SpectatorBytes

Today, there was an interesting article on USA Today about the impact of DVRs on TV viewership (See Here). It seems that we have certainly been talking about DVRs and specifically Tivo for quite some time. Yet, as the article indicates, DVRs have yet to reach mainstream; penetration levels are hovering at 23%. This will likely change as cable companies and telcos more aggressively integrate DVRs as a core feature of the TV watching experience over the next couple of years.

DVRs feel a bit like the Blackberry. While business users have lived with blackberry devices for over five years, it is only until now that mainstream audiences are having access to and falling in love with them.

When this happens, it will have a dramatic impact on TV audience viewership. The numbers outlined in the survey are already pretty dramatic. At14% penetration level (when survey was conducted), the percent of audiences for hit TV shows that opted to watch after the show’s airing ranged between 12% and 26%. If we extrapolate this numbers, we could estimate that when DVRs reached 50% penetration, >50% of the audience would likely watch the show after its airing.

Three implications of this trend which come to mind:

- The TV advertising value proposition needs to change. Delivering simultaneous audience reach becomes more difficult. Advertisers will also have to assign more value to relationship to good content rather than simply reaching mass audiences

- Live shows (e.g., sports events, award shows, etc.) will continue to increase in value as they become the only vehicle for advertisers to meaningfully get simultaneous reach

- For long-form programming, TV advertising and online ad solutions will likely start to look more similar than not. DVRs will probably enable overlays and post roll ads.

If you have other implications that come to mind, i would like to hear about them.

Over the past 10 years, there has been much discussion about who will win the battle for the set-top box in the home. Hardware manufacturers, cable operators and telephone companies have invested billions of dollars in becoming the gateway for consumption of digital goods in the home. The market belief has been that whoever controls that set-top box would have an opportunity to capture new business opportunities (Video on demand, interactive advertising, new channels, digital asset sales – music, video, etc.)

This belief was driven by two assumptions: 1) Television would be at the center of home entertainment, and 2) Set-top box owner would have the ability to control the services offered through that box.
Given where Internet consumption and mobile devices are heading, it seems that both of these assumptions were wrong. Internet consumption is growing at levels that are quickly matching television. Online video consumption is a major force behind that.

In addition, the emergence of the iPhone and other similar phones, which truly deliver a mobile Internet experience, have quickly positioned mobile devices (including laptops) as the ultimate personal set-top box. If you have kids, you probably know that new generations preferred personal, mobile experiences than TV-centric ones.

So, mobile devices (including laptops), not the set-top box, will be at the center of digital entertainment ecosystem. Owners of these devices and other players in the ecosystem will capture significant value as consumption patterns continue to rapidly shift.

Who would have thought that it would be Apple the company best positioned to win the battle for the set-top box? Did you?

Recent report by Pubmatic (see here) over the past week indicate that online advertising prices are declining. This trend had already become evident as leading Web players announced their Q1 results.

The forces that have enabled the growth in advertising on the Web now seem to be working against it.

Direct Response advertisers have driven the growth of online advertising. These advertisers, however, put significant pressure on CPMs as they focus primarily on performance. As DR advertisers have grown more comfortable with ad networks, it is becoming harder to sell premium inventory.

Increase in usage has allowed the creation of new inventory. This has led DR advertisers to enjoy an abundance of advertising options. There is no scarcity premium on the Web, and thus DR advertisers are being able to buy inventory at lower prices.

Ultimately, this has led to little to no differentiation between premium and non-premium inventory.

To break from this depression, we need to work to find solutions that attract brand advertisers. I have written about this in the past (see here). These new ad solutions are focused on delivering guaranteed levels of engagement within the right context. Also, these ad solutions need to be custom but scalable.

In addition to ad solutions, advertising networks need to identify how to most effectively serve brand advertisers. Selling premium online advertising is very different from selling ad network solutions. Premium advertisers want customization, unique engagement metrics and transparency. Ad network sales focused primarily on performance and reach.

Lastly, we need to work quickly to create standard metrics around these new solutions for brand advertisers.

The quickly we start working on solutions for brand advertisers, the faster will be able to overcome this depression.

The online video revolution has certainly been on its way for quite some time now. YouTube’s skyrocketing audience numbers and overall video streams statistics from the Web indicate that video has become a core element of the Web experience. This trend will expect to continue as increasing number of traditional and new video content producers are embracing the Web as a key distribution channel.
Given this video phenomenon, it has been surprising to me that the Web still appears to have separate incarnations: “text” Web and a “video” Web. This is probably a reflection of how the traditional world is divided producers of text content (e.g., newspapers and magazines) and video producers (e.g., TV networks, film studios).

The Web, however, is a medium that enables the marriage of both worlds. The Web is poised to be the first truly multi-media platform (e.g., images, audio, text). Newspaper sites and some magazines appear to be embracing this trend. The New York Times and the Wall Street Journal are increasingly incorporating video as part of their offering. Another good example is Las Vegas Sun (Check out their cool high def video player).

Interesting enough, bloggers (as well as most Web sites) have been less aggressive in embracing video as part of their offering. Most blogs add a video from time to time as part of their offering. Part of the reason for this lack of video in blogs is that videos while engaging do not generate revenues for bloggers today. So, any time spent in producing or choosing videos from the Web for their audiences generate little (if any) revenues.
As online video monetization emerges, I would expect this to change. Bloggers and Web sites in generally will increasingly work to provide audiences with videos that engage their community of enthusiasts. The same way that bloggers curate/select interesting articles from other/3rd party sources.

Clearly, publishing platform and tools to drive video integration have to further evolve to make the process more efficient for editorial teams. Check out what Magnify.net is trying to do on this front (see here).

We know video works on the Web. We know need to figure out how to use it in conjunction with other forms of media to create unique experiences on the Web.

Update: Today Disqus announced another cool tool to integrate video into the Web ecosystem (see here)

Acquisitions have emerged as an essential capability for digital media players to build scale and drive product innovation. The digital media business has become hit-driven and increasingly hyper-competitive. As a result, building a successful Web business is increasingly hard for anyone but particularly for corporate media players. This is leading most media players to rely on acquisitions to drive long-term growth.

Even though most players are recognizing the growing importance of acquisitions in digital media, they do not seem to have taken the necessary steps to maximizing the value and ensure the sustainability of this strategy.
For media players, institutionalizing acquisitions as a corporate capability requires re-designing the overall organization and operational approach. For example, functional (highly centralized) environments will prove inadequate in dealing with acquisitions. Organization needs to recognize the need for independence for acquired companies to be successful as well as clearly identified the key support layers they need to extract the benefits from belonging to a larger organization. This does not mean I am advocating a holding company approach but rather to rethink what is the right “operating” company approach to manage digital enterprises.

Corporate media players should consider some of the following principles as they organize their digital efforts:

- Design organization to enable acquired companies to remain independent and to enable successful internal products to flourish.
- Establish support organizations with a focus on service
- Create a “titling” hierarchy, which allows talent to co-exist with corporate management
- Set up an integration team to manage integration process
- Organize your talent recruiting efforts around backfilling exiting personnel from acquired companies (e.g., have a strong bench of engineers/developers, stable of General Managers, etc.)
- To the extent possible, allow business units to serve both internal and external constituencies. Similarly, allow business units to use both internal and external resources. (e.g., a publisher should be able to use a sister ad network as well as third party ad networks; optimal way to optimize monetization and ensure competitiveness)
- Create a thin corporate layer to stimulate interaction among business units and ensure strategic cohesiveness
- Always be concerned with too much integration. There is always a tendency to consolidate companies with similar capabilities. Yet, this may reduce overall competitiveness for an acquired business. I would always lean on the side of enabling businesses to remain independent (I am not talking about incremental product acquisitions but rather business that have the potential to scale on their own).
- The collorary of the above is focus on “fostering collaboration” among business units
The better companies prepare to absorb acquisitions, the more successful their digital businesses will be. These principles are not easy to follow and may be considered counter-intuitive to current organizational principles. However, I have seen them work.

The phenomenon of Twitter and Friendfeed seems to have regained momentum over the past couple of weeks. Early adopters are increasingly fascinated with these applications’ ability to broadcast information across the Web to a community of followers. The recent incident involving a US citizen arrested in Egypt, who used Twitter to ask for help, demonstrated the potential broadcast power of these tools (see here).

Although these types of tools have not become mainstream yet, they most likely will. It may not to be specifically Twitter or Friendfeed that do so. It could be a similar tool or the next generation version. The reason for this assertion is that I see these tools representing a new breed of “discovery” tools for the Web. These tools help empower users to become broadcasters of content (by way of sharing their activity and messages with their community). These broadcasters could be a user’s “friends” but also could be influential figures, experts, journalists and even brands. As followers or audiences , we are able to use the activity of these broadcasters as a new way to filter and discover new content on the Web.

The need for discovering information efficiently on the Web is increasingly important given the Web’s rapid rate of expansion. Current discovery tools such as search or topical blogs seem to be less efficient nowadays in helping us discover new content. Aggregator tools such as Digg and Stumbleupon have certainly enjoyed some success in leveraging communities to help us discover new information and sites. However, their reach has remained somewhat subscale.

I expect this new generation of people-driven discovery tools to prove more effective long-term given their ability to tailor to specific individual interests. These tools take “sharing” to the major leagues. Twitter and Friendfeed have some way to go. Yet, they seem to be the first manifestations of a new way to discover content on the Web. I expect many new companies to emerge that seek to further build on these capabilities.

It used to be that past generations rely on the broadcast news anchors to help them learn about new topics of interest. These new discovery tools will likely provide this service for the Web generation.

I am increasingly surprised by how many more sites seem to be looking to build audiences through SEM efforts. The concept of using a direct marketing ad unit such as paid search to promote content websites has seemed strange to me. The idea of having to continually advertise to be able to aggregate audiences seems at first glance a flawed (or unsustainable) model. However, given how aggressive competition for audiences is on the Web, sophisticated SEM strategies increasingly appear to be a critical tool for content sites aggregate the necessary page views to reach scale and deliver on their advertising commitments – particularly those of premium advertisers who demand delivery guarantees.

As a result, setting up a model that uses low cost paid search marketing to aggregate audiences that can be sold to premium advertisers appears to be smart approach. Critics may call this strategy an arbitrage game. Yet, it is not necessarily that. Premium advertisers care about “context” and high quality content provide that needed “context”. If high quality content providers are able to break through the clutter on the Web by using SEM techniques (obviously in addition to optimal SEO), brand/premium advertisers benefit because they are able to reach those audiences that increasingly avoid them on other media but they do so in a context that they deem appropriate.

Broadband Enterprises (a Velocity portfolio company) recently launched a content syndication engine that uses a similar strategy but through display banners. Broadband Enterprises buys display ad inventory designed to generate video views. That way they are able to guarantee a certain amount of views to their premium clients (which is what they have been asking for).

The role of high quality content providers has always been to deliver a product that aggregates compelling audiences for advertisers. Online SEM increasingly is becoming a critical tool to be able to do that in the online world.

Interesting implication: Google has some additional paid search growth coming his way.

In an effort to increase TV audiences, the CW network has decided to stop streaming new episodes of Gossip Girl on the Web. To some extent, this decision seems to ignore evolving consumer media habits and appears to be founded on the hope that the traditional television model still works. While I understand the economic concerns of the CW, their decision seem to illustrate why the traditional model is likely to evolve significantly over the next few years.

I am not saying the Gossip Girl is not like any other show that deserves cancellation in the face of poor ratings. However, assuming that the show is not pulling audiences on TV because the show is also being streamed online suggests to me that broadcasters still have much to learn about how to deal with new digital media outlets.

I remember that the show “24” was almost cancelled for poor ratings in its first season. Yet, it was the DVD format that helped the show find audiences and eventually become a major television franchise.
If Gossip Girl has the potential to be a hit, the show should be available in as many distribution outlets as possible. This would enable audiences to easily find and consume the show. Forcing audiences to return to the days of appointment television only reduces the show’s chances for success.

I could certainly understand if the CW may not be able to afford waiting for audiences to find the show. If that is the case, let it be a lesson for broadcasters and content producers. A new economic model is needed for television in which highly targeted shows (which developed engaged and valuable audiences) can work. The model may include download economics, ad-supported streaming, pay VOD and DVD.

Finding audiences is increasingly difficult and thus maximizing distribution is ever more critical.

Hopefully Gossip Girl won’t have to become a case study. We already have Jericho or Friday Night Lights for that.

Update: Happy to report that the show is still available via iTunes for $1.99 per episode. 

Last week, Paramount announced that they are forming a new venture with MGM and Lionsgate to launch a new pay for TV and VOD network (see here). This meant that Paramount opted for not renewing its distribution deal with Showtime Networks.
While most of the discussion on this event has been focused on alleged animosity between CBS and Viacom, the current analysis seem to have ignored what the potential success of this enterprise may mean for cable networks and content producers.
If this venture is successful, cable networks that lack original programming could quickly be des-intermediated by content producers.

As consumers preferences shift away from appointment television and channel affiliation to on-demand programming, content producers as well as MSOs have an ability to change the current economic model of cable television. This is something MSOs would love to do.

In this context, original and “hit” programming become a key element for long-term survival. Channels without these elements would seem to face the most exposure – even a powerhouse channel like HBO could be threatened by this potential trend.

Programming and packaging will remain important in digital environments. Consumers will rely on certain branded channels to enable them to discover new content. However, consumers would expect these channels to be highly specialized and knowledgeable about their audiences/communities. Most generic channels that rely on only one or two signature shows to anchor their entire offering may find challenging to survive long-term.
Content producers should rejoice given the growing power of hit content. Content Packagers (e.g., cable networks) focus…focus…focus on developing a highly targeted offering.

Please keep in mind these changes take 5-10 years to take hold…but preparing for that change may take players just as long.

For content producers and providers, the Web is bound to create significant value in the middle. Much has been said about the Web’s long-tail over the past few years, and certainly many companies are focused on the “head” since most offline models have been built around the “head”. However, the middle – which some call it the torso, others the sweet spot and Jon Miller calls the expanding middle – is where I expect most of the value will be generated on the Web over the next few years.

The Web provides an opportunity to aggregate smaller but high value audiences with whom advertisers will be seeking to build relationships. If you think about it, cable networks created significant value in the 1990s and early 2000s. The middle of the Web can be thought of as the next level of audience targeting.

The middle will enable advertisers an ability to more precisely reach attractive audiences. More importantly, they will be able to reach high-quality audiences that are engaged given the 2-way nature of the Web. Advertisers will not be able to reach these audiences with the level of precision and efficiency that the Web offers anywhere else. It will take some time before content providers in the “middle” can win over advertisers. It took quite some time for cable networks to do so. Nevertheless, they finally will as these audiences begin to use less traditional media and more the Web.

I expect many models that have been tried for the Web at large to focus on being tailored for the “middle.” High quality-only news aggregation services, tailored/invite-only social networks, search (such as Mahalo.com) and discovery services etc. The middle of the Web is not new. It has been there for quite some time. Yet, it is about to get further momentum as the Web increasingly needs to be further organized and packaged for consumers. Traditional talent is finally committing to the Web and see the middle as the place that can change current economic dynamics. This will ultimately help make the middle mainstream.

This is not to say that long-tail businesses will not create/capture value. They will. Yet, the middle is where I expect most of the action will be in the coming years.

The Web will increasingly become “Fat”….which in some cultures is a sign of wealth. My father says it better: Fat is the best part.

Microsoft’s control over Yahoo has reminded me about the importance of “religion” to succeed in technology. I believe “religion” is one of the key underlying reasons why Yahoo’s management and board has resisted Microsoft’s overture.

Digital media companies are founded and scaled around a particular “set of beliefs.” These beliefs reflect a particular way to look at the world, insights on how the market dynamics will evolve, and vision on how to serve the specific needs of a market in the future. These beliefs shape a company’s product development, organizational culture, business approach, and acquisition strategy.

Sets of beliefs are becoming increasingly critical to succeed for digital media companies. In a hypercompetitive environment, companies need to be laser-focused on what they are trying to accomplish. A clear set of beliefs allows companies to do that. It also enables them to move fast and avoid pitfalls (e.g., copying competition, misunderstanding market dynamics, etc.) In a world where the difference between achieving success or becoming a failure has become increasingly hard to identify, a clear set of beliefs becomes even more critical. It allows all essential constituencies (management, employees, investors, partners) to be on the same page and work jointly towards the same vision. It also allows companies to simplify their interaction with their existing customers and potential new ones.

Many businesses and companies that I have seen fail because they fail to have a clear set of beliefs. A CEO articulating a vision that is different from a company’s product or services is the clearest example of that phenomenon. Partnering with companies that do not share similar sets of beliefs is another. Recruiting talent whose experience has been built around other sets of beliefs is another.
Needless to say, one has to have the “right” set of beliefs. However, I find that in today’s digital media market at least having one improve your odds of long-term success.

Much is being written today about the imminent downturn in the economy and how it has started to impact overall business activity (see here). This has gotten me thinking about what are the potential implications for the digital media community over the next 18-24 months.

Realities:
– Consumers’ online usage will continue to increase at a significant rate. The Internet is positioned to become the most pervasive medium in people’s lives (surpassing TV); As consumers decide to reduce their spending, they will likely seek greater amounts of “free” entertainment on the Web.
– Video consumption will continue to grow as traditional content providers continue to move their content online; they need to stay relevant in world where they only account for an increasingly smaller sliver of content
– Direct response advertising spending will given online’s cost efficiency and measurability; However, overall DR spending may slowdown a bit given slower consumer demand (i.e., less users may be interested in signing up for online courses)
– Online publishing will continue to flourish as talent from newspapers and magazines, whose advertising is likely to be impacted by the economic slowdown and thus continue to reduce organizations, begin to migrate online and start taking advantage of the existing tools such blog platforms, niche networks, etc.

Potential Benefits:
– Innovation will focus on “mainstreaming” existing technologies and products rather than on complex, cutting edge technologies; this will lead to larger audiences and better outlets for advertisers
– M&A activity will continue as traditional media players will face increased pressure in their core businesses (which are likely to be affected by advertising) and will need to reconstitute their portfolio of assets. Also, traditional media and large Web networks are still flushed with cash.
– Valuations will likely increase for startups that have achieved success – e.g., aggregated large audiences, and build scale in revenues.
- Poor performing startups will join the deadpool quicker. As pointed by Jeremy Liew a few months back, this is not a bad thing. Talent would be redeploy to new ventures.
– Startups will also become more focused and discipline – thus, increasing their likelihood of reaching success.

All in all, the downturn may slow down a bit of the transformation of the media business but not to the levels seen during the 2001-2003.

Consumers are voting with their clicks and eyeballs. Opportunities to create value will not subside.

A couple of days ago, Fred Wilson posted an interesting note on the future of the music business (see here). Fred’s main point was that streaming will likely emerged as the new model for music online. Fred posits that given the increased availability of connectivity and portable connected devices, streaming will eventually prove to be the main method, which consumers will use to consume music.

One of the things that I have learned in my career is that new technologies and consumption habits take about 5 years to hit mainstream level. It used to be 10 years. So, Fred’s post got me thinking about whether or not the path chosen by the record labels is a good one. What is going to happen over the next five years until streaming hits mainstream behavior and consumption levels?

Today, consumers have fallen in love with music downloads. This format has put them in full control over their music experience. It has allowed them to make music a core part of their lives, a 24/7 experience. Downloads allow anytime, anywhere access one’s personal catalogs, and discover new acts through social sharing. Overall, downloads have made music a great experience. The stats speak for themselves about consumers feel about the format.

According to the IFPI, consumers downloaded an estimated 34 billion tracks in 2007 (only 1.7 billion were legal and they generated only $1.4 B in revenues – 7% of total global sales)
I hope the record labels have not simply anointed streaming as the only model that they will support. They will continue to lose significant value if they do not continue to work on creating a legal download model that meets consumers’ expectations. Record labels would benefit greatly from harnessing the power of legal download distribution.

Music has been used as a loss leader by many businesses to create significant value Think MTV, WalMart, Live concerts. Record companies have begun to reposition themselves to be able to participate in the next wave of value creation. Entry into artist management is an example of this effort. Helping create platforms for legal distribution of music can better position music companies to go down that path. They would be able to monitor and track how music is being consumed across geographies, they would be able to promote new acts, revitalize old genres of music, stimulate sharing of music across geographies. Also, they could leverage downloads to create new ad-supported promotional platforms.

The record labels don’t want to lose the next five years waiting for music streaming to take off. This model may not completely fully satisfy consumer’s expectations. At the same time, new discovery (e.g., blogging, social networks) may emerge as viable distribution platforms for new and established acts, and thus record companies may find themselves in position of less leverage than they are today.
The change the record companies have to undergo is not an easy one. Yet, it is better to start now than continue to focus on simply protecting the old model. A lot of things can be done in five years.

Today’s major news headline is NewsCorp’s FIM sales reorganization (see here). While internal politics have been blamed for the changes in the blogosphere, in an strategic sense, I would expect the move to further help FIM built its brand advertising revenues. Here are some of the reasons why:

- Increases focus on creating “scalable” custom solutions for brand advertisers at each property; Brands will demand it
- Allows each property’s sales teams to focus on highly targeted, relevant set of advertisers
- Makes easier to identify properties which will not command premiums from advertisers
- Positions successful properties to share success with other publishers in their vertical and thus build market scale (yes, this could mean more vertical networks)

In terms of non-premium (or some people like to call them premium unsold) advertising revenues, the question that is still outstanding is whether or not each property will be able to optimize their advertising revenues by accessing multiple ad networks rather than being asked to use Google or the FIM network – i.e., are they going to be able to use adopt some of the emerging tools like Rubicon Project or Yieldbuild to further optimize their monetization.

Given the Darwinistic nature of the Web, I believe Web networks would benefit by letting their “owned” publishers (or o &o’s) behave like a third party publisher. This would also have the added benefit of making the owned ad network even more competitive.

Managing these new dynamics will not be easy (e.g., Multiple calls to advertisers coming from multiple people, some cost inefficiency, internal competition, etc.). However, in today’s Web, clear focus seems critical to succeed.

FIM is certainly exploring waters other Web networks have not to date.

Having said all that, I may be reading too much into the changes at FIM.

Much has been said about Web 1.0 companies struggling to adapt to the current dynamics of the Web. No need to call it Web 2.0. The Web has simply evolved and conditions changed. The list of changes is pretty evident:
- Broadband penetration has reached full scale
- Product development costs have fallen dramatically
- Infrastructure services (hosting, storage, databases, etc.) have become a commodity
- Users have become “power users” capable of easily navigating and discovery new things on the Web
- Open platforms and web services are core product elements
- Distribution and syndication ecosystems have taken full shape and are accessible to all – Think SEO, RSS, Widgets, etc.
- Hyper-competition has come to age

These new conditions require a new business approach for all companies looking to succeed, scale and ensure long-term success. The following is my list of key elements the optimal business approach for companies in this new phase of the Web:

- Offer “specialist” products and services rather than multi-purpose ones
- Optimize infrastructure to scale through acquisitions rather internal development
- Focus internal product development on enhancing/evolving core products to maintain leading edge
- Build and sell multiple brands rather than focus on building and selling a single brand
- Leverage third-party monetization solutions to tap on diverse base of advertisers
- Focus on hyper distribution across the Web rather than on “marketing” a single entry point
- Design organization for managing hit-driven dynamics (products and services will grow and decline much faster than they ever have)

Adopting this new business approach is not easy. Many of the new requirements are counterintuitive to business managers and thus continue to face resistance. However, practices will finally change over the next few years as more businesses begin to struggle to secure and maintain scale.