The Next Big Thing

Media companies around the world are trying to come up with the right business plan for the new age of video content.

April 2007

By Peter Caranicas

What’s a multibillion-dollar media company to do?

Everyone knows the world is changing. Go to any television- industry conference and you’ll hear pundits universally agree that technology is enabling audiences to move from the previous age of appointment viewing—during which viewers tuned in to watch shows at the time they were broadcast—to the new era of content abundance, where any video can be consumed anytime, anywhere, on a device of one’s choosing.

Of course, we’re not there yet, but it’s really just a matter of time. The question is, how much time? And media companies around the world are experimenting with a variety of initiatives—including broadband streaming, broadband downloading, short-form material for mobile devices, time shifting and place shifting—in a wild free-for-all as they throw ideas at the wall, waiting to see what sticks and what doesn’t.

One of the biggest initiatives came in late March when old-media behemoths NBC Universal and News Corporation announced a 50-50 joint venture to provide free film and TV content via broadband using Internet giants AOL, Yahoo!, MSN and News Corp.’s own MySpace for distribution. The deal—which included online advertising commitments from General Motors, Intel and others—appeared aimed at countering the growing influence of YouTube as the web’s primary video distribution site.

Indeed, the twin phenomena of social networking and user-generated content—epitomized by MySpace and YouTube, respectively—are the focus of most media activity these days. News Corp. jumped into the waters early when it paid $580 million to acquire MySpace in July 2005. Following Google’s acquisition of YouTube for $1.65 billion in October 2006, the march to get involved with sharing and networking has swelled to a stampede.

THE RACE FOR WEB SPACE

Take Viacom, for example, which ousted CEO Tom Freston in September 2006—reportedly for not moving fast enough to enter the new-media space, and for failing to acquire MySpace when he had a chance to, before Rupert Murdoch got his hands on it. As if to make up for lost time, in mid-February 2007, Viacom’s MTV announced plans to let consumers take clips from its shows and post them on their personal blogs and web spaces.

Viacom’s move came shortly after its early-February dust-up with YouTube, when Viacom demanded that the Google-owned site remove over 100,000 clips from its web pages that belonged to Viacom—including videos from the popular comedy shows The Daily Show with Jon Stewart and The Colbert Report.

Viacom now maintains that its shows have enough appeal to attract online audiences on their own without relying on YouTube—thus explaining its new permissiveness in allowing its property to become part-and-parcel of millions of uncontrollable individual blogs. “We need to open up our websites and content both for consumers and for other companies,” said Mika Salmi at the time, �shortly after he was appointed MTV Networks’ president of global digital media, following MTVN’s acquisition of his Internet company, Atom Entertainment. Presumably, MTVN wants to dictate the terms of all such sharing.

Acquisitions seem to be today’s favorite way for traditional media companies to enter the new-media space. In addition to News Corp.’s acquisition of MySpace and MTVN’s acquisition of Atom Entertainment, NBC Universal bought iVillage for $600 million in March 2006, and more such deals are likely to follow—in a striking reversal of the late ’90s scene, before the dot-com implosion, when Internet companies were buying traditional media conglomerates, culminating with AOL’s ill-fated acquisition of Time Warner in 2000.

Will today’s large media companies be able to embrace and monetize new media fast enough? Many are skeptical. “It’s possible, but difficult,” says Roma Khanna, the senior VP of content for Canada’s CHUM Television. “The models we’ve worked with for so many years are based on distribution realities that are changing.”

Khanna notes that until now, the business of selling and buying TV content has been based “on the notion of territoriality, with rights bought and sold for specific territories, and on a tight control over the timing of [a product’s] release through successive windows like free TV, pay TV, DVD and so on. Those are the things that are dramatically changing around us,” she says. “We don’t have the same level of control that we used to.”

If you’re a large media company, Khanna asks, “How do you pay for a drama that costs millions of dollars when you don’t have the first and primary [broadcast] window?” Fortunately, she says, that’s not a question CHUM faces because, as a nontraditional media company that reaches consumers through radio, local television and specialty TV channels as well as broadband and mobile, it is �relatively small and nimble. “We’re a highly multiplatform company, �driven largely by MuchMusic—a brand that has a relationship with consumers and isn’t just about TV. For us it’s a natural extension to be present on wireless platforms and broadband,” says Khanna.

THE BIG PICTURE

But what about the giants? Executives at the large media companies who are leading the charge into the unknown are generally positive about the challenges they face—and approach them with a multi-pronged strategy.

Albert Cheng, the executive VP of digital media at the Disney-ABC Television Group, sees a lot of opportunity. “Our premise is that the consumer marketplace will be fragmented,” he says, “but the consumption of content will continue to coexist on all platforms—some growing, some shrinking—for at least ten years. TV will continue to exist. Cable and satellite will continue to be there. There will be mobile and portables. All are different ways to access content, and each of these platforms will meet a certain need for a certain type of consumer.”

Cheng believes that “in aggregate, there will be an increase in consumption of our content through different types of platforms,” but acknowledges that “after ten years it might be a different picture, so it’s imperative for us to be able to address all the different markets.”

As they reach out to different markets, the major companies cannot lose sight of the value of the content they are distributing. “That’s where our biggest debates and challenges tend to be—in �making sure we’re getting the right �value for the content,” says Beth Comstock, the president of integrated media at NBC Universal. “We believe you can’t just say all content is created equal.”

At BBC Worldwide, the director of digital media, Simon Danker, who is responsible for increasing the company’s new-media business, takes a similar tack. “We want to make our content available on as many platforms as possible to as many different types of audiences as possible,” he says. But the challenge is to “learn what content works with different audiences, and how to build new revenue streams for that content’s rights-holders.

“We’re entering into a nonexclusive world, where lots of different services are emerging,” he adds. “Some offer download to own, some offer download to rent, some offer streaming, but ultimately all are offering a similar type of content, just in a different way. The key thing for us is to work with as many of them as possible.”

BSkyB, the British pay-TV platform, has been at the forefront of offering its customers a plethora of ways to enjoy content. BSkyB currently has 8.2 million subscribers—that’s one out of every three homes—and 2 million of them subscribe to Sky+, the digital service that includes the PVR (personal digital recorder.) Customers can also choose to watch Sky programming via broadband or mobile.

Brian Sullivan, the managing director of BSkyB’s customer group, says that the company’s close relationship with subscribers is at the basis of offering any new service. “It ultimately is about simplicity, flexibility and choice for customers. We’ve always taken the view that innovation is at the heart of the company. We want to constantly be changing and adapting to what customers want from us and be able to provide the best entertainment experience possible through whatever means they choose to engage with us.”

Granada International’s head of new media, Martin Blakstad, has a similar multiplatform strategy. “You have to be absolutely everywhere,” he says, “with any means of digital delivery, including broadband, mobile, any handheld device, IPTV, VOD. It includes anything outside the traditional windows of exploitation like terrestrial broadcasting, cable and pay TV.” The first order of business, stresses Blakstad, is to define how new media will affect the existing distribution business, and to figure out how to exploit its strengths.

VONGO DRUMS

The scattershot approach also seems to be the operating philosophy at Starz, the production and distribution subsidiary of Liberty Media Corporation. “We want to give as many reasonable new concepts as possible a tryout at minimal financial risk so that we have as many chances as possible to hit a home run,” Starz’s chairman and CEO, Robert Clasen, told his audience at a New York University television conference last November.

Starz’s major initiative in new media so far is its Vongo movie download service, which was launched in early 2006 by Starz Entertainment, the premium film service provider that distributes the Starz and Encore movie channels in the U.S. Vongo offers unlimited downloads from a library of over 2,500 titles—1,000 of which are feature films—for a flat $9.99 per month.

This past January, Starz took the Vongo service a step further via a deal with Microsoft, which made Vongo the “movies launch partner” for the new Vista operating system. The arrangement includes technology that lets purchasers of Vista-based PCs who download Vongo’s titles onto their computers to view them on any connected TV set.

That capability is a key to the success of any broadband video service, believes Bob Greene, the executive VP of advanced services at Starz Entertainment. Vongo’s relationship with Microsoft allows Microsoft’s Xbox 360 video-game console to act as a “media extender,” taking Vongo movies stored on the computer and streaming them wirelessly to the TV set.

Starz is making a significant, long-term investment in Vongo, even at the risk of competing with its cable affiliates, which offer their customers the same Starz films for their own monthly fee. “Like any startup, we’re not going to be looking at making money in the first couple of years,” says Greene. “We’re in this for the long play.”

In late March, Starz demonstrated the high importance it places on Vongo by filing a lawsuit against Disney’s Buena Vista Television for copyright infringement and breach of contract. At issue: Starz claimed that Disney had recently begun to sell via Internet services like iTunes and Walmart.com the same films that the studio had licensed exclusively to Starz. In the suit, Starz said that over the life of its multi-year contract with Disney it had paid over $1 billion for periods of exclusive rights to the movies.

“Vongo is a great example of a new premium broadband video service,” says Will Richmond, the founder and president of Broadband Directions, a research firm that studies the broadband video market. “It’s a great value proposition to users who can consume as much as they want for one price. It’s a bit like Netflix, but online, and you can store it on your machine.”

Another company whose main concern is offering value to its customers is Joost, the new online content platform created by the founders of Skype. “Joost offers the best TV experience and the best Internet experience in one combined package,” explains Fredrik de Wahl, the company’s CEO. “It takes the TV experience and what is good with TV today—high entertainment value, full-length programming, full-screen experience and channel concepts—and brings that online. You can watch what you want to watch, when you want to watch it, and where you want to watch it. You can bring many more interactive features, social networking, all of the best Internet technologies.”

De Wahl adds that Joost’s business model sets it apart from other online TV ventures. “That is very important for us,” he says. “We fundamentally respect the content owners, the advertisers and the viewers of this platform. You cannot have a long-term sustainable business model online unless you respect all of these three groups.”

THE POWER OF DISRUPTION

The buzzword that perhaps best describes what is happening in media distribution today is disruption. While big TV events are less affected, most other forms of programming are likely to be battered in the changing landscape. “There will continue to be major occasions like the Super Bowl or the World Series, where everyone will gather around the TV and have parties,” says Frank Childs, the VP of business development at PeerApp, a company that provides infrastructure to Internet service providers. “That will never go away. But when it comes to day-to-day media like news, TV shows and movies, it’s hard to compete with an experience that gives you the ability to watch it anytime, anywhere, on any device. And that’s what you’re seeing. That’s the disruption.”

The disruptive trend started back in the ’70s with the VCR, says Childs. “The next step was TiVo. The next stage is the web, and Slingbox, which place-shifts television so you can watch what you want anywhere you want. Most people want their television anytime, anywhere, and on any device. That will create disruption. Companies who adapt to that model are the ones that will be successful. It poses new threats, but also new opportunities.”

“Video delivered over broadband Internet connections is the single most disruptive influence on the traditional video-distribution value chain,” agrees Richmond of Broadband Directions. “That’s because broadband is the first open platform. All of a sudden, everybody has equal access to audiences. This is a very disruptive state of affairs for the traditional players who used to own all the scarce real estate in the home.

“Any content provider can now deliver video to their intended audiences without any middleman getting involved,” Richmond continues. “That’s a huge shift from the way the video business has always worked, with a fixed number of channels. It has been a finite, scarce environment until broadband came along. Now, anyone can send any video to anyone else.”

Richmond observes that “virtually all big media companies have moved broadband media to a front-and-center priority. Over the past 12 to 18 months, the community has acknowledged that broadband will be significant to its business. As a result, we’re seeing a proliferation of video posted online, both by large media companies already in the video business, as well as other companies that have not been in that business.”

But that’s not all. Richmond notes that media companies now compete not only with one another but with the world at large when it comes to getting consumers to pay attention to video content. Newspapers and magazines that have historically never been involved in producing video, as well as websites like CNET and �marketwatch.com that until now offered mostly text, are now “leveraging their brands and online traffic and editorial competencies into the video area,” he says. “Video is popping up all over their websites. They now have a historic opportunity to bring their videos directly to consumers.”

Moreover, “big-brand marketers and retailers who typically bought TV time in order to advertise now recognize they can run their own video sites and can go beyond advertising and get into the content business,” adds Richmond. One high-profile example is what Anheuser-Busch is doing with Bud.TV—a male-oriented website it launched during this year’s Super Bowl that rewards viewers with entertaining videos even as it promotes the company’s beer.

PEER TO PEER

But even as media companies and others try out different schemes to embrace new technology, technology itself moves ahead so fast that it outpaces their efforts to remain current. While the buzzword that best describes what’s happening today may be disruption, the buzzword that describes the means by which it is happening in the broadband arena is peer to peer—or P2P in computer jargon.

The advantage of P2P networks, compared to traditional networks, which use a limited number of central servers, is that P2P relies on the aggregated computing power of its individual users and the available bandwidth of all the network participants. This is a far more flexible and capacious system than centralized network management and may well be the way most high-bandwidth traffic, like Internet video, will be handled in the future.

BitTorrent, the P2P com�pany most in the news these days, launched a movie-download service in late February to handle legal downloads of films and TV shows. The company, which had been criticized for making available a technology that enables content piracy, has now signed deals with such film studios as Twentieth Century Fox, Warner Bros., Lionsgate, MGM and Paramount.

Known as BitTorrent Entertainment Network, or BEN, the ser�vice will also support video-sharing communities, allowing users to post their own videos online—a service that the company expects many independent filmmakers to take advantage of.

“Until now, all we’ve had is free promo content, trailers, music videos and the like,” says Ashwin Navin, the president, COO and a cofounder of BitTorrent. “But BEN will have the media from 34 studios and TV networks available for a price tag. You can rent movies, purchase TV shows and music videos, try out video games, and if you like them, you can purchase them. All is downloaded with BitTorrent protocol.”

BEN charges $3.99 per movie rental for new releases and $2.99 for older titles. TV shows are set at $1.99. Self-publishing is free. The movie rentals last for 24 hours, after which the file locks up and the user must rent the movie again if he or she wants to see it beyond the rental period.

More than 135 million people already use BitTorrent software and, according to Navin, P2P technology is “revolutionary” because the more people use it, the faster and more efficient it becomes.

But even as BitTorrent announced its new entertainment service, another company, Veoh Networks, which is based on a modified form of P2P technology, unveiled a new service that will “syndicate” Internet video content and automatically distribute it to major video destinations on the web, including YouTube, Google Video and MySpace.

According to Veoh’s CEO, Dmitry Shapiro, Veoh is built on serving two sets of users: producers/content owners, and viewers/consumers. He touts Veoh’s liberating impact on both groups. “Content owners are folks who use video to distribute their work directly to consumers,” he says. “With traditional media, it was hard. They had to make deals, get carriage, etc. Most things were out of reach for independent producers. But now anyone with a computer and an Internet connection can broadcast programming.

“Veoh does for TV-grade programming what YouTube did for web video,” he continues, “which is to democratize broadcasting and create tools that allow consumers to find what they’re looking for. It’s the next step beyond YouTube.”

Veoh serves consumers, says Shapiro, by vastly improving their viewing experience. “Today, they watch these grainy videos playing within their browser, and �periodically the videos will stop because the download is buffering. It’s a poor experience if you’re watching Lost.”

He claims that Veoh has remedied this by developing a patent-pending proprietary P2P technology that dissipates the cost and burden of delivering large files. “It acts like a TiVo for Internet television,” he says, “that can download large, high-res files from any source, which can then be watched full-screen.” He adds that while today the files are downloaded and stored, Veoh has plans for high-quality streaming as well.

THE LONG HAUL

Where will we be ten years from now? BitTorrent’s Navin believes that in a decade the consumption of television will have undergone a total revolution and that 100 percent of all TV content will be available online. “Media companies will no longer have to guess how to schedule limited shelf space or air time. They’ll be able to create a personal experience on demand for every single customer. There will be one channel, one medium, to get whatever you want.”

Navin also believes that P2P technology is the key that will unlock what many see as the dilemma of today’s media evolution. On the one hand, large plasma screens and HDTV are starting to dominate the high-end home-viewing experience. On the other hand, drawn by convenience of time and place, consumers now also view content at a much lower quality on computer screens and the tiny screens of portable devices.

BitTorrent’s flavor of P2P, says Navin, is the “secret sauce” that will turn the Internet into the main video distribution medium, making file delivery very efficient: “There’s no more sensible way to deliver HD video over the Internet than with a peer-assisted architecture.”

The veteran media player Barry Diller, who held major positions at ABC and founded the FOX television network while at News Corp., sees a continuum between old media and new media. Now the chairman and chief executive of IAC/InterActiveCorp, which owns the home shopping network HSN and the online mortgage broker LendingTree, he answered questions at the McGraw-Hill Media Summit in New York in February. Asked whether he might return to his roots, he answered, “I never left. It’s just different kinds of programming. None of us can fool ourselves. Everything will be in digital form.”

Granada International’s Blakstad is one of those individuals who bridges old and new media. He worked for years in Europe for Columbia Tri-Star before switching over to Internet companies. Now he helps Granada negotiate deals in the changing media environment and is excited by all the developments. “I’ve been saying this is going to happen for the last five years, and now it’s actually happening,” he says. “It’s a very interesting space to be in.”