coax cableI’ve been in a few interesting discussions lately around the media business and where things may be headed. One recent discussion centered on the video business and its comparisons to the music business and was led by Laura Martin, a Needham analyst, who countered that video can not go down the same route.

While demand for old school media such as print media (newspapers and magazines) is way down, demand for video remains robust. The market cap of the TV ecosystem is estimated to be around $300 billion and demand for packages and service bundling continues. There is discord out there with some households cutting the cable cord, but this has not stopped cable providers from posting healthy gains over the past quarter. I think the discord is very notable because it is happening, and may be driven by economic factors or customer service and packaging dissatisfaction, or both.

In the discussion last week, the argument was made for service providers to resist the unbundling of services or channels, because unbundling destroys economic value. And economic value was destroyed when music companies unbundled songs from albums and began selling them separately. I kind of took the music business comment in stride, since the market sentiment and momentum for years had been steering record companies towards an unbundled model, and then Apple came along and pushed everyone over the edge. And now the customer gets what they’ve been asking for, but for years no one was listening (or willing to come up with a model that worked). The music industry was clearly not producing what the customer wanted by sticking to the album format.

But cable unbundling is interesting. Until now, the only unbundling and cord cutting that was occurring, was in landline telephone service. But who’s economic value is being destroyed if the video model changes? Well, it depends on which side of the objective analyst fence you stand on. Clearly the economic value of the customer is not being destroyed if they are getting exactly what they want and paying just for that, and nothing else. So it must be the economic value of the service provider then.

The issue with video, specifically of the cable or iPTV kind is that customers increasingly want more variety in channel bundling, or in reality, the unbundling of today’s megablocks. I want to pay for what I’m going to regularly watch, and not all those extra channels. Yes, 300 channels are up there and there’s still nothing on to watch! The question is— is there enough customer momentum to force cable providers and telcos to change, or will we increasingly see households disconnecting from the cable bundle? To counter this, service providers are now buying up online properties and forcing them into subscription models. We now have Comcast putting Hulu behind a $10 payroll (see my 2010 prediction about Hulu, did they leave it alone?).

There is a growing army of Internet-only content providers, that are wagging the long tail. Production costs are low, about $100K for 20 five minute episodes, compared to syndicated content broadcast over TV that then makes its way to the networks’ online sites. In the discussion last week, the argument was also made that while advertising was the primary means of revenue back in the day of mass media silos, today you can’t get it to follow you online. The long tail is not profitable. Well, it seems that every video clip I watch has been monetized by some form of advertising attached to the front of it. The problem is that it’s not personalized. Every mobile video is ending up the same way as well, but there is a better chance that it will not only be personalized but of high quality, if Apple has anything to do with it via its iAd program.

Again, analogies were made to the music business, and that unbundled video is not financially viable. Rhapsody has about 300,000 artists on it. The top 100 are making millions, the next 5,000 are making about $250,000 per month, and the next 5,000 are making about $50,000 a month. The rest make substantially less. So if you’re a band, you’d better make it to the top 5,000. But then I thought artists were increasingly getting less and less from actual song sales these days, as the revenue generator has clearly become touring? Laura Martin of Needham commented that Facebook and Pandora were better mousetraps for services like Rhapsody, and that barriers to entry remain very low with great innovation possible. But that even Facebook and Pandora were not sustainable for 10 to 15 years. And my thoughts were— why should they be?

And this is the difference between thinking in Internet time versus old media time. Do you know of any Internet service that has lasted 10 to 15 years? That’s the beauty of the Internet. Things reinvent themselves and models get disrupted because they reach a point where the provider’s economic value does not equal that of the customer.

The $125 billion advertising market has already been disrupted, and I don’t think there is any going back to the old ways of doing things and the old CPMs. While today’s TV CPMs are running close to those of Yahoo! around $25 per thousand, general interest internet video ad CPMs are running around 5 cents. Is that the long tail or is that just ineffective advertising that is blocked in every which way to Sunday because the customer views it as obtrusive? Probably both. The issue though is that the audience is increasingly moving to the Web, and away from TV. The technology is there and, more importantly, the timeframe, the way, and the place they want to view video has changed too! It’s called a significant usage pattern shift in market research circles.

The big issue is the measurement one. And if you’ve noticed, there’s been a lot of media measurement activity in this recession, with big firms buying up boutiques who have developed methodologies for measuring the effectiveness, attitudes, and behavior of an increasingly online video generation.

Media companies think the Web is too fractured, but that’s where households and people are headed. A growing gap is occurring between media companies that keep dollars from moving to the Web and an audience that is moving there in big numbers. And a growing gap is not economically viable for anyone.

– Randy Giusto

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