Content Chaos: Part I
Apparently not. Right now, many old-school telco execs are tripping over themselves trying to sound hip and content-aware, but in many ways it's painful to watch. It's like that guy with the pocket protector and a slide rule telling you where the hot new club is.
Given their power in owning large and complex networks, I would have thought incumbent telcos would be doing more with it. They could be racing to to build an all-powerful vertically integrated network – supplying bandwidth, innovative applications, and proprietary content. Wouldn’t that be a fun business?
Hollywood started with a vertically integrated model like this. The "Big Five" studios built and owned all of their own content – including the actors, most of whom were under contract – and then they distributed the content through their own network (movie theaters), which they also owned. It became such a successful model that the Federal Gummint had to shut it down in 1948 in U.S. v. Paramount, et al,, declaring it in violation of antitrust laws.
Now, are the large telcos avoiding this strategy because it might be too successful – and they fear the government would shut them down? Well, that never stopped them before. No, they're not doing it 'cause they don't get it.
That's why you see all the big Internet content deals being made by the Internet companies, who appear to be in the driver's seat. More people are talking about Skype Ltd. and Google (Nasdaq: GOOG) than they are about FiOS and U-Verse.
The startup community, meanwhile, doesn't really want to deal with large telcos, especially in North America. Can't really see YouTube Inc. having talks with Verizon Communications Inc. (NYSE: VZ), can you? Skype doesn't need to talk to AT&T Inc. (NYSE: T) or Deutsche Telekom AG (NYSE: DT) to launch Joost. After all, with broadband cable, WiFi, 3G, and WiMax coming, who needs to spend time being intimidated by the incumbent wireline provider?
Given the way telcos treated startups – and Internet content – in the collapse of the bubble, what we might be seeing is the industry's largest karmic payback. Startups, spurned for years, now avoid large telecom companies like the plague: They're a place to go only when you want to be pushed around and have your margins sliced to pennies.
The result: We'll see slower development of innovation in the wireline telecom market. If you want to look for innovation, you have to look to the mobile content market, Ethernet networks in Asia, or Internet distribution systems that can be adapted to be used over any broadband system, regardless of who’s delivering it.
It's a statement as to where the world is going, and how little of it is being controlled by the larger telecom companies. Look at the applications that have resulted in exploding revenues in recent years: Online gaming, text messaging, ringtones, text ads, and mobile interactive tie-ins to television shows. Very little of this revenue has flowed to, or been controlled by, the largest wireline communications companies.
Wireless providers have done well, and that's because they built new content and communications business with partners from the ground up, rather than treating them like just another service to be commoditized. Think of text-messaging or, better yet, ringtones. These services were created out of thin air, and they cannibalized nothing. They were new and premium services, something the user was willing to pay extra for.
In their battle with cable MSOs, the telcos are depending largely on service bundling and pricing. Their services are profoundly lacking in creativity: the same video channels that you get on cable – and cheaper phone calls. Is it enough to make me switch? I don’t think so.
Lou Volpano, president and CEO of Ascertain-ment , a media consultancy, thinks the telcos are doing the wrong thing: They’re trying to commoditize content.
“You should build your own network and buy your own content,” says Volpano. “Phone service is a commodity, and entertainment is a luxury. Don’t commoditize entertainment!”
Seems right to me.
Volpano points out that it would be relatively cheap for the largest telcos to develop pioneering new Internet applications or even their own hit video shows. How much would it cost Verizon to hire a hit producer to come up with its own reality show? A few million, at most. [Ed. note: Look for Volpano's column on this topic later this week.]
Of course, given their significant cash flows, telcos can continue to ignore the potential for proprietary content, and they aren't going to die any time soon. They still own valuable assets. In fact, the "just moving bits" strategy might work in the interim, as the telcos do subsist quite nicely on broadband growth. But in the long run, they are missing a huge opportunity to build out an explosive new revenue category.
Without superior content and applications, they'll be consigned to a lifetime of boredom in a commodity utility business, pure and simple.
— R. Scott Raynovich, Editor in Chief, Light Reading