Outside the Herd

What would happen if Random House launched an online competitor to Amazon’s book site? Crazy right? But Paramount (NYSE:VIA) is running a little experiment that is basically the same thing. They quietly launched direct rentals of Transformers: Dark of the Moon from their web site. Sounds crazy but combine original content with an off-the-shelf video rental platform and a little known effort called Ultraviolet and it might payoff, just not in the way you think.

Amy Powell, Executive VP Interactive Marketing and Film Production at Paramount says “We’re testing the waters and interested to see consumer feedback. It’s just a little toe-dip to move in the direction we believe will be one of the future distribution means for content.” It’s a “little toe-dip” designed to kick the distribution/technology wannabe gatekeepers in the nuts. But more on that in a minute.

The offering is being delivered on CSGI’s Content Direct platform. Content Direct is an off-the-shelf video rental platform that allows content providers to offer content directly to consumers. It includes member management, billing, ad monetization, and of course content management.

So Content Direct is a new wrinkle in the diffusion of video distribution. Most of the headlines have focused on Netflix (NASDAQ:NFLX), Apple (NASDAQ:AAPL), and Google (NASDAQ:GOOG) and their TV/mobile plays. A platform like Content Direct means the content providers can open another front in the war for video dollars to scare distributors.

Another interesting wrinkle adjacent to direct-to-consumer rentals is Ultraviolet. It’s a standard/platform/alliance backed by most of the major studios and a who’s who of video industry and technology players. It basically allows for media portability. Bought a video through iTunes on your computer and want to watch it on your Android tablet? Not possible now. But if Ultraviolet takes off you could.

That all said, who really wants to have to go to twenty web sites to shop for a movie. Nobody. But this isn’t about Paramount or other studios offering direct rentals. This is 100% about leverage. The industry fears Apple dominance in video the way they dominate music. They fear Google almost as much. Add direct to consumer offerings and media portability to distribution contract negotiations and the content guys get more leverage. As a result, content providers can ratchet down Apple’s, or anyone else’s, aspirations to take 30% of the dollars in the industry. Even if those would-be gatekeepers own the hardware, software, and ultimately the customer relationship.

Just another interesting salvo in the $500 billion television battle.

So Yahoo is trying to get into the $500 billion TV battle, again, with what is now typical Yahoo awkwardness. (Terry Semel is either happy or pissed.) Yahoo just relauched their video portal under the moniker Yahoo Screen. It’s a hodge podge of Yahoo original content , webby partnerships with traditional media like ABC News, and stuff from Hulu. And just like Google’s search persona permeated version one of Google TV, Yahoo’s corporate personality shines through in Screen: ok-to-good assets underneath but no clear direction leading to a bungled opportunity.

No one knows how TV 2.0 is going to turn out, and apparently neither does Yahoo. Yahoo has always flirted with video on the web. One of the first web-based “channels” I ever watched was the Yahoo Finance video channel. It was a low-budget, people-curated, aggregation of things going on in finance. It felt like some kid reading search results on camera. And as evidenced by Yahoo’s Prime Time in No Time, things haven’t changed much. Production values have gone up a little and the search result readers are older but Yahoo’s original content is still some webified version of people curated aggregation. With semi-lame original content on one end and Hulu traditional media on the other, it looks like Yahoo is throwing together everything and anything that looks like tv under one portal. As such it’s hard to understand what Yahoo’s strategy is for creating an audience other than let’s try every.

Of course the definition of television is getting weird so Screen might just be a sign of the times. Just 3 years ago there was broadcast quality television and YouTube with not much in the middle. But with content guys trying to hold onto their ad and sub dollars combined with an ever increasing number of well-funded challengers, everyone is seems to be in the content creation game these days. Google, Netflix, and others are apparently funneling hundreds of millions into original content. So the definition of what is TV is going to get really fuzzy near term.

Yahoo’s kitchen sink approach is probably okay given the current state of things. More helpful is Yahoo’s enviable demographic numbers. Despite the growing impression that they don’t know what they’re doing, Yahoo still seems to have a ton of traffic in key media areas: news, finance, celebrities, sports, women, etc.

So combine their quirky original content, partnerships with traditional media, and a strong demographic base and you might have something. Ah, but this is Yahoo. It feels like they should be able to do something but the lack of direction means more aggressive and focused players will likely eat their lunch. Sound familiar.

Business Insider is quoting two sources that Dish was the highest bid at $1.9 billion because Google’s $4 billion bid came with a lot of strings attached.

“Dish was the highest bidder, coming in around $1.9 billion. It beat out both Amazon and Yahoo.

Google bid much more â something in the range of $4 billion. But that bid came with special conditions, as has been previously reported â Google wanted more content for a longer period of time, and perhaps other concessions as well.” Read BI’s full article here

As I’ve mentioned before, TV is the next huge battleground for Google at $500 billion. So $4 billion is peanuts to make Google’s content issues go away. But it’s not that clear cut for Google. The fact that the content guys are saying they want the ad model to go away is important. With WSJ reporting that YouTube is on the cusp of launching their TV channels, it’s a complicated game Google is playing here.

Dish is a bit different. They already have content. Opening up on the Internet front in addition to satellite has got to be game changer for them. They also don’t have the complexity issues that come with the Internet guys.

If you’re a large tech company looking for your next phase of growth a $500 billion market being massively disrupted by the Internet would be pretty interesting right? Turns out you’re in luck. Say hello to the television market.

See if this sounds familiar. A large content market goes digital. Slow-moving incumbent players try to hold the dike through a combination of blocking maneuvers and token, ill-fated, self-cannibalization initiatives. Internet-savvy interlopers swoop in to kill the poor incumbent ostriches. Content providers are sitting pretty but everybody between them and the end user is at risk. Change is geometric, slow at first but quickly accelerates. Yep, sounds just like the battles in the classifieds, newspapers, music, books, magazines, etc. But this time things might be different and more interesting for a few reasons.

First, the TV market is currently the mother of all content markets so no one is going to give up $500 billion easily. Next, big Internet challengers have already tried and failed (but are now gearing up for the next pass). Third, the incumbents have seen this play before and have prepared better defenses. Lastly, taking the distribution channel isn’t going to be as easy as other content markets. The incumbents own the pipes and are going to leverage the heck out of that stranglehold. It’s going to be fun to watch. Here’s what’s at stake. (If you want a 10,000-foot view of the battlefield click here.)

Ads + Subscriptions + Hardware

For the TV battle, it’s not just ad and subscription revenue at stake. Apple has proven that hardware revenues are at risk too. Add these three up and you get about $500 billion globally. About $190 billion in television advertising. About $200 billion in pay TV subscriptions including cable and satellite. And about $75 billion in television hardware revenue. There’s probably overlap and some additional ancillary markets I’m missing. I’m not counting set top box revenue because that’s largely subsidized as part of the pay TV fees. Internet access probably shouldn’t be included either since the cable, satellite, and telco companies have got that locked up.

While Internet ads are catching up, television ads are still the largest ad market. $190 billion for television versus $72 billion for Internet advertising. And according to Deloitte & Touche, television has been growing and will continue to grow as a percent of total ad dollars.

The vast majority still goes to broadcast providers. Using MagnaGlobal’s data, the almost $200 billion TV ad market breaks down as $126 billion going to broadcast providers and $44 billion going to pay TV providers.

For the $200 billion pay-TV part of the equation, revenue is primarily split between cable and satellite providers with IPTV coming on strong but still at a tiny 4% percent. Satellite surprisingly has been gaining and is projected to overtake cable this year. According to Digital TV Research, 2010 pay TV broke out to cable $76 billion, IPTV $6 billion, $73 billion.

Over-the-top (OTT) revenues, like Netflix, Hulu, and YouTube, are projected at $14.7 billion by 2016 will come out of the existing $500 billion spend. Video-on-demand is a $16.4 billion business.

Key Participants Downstream

Even though they don’t bill customers directly, some of the downstream players here are important. Most important are the content guys. They can play king makers by withholding their content. As the Stars/Netflix conflict shows, the content guys are going to aggressively protect their lunch. Overall content producers will do well. They are racking up record affiliate fees and the TV ad market seems to be weathering the recession okay.

The other downstream players that are interesting are the set top box manufacturers. They’re important because they are the key cable and telco gatekeeping. As long as cable companies are subsidizing set top boxes this is a tough mote. But the penetration of Internet connected TVs represent a way around. Internet TVs are up to 30% of households and growing fast. Also Google’s link up with Motorola, a key set top box manufacturer, should prove interesting.

How often does a $500 billion market get turned upside down? Not often. It is going to be fun to watch the challengers and incumbents duke it out. Click here to see an overview of the battlefield.

Google quietly, very quietly, launched it’s movie service for YouTube. And some of the movies are free. Granted they are old or lame movies but still it’s what the industry has been afraid of. Not only does it start to degrade the price point for movie downloads and cable, it puts $32 billion in affiliate fees at risk. Something the content guys have been doing everything they can to protect.

Google is on a clear and obvious path toward the $500 billion television market. They need to come out and partner in a public way with the content guys and make it clear they are going be a strong partner in maximizing ad and subscription revenues. The affiliates will have to fend for themselves or join in somehow. The cable guys becomes ISPs and will have to split the $200 billion pay TV revenues with Google and Apple because Google and Apple are going to own the customer relationship.