"They didn't get it wrong; their timing was just off. Venture capitalists, that is.
They promised investors a broadband-connected world and all the services that
could be sent over a wire or without a wire. Potential profits in the gazillions.
They were thinking iTunes, but in 1999, they were a little early — about five years.
Except for the absence of expense accounts without accounting and the IPO infection of the late ‘90s, it sort of feels like the old magic is back. And this time, everyone is too busy actually implementing plans to make much noise about it. Welcome to the second coming of the Internet revolution — and this time, the reality meets the perception.
Over the past six years, broadband has been implemented on a scale that constitutes a mass market. The first phase of conventional broadband just reached 50 percent of all Internet users in the United States. Meanwhile, faster, video-capable broadband is being rolled out by telcos, cable, satellite, and wireless providers. For example, Cablevision recently offered customers in the Northeast a five-fold speed increase over what was already one of the fastest broadband services in the country. With Cablevision's Optimum service topping out at 30Mbps, HD movie trailers on the Apple site begin playing after a few seconds. This is an entirely new Internet experience, and over the next four years it will be coming to a monitor near you.
Even without faster broadband, iTunes has shown that the old ad-supported entertainment model is not the most profitable. From a percentage point of view, studios make more money from a download of CSI on the iTunes site then they do from the ad revenue when the show is broadcast. This point was made recently in a report by JP Morgan Chase analyst Spencer Wang that outlines a major shift in the way producers and studios distribute and monetize content. This combined with a massive infrastructure upgrade that is actually several competing systems and standards is turning new media back into the wild west with the FCC mediating things in its traditional pro-big business way. The battle over broadband may be messy but there's no question that a huge number of new businesses and consumers will benefit from the avalanche of bits. If you make, distribute, finance, or watch entertainment, you're in the cross-hairs of the most radical changes the industry has seen in an already revolutionary period. Maybe, just maybe the public interest will survive the gold rush. The following are some of the major trends taking shape.
Since the beginning of 2006, the majority of Hollywood studios and networks have announced some kind of distribution effort for their content to be played on handheld devices such as Apple iPods (top) and Creative Zen portable media centers (bottom).
iTuning the studios
Only last year the networks and studios scoffed at Mark Cuban's experiment to shrink the broadcast and theatrical release window by simultaneously releasing the DVD of Steven Soderbergh's Bubble and the theatrical version in select Landmark Theaters. Now, less than 12 months later, episodes of popular television programs are being sold on iTunes at the same time they are first aired on cable or broadcast by a network. Since the beginning of 2006, the majority of Hollywood studios and networks have announced some kind of iTunes relationship or similar distribution effort such as Movielink and CinemaNow. Many of these are toe-dipping trials, but it's still an endorsement of Cuban's experiment, which is now considered an alternative release strategy for certain movies.
One likely result of the merging of the release window and online distribution is the strengthening of the concept of direct-to-DVD movies, previously a category one step above recycling. Revenue commands respect so, as they say in criminal investigations, “Follow the money.” Super-fast broadband may allow studios and boutique indie distributors to more effectively reach their niche audience and make a direct-to-DVD release strategy a prestige brand rather than a last resort.
In the '80s, a combination of niche targeting and spirited marketing yielded a breakthrough strategy for publisher Vintage Contemporaries. The company sought to create a more compelling look for its paperback series of titles from authors such as Mona Simpson, Ann Beattie, and James Crumley — writers with big talents but modest sales. Vintage repackaged the books with great covers displaying a consistent and recognizable style. This was good for business and made it easier for the target audience to find books that they were likely to enjoy. Contrast this with the fate of movies that don't make it to the big screen, the marketing strategy for which is more like dumping toxic waste. Now there's a way to reach small audiences and not be apologetic. Yes, most of the movies dumped are getting what they deserve, but new broadband business models may provide new life — and interested eyeballs — for all the great content that slip through the cracks.
User-created content
Almost weekly, a new company announces that it is aggregating user-created video content for the Internet, wireless devices, or both. Community sites have been doing this for years in a low-key way, enhancing the user experience for members rather than directly charging for content. That model is changing. Internet companies and sites such as iFilm, Yahoo, Google, Metacafe, MySpace, and YouTube, to name a few, are creating contests and cross promotions with cable stations. In the current televison season, the aptly named VH1 program Web Junk features a selection of the best amateur videos submitted.
Right now, many of these early experiments make flat-rate deals or award videomakers prizes in the $500 to $2,500 range. YouTube, the brainchild of founders Chad Hurley and Steve Chen, serves up 30 million videos a day and uploads as many as 30,000 files a day. This is a community site that took off without much of a business plan, but with that kind of traffic, you can still send your valuation through the roof. On the professional side, iTunes provides a 70/30 split with content creators, and this is rapidly becoming the defacto standard, with 70 percent of gross going to the creator. Google's Video Store uses a similar formula. One could foresee a future in which entertainment companies become more of a talent marketing agency using services like YouTube to help scout upcoming videomakers who are simultaneously market tested by the audience. Scary.
Qualcomm MediaFlo, shown here on a prototype Samsung cell phone, uses an end-to-end system to deliver multimedia to wireless subscribers.
Wireless entertainment
In a recent survey conducted by RCB Capital Markets, three quarters of respondents were not interested in watching TV programs or movies on a handheld device. In-car mobile entertainment and Internet connectivity was similarly uninteresting to respondents. In spite of this, companies are lining up to produce short-format material for cell phones, Personal Media Players (PMPs), and PDAs. The survey's questions may be too narrow, since wireless entertainment can be ring tones, music, wallpapers, screensavers, games, mBlogs, cartoons, baseball scores, headlines, and stock reports. OK, what has that to do with our business? Well, plenty when Marvel comics is licensing branded characters to sell everything from sports equipment to food products. The point is that no one actually knows what will work and mobile media is going to serve as a virtual focus group to discover what sticks. Expect unbridled opportunism to lead to unwatchable junk on your cell phone, but also the next Boondocks.
At the moment, wireless is still stuck in the low-bandwidth mode. WiMax, or one of the other competing standards, is needed to kick wireless into high gear for laptops and other large-screen displays such as the latest PMPs, with which viewers would like to enjoy high-quality video while traveling. Mobile phones are wireless, but work on their own more mature systems that are close to ubiquitous but technically inferior to what is found in Korea and Japan. Similarly, the local area WiFi service is a rag-tag collection of hotspots — each one not much larger then your living room — but soon to be replaced by WiMax. Google made headlines recently by announcing that it would provide WiFi for free in San Francisco. Despite the technical hurdles that WiMax must overcome, this may be the last gasp of true, open Internet access. At least that's the hope. In fact, with the high cost of the analog spectrum favored by wireless providers, it is unlikely that public-space, fast broadband is even possible — at least not without the help of legislation.
You may not have heard, while you were preparing your latest pitch for Cartoon Network or HBO, that these stations were meeting with Verizon and Cingular. Yes, the phone companies have all opened entertainment divisions. Naturally, the telcos are looking for established content, but the rise in user-created content is not wasted on them, either. The opportunity and rewards of discovering talent and creating a brand is seductive. In other words, cell phone company executives will very quickly be thinking of themselves as movie makers and studio heads. In the end, whether you're at Fox or Verizon, it's just another meeting with development executives who can greenlight a project or send it into turnaround.
Personal networks
This trend is about direct sales from your site. Streaming video or progressive downloads is fairly easy to set up, so if you're a post house with content creation ambition or just want to share a video diary of the making of your low budget doc, the infrastructure is being put in place to present something other than 320Å~240 video. You could even show HD to any of the early adopters who have fiber-optic connections or Cablevision's premium broadband service. The hitch for content producers is that they will be charged by the megabite for each movie streamed. The more data you send, the more you'll pay. If you're lucky enough to reach hundreds or even thousands of people, you will have a very big monthly bill. So if you have been listening to the hype that fast broadband will place indie content creators on a level playing field with the media giants, don't hold your breath. Won't happen. We may be in the midst of an enormous realignment in the entertainment industry, but laws of nature have not been repealed and the big fish are not going to lose their appetites or legislation that puts small companies at a disadvantage.
------------------------------------------------------------------------
Wireless Entertainment Players
If you have an idea for a mobile phone series, here is a list of wireless entertainment players to get you started:
* MobiTVmobitv.com
* Boost Mobileboostmobile.com
* V Cast (Verizon Wireless) verizonwireless.com/vcast
* JamDat (EA Mobile Games)jamdat.com
* Qualcomm MediaFlowww.qualcomm.com/mediaflo
* Think Mobilethinkmobile.tv
------------------------------------------------------------------------
The Public Interest Gets Interesting
You may be eager to sell your content to the consumer directly, or you might be perfectly happy to pitch ideas to publishers and network execs. Not everyone is an indie player. If you do plan to distribute directly to the consumer, the really big opportunities are likely to happen in the early stages of destabilized traditional business models. That's because, after a while, the larger players tend to have legislation written to their advantage as the FCC and NAB have demonstrated for decades. What I'm suggesting is that history has shown us that media consolidation favors the media status quo despite what may seem like a new era of opportunity.
In February this year, the FCC published its annual video competition report presenting a healthy array of options for how American consumers receive their video and phone service. This is one of the reasons given by the FCC for relaxing ownership rules. However, the 1996 Telecommunications Act was a huge giveaway to the broadcasters, which the FCC does not like to discuss. While the conversion from analog to digital has been presented to the general public as a government requirement, it is likely that broadcasters would have had to go digital to remain competitive. They received billions of dollars of free spectrum that their emerging competitors must pay for — including the recent auction of spectrum to wireless providers. All the new media players are paying for infrastructure that the broadcasters receive for free.
In spite of this, the NAB has asked for the removal of the FCC's long-standing media ownership limits and permitting duopolies in local markets. The cap was recently raised to 65 percent, and now the NAB wants it removed entirely. While this is called deregulation, it still leaves broadcasters with arguably the most valuable bandwidth — a situation that only exists because of government largesse. Auctioning of the digital broadcast spectrum used by broadcasters is also deregulation, but not the kind of free market the FCC is likely to consider.
One argument is that the media ownership limits placed on broadcasters in any given market are no longer justified because of new competition from cable, satellite, and telephone companies. While the latest statistics published by the FCC may indicate a lot of consumer choice in the near future, this is likely to be a temporary situation until video-capable broadband penetration begins to plateau by the end of the decade or perhaps a little later. After that, watch for the consolidation. This has been the trend in telecommunications for most of the century with few exceptions. In the case of AT&T, you don't have to wait. Pending SEC approval, AT&T will pay $67 billion for BellSouth (which owns 40 percent of Cingular Wireless) in order to compete in the new world of converged media. The new AT&T begins to look a lot like the pre-1984 AT&T, when the courts declared it a monopoly and the company was broken up into the Baby Bells.
Discussion of cable providers, telcos, and broadcasters as separate entities is also misleading insofar as all the big players are increasingly diversified into multiple forms of distribution. With so few large telecommunications or media conglomerates, it makes mores sense to discuss competition while analyzing Viacom, General Electric, Sony, and Fox. The real danger is that once the high-performance infrastructure is in place, a few large players will control fast access to the Internet. Competition will evaporate as large companies may find it is easier to raise rates than to start a price war. In addition, it is unlikely that the bandwidth providers will remain out of the content business for long, and they will be in a position to exert anti-competitive influences in the marketplace. After all, within several years bandwidth will be a commodity that is only valuable by virtue of artificial scarcity. Like electricity and water, Internet connectivity is rapidly becoming an essential requirement for consumers, and it may be that utility law should be applied in the administration of access and pricing.
Either the information highway is like the free streets, roads, and interstate highways across 50 states with equal access for all, or it's operated by a handful of gatekeepers. The Internet is increasingly becoming connected to the election process and the way in which we are informed about the world. Spectrum allocation and telecommunication infrastructure is probably the most significant issue for the country in this decade. It really affects every aspect of our lives. Just don't expect to hear much about it on the network news."
They promised investors a broadband-connected world and all the services that
could be sent over a wire or without a wire. Potential profits in the gazillions.
They were thinking iTunes, but in 1999, they were a little early — about five years.
Except for the absence of expense accounts without accounting and the IPO infection of the late ‘90s, it sort of feels like the old magic is back. And this time, everyone is too busy actually implementing plans to make much noise about it. Welcome to the second coming of the Internet revolution — and this time, the reality meets the perception.
Over the past six years, broadband has been implemented on a scale that constitutes a mass market. The first phase of conventional broadband just reached 50 percent of all Internet users in the United States. Meanwhile, faster, video-capable broadband is being rolled out by telcos, cable, satellite, and wireless providers. For example, Cablevision recently offered customers in the Northeast a five-fold speed increase over what was already one of the fastest broadband services in the country. With Cablevision's Optimum service topping out at 30Mbps, HD movie trailers on the Apple site begin playing after a few seconds. This is an entirely new Internet experience, and over the next four years it will be coming to a monitor near you.
Even without faster broadband, iTunes has shown that the old ad-supported entertainment model is not the most profitable. From a percentage point of view, studios make more money from a download of CSI on the iTunes site then they do from the ad revenue when the show is broadcast. This point was made recently in a report by JP Morgan Chase analyst Spencer Wang that outlines a major shift in the way producers and studios distribute and monetize content. This combined with a massive infrastructure upgrade that is actually several competing systems and standards is turning new media back into the wild west with the FCC mediating things in its traditional pro-big business way. The battle over broadband may be messy but there's no question that a huge number of new businesses and consumers will benefit from the avalanche of bits. If you make, distribute, finance, or watch entertainment, you're in the cross-hairs of the most radical changes the industry has seen in an already revolutionary period. Maybe, just maybe the public interest will survive the gold rush. The following are some of the major trends taking shape.
Since the beginning of 2006, the majority of Hollywood studios and networks have announced some kind of distribution effort for their content to be played on handheld devices such as Apple iPods (top) and Creative Zen portable media centers (bottom).
iTuning the studios
Only last year the networks and studios scoffed at Mark Cuban's experiment to shrink the broadcast and theatrical release window by simultaneously releasing the DVD of Steven Soderbergh's Bubble and the theatrical version in select Landmark Theaters. Now, less than 12 months later, episodes of popular television programs are being sold on iTunes at the same time they are first aired on cable or broadcast by a network. Since the beginning of 2006, the majority of Hollywood studios and networks have announced some kind of iTunes relationship or similar distribution effort such as Movielink and CinemaNow. Many of these are toe-dipping trials, but it's still an endorsement of Cuban's experiment, which is now considered an alternative release strategy for certain movies.
One likely result of the merging of the release window and online distribution is the strengthening of the concept of direct-to-DVD movies, previously a category one step above recycling. Revenue commands respect so, as they say in criminal investigations, “Follow the money.” Super-fast broadband may allow studios and boutique indie distributors to more effectively reach their niche audience and make a direct-to-DVD release strategy a prestige brand rather than a last resort.
In the '80s, a combination of niche targeting and spirited marketing yielded a breakthrough strategy for publisher Vintage Contemporaries. The company sought to create a more compelling look for its paperback series of titles from authors such as Mona Simpson, Ann Beattie, and James Crumley — writers with big talents but modest sales. Vintage repackaged the books with great covers displaying a consistent and recognizable style. This was good for business and made it easier for the target audience to find books that they were likely to enjoy. Contrast this with the fate of movies that don't make it to the big screen, the marketing strategy for which is more like dumping toxic waste. Now there's a way to reach small audiences and not be apologetic. Yes, most of the movies dumped are getting what they deserve, but new broadband business models may provide new life — and interested eyeballs — for all the great content that slip through the cracks.
User-created content
Almost weekly, a new company announces that it is aggregating user-created video content for the Internet, wireless devices, or both. Community sites have been doing this for years in a low-key way, enhancing the user experience for members rather than directly charging for content. That model is changing. Internet companies and sites such as iFilm, Yahoo, Google, Metacafe, MySpace, and YouTube, to name a few, are creating contests and cross promotions with cable stations. In the current televison season, the aptly named VH1 program Web Junk features a selection of the best amateur videos submitted.
Right now, many of these early experiments make flat-rate deals or award videomakers prizes in the $500 to $2,500 range. YouTube, the brainchild of founders Chad Hurley and Steve Chen, serves up 30 million videos a day and uploads as many as 30,000 files a day. This is a community site that took off without much of a business plan, but with that kind of traffic, you can still send your valuation through the roof. On the professional side, iTunes provides a 70/30 split with content creators, and this is rapidly becoming the defacto standard, with 70 percent of gross going to the creator. Google's Video Store uses a similar formula. One could foresee a future in which entertainment companies become more of a talent marketing agency using services like YouTube to help scout upcoming videomakers who are simultaneously market tested by the audience. Scary.
Qualcomm MediaFlo, shown here on a prototype Samsung cell phone, uses an end-to-end system to deliver multimedia to wireless subscribers.
Wireless entertainment
In a recent survey conducted by RCB Capital Markets, three quarters of respondents were not interested in watching TV programs or movies on a handheld device. In-car mobile entertainment and Internet connectivity was similarly uninteresting to respondents. In spite of this, companies are lining up to produce short-format material for cell phones, Personal Media Players (PMPs), and PDAs. The survey's questions may be too narrow, since wireless entertainment can be ring tones, music, wallpapers, screensavers, games, mBlogs, cartoons, baseball scores, headlines, and stock reports. OK, what has that to do with our business? Well, plenty when Marvel comics is licensing branded characters to sell everything from sports equipment to food products. The point is that no one actually knows what will work and mobile media is going to serve as a virtual focus group to discover what sticks. Expect unbridled opportunism to lead to unwatchable junk on your cell phone, but also the next Boondocks.
At the moment, wireless is still stuck in the low-bandwidth mode. WiMax, or one of the other competing standards, is needed to kick wireless into high gear for laptops and other large-screen displays such as the latest PMPs, with which viewers would like to enjoy high-quality video while traveling. Mobile phones are wireless, but work on their own more mature systems that are close to ubiquitous but technically inferior to what is found in Korea and Japan. Similarly, the local area WiFi service is a rag-tag collection of hotspots — each one not much larger then your living room — but soon to be replaced by WiMax. Google made headlines recently by announcing that it would provide WiFi for free in San Francisco. Despite the technical hurdles that WiMax must overcome, this may be the last gasp of true, open Internet access. At least that's the hope. In fact, with the high cost of the analog spectrum favored by wireless providers, it is unlikely that public-space, fast broadband is even possible — at least not without the help of legislation.
You may not have heard, while you were preparing your latest pitch for Cartoon Network or HBO, that these stations were meeting with Verizon and Cingular. Yes, the phone companies have all opened entertainment divisions. Naturally, the telcos are looking for established content, but the rise in user-created content is not wasted on them, either. The opportunity and rewards of discovering talent and creating a brand is seductive. In other words, cell phone company executives will very quickly be thinking of themselves as movie makers and studio heads. In the end, whether you're at Fox or Verizon, it's just another meeting with development executives who can greenlight a project or send it into turnaround.
Personal networks
This trend is about direct sales from your site. Streaming video or progressive downloads is fairly easy to set up, so if you're a post house with content creation ambition or just want to share a video diary of the making of your low budget doc, the infrastructure is being put in place to present something other than 320Å~240 video. You could even show HD to any of the early adopters who have fiber-optic connections or Cablevision's premium broadband service. The hitch for content producers is that they will be charged by the megabite for each movie streamed. The more data you send, the more you'll pay. If you're lucky enough to reach hundreds or even thousands of people, you will have a very big monthly bill. So if you have been listening to the hype that fast broadband will place indie content creators on a level playing field with the media giants, don't hold your breath. Won't happen. We may be in the midst of an enormous realignment in the entertainment industry, but laws of nature have not been repealed and the big fish are not going to lose their appetites or legislation that puts small companies at a disadvantage.
------------------------------------------------------------------------
Wireless Entertainment Players
If you have an idea for a mobile phone series, here is a list of wireless entertainment players to get you started:
* MobiTVmobitv.com
* Boost Mobileboostmobile.com
* V Cast (Verizon Wireless) verizonwireless.com/vcast
* JamDat (EA Mobile Games)jamdat.com
* Qualcomm MediaFlowww.qualcomm.com/mediaflo
* Think Mobilethinkmobile.tv
------------------------------------------------------------------------
The Public Interest Gets Interesting
You may be eager to sell your content to the consumer directly, or you might be perfectly happy to pitch ideas to publishers and network execs. Not everyone is an indie player. If you do plan to distribute directly to the consumer, the really big opportunities are likely to happen in the early stages of destabilized traditional business models. That's because, after a while, the larger players tend to have legislation written to their advantage as the FCC and NAB have demonstrated for decades. What I'm suggesting is that history has shown us that media consolidation favors the media status quo despite what may seem like a new era of opportunity.
In February this year, the FCC published its annual video competition report presenting a healthy array of options for how American consumers receive their video and phone service. This is one of the reasons given by the FCC for relaxing ownership rules. However, the 1996 Telecommunications Act was a huge giveaway to the broadcasters, which the FCC does not like to discuss. While the conversion from analog to digital has been presented to the general public as a government requirement, it is likely that broadcasters would have had to go digital to remain competitive. They received billions of dollars of free spectrum that their emerging competitors must pay for — including the recent auction of spectrum to wireless providers. All the new media players are paying for infrastructure that the broadcasters receive for free.
In spite of this, the NAB has asked for the removal of the FCC's long-standing media ownership limits and permitting duopolies in local markets. The cap was recently raised to 65 percent, and now the NAB wants it removed entirely. While this is called deregulation, it still leaves broadcasters with arguably the most valuable bandwidth — a situation that only exists because of government largesse. Auctioning of the digital broadcast spectrum used by broadcasters is also deregulation, but not the kind of free market the FCC is likely to consider.
One argument is that the media ownership limits placed on broadcasters in any given market are no longer justified because of new competition from cable, satellite, and telephone companies. While the latest statistics published by the FCC may indicate a lot of consumer choice in the near future, this is likely to be a temporary situation until video-capable broadband penetration begins to plateau by the end of the decade or perhaps a little later. After that, watch for the consolidation. This has been the trend in telecommunications for most of the century with few exceptions. In the case of AT&T, you don't have to wait. Pending SEC approval, AT&T will pay $67 billion for BellSouth (which owns 40 percent of Cingular Wireless) in order to compete in the new world of converged media. The new AT&T begins to look a lot like the pre-1984 AT&T, when the courts declared it a monopoly and the company was broken up into the Baby Bells.
Discussion of cable providers, telcos, and broadcasters as separate entities is also misleading insofar as all the big players are increasingly diversified into multiple forms of distribution. With so few large telecommunications or media conglomerates, it makes mores sense to discuss competition while analyzing Viacom, General Electric, Sony, and Fox. The real danger is that once the high-performance infrastructure is in place, a few large players will control fast access to the Internet. Competition will evaporate as large companies may find it is easier to raise rates than to start a price war. In addition, it is unlikely that the bandwidth providers will remain out of the content business for long, and they will be in a position to exert anti-competitive influences in the marketplace. After all, within several years bandwidth will be a commodity that is only valuable by virtue of artificial scarcity. Like electricity and water, Internet connectivity is rapidly becoming an essential requirement for consumers, and it may be that utility law should be applied in the administration of access and pricing.
Either the information highway is like the free streets, roads, and interstate highways across 50 states with equal access for all, or it's operated by a handful of gatekeepers. The Internet is increasingly becoming connected to the election process and the way in which we are informed about the world. Spectrum allocation and telecommunication infrastructure is probably the most significant issue for the country in this decade. It really affects every aspect of our lives. Just don't expect to hear much about it on the network news."