Table of Contents
Executive Summary
Key Trends
The ICA Viewpoint
The Convergence Landscape
Background
One Network
One Box
Ubiquitous content
The Content Industry
TV, Video & Film
Print and Online Media
Portals and Search Engines
Aggregators and Enablers
Prevailing business models
Revenue models
Advertising
Subscriptions
Content Licensing
C-commerce
Product strategies
Implications of Convergence
Consolidation opportunities
Impediments & regulatory impact
Well-positioned large cap companies
Vulnerable large cap companies
Small Cap & venture-backed companies worth watching
Executive Summary
Just as content producers are becoming expert in the new business models driven by the growth of the Internet, another revolution is about to take place, brought about by the convergence of voice, data and video over one network and into one box. Indeed, the fusion of the global telecommunications system, the networks delivering broadcast and cable television, and the Internet is already here in many aspects.
On one hand, this new revolution won’t be as destructive to content producers as the Internet has been. On the contrary, it will bring back a more rational pricing model in which quality content is in high demand and ubiquitous in its availability. At the same time, however, the changes it brings to the content industry will be just as dramatic and just as far-reaching.
The past decade has been a challenging one for the content industry. The traditional concept of the delivery and pricing of content – be it news articles, books, or music -- was thrown into chaos by the Internet. Content that previously was delivered to a select few at well-established price points was suddenly thrust into the hands of the general public, often for free.
Post-convergence, the content companies that survive and prosper will be those that not only produce the best content but also strike early to refashion their content to new delivery protocols, partner with distribution and platform leaders, diversify their revenue streams and take advantage of new technologies to improve upon the content they offer.
Key Trends
Over the next five to ten years, convergence will become a reality, aided by a number of key trends:
· Content production, infrastructure and distribution are unlikely to converge. Indeed, the opposite is likely to occur, as companies that have already combined two or all three of the above will focus on just one and spin-off their non-core holdings.
· Network-affiliated local television stations will cease to exist as users continue to migrate away from watching channels and toward watching programs, which will be pumped into the home by a small number of major network providers.
· End users will have more control over what they watch, when they watch it and how they are marketed to in the process.
· Outsourcing will become the norm. The competitive business model that has driven, for example, gaming companies such as Nintendo and Sony to outsource virtually all their content will be repeated across all content industries.
· Publishers and production companies will see the overall value of their content increase but will need to be extremely focused on quality in order to secure a prominent place among providers, distributors.
· There will not be one dominant revenue model for content companies. The advertising market will come back, but companies will not be able to rely on it, and advertisers will need to be creative to reach clients.
The ICA Viewpoint
Shareholders must stop punishing forward-looking companies such as News Corp., Vivendi Universal and AOL Time Warner for acquisitive strategies that position them well for the convergence future. By the end of 2002, it will become increasingly obvious that some companies are simply not positioned for the next wave of mass-market media, while others -- which even some of Wall Street’s brightest analysts have accused of frittering away cash flow -- will surface as convergence leaders.
The convergence of voice, data and video is still, from a technology and delivery standpoint, at least two years away from reality, and at least four years away from the beginnings of mass-market adoption. From an investment horizon standpoint, that might as well be tomorrow. Venture capitalists have already placed their bets behind the most promising emerging companies, in spite of Wall Street’s continued downward pressure on many of the most widely held public companies. Content production companies that sit back and wait for the arrival of convergence will eventually be confronted with declining market share and, as The Street takes notice, declining share prices.
Figure 1: Content distribution landscape – Current vs. Convergence
The convergence of content will change the way that traditional content is delivered, interfaced with, watched, listened to and read. It will also drive creation and widespread use of entirely new types of interactive content, from community gaming that will make Electonic Arts’ on-line community game, Ultima, look like Monopoly by comparison, to reality television that will make CBS’s ‘Survivor’ series look like a stage play.
At the same time, the ability of content producers to address competitive distribution challenges by simply erecting a website that competes for audience and placement with companies focused exclusively on content distribution will not be sustainable in the converged future.
That means content producers must focus on just that – production. Inventions such as the printing press, the typewriter, the radio, TV and the PC each revolutionized content in its own way, be it through faster production, higher quality, or richer medium. But all of them had the commonality of allowing wider audiences to receive richer content at lower cost. The same is true of the Internet, and like the inventions before it, the Internet created a shake-up in the content industry that prompted all content-oriented companies to rethink their business models.
The well-publicized case of Encyclopedia Britannica’s rapid decline at the hands of Microsoft’s Encarta software is but one example. How can an old-fashioned mapmaker compete against MapQuest.com? How can travel guide publishers compete against Yahoo!? How could IDG Books, the now-defunct publisher of the “Dummies guides,” compete against the myriad of how-to sites on the Web? How can Columbia Records compete against Napster?
The answer, for those that did compete effectively, was through proactive, strategic planning, creative product enhancements, effective marketing and product placement, the building of sound distribution and platform partnerships and, in the case of Napster, an aggressive lobby of government regulators. It’s these same lessons that will drive the winners of the convergence landscape.
Creating those winners will be as much about mergers and acquisitions as it is about marketing and infrastructure investments. Network providers will need to gain expertise across three flavors of content – voice, data and video – and all the various technology and business platforms that comprise them. Likewise, content producers will gain more leverage among those service providers if they can expand their product offerings through acquisitions. While voice content won’t fit into their merger plans, content production companies will nonetheless have to reach out to all three for platform adherence and interoperability.
The Convergence Landscape
Background
Before going into detail on the landscape of the content producers, it’s pertinent to provide some background on the convergence of the networks and the devices that will bring the content to homes and offices. One Network and One Box will be the subjects of ICA’s subsequent reports on content convergence, which will address those issues in much greater detail.
The arrival of content convergence was brought about in part by the overbuild approach to the development of the public telephone, cable television and Internet networks, which in turn fostered separate development tracks for content. The financial community, not the free market, drove the creation of these sectors, and the perception that users would have an insatiable desire for new and richer forms of content sufficient to support the cost of operation. That demand didn’t materialize. Now, as the network glut becomes evident to the investor and telecom, Internet and cable companies succumb to the pressure of their debt loads, the requirement for integrating these competing approaches; convergence, finally has found its footing.
One Network
The network providers will be companies, or alliances of companies, that bring voice, video and data content into your home or office via cable, fixed telephone lines, wireless or satellite and present it to you with the aid of an intuitive and easily navigable interface.
The connected user today has plant entering their facility corresponding to each protocol, but each has its limitations. Cable plant works well for downstream data and video. Circuit plant works efficiently for bi-directional voice and data, but video transmissions file size and requirements have left PSTN network engineers with little in the way of answers. DSL already maximizes the capacity of the PSTN network.
Figure 2: U.S. Household Internet Penetration Projection
While the convergence of the networks won’t be easy, combining the technologies and platforms of each will be infinitely less expensive than extending either of them individually. The major impediment to convergence remains, for now, the ‘Last Mile’ – how to reach end users with higher speed solutions without the cost of installing bigger pipes. It will likely be addressed through a blend of satellite constellations, next generation wireless mobile approaches and localized wireless hotspot coverage, with the ‘Last Foot’ accomplished through wire management derivatives of Bluetooth-like technologies.
One Box
While network providers are racing to deliver a secure, efficient, feature-rich one-stop shop for both the home and the workplace, hardware manufacturers will be competing to provide a single, edge device that captures all feeds and enables a bi-directional user experience through a single interface.
Cable set-top boxes were the first generation of the One Box. Personal video recorders such as those offered by TiVo, SONICblue and Moxi Digital are closer to what the convergence One Box will look like, but still have a long way to go. Currently, these devices simplify the recording of television shows, with features that allow you to skip advertisements and rewind live TV. Down the road, you’ll be able to upload and download photos, videos and music to and from the Internet, hook your digital camera to them to input video, attach a joystick to play digitally downloaded games, and do a host of other creative functions. And its connection to the Network will be instant.
“If the past is any guide, 20 years from now children will be wondering what it was like to have an Internet that doesn’t look as good as your television set,” says Michael Terpin, founder and chairman of Internet Wire.
Ubiquitous Content
So just what does the convergence of voice, data and video networks mean for the producers of the content themselves? At first glance, it might seem like it has very little to do with them. Can’t content producers simply sit back and wait for the delivery systems and standards to be in place? Won’t TV viewers continue to watch the same programs, regardless of the format and delivery, and regardless of who makes the devices and who services the networks?
To some extent, they will. There will always be a market for the very best content, whether it’s in the form of data, video, voice or text. But content producers can vastly expand their audience reach, their price points and their profitability by choosing the right distribution platforms, adapting their content to the right platforms, and enriching their content to make full use of the new technologies. And besides, even the best content can be usurped by a sharp newcomer that knows how to leverage innovation.
In a nutshell, content producers need “a content strategy, not just a television program,” W. Paterson Ferns said in opening Canada’s Banff Television Festival, of which he is the Chief Executive Officer. “The ‘big guys’ will want to know how the program component will play on their mass channels, how it can be repurposed for their specialties, what the website will include, and how all these media will drive advertising, merchandising and e-commerce while, at the same time, each medium will be promoting and reinforcing all the other expressions of your content.”
An example is the new Fox primetime hit “24,” starring Keifer Sutherland as an imperiled counter-terrorism operative. One of the innovative features of the program is the use of split screens to show what different characters are doing at different times and different places. In the convergence future, such programs will have the added capability of being interactive, so that the users can decide whether they want to only watch what Keifer is doing, or whether they want to see the terrorist who is approaching five blocks away, in essence allowing the viewer to decide just how much suspense they want. Of course, the controversial potential for allowing audiences to choose an ending for a show will also be possible, whether or not there’s a market for it.
Digital film production, which to date has been used only in a few major films such as George Lucas’ upcoming Star Wars sequel, will become the mainstay in the convergence future as it allows for easier, more cost-efficient distribution over convergence networks and boxes. "Digital video, in particular virtual movies using virtual actors, will prevail as it significantly drives down production cost - what it took five hundred grand to produce I can now finish with five thousand,” says Steve Perlman, founder of Moxi Digital and president of Rearden Steel Studios.
The Content Industry
While network providers will be covered more extensively in the second part of this Convergence suite, it’s important to discuss some of those players now because, for the time being, they continue to be among the largest content producers. As we said earlier, convergence of voice, data and video will drive a separation of content producers and network providers, with the field of major service providers being limited to just a handful.
“Why would I put content on my own website when I could sell it to AOL Time Warner and get high licensing fees and a much wider audience,” says John Bertolli, executive producer at Lynda Obst Productions, a Paramount-affiliated film production company.
In the converged future, network providers will compete head-to-head for the mass consumer market, but they will also differentiate themselves from one another in order to cement market share among diverse segments of the market. AOL Time Warner, for example, has already made its mark on the general populace – from the almost child-like user interface on AOL.com, to the family programming of Warner Brothers. But as viewers become more adept at the technologies, and as the technologies become more user friendly, there will be a migration of some users toward more sophisticated platforms.
Microsoft, via MSN, has also structured its content offerings to the first-time user, as has AT&T/Comcast. Neither is likely to give that up in the converged space because it could be years before the point of saturation is reached. AOL, for example, continues to add total online users because the inflow of new users is faster than the outflow of veteran users looking for something better, or cheaper. Look for Microsoft to present a dual-product strategy that both courts the first-time user with a simple, easy-to-use interface while going after the higher end of the market through added functionality and more sophisticated navigation.
AT&T/Comcast, meanwhile, is well known across the general population for the reliability of its former parent in telephone service and has made strong inroads in cable and broadband services. AT&T/Comcast’s problem is that it has no recognizable presence on the Internet that it can leverage in the converged space. Users of the converged space will need a recognizable face to guide them through the new functions and navigation. While it’s possible for AT&T/Comcast to build such a presence if it starts now, it’s also possible that the company will acquire it. One possible acquisition target would be Yahoo!. It’s widely known and trusted, and at current valuations AT&T/Comcast could buy it without significantly eroding near-term value. Amazon.com is another possibility, as home shopping will be a key facet of convergence, and Amazon’s brand and interface are also widely known and respected.
So, what about the hundreds of other content providers out there that are still searching for a market? They will be forced to choose between either merging with rivals and forming cross-media alliances in an attempt to become one of the five or so surviving network providers, or instead simply focus on content production.
It may sound like choosing to be a content producer instead of a content provider relegates the company to a smaller business model. Indeed, this is likely to be the case for the first few years of the convergence model. However, the convergence model is going to place a new, higher premium on quality content, and eventually the top content producers will be calling the shots, rather than the providers. The hardware for the converged content space will, after initial sales to early users, become commoditized. The same goes for through-put (bandwidth now and later a combination of bandwidth and wireless airtime). But content will not face the same fate. Quite the contrary, the era of the business model that filled the Internet with mounds of free content is nearing a close. New revenue models are already popping up, and will increase in popularity, driving higher profit margins for content producers.
TV, Video & Film
Among the leading video content companies, Disney – providing it isn’t acquired by a network provider -- is likely to choose to be a content producer and to cease attempts to distribute its own content. It makes little sense for Disney to continue trying to be a content provider, when its expertise lies in content production. Its business strategy, therefore, is to ensure its content continues to be in high demand and is distributed by as many of the top content providers as possible (See Product Strategies section). Disney has been the subject of plenty of conjecture over the past year or so as a potential takeover candidate. But none of the suitors that have been mentioned most frequently, including Yahoo!, stand to gain much by such an acquisition. For a network provider, the cost of acquiring Disney would be too high given the few benefits of owning Disney in a converged world. While there might be some near-term synergies, it would be suicide to try to hold a monopoly on Disney content and exclude it from competing content providers. On the other hand, Disney would be a prime target for a company seeking to enter the content production space, or to build on current expertise in that area.
AOL Time Warner is a living example of the lack of synergies between content production and content distribution, and the subsequent disappointment of shareholders has been reflected in the stock’s performance. “(Since the merger,) the AOL division has shown vulnerability on several fronts, while the synergies have been hard to come by,” Lehman Brothers analyst Holly Becker wrote in a February 2002 report. Those synergies will be even less significant once voice, data and video converge.
Still, it is too early to count AOL Time Warner out. “AOL remains among the best marketing companies we have seen. We are confident that management will turn the ship around. However, it does seem that things may get worse before they get better,” Becker says.
AOL doesn’t appear fazed by its slow growth. The company is spending heavily on extending digital cable service to users, and COO Bob Pittman has said he expects users to pay as much as $230 a month for bundled convergence products, including video on demand.
Like Disney, NBC is likely to focus on being a prominent content producer as opposed to a TV station and network operator. NBC itself is a well-run production operation that has consistently turned out hit programs. However, what the synergies are with its parent company, General Electric, remains something for conjecture.
News Corp. could be another leader in the content industry, and is one of the few companies that stand to be competitive as both a producer and a provider, given its global reach. Within the U.S. market, News Corp. will have a tough time competing with the likes of AT&T and AOL-Time Warner as a provider, but overseas – in Europe, Australia, Latin America and just about worldwide – News Corp. is positioning itself to be a major provider of converged content. In terms of content production, News Corp. units such as Fox Television and 20th Century Fox, have been successful in coming up with popular content that is likely to assure it a strong place among convergence distributors.
For all of these companies, video on demand is likely to be one of the fastest growing segments, although it will continue to be just a small part of overall revenue, with the bulk made up by subscriptions and advertising. Market research firm Kagan World Media estimates that video on demand accounted for just 0.3% of the cable industry’s $41 billion in revenue in 2001. By 2006, that figure is expected to grow to 5.8% of the cable industry’s estimated $65.7 billion in revenue.
In a similar position to News Corp. is Vivendi Universal, a company that has received harsh treatment from the markets over the past two years precisely because of the company’s visionary strategic planning towards convergence. The stock is worth less than a third of what it was two years ago.
Over the past two years, Vivendi CEO Jean-Marie Messier has turned a scandal-plagued water company into one of the world’s dominant media empires, paying $34 billion for Seagram, owner of Universal, and then buying European cable giant CANAL+, along with publishing house Houghton Mifflin, music website MP3.com and a host of other media properties, including a 10 percent stake in EchoStar. If done correctly, Messier could turn this sizable and synergic base of assets into one of the dominant producers and providers of converged content outside the United States, while building on Universal’s position as one of the leading producers of films and music.
Investors, however, don’t have the same long-term vision that Messier has, and have worried that by spending so much on acquisitions the company is destroying value and putting the company at a short-term financial risk. Messier’s buying spree hasn’t been the only reason for the falling stock price, however, Vivendi announced in March 2002 a 14 billion euro loss, much of it due to increasing losses and a sizable write-off at CANAL+.
The question for Messier now is can he pacify shareholders long enough for his vision to start bearing fruit. If not, he might be wise to sell off one of his prizes, even Universal, which in the long run will provide fewer synergies with his network provider businesses.
While companies like Vivendi, News Corp., and Charles Ergen’s EchoStar have been building global convergence empires, other U.S. conglomerates have been concentrating on domestic assets, some with a keen eye to the convergence future, others without one. The recent U.S. Court of Appeal ruling that throws out a regulatory ban that prevented cable TV operators from owning broadcast TV stations that they carry on their networks, is expected by many to incite even more consolidation. Among the big cable companies that may make bids on key stations are AOL Time Warner, AT&T/Comcast, Cox Communications, Adelphia, General Electric/NBC, Viacom, Disney and Paul Allen’s Charter Communications.
Figure 3: U.S. Cable vs. Satellite TV Market Share – 2001
However, a closer look at the convergence future indicates that buying up TV stations might not be the sound, synergic business plan it appears. The companies that suffer most in a converged future will be those whose business models rely on traditional distribution and product strategies and would require either complete cultural makeovers or prohibitively expensive repositioning to adjust to the new landscape. In the converged future, people won’t watch channels, they’ll watch programs, and they’ll receive them directly from network providers rather than broadcast affiliates. Among the hardest hit will be pure-play TV broadcasting companies such as Hearst-Argyle Television, Young Broadcasting and Liberty Corp., all of which own multiple stations in key markets around the United States. If you want to find out which media companies have clear visions into the convergence future, follow the companies that don’t buy up local TV stations! The local TV stations, meanwhile, will either shut down entirely or divide their operations into two separate businesses – local broadcasting networks, and television production houses. The operations that today produce news and other local programming will, in the convergence future, sell such programming to the network providers instead of airing it on their own channels.
Local programming is hugely popular in U.S. households and will remain so in the convergence future, in spite of the fact that it will be distributed over nationwide converged networks.
Figure 4: TV Industry Landscape – Current vs. Convergence
While mass-market broadcast channels as we know them today will cease to exist, there will continue to be, for the foreseeable future, a segment of the population that will elect not to purchase content from the converged network providers, mostly because of financial reasons. Today’s broadcast television stations, therefore, could elect to transform themselves into being the video content providers to the lower-income segment of the population. As such, there probably won’t be room for three or four stations in each metropolitan area, and network affiliations should cease to exist. These stations will instead purchase a mix of programming directly from the producers – or from the major network providers. Therefore, while it doesn’t make sense for a company like Viacom/CBS or Hearst-Argyle to buy up more local affiliates, it does make sense for a company like Univision, which targets the lower-income Hispanic population and has a much longer window of opportunity in which to earn revenue before the convergence networks force it out.
Another possibility is for non-profit, public television to buy up the broadcast operations of local broadcast TV affiliates in an effort to reach lower-income users. Without the channel-allegiance that exists today, public television, like the networks, will have to change its business model in a converged future. They are likely to focus on producing the same types of quality educational content they are known for today, which in turn will be distributed mostly on a program rather than channel basis by the major network providers. While the availability will still be there, gaining the right amount of placement might be more difficult for public television in a converged future than it is now.
Print and Online Media
While broadcast and cable companies are jockeying for the right combination of diversified assets that will sail them into the convergence future, some traditional print media companies have been building empires of their own around content itself. One of the leaders is, ironically, one of the oldest and most traditional – Reuters. The 150-year-old British news wire has used the down market to quietly buy up an array of companies that together make up a global empire of financial information, from knowledge companies such as Yankee Group and Venture One to news and data leader Bridge and even TIBCO Software, a provider of business integration systems. Meanwhile, the company has spun off some of its non-media assets, such as last year’s IPO of Instinet.
Is being the world’s biggest supplier of financial news and information folly at a time when content itself is of low value and the financial markets are in a tailspin? Or is it keen long-term vision that banks on the resurgence in value of both content and the financial markets and sees its vast empire as the kind of leverage it will need to secure a place on every computer and TV screen around the world?
During the dot-com boom, rather than invest heavily in its own Web presence, Reuters distributed its news for a price to others – a business model that will become even more profitable in the convergence future.
But whether that is the result of keen strategic planning or pure luck is unclear. In its core financial information business, Reuters continues to lose market share to Bloomberg, even though Bloomberg’s tightly proprietary system can’t possibly compete in the convergence future without a significant shift in its distribution model.
Other traditional media companies such as Knight Ridder, McGraw-Hill, Dow Jones, and even the local newspapers, will find willing buyers for their content in the network providers. Their content will be sold both as part of article subscription packages that allow users to personalize news subjects, frequency and format.
Niche content providers will also transform themselves into content producers, and in many cases are already doing so. Look, for example, at CBS MarketWatch, the leading online provider of financial news and information. In 1999, fully 70 percent of MarketWatch’s $24 million revenue came from online advertising. By 2001, revenue had grown to $45 million, but less than 40% of it was from advertising. The bulk of it, about 60%, had moved to content licensing. While mostly due to the drying up of the ad market, the change was also due to the company’s shift away from distributing its own content. This trend won’t reverse itself once the ad market comes back.
In fact, the MarketWatch website will become less and less important to the company until at some point, its content will be distributed almost exclusively by third parties. For example, MarketWatch content is displayed prominently all over AOL, but AOL has to this day never paid MarketWatch for its content. On the contrary, MarketWatch pays AOL – although what they actually pay for is considered to be the link from a news article back to the MarketWatch site, rather than the placement of the content itself. Those prices, however, have dropped dramatically.
“When advertising returns, it is very likely they will come to us and say we want to buy your content but we want to keep the user (aka eliminate the links to MarketWatch),” says Larry Kramer, MarketWatch’s CEO. Kramer still believes that the advertising model will come back strong enough for MarketWatch to continue in the business of being a content provider, though he sees the past two years as a learning experience that have helped the company develop a more diversified revenue stream. “We have a mass market brand and it would be a waste of everything we have built to not use that to create mass market revenue,” he said. “The convergence issue only helps us in using the very best mediums to tell the story.”
Portals and Search Engines
As the video and text content industries undergo a convergence revolution, the changes in the portal and search engine industry will be equally as dramatic. Portals such as Yahoo! and Terra Lycos and search engine firms such as Google and Overture will be hit from all sides in the convergence war.
The technology behind searching for information on the Web is already beginning a gradual transformation away from companies like Google, which also powers Yahoo!’s search functions, to a combination of the domain name registrars, specifically VeriSign, and the Internet browsers such as Microsoft Explorer and Netscape. As little as two years from now, you won’t need to go to Yahoo! to find sites and pages and even keywords on the Web. Your browser, supported by VeriSign’s global registry platform, will do it for you. Meanwhile, the slowdown in advertising that has already sapped business from portals will only increase in the convergence future, as that advertising will migrate to the network providers.
Also having a negative impact on the portal industry will be the trend away from free content. Content producers, who up until now have been happy to give Yahoo, Terra Lycos, AOL, MSN and others free content in exchange for traffic, will be less willing to do so until they have stopped the practice altogether. Already, the business model is moving in that direction. For example, ABCNews.com ended its agreement to provide content to Yahoo! in February after Yahoo! refused to pay more up front for the content.
So what’s a Yahoo! to do? In the converged future, there’s one thing that Yahoo! has that will be just as important then as it is now – brand recognition. Yahoo! is the most recognized brand on the Internet for navigation, and for that reason the company becomes an attractive acquisition target to a network provider.
Navigating and searching for converged content from an easy-to-use interface will be even more important five to ten years from now than navigating the Internet is now. While some network providers already have their own recognizable interfaces, such as AOL Time Warner and MSN, others such as AT&T/Comcast and NTT do not. Yahoo!’s agreement late last year to team with SBC Communications to sell high-speed Internet access is a step in the right direction, but unfortunately with the wrong partner.
Recently, Yahoo! has been pushing paid programming opportunities such as premium content and subscription-based streaming-media services, but these are likely to generate little long-term revenue and will likely be dominated by the network providers. More likely is a shift toward monetizing offerings by moving product suites towards the service provider and enterprise sectors. It is within these deeper pockets that companies such as Yahoo!, Google, and Inktomi will find the revenue support their shareholders are in search of.
For many players it will be their final resting place. Integration of these thin, yet integral navigational tools into a converged content landscape is highly likely as the content producers and network providers have invested little time or resources in the improvement or innovation of this first user touch point.
Building on the grass roots adoption of the Google search engine, the company recently announced product offerings allowing for enterprise customers to deploy the very same technical approach to navigation at company Web sites, intranets, and corporate database applications. Evolving this approach to navigation for use in voice, data and video communications is the next step. Users already conditioned to and expert in the utilization of Google Web search techniques afford a softened audience to market next generation offerings to, with more predictable rates of adoption. Monetization of this service is unlikely in a stand alone fashion as the perceived value of a search is still quite low, however, with strategic partnering and/or acquisition of said properties, look for the Voice/Data/Video search engine to continue its prominent location as the first stop on the network.
Less robust approaches to network navigation such as Directory Assistance in the telephony world, TV Guide in the Broadcast Television environment, and the Yellow Pages for business listings will find themselves poorly equipped to compete with more technically inclined and convergence focused Internet navigation companies. The appointment of Terry Semel as CEO of Yahoo!, a long time Hollywood insider, should bode well for the company as it looks for either a suitor or strategic partner to shore up future relevance and shareholder value. While it is unlikely that a single navigation technology or approach will ‘own’ the market as was the case with Microsoft and operating systems, many of the also-ran companies in the space may find the convergence landscape unforgiving.
Look for market leaders Yahoo! and Inktomi to go first in the land grab. Innovation engines Google and Overture, meanwhile, will plug along independently in search of affectation of maximum investor return by diversifying their businesses toward the enterprise market and expanding product offerings.
Aggregators & Enablers
In the areas of music, text, data and videos, Content Aggregation will continue to thrive as a business model, but large-market aggregators will be bought or overtaken by the major network providers, while niche aggregators will make their mark by targeting specific audiences and through personalization of content.
Generalized text aggregators such as Screaming Media and privately held Yellowbrix have made their marks by packaging other peoples’ news into customized packages, mostly for enterprise clients to use on their websites. While it’s possible to make money in the sector, the demand for such services will be limited in a converged future because network providers will mimic much of their services, allowing users to customize their own news feeds at lower price points. Also, enterprise clients are already learning that they should be more concerned about distinguishing their digital presence with unique content rather than repackaging content that people can see elsewhere.
Similarly, mass-market aggregators such as Multex that attempt to resell news, data or research to individuals over the Internet will likely be usurped by companies such as Yahoo! that are already starting to do the same thing and can reach much wider audiences.
An exception is Lexis/Nexis owned by the UK’s Reed Elsevier, whose huge proprietary database is something that isn’t searchable on the Web, and therefore holds higher value. Niche aggregators that offer proprietary or hard-to-find content that can’t be located with a Google search, or that need to be pushed out to a targeted user base, will find markets, however small, for their services.
For example, the agencies that aggregate and distribute corporate press releases to media and online outlets, such as Business Wire, PR Newswire and newcomer Internet Wire, have an expertise and a niche that is largely protected from intrusion by the major network providers.
Video content aggregation has not yet taken off because the technology is not mature, and even if it was the intellectual property rights issues of distributing films and TV programs over the Internet is a long way from being resolved. Once they are, it is sure to favor Hollywood. Don’t expect Napster-like websites to surface that distribute videos for free or next-to-nothing. Video aggregation and distribution will be tightly controlled by a distribution chain that starts with the producers and ends with the major network providers.
That said, there is and will be a market in the converged future for niche film aggregators and distributors of the likes of IFILM and Mondo Media. “What IFILM and Mondo Media are saying is that there’s a business for filmmakers who want to make only one film a year and appeal to a very small audience,” Terpin says. “It’s not a business that AOL is going to want to be in.”
That leaves music aggregation as the major battlefield still to be resolved. While it’s still up in the air just what the online distribution of music will look like in a converged future, in most likelihood it will be a combination of subscription-based and one-time downloads and the sale of physical, next-generation music products. Jupiter Media Metrix estimates that total Web-based music sales will amount to $5.5 billion in 2006, or a third of total U.S. music sales, of which about $1.6 billion would come from downloads and the rest from online sales of physical music products. That’s up from a total of $900 million in online downloads and physical sales in 2001.
As far as platforms for distribution, the lawsuit that shut down Napster in July 2001 is likely to stick, although rogue software that allows users to swap music files will be difficult if not impossible to stop. Still, buying or trading music in such a way will be considered illegal pirating, in the same vain that copying software is considered illegal, and isn’t likely to deal a death blow to overall music sales. Instead, music companies will expand and improve their own online fee-for-download music sites through companies such as MusicNet (backed by RealNetworks, Bertelsmann AG, AOL Time Warner and EMI Group), and Pressplay, (Sony and Vivendi Universal).
Streaming Media, as it is known today, will eventually become obsolete as technology allows for the seamless upload and download of video feeds. It will be replaced by video-on-demand, which will be provided by the major service providers as opposed to streaming media companies. Streaming media is a technology that surfaced as a solution to the problem of limited bandwidth. Compared to text files, video files are huge and require more bandwidth than most users have. Streaming media compresses those files so they can squeeze through smaller pipes. As those pipes get larger, and are replaced by wireless networks, the need for streaming media evaporates because downloading and uploading entire files becomes more efficient and cost-effective than streaming them.
Still, it is likely that some forms of the compression technology that companies such as RealNetworks and Microsoft employ in their video and audio players will be used in the downloading and uploading of files in the convergence future. RealNetworks would like to be the company that supplies that technology, and has already signed some key contracts with TiVo, Moxi, AOL Time Warner, Bertelsmann and Sony. Compression technology, however, is fairly simple, and it’s likely that after a certain point, network providers and device manufacturers won’t need RealNetworks anymore.
RealNetworks itself says that day won’t come. “There already are and are going to be multiple devices that connect to the Internet. There will be multiple but interoperable operating systems. Our streaming formats will run across all of those including the converged hubs in the home,” says Mark Hall, vice president for programming at RealNetworks.
Whether or not that happens, it’s entirely possible that companies like RealNetworks will focus less on being technology providers and more on being service providers to consumer and enterprise clients. Packaging videos for distribution on the net could be a huge business for corporations that want to provide video images of their services, financial companies that want to air video interviews of their analysts, and content companies that want to upgrade their text and still picture offerings with rich video. RealNetworks and some of its partner companies such as privately-held ON24 are already involved in that side of the business and could see its growth counter some of the lost business from today’s streaming media clients. Similarly, there will be opportunities for selling compression technology services directly to consumers, both for uploading and downloading purposes. Operations like Yahoo! FinanceVision and ON24 are also looking to diversify revenue streams by targeting consumers with financial news, analyst comments and conference calls.
Prevailing Business Models
Content will become more valuable as the networks converge for a variety of reasons including competition among network providers, a return of the advertising market, and a realization that the era of free content is over. The Internet is now a widely used and accepted medium, so there’s no need to provide free content to drive users to it, and the still-fresh memories of the sharp downturn in the Internet market means that individual Web sites will be less inclined to seek an all-advertising, free content business model.
Revenue Models
Content producers will essentially use the same basic four revenue models they use currently, with the slight modification that E-commerce will become ‘C-commerce,’ or Convergence Commerce, as it will be carried out in different formats across several medium:
· Advertising
· Subscriptions
· Content Licensing
· C-commerce (including spot sales)
However, the difference will be in the combination of these models and how they are billed. Content licensing, for example, will be much more prominent, and advertising will undergo a dramatic shift in favor or putting more control in the hands of the public. C-commerce will become much more of an internal function, for the one-time sale of downloaded or mailed content, while content companies will get out of the business of conducting e-commerce for third parties.
“Until now, the underwriting of the cost of content has been implicit – I stick this ad in and you’re going to watch it,” says Glenn Reitmeier, vice president for special projects at Sarnoff Corp. “Maybe that cost model has to be extended to the consumer instead of the service provider or the network.”
Advertising
Advertising is not something that is going to go away when content converges into one network and one box. Certainly, users will have more control over what they watch and when they watch it, and will be able to filter out most blunt advertising, but they will pay for that privilege. Millions of other users will be happy to pay less in exchange for the continued bombardment of mass market advertising, and that advertising will come in many shapes and forms, some of which we haven’t even seen yet. Some will be as subtle as the Coke can Mel Gibson sips in his new movie; others as blatant as the pop-up ads that are the bane of the Internet user. New twists on advertising are already surfacing, such as the “plot placement” viewers are beginning to see on programs like ABC’s “All my Children.” Revlon agreed to buy several million dollars worth of advertising on the show in exchange for developing a plot line in which soap star Susan Lucci’s small cosmetics company competes against corporate giant Revlon.
“Media’s got to get paid for. There are only a few ways to do it – advertising is one of them and it’s not going anywhere,” says Richard Frankel, general manager for published solutions at DoubleClick, the online advertising and statistics firm.
A big part of the change in advertising will be due to the reduced influence of television “channels.” As more viewers watch programs that they select individually, and watch them at their leisure, advertisers will be less able to reach viewers at different time slots or in between favorite shows. “We don’t see convergence as a future event. It’s already here,” Frankel says “But it isn’t about hardware in your house. It’s about the convergence of methodology in terms of reaching customers and interacting with them. You are going to see advertising built for each environment –- but it will be managed, forecasted, measured and delivered centrally.”
What that means for content producers is that they will have to work closely with network providers to enable their products to effortlessly accept any new type of advertising campaigns that come about, for termination on any type of edge device. Wireless ads, for example, aren’t yet big in the United States, but they’re prevalent in Japan and Europe, and it’s only a matter of time before wireless content in the U.S. is invaded by ads. That means content producers not only have to worry about targeting their content for different audiences and packaging their content for use on multiple devices, they also have to worry about how advertisements will fit in each of those environments.
What it means for advertisers is that they will be able to conduct single ad campaigns that work over multiple types of media and on multiple devices, and pay for them with one check. Convergence also means that ad campaigns can be more targeted, and thus more effective, because converged networks and devices will closely monitor viewing, listening, reading and spending patterns of everyone who is hooked up to the network.
Finally, for ad agencies, it means the separation between online agencies and traditional ad agencies will come to an end. Those traditional agencies that have developed strong online divisions will prosper. Those that haven’t will either have to do so quickly, or acquire the expertise by purchasing or merging with an online ad agency. Likewise, online ad agencies won’t be able to rely on their expertise in putting together pop-up ads and banners. They’ll have to offer clients broad ad campaigns that traverse all forms of media, and target all audiences.
Subscriptions
Subscription-based revenue models have been around for centuries, progressing from newspapers and magazines to cable television and finally the Internet. As networks converge, it will be as important as ever. Indeed, as users gain more control in selecting the types of content they want, subscription-based revenue could actually increase in importance.
In most cases, subscriptions will be billed to the consumers by the network providers, who in turn either buy the content outright from the producers or arrange a revenue-sharing model whereby a percentage of each subscription goes to the service provider and the remainder to the producer. Such revenue-sharing models are generally favored by network providers because it reduces risk, especially for unproven or niche content. In most cases, producers can expect to give up a significant amount of the revenue to the network providers, on average between 20% and 60% of total revenue.
There will also continue to be small content producers that bill consumers directly. As we have said, the proportion of content that is distributed by major network providers is going to increase sharply in the converged future. That doesn’t mean, however, that small, niche content producers who make and sell their own content will completely vanish. The ability to search the Internet for independent content that is not distributed by the major network providers will always be there. And in many cases, producing and distributing independent content over the Internet will be a precursor to getting it noticed and distributed by the major network providers.
Content Licensing
The example of CBS MarketWatch’s increasing shift toward content licensing has been played out across the industry ever since the advertising market began to dry up in early 2000, and it will continue. As outsourcing grows as a source of content, licensing will become more prevalent. The outsourcing will take place not only on the network provider level but also within content production itself. Competition drives outsourcing as companies look for ways to produce content at lower costs. In the converged future, content producers will compete more fiercely for placement on the major delivery platforms.
The model that will play out over and over is similar to that used by the major game companies such as Nintendo, Sony, previously Sega and now Microsoft, all of whom use content-only companies such as Electronic Arts to produce their games. This wasn’t the case ten or even five years ago, when many of the games were produced in-house. It was driven by the fierce competitive nature of the gaming companies. As the best game producers have grown in reputation, they have also been able to wield more influence and attract higher payments for their games. More importantly, they have been able to avoid exclusive contracts and to sell their games to multiple vendors. As convergence takes place, and competition increases, the same will take place in text, video and even audio.
The major movie studios, for example, have long outsourced most of their production to smaller film production houses. The best of these production houses will little by little be able to wield more influence in a converged future. Whereas today the studios are able to lock in exclusive contracts and most if not all of the distribution rights, in the converged future the smaller production houses will be able to retain more rights and to sell their films to other distribution channels after their initial launch to box offices.
Still, that doesn’t mean that the big movie studios will become unnecessary. “The big barrier in the movie business is the cost of capital and the cost of producing and distributing feature films,” says Bertolli. “The power in the business is in distribution and being able to attract talent. Talent is going to gravitate toward the source of money and distribution – and that is the studios.” Even so, outsourcing will move vertically down the production chain, with the small production houses farming out huge chunks of their production capacity to niche filmmakers that may produce segments of films or aspects of films such as animation, interactive elements or certain specialized graphics or audio.
Outsourcing among text content producers will also flourish as content licensing becomes a larger part of revenue. Major news companies that are able to lock-in large content licensing contracts with network providers will in turn outsource specialized types of news to third-party vendors who can produce it at lower cost and higher quality. Freelancing, which today is a major source of content for many online and offline publishers, will become institutionalized as groups of writers join independent content companies that sell to companies such as Dow Jones, The New York Times and McGraw-Hill.
MarketWatch’s Kramer points out that, while being able to choose what content you want and when will be an axiom to the converged future, some people will still want to be told what they should be reading. That’s one reason that newspapers and magazines will not cease to exist. People want to look at a front page that someone else has designed which prioritizes the news in terms of headlines and placement on the page. “They want our editorial intelligence,” Kramer says. The increase in content licensing will not only be driven by the service providers but also by enterprise clients looking to distinguish their own product offerings with niche content that helps attract and retain customers to their web sites.
C-Commerce
For most websites today, E-commerce means two things: selling their own content by taking an online payment in exchange for downloaded content or a copy sent in the mail, and selling other peoples’ products and services on their content-focused websites. In the convergence future, the latter model will all but disappear. C-commerce will soar in the converged future, as online retailing and home shopping channels become synonymous, but it will be led by companies such as Barry Diller’s USA Interactive (parent of the Home Shopping Network and Ticketmaster) and Amazon.com. Content companies that choose not to license out their content will have the option of listing it for sale via network providers, which will aggregate it and offer it both as subscriptions and one-time purchases.
Product Strategies
While content will attract higher valuations in the converged future, that doesn’t mean that anyone with good content will make money. The successful monetization of content requires a combination of factors, the most important of which are outlined below:
1. High Quality of Content – There’s no substitute for quality. Movies like “Toy Story” and “The Lion King” have cemented Disney’s reputation as the world’s leading producer of children’s animation, even if the company hasn’t had a blockbuster recently. Disney’s production expertise guarantees that its content will always be sought after by the top distributors. Likewise, there’s no small wonder why The Wall Street Journal has been the only major U.S. newspaper that implemented a successful, subscription based website. Its articles are well-written, actionable and exclusive, and as a result are sought after on any medium.
2. Low Cost - After quality, the most important aspect of competition in any industry is cost. The same goes for content. Whether the price is charged directly to the consumer in the form of a downloaded video or an online magazine subscription, or to a third party distributor, price will always be a factor, and companies that can drive down their own production costs so they can offer better prices will succeed. Take Multex, the online reseller of analyst research, for example. By striking low-cost deals with outside suppliers, mostly investment banks, Multex has been able to offer analyst research reports for as low as $10 each to the general public over its website. These reports are usually reserved only for institutional and high-net-worth clients. Down the road, though, even Multex will have trouble from the likes of Yahoo!, which is imitating its business model and can do so on a much wider scale.
3. Time Sensitivity and Reliability - The Bloomberg is one content model that is both its own distribution platform, its own branded content and its own database, and yet has managed to survive and prosper alongside the Internet. Why? For one, quality. For another, time sensitivity and reliability. A monthly subscription to The Bloomberg, whether one receives it on your own computer or via a separate terminal, costs roughly $1,200 a month – far more than any Internet subscription or any online financial information service. But investors who have millions of dollars riding on time-sensitive stock quotes, news and data can’t afford to bet on a faulty connection, a slow download or a server glitch. Mike Bloomberg bet correctly that it would take years for the speed and reliability of the Internet to match the dedicated lines over which Bloomberg delivers its content. He was right. Once content converges over high-speed throughput, The Bloomberg won’t be able to continue as its own platform, and at that time the company will have to alter its business model. Nonetheless, time sensitivity and reliability are likely to remain two of the company’s key selling points, even if Bloomberg’s content is delivered over the same network as everyone else.
4. Exclusivity - Content you can’t get anywhere else. A drawback of offering exclusive content has always been that by being the only seller of it, you are limiting your audience and thereby reducing your sales potential. Even on the Internet, where websites such as Salon.com and TheStreet.com could offer exclusive, premium articles for a fee, such companies are vastly reducing the marketing and distribution potential that providers such as AOL and MSN could do for them. As a result, if they want to survive, such companies will increasingly stop trying to sell their content via their own websites, and will instead change their business models to emphasize content licensing. When they do, however, that exclusivity will be a key selling point.
5. Secure a Niche - There are certain types of content that are better served by smaller, niche players that can build themselves a name that people trust. Take Zagat’s, the restaurant reviewer, for example. People worldwide have trusted Zagat’s printed restaurant guides for more than 20 years, and their reviews haven’t lost anything on the Web. The Zagat website is free, easy to navigate and uncluttered. If someone else had come along in the early days of the Internet, and Zagat hadn’t responded, it’s possible the company would have went the way of Encylopedia Brittanica. But that didn’t happen, and today’s Zagat.com is the most trusted source of restaurant reviews on the Web. It’s also a business model that will scale well in the converged future, as TV advertisements can link to Zagat content, streaming videos can show the inside of a restaurant and sample dishes, and users can make reservations with their TV remotes.
6. Branding and Ubiquity - The value of the brand name won’t be lost in the converged future. Companies with trusted names such as Disney, The New York Times, Yahoo!, etc., will find markets for their content. The ubiquity of their brand will be an important selling point. Take Reuters, for example. It’s a trusted brand that has been around for 150 years, and every site that offers news looks to Reuters first. This business model works now, and will work even better in a future where there are fewer distributors fighting to compete by offering the best, most trusted content.
7. Customer Service and User Friendliness - It can’t be stressed enough the importance of customer service and user friendliness, two inter-related essentials of any good content company in the converged space. Customer service was difficult for most online content firms at first, but technology is making it much easier. Security and ease of use for credit card transactions, for example, will continue to be a cause for concern. Processing customer feedback and billing questions is being helped along by new technologies such as voice recognition, and companies that strike first in these areas will win clients. Likewise, distribution to multiple devices will be important. Some financial companies such as Charles Schwab and Fidelity, for example, have been pioneers in not just allowing account access but in providing packaged financial content for wireless devices, ahead of many content companies.
8. Packaging and Personalization - Finally, the technologies made available in a converged future will allow users to access, package and personalize their content in ways never possible before, from the creation of personal front pages, to alerts when your stocks drop to a certain level, to suggestions on new TV or music content that matches your viewing and listening tastes. Content companies will need to work with both device manufacturers and network providers to ensure that their content is appropriate and navigable for such technologies. Early examples are My Yahoo, My AOL and other such services.
Implications of Convergence
Consolidation Opportunities
As mentioned earlier, the network provider field will not be a large one, and will probably be limited to no more than five companies or groups in the continental United States. In choosing to be one of these five, companies will need to acquire smaller rivals, invest in infrastructure and branding, and shed non-core assets such as content producers in AOL Time Warner’s case. As important as divisions such as Time Inc. and Warner Brothers may appear now to their parent, these holdings will become gradually less important to the overall goal of the company. Emphasizing Time Warner content on AOL has not helped AOL’s attraction to users, while in a converged future it might actually hurt the company’s chance to push its content out on other network providers. As a result, the more these units are pushed to the company’s fringe, the faster the quality of their content will decline until they can be sold to someone else who will reemphasize their content quality, exploit their brands, and drive them toward higher profitability. Portals and search engines will also be attractive acquisition candidates by network providers, as will content aggregators.
At the same time, content production companies will initiate their own wave of mergers in an effort to leverage their brands and ubiquity. Look for companies like Vivendi Universal, News Corp., Bertelsmann, and Reuters to continue their acquisition activity. Potential targets will range from networks, to film studios, to small, niche content production companies.
Impediments & Regulatory Impact
The risks of doing business in the convergence world will not be insignificant. The major risks are regulatory and standards, financial and economic, and technological.
Regulatory and Standards Issues
The idea of large multinational voice, data and video network providers buying each other and running the convergence network may at first seem like ripe picking for the Justice Department’s Antitrust Division. Still, as counter-intuitive as it may seem, it is unlikely there will be any major regulatory hurdles to the consolidation and strategic positioning that convergence will require. The convergence is being driven by consumer demand and new technologies, not by monopolistic or anti-competitive behavior. Indeed, competition will only be more intense in the convergence future, both as companies fight to be one of those handful of network providers, and then among that handful. Among content production companies, competition for consumers will be just as fierce, and consolidation isn’t likely to attract regulatory interference.
Already, the various U.S. government agencies have lined up in favor of this form of convergence landscape. For example, the FCC agreed in March 2002 that cable companies should be exempt from having to share their networks with competitors. The ruling means that federal rules governing phone companies don’t apply to the cable companies, and clears the way for cable companies to sell high-speed Internet access without opening their lines to competing firms.
Still, the biggest regulatory risk is the pace at which the regulatory bodies will allow convergence to progress. The convergence of voice, data and video has already been acknowledged by industry and government leaders, but the details of that convergence will take time to work out and will lead to infighting among the diverse regulatory bodies: the FCC, Department of Commerce, the State Department, etc.
Likewise, subsequent issues such as allowing network providers to bypass TV stations entirely and eliminate channel allegiance will require bold visions and intense lobbying, not just by corporate executives but by government as well.
Perhaps even more cumbersome could be the standards body initiatives that govern the networks. Determining, for example, which wireless technology will be used to connect devices in the home, or what form of compression technology will be used in video downloads, or which platform is best for online music sales, will all be issues that require consensus in an industry better known for discordance.
Financial and Economic Risk
From a company perspective, the biggest financial risk to convergence will be that shareholders and boards of directors won’t allow it to happen. As explained earlier, the current environment in which management is punished for bold, strategic moves will begin to ease by late 2002, and that by the end of next year the companies that haven’t taken the right steps toward convergence will be the ones taken to task by shareholders. Still, taking bold steps toward convergence doesn’t mean placing undue short-term financial risks on a company. Management will have to lobby hard to win shareholder backing before completing acquisitions, and that means laying out long-term strategic plans that, in the past, management would have preferred to keep guarded from competitors.
The time frame of convergence could also put added financial risks on companies, as acquisition synergies might not be realized until far into the convergence horizon. Careful trajectory forecasts will be required as part of any due diligence, and should be weighed against the risks of not being positioned for convergence leadership.
The protracted sideways stock market and the risk of the current economic recovery being short-lived will also place significant risk on industry-wide progress toward convergence. Even if new technologies bypass the need for new, fatter pipes to be installed to homes and offices, the convergence landscape will require significant investments in infrastructure and technology that will require a change in the current corporate mindset of tight capital spending. Venture capitalists too will have to reopen their checkbooks to invest in portfolio companies in the convergence space.
Technology Barriers
From a technology standpoint, convergence is already a given. The risk will not be in betting whether convergence happens but on which technologies will lead it, and what devices and services consumers will cling to. Content producers don’t have to worry too much about the technology, but there will be some amount of risk when deciding to build content for a new platform or delivery model, or to include technologies that enable better distribution or production.
Some of the lower-risk technologies, which have already proven themselves among content producers and network providers, include digital film production and XML-based Web Services that allow content companies to exchange data seamlessly. Buying XML technology and expertise might seem like an expensive proposition for some content production companies now, but it will be required in the convergence landscape. Conversely, content companies will have to think twice about spending lavishly on technologies like streaming media or distributed computing which may not be around for that long.
The Content Playing Field
Figure 5: Top Media Players Business Highlights
Well-Positioned Large Cap Companies
The companies best positioned to lead content production in the converged space are those that have already begun not only thinking about, but taking active steps toward positioning for it. These include Disney, News Corp., Vivendi Universal, Reuters, and AOL Time Warner.
Disney, through its film production and ABC unit, could be one of the convergence leaders in terms of content production. In spite of some early misfires in its Internet businesses, and cable operations that add little synergy, the company is still targeted on its core content production units. That concentration will have to become even more focused, as the company will have to direct spending toward beating competition in animation from DreamWorks and others, and reversing its dearth of blockbuster feature films. Buying TV stations – Disney was reportedly looking into acquiring Paxson Communications – is not the way to go.
News Corp. and its U.S. production group Fox Entertainment, which includes both Fox Television and 20th Century Fox, have the advantage of being led by Rupert Murdoch, one of the boldest and yet most visionary corporate media leaders in the world. While Murdoch’s strategies have been much maligned, and investors lukewarm, there are synergies to his holdings in the convergence future. Like others, he will have to pare some non-core holdings, but he can afford to build an empire of global network providers outside the United States, while Fox remains known within the U.S. as a leading and innovative content producer.
As mentioned earlier, Vivendi Universal has been eagerly building a base of content production companies, both in the U.S. and abroad, and forming strategic partnerships and investments in companies that will drive convergence. Shareholders should be won over as early as this year, giving CEO Jean-Marie Messier room to resume building his convergence strategy.
Reuters is not often referred to as well positioned, but the company is benefiting from having a long-term vision of the value of financial information. Its worldwide brand identity, ubiquity and focus on content production position it well for the convergence landscape. Reuters has been fortunate in that its limited exposure to the Internet revolution means it has been protected from the worst effects of the downturn. However, it can’t count on continued good fortune – winning in the convergence landscape will require first-mover positioning and strategic investments in products and services.
Finally, AOL Time Warner should be a long-term winner as a network provider and a near to mid-term winner in content production, both with an asterisk. The synergies between AOL and Time Warner are all about the cable properties and nothing about Time Warner’s content. The content is of a high quality, but it’s a separate business and at some point should be treated as such. Holding onto it for too long will dent the company’s distribution capacity and dull its focus on the network.
Further coverage of AOL Time Warner as a network provider will be provided in our next Convergence report, but for now suffice to say that its cable properties aren’t enough. The company will need to work fast to either acquire or partner with the companies providing the network technology to span the Last Mile.
Vulnerable Large Cap Companies
Vulnerable large-cap companies will come in two flavors: those that are simply in sectors whose futures will be limited in convergence, and those that are in the right sectors but haven’t prepared and positioned themselves correctly. As we’ve already mentioned, sectors such as broadcast TV stations and streaming media will have a questionable future once convergence arrives. Similarly, other sectors such as online content providers, aggregators and search engines will have a future, but only if they transform their business models to adapt to the new landscape.
In video, two that stand out are General Electric’s media business, and Viacom. Both are entrenched in the current analog environment and have built few synergies within their respective business units. Viacom’s Blockbuster unit will go the way of the 8-track in the convergence future, as video-on-demand will become ubiquitous. The company’s expressed interest in acquiring TV stations after the ban on multiple ownership was lifted also points to a lack of vision. What’s more, Viacom seems split on whether it wants to be a network provider or a content producer, with a lack of leadership in both areas.
While the whole of General Electric is beyond the scope of this report, it’s quite obvious there is a complete lack of synergies between the media businesses and the rest of the company, or for that matter among the media and convergence businesses. NBC is clearly in a position to be a top content producer in the converged future. Nonetheless, GE’s penchant for buying TV station operators (it owns 32 percent of Paxson Communications and has expressed interest in buying the rest), and other non-core assets put it at a disadvantage going into convergence. Moreover, as PIMCO bond fund manager Bill Gross pointed out in his monthly report in March 2002, GE has been growing through acquisitions and financing its acquisitions mostly with short-term debt that call into question the company’s ability to maintain its Aaa bond rating. If GE does have a convergence strategy – which to date isn’t apparent – shareholders may never let them carry it out.
As already mentioned, one of the sectors that will be hardest hit by convergence will be pure-play TV broadcasting companies such as Hearst-Argyle Television, Young Broadcasting and Liberty Corp., all of which own multiple stations in key markets around the United States.
Among print media, vulnerable companies include those that rely almost exclusively on an advertising model, such as Gannett Co., which owns USA Today and 94 other newspapers, and Knight-Ridder. While some people will always want to read newspapers, it will be increasingly difficult to be profitable with an all-newspaper business model because of the volatility of the advertising market and a migration of some readers toward the convergence network. Newspaper companies will need to find new ways to make money, such as packaging and improving their content for distribution by network providers. One caveat to this is the possibility that, in the convergence future, advertisers will have such a hard time reaching users that they will migrate back to the traditional newspaper model, where the advertisers rather than the users continue to have control – though that’s unlikely.
Small Cap & Venture-Backed Companies Worth Watching
Unlike hardware manufacturers or network providers, the field of emerging content producers worth watching will be driven less by technical innovation and more by quality products and strategic positioning. Having said that, innovation doesn’t hurt, especially among such sectors as video production, music distribution, and production of next-generation content such as community gaming.
A recovery in the financial markets could boost small and venture-backed companies in the print and online financial information industry. Look for leaders with core specialties such as privately held Bloomberg, CBS MarketWatch, Morningstar, Financial Engines and venture-backed newcomer Investor Force to emerge from the pack, providing they can secure the right distribution partners in the convergence landscape.
Traditional, niche content producers that have brand awareness and the ability to transform their products to the converged landscape, such as restaurant reviewer Zagats’s, are also worth watching. The company has venture backing from General Atlantic Partners, Kleiner Perkins and Allen & Co.
Aggregators and enablers worth watching include some of those we’ve already mentioned – Business Wire, PR Newswire and Internet Wire; Mondo Media and IFILM; as well as some information service providers to the cable industry including Nielsen Media Research, Arbitron NewMedia and ADcom Information Services.