Archive for September, 2010

How the Mail DVD Service Stole the Market From Cable and the Studios — and Hulu, Apple, Google, Amazon

Paul Verna
Paul Verna

Now that premium entertainment is becoming easy to stream from web to TV, the race to monetize growing consumer demand is becoming fierce. The stakeholders include nearly the entire internet — Google, Apple, Amazon, Hulu — and nearly the entire entertainment industry — NBC Universal, News Corp., Disney and, soon, Sony, Viacom and Time Warner.

Unfortunately for them there’s already a clear winner. Netflix. Here’s why:

  • The company built its business on DVD rentals by mail but realized early on it needed to diversify to accommodate shifting consumer behavior — which it successfully achieved with its streaming offering, Watch Instantly.
  • Over the past two years, Netflix has grown its subscriber base by 78% and its revenue by 54%, according to its recent earnings reports. These gains have come organically from steady quarter-to-quarter increments. The percentage of Netflix subsribers who stream video is growing even more dramatically. In Q2 2010, some 61% of subscribers used Watch Instantly for at least 15 minutes, compared with 55% in Q1 2010 and 37% in Q2 2009.

  • Netflix understands that it needs to invest heavily in content acquisition to beef up its library of streaming titles. The company just cut a film licensing deal with Paramount, MGM and Lionsgate worth an estimated $200 million a year for five years. That sounds like a lot of money until you realize that Netflix spends about $600 million a year on postage. If it can shave off those costs by converting more of its customers to digital, it will increase its licensing war chest.
  • Netflix has also been smart about partnering with makers of TVs, set-top boxes, video game consoles, Blu-ray players, tablets and smartphones — not to mention Apple TV, which is essentially a competitor. The Netflix logo is ubiquitous on most of the major viewing platforms.
  • Netflix is perceived as more of a movie brand than a TV brand, but this is starting to change thanks to CEO Reed Hastings’ aggressive pursuit of licensing deals for back seasons of popular TV shows. Netflix is determined to pull the rug out from under Hulu in the TV space — at least when it comes to back catalog — and seems to have the right strategy to do so.

Compare this to how other companies are approaching the digital onrush.

Hulu. Hulu earns more revenue from online video advertising than any other site on the internet, according to eMarketer estimates. But its ad revenue still consistently falls short of analyst projections and the expectations of its owners. Its next move: Create Hulu Plus, a Netflix-like subscription service for TV shows, with less total content and similar price point. Hulu has, however, floated the idea of an initial public offering, which presumably would raise capital to finance content acquisition.

Apple. Lowering the price of its Apple TV player to $99 and transitioning iTunes TV shows and movies from a download model to a rental/streaming model are good ideas. But it’s hard to imagine massive numbers of people spending $99 on a separate gadget when they already own — or plan to buy — devices that enable them to watch online video (in other words, Netflix) on their flatscreens for no additional cost, including game consoles, Blu-ray players and internet-connected TVs. By the same token, many people would rather take advantage of Netflix’s bundled offering, or free TV shows on Hulu, than pay $5 for a movie or $1 for a TV episode on Apple TV.

Google. The search giant has virtually owned user-generated video since 2006, when it purchased YouTube. The problem is user-generated video has proven very difficult to monetize. Will Google TV or a rumored YouTube premium HD subscription service help? It’s too early to say how well Google will be able to integrate these products into technologies like internet-connected TVs, game consoles and set-top boxes, but if Google can afford to undercut Apple and other set-top box makers, it could gain a competitive edge. That, however, is a big “if.”

Amazon. Amazon is reportedly considering adding a TV and movie subscription service along the lines of Netflix’s Watch Instantly. Without knowing more about its offering, it’s tough to say how Amazon stacks up against the others, but it’s clear that Amazon is late to the party. Neflix, Hulu, Apple and Google have far more equity in the TV and movie industries, and it’s hard to imagine that Amazon would radically change the dynamics of the market.

The Bottom Line. It will be years before TV and home movie viewing shift en masse from cable and broadcast to purely internet-based offerings. Until TV networks and movie studios start seeing dollar signs, they’re not likely to make a critical mass of content available to digital video providers.

But with the advantage of having built and strengthened its user base for TV and web platforms during the past few years, Netflix has placed newcomers at a critical disadvantage: The potential users of Hulu, Google/YouTube, Apple, and Amazon TV offering are — for the most part — already loyal Netflix users. And as long as Netflix continues to get the content licenses it needs to keep its users happy, their attention — and dollars — will will continue to go to Netflix.


Paul Verna is a senior analyst at eMarketer.

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By David Lieberman, USA TODAY
This is an awkward time to write about the media business. We know a lot about the damage that the Internet and other technologies have done to traditional movie, television, music and print companies. It’s still unclear, though, whether the familiar pillars of civic and popular culture are merely teetering, or about to collapse — and, if they do fall, what will take their place.

Still, the story is too important to resist. And three books provide useful, but different, perspectives for readers who want to understand the current mess.

The Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies is the most challenging book in this group. But it’s also the most important for anyone who wants a sophisticated analysis of how media businesses work — or, more precisely, how the authors believe they should work.

Jonathan Knee, Bruce Greenwald and Ava Seave deftly and often entertainingly cut a generation of media CEOs down to size. Curse shows that many of them were geniuses at finding ways to stuff their pockets with cash, but pompous lightweights when it came to serving their shareholders or preparing their companies for the digital onslaught.

(Full disclosure: The book grew out of a course the authors teach at the Columbia Business School, which I took in 2004.)

The authors throw their sharpest knives at moguls in hit-driven businesses who think they’re hot stuff because they’re tight with entertainment stars or have a sixth sense for what TV watchers, moviegoers or music listeners like. That sounds impressive in magazine profiles, or when companies try to justify their CEOs’ inflated salaries. But the data show that these creative-friendly executives don’t consistently deliver big profits.

The same can be said for moguls who love megamergers, including ones that blend news and entertainment with distribution, such as TV networks and cable systems. They dream that their size will enable them to beat or circumvent all comers.

But the winners in media avoid competition. When companies have competition, the authors say, they should divide the market and fix prices (using code so as not to rouse antitrust officials).

That’s great for investors; not so much for consumers.

And it’s especially cold comfort for most companies trying to make it in the digital age. How do you create barriers to entry in a medium that enables everyone to reach a worldwide audience?

That’s what makes Google so intriguing, and a worthy subject for New Yorker writer Ken Auletta‘s 11th book, Googled: The End of the World As We Know It. Unlike Curse, which treats moguls with derision, Auletta’s more interested in penetrating the often secretive world of the business elite and telling the stories with skill, intelligence and respect.

As the media industry’s most inside outsider, Auletta has become its chief storyteller — much as The Making of the President author Theodore White was to presidential campaigns.

That makes Googled a fine guide for people who want to know how the force behind the leading Internet search engine, YouTube and Android phones positioned itself to become the first $100 billion media company.

Unfortunately, the story delves too deeply into Silicon Valley’s cool, insular subculture to grip readers who aren’t already interested in Google. For all of its importance in contemporary life, this media company is about engineers solving technical and business problems — not entertainers who want to touch people’s hearts or journalists who want to engage their minds.

Also, Auletta never seems to get close enough to Google founders Larry Page and Sergey Brin to humanize them.

So the book’s detailed accounts of key events in Google’s development read more like a series of stories from a trade magazine than a compelling work of literary journalism.

Just as important, it’s still too early to say anything that’s meaningful about where Google’s taking the media business.

Bob Garfield, Advertising Age editor at large and co-host of NPR‘s On The Media, faces a similar problem in The Chaos Scenario, a sweeping, often provocative and sometimes entertaining series of essays about how the media business is changing.

Unlike Auletta, Garfield seems eager to channel Hunter Thompson. He taps his keen sense for the absurd to riff on social trends and personal experiences as he makes bold predictions about what he thinks will happen to media companies.

But the effort offers too few flashes of brilliant insight, and strains too hard to impress with bluster, anecdotes and shtick.

The bulk of Chaos suggests that the gig is up for traditional media. These companies are wedded to obsolete models and arrogantly fail to listen to their customers.

Garfield, who likes to label things, considers listening so important that he’s elevated it to a field of study he calls Listenomics.

Garfield seems OK with the prospect of newsrooms and studios going under: The masses have “aggregated curiosity, IQ to spare, and all the time in the world,” he writes, to replace them with their own news and entertainment.

That’s a fascinating possibility.

Sadly, Garfield never develops the evidence and arguments that might support his vaguely libertarian faith

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Most companies believe that technology has changed the way in which they do business. This is notable because ten years ago they would have been more likely to confirm technology had speeded an existing process up – word processing made correcting and editing a typescript less laborious, and a spreadsheet would do some calculations, but the underlying processes were substantially the same.

Skip forward by a few years and the position changes drastically. The internet has made areas such as research and selling completely unrecogniseable. Other technologies that have emerged include customer relationship management, in which a customer can call any employee and their details can be flashed up on a screen so everyone knows what’s happening in a given account. This has led to offshoring, which has had a mixed press.

Speculating on what’s going to happen over the next few years is of course entertaining and is an area to be approached with many caveats. Devotees of old episodes of “Tomorrow’s World” will recall numerous predictions that never came true.

Nonetheless, some pieces of speculation appear more than reasonable. Everyone wants more mobility in their IT, and Gary Bullard, managing director of BT Global Services UK, concurs. “The success of the Blackberry has been phenomenal,” he says. “People are coming to expect to be able to get at their information wherever they are, across any device.” Well yes, but that’s not quite the step change that the internet provoked. “No, I think the internet fundamentally changed the way we do things and I can’t see that happening again in the short term.”

Others appear to agree. Tony Jones, VP of professional services for e-business company The Ivis Group, sees mobile and distributed technology in general shaping where rather than how business happens. “For the future we see technology allowing organisations to be far less centralised with greater collaboration across the enterprise with partners and customers,” he says. “From a technology viewpoint this requires high quality, standards based data and use of a Service Oriented paradigm for the implementation of new systems. These systems must be business user driven, not IT centric, and offer greater business agility.” Crucially he adds that this will mean IT suppliers knuckling down and understanding the needs of their customers rather than coming up with a technical ‘solution’ and looking for a problem to fit, which has historically been their approach.

The other thing slowing people down will be the rate at which larger companies might wish to upgrade to anything new if it is too radical a change. There is no consensus on when to upgrade to new technology but resistance to change is growing in the opinion of Alex Neihaus, marketing VP for Ipswitch. “We believe that large businesses are among the least likely to upgrade to new releases rapidly. Just consider the number still using Windows 2000 as their standard desktop operating system several years into Windows XP’s lifecycle,” he says. “The reason is simple: enterprise software systems are so layered with overlapping prerequisites and corequisites that no matter how hard a big business tries to mitigate risk in upgrading, the risk is still there. And it’s substantial.” He observes, ironically, that it’s actually the requests from the corporates that drive these changes they’re so reluctant to make.

David Chalmers of Macro 4 is another person to challenge the notion that change will be as rapid as it has been before. It’s a question, he suggests, of trust. “The technology to connect users to the services they want is, or soon will be, available. SMS based around 3G mobile devices, voice automated control, smaller devices providing ever greater embedded ‘intelligence’ in everything from cars to clothes – these are all short term,” he says. “However, in the post 9/11, post London attack world that we live in, just how much trust will there be between users and suppliers? Is the message, voice note, coat-based reminder that I have just received really from my bank, or is it from a fraudster posing as the supplier and trying to get me to provide information that can be used to access my money/information/life?”

So the majority are expecting small changes to existing processes. In Bullard’s view, which echoes those of most people contacted for this article, it’s not a question of a huge sweeping thing like the internet coming and altering business practice, but of business adopting technologies that are available now over a period of time. After all, the possible changes discussed above could all be done with existing technology this afternoon if a company wanted it.

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Gerd Leonhard is a Music & Media Futurist, Author, Speaker, Advisor, and Digital Media Entrepreneur.

Gerd Leonhard is a Music & Media Futurist, Author, Speaker, Advisor, and Digital Media Entrepreneur.

The Wall Street Journal calls Gerd one of the leading media futurists in the world. Gerd is the Co-Author of the influential book “The Future of Music” (2005, Berklee Press), as well as the author of “Music2.0” (released 2/2008 http://www.music20book.com), and of “Open is King – The Future of Media beyond Control” (eta: late 2008).

Gerd’s background is in Music (he won the Quincy Jones Award in 1986 and is a graduate of Boston’s Berklee College of Music) as well in Technology and the Internet (former CEO of LicenseMusic Inc, currently CEO of Sonific.com).

Gerd’s work focuses on the converging sectors of music / content and technology, communications, lifestyles and culture, and he is considered a leading expert on topics such as the future of media, (incl. broadcasting and the future of TV and Radio), Web’whatever’.0, social networking, online communities and UGC (user generated content), copyright trends, the digital content economy, convergence, globalization and other media-related mega-trends, mobility and mobile entertainment, the future of advertising, branding, marketing and PR, and digital privacy.

Gerd’s keynotes, talks, videos and think-tank appearances are renowned for his hard-hitting, provocative yet inspiring and motivational style. With over 100 engagements in 23 countries during the past 3 years Gerd has addressed executive level audiences in the sectors of recorded music & music publishing, radio, TV, film/video and broadcasting, online gaming and virtual worlds, telecom & wireless, and advertising and branding. His client list includes companies such as SonyBMG, RTL, ITV, the BBC, Deutsche Telekom, France Telecom, Orange, The Financial Times, TribalDDB, the European Commission, Nokia-Siemens, Unisys, the NFL and many others. Gerd is a fellow of the Royal Society for the Arts (London), and resides in Basel, Switzerland. http://www.mediafuturist.com To view Gerd’s videos: go to Future Talks: http://www.futuretalks.com or go to http://www.gerdtube.com

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Already the envy of its Caribbean neighbours with its electricity bill, Trinidad’s information technology sector is also moving ahead.

New technology was unveiled at Flow’s inaugural world expo last weekend in Port-of-Spain.

Among the more popular exhibits was the My Future, which presented technology not yet ready for the general public.

Flow showcased the evolution of video phones. Other than just being able to see who you’re talking to, you will be able to access the Internet and all your social-networking sites.

Flow representatives admitted that they were still trying to find out all the capabilities of the phone but, once that was done, it would be available.

Another major draw for the ‘techies’ was the next wave of Internet protocol televisions (IPTVs), which are sets that can facilitate the delivery of multi-definition content via a broadband lineout. In the near future of IPTV, users will be able to put all the information stored on their various gadgets, for example, their iPod, XBox or Playstation, and put them on the same platform; your Flow set-up box. The new set-up box enables the various gadgets to com-municate with each other and share files, with all that information represented on your television screen. The more modern IPTVs will be more application


There will be further improvements to the digital video recorder offerings, for instance, the ability to record different programmes in two separate rooms at the same time. Three dimensional (3-D) television sets, already available in more developed countries, will also be coming to Trinidad shores by year-end, according to Flow’s president and chief operating officer for the southern Caribbean, John Reid.

Triple A launched

Also looking to the future, Flow launched its Aim, Aspire and Achieve Programme (Triple A) before the start of the Flow’s World expo in Trinidad on Friday. Flow will provide free Internet, wi-fi and cable access to schools across the island. It will also partner with interest groups to equip 10 primary schools and homework centres with Internet and cable TV services to support online and video-based techniques.

These innovations are typical for a market that has embraced the telecoms provider. Flow’s coverage in Trinidad is at 70 per cent and Flow’s mainstream Internet access runs at 100 megabytes per second, best in the region by far.

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