Thursday, February 13, 2014

Comcast/TimeWarner Cable Merger: It's All About Slowing Down Content Moving to Cord Cutters

As much as I advise companies about the future of the content industry, inevitably the discussions move towards what can be done in the next six months. That's understandable, because it's not too often in a fast-moving business that an organization can shoot for much of a longer horizon without risking the wrath of management, shareholders and stock analysts conditioned to full acceptance of the concept of "shareholder value." Well, to put it succinctly, Microsoft has been a diligent devotee to shareholder value and left untold billions off the table for those shareholders by failing to bring many of its amazing research-driven innovations to market. There comes a time when an organization and an industry has to double down not on the present but the future - for everyone's sake.

Such a moment seems to have arrived in the cable communications industry in the U.S., with the anticipated merger of the two leading cable companies - Comcast and Time Warner Cable. The business media has been pushing this story all day as a done deal, and so it might be if their lobbyists and PR folks get to spin the story the way that they want to. The Comcast/TWC argument is that their areas of service are almost completely non-overlapping, so how could this be considered a reduction of competition? It's a simple argument that rolls of the tongue so sweetly, but ultimately it's simplistic to the point of covering up the obvious. Fewer cable companies means that there are fewer options for consumers to turn to one way or another. If, for the sake of argument, a regulator said, okay, we're going to open up market "X" in the U.S. to all cable companies, if you've got one ginormous company owning 40 percent of the U.S. market and wee little competitors left over, guess how effective that's going to be for consumer choice. At least if there's a broader array of reasonably sized companies, we'll have a better chance at meaningful competition for reaching consumers.

But the real issue in this merger is not the consumer cable side but the greater threat to cable revenues - the rapidly emerging world of "cord-cutting" TV viewers who prefer to toss up streaming video on their TV screens from PCs and mobile devices. On the Internet side of their business, as long as the Net Neutrality concept of Internet regulation reigns, then all Internet traffic provided by cable companies flows through from all places at a specific rate at one bulk price. No more bundles for content under Net Neutrality, so cablecos like Comcast develop revenues from the Internet by placing mobile carrier-like caps on Internet traffic. With a Comcast/TWC merger, little would change in terms of technology in the short term but you can expect that both cable TV content bundles and Internet bandwidth pricing will be jacked up significantly.

With far fewer points of negotiation for content licensing and higher costs, TV content producers will have less pressure to develop Internet-first unbundled streaming TV services and a lower demand for those through higher cable Internet prices to get adequate service without bandwidth caps. And no doubt the short-term strategy mavens at those companies are plenty happy with that state of affairs. It leaves consumers little choice but to prop up the cable bundling model on the non-Internet side of their services as long as possible to get the entertainment that they want. The TV producers benefit significantly from the local and infomercial ad dollars that cablecos push into their programming, so to them it means not having to work as hard to monetize their content as they would have to in a Web-driven market for streaming video. So there are layers upon layers of parties benefiting from this merger - with the consumer last on the list.

So mischief managed from the short-termer's perspective, but there's a huge problem with this strategy. The assumption that is being made is that all of the "good" TV content is in the walled gardens controlled by the media companies. But that's just not true any more. One needs say no more than "Netflix" to poke one huge hole in the slow-down-cord-cutting argument, and "Roku" or "Google Chromecast" to poke yet another chasm. The truth of the matter is that we're rapidly approaching the point at which Web-first television viewing is the preferred mode for a majority of Americans. We're not there yet, but if my 85+ year-old father is streaming Netflix to his TV via a Chromecast and loving it, then we're about to get there real soon.

So, how does it benefit TV producers to delay coming up with a viable strategy for online distribution? It seems to be very similar to the wishful thinking that grew up around early Internet-based services like Compuserve and America Online, which provided a cableco-like walled garden experience for media companies via an Internet connection. In the time that they tried to prop up those walled gardens with inferior content services the open Web was allowed to appeal to people with far more sophisticated services, services which left most media companies far behind in the race to appeal to these audiences weaned from their brands. Net result: mainstream media companies have all but fallen off the online map, with social media and upstart news and entertainment outlets all but crushing their share of content viewing. The delay by short-termers hurt the media business badly - and continues to hurt it to this very day. The only real difference that I see in the current situation with the cable/Internet divide is that customers are forced to get what's coming out of a wire through two ends of a cable splitter. And consumers understand that a lot more these days.

This landscape of interlocking anti-competitive factors is complex enough that there's a reasonably good chance of this merger going through, since the simple explanation of little overlap in service areas is a fig leaf that regulators can take on fairly easily. But should they go ahead with this, I fear that the TV producers will start to feel like Compuserve wallflowers sooner than they think. They are choking off the natural development and growth of their own Internet markets and opening the door to a galaxy of entertainment alternatives - alternatives that are likely to eat their lunch sooner rather than later. If they want to have long-term hope for their brands, now is the time to solve the revenue issues for cord-cutting, even if it may make relationships a bit difficult with the cablecos. Without that, they're likely to be tying their fate to companies that are likely to fall prey to new gigabit-oriented Internet service providers like Google Fiber that have their own strong lobbyists. If I were a TV producer, I'd be working with the Internet providers who would move fastest to support cord cutting profitably at realistic consumer prices - prices that will align with the more competitive landscape for communications services looming under pending regulatory changes.

So, you can hunker down with a bigger Compuserve - ah, Comcast/TWC, that is - or do your shareholders a real favor and get aggressive with independent online streaming services ASAP. Myself, I'd go for door number two. If you'd like to explore what's behind that door more, let me know.

Monday, February 10, 2014

Do Phones Still Matter?: The Signal Economy Moves From Informing to Action

The mobile smart phone market is booming. About a billion new smart phones were sold in 2013, and total mobile phone sales are likely to approach the 2 billion mark by next year. New models such as +Motorola Mobility's Moto G global phone are bringing performance and features that would have been considered top-of-the-line only a couple of years ago for comfortably under $200 off-contract. There are over a million apps in both Apple's App Store for its iOS phones and tablets and mobile browsers such as +Google Chrome now bring a mobile native Web experience about on par with desktop and laptop PC browsers. And should you be willing to pay for them, a new generation of smart phones is about to introduce 4K video capabilities to phone screens and to their outputs to TVs and high-resolution monitors.

Things could hardly be better for the smart phone industry. But allow me to be one of the first to say that as a leading-edge indicator of performance value, the smart phone is now entering a long era of twilight.

This isn't because smart phones will disappear any time soon, but more because they all do pretty much the same thing about as much as we can expect them to do it in all the places we'd expect to find them doing it. They all have pretty much the same sensors, pretty much the same cameras, pretty much the same apps. have pretty much adequate battery performance for most circumstances (at least on the high end of the market), deliver pretty much the same signal for analysis and can deliver signal-driven services in pretty much the same way. There is lots of economic value in this equation that has yet to be tapped, mind you, so the maturity of smart phones paves the way for an abundance of "catch up" from signal-based services trying to find a broader mobile market.

This can be seen in the down-spiraling of unit prices as well as in component prices. Besides value leaders like the Moto X, component suppliers like Broadcom are beginning to scale up for producing communications chips capable of high-bandwidth LTE mobile signals at prices which should ensure that budget-conscious device buyers should be able to afford a high-bandwidth mobile Web connection pretty much anywhere. Factor in the U.S. Federal Communications' testing the elimination of separate mobile voice networks in favor of voice-over-IP support for Internet voice services, and what you wind up with is a mobile world in which the very idea of a "phone" is disappearing rapidly.

It is a world in which we have our mobile phones surrounded by tablets, +Google Glass, smart watches, smart TVs, in-car displays and whatever, perhaps the notion of a phone is becoming more the notion of a mobile sensor-driven identity with different contact points. What we seem to be winding up with instead of specific general-purpose appliances as the focus of The Signal Economy is an all-purpose capability that can connect signal to services that deliver satisfaction to markets on the best platforms suited for that purpose. Sometimes those devices will continue to be flat-screen experiences, but increasingly they're end points like machines that actually do things - be they controllers like the +Nest in-home climate control and smoke/gas detectors or sophisticated one-or-many manufacturing machines like professional-grade +MakerBot Replicators.

This shift to being able to translate signal into real-world actions with monetary value rather than into just stimulus to take actions is no doubt a major factor in some of Google's most recent shifts in company strategy. Google's planned sale of +Motorola Mobility to China's +Lenovo is a sign that Google is far more interested in accelerating the commoditization of mobile phones to the point that signal acquisition and generation is as universal as possible. This is underscored by Google's acquisition of a string of companies focused on robotics such as Boston Dynamics and advanced artificial intelligence computer capabilities. If you're a master of signal, why stop at just giving people information - why not be a master at helping people to take action with that signal?

There is plenty of money to be made in applying signal to flat-screen appliances, and companies like Google will rely on those appliances for many years to come as a revenue backbone as The Signal Economy begins to unfold. However, I believe that we are already beginning to enter in which cataloging and describing the objects being described by signal are going to be less important than the verbs which apply to those objects that can be inferred from a signal-driven analysis of those objects. Sometimes those verbs will lead us to creating marketing offers for mobile sales prospects just as they're entering or nearing a store. But increasingly it means translating those verbs into the production of actual products and services, sometimes, as seen with the emerging Amazon Yesterday predictive delivery service, even before we've actually asked for them. What happens when that box contains not an item produced for mass markets but an item produced just for us?

What will happen is a shift as dramatic as the Industrial Revolution of the 19th century, but not necessarily in ways that we might expect. We'll have global mass production of certain items indefinitely, but increasingly economic growth and employment will depend on independent thinkers responding to the needs of specific people through understanding their needs via the signals that they produce. Sometimes those needs will be met by major companies, to be sure, but as evidenced by the rise of crowdfunded products like the Pebble watch, it's no longer necessary to have a huge base of capital to get innovative new ideas to market at any scale. So it's at least as likely that The Signal Economy will resemble the artisan-craftsman era of the 18th century in which the peculiar abilities of any number of creative people found profitable niche markets - except now they will be able to harvest those niches on a global basis.

So yes, we'll have mobile phones indefinitely, just as we still have TV sets in our homes more than sixty years after they started to become commonplace around the world. But the economics of what drives content to those screens seems to be shifting towards making them far less of a central point in the Internet-driven information economy. Publishers need to recognize this shift and to see that intellectual property that is not aligned with the Signal Economy may wind up being just secondary cogs in an economy that values real things and actions produced by intellect more than the value of temporary vessels for transforming that information into real-world benefits. Forget about content being "water in a pipe" or even in a bottle. Look at the wheels of economic activity that can be driven by your content by signal, and adjust for those verbs. Soon. Always glad to help, of course.