Content Owners Need to Make Money Too!

So, there is a tangled web of content owners, distribution partners, websites, employees, ad salesmen, actors and more that all have an interest in extracting the most value from their spot in the value chain.

Because traditional distribution (television) is still by far the most profitable (in that it provides the most revenue and cost per episode is basically a sunk cost), it certainly has a chance to influence where content is delivered. Ultimately though, the content owners should get to make the decisions. They are hopefully thinking about value per eyeball per episode in their decision making. Unfortunately, the OVERWHELMING majority of viewers will come from television. Online video sites would need to make a major case for substantially higher CPM for their viewing experience, which would probably be difficult to maintain if they were aiming to build for the 10-ft viewing experience (though with a wiimote or ipod touch as the remote, who knows!).

Hulu, as the leader (in my opinion) in the online video space, is going to be involved in probably every shitty thing that is going to happen as the content owners and distributors work to protect their legacy revenue streams/business models. This week, they removed their content from TV.com and asked to remove their content from Boxee. It's a major blow to the progress being made at the expense of cable companies, but that is how it's going to happen over, if I had to guess, the next 5 years (not to say that Hulu or Boxee will be around after that).

It just goes to show that being a web portal is not enough. There has to be some other differentiator. I think these guys need to focus on providing a superior interface, recommendation engine and innovative advertising model. It also makes me wonder who the ad sales guys are at Hulu. There really weren't that many ads from actual advertisers in there, in my experience. Obviously, they limit ads per show on purpose, but even the ads they have don't seem to be major advertisers. Maybe the low sales drove the content partners crazy? It's too bad really, because Boxee had potential to turn Hulu into the iTunes of streaming. Easy to use, slick interface with a deep library.

Well, if only Hulu had enough lobbying, we could have tried to use the stimulus to buy all the already laid cable/fiber in the US and nationalized the infrastructure, which would have created a real competitive environment. I have been meaning to research the history of the national highways, but I haven't yet (I'll opine anyway). I think the highways were once private, with a toll collector literally turning a pike (hence turnpike) to let people pass onto his road. At some point, we nationalized it (it's going the other direction now, but let's not think about that for now).

In the meantime, I have a suggestion for content owners. You made the choice to succumb to the large audiences that the cable companies can provide you. That is an understandable business decision. Just consider the impact of cableco provided DVR. People use DVR to skip ads, that costs you money. The cable companies provide these DVRs for super cheap. Maybe the case can be made (though I don't know the actual viewership figures) that you lose as much to people watching on DVR as they lose to people dropping cable in favor of Boxee. Not to mention how pissed off all the early-adopter, techies are. I hope you are putting pressure on them to build a channel like Hulu in the OnDemand section. In that channel, place unskippable ads or micropayments. Everybody wins (except maybe the Pirate Bay).

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What is going to happen to online video?

Currently, Hulu is my favorite online video site. Boxee is my favorite way to bring online video to my TV. Well, what is going to happen going forward? How do companies make enough money from online video? Trading analog dollars for digital pennies is a legitimate concern for these ginormous corporations.

ABC has an interesting strategy. They only allow their content to be streamed from their site, with their player (well, Boxee has it too). The user experience is crap. They make you click to continue the show after the advertisement plays, which makes it tough to watch from across the room. On top of that, they just increased the amount of ads they are going to show. But, if you are a fan of Grey's Anatomy or Lost or anything else on that network and you missed an episode, you can only go to their website. They keep the brand tight, rather than allow it become associated with another site like Hulu or Joost. Plus, if the ratings were one person lower because you didn't watch, they made less money. So, I guess they feel like you need to pay with attention for the show regardless of where you watch it.

As a consumer, I hate the strategy. However, I completely understand where they're coming from. It is a clear example of 'Content is King'.

But, here's where this could get interesting. It's not that the video I want to watch was created by/for the internet. It just happens that is where I can find it now. So, I plug my computer into my TV and use Boxee to get it onto the TV. If I was a cable company, I could cut this whole thing off immediately by just improving the on-demand content library. I cannot think of a good reason why they wouldn't (that's an exaggeration, but in a truly competitive market, it would likely be worth investment).  Putting ads into the show on the fly seems relatively trivial at this point (as long as you can sell the inventory).

Hulu and Joost, while great websites with deep content libraries, still don't control their fate, which is their biggest weakness, as evidenced with the hulu-baloo over the removal of It's Always Sunny in Philadelphia (aside: I love that show, but have no idea when it is on. I am without Sunny now. It doesn't seem like FX is making any money by taking it off Hulu). But, maybe what Hulu and Joost do really well is create fantastic user interfaces for quickly browsing through tons of content and choosing just what you want, and then suggesting what to watch next. Which could be the channel for discovery that I mentioned in my last post.

The current on demand channels on Time Warner Cable (in NYC at least) are pretty crappy. But, what's worse is that other than the premium channels (HBO, etc), most people don't even know they exist. There is a music videos on demand channel. Fitness on demand. A&E on demand. National Geographic on Demand. The list goes on. But, most of the channels have very limited selection and the browsing experience is designed to find something only if you know it exists. There is no serendipity button.

If the dream is 'anything at anytime', like I think it is, then this is the time for cable companies to invest in making their on demand offerings amazing.  You can even do 'variable pricing' by putting in more or less ads depending on how much people might want to watch. Limiting fast forwarding like on Hulu. And, of course, micropayments for ad-free episodes (not to mention my 'learn the message' free episodes). Cable companies, which already take payments for pay-per-view items, could easily add the ability to buy one episode of a sitcom for 24 hours for $0.20 (the price point obviously needs to be studied in more depth, again with variable pricing depending on how recent the episode is, how many people want to see it, etc.)

I have to imagine that ads placed into on-demand content on a Saturday afternoon when I'm just trying to kill time would be just as profitable as those inserted into whatever crappy show is on FOX.

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You like it? Pay for it!

The advertising supported model is fantastic. There was a period of time when it looked like everyone wanted their business to be ad-supported. It's a good idea because consumers don't feel like they are paying for your product, so they may use it a lot. But, in reality, consumers are paying with attention. It's a very small micropayment, but it is real.

The fact that it is so valuable to introduce people to a product which they might not have heard about is wonderful. But, when you think about it, if you buy Charmin toilet paper, you're paying for the ads they run on television. If they pay to advertise during The View, and you don't watch The View, you are subsidizing someone else's TV show.

That's why I love car manufacturers. I don't have a car. I don't need a car. I don't plan to buy a car. But, I love sports. I spent every Sunday this season watching the NFL. Car manufacturers subsidize the hell out of that. It's great to know that something so expensive, like the rights to broadcast the NFL, is not paid by me. It's paid by all of the people who need pick up trucks (Aside: Why do marketers think that everyone who watches football needs a pickup truck? Probably because Ford and GM thought everyone in America were in construction).

But, the ad-supported model is coming under stress now. I think it's rather funny. We were headed towards a place where everything in the country would be free except for toilet paper. But, toilet paper would cost $80,000 a year. Now that the ad markets have collapsed, people are re-evaluating. It was a crazy phenomenom, because most of the ad-supported tech companies targeted early adopter-types who, for some reason, have a moral aversion to ads. They don't see paying attention to an ad in this week's episode of Heroes as the micropayment for the production of that show. They see ads as annoying (despite the fact that they give us cliffhangers which actually increase the enjoyment many programs).

Well, I want to suggest that we stop this madness. As consumers, we should be much more direct about what we like and don't like. We should all start paying for our content. We do it with the movies. Why can't we do it with shorter form content at home? There should be more options for consuming content.

For example, I want an episode of 30 Rock. I can see a lot of ways to support that:

• Pay for it without ads (HBO)
  
• Pay less for it with some ads (Cable)
  
• Pay nothing for it with more ads (Networks)
  
• Pay nothing for it with a lot of ads contingent on passing a quiz at the end that proves you watched the ads and learned the marketing message(s)
  

That last option is potentially revolutionary. Imagine the CPMs you could charge if people had literally promised to learn your marketing message. Even if you haven't found the right person for your product (for Charmin, that would be an ass-less guy), you have guaranteed that he knows your value proposition. It's possible that he has friends with asses and one day they'll talk about TP, and he'll share his knowledge. It potentially could take the wind out of the sales (punny?) of ad-targeting. I mean, who really cares if you played the right ad to the right person if they didn't internalize the message? Hard to believe that would result in increased sales.

But, the bottom line is that it would be great for us as consumers to get past the hurdle of paying for the show we want directly and thereby direct our resources to the content that we like, not the content that advertisers think we like. We need to become the patrons to the arts that existed in a bygone era.

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Election Results

Just a few quick thoughts on a politics. I do not claim to be an expert. In fact, I claim to be quite ignorant. I am mostly posting questions here, even if not phrased that way, and would much appreciate your input.

Listening to the pundits talk about elections last night drove me a bit crazy. However, I was definitely happy to hear that the Democrats were going more moderate overall. With a country this big, how can anyone not agree that we need constant compromise?

The fact the longest serving Senator just got convicted of a felony is maybe one of the scariest things I've heard.

I am happy that the Democrats do not have a super-majority, if for no other reason than that the system of checks and balances would become woefully out of whack.
There are problems with the two-party system, but I think there is little reason why any new potential member of Congress would go alone.

Republicans are already looking to 2010 as a possible repeat of 1994. Personally, I thought 1994 was the start of a pretty good time in the USA, but I was only 12. As they say, correlation is not causation.

Not that I am an expert, but I've been thinking about the structure of our government. Specifically, the relationships between states and the feds. The comparison to our major corporations that are called 'too big to manage' is very apt. The value of a state being in the union with another is that if one has a major disaster, they can count on the other to help bail them out of it. That could mean one state may be supporting others in most years. Very similar to a large corporation where one division is a cash cow funding everything else (e.g., Google with AdSense funding YouTube, etc.).

Not every issue needs to be a national issue. Some issues can be dealt with at the state, county or city level.

Also, I think this election (and coming recession) may have at least a short term impact on the personal accountability of Americans. I believe that sometimes things go wrong. I believe that by trying to legislate wrong-ness out of existence we are trying to pass on accountability.

All of these thoughts deserve a lot more conversation. I almost wish I hadn't started thinking about them. Any pointers to already written papers on these topics would be appreciated (please don't suggest the Federalist Papers)

The Future of Music [Rant]

The launch of muxtape (which you should check out) has lead a lot of people to talk about the future of music. I thought I would take this chance to throw my two cents out into the fray. (Not all of these are original arguments, but when I first had this discussion they were pretty novel)

About two years ago, when I was looking to switch jobs, I interviewed with Warner Music Group's Digital Strategy group. I was drawn to the position because I thought that they were faced with one of the biggest challenges a large company has faced maybe since the best horse carriage maker had to deal with the Model T. After a few rounds of interviews, I was having a discussion with one of the guys on the team about what the real value add is of the record labels. My opinion is that before the internet and crowd-sourcing and wiki's and all that other great stuff that has made finding great content easier (and actually possible), the record companies had a HUGE and valuable role. They were the tastemakers, manufacturers and distributors. They 'discovered' the artists, they helped them produce the music and then they distributed and marketed it. They controlled the entire value chain because they provided access to resources unavailable to starving musicians-and they were good at it.

Once upon a time, recording studio time was unfathomably expensive because of all the intense equipment (in addition to the expensive producers/technicians in there). Then, assuming that a hit single came out of that session, you still had to get someone somewhere to play it. Sure, a band could play some small venues and keep growing their fanbase, but to really hit it big, you needed radio play (or MTV, but that requires a music video and all those extra costs, too). If people actually wanted to buy your album, you would have make physical copies of it and get large quantities them to stores.

What's changed?

Almost everything. The cost of production is much lower. A band can get high quality recording equipment to use in the garage. Manufacturing is possible because making mp3s costs basically nothing and no one even buys CDs anymore. Furthermore, distribution is possible, because you could create a website or myspace page and offer downloads or shipping. Even iTunes might let some indie bands on there for a cut of the sales (basically the strategy they are using for iPhone apps). During my interview, I made the case that big record labels are losing a major portion of the value proposition they bring to musicians, big and small. Musicians might soon be confronted by the possibility that signing with a label might cost them more than its worth. Basically, giving the label its customary cut may not be as profitable as going it alone. Youtube videos and myspace pages can and are being used successfully to reach and interact with fans.

So, what do the labels have to offer?

Marketing. In the most recent past this was making big acts into huge acts. Going forward, how can they keep provide this value for the long tail of indie bands? I don't think they can, and I think we'll see a lot more small acts doing it on their own. Furthermore, as radio stations become less relevant, getting played is less important and another leg of the labels' value proposition is broken. The guy from WMG did not agree with my view. He seemed more concerned with wringing the last few pennies out of the last Snoop track by selling ring tones and putting music in video games. It seems to me that they were content to negotiate a royalty stream on their existing library (which is fine, but I think shortsighted).

If I was a record label, I would focus on my pipeline of new acts. When I interviewed with WMG, I made the additional point that the success of a record label is not tied to its own brand. When listeners want to hear a song, they aren't looking for the newest album produced by WMG. They're looking for acts that they like. What if WMG became really good at helping me find music that I would like? Pandora and last.fm already do a great job, so they might be too far behind already. But, presumably, the record labels have an expertise in A&R that could be leveraged (to borrow an obnoxious consulting term) to build a great channel for the average joe to discover new and exciting acts. There is already a ton of music out there that I've never heard or even heard about. And if production and distribution only get cheaper in the future, there will probably be even more music to never hear.

Isn't there some kind of value in the label as a brand? Couldn't the expertise in A&R be one of its core strengths? Maybe all of the value add is behind the scenes, and there will never be value in that brand to consumers, but the same was probably said about the chips in your computer, until Intel came along with the Intel Inside campaign.

What if there was a connection between me and the WMG brand similar to what I have with, for example, Zappos.com. I trust that if I get shoes from Zappos that don't fit, they'll replace it or refund my money. Well, why can't a record label build the same level of trust with its customers as a random website selling shoes? I see some difficulties. For example, the relationship is really between artist and listener. However, the label could help foster the first interaction between artist and listener. Like a music matchmaker setting you up on blind dates with music. The lawsuits also probably aren't helping.

So, where do we go from here? What's the future of music?

Fred Wilson, by all accounts a smart guy, thinks that we'll have completely on-demand music, with very few people actually interested in even downloading the tracks. Not only are people going to stop buying the physical CDs, they're going to stop downloading songs! He thinks the web services that provide the tracks will be ad supported, like today's radio stations. Or else, people will pay a penny each time the listen to a track on-demand. I think one of those (or both) will happen (though I don't see us abandoning our files entirely for ad supported music). This basically makes us all like the patrons of the arts from Beethoven's days, although we'll pay after the creation happens, rather than commissioning a symphony in C.

Am I right?

I don't know for sure and it's still too early to tell. However, In the two years since I interviewed with WMG, Radiohead and Trent Reznor have left labels to sell (or give away) their music on their own, both ventures seem to be successful (though Trent may not have felt it at first). Plus, I wouldn't want to have owned this stock.