Media 2.Uh-Oh Part 3: Virtual Pipes

Intro
Part 1: Pipe
Part 2: Layer Cake

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.

A slight twist to this platform strategy is Apple iTunes. If all the iPod were about was playing Mp3 files, then Sony or maybe Samsung would probably have owned this business long ago.

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" strategy.This 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 America (and perhaps the media) works.  “In this country, you gotta make the money first. Then when you get the money, you get the power. Then when you get the power, then you get the women.”  Steve Case at AOL got it backwards. He had the teenage girls locked into his pipe (man, that sounds weird) but couldn't figure out how to turn it into a sustainable media empire. Instead he merged with an existing one in TimeWarner and more or less killed them both.

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.

Comments

[Matt Savarino]

Great series - I can't wait to see who gets run over by the truck.

[Steve Franco]

eBay had a nice long ride during the tech downturn by growing its closed system. Paypal, search, and user generated ratings helped keep the eBay shopping experience convenient enough to keep both buyers and sellers coming back. At least until Google's Adwords began giving sellers an opportunity to be seen without eBay's help. But they are probably the best example of an online only virtual pipe.

[David Bofinger]

And what makes eBay special as a pipe? It's the metastability of being an intermediary, rather than a provider. If Geocities, say, dominates vanity sites, and I set up a clone of Geocities and try to compete, it'll be hard to get the mindshare but however much I get I can hold, there's no force squeezing me out. Contrast this with eBay, where the big tends to squeeze out the small. That's because for eBay the installed client base wasn't just an asset to the company, it was the service it provided. Sellers came to eBay because they knew there were buyers coming. Buyers came because they knew there were sellers. Someone who had neither couldn't accumulate them. This is why eBay lasted so long. YouTube is like eBay to the extent people find videos by browsing from other videos, but not like eBay to the extent they get e-mailed a URL or find it via Google.