Video Business Model Disruption Inevitable, But Not Imminent

What will media companies look like in a couple of years? Pretty much what they look like today. But what will they look like in 10 to 15 years? Very different.

There are clear reasons why the couple of years will look an awful lot like this year,  while a decade from now the whole media business could be structured in very different ways.

First, new IP technology and broadband is in place that will drive a long cycle of innovation for challengers and economic destruction for incumbents. That almost assures vast change over a longer time frame. But the emphasis here has to be on "long" cycles.

Changes in the media can take quite a long time to mature. Gordon Crawford, The Capital Group managing director, notes that in 1972 the existing media business was quite attractive, financially. But that changed after 1995, the year of the Netscape initial public offering, which ushered in the age of Internet-based media.

Only now, 14 years later, is the impact starting to really affect the print segment of the business. And most of the video impact has yet to arrive.

Still, Crawford thinks change is inevitable. "If you go out enough years, bandwidth will be there," he says. "Storage will cost nothing and rights issues will be resolved."

"People will have access to whatever they want, whenever they want it, on any device," says Crawford.  "That is where we are going."

But one has to remember that large-scale and fundamental technological changes seem to have less impact when the trends are just beginning, but reach some inflection point, beyond which vast change happens relatively quickly. That should not be too different for the video business.

There will be less change that you expect early on, and greater change later, in other words.

There are some possible outcomes, though. If regulators were, for example, to impose an "a la carte" pricing regime on video providers, 250 of 400 cable channels will disappear overnight," says Crawford.

Peter Chernin, former News Corp. president, also agrees that fundamental change is coming. "Non-consumer-friendly business models cannot be supported anymore," he says.

"The single biggest question facing the industry is the ability of niche cable channels to survive," says Chernin. "About 60 to70 percent of media profits of big conglomerates come from there."

But people only want to watch 10 to 15 channels. "Is that sustainable?" Chernin muses.

And while most people think Hollywood ultimately will change its "release windows," that might not have as much effect on what consumers decide to rent or buy as one might think. But there could be big changes in distribution.

Chernin thinks the days of people buying DVDs are numbered because of streaming. "The DVD business is declining 15 to 20 percent a year," he says. If networks are ubiquitous, can you convince people to own content for $15 when they can stream it for lots less?

Some "70 percent of DVD purchases are for new releases," Chernin notes. Even if the delivery format changes, that is likely to remain the buying pattern.

"It’s just a matter of time" before cable networks are faced with "digital destruction," Chernin says.

There are obvious implications for satellite, cable and telco multi-channel video providers, of course. The good news is that distributors have some time to get ready for the transition. Being "too early" is about as bad for business as "being too late."

Smart phones for Play, More than Work

Though businesses only buy smart phones for their perceived productivity advantages, a new Compete survey sugggests people mostly use their smart phones for entertainment and other personal applications.

That is to say, entertainment, games, music, social networking and weather are the most popular across smart phone platforms.

More than anything else, the Compete survey results illustate the changing value proposition, application focus and business models possible in the wireless space. Communication remains fundamental. Email, microblog posts, instant and text messaging are communication formats, first and foremost.

But mobiles also are becoming entertainment devices. The survey shows that smart phone owners prefer personal and social apps to business applications.

That was not true early on, when a "smart phone" was nearly synonymous with "BlackBerry," and was bought on behalf of business users. While business users remain a key segment of the market, consumer users gradually are becoming the majority of the market.

The survey suggests that iPhone owners, more so than other smartphone users, were more likely to spend money on apps., while 83 percent of all smartphone users preferred apps $5 or below. Whether that is because first movers are different than mainstream users, or because the Apple user experience is so much easier, is hard to determine with precision at this point.

About 73 percent of Blackberry owners have downloaded five or fewer applications; in contrast, 72 percent of iPhone owners have downloaded 10 or more applications. Clearly, iPhone owners have been more receptive to customizing their devices.

Facebook is hot among iPhone owners. About 71 percent of iPhone users report accessing Facebook from their mobile device, and 37 percent listed Facebook as one of their top three most used apps. About 18 percent claim it's their favorite app.

Despite Twitter's ever-increasing mobile popularity, 85 percent of smart phone owners still prefer to access the site from the computer.

While 26 percent of iPhone users tweet from their device, only 15 percent of Palm owners and 10 percent of Blackberry users report accessing Twitter on the go.

Of the smart phone owners who do access Twitter via their phones, 41 percent use the application to keep track of what their friends are doing, 32 percent use the service to keep up with current events and 19 percent tweet from their handset to build a fan base or promote their company.

Facebook is the most heavily trafficked social networking site among smartphone owners, says the report, and iPhone users are twice as likely to use the mobile Facebook app as their Palm counterparts. In fact, iPhone owners are the most active mobile social networkers, with the highest percentage of respondents reporting mobile use of Facebook, MySpace and Twitter and from their mobile devices.

Prepaid Mobile Declining in Western Europe

In Western Europe, the prepaid share of total mobile connections varies significantly by country, but on average it was 57 percent at the end of 2008. Yankee Group is forecasting that figure to decline to 47 percent by 2013. In developing markets, prepaid dominates. For example, in Latin America prepaid accounts for 84 percent of mobile connections today. Yankee Group is predicting this percentage will remain flat during the next five years.

AT&T Google Voice Complaint Partly About Traffic Pumping

In asking the Federal Communications Commission to investigate Google's refusal to terminate some calls placed to high-cost rural areas, AT&T is not simply sparring with Google over network neutrality, but rather pointing up a pricing anomaly that distorts behavior and reduces carrier profits.

while suggesting current regulatory rules do not fairly treat competitors in the market, and arguing for narrowing the regulatory differences between VoIP and other carriers and between access, application and content providers, AT&T also is highlighting what it and other carriers say is a pricing distortion in the termination rate regime that directly underpins the businesses of free conference calling services.

At immediate issue here is Google's refusal to terminate some calls in high-cost rural areas. Many of you are familiar with free conference calling services that use area codes in rural areas. You might have wondered what the business model is. Simply, it costs carriers enough money to terminate calls in those rural areas that conferencing services can afford to give away the service and make their money on the termination fees.

Over the last couple of years other skirmishes have been fought about high termination rates in some rural areas of Iowa and some other areas.

Services such as Free Call Planet, freeconferencecall.com and others teamed with Iowa telcos to set up inexpensive or free calling services that generate profits for the providers primarily by collecting millions in access fees.

The local telcos provide the Iowa telephone numbers and voice gateways for the services, bill long-distance companies to terminate calls and then pay“marketing fees” to the conference calling services.

AT&T said in 2007 that the arrangements were costing it $250 million a year. AT&T, Verizon, Qwest and Sprint Nextel have opposed the "traffic-pumping" schemes, and the Federal Communications Commission did move to limit the practice.

Rural phone companies are allowed to charge about 2 cents to 8 cents a minute to connect long-distance and wireless calls to their networks. The fees, up to 100 times higher than rates charged by large local phone companies, are intended to offset the rural companies' high costs and low call volumes.

But that's where the arbitrage opportunity arises. Specialty calling services teamed with some rural phone companies to offer free conference calling, adult chat and other services, splitting the call-connection revenues with the rural carriers.

The FCC did move to suspend the rural companies' rates. But new providers have set up shop.

About 160 million minutes of calls by AT&T customers were routed to rural CLEC networks in March, 2008, surpassing the peak level of calls to rural incumbents, about153 million minutes, in January 2007, AT&T says. Sprint told the FCC that its bill from 11 competitive carriers soared 5,000 percent in 21 months.

Recently, even other rural telephone companies have decided they'd better side with the large tier one providers as well, as the practice might damage the wider rural termination regime.

Google tariff specialists know that, and apparently want to avoid those costs by restricting termination to such numbers, as the tier one carriers themselves did until forbidden to do so.

So aside from the other clear issues about treating like entities in similar fashion, there is the outstanding issue of high termination rates in some jurisdictions.

Twitter Usage Remains a Bit Mysterious

Sometimes numbers can be deceiving. Hitwise data, for example, suggests that Twitter traffic hit a peak in April, and then dropped, peaking again in July before dropping to levels below that of the April peak. In other words, traffic has dropped since April.

But one has to make adjustments. A majority of Twitter users use a third-party client to access Twitter. In fact, only about 20 to 30 percent of people go through the Twitter Web site. So the direct Twitter data does not show the full impact of Twitter usage.

The Hitwise data also suggests the same effect, showing the number of new users--new, not total--coming to Twitter from its top traffic sources, such as Facebook, Google, and MySpace, also has fallen consistently across the board from April to September 2009.

But those statistics only point to a slowing rate of growth, and that always happens to any application or service which starts from a low base, no matter how popular.

The Twitter Web site does attract about 54 million visitors a month, and that does not count the 70 to 80 percent of users who use the application from a third party portal of some sort.

A slowing rate of growth likely is nothing to worry about. Other studies have shown a high abandonment rate for new users, though.

In March 2009, for example, more than 60 percent of Twitter users fail to return the following month, says David Martin, Nielsen Online VP.

That means Twitter’s audience retention rate, the percentage of a given month’s users who come back the following month, is about 40 percent.

To put that in perspective, it is roughly the equivalent of turning over 100 percent of the user base every three months. Such a churn rate is unsustainable. One suspects the churn rate also will drop over time. People either like it, or they don't. But whether they like it or not, even resisters will use the app if their friends, family and associates do. Ultimately, that is going to make a difference.

Back to the Future for Internet Apps?

Time spent on social network and blogging sites accounted for 17 percent of all time spent on the Internet in August 2009, nearly triple the percentage of time spent in 2008, says The Nielsen Company.

“This growth suggests a wholesale change in the way the Internet is used,” said Jon Gibs, vice president, media and agency insights, Nielsen’s online division. “While video and text content remain central to the Web experience, the desire of online consumers to connect, communicate and share is increasingly driving the medium’s growth.”

In some ways that is a "back to the future" move, as it was email that drove the dial-up Internet access business. After waves of growth driven by online commerce and then entertainment, it appears communication might again be moving to the forefront.

70% of Mobile Users Planned Mobile Spending Cuts. Have They?

An October 2008 survey by Getjar suggests users were planning significant changes in mobile consumption in response to the recession. It still isn't completely clear whether people actually followed through with action, what adjustments they might have made, or how how much less they might have spent.

About 70 percent of mobile phone users who partcipated in the survey suggested they planned to reduce the amount they spend on phone usage. So far, the revenue impact remains hard to quantify, though.