I am off to CA for a few days, so blogging will be on hold until the weekend. With reports today about a COD network, the OTT pompom waving, Apple’s rumored iCloud announcement in the WSJ and the negative NOK pre-announcement, I thought this would be a good opportunity to review a post I wrote on my old blog from September 2006 (full text of that post below for your review).
Back in 2006 I defined content as “applications that provide services, entertainment broadcasts, videos on demand, music on demand, interactive gaming, real time broadcasts, collaborative productivity applications, and information that results in the completion of an economic transaction in which value is exchanged.” I think that is accurate. You want to own the application, the media content or the broadcast rights to a real time event. Those elements have licensing value – albeit that value chain has become compressed since the mid-1990s due to the lower cost of delivery and increased access options for consumers.
When I wrote the 2006 post, I thought the world of content could be put into four groups: (1) owners, (2) aggregators (3) service providers and (4) infrastructure providers. A few months shy of five years later, that grouping still looks accurate. The two questions investors what to ask are what is the value of each group relative to the other groups and what would actions would various group members take to alter their value positively relative to the other groups? Below is a real simple table for blogging purposes:
||RBOCs and PTTs
||Colo and Hosting Firms
|Real Time Broadcasters
||Microsoft / AOL
What I think is more interesting than debating the model or who belongs in what bucket, is what the various companies are doing in the ecosystem to create value, which means take market share, take a larger portion of the available revenue and force others to live on less revenues. This is why I think usage caps come to wireline connections just like they exist for wireless broadband connections. When you use shared wifi connections provided by transportation services, hotels, meeting sites they tend to limit your ability to consume long form content.
The whole idea of a game specific network for COD is because “Jamie Berger, Activision’s vice president of digital for “Call of Duty,” said the company has about seven million daily players of the game who spend, on average, about seven full days a year playing the game against others online. Players often use headsets to communicate verbally with other online gamers.” I have no idea what the company is going to charge, bet let’s say it is $3.99 per month or $40 on an annual basis and three million people sign up for the service, that results in $120M in found revenue for franchise. When I wrote the two networks would exist in the future and the compute point matters it is because of “persistent network connections like Gmail, Facebook, applications, non-streaming content, games, etc are changing the rules as to how content is stored and handled. Where and how the security and policy authentication occurs is affecting content distribution. The future is more bandwidth with shorter distances between the compute elements. Despite all the papers on data center fabrics I read, the winners will be the companies that deliver constant improvements in bandwidth and enable a closing of the distance gap between compute elements.”
* It is all about the network stupid, because it is all about compute. *
** Comments are always welcome in the comments section or in private. Just hover over the Gravatar image and click for email. **
Tuesday, September 19, 2006
Do You Want to Own Content, Aggregate or Provide Access to Relevant Content?
Jim Cramer says the way to play YouTube.com is to invest in Level(3). I can think of three important questions to consider:
- Are Cramer’s comments just a trade on YouTube.com’s value to the share price of L3?
- What is the state of long term expectations regarding Level(3)?
- As technology, services, media and content markets evolve, will the greatest value be found in companies that own (i.e. license or create) content, aggregate content or provide access to content? A few definitions to consider:
Content: Applications that provide services, entertainment broadcasts, videos on demand, music on demand, interactive gaming, real time broadcasts, collaborative productivity applications, and information that results in the completion of an economic transaction in which value is exchanged. To avoid any confusion, voice is service that is provided by an application called VoIP. It is true that legacy voice is deployed the world over, but voice as a service is migrating to IP and is a flat rate ($24.99 a month) application.
Content Owners: Companies or entities that create and or license the intellectual property rights to content.
Content Aggregators: Content aggregators are companies such as MTV, Apple via iTunes, Digg.com, YouTube.com, eBay.com, Google.com, Yahoo.com and MySpace.com. These companies provide an indexing and ordering function, as well as provide content aggregation that is relevant to various demographic groups. A seminal aspect to the success of MTV has been its ability to remain relevant over a 25 year history to specific demographic groups. The web sites that focus on social networking face the same challenge as MTV. We can call this the “MTV Challenge.” How does a company, broadcaster, web site remain socially relevant? This is the same challenge that any consumer products company faces. How do you maintain a stable of hot and relevant brands?
Content Service Providers: Content Service Providers are what people traditionally called carriers, PTTs, ILECs, RBOCs, CLECs, Cable, Cell Phone Providers, Telcos, Wireless providers and service providers. Although there is a lag in the migration of legacy services to new services, these companies are increasingly finding themselves competing in the same game. They all come from separate domains of expertise, but they are now in the same arena. Content Service Providers are companies that provide connectivity in all forms that enables consumes and businesses to access content.
Content Infrastructure Providers: This is a large group of companies that create and build technology elements that enable content service providers, content aggregators and content owners to create and deploy applications. Companies in this category are Cisco, Akamai, Alcatel, Microsoft, HP, IBM, Dell and many others.
Getting back to the question, the answer to question one has to be yes. Level(3) was a company that started with an IXC (i.e. long haul exchange carrier) business plan to build a US backbone and rely on local service providers (e.g. CLECs, ILECs, RBOCs) to fill their long distance pipes. The answer to question two lies in understanding the history of Level(3) and the market structure it is operating in today. Well after the collapse of the telecom bubble, Level(3) is a company with annual revenues in the range of $3-4B, $7B in debt and negative EPS history. The incumbent (i.e. ILEC and RBOC) service providers in the US own ~80% of the local loops and the two largest backbones (AT&T and MCI) are owned by the two largest service providers in the US: at&t and Verizon. Level(3) needs to find a niche in which to excel and perhaps being a specialty service provider to content aggregators such as YouTube.com will be successful – but it will not lead to Level(3) being a tier one service provider.
The answer to question three is the most difficult. The whole crux of the net neutrality debate is founded in the principle that content service providers want to charge more for the use of their network elements. The evolution of technology by the infrastructure providers has created a world in which applications can operate independent of the service provider. This relegates the service provider to being a provider of bits per second or a low profit business. The proliferation of networks and access options has created a challenging business model for service providers in relation to the investment costs required to build new networks. The conundrum is that content owners have a proliferation of content distribution options, content aggregators have additional leverage because they are able to create a socially important or relevant brand and content service providers are forced to compete on price to secure the business from content owners and content aggregators. Service Providers are at the bottom of the value pyramid.
An example of this evolution is the NFL. The National Football League (NFL) is arguably one of the strongest consumer content brands in America. A few years ago they started their own television network. Why? They did this to provide more content to the extreme element of their targeted demographic who wanted to come home and watch reruns of college athletes running the 40-yard dash in February. This is the point where the NFL started – but it is not the point where they are going. In 2006, they started broadcasting games on the network. Why? Twenty years ago the costs associated with building a broadcast television network was beyond the intellectual scope and ability of the NFL. In 2006, the proliferation of content distribution options has grown to the point where it is now conceivable that the NFL could in time, directly license their content to end-users. The whole NFL package could some day be an on demand broadcast via the internet, wireless, podCast, YouTube.com and various other content aggregators or service provider outlets. If this evolution occurs, it is because the NFL can keep more of the broadcast revenues and advertising dollars, rather then distributing profits throughout the broadcast television industry. When this occurs I would expect to hear about a “broadcaster neutrality debate.” An additional point on the relevance of content, do you remember when CBS lost the NFL package to FOX and subsequently watched a number of affiliates join the FOX network, which in time created a bigger outlet for FOX content? This is the same evolution that is occurring in the world of relevant web sites.