Microsoft’s Rumored Xbox Live Announcement Not Likely to be a Shocker

June 6, 2011 § Leave a comment

UPDATE:  Microsoft’s announcement is in, and the winner is …
A platform enhancement.  Albeit a pretty slick one.  Xbox 360s powered by Bing and a subscription to the Live Marketplace will be able to use voice recognition to help users find access to content from sources such as Hulu Plus, Netflix, and ESPN.  The capability will extend to live programming in regions where Microsoft has the required partnerships, such as Canal+ in France, Sky TV in the UK, and FOXTEL in Australia.  It’s a given that the proliferation of content across platforms and media genres (linear, on-demand, games, etc.) poses a user experience challenge, and Microsoft’s announcement offers a unique solution.  But it’s one of many, as many incumbents and newcomers seek to deliver the “ultimate programming guide”.

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Microsoft is expected to make a major Xbox LIVE – IPTV related announcement today at the E3 gaming conference.   The rumors range from a Mediaroom enhancement (the platform that AT&T’s Uverse service uses to bring IPTV to its customers), to an a la carte service (competing with Netflix and Hulu Plus), to a full-on linear TV subscription service.  A few reasons why I don’t expect Microsoft to announce the latter:

  1. The live TV business is a monster to get into.  Huge fixed costs, and programming is getting even more expensive (not that Microsoft can’t afford it, but why would it?)
  2. The Xbox may be a trojan horse on which to launch a video service, but how many homes have multiple Xboxes connected throughout their home?   If Microsoft were planning to compete with linear TV, it would need distribution (or a hardware extender, perhaps), that it doesn’t have today
  3. Moving from platform to B2C service would put it in contention with AT&T and any future partners it hopes to add.  Counter to Apple’s, Microsoft’s strategy has always been to be the platform.
  4. Live TV is a competitive industry.  In any given market, you have a cable company, perhaps a fiber option, and a couple satellite providers, not to mention over-the-air, and over-the-top alternatives.  Microsoft, or any company wishing to enter the space, would need some pretty thick skin, if they hope to be successful.

So, we’ll see what they come up with, but I don’t think it will be the shocker that some are predicting.

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For Aol, The Huffington Post is a piece of a larger puzzle

February 7, 2011 § 3 Comments

Aol is making bold bets again.  It announced this morning that it will purchase the Web’s #1 blog, The Huffington Post, for $315M in cash and stock, and make its founder, Arianna Huffington, the editor-in-chief over all its content properties.  The deal comes on the heels of Aol’s acquisition of Michael Arrington’s popular TechCrunch blog, which became part of the Aol family last December.  In adding The Huffington Post’s 25-30M monthly readers to its stable, Aol advances its audience strategy, but is still dependent on a number of elements coming together before it can return to the days of meaningful revenue and profit growth.

The underlying assumption of Aol’s strategy is that the online ad spending market will continue to ramp aggressively because while ~40% of media time is spent online, still only ~15% of U.S. ad spending is on digital media.  This certainly seems to be playing out, as online advertising growth rates continue to hit double-digits, while overall ad spending is lumbering away at 1-4%.

               

Search is the leading format by far, but Google’s 76%+ share precludes all but the strongest of wills and deepest of pockets from participating.  Microsoft’s takeover of Yahoo’s search business was an outlier.  In November 2010, Ask.com announced that it would cease investing in its search business, and Aol outsourced its search business to Google years ago.  Even the famously determined Jason Calacanis, the serial entrepreneur and founder of search upstart, Mahalo, recently determined that he would pivot his business away from search and towards video how-to content. 

Under these circumstances, Aol has prudently chosen to focus its efforts on the display market, and in particular, online brand advertising, which at only 5-6% of the total brand advertising market — which itself is 165% larger than the direct response market – would seem to offer significant upside.

But there are reasons why brand spending lags in online media.  One is fragmentation.  Unlike in paid search, where most ad dollars flow through Google, display and brand advertising can be allocated across a dizzying array of portals and networks, each claiming unique reach and targeting capabilities.  Another barrier is the uneven content quality that serves as the anchor for brand advertising.  Advertisers know that their brands will be affected positively or negatively based on the quality of the content they’re associated with.  The fear of a negative “halo” is why YouTube’s 100% advertising-supported model is just now turning a profit, even though it nearly controls the user-generated video space, with 117M unique monthly visitors, and counting.  A third reason is that brand advertising, long the exclusive domain of broadcast TV and glossy print, have until now depended on the passive characteristics of those media to capture brief moments of consumer interest (and even then, is dependent on great creative to avoid being diluted by the thousands of marketing messages targeting us daily).  But online is a traditionally more active medium that plays right into the sweet spot of direct response advertising in general, and paid search in particular.  Establishing a brand connection with a consumer while she’s on a mission to check her Facebook page or to research where her favorite local band is playing on Saturday night, is immensely more challenging.  So now let’s take a look at Aol’s approach and progress with regards to these issues:

  • Fragmentation – this is where the recent acquisitions come in.  Aol had already reported growing audiences, but with The Huffington Post, its overall reach in the U.S. will be about 117M UVs.  Not a dominant position, but a meaningful number, to be sure.
  • Content Quality –Aol recognizes that its content must be home grown and exclusive if it is to differentiate itself and offer a “safe” platform on which to invest in brand advertising.  Its Patch (hyper-local content) and Seed (editorial platform) projects are an attempt at this, but neither has translated into revenue growth for the company as of yet.  Of course, the story is still being written, and Aol hasn’t been shy about posting some pretty lofty goals – in a recently released strategy doc, dubbed “The AOL Way”, it was revealed that Aol intends to ramp from 31,500 pieces of editorial content per month today, to 40,000 by the end of Q1.  Some have criticized Aol’s approach as “content farming”, a practice that Google said it plans to demote in its rankings in the near future.  Aol’s acquisitions of highly successful, branded blogs may be a safer approach.
  • Engagement – last year, Aol announced Project Devil; an attempt to drive premium ad rates and to make display advertising more engaging through larger formatting, cleaner design, and more interactivity.   It may prove to be a smart move, but by itself, doesn’t do enough to convert an “active” medium into one in which brand messages will be seen or heard.  For that, Aol needs online video into which it can place pre-roll advertising.  Aol’s strategy document indicates that its ambitions here, to embed video in 70% of its owned and operated pages from only 4% at the end of last year, are even greater than that for its content growth.  And it’s off to a good start.  In a letter explaining the HuffPo deal to employees, Tim Armstrong indicated that Aol’s video UVs are up 400% Y/Y for 2010, which wouldn’t be so impressive if he didn’t also mention that they already exceed those of Hulu.

About 3 minutes and 45 seconds into an eight minute interview with AllThingD’s Kara Swisher, Tim Armstrong and Arianna Huffington help justify the deal by citing their shared vision “… to create the future of brand advertising on the Internet …”  To reach that destination, many efforts must go right, including those that extend well beyond this partnership, and especially with regards to its video strategy.  So far, the trends are in its favor.  If they continue this way, Aol could very well pull off one of the great turn arounds in history, and indeed, create the future of online brand advertising.

Video entertainment … the fantasy list

February 3, 2011 § Leave a comment

If you’re in the media industry, you can’t avoid being caught up in the frenzy that is streaming video.  It’s the talk of the town.  Netflix this, and Hulu that.  There’s innovation from every angle, disruption of business models, and even venture dollars streaming in (pun intended).  It’s terrific fodder for the blogosphere.  Judging from the proliferation of products and services over the last few years (Amazon, Vudu, Roku, Boxee, Google TV, Apple TV, and so on), the market’s ready for services that let us access our content when and how we choose.  But for all the new solutions out there, none has fully delivered on the promise, which I’ll summarize as my media, my way.  The ideal is still a figment; leaving one to fantasize how, if given supreme power and influence, he’d design a solution from the ground up that meets all his needs.  My own wish list, which I think probably speaks for many, would include the following:

  • Provide a LOT of programming options, covering a broad range of genres and formats (i.e., short and long form).
  • Live programming, especially news and sports.  I would also have access to the content I want on demand.
  • The menu UI and navigation would be simple to use and easily harness the myriad of content choices.
  • Let me choose what to watch, and when, but also cater to my passive moods (which is most of the time when I’m watching TV) and curate the “must see” programs for me.
  • Deliver much of my content in HD.  And in the near future, HD3D (I’m happy to wait for when the goggles are no longer necessary).
  • Be ultra reliable, resistant to severe weather conditions, and don’t degrade in quality even if everyone in my neighborhood is online at the same time.
  • Push my content instantly.  Little or no time for downloading or buffering.
  • Seamlessly connect with my TVs.  It wouldn’t require another hardware component on the shelf, or if it did, it would be a small footprint.  Setup would be quick and straightforward.
  • Deliver content to my other screens as well – my PC/tablet and my smart phone.

A demanding list, I know.  But wait a second!  Doesn’t a cable subscription and DVR, combined with TV Everywhere deal structuring and authentication, deliver all of the wish list items, at least in part?  For all the hype out there, isn’t cable TV still the single best solution?  One of the last big pieces, streaming live video to our PCs and smart phones, appears to be falling into place with the latest deal announced earlier this week between Comcast and Turner.  VOD windows are shrinking as well.  The other domino is device compatibility, which is in the midst of tipping too (see also Comcast for iOS).  Comcast is obviously ahead of the curve on these initiatives, but is a reasonable proxy for the direction of the industry overall.

Don’t get me wrong – I’m not saying that the cable guys don’t have more work to do.  But with all the hubbub about the online-only challengers, it’s easy to lose sight of just how close the incumbents really are to the goal line.  The fact is that the challengers have a much bigger gap to fill.  Any household that chooses to “cut the cord” as things stand today will do so only with great sacrifice.  This video summarizes it nicely. 

My point is this … the online guys have helped to identify the market need, and in doing so, have been getting much of the attention.  But the buzz around their efforts has sounded the wake-up call for the paid TV incumbents.  Yes, traditional, subscription TV is expensive, and yes, the challengers will continue to work on the large gaps in technology and content (driving up their cost of goods, I might add).  The incumbents, though, have a solid head start, and the technology, the capital, the content relationships, and (maybe most importantly) the incentive, to strike back hard.  Already, they, and especially Comcast, have demonstrated that they can move relatively quickly.  So before you join the pile-on, give the cable guys some credit.  They will not sit idly by.  In fact, we can expect them to come out swinging.

Amazon on the verge of a rare mistake

January 31, 2011 § 5 Comments

Over the weekend, super-blog Engadget revealed screenshots of an apparently new product offering from Amazon.  Based on the screens, which are no longer accessible from Amazon’s site, the ecommerce juggernaut intends to offer unlimited streaming of TV shows and movies, for FREE, to all Prime subscribers.  Prime subs currently pay $79 annually for unlimited shipping, and Amazon has reported a strong correlation between the launch of this delivery service and an uptick in sales activity.

In and of itself, Prime may be a winner, but I think Amazon is on the brink of making a large mistake if it intends to include online media benefits for no additional charge.  Here’s why:

  • It devalues the online media industry.  For the sake of argument, let’s attribute the full price of the Prime service to the media feature.  At $79, it’s already $16 below Neflix’s comparable, streaming-only service.  If it’s successful, as Amazon surely hopes, Netflix will have no choice but to meet or beat the price, and voila!  There go Netflix’s profits, and Amazon’s differentiator.  Listen for the hissing sound of margin escaping the industry, like air from a balloon, as the two race each other to the bottom.
  • It requires heavy subsidization.  Shipping is a money loser for Amazon.  Even with the Prime subscription fees, Amazon spends more on shipping than it takes in, and the stats are worsening.  According to its financial statements, Amazon took in $1.193B in shipping revenue last year, while incurring $2.579 in cost.  Relative to the prior year, shipping revenue grew only 29%, while cost grew 45%.  Yikes.  It may be a perfectly sound strategy for Amazon to increase its appeal by making shipping more affordable, but with shipping being a cost center, the subsidy for the online media business has to be funded by its core ecommerce operation.
  • It smells of the “causality trap”.  Their research may indicate otherwise, but it’s not intuitive that the way to increase memberships to its premium shipping service is to add online media benefits.  And even if their ploy were successful at growing Prime subs, it’s even less likely that the new members will buy more physical goods from Amazon (which is necessary for the subsidy to work).  I think Amazon my be falling for the causality trap, in which company planners observe a beneficial correlation (in this case, Prime subs order more frequently than non subs), assume a causal relationship, and then extrapolate that if they could only drive more of the causal behavior, that the correlation will surely hold, and they’ll make a whole lot more money.  But this is flawed logic.  Existing Prime subs value the service for its shipping benefits and are therefore more likely to be active buyers.  If new subs are lured in by media benefits, they will care less about the shipping features, relatively speaking, and can be expected to behave differently from the installed base, i.e., buy less often.

So what might explain Amazon’s strategy?  It’s media business is large, contributing over 40% of its overall revenue, but while its Electronics and General Merchandise business is growing at an increasing rate (67% last year vs. 48% the year prior),  Media has started to flatten, producing a comparably modest 16% growth over the last two years.  So Amazon is under some pressure to try something new.  It is also likely anticipating a not-too-distant future as Netflix has, where streaming and downloading online content overtakes the sale of physical media, such as DVDs and Blu-ray disks.  Both are good motivations, but I think their strategy is off base.  If they’re willing to invest in subsidies, as they seem to be, they could boost media service subscriptions with a more relevant and targeted offering to electronics buyers, particularly those buying units compatible with its online media services (e.g., free 12-month trial).  Who wouldn’t give that a try?  An offer like that would produce paying subs as they roll off the promotional period, and would help differentiate their electronics business (not to mention, leverage the huge amount of volume generated by that business already).  Similar reasoning underscored Best Buy’s purchase of CinemaNow, Walmart’s acquisition of Vudu, and Sears’ recently announced partnership with Sonic Solutions.

Amazon, if you’re planning to give online media away for free to your Prime subs, you may want to take a step back and rethink that.  Sorry if I’m disappointing all you Prime customers out there.

Netflix’s perilous future

December 23, 2010 § Leave a comment

Interesting banter between Reed Hastings, CEO of Netflix, and his short-seller “friend”. It could be unwise to second-guess Netflix, but much of Hastings’ defense seems to be that the threats noted by Whitney are longer term than 2011. Yet, if 70% of an equity’s value is captured by the NPV of its cash flow beyond foreseeable years (the “terminal value”), there could be a material impact on Netflix’s stock if any of the threats gain traction in 2011. So here’s what I’d really like to know now … how successful is the $7.99 streaming plan, and to what degree are DVD-plan subs truly shifting usage to streaming?

Discriminatory Content Management? No. Tiered Pricing? Perhaps.

December 23, 2010 § Leave a comment

Netflix streaming already accounts for 20%(!) of Internet traffic during prime time – to meet the growing demand of online video, ISPs must continue to expand infrastructure, and should be allowed to recoup the investment. The idea that was once before its time — tiered pricing — may be the answer. AT&T has already launched wireless data plan tiers, and the FCC is clearing the way for the same to happen on the wireline side. http://bit.ly/eBp8RG

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