Here is the entire Media 2.Uh-Oh series in a single file.
Media 2.Uh-Oh: Intro
There is always hidden meaning to deals - the Google-YouTube deal is no exception. Why YouTube sold is pretty easy - $1.65 billion ain't bad for 20 months work and it would have taken at least $50-100 million from Sequoia Capital, their venture backers, to build the infrastructure and salesforce to build a real company. That's real money.
But what about Google? Why do it?
Google is an amazing beast. Massive growth AND huge 64% EBITDA profit margins from basically one service: serving ads on pages with search results. A $10 billion run rate and $130 billion market capitalization. As Darth Vader might say: impressive.
So why bother buying YouTube? Is this a sign of strength ("we bought
them because we can turn anything into gold") or weakness (like, say,
Ebay buying Skype as their auction franchise weakens) or desparation
(Excite merging with AtHome). It makes a difference. On the surface,
this looks like a deal from strength - video is the next frontier on
the Internet, blah, blah. But really, did Google want to do it or have
to do it?
Despite continued growth, Google has hinted at a few signs of weakness. One is their huge capital spending to build datacenters and servers and bandwidth capacity, dinging their cash flow. I thought the search business scaled with much less investment. Maybe not.
And second, Google actually paid for traffic - $1 billion to Dell over 3 years for a crummy toolbar on Dell PCs. The numbers may work, but it's kind of like Hugh Grant paying for something he would get anyway. There may still be someone in Sheboygen who doesn't know about Google. Is search now such a commodity that Google needs to pay money to keep growing?
Perhaps that is what this deal is foreshadowing. YouTube is a company whose amazing growth from zero to 100 million videos served per day is based on copyright infringement, amateurish video (I get it, don't drink Diet Coke after eating Mentos), their stomach to lose money on each video shown and a hobbled together business model to charge record labels to show music videos (we now know Paris Hilton can't sing).
If Google needed an easy to use technology to upload and then view videos (which they kinda , sorta have with Google Video), they could have paid the same $65 million that Sony paid for Grouper. Nope, we don't need your stinkin' technology, Google is paying $1.65 billion (with a "b") or 1.3% of Google's current value, for a media property. Plain and simple. But what does that even mean?
Maybe it will just be an expensive sandbox to play in. Keep it separate from Google (which they should have done with Google China), and give Chad Hurley enough rope to either keep growing and get a decent shave or hang himself. If the legal battles get ugly (and I agree with Mark Cuban, they will), they can just shut it down one Friday afternoon. But maybe losses over the next three years from YouTube, a wholly owned subsidiary of Google, will be less than the $1 billion they are pissing away paying Dell for traffic. But despite all the attempts and Yahoo's Terry Semels strategizing, real media on the Web is still just a concept.
Who are the next media moguls and to whom do they have to sell their souls for the priviledge? The $165 billion question left unanswered by this deal is: What is media anymore? Can you just slap videos up on the Web and become a younger and more vibrant Rupert Murdoch or Sumner Redstone?
(Fade to Carry Bradshaw typing on her laptop in every dopey episode of Sex and the City.)
Is it Media 2.0 or Media Two Point Uh-oh?
Over the next couple of days, I will churn out some thoughts - channels, layer cakes, slivers, political entrepreneurs, virtual pipes and other gimmicks to try and explain all this - with hand-drawn illustrations to boot. Come back for the next parts, program your Tivos, set your RSS - same Bat Time, same Bat Channel.
Part 1: Pipe
me·di·a - Channels of communication that serve many diverse functions, such as offering a variety of entertainment with either mass or specialized appeal, communicating news and information, or displaying advertising messages.
That's pretty lame. Even Katie Couric is confused. Like the elephant and the seven blind guys, some think of media as content, others as distribution, aggregating viewers attention, user generated content, ad sales, keepers of our culture, public trust and on and on. How can you lump TV, radio, movies, newspapers, music, cellphones, cable, satellite into one phrase?
My definition is quite simple: Media is about control of a pipe.
Everything else follows. I recently sat through a presentation by junk bond king Michael Milken. He flashed up photos of some of his old clients: Ted Turner, John Malone, John Kluge, Rupert Murdoch, Craig McCaw. Each one of them had borrowed billions in high yield (junk) debt to build their media empires. Banks wouldn't lend to them, but Milken's network would, because he saw something that banks couldn't see - each of these guys controlled a pipe, there fists gripped tightly around it, and could leverage that control into massive media companies.
And not just any pipe, a government-mandated pipe that guaranteed control. Turner had TV station licenses, Malone had cable lines, Kluge radio and TV spectrum, McCaw cellular licenses and Murdoch, who at one time only had newspapers, bought up enough TV stations (and demanded regulations on ownership to be relaxed) to form the Fox Network to challenge ABC, CBS and NBC and their pipes.
Here is what I mean:
Nope. This is a closed system. You only allow the voices, music or video of your choosing down your pipe. You control choice. Viewers can flip channels, to a degree, but you figure out a way to get paid for that too! Iron pipes, not flimsy PVC.
Control the pipe and you've got an economic engine to run ads against your content, charge subscriptions, sell voice calls and charge per minute - the world is your oyster.
Movies? Hollywood does control access to theaters (ask anyone trying to get screens for independant films) but their economics include "windows" on cable (HBO) and TV, hence the same media companies own studios as well. Control a pipe and extend the business to everything it touches.
While media includes newspapers and magazines and even billboards, the root of practically every media empire is control of a some pipe. Spectrum, bandwidth, cable lines, phone lines, sewers - any closed system.
Adage has a great illustration of all this. Check out their PDF of Media Family Trees by revenue in 2005. Very telling. Look for the pipes they control. TimeWarner and Comcast: cable, Disney: TV licenses and cable stations like ESPN, News Corp: TV licenses, cable stations and newspapers. As an aside in non-electronic media, read Roger Lowenstein's 1995 book Buffett: The Making of an American Capitalist for a great story of Warren Buffett trying to make Buffalo, NY a one newspaper town so he could control a pipe.
Once you control a pipe, the economic model of media is pretty simple. My buddy Rob Hersov, an old Morgan Stanley colleague out of London, and I came up with this in 1992, something we called EPI-LIT. Entertainment (or Editorial) and Perishable Information Leading Indirectly to a Transaction. All right, I know it sounds stupid, but it explains everything. I wrote this up in a series of columns for Rich Karlgaard at Forbes ASAP back in 1995. I've reposted the columns here. Bear with me, this was a long time ago. Many of the examples are dated but I suspect some of the ideas (finally!) work.
Sitcoms and sports (entertainment) along with news and weather (perishable information) draws in viewers, in whose face you jam branded advertising until they can't see straight, so they go forth and buy lots of Bud Light, Gillette Fusion razors, Avodart and Mazda zoom-zooms.
Ad sales are based on the concept of scarcity. Sellers want to reach a large and perhaps targeted audience of buyers. If they are in the spell of your pipe, you can charge a premium. The TV network conduct an "upfront" auction each year, hoping to sellout the ad slots forcing costs per impression higher. Weird business. The incentive is to limit the number of pipes.
And its not just ads. Own a solid enough pipe and eventually you can control distribution of movies (HBO) and NFL games and charge subscription fees (Disney gets $2.50+ a month for ESPN whether you watch it or not). Control the pipe and charge whatever you like.
Ratings allow you to charge more, but even the worst or least watched shows generate decent sales. Talent eventually figured out how to weasel their way into this model, demanding $1 million fees per episode or $20 million to open moveies. But its only because someone else controls the pipe that these extravagent numbers are possible. Same with Derek Jeter earning $20 million a year. The YES Network is another controlled pipe. It's a tax on the stupid (viewer). We pay up for the artificial scarcity.
We all can't own pipes, so this tends to leave media in the hands of a very few moguls who get Wall Street to fund their follies. They receive all sorts of praise as brilliant business men. But are they? Thomas DiLorenzo wrote a piece on Robber Barons for free market site mises.org:
...the distinction between what might be called a market entrepreneur and a political entrepreneur. A pure market entrepreneur, or capitalist, succeeds financially by selling a newer, better, or less expensive product on the free market without any government subsidies, direct or indirect. The key to his success as a capitalist is his ability to please the consumer, for in a capitalist society the consumer ultimately calls the economic shots. By contrast, a political entrepreneur succeeds primarily by influencing government to subsidize his business or industry, or to enact legislation or regulation that harms his competitors.
These media moguls are political entrepreneurs who adore regulation that keeps them controlling pipes. I love this quote from Peter Wallison in the WSJ:
...industries that rely on regulation to protect them from competition build a coffin instead of a wall. In our dynamic and innovative economy, regulation is a double-edged sword. While it might confer some temporary protection from competition, in the long run it isolates the regulated industry from the realities and opportunities of the marketplace.
and then the Internet came along. Move along - no scarcity here. Cisco
routers send packets around to where folks want them - no moguls
Market entrepreneurs used the chaos of packet switching to deliver text and pictures to websites. Then bandwidth got cheap enough to move music around crumbling record labels control of distribution. It's hard out there for a ... And now bandwidth is even cheaper and more plentiful and its time for video to move around this wild and wholly network. Those pipes are now coffins. The moguls will die within them.
But therein lies the problem. Senator Ted Stevens notwithstanding, the way the Internet is architected, there ain't no pipes to control. No "end to end" pipes anyway.
Yeah, there is some last mile pipes for cable modems, DSL and getting packets to cellphones. But while Stanford Professor Larry Lessig has done a great job of pushing the network neutrality debate which seems to have slowed the ability of any of these last mile pipes becoming the root of a media empire, beware of more regulation. Perversely, someone will take any net neu regulations and turn them around to be able to control a pipe. Cellular is about as close to an end to end pipe.
Plus, there are unregulated paths such as Wi-Fi and hopefully more competition, not less to keep this map with no "end to end" pipes that the likes of Sumner Redstone or a future Ted Turner can control with an iron fist.
Wall Street knows this. It's why media stocks have looked "cheap" for a while now. The pipes they control are leaky. Things like Skype for free or cheap phone calls are killers, even if Skype isn't quite a business on its own. Municipal Wi-Fi whacks everybody, phone companies, cellphone operators and at some point, with say, 3 megabit connections, real standard definition video can be delivered outside of pipes. Who needs to pay Comcast $99 a month anymore for crap they don't watch anyway?
The old moguls know this too. They are all scrambling for a Web strategy. Murdoch buying MySpace is interesting, but the fact he cut a deal with Google to sell ad means he isn't interested in actually investing in it as a platform for the future. What are these guys to do?
Hey, how about Web 2.0? How about it - APIs, mashups, user content, hyperlinks, Mentos. Oooooh! Co-o-o-ool. We can just simulate a pipe. Google did it, right? $10 billion in ads. Yeah maybe. But without a pipe, is their platform precarioius?
No pipes, no moguls, no media?
It's a cliffhanger - who shot JR? In the next piece, I'll take a look at the model the technology business has evolved into and what that might mean for Media 2.Uh-Oh.
Part 2: Layer Cake
I had a college roommate, Franz, who after taking business classes would come back to our house, pound a few beers, proclaim, “Dude, when in doubt, get horizontal” and then proceed to pass out in front of the TV. (I still can't believe Forbes let me write this back in 1998!)
This may provide a clue as to what will happen with the (mostly) vertically integrated media mess.
The computer industry used to be a vertical behemoth. IBM (or DEC in minicomputers) did everything from system architecture to designing chips, manufacturing them, assembling boards, slapping them in boxes, writing software and applications and then the mainframe was sold through their very own sales and service organization. Soup to nuts (or chip to ship) – IBM controlled the whole thing. And why not? Why give up profits to someone on the outside when you could capture it for the centrally controlled enterprise?
It was the model of efficiency, – five year plans and all (just like that other model of efficiency in the 1970’s, the Soviets). Once customers were set up with IBM mainframes, the switching cost was high, so companies would pay what ever IBM asked, so eventually, IBM lost touch with price. They even unwittingly unleashed the horizontal model that would destroy them, going outside for parts for the IBM Personal Computer (a toy that internal projections had at selling 250,000 units over five years - ooops). Intel processor, Microsoft operating system, Western Digital disk controller.
Same with the old AT&T. They manufactured phones, leased them to customers, ran long distance lines, built switches and ran the wires to our home. Again, soup to nuts, why give up profits to someone else when you can capture it all for yourself. AT&T did IBM one better - they claimed a natural monopoly, why have more than one set of wires running to your home - and were regulated by the Federal Communications Commission, who approved rates as a reasonable return on investment.
And of course, it failed. IBM and AT&T may
the profits from mainframes and telephone calls, but there was a much
computer and communications business that they missed. Like railroads
forgetting they were in the transportation business instead of stuck on
tracks. They forgot about price and outsiders took them out at the
Media companies are mostly vertical. They produce shows (or control the independant companies that do), market them, deliver them, sell ads, everything that touches their pipe, soup to nuts, they do. Only regulations like fin syn or limits on ownership changes this formula. Why give up profits to those outside, blah, blah.
The new horizontal model is more efficient, at
least for computers and communications - with media, we shall see. The
the winners from the losers, not some putz on the executive floor
making decisions (swayed by internal backstabing politics, no less).
By the end of the '80's, you could create a multi-billion valued
enterprise just owning a
sliver of intellectual property on any one of the horizontal layers.
But no one
gave it to you, you had to earn it.
And it’s not just Intel and Microsoft, which are the most lucrative and most visible, there are scores of slivers in disk drives, graphics, storage control, font handling, virus protection, compression, and the list goes on. Same in telecom. It’s not just Cisco or Yahoo, there are stacks of useful slivers that companies can wedge their way into. The trick is to not pick some narrow market, but to go wide, serve millions or hundreds of millions of devices or users.
OK, I get it. But how does that explain successful media companies on the Web - Google, Ebay, Yahoo, Apple?
Well, these are market entrepreneurs (no regulations beyond patents and copyrights which everyone has access to). Even though the telecom cloud is a chaos of packets getting passed around and no "end to end" pipe, these companies and others have figured out how to create a virtual pipe, keep content and viewers/users inside a pipe they control. Pretty neat and quite a lucrative parlor trick.
How do you keep users in your corral? Circle the wagons, pardner. It ain't easy. Packets go where they damn please. It's the Wild West - an open prairie. You've got to be creative. Use a tractor beam to get them into your camp and a mind meld to keep them there. Or something like that.
eBay pulled one off. They created a closed "community" of buyers and sellers, locked in via feedback ratings creating a layer of trust amongst the chaos of anonymity on the Web. Wall Street applauds to the tune of $40 billion. But now eBay is struggling to show that their growth is sustainable.
Part 3: Virtual Pipes
Yup, Media is about controlling pipes and Technology is (now) about horizontal layers, and on the Web, with all those packets whizzing around like bumper cars, there are no natural end to end pipes to be found. So, can you construct a virtual pipe and actually create a media company on the Internet?
We've seen a few examples that work. Video game companies had a virtual pipe of sorts. They define a gaming architecture (Nintendo really perfected this in the early '90's) and then sell gaming consoles at perhaps a $100 loss. You still needed a few outstanding games that would sell for close to $50. But then they allowed others like Electronic Arts to write games for their platform in exchange for (rather steep) royalties for the rights to run on their platform. It was a closed system. You didn't have to control distribution via retail, just what ran on your platform. OK, but that's hardware.
But Apple created a virtual pipe, tunneling through the internet, so that in addition to probably pirated Mp3 files, you could buy music on the Web and deliver them to your iPod safely and more importantly for record labels, securely.
It's a pipe because music purchased on iTunes only plays on iPods (well, they'll also play on your not very mobile PC.) Using DRM or digital rights management, Apple created a pretty iron clad pipe.
I'm no fan of DRM but voila, it works in creating and sustaining a
virtual pipe, albeit a rather leaky one. CD's are still rippable - you
don't actually have to buy music, piracy is a viable option. This plays
to Apple's advantage - a "steal most, buy what is hard to steal"
is probably why Apple chose to sell music at a loss and make it up with
sales of iPods, 50 million plus and counting.
A tight coupling between
server and device is their virtual pipe, tunneling right through that
Internet cloud - tough to compete with and even tougher to duplicate.
But the debate still rages whether Apple's advantage is that closed
iTunes pipe or their "fly like the wind" pace of new iPod
introductions. A bit of both - Microsoft be warned.
How about online? Who wants to deal with messy devices like game machines and iPods? Probably the earliest example of an online only virtual pipe is Instant Messaging. AOL bought Israel based Mirabilis for some $400 million bucks, whose ICQ instant messaging had millions of users and almost no revenues (sound familiar?). Mirabilis CEO Yossi Vardi famously quipped "revenue is a distraction."
What made the move brilliant, an early cut at social networking, was that for a long time, it was a closed system. You had a buddy list and though others had instant messaging, you went where your buddies hung out. This was paradise for teenage girls - modern day Princess phones.
In the 1983 movie Scarface, Tony Montana (Al Pacino) explains to his buddy Manny how
OK, that's still old news. What about now - 2006? Google's got a $10 billion plus ad sales business. That's media, right?
Well, sort of. It's still more of a portal (albeit one done to
perfection) than a virtual pipe. You go to Google to look stuff up. You
don't have to stay, but you do because of the relevancy of the results
and according to this article by George Gilder,
how fast the results come back. Huge datacenters near fast running
water and purpose built PCs get results in 0.2 seconds, faster than
they can come off your own hard drive. Other search engines are too
slow. Is that it? Well, certainly some of it. Maybe the speed advantage
is subliminal, but it's created $130 billion in Wall Street value.
Again, impressive. Google has been piling on all sorts of fun stuff to
keep you at there site. Maps are cool, GMail is nice, but most of the
rest is ho-hum. Can you think of any application that locks you into
Google - besides their excellent and rather swifty search and the
billions in ads that go with it? A toolbar? Perhaps there is no lock,
merely a brand backed by a technology lead. Buying YouTube may be their
quest for a lock.
But there are virtual pipes that lock you in. So far, they are the two successful social networking sites, MySpace and Facebook. These are modern day GeoCities clones. They allow folks to put up pretty web pages about themselves, but instead of just text and photos, which was more or less the limits of GeoCities, you could add music and video and whatever else would run as code on the site. But what separated these folks from the Web of old was the addition of the concept of friends, interlinks within the closed system. To have MySpace friends, you needed to be on MySpace. That's it? That's the virtual pipe? Probably, but it works, 100 million strong depending on whose numbers you want to believe (my dog has a MySpace profile but he doesn't use it too much).
They beat pedigree competitor Friendster with technology that worked. MySpace founder Chris DeWolfe told me (and anyone who would listen) that against everyone's advice they had to write custom code, they built their system with an Adobe product ColdFusion and are now moving it to Microsoft's .NET, and spit out pages to the tune of 1.5 billion a day. Until it was too late, Friendster never quite got their code to scale. A technology got them there, but the social links keep them there.
Facebook is closed in a similar way, until recently you needed a .edu email address to get an account and then could have lots of like minded college "friends". They got there first and best and, for now, own college faces. DeWolfe likes to point out that there are only some 15 million college students, so Facebook's growth is limited. Imagine that, badmouthing a media property with "only 15 million" potential users. But on the Web, he's got a point. Big numbers
How do you leverage these virtual pipes? Once captive to your pipe, you throw silly ads in front of people. Remember the EPILIT - entertainment and perishable information leading indirectly to a transaction? Same with a twist - EPILIT: entertainment and perishable information leading to an impulse transaction. For the most part, it's direct advertising, create a sale, not a brand. Different game then branding beer or hair color. But of 15-25 year olds are in your social networking pipe, they are ripe to put ads in front of to entice them to buy soda and video games and iPods and flat screen TVs (these kids seem to have more disposable cash then I did at that age.)
And that's just in the "real" world. The most amazing virtual pipes to me are MMOs. Huh?
Chew on this stat. 7 million subscribers pay $50 just to enter and then another $15 a month for access. Yup, World of Warcraft has been an amazing success for Blizzard Entertainment - a massively multiplayer game that is easy to learn, addictive and then requires months of overuse to master to reach Level 60. As one online poster comments, "So there are millions of people who play WoW. There are also millions of people with a drinking problem. I place them in the same category."
Unlike TV or the Web, users shell out $50 for the software just to link into your virtual world to kill things (let alone the extra $3-400 for the latest GeForce video card and $50 a month for high speed internet access) . Other MMOs include Everquest, City of Heroes, and Ultima. Expect many more.
In South Korea, kids gather in Bangs (pronounced bongs) to play
multi-player games. Beats hanging in front of the 7-11. Note how they
do it. You are locked into a front end player (which, again, you put up
$50 for the priviledge) which is locked into their backend servers.
Talk about control - your packets do what WoW tells them to do,
tunneling through the Internet cloud. Of course, the experience has to
be good enough to get you there and keep you there. Add social
networking - guilds of like minded, er, adolescents off all ages to
roam around and destroy things together and you have an iron clad pipe.
A view on things to come.
How is it a business? Ads, schmads. Get your credit card out if you want to stick around. And it's addictive. Yup, this is Starbucks without cups, all fueled by 3D graphics, and now a $1 billion business. A movie with 7 million viewers is flop at $70 million in ticket sales - a network TV show with these numbers would be replaced by Montel Williams reruns.
In the final Media 2.Uh-Oh piece, let's roll the clock forward and see what the media and technology space looks like in a few years and perhaps a way to help identify who wins and who needs to try to get the license number of the truck that is about to run them over.
Part 4: Go Wide
So what is a Media Mogul to do? They control pipes in a world of zero margin costs. It costs virtually zero to sell one more digital song, or run one more digital ad or post one more digital classified. As chips and bandwidth get cheap, digital distribution crumbles the quaint old days.
- Craigslist took the classified ad business away from newspapers by doing it better for zero marginal cost. They charge for job listings in San Francisco and NY because, well because they have some bills that need to be paid. So classifieds were are huge profit center and are now,... , are worth almost nothing.
- Music is must cheaper to distribute in digital form than truck deliveries to record stores. Copyright issues be damned, listeners preferred digital music to be carried around in devices the size of a deck of playing cards or a pack of Wrigleys Chewing gum. Morpheus, Kazaa, BearShare, LimeWire gave customers what they wanted. iTunes barely makes up for the record labels missing the beat. Music may not want to be free, but it sure wants to be distributed for free.
- Voice calls via Skype, PC to PC, are free. They singlehandedly yanked down the price umbrella of overseas calls to 7 cents a minute. The telcos had to respond to free.
- Newspaper and TV journalists had a long run as the trust voice of news. Now distributed bloggers can take turns scooping professionals. It's not only that distributed news gathering is cheaper, its the zero marginal cost of distribution. Post it to a blog, get picked up by other blogs and search engines. Bask in glory. Rinse. Repeat.
In each of these examples, because of marginal costs approaching zero, it is increasingly a better business to provide technology to millions, even billions of folks rather than try to protect the control of a pipe to a few. The right answer is to GO WIDE. It's time to get horizontal. Newspapers should have licensed Craigslist's (or eBay's) technology years ago. Telcos should have embraced or emulated Skype. Drop CDs and distribute all your music (and everyone else's) online at a price that doesn't protect retail, but destroys it (which is happening anyway!).
The time and the tools are ripe for this GO WIDE approach. Especially on the Web, which is nothing but layers and layers of functionality.
Let's go back to the days of so-called Web 1.0. There were a few online services, Compuserve, AOL and lots of dialup bulletin boards. The Netscape browser came along and was basically a container - a bucket. You sent out a request and packets which found their way from a server and "filled" your browser container with text and images. It set off a battle between Netscape and Microsoft but in the end, roasted the non-Web online services to a crisp.
It was a real time link between client and server. You could run and control programs running inside the web browser, again without hitting Refresh. Google Maps is the best example - it paints the screen with a map and then when you scroll north, the server fills in the pieces of the map you are missing.
But more importantly, via an API, you could do mashups - put hotel or restaurant locations into maps. Play music in your blog. Or very easily put video from another website into yours (YouTube uses a Flash Player). You could seamlessly link applications into each other in, dare I say, layers!
AJAX allows for the "layerification" of the Web - not just transport and routers and cable modems, but applications and content too. So as the Web starts to emulate, emolliate and eventually circumnavigate today's media, its power will come from a stack of individual layers, each a mile wide.
Let me say that again. It's the ability to both run programs inside the browser window AND allow for applications to pass information to each other that allows media on the Web to organize into horizontal layers instead of the fat and mogul owned pipes we are used to.
The layers are endless. Someone does search better than anyone else. Or classifieds, or music sales, or telephone calls, or video, or real time highway traffic, or comedy, or news or social networking, gaming, recipes, or WHATEVER anyone wants that can be delivered with zero marginal costs and provides it anywhere and everywhere.
Think about how different this is from media today. The technology of sticking a microphone in front of someone, or turning on a camera or switching a phone call has been perfected years ago. It's not about technology anymore, it's about programming to attract viewers (which with a few decent exceptions, has been a race to the bottom, thank you Mr. Murdoch!). Animation and special effects movies are increasingly commoditized too.
But now getting packets through that bumper car of an internet to
create a virtual pipe, actually takes someon writing code and
designing easy to use services, so much so that a Chad Hurley
becomes a rock star. But who wants to write code? It takes forever -
Jolt, all nighter, nerf guns, the brightness up on the monitor and dark
sunglasses to get all the bugs out. Better to let coders write code,
and programmers (as in network TV) develop 30 minute sitcoms. Layer
this sucker out.
The Moguls of Media 2.0 (sorry, I hate all 2.0 terms, but you get the idea) will be about creating virtual pipes out of a stack of these separate layers. Facebook for Senior Citizens, with friends to call in the event of a Clapper emergency, discussion groups on how to make your children feel guilty for not calling, and videos of how to properly wear Depends adult diapers. This thing will be a lock. Want to be a Mogul? Think out all the free services never thought possible without lots of broadband and pieces you can pick and choose from to build it and you are on the right track.
Unfortunately, the architecture of today's infrastructure, huge datacenters near cheap electricity with racks of PCs and disk drives and uninterruptible power supplies and lots of fiber, is an artifact of our still narrowband world. It's faster to query to distant lands on fiber optic than to look something up on our own PC, or our next door neighbors PC. It's why video still sucks on the Web - 10 minute scratchy videos. It's not zero margin costs. The more video you stream or allow users to download, the more your bandwidth and storage costs rise and the more money you lose.
P2P: But that's about to change as well. Peer to Peer or P2P is another game changer. It allows for true zero margin cost distribution. It will be what starts today's media into its death flush spiral.
Post Napster music stealing sites use Peer to Peer. You download songs from your virtual neighbor. It's uploaded from their disk drive and downloaded to yours. With P2P, video is not so much streamed as shared, you get what you need one and preferably more than one source. BitTorrent is former underground, now being productized version of P2P video. Lots of first run movies and an occasional TV show before it is broadcast. You download the ".torrent" file and then have the option of being a "seed" and allowing others to download it. Not quite mainstream.
Skype founders Zinstrom and Friis are working on "The Venice Project" to do easy to use P2P video distribution. There are at least three P2P video networks in China. Here's a cool example. This is coming on fast. Think about a world with zero marginal cost video distribution - not even much in data centers and servers required. Pipes be gone. It becomes another horizontal layer in this Media 2.0 stack.
As an aside, Peer to Peer cellphone service is an obvious next step as well. Why blast signals all the way to towers when cellphones can just pass packets along until someone is close enough to an internet connection to dump the packets into the backbone. A wireless Skype is not that far fetched, wrestling control from the Cingulars and Verizons. It's not just Hollywood.
User generated content? It's all the rage, Mentos and all. Is that the future of media? I'm not so sure. I never even liked America's Funniest Home Videos. UGC will have a place. If you want to call it the Long Tail, feel free. It's not as long as you think. Or if it's long, it's as skinny as a fiber optic strand. It's the head and the fat belly where the money will be made to drive Media. Someone has to pay for quality output.
So, how do you get paid when you don't control a pipe and the payments from advertisers or customers for access to that pipe. And it's unclear that video ads fit the direct marketing model of click and buy beyond Home Shopping Network. It is similarly unclear at what price new networks might get to emulate that mass audience branded advertising, especially when you know exactly how many people watch, how many click away, etc.
As far as subscriptions or pay per view, DRM or Digital Rights Management is only so good. Plus, it's broken once the first person pays for it and it leaks out of the DRM virtual pipe into the P2P networks. Copyrights are tough to enforce in the Internet cloud. $100 million budget movies? Tough call. Hard to recoup. $1 million per actor per episode TV shows. Hmm. Tougher to imagine in a world without syndication.
Is there an economic model to these virtual pipes? Early TV was radio shows with cameras turned on, much as early movies were Broadway shows with film running (I still laugh at the Marx Brothers The Cocoanuts and Animal Crackers, hurray for Captain Spaulding...). It took awhile, but eventually, production values increased to $2.6 million per TV episode (for Friday Night Lights) and $100+ million movie budgets. This became the barrier to entry. Viewers demanded better quality, better than the cheap stuff they were initially fed. Animal Crackers is a classic, but now quaint.
The Web is still back in the pioneer days. Beyond the pirated stuff that leaks
out of the mogul's traditional media pipes, early Web media is mainly that user
generated content: MySpace pages, You Tube videos, podcasts, all disgustingly
cheap to produce (and armchair critics like me go sniff, sniff and mutter
"lame"). But lots of it is made and there are lots of people to view
I traded a bunch of emails with Mark Cuban (who knows a thing or two about both Internet video and owning media franchises) about the loss of control of moguls. This one paragraph by Mark nails it - the eventual economic model of this whole thing as production values inevitably go up:
Mashups, hyperlinks? We have seen it all before in the music business. Anyone can produce and distribute any song they want. We have seen some artists and songs emerge, but very, very few. And that is in an environment where there truly are no digital barriers to entry. Yet the moguls are still the moguls. Not as strong, but still in control. I don't see them going away. Why? Because in a long tail universe, the cost to crawl up the tail to the rat's ass is more expensive than the production. Which means only the people with the money can make the investment, which brings you back to the moguls.
The Yogi Berra problem - no one goes there anymore, it's too crowded. You gotta spend as much on promotion as you do on production to attract folks to your pipe, virtual or otherwise.
Mark might be right. Moguls will still roam the earth even after the asteroid hits. But they won't be like the moguls of today. It will be a different landscape. The view from here suggests it won't be possible to control pipes anymore. Not like today anyway.
How soon do we get there on the Web? Probably sooner than we all think. The Diet Coke and Mentos days will seem quaint. Go wide, young man.
Andy Kessler - October 2006