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.

Will 2011 be the "tipping point" for over-the-top video?

Ty Braswell wrote a thought-provoking post for VentureBeat, calling on his past experience as a music industry executive to suggest that the same dynamics that overturned the conventional order in the music business are happening in video:

• Viewers now have easy access over the Internet to much the same content that was previously only available from cable, satellite and IPTV service providers
• Convenience (for example, the ability to start watching a movie on your iPad, leave your house and pick up where you left off on your iPhone, and then come home and finish watching the movie on your HDTV) is driving consumer decisions
• Service providers are raising prices, even while they're facing unprecedented competition from over-the-top video services

There is one big difference between the music industry's situation and that of the video industry: The music industry was decimated by completely free services such as Napster and P2P networks before Apple launched iTunes, while video content producers are still (relatively) healthy. The same formula that Apple came up with for iTunes in the music business is being applied to video successfully by Netflix, Amazon, and, to a lesser extent, Apple itself. There's money to be made, but who makes the money is shifting from the service providers to the over-the-top distributors and content providers.

Braswell gives the example of ESPN, which typically charges $4 per month per cable subscriber. What if millions of consumers were willing to pay $12/month to ESPN if they could get it wherever they want, without a cable subscription? ESPN would be way ahead, even if 30% or 40% of the gross revenues went to Netflix, Amazon or Apple, and those companies handled distribution and billing.

I'm not a big sports fan, but I'd gladly spend $10/month for the Discovery and National Geographic networks, and go back to basic cable for everything else. Could Time Warner sell a bundle of its cable channels directly? I think that it could. Would Fox News viewers pay for anywhere, anytime access to the Fox cable networks? I believe they would. Even better, unlike the music business where there's Apple and everybody else, no one company dominates over-the-top video distribution. Netflix is the biggest player, but by no means is it the only player. That gives the movie studios and cable networks more negotiating power and pricing leverage.

Content providers can see the new over-the-top landscape as "the sky falling", or they can see it as an opportunity to gain more control over their pricing and distribution.

Who's afraid of the big, fat pipe?

Cable, satellite and IPTV services all do the same thing: They distribute video content to set-top boxes in consumers' homes, where the content is watched on televisions. If you suggested to them on the record that they get rid of the content, get rid of the set-top boxes and simply allow consumers to get content from wherever they want, their heads would explode like they did in David Cronenberg's "Scanners".

Last week, however, Ivan Seidenberg, the chairman of Verizon, suggested that the future of video is over-the-top content at a Goldman Sachs conference in New York last week, and that a transition from Verizon selling the content to consumers getting content from their own sources is inevitable. Service providers would offer very fast Internet service (100Mbps or more--some Asian service providers are offering 1Gbps), thanks in part to not having to reserve so much bandwidth for video, and would act as common carriers--their pipes would carry just about anything. The service providers would make money on the connectivity, not the content. Set-top boxes and a whole lot of infrastructure and truck rolls would go away.

One enormous thing that goes away in the common carrier model is the need for service providers to negotiate for and license content. Most cable operators would tell you privately that they'd rather have a colonoscopy without sedatives than negotiate with Disney for retransmission rights. Disney's ESPN is the "900-pound gorilla" of cable channels, and Disney uses it like a hammer to get concessions from service providers, from paying to retransmit their local ABC owned-and-operated stations to carrying all of Disney's sports and children's networks. And Disney is only one player: There's CBS, NBC Universal, News Corporation/Fox, Time Warner and many others, all demanding their own share of operator revenues and priority positions in bundles.

There are only two service providers in the U.S. with their own large stables of content: Comcast, which owns E! Entertainment, Versus, The Golf Channel and G4, along with regional cable networks across the country, and Cablevision, whose Rainbow Media subsidiary owns AMC, IFC, The Sundance Channel ad WeTV. (Since 2008, Time Warner Cable has been independent of Time Warner, which owns HBO, TNT, CNN, HLN, TCM and many other cable networks, as well as Warner Brothers.) Comcast, of course, is trying to get government approval to acquire NBC Universal, which will give it NBC, Telemundo, USA Network, MSNBC, CNBC, Bravo, Lifetime, SyFy, The Weather Channel, Mun2 and other wholly- and partially-owned cable networks, as well as Universal Studios.

Comcast and Cablevision can make money by licensing their content to other service providers. They sell themselves the content they need for their own cable systems through what's called "transfer pricing"--essentially, the money goes from one pocket to another. Thus, they have lower content acquisition costs and more control over their future outlook than other service providers.

But what if some of the larger service providers decide to go the common carrier route, or pursue a hybrid strategy of offering only local broadcast stations and a small number of national cable networks, with subscribers free to get anything else they want from anyone they want? To date, no one in the U.S. has had that option (legally), but it could happen. If it did, there would be a lot of cable and IPTV service provider executives who would sleep much better at night.

The media powers "have this Internet thing all figured out"

Earlier today, at the Cable Show in Los Angeles, former FCC Chairman Michael Powell chaired a panel of media bigwigs (plus Marc Andreessen) to discuss content on the Internet. The other panelists were Brian Roberts of Comcast, Tom Rothman of Fox, Les Moonves of CBS and Jeffrey Bewkes of Time Warner. The consensus of the media executives is that they've got this Internet thing all figured out. Their content will be on whatever devices consumers want to use, so long as they (the content providers and distributors) get paid for it. By and large, it sounded like a bunch of guys sitting around using buzzwords that they've heard but don't quite understand.

The executives clearly want to maintain the status quo, just on a larger variety of delivery platforms. They still want release windows so that they can maximize revenues from each platform. They see new technology simply as an extension of their old technology. For example, Brian Roberts demonstrated an application that turns a $600 iPad into a glorified remote control for your ten-year-old cable box. It can show program schedules, allow you to browse VOD content and even invite your friends to watch, but you watch the content on your TV screen through your set-top box, not on the iPad that you have in front of you.

What disappointed but didn't surprise me about the panel is that there was really no "outside the box" thinking from anyone, even Andreessen. He pitched integrating Facebook and Twitter with the services that the big media companies already have in place, and talked about Zygna's model of free games with in-game transactions, but didn't really explain how the media companies could take advantage of that model. Comcast's Roberts pitched using an iPad as a peripheral to its set-top boxes, not as a legitimate delivery platform. Thar was about as far as the envelope got stretched.

The incumbent content and service providers will never fundamentally change the economics of content production, distribution and purchase. It runs counter to their business interests. It's up to a new generation of content producers and distributors to convince a critical mass of consumer/producers to get on board.

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.

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.

A Huge Win for Cablevision (and for consumers)

Earlier today, the U.S. Court of Appeals for the Second District reversed a previous ruling that Cablevision's network PVR service infringed the rights of content owners. In 2006, Cablevision announced its network PVR service, called RS-DVR, which was based on technology from Arroyo Video Solutions, a company that was subsequently acquired by Cisco. The big advantage of a centralized PVR system is that conventional set-top boxes can provide video recording capabilities; in-home PVRs, with their cost and complexity, aren't needed. Network PVRs are the standard in China, India and other countries where subscriber income precludes the cost of in-home PVRs.

Almost immediately after Cablevision's announcement, a flock of content companies, including CBS, Viacom, News Corp., Time Warner, Disney and NBC Universal, filed suit to stop deployment of RS-DVR. In the initial court case, the media companies prevailed and won an injunction that precluded Cablevision from offering RS-DVR. Today's decision by a three-judge panel overturned the lower court's ruling and lifted the injunction. These articles provide more details about the ruling itself.

This is not the last word in the case, of course. The media companies can request that the entire U.S. Court of Appeals for the Second District rehear the case. No matter how that turns out, the losing side can appeal the case to the U.S. Supreme Court, which can (but isn't obligated to) hear the appeal. However, we're a giant step closer to legal network PVR service in the United States, which will likely mean lower costs for consumers.

Here Comes Everybody

According to this article from OneTRAK, Verizon has begun construction (overbuilding) that will enable the company to introduce its FiOS service into two Texas cities (Frisco and Allen) already served by AT&T's U-Verse service. This announcement could also have implications for the five other states (Florida, California, Indiana, Washington and Oregon) that Verizon shares with either AT&T or Qwest.

Historically, overbuilding phone systems simply wasn't done; each city had one and only one telephone franchise. However, now that local franchising is no longer an issue, the decision about whether or not to overbuild is driven by economic and technical issues. It's a lot less expensive to overbuild when you already have a telephone network built in an adjoining city, and that's what's enabling Verizon's encroachment into AT&T territory in Texas. (Why is Verizon in these states, you ask? The company was formed by the merger of Bell Atlantic and GTE, and it's some of the old GTE systems that are in play for expansion.)

By and large, AT&T has three video competitors in every market: The incumbent cable operator (Comcast, Time Warner, Cox, etc.), DirecTV and Dish/Echostar. The last thing they've expected is head-to-head competition with Verizon, but they're going to get it, and in their home state (Texas). Verizon apparently believes that in FiOS, it will have a superior product to U-Verse for the foreseeable future, thus justifying the capital investment necessary to compete on AT&Ts turf.

In the past, I've talked about how Verizon's big bet on fiber to the home is turning out be much more "future-proof" than AT&T's smaller bet on fiber to the node. That's great if you live in a Verizon territory, but meaningless if you're an AT&T customer...until now. Here's an example: I live in Campbell, California, just north of Los Gatos, a Verizon city. FiOS isn't in Los Gatos yet, but once it is, one could easily envision Verizon expanding from Los Gatos to Campbell and San Jose, and from there throughout the southern part of Silicon Valley. Other Verizon outposts in Northern California could also expand, until the entire San Francisco Bay Area, or at least the most profitable parts, are covered.

This possibility has to scare AT&T silly, since the company needs those same highly profitable customers in order to pay back its capital expenditure on U-Verse. Verizon's first moves in Texas likely presage a battle that will take years to play out, but it's entirely conceivable that Verizon could end up as the sole national wireline (or "fiberline") carrier in the U.S.