If Fox and Univision go to cable, what happens to their stations?

Yesterday, both Fox's Chase Carey and Univision's Haim Saban said that they would move their networks from over-the-air broadcast to subscription cable distribution if Aereo is allowed to use their content without paying for retransmission rights. Both of these statements are empty threats, because the economic damage from going cable-only would be much greater than the loss of retransmission fees. Here's why:

• Fox owns 27 television stations, 17 of which are Fox affiliates. The 10 non-Fox stations are MyNetworkTV affiliates. If Fox goes cable-only, what happens to the 17 stations? Will Fox make them MyNetworkTV affiliates? Not likely, since it already owns MyNetworkTV affiliates in a number of the same markets. Will it sell them off? Perhaps, but not at the price it would like, since they'd be independents. (See Young Broadcasting's fiasco with San Francisco's KRON.)
• Univision owns 23 television stations, all of which carry the Univision network. They've got the same problems and issues as Fox--what will it program the stations with if they don't carry Univision, and who will it sell them to?
• In both cases, can the networks afford to lose viewers who can't afford or don't want to pay for a cable, satellite or IPTV video subscription?
• Finally, if either Fox or Univision goes cable-only, their affiliates will immediately go to the FCC and Congress to block the move. Just as with the networks themselves, the economic value of their stations would be dramatically reduced by losing their network affiliations.

There are several other reasons why a shift to cable is unlikely, especially for Fox. In any event, Carey's and Saban's threats are nothing more than that. If they can't stop Aereo in the courts, broadcasters will use their enormous clout to get legislation from Congress banning or greatly limiting Aereo. Lobbying, campaign contributions and Fox News' bully pulpit, not taking the broadcast networks to cable, will be the tools used to minimize or eliminate the threat from Aereo.

Hulu: Here we go again

You may recall that in June of last year, Hulu put itself up for sale, in part because of strategic disagreements between joint venture partners Disney and News Corp. (NBCUniversal, the third partner in Hulu, is prevented from taking an active management role as part of the terms of Comcast's deal to acquire NBCUniversal.) In October, Hulu's owners cancelled the sale because of "disappointingly low offers." That didn't solve the strategic differences between the partners, however. Today, All Things Digital reported that Guggenheim Partners, Yahoo and Amazon, possibly among others, are considering making offers to acquire Hulu--even though the partners haven't announced that it's for sale. The smell of blood in the water is just too strong.

I'll keep this brief: The reason that the offers for Hulu were disappointingly low last year was that the partners were unwilling to offer Hulu's buyers long-term access to their content. Exactly the same issue will arise if Hulu is put up for sale again. Hulu is effectively worthless without its content. With the exception of Guggenheim Partners, all of the potential bidders already have their own video infrastructure, players and apps. There was a time when Hulu's player was head and shoulders above anyone else's, but that's simply not the case anymore.

The purchase price of Hulu will have to include three to five years' of the partners' content, along with assurances that their content will continue to be available after that time at a price that Hulu's buyer can afford. If the content isn't there, any potential deal will fall apart.

This could turn into the Mergers & Acquisitions equivalent of Lucy pulling the football away from Charlie Brown at the last minute every year. Fox Sports could broadcast "Who Wants To Buy Hulu?"--just put Cleatus the robot into an Armani pinstripe suit, give the play-by-play to Fox Business, and you're all set. For now, all we can do is sit back and watch the action.

Penguin Random House: The Aftermath

Earlier this week, Pearson and Bertelsmann confirmed that they intend to merge Penguin and all of Random House except for its German-language business into a new joint venture, to be named Penguin Random House. (No Random Penguin or Penguin House for us.) Shortly before the deal was announced, word leaked out that News Corp. was considering making an offer to acquire Penguin, but the terms of the Pearson-Bertelsmann deal mean that Pearson can't consider any other offer.

I believe that, three to five years from now, the publishing industry will look much like the recording industry does today, with the Big 6 becoming the Big 3. In fact, it was Bertelsmann's experience in its joint venture with Sony Music that's said by some to be the reason that the company insisted on having a majority interest in its joint venture with Pearson. Its joint venture with Sony was 50:50, and differences in objectives and strategies between the two companies eventually led Bertelsmann to sell its recorded music business to Sony.

If the publishing industry looks like the recording business in a few years, here's a preview of the likely winners and losers:

• Publisher employees: The biggest reason for publisher consolidation is cost reduction. Penguin and Random House, and other consolidating publishers after them, will get rid of redundant distribution facilities and most of the people who work in them. In addition, they'll consolidate cross-imprint functions, such as sales, marketing, copy editing, production and design. That will put a lot of talented professionals on the street, and with fewer big publishers, there will be fewer places for them to look for work.
• Authors: Despite what Penguin and Random House have said, it's inevitable that they, and other consolidating publishers, will reorganize their imprints. Some imprints will be discontinued, and their authors will be moved to other imprints or dropped. The same thing will happen to the editors at the imprints--many will be laid off.
  
  Author acquisition will be dramatically affected. The Big 3 recording companies have all but discontinued their formal A&R (Artists & Repertoire) operations that sent people into the boondocks in order to find new artists. Their equivalents in publishing are acquisitions editors, and many of them will find themselves without jobs. The big publishers will increasingly focus on successful self-publishers as their "farm teams", and will pay big money to poach bestselling authors from each other. For their part, bestselling authors will have less loyalty to publishers, because many of their editors will be gone.
• Retailers: Some industry pundits have speculated that consolidation of the top publishers would give them more clout with retailers such as Amazon and Barnes & Noble. If the recording business is any indicator, they're wrong. Just as with books, the music retailing business consolidated, and highly influential retailers such as Tower Records, Musicland, Wherehouse and Virgin Music are gone (Virgin has closed its U.S. stores but still operates in other countries.) Music retailing in the U.S. is dominated by Apple, and the consolidation of the Big 6 recording companies into the Big 3 has given the surviving record companies little or no additional leverage with Apple or Walmart.
  
  It's unlikely that mergers between the Big 6 publishers will give them any more negotiating power with Amazon, Apple, Barnes & Noble or Kobo. The publishers will continue to depend on the retailers for the vast majority of their revenue, and the U.S. Justice Department will be watching over their shoulders in order to prevent more shenanigans like organized price-fixing.
• Independent Publishers: Independents will actually be helped by publisher consolidation, for several reasons. First, many talented publishing professionals who ordinarily wouldn't have considered working for smaller publishers, or working as freelancers, will become available to independents. Second, some of those professionals will set up their own independent publishing companies. Third, the authors that are shed from the rosters of the consolidating publishers will become available to the independents. Fourth, authors who might have been discovered and developed by the top publishers will instead go to independents. Fifth, with fewer titles coming from the big publishers, retailers will have more shelf space (real or virtual) to devote to independents.
• Self-Publishers: The big publishers will increasingly recruit successful self-publishers to fill their rosters and compensate for the loss of acquisitions editors. The success of the 50 Shades trilogy has eliminated any remaining stigma from self-publishing authors. Big publishers now know that success as a self-publisher is a very strong indicator of marketability--and it eliminates the cost of spending years to develop a promising author.
• Agents: Consolidation of the Big 6 will spell problems for literary agents. They'll have fewer authors on the rosters of the top publishers, and thus, fewer opportunities to earn commissions from big advances and royalty payments. They'll have to devote more of their time to independent publishers, which generally pay lower advances and generate lower royalties for their clients. And, they'll have to compete with other agents to represent successful self-publishers, meaning that they'll have to accept lower commissions.
• Consultants: Publishing consultants who have spent their entire careers in the publishing industry are going to find it hard to adjust to publisher consolidation. Consultants with contracts with two publishers that consolidate into one will have one of their two contracts cancelled, and the surviving contract will be closely scrutinized. (I saw this happen first-hand as the IPTV industry went through massive consolidation starting in 2008.) Publishing consultants will have to shift their focus to independent publishers, which have much smaller budgets than the Big 6.

In short, independent publishers are about the only group that will be a clear winner from publisher consolidation, followed by successful self-publishers. Everyone else will end up either neutral or a loser as a result of consolidation. 

David vs. Goliath? How about Goliath vs. Goliath?

In the U.S. Federal, state, and private eBook price-fixing lawsuits against Apple and five of the Big 6 publishers, some observers have equated the battle to David vs. Goliath. The defendants are David and Goliath is Amazon, which, they argue, would have monopolized eBooks and wiped out the publishers if they hadn't imposed agency pricing. The problem with both the analogy and the rationalization is that most of the Davids are actually Goliaths. Here's a rundown:

• Apple: Until recently, it was the most valuable company in the world, with $100 billion of cash and equivalents on its balance sheet and profit margins that Amazon, and the other defendants, would kill for. 2011 revenues: $108.25 billion.
• Hachette: The second-largest publisher in the world, and a division of Lagardère Group, which owns magazines including ELLE and Paris Match, a variety of television broadcasters in Europe, a network of duty-free shops, and 7.5% of EADS, which is the parent company of Airbus. Parent company 2011 revenues: $10.02 billion.
• HarperCollins: A division of News Corporation, which owns Fox, The Wall Street Journal (which has been one of the most vocal critics of the Justice Department's lawsuit,) the New York Post, a bunch of newspapers in the U.K. (which are embroiled in an ever-widening phone hacking scandal,) newspapers and broadcasters in Australia, 39.1% of British Sky Broadcasting, and a lot more. Parent company 2011 revenues: $33.4 billion.
• Macmillan: A division of Georg von Holtzbrinck Publishing Group, owner of Macmillan Education, Nature, Scientific American, several German publishers and the newspaper Die Zeit. Privately held; parent company 2010 revenues: $2.98 billion.
• Penguin: A division of Pearson PLC, the world's largest education and trade book publisher; owns Pearson Education, the Financial Times and 50% of The Economist. Parent company 2011 revenues: $9.45 billion.
• Simon & Schuster: A division of CBS Corporation, which owns the CBS television network, multiple television and radio stations in the U.S., Showtime, CBS Television Distribution (which used to syndicate Oprah and still syndicates Dr. Phil and other shows,) and CBS Interactive (which owns CNET among other Internet properties.) Parent company 2011 revenues: $14.2 billion.

Amazon is certainly no slouch; its 2011 revenues were $48 billion. However, that compares to total revenues of the defendants of $178.3 billion. Even if you leave Apple out of the comparison, the parents of the five publishers had revenues of $70 billion. You can argue that publishing is only a small portion of the revenues of some of the parent companies, but books only represent a small portion of Amazon's revenues as well. In 2011, Amazon's media sales, which include books. music and video, were $6.01 billion--12.5% of the company's total revenues.

In short, the conflicts between the five publishers and Amazon aren't David vs. Goliath--they're actually Goliath vs. Goliath. When Apple is added into the mix, it's Amazon that could justifiably be called David.

DRM: The product that (almost) nobody wants

A few years ago, I was an industry analyst covering the IPTV (Internet Protocol Television) industry--the video delivery technology used by Verizon (FiOS) and AT&T (U-Verse) in the U.S., and many other companies worldwide. One of the hardware segments of IPTV that I tracked was Digital Rights Management (DRM). When I came on-board, the retiring analyst whom I replaced warned me that the DRM vendors would probably cause me ten times as much grief as those in any other segment. He was right.

DRM is an unusual business: The companies that demand that DRM be used aren't the ones that pay for it. You can't distribute television shows or movies from any of the major television networks or studios unless you have an acceptable DRM system in place. The same is true if you want to distribute eBooks from most of the major publishers (O'Reilly is the biggest exception...in fact, O'Reilly demands that its eBooks be distributed without DRM.)

The movie studios, television networks and publishers often specify which DRM systems are acceptable, but they don't pay for them. That cost is borne by cable and IPTV operators, over-the-top video distributors (such as Netflix and Amazon) and eBook distributors. For their part, cable and IPTV operators have their own conditional access systems, and a nearly foolproof way of keeping unauthorized users from getting their content--in the worst case, they can send out a truck and disconnect the pirates from their network. However, that's not good enough for the movie studios and television networks, who want to make sure that their content can not only not be viewed by the wrong people, but that it also can't be copied.

Over-the-top video and eBook distributors are less concerned about piracy than they are about making their services extremely easy to use, in order to stimulate sales. They already require usernames and passwords in order to download content, which helps to insure that only those customers who are authorized to access their content can get it. They want DRM, but they don't want it to make their services hard for average consumers to use. The more hoops that consumers have to jump through in order to purchase, download and use content, the less likely it is that consumers will continue purchasing from those vendors.

Apple and Amazon developed their own DRM systems, which were designed to protect content while making access as easy as possible for consumers. Most other companies don't have the ability to develop their own DRM systems, and that's where third-party vendors come in. Content distributors want the cheapest DRM systems they can get that are acceptable to their content suppliers, because DRM adds no value for the consumer (it actually subtracts value), and it adds cost for distributors while offering little or no value. The only parties that it serves are the content providers, who don't pay for the DRM systems, implement them or deal with customer complaints.

This has created a field of third-party DRM vendors who are fairly paranoid. DRM vendors regularly compete on price, but some companies have chosen other approaches. Widevine, which was acquired in 2010 by Google, had several patents on its DRM technology and would threaten (and sometimes file) patent infringement lawsuits against competitors who were undercutting it on price. Widevine used the same tactics against market research and industry analyst companies that didn't report on the company the way that it wanted, or that put its competitors in a positive light. In the case of the company I worked for, Widevine demanded that we lower the installation counts that we had compiled for some of its competitors. When we refused to do so, it threatened to file suit against us. We easily could have prevailed in any litigation (simply going public with their threat would have been sufficient to destroy their credibility), but the owner of my company caved in and removed Widevine's name from our report, replacing it with "Anonymous". Shortly after, Widevine signed a consulting contract with us, hoping to have more influence over our reporting. When a subsequent report had installation counts for competitors that Widevine disagreed with, they again threatened to file suit, and my company's owner again caved into their demands. I demanded that the company take my name off the report and resigned shortly after, because I didn't want my reputation to be sullied. 

Another company, NDS (owned by News Corporation) refused to give us any numbers for its installed base, but after each report we issued, they would complain loudly that our numbers were inaccurate. When we said that we would be glad to adjust the numbers if they gave us installed base numbers that we could confirm, they said that they were under no obligation to give us any information. Given that they were unwilling to provide any evidence to support their complaints, we stuck with our numbers.

In short, DRM is a product that (almost) nobody wants, where the companies that want it don't pay for it, and most of the companies that are forced to pay for it don't really want it. That would be enough to make just about anyone a little paranoid.

Who buys Hulu? Most likely, no one

Silicon Alley Insider is reporting that, now that Hulu's auction is completed, the company's owners have some hard decisions to make. Comcast, News Corporation, Disney and Providence Equity Partners were looking for well north of $2 billion for Hulu, but they didn't get it. More accurately, they got it, but not in the way they wanted.

(Update, October 13, 2011: AllThingsD has reported that Hulu's owners have called off the company's sale and will continue to manage it themselves.)

The top bidder for Hulu was Dish Network, which bid around $1.9 billion dollars, more than either Yahoo or Amazon. Google apparently offered far more--around $4 billion--but the company wanted guaranteed access to Hulu's owners' content for much longer than the two to three years that had been offered. Without that kind of concession, the Hulu deal is really a two to three-year non-exclusive license to its content, not an "acquisition" in any real sense.

That's why Dish, Yahoo and Amazon weren't willing to spend even $2 billion for the company. Hulu's partners could more than double Dish's bid overnight by accepting Google's terms, but I don't think they will. They believe that their content, and the investment they've made in the Hulu platform, is worth more than $1.9 billion, and they're not willing to extend longer terms, given the rate of change in the online content market. Therefore, it's most likely that they'll cancel the auction and keep Hulu themselves.

Google (plus Microsoft, Yahoo, Wendy's, Pep Boys, etc.) are in talks to buy Hulu

The Los Angeles Times reported today that Google is in preliminary talks to buy Hulu. More precisely, as the newspaper reported in the very next sentence, Hulu's investment advisors have arranged to make presentations to Google, Microsoft and Yahoo, and probably any other company that has money in the bank. Whether Google is seriously interested, or is simply "kicking the tires", remains to be seen.

Hulu has a very nice technical platform and semi-exclusive distribution rights from its existing owners (Comcast, News Corporation and Disney), but it doesn't own any content. It has no permanent exclusive rights to anything, but it recently renewed its distribution rights with News Corp. and Disney. Comcast, which acquired part of Hulu when it acquired majority control of NBCUniversal, is prohibited by the terms of that acquisition from exercising any control over Hulu, so it's required to license its content to Hulu on the same terms and conditions as its other partners.

For Hulu to have any real value to Google or anyone else, the buyer will have to get Hulu's existing partners to grant semi-exclusive rights for much longer than three years. Most buyers would settle for a ten-year deal, but if Hulu's existing owners could take back the rights after just a few years, the company would have almost no value to an unaffiliated buyer.

If Hulu's current owners are willing to grant long-term distribution rights, an acquisition could happen fairly quickly. However, if, as reported elsewhere, Hulu's current owners and content partners are demanding that the company's distribution rights be renegotiated after the acquisition, it makes little sense for anyone to bid.

New media has to break its addiction to old media

People have been trying to turn the Internet into a new medium that can compete on an equal footing with television, radio, newspapers, etc. since the Netscape days of the mid-1990s. So, fifteen years on, what have we accomplished?

• Netflix has more subscribers than Comcast, but it lives or dies based on which television networks, cable networks and movie studios are willing to do business with it, what shows they're willing to supply, when they're willing to supply them and at what cost.
• Hulu has much the same problem, even though it's owned by three of the four major U.S. television networks.
• YouTube is trying to cut distribution deals with many of the same television networks, cable networks and movie studios as Netflix and Hulu.
• Pundits spend an inordinate amount of time discussing how much The New York Times and The Wall Street Journal are charging for access to their newspapers online, whether paywalls work, how to circumvent paywalls, etc.
• Hearst, Condé Nast and Time Warner will offer their eMagazines on the iPad if they can only get a business deal worked out with Apple. Meanwhile, News Corporation's "The Daily" is on the iPad and is losing money.
• Clear Channel is building its own clone of the Pandora streaming music service and plans to launch it this summer.

The "new media" has largely become a repackaging of old media for Internet delivery: Old wine in new bottles. Almost all of the content on the Internet that's economically viable comes from old media companies.

In order for content to be economically viable, it has to have two key attributes:

1. It has to attract a large audience, and
2. It has to be repeatable--audiences have to be willing to come back day after day, week after week

Content that repeatably attracts large audiences can be sold to national advertisers, which generates the revenues necessary to create more content and make the business attractive to investors. Viral videos, like those found on YouTube, meet the first criteria: A popular viral video can get millions of views. The problem is that they're not repeatable. The vast majority of viral videos are "one-hit wonders". Google has found that it's possible, but very difficult, to sell advertising against viral videos. Many advertisers don't want their ads to run alongside "objectionable" content, yet it's that same objectionable content that makes many videos go viral.

On the other hand, webcast networks like TWiT and Revision3 get audiences that come back week after week for original shows, but the audiences aren't big enough to generate a lot of advertising revenue. They make enough money to make a nice living for a few people, but not enough to attract investors.

That's why new media companies keep turning to old media companies to get their content. The problem is that old media companies don't want to risk their existing revenue streams, even if those revenue streams are already being eroded. If you're an Internet company and your business plan depends on convincing old media companies to license their content to you, you're starting with two strikes against you. Even worse, your biggest suppliers are in a position to become your biggest competitors, if they aren't already competing against you.

New media companies have to break their dependence on old media, and the only way to do that is to produce original content in new forms that old media companies can't, or won't, duplicate.

Broadcasters and Cable Operators: Hypocrites on the Hill

Broadcasters and cable operators are facing off today in hearings at the U.S. Congress over compensation for broadcast retransmission rights and the ability of broadcasters to withhold their programming from cable, satellite and IPTV service providers. The broadcasters are being represented by Fox/News Corp. and Univision, and the cable operators by Cablevision and Time Warner Cable.

Today's hearings were triggered by the standoff between Fox and Cablevision that led to Fox's television stations and most of its cable channels being unavailable to Cablevision subscribers for almost two weeks. The broadcasters, led by Chase Carey of News Corporation, want the government to keep out of the negotiations and impose no requirements for binding arbitration. The cable operators want broadcasters to be required to make their programming available so long as negotiations are continuing, and want binding arbitration at a minimum, if not outright controls on the prices that broadcasters can charge for retransmission rights.

Let's take the broadcasters' side first. They don't want any government interference in or controls on their negotiations. However, their right to set prices for and control retransmission of their programming was established by the U.S. Government in the 1996 Telecommunications Act. Prior to that, they had no choice but to provide their programming to any cable operator who wanted it and was willing to pay the U.S. Copyright Office for the right to use it. If the government hadn't "interfered", broadcasters wouldn't have the rights that it doesn't want the government to interfere with.

In addition, other than a modest fee for a license issued by the U.S. Government, broadcasters don't pay a penny for the bandwidth that they use. If they had to pay the true market value for the bandwidth they use, broadcasters might have a stronger argument, but they're getting the bandwidth that makes their businesses possible for free.

Now, consider the cable operators. The rates that consumers pay for cable service have been going up steadily for years, faster than the rate of inflation, even before the current round of retransmission negotiations. Cable operators have managed to rid themselves of most local controls over their pricing, and they steadfastly refuse to implement a la carte pricing, which would allow consumers to pay for only the channels that they want to watch. The result is that cable (as well as satellite and IPTV) subscribers are forced to pay for dozens of channels that they never watch and wouldn't miss if they weren't available.

Broadcasters want the U.S. Government to subsidize their bandwidth and give them the right to charge for their programming, but they don't want government interference in their negotiations with cable operators. Cable operators plead poverty but have been raising rates for years, and refuse to give their customers the right to pay for only the channels that they want to watch. Both sides are hypocrites.

Is binding arbitration coming in cable retransmission deals?

As of today, Fox's local television stations and cable channels have been unavailable to Cablevision subscribers for five days. Dish Network's retransmission deal with Fox runs out at the end of October, and the Fox channels may go dark on Dish as well. Cablevision has offered to enter into binding arbitration, but Fox appears to be afraid that it won't get what it wants from arbitration.

It's looking more and more like the U.S. Congress or Federal Communications Commission may step in and impose rules for retransmission negotiations. One line of thought is that broadcasters would be prohibited from withdrawing their over-the-air programming from cable, satellite and IPTV service providers while negotiations are underway. Cable networks would be exempt from this rule, but the problem is that service providers could simply stretch out negotiations indefinitely.

Here's where I think this will go: Broadcasters will be required to supply their programming to service providers for a limited time after the expiration of a retransmission contract (perhaps 30 to 60 days) to allow the parties to negotiate a new deal themselves. After that, binding arbitration would be imposed. This would only apply to over-the-air programming--Fox would be free to pull down its cable networks as soon as its contracts expire, as would NBC Universal or Disney.

Any such rules would be tied up in court challenges, potentially for years, but as retransmission standoffs escalate and more service provider customers lose access to channels they want to watch, there's simply going to be too much pressure on the U.S. Government to ignore. 

Hulu Plus begins testing, and it's an OMG experience

You may remember when the company that became Hulu was first announced by NBC Universal and News Corporation. Critics derided the company and said that two non-tech media firms could never build a compelling online video service. Google called it "ClownCo." But when Hulu actually began beta testing, virtually all of the critics changed their tune overnight. It was head and shoulders above any online video service available at the time.

Rumors have been flying for months that Hulu would introduce a paid subscription service, and yesterday, they did just that, announcing Hulu Plus. The new service will be priced at $9.99 per month, and it provides full access to all the current year's episodes of shows from ABC, Fox and NBC, as well as complete libraries of episodes of some series. One of the biggest complaints that users have had about Hulu has been spotty availability of episodes--some series would only have three or four episodes from the current season available, others would only have a single episode available for a limited time, and so on. By and large, Hulu Plus appears to eliminate these problems.

I've had a chance to try out the free preview of Hulu Plus on both an iPad and iPhone 4 (it's available from the iTunes App Store,) and like the original Hulu, it's an OMG experience. I tested it on a WiFi network, so I can't speak to its quality when viewed using AT&T's 3G network, but the video quality is superb and the user interface is well-designed.

Some reviewers are already calling it a cable or TV Everywhere killer, but Jason Killar, Hulu's CEO, is trying to nip those ideas in the bud. TV Everywhere has a big advantage in that it carries content not only from the broadcast networks but from the major cable networks as well. Hulu may well extend its array of content providers, but the company has to be careful not to over-expand and dilute the revenue shares that it has promised to its investors and primary content providers. Similarly, Hulu Plus is strictly an on-demand service; if you want to watch a live sports event, or see a series episode on the day and date that it's originally broadcast, you'll need a cable, satellite or IPTV service provider.

In any event, I wasn't particularly excited about Hulu Plus until I had a chance to try it out. I'm very likely to be parting with $9.99/month once the service becomes available.

News Corp buys Skiff from Hearst, invests in Journalism Online

Earlier today, News Corporation announced that it acquired Skiff from Hearst, and made an investment in Journalism Online. Skiff is developing a large-form-factor eBook reader designed for magazines and newspapers, and Journalism Online is a venture led by Steve Brill that's developing ways to monetize online content.

News Corporation's investment in Journalism Online makes perfect sense, but its acquisition of Skiff opens up some questions. Rupert Murdoch has made it clear that he believes that the era of free content on the Internet is over, and Journalism Online may give him the tools that he needs for monetization. However, News Corp doesn't need its own tablet platform...unless it's planning to make its sites "walled gardens" and close off access to the open Internet.

Here's a potential scenario: News Corp's newspapers would maintain a token presence on the web, but to access to their full contents, you'd need to buy a Skiff reader. News Corp will discount the price of the Skiff when it's purchased with an annual subscription to one of its newspapers. It may still support dedicated apps for the iPhone and iPad, but you'll no longer be able to get to the "meat" of its sites with a web browser.

News Corp would make its platform available to other publishers (for a price,) just as Hearst had planned to do, so it wouldn't necessarily be a News Corp-only reader. It's likely that News Corp will also make its eBooks available on the Skiff reader.

This strategy would undoubtedly sacrifice advertising revenues for subscriptions in the short term, but Murdoch may be willing to make that trade-off. Over time, he may believe that he can build a big enough subscription audience to generate substantial advertising revenues along with subscriptions. Also, by owning the hardware platform, News Corp can control the pace of development and insure that it gets eBook readers at the lowest possible price. News Corp would also not be at the mercy of Apple or Amazon; if those companies change pricing or distribution models in their favor, News Corp can move subscribers over to the Skiff.

There are a number of questions, however: If the Skiff is perceived as a closed platform, would News Corp sell enough to get a profitable subscriber base? (One could argue that the Kindle is a closed platform and it hasn't hurt Amazon.) Can News Corp keep the Skiff platform competitive over time with tablets and eBook readers from competitors? Are customers going to be willing to add a Skiff reader to the other devices that they already carry? It'll be interesting to see how News Corp integrates Skiff into its plans over the next 12 months.

Update: According to PaidContent, News Corp acquired Skiff's intellectual property and software from Hearst, not the Skiff reader hardware, for which Hearst is still trying to find a buyer. It appears that News Corp will try to license the Skiff software to other manufacturers.

The Content Paradox

The "old media" Goliaths like News Corporation, Viacom, CBS, Disney, NBC Universal and Time Warner are often said to be doomed to extinction by the Internet, yet it's content produced and owned by those same companies that's the most popular on the Internet. Those of us in the U.S. may complain about Hulu's limited selection of and time limits on access to content, yet Hulu is envied by content consumers around the world. YouTube would never have gotten to where it is today without all the "old media" content that was (and still is) uploaded for free consumption. If YouTube had depended totally on user-generated content, it never would have reached critical mass.

We may not like the restrictions and limitations that the old media companies put on usage of their content, but they own it, and they have the right (subject to "first sale" rules and other restrictions in the U.S.) to control how it's sold and distributed.

No Internet "new media" companies have content that's in the same popularity class as the old media companies. Producer/Distributors such as Revision3 and TWiT have built very solid businesses. TWiT, Leo Laporte's company, is attracting bigger audiences than TechTV ever did, and judging from Laporte's own comments, it's making a nice profit. However, the audience for all of TWiT's programming is tiny compared to any of the old media sites. Thus the paradox: The Internet relies on old media to drive traffic to new media sites, but the vast majority of original new media properties can't find big enough audiences to sustain themselves financially.

The Internet has lowered the barriers to entry for content producers and distributors down to almost nothing, but making the content available and getting people to read or watch it are two very different things. Building a big enough audience that your content or site becomes attractive to advertisers is much more difficult, and getting people to pay to access the content is even yet more difficult. The old media companies have at least solved the problem of getting people to watch or read their content, but the new media companies all have to start from scratch to build an audience.

Old media isn't having that much easier a time of it on the Internet--just today, for example, Hulu announced that Viacom's Comedy Central is withdrawing its programming at midnight on March 10th, thus removing some of the most topical and popular content from the site. Hulu is widely believed to be unprofitable, and rumors have been flying for months that its parent companies (News Corporation, NBC Universal, Disney and Providence Equity Partners) have been pushing it to adopt a pay model in addition to its existing advertising-supported model. So, simply bringing old media content to the Internet isn't a formula for financial success.

This argument is going to continue until someone releases a breakout hit on the Internet, figures out how to make money with it and builds a profitable, growing media business. Until that happens, the Internet will remain primarily a distribution channel for old media, rather than a viable channel for launching new media.

NBC Universal: We make it up as we go along

In Congressional hearings today, NBC Universal and Comcast answered questions about how their merger would affect the supply of programming to competitive outlets, among other topics. During questions, NBC Universal Chairman Jeff Zucker was asked about Hulu's decision to block the ability of Boxee to display its programs. It's important to remember that at the time of the dustup between the two companies, Hulu was owned by NBC Universal, News Corporation and Providence Equity Partners (Disney subsequently invested in Hulu.) Therefore, any decisions that were made weren't Zucker's alone. However, responding to direct questioning, he said that the decision to block Boxee was made by Hulu's management because Boxee was "... illegally taking the content that was on Hulu without any business deal."

The problem with this statement is that it's wrong on both counts. First, Hulu's management has admitted that it was pressured by its joint venture owners, including NBC Universal, to block Boxee. Second, at the time that Boxee was displaying Hulu's content, it was using the same facilities that Hulu made freely available to anyone. Boxee wasn't stripping out any advertising in Hulu's streams or interfering with the streams in any way. Hulu specifically targeted Boxee in denying it service. Then, when Boxee attempted an end-around by using Hulu's freely-available RSS feeds, Hulu blocked them as well.

I wrote earlier about Zucker's cowardice in how he blamed Jeff Gaspin for the disastrous late night "musical chairs" plan at NBC. Now, Zucker is hiding behind Hulu's management (that acted at Zucker's direction) and is accusing Boxee of illegal behavior that never occurred. Boxee has responded to Zucker's charges and has linked to a video of the Congressional Q & A. I've given up on trying to comprehend how this man has managed to keep his job. All I can say is that Jack Welch is spinning in his grave, and he isn't even dead yet.

Comcast/NBC Universal: It's Not AOL Time Warner

Comcast's acquisition of 51% of NBC Universal from GE has been derided by some observers as the second coming of the AOL-Time Warner deal--two big media companies merging with few real synergies. On the contrary, I think that it's a very good deal for both companies--but it's not without risks.

AOL was "circling the drain" before the merger with Time Warner--subscriptions rates were flattening out, churn was increasing, as were subscriber acquisition costs. The company was hard-pressed to find growth, so it instead engineered one of the dumbest mergers in U.S. history, getting one of the biggest media companies in the world to essentially give itself to AOL. (Let's be clear...the merger was dumb for Time Warner but brilliant for AOL.)

By contrast, NBC Universal is in far better shape than AOL was. NBC's broadcast network is a mess, and the Universal movie studio is questionable (as it's been ever since MCA was acquired by Panasonic years ago), but its cable networks are generally strong, well-run and profitable. It's the cable networks that formed the primary reason for Comcast's interest.

The FCC is almost certainly going to require Comcast to either divest NBC's owned-and-operated television stations in markets where Comcast has cable systems (in Chicago, Philadelphia and Washington, D.C., among other cities) or its cable systems in those same markets. I suspect that it's the television stations rather than the cable systems that will be sold off.

Antitrust arguments against the merger are going to be a lot harder to make; for years, Time Warner owned Time Warner Cable (the second-largest cable operator), a movie studio and a collection of cable networks at least as powerful as those of the Comcast/NBC Universal combination without running afoul of antitrust regulators. Comcast has already pledged to make NBC Universal's cable networks available to competitors. The deal is likely to get done without major concessions beyond those required by the FCC.

The NBC television network can be fixed; it fell from first to fourth place in little more than a year, and one or two years of strong program development could turn things around. (To do so, however, Comcast will have to get Jeff Zucker and his cronies away from the network and install a new programming team.) Universal is a bigger problem, in that Comcast will be its sixth owner in less than 20 years, and no one in that time has figured out how to return the studio to success. The solution may be to sell off Universal in parts, keeping its library and selling off the ongoing studio operations.

NBC Universal's digital assets have been called a key reason for the deal, but I think that they're clearly the tail in this deal, not the dog. The most important digital asset is Hulu, but NBC Universal is a minority owner. Comcast will get a seat at the table, and Hulu will get to play in the TV Everywhere initiative, but it's not going to negate News Corporation's and Disney's interests.

I've learned from my own sources is that Comcast is working on its own low-cost, Roku-style set-top box to make its Xfinity service available on television sets without having to replace millions of existing set-top boxes. This could become the "official" mechanism through which Hulu will get to television sets.

In short, this deal makes sense for both Comcast and GE: Comcast gets control of a treasure trove of content, decreases its costs for distributing some of the most popular cable channels (they become internal transfer costs instead of outright expenses) and gets partial ownership of the Internet video distributor that poses the biggest risk to cable operators. GE gets out of the entertainment business without taking a financial bath, and can focus on industrial, medical and financial areas. The merger will almost certainly go through.

Hulu--get successful, shoot self in foot

It's a common story--start-up that initially isn't taken seriously by either its competitors or the industry in general, delivers a great product and turns the industry's perception around. In order to get distribution, the start-up cuts deals with some competitors, and makes it easy for others to redistribute its products. Once the start-up gets successful, however, those partners start to look more like competitors, and it starts pulling back on deals.

That's exactly what's happening with Hulu, the web video start-up that was derisively labeled "ClownCo" by executives at Google, only to become, in some ways at least, a more profitable and popular destination than Google's YouTube. Last week, however, Hulu started pulling the plug on distribution. The first was to take Hulu's content off of TV.com, a site that CBS purchased when it acquired CNET last year. The second was to take Hulu off of Boxee, an increasingly popular web video browser for Linux, OS X, AppleTV and Windows that turns PCs into set-top boxes. Hulu's distribution deal with TV.com was contractual, while there was no formal business arrangement between Hulu and Boxee.

In the TV.com case, Hulu merely stated that it had the contractual right to remove its videos, and was doing so. In Boxee's case, Hulu seemed to be more apologetic, stating that it withdrew its content at the request of its content partners. It's important to note that Hulu's largest owners, with equal control, are NBC Universal and News Corporation (Fox), and to my understanding, it would only take one partner to get Hulu to yank its content. I'm not going to speculate on which partner I think pulled the plug (NBC Universal), because they're both extremely well-run companies with top-notch management teams (and pigs can fly.)

What is happening is that Hulu's actions are getting people to reconsider The Pirate Bay and other sources for the content that's distributed by Hulu. These are unlicensed sources, and not a penny of revenue goes back to Hulu, its parent companies or other affiliated content providers. At precisely the time that Hulu is engaging in a promotional program involving commercials on NBC, Fox and both companies' cable outlets, it's taking actions that curtail Hulu's distribution and encourage piracy.

In Boxee's case. it's entirely possible that it was cable operators that forced Hulu's partners to take the action they did. To these operators, I say that taking Hulu off of Boxee and any other service will not in any way slow down the trend for consumers to drop their cable services. The only thing that will do that is an industry-wide switch to a reasonable a la carte pricing scheme, which will happen fairly close to the heat death of the universe.

In short, Hulu's actions are only going to hurt Hulu. They won't accomplish what either the content providers or the cable operators want--in fact, they'll accomplish the reverse. Joint ventures almost always suck massively--they're impossible to manage, because the participating partners almost always have divergent strategic goals and objectives. I chalk Hulu's behavior up to that.

TiVo and DirecTV: Back Together Again

When News Corporation took operational control of DirecTV a few years ago, it began an agonizing split between DirecTV and TiVo, its supplier of DVR technology. Prior to the split, DirecTV was by far TiVo's biggest market. After News Corp. took over, it demanded a much bigger split of subscription revenues, which TiVo wouldn't agree to. News Corp. called on NDS, a corporate subsidiary, to port DVR software that had already been developed for BSkyB and other services to the DirecTV platform, cutting out TiVo. Last March, DirecTV announced that subscribers wanting HD DVR service had to switch to NDS's set-top box, a decision that's been roundly criticized by many DirecTV users.

However, within days of DirecTV's announcement, John Malone's Liberty Media acquired News Corporation's controlling interest in DirecTV. Liberty Media almost immediately began talks with TiVo to reestablish the relationship between the two companies, and today, both companies announced that TiVo will develop a DirecTV-compatible HD DVR for delivery in the second half of 2009.

The loss of DirecTV as a major customer made TiVo a much stronger company: It completed a distribution deal with Comcast that's in the process of rollout, and it shifted a good deal of its revenues from selling boxes and subscriptions to selling viewing and marketing information to advertisers. Winning DirecTV back can only help the company's bottom line.