Quick News Bites – September 28, 2012

Why HBO, NBC, and Comcast Are Betting On A Startup To Power Their Second Screens – FastCompany. Excitement Rating: 2 out of 5. Success Rating: 3 out of 5.

I’m conflicted about how I feel about the prospect of Zeebox being introduced to America. On the one hand, I’m a big proponent of start-ups that serve as traditional media enhancers rather than traditional media disruptors. The “enhancement” business is much more likely to be successful, although the “disruption” business is much more likely to be lucrative. Think of it as hitting for singles and doubles versus hitting for home runs. That being said, I feel like any new startup product that gets backing and promotion by large corporations, in this case Comcast and HBO, automatically loses its edge and “cool-ness” factor. And with something as youth-oriented as television viewership-based social media, that is a big value to sacrifice. The app itself seems to be pretty cool, falling short of killer-app status, but still a value-add service. And with backing from Comcast and HBO, there will be no expense spared from marketing and promoting it to consumers. Hence while my excitement rating is low, my success rating is a bit higher. Risks include various factors such as: DVR rate amongst Comcast/HBO programming (outside of HBO’s hit shows and NBC’s sports unit, there’s not much protection from this risk), prevalence of Netflix and Hulu usage (ironically, NBC is a big investor in Hulu, although Zeebox seems like much more of a risk hedge than business cannibalism), audience behavior (Do people really want to talk to each other via social media during their favorite shows? Does this ruin the water cooler talk behavior that follows the next day?), and existing technologies (Facebook and Twitter could easily enter this market, while other apps such as Miso, GetGlue and Shazam already exist in this space.)

Dish Said to Be in Talks With Viacom About Internet TV – Bloomberg. Excitement Rating: 4 out of 5. Success Rating: 2 out of 5.

If Dish Network were to successfully convince Viacom to introduce a new business model that exists somewhere between a la carte pricing and the current bundling system, the repercussions could be huge throughout the industry. I’ve written much about the dynamics of the television business which falls largely on the way affiliate fees work (thanks to @bgurley for the education, via his blog). This would mark a paradigm shift away from the business model that has allowed the major broadcasters to earn over $30 billion annually from said affiliate fees. Since the talks are private and the deal is not yet done, it’s hard to determine how this would affect the future of the TV business (most of the effects are well-explained in the above mentioned link to the Bloomberg article). But if this deal were to be completed, it would be a watershed moment for Viacom, although I wonder if other conglomerates would actually follow suit. Viacom has the unique distinction of not owning any sports-property channels in its portfolio (see: BET, MTV, Comedy Central, Nickelodeon). Its programming’s “must-see-now”-ness is incredibly low when compared to the other networks (CBS has CBS Sports, ABC has ESPN, Fox has Fox Sports, NBC has NBC Sports) and I suspect it is highly affected by new technologies such as DVR, Netflix, online streaming, etc. that have destroyed its traditional advertising base (witness the fall of its credit ratings when Nickelodeon had a down quarter in viewership). Until Viacom brings in “must-see-now” programming into its channels, it will continue to remain the weakest and most susceptible conglomerate to new media disruptors.

Netflix, HBO to expand into Denmark, Finland, Norway and Sweden – LA Times. Excitement Rating: 3 out of 5. Success Rating: 3 out of 5.

Although many Wall Street analysts take Netflix to task for expanding overseas too quickly at the expense of focusing on its domestic business and streaming content acquisition, I’m a firm believer in its quest to become the market leader in streaming content worldwide, not just domestically. If Netflix really aims to become a game changer in the way people consume high-quality television and film content, overseas expansion is not only an inevitable initiative, it is a mandatory one. And waiting for its domestic business to flesh out before activating internationally is no sound strategy, not when its core business is so easily duplicable, software-wise. In essence, Netflix’s expansion overseas is not so much used as a revenue generator, but rather to erect a first-mover wall around the streaming content business in other countries to maintain market leadership. Although this is a very expensive endeavor in the short term (with no guarantee of success), it is very forward thinking for the benefit of the company in the future. In the Wall Street Journal’s recent interview with CEO Reed Hastings, they asked him about the overwhelming costs of expanding overseas. Replied Mr. Hastings: “It’s hard for us to get into a new market; it’s expensive. We have to license a large set of content for a relatively large amount of dollars just to launch, to be able to have enough content to attract members. Then we have to market hard, then we build the subscriber base. But that also means there are barriers to other people doing the same thing. It’s a double-edged sword, it’s expensive for us to build a big market, but it’s also expensive for someone to compete with us.”

Smart man.

Screw Cable, I Just Want ESPN and Mad Men

Many technologists and general consumers wonder why an “a la carte” pricing model doesn’t exist yet for television channels. The benefits seem to include the mobility of extended choice for consumers, increased revenues for proven channels, and an overall more efficient business model for networks and television studios.

Sadly, the main sticking point is that a more efficient business model is not something the media conglomerates are looking for, since any efficiency shift in the programming business would directly take money out of their coffers and into the hands of either a) the consumers or more likely b) the MVPDs (multichannel video programming distributors such as Comcast, DirecTV, Dish, Time Warner Cable, etc.) who would absorb the value of lost, under-performing channels that people generally would not watch were it not included in the bundle.

Furthermore, while there’s little doubt that people would indeed like the option to pick and choose which channels they receive, there’s no reason to suggest that consumers would actually prefer to purchase their channels directly from ESPN or AMC or Comedy Central. While those specific channels (and a few others) have tremendous brand equity with consumers, I believe most people would still prefer to go through an MVPD to get their programming and vice versa. Case in point: You would never go buy bananas directly from Dole, you would go to your local supermarket. Even if the only thing you’re looking for that day is bananas, supermarkets (and MVPDs) create value by providing the necessary distribution network for goods/services.

In addition, cable channels obviously want to go through MPVDs for distribution because of the added value of bundling. Case study 2: HBO Go and ESPN3 could both operate as standalone businesses that charge users a subscription fee for access to content. However, it is very deliberate choice that they do not, so as not to upset the current bundling model that makes the TV world go round. Both companies decided to create these killer must-have apps for free to drive more subscribers to cable operators and subsequently their channels (where the real money lies).

You might say that buying bananas is one thing, and paying for programming (which is made up of bits and bytes of data) is another. One requires physical real estate of housing and inventory, while the other simply exists in the ether and can be distributed wirelessly. To counter, let’s take a look at the music industry (the once-and-future punching bag for all cautionary tales in the media business).

The erosion of the music-buying business was not cemented until Apple’s iTunes came along. It’s worth repeating again, iTunes destroyed the music-buying business. Sure Napster, Kazaa, Grokster and a variety of other music sharing web apps precipitated the downfall and piracy made it viral. But when Steve Jobs decided to favor the 99-cent single business over the $10+ album business, the nail was in the coffin. The long tail of music was created and all the 99-cent singles at the head of the curve could never make up for the lost value in the album tail-ends.

For that reason, I don’t see the bundling business going away anytime soon in cable. The stakes are too large, the media conglomerates involved are too powerful, even for Google. It would truly require a disruptive service as paradigm-shifting as iTunes by a company as large as Apple or Google in order for a la carte pricing to even sniff daylight. And the MVPDs have the benefit of business hindsight to prevent another iTunes-debacle from occurring (see TV Everywhere).

Then again, if the BCS can adopt a playoff system, then anything in this world is possible.

Why I’m Bullish on Netflix

Over the past year or so, Netflix has received a serious bashing from Wall Street as the company continues to re-invent its business and flesh out internationally. From a high of around $300 back in the summer of 2011, the stock has fallen more than 75% to around $58 today. This past Monday, the stock fell a whopping 6% based on more concerns about the video subscription service’s ability to make money and retain customers as it grapples with higher licensing costs and tougher competition (Grim analyst report delivers latest hit to Netflix, Yahoo! Finance).

While the stock may have been indeed over-valued at its peak, here are some of the reasons why I still believe in the company, both as an investor and a consumer (note: I currently do not own any shares of Netflix).

1) Strong CEO – Reed Hastings is a boss. Intelligent, intuitive leader with strong views on management and organizational growth in addition to innovation. Two moves particularly stand out to me that prove he’s a great CEO. #1: He was willing to cannibalize his own industry-leading, high-margin, business of traditional DVD mailings in order to capitalize on and stay in the forefront of the digital distribution revolution. Many a strong company have sunk into complacency when they carve out an industry leading position in a particular business only to fall victim to the changing times (see: Sears, Blockbuster, Blackberry, potentially Microsoft) with their inability to innovate. Hastings saw that streaming was the future of the content delivery business and took huge hits in the media and in the company’s stock price to adjust ship and focus his R+D to online delivery services. This fearlessness cannot be quantified or reflected in annual reports but it is the reason why companies are successful for as long as they are. #2: Reed is not afraid to take chances on his business and own up to his mistakes when those chances fail. When Netflix split their DVD business from their streaming business into two companies (and subsequently, charged for both services), the public backlash was tremendous. Everyone makes mistakes and even really smart people make really stupid mistakes, CEO or not. I think a true testament to leadership is not the ability to avoid mistakes but rather the ability to take risks and then to recognize and rectify mistakes when they happen. Qwikster is now dead and may it never rise from the dead like Resident Evil, but Reed Knows He Messed Up. And he wasn’t so arrogant or out-of-touch to not change things.

Side tangent: Other strong media CEOs that I like include Les Moonves (CBS), David Zaslav (Discovery Communications), Jeffrey Katzenberg (Dreamworks Animation), Jeff Bewkes (Time Warner), Bob Iger (Disney), Jeff Bezos (Amazon) and Brian Roberts (Comcast).

2) Strong company culture. Much has been written about Netflix’s company culture (which again, is derivative from the strength of top-down organizational management that starts with the CEO) so I won’t bother to reiterate it here (but you can read about it here, here or here). All I know is that the most effective armies are staffed with the strongest soldiers who will defend their country (or company) to the death. Obviously an overstatement to compare Netflix to a military unit, but the comparisons are certainly there.

3) Value added service. Netflix serves as both a traditional media enhancer AND disruptor. Many new tech companies are one or the other, few are both. And that is a very good place to be in.

4) The “verb” test. Once a company name becomes a verb in everyday use, it’s going to be around for a while. See: Google, Facebook, Twitter (tweet), Yelp (to be determined, but I have strong faith in this company).