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Video services

Content Chaos: Part I

Online video content. Online music content. User-generated content. Does the traditional telco world know what to do with all this stuff?

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

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rjmcmahon 12/5/2012 | 3:15:09 PM
re: Content Chaos: Part I http://www.apple.com/hotnews/t...

It looks like the music industry is pressuring Apple to open or license their Fairplay DRM system. Job's seems to be using a subtle door-in-the-face persuasion technique to convince them interoperable DRM isn't a good idea. (His post is a good read)

It's amazing how the press jumps all over the door-in-the-face request (getting rid of DRM) as if it were even somewhat realistic and totally misses the real issue at hand. (which is an open DRM system analagous to what TCP/IP did for networking.)

http://en.wikipedia.org/wiki/D...

"The door in the face technique is a persuasion method. The persuader asks an individual with a request that is so demanding or outrageous that it would most likely to be refused. Then, the persuader would ask a smaller and reasonable request which is the persuader's intended request. The individual accepts the second request because it seems smaller than the first. If the persuader would have asked for the smaller request first he would have been turned down, but because the larger one was presented first the individual is more open."
rjmcmahon 12/5/2012 | 3:15:12 PM
re: Content Chaos: Part I I think GOOG's got a pretty big lead on advertising supported user generated web content. They perform poorly on consumer paid for content (big hole that nobody has solved) and unfortunately their search is getting more and more polluted by advertisers who are figuring out how to game their algorithms.

On the video side Viacom is starting to make rumbles about the YouTube copyright violations (good thing the VCs shifted that liability to GOOG shareholders) and the reality is that there is no obvious way to monetize that anyway.

If I were the phone companies I think I'd just keep increasing the taxes on the bit pipes, consolidate wireless, continue honoring the no-compete clause with the MSOs, feign competition for the regulator, and not worry too much about the content side of the business. That's how to best serve the shareholder in my opinion.
rjmcmahon 12/5/2012 | 3:15:12 PM
re: Content Chaos: Part I It would be more interesting if we didn't have to sit around waiting for Microsoft to come up with the solution.

Huh? Why do you have to wait around for MSFT? Here's a home project for music playback sans Microsoft (and no Jobs tax required either).

http://fieldnetworks.com/slim/...

Then for content distribution at gigabit rates put NAS disks in the mail. Much cheaper and faster (as well as more secure) than renting bit services from the oligarchs ;-) Works for backup too.
Scott Raynovich 12/5/2012 | 3:15:15 PM
re: Content Chaos: Part I
Brooks said: "In FiOS or U-Verse for that matter, there needs to be an extendable piece of hardware. That might be an STB, BHR, or the ONT. Then, there needs to be a way to get 3rd parties to get content going and an UI defined."

I agree, the new devices and UI will be key. But isn't this already happening? You have Xbox, some of the new DVRs, and certainly Cisco will be coming to town with an amped up setttop.

Yet the phone companies could get even more creative. I kind of liked the idea of that recent Verizon "kitchen phone" with LCD Screen -- only one problem, it didn't surf the Internet (DOH).

I agree, it's got to get done with third parties -- especially startups. It's got to involve sophisticated UI -- something I still envision as the "Tivo on Steroids."

It would be more interesting if we didn't have to sit around waiting for Microsoft to come up with the solution.
rjmcmahon 12/5/2012 | 3:15:17 PM
re: Content Chaos: Part I So the telcos were left with the less aggressive!

OldPOTS; And at the end of the day (or at least this day) it's been the less aggressive telco's rolling up the wireless pioneers. Seems like the telco senior execs would be doing themselves (and society) a favor by promoting municipal fiber projects that they would end up operating eventually.
OldPOTS 12/5/2012 | 3:15:17 PM
re: Content Chaos: Part I When I first dealt with the wireless guys in the beginning, they were the restless cream of the crop. They were the ones in the Telcos that understood that you had to start doing more than just provide (rjm's favorite thing) a connection service. So they volunteered to get in those (almost new) startups, at least from a Telco/RBOC).

Many were those misfits just looking for a way to make a mark and so they did by moving to the wireless companys without the large management incumberance. Most of these have migrated/stayed up the ladder, even with rationalizations/combining of the companies. So you have nimble/restless people up the chain attuned and looking for that next big content and how to market it.

So the telcos were left with the less aggressive! rjm I knew you would like this comment.

OP
rjmcmahon 12/5/2012 | 3:15:17 PM
re: Content Chaos: Part I If they do, then is there a way to put these brains in charge of the marketing/business of FiOS/U-verse while the wireline guys build out the network?

Seven, I don't think it's a brains problem but a market problem. You're desire for ILEC CAPEX to go towards fiber equipment may be biasing your analysis.

In FiOS or U-Verse for that matter, there needs to be an extendable piece of hardware. That might be an STB, BHR, or the ONT. Then, there needs to be a way to get 3rd parties to get content going and an UI defined.

These devices don't have sufficient gross margins to subsidize the sunk costs of fiber infrastructures. TV's and PC's support churn but are the markest are too mature. High end (multi thousand dollar) entertainment systems that get replaced every 3 years aren't ubiquitous enough and there isn't a way to redirect proceeds from consumer electronic purchases towards infrastructures improvements.

The solution is to direct the expansion of the money supply towards infrastructure but we're not doing that but rather have hamstrung the system such that it just ain't going to happen.

Sorry but both the market and gummit has failed and we're all the worse off for it.
paolo.franzoi 12/5/2012 | 3:15:17 PM
re: Content Chaos: Part I
Well beyond rj's rantings that FiOS will fail (he has been on this for 3 years) it is an interesting question.

Wireline companies made a lot of money by putting some simple services in the network (Caller ID as an example). Vonage is giving these away for free, so it is hard to see these as a profit driver going forward.

On the wireless side, they have a way of linking content to phones - and if you want newer content you have to get a newer phone.

In FiOS or U-Verse for that matter, there needs to be an extendable piece of hardware. That might be an STB, BHR, or the ONT. Then, there needs to be a way to get 3rd parties to get content going and an UI defined.

Normally, I would think the BHR would be the piece that would work here. Perhaps with some software elements on the home PC (keys enabling services?) perhaps it can be. Problem is that PC apps already exist and its not clear that the models that exist are broken in any way.

That leads back to the STB. Perhaps having some content mechanisms tied to the STBs would work. You could provide a better control mechanism. There is certainly hardware and conditional access already.

Now the question is what would those services be? Here, I agree a bit with Materialgirl. I really think the best way is to create an open platform for people to innovate on. Then, become a pass through purchasing agent (taking a sales commision of course).

But where I was headed and you caught it, was the separation of church and state between the wireless and wireline guys. I just believe the wireless teams have a better handle on the consumer. If Ivan and Ed don't see that, then I don't know how to help. If they do, then is there a way to put these brains in charge of the marketing/business of FiOS/U-verse while the wireline guys build out the network?

Certainly would be a big retool. But, I think it is a way to answer your issues.

Beyond that, I still come back to my own question of "Where the Apps Are?" (see the Spring Break movie and hum along).

seven
Scott Raynovich 12/5/2012 | 3:15:18 PM
re: Content Chaos: Part I Brooks,

Good point. In reality, though, it is schizophrenic.

I don't really get the sense that the Wireless and Wireline units of these large telco companies are working together. It's more like they bought wireline assets as financial "hedge" -- and they're plenty happy now that they have them.

I have wondered a lot about why the wireless industry has been so succesful in introducing new revenue producing applications, while the wireline guys have not. I mean, take a look at your wireless bill and compare it to your home phone bill! Mobile phone revenue is constantly being boosted by new services (text messaging, voice mail, Web camera, games, e.t.c.). Wireline phone is not.

Perhaps it's that becuase mobile phones are a newer technology, they went out and partnered with folks on new applications -- a great example is gaming and how companies like Jamdat Mobile have risen while helping the mobile guys.

But then I wonder, what's to stop them from doing this with FiOS? What are the equivalents of ringtone and gaming apps for FTTP?

I'd like to hear your thoughts. Let me know if I'm missing something.

--Scott
rjmcmahon 12/5/2012 | 3:15:18 PM
re: Content Chaos: Part I But then I wonder, what's to stop them from doing this with FiOS? What are the equivalents of ringtone and gaming apps for FTTP?

I'd like to hear your thoughts. Let me know if I'm missing something.


Didn't the infrastructure for wireless start in the 80s and didn't it take decades to put it into place? The premiums people payed for mobility enabled the sunk costs of the plants. Intial bills in the 80s averaged what, $300 a month? (which would be about $800 in today's dollars) Now that that is done, decades later, they are finally starting to leverage the footprints with new revenue generating services. (Though the obvious one of music has taken forever and who knows why they let apple and itunes take the lion's share of the market.)

FiOS has no premium service but immediately enters into a price war and the sunk cost are much greater than cellular. It will take decades to get the FiOS plants to enough premises which in turn could enable new revenue generating applications. And it's probable VZ will stop with its FiOS investments when it proves not to generate the ROI Wall St. demands. Hence when that fails the next step for the US is for the regulators to assisting in the cable co and telco consolidation of local wired access networks and turning them into a pure utilities (similar to what happened with gas and electricty.) Then we might see investment into fiber access plants with the pricing power to support it.

So I wouldn't hold my breath. The direction the US is headed suggests we will be a few decades behind the rest of the industrialized world before we finally respond.
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