BelAir Networks, Sky Pilot, Trapeze, Tropos Networks and others.

Where might today's major US media distributors enter this new paradigm?  Aggressive partnerships with some of the wireless distributors moving content around the human experience will help.  Much of Kleinrock's inspiration for packet-switching as a means of moving content on the ARPANET was theoretical.  He developed problem-solving logic for mass connectivity away from his physical computing environment and demanded that the environment shape itself to his vision. 

Cable, telecom and satellite distribution might adopt a similar stance, envisioning the post-modern home, office and store all-in-one, shaped by multiple personalized interconnected content and distribution with many well-authenticated cash registers at the ready.  This would require cable and telecom to move off their traditional models of controlling every access point and output of their networks--even if only just a little bit. 

By assembling a physical and deal infrastructure that includes wireless internet access providers, media distribution might see its smart home plans materialize, blended profitably with smart commercial and in-home entertainment.  Media content might escape some of the confines of distribution collars for a new environment that moves its products around town and resells them through traditional and alternative retail distribution hybrids.  

A few examples of how the media's embedded personalized second life might take hold?  Traditional distributors could break down some of their one-dimensional walls between homes and businesses, acknowledging the massive portability of life and work.  Today, distribution and content use anachronistic place-based rules for defining the types of services they provide and their rates.  Everything is divided into Residential Service and Commercial Service. 

For video, the origin of the strict separation between homes and businesses originated with content companies who didn't want to see group viewings of pay TV content eclipse their ability to sell to alternative commercial distributors--including theatrical distributors at the head of the line--at very high prices.  For broadband, the rules are based on some combination of distribution's network management preferences, capital conservation requirements facing pricey line extensions and the drive to profit.

If it's true that the biggest near-term US job gains must come from small and mid-sized businesses, cable and telecom might take a worthwhile tour through the place-based realities of those businesses.  Many small businesses operate from homes.  Many large businesses rely heavily on the work that their employees do "after hours" at home.  If media distributors were able to reserve the distinction between home and business in only those cases where it actually benefited the customer, new profits through integration might logically follow.

Why shouldn't Bloomberg, Thomson Reuters, WSJ Interactive/Market Watch/Barron's, The New York Times and The FT/Pearson be encouraged to bring their business acumen, reporting and information loads into the home through cable and telecom distribution and disruptive marketing?  Bloomberg's business data and communications service purchased at home is a pretty pricey extravagance.  Given that the Bloomberg market has suffered a few down-sizing dents, can a less expensive more widely targeted wired and wireless business news service create value? 

What about the revenue that can be captured driving the in-home media business out-of-home?  Comcast, Time Warner, Verizon and AT&T might originate Enterprise/SMB products that integrate "home" content and services--like TV and search--with wireless networks serving offices and stores. 

Imagine the transformation of traditional home-based products--premised on two-screen internet-aided TV viewing--into a suite of business products tailored to the real work experience, enriched by multimedia out-of-home screens interconnected via wired and wireless hybrids with office and home PC's.  By integrating fixed and wireless distribution platforms with audience measurement triggered by mobile cards or device authentication, big distribution can enable communications and advertising systems that power large and small displays, stores and offices.  They can also sponsor the cost-effective replacement of some voice systems with multifunctional cell phones for home and work.

The integration of home, retail and office products might even result in widespread revenue streams based on the Kindle phenomenon.  The Kindle and its "Whispernet" have made the immediate physical gratification of our buying impulses contribute to the value of the products bought.  Maybe that's why Kindle users are reputed to purchase 40-50% more books after getting turned on.  Might businesses as well as stores, theaters, arenas and MDU's benefit from being a backbone for the on-premise sales of selected advertised products shown on integrated screens in common areas and on personalized mobile devices?  With a better integrated system for revenue development, we might even embrace the fact that we all shop at work as well as at home and on our "weekends."

If the complex products offered by traditional media content and distribution companies can't be made to fit into the backwards Second Life integration of cyberspace and physical space, new media content and distribution hybrids will likely lead the charge.  A personalized Google made for office and home that targets each individual's lifestyle and commercial avatar is likely.  Office parks, MDU's and stores can build and drive profit from their own wireless and wired distribution hybrids.  So can governments, if there is a will inspired by a need.  But progress will be faster and bigger if today's big media businesses stay opportunistically engaged.  To extend their own profitable revenue growth, they might turn their gaze from the last war that birthed their disruptive media businesses to the virtual and real victories to come.