Cartelization and Revenue Sharing in the Magazine Industry

The magazine industry appears to be suffering from a similar blight as the newspaper industry, with consumers increasingly choosing digital content from disparate sources, such as via google searches, rather than showing loyalty to a particular brand and backing it up with a (usually still paper-based) subscription.  The good news for the magazine industry is twofold. First, despite shrinking readership, they never relied as heavily on classified advertising, which has been decimated by google, eBay, monster (& other online job services) and craigslist in particular.  Second, magazines can more easily stem operational losses since they print less frequently. This buys them time to figure out a better way to approach the digital world than merely posting their content online and hoping the banner ad revenue will compensate for the loss of subscriptions and decline in both the number and price-per-square-area of print-ads.

This week, Time Inc announced a joint venture with many of the other major magazine publishers in the USA.  This initiative has as its objective creating and pushing a standardized "e-magazine" format, which will allow for rich content (controlled by the publishers) which is portable across devices of various platforms, including e-readers, pc's, macs and the iPhone.  Some have deemed this "the mag industry's Hulu", which seems to be a bit of a misnomer.  In this case, the industry is picking a technical and somewhat aesthetic standard for delivery, not a means or channel of distribution, or even a single business model, since publishers will still be free to choose ad-supported or subscription-based schemes. It does, however, include a single storefront (sound familiar?), which is notably lacking for magazines at the moment.

This move strikes me as being motivated at least in part by the media companies's realization of what happened to music companies, who saw their market power greatly weakened by the initiative Apple's iTunes (not alone, but certainly in the greatest part) took from them by aggregating a huge catalog of content, making it available online, and most importantly easy to purchase and put onto popular devices for consumption.  Thus we now see erstwhile competitors Time, Condé Nast, News Corp, and Hearst forming a joint entity responsible for developing and monetizing a more robust - and controlled - way to deliver content electronically.

From my point of view, this looks like a strategic move on the part of the publishers.  They seem to be viewing their consumers as a party to a strategic game, and acting as if the game were sequential by making a commitment move.  In other words, the publishers are telling consumers not to expect their easy, zero-marginal monetary cost (just the cost of viewing a few ads) access to quality content to continue unabated into the future.  They are committed to reviving their ability to charge subscription revenue, even if it means effectively cartelizing in order to start this phase of the game.  It will be interesting to see if consumers will be happy to pay for legal, portable high-quality content, as they largely have shown to be with music after years of preferring piracy (to DRM and fragmentation) - or if this commitment move will be the end game of this industry as we have known it.

Another interesting topic related to this announcement is the problem of revenue sharing.  How will the joint-venture be funded?  Will Time simply get licensing revenues from the other publishers from having taken the initiative and created the prototypes?  Or will the publisher, recognizing the network externalities in play (e.g. that the system, and particularly digital store if that actually launches, are more valuable the more wide-ranging the content available is), come up with a more sophisticated revenue-sharing system.  What would be the standard of 'fairness' used?  Will a publisher whose content lands more visitors who end up buying other publishers' content be rewarded?  How?  This aspect of the cartel will probably prove the most contentious, as there is no simple way for the members to get equitable, efficient, and envy-free pieces of this new, complex, digital pie in the internet ether.

Strategic Blunders on Top Chef

Synopsis: Honesty appears to be the lesser policy to strategic misrepresentation as the judges send off the last chef before the final.

(Spoiler warning for those who may care - discusses the judge's panel from the 2 Dec episode.)

Fans of Bravo's Top Chef will recognize the typical blunders made which lead to a chef 'packing his knives' to go: working with unfamiliar ingredients, using techniques or styles they are not familiar with or are beyond their technical ability, being uninspired or careless, or clashing with colleagues with whom they are meant to be collaborating.  Sometimes the flaws in a chef's dish are fairly obvious, which make the trip to judge's table a mere formality.  Other situations, such as in last night's episode, where the judges are merely picking over the fine points of a number of contestant's otherwise fairly well-executed fare, reveal the strategic dimensions of an episode's final stage - the judgment.

Last night, all four chefs executed reasonably well and received generally positive feedback from judges and other tasters alike.  However, only three chefs could walk away and join the final round of the competition.  Each chef prepared one vegetarian and one 'protein' dish for an outdoor event in Napa valley.  Whose dish had the most flaws?  That wasn't clear from the judges' preliminary discussions, so for me, this episode came down to the chefs' own comments at the judge's table.

Kevin had a very well-received vegetarian dish but his meat, a beef brisket, had only cooked for five hours and was thus still a little tough and stringy.   Jen had prepared two good dishes, but her vegetarian one was a bit too salty.  The judges had commented during tasting how much they enjoyed the 'duckiness' of her meat (duck) dish.  However, at the judge's table she made the fatal error of disclosing that instead of preparing the duck as confit she had wanted to grill it, but had lost focus during preparation and let the coals die down.  Kevin, on the other hand, made the strategic misrepresentation (otherwise known as a lie, a white lie in this case) that he was happy with the stringy brisket and intended it that way so that his overall dish wouldn't be mushy, because he was serving the beef with obviously mushy polenta.

You could see the judges' reactions to Jen's ill-advised disclosure.  Now instead of thinking about her duck dish's nice flavor, they doubted her focus and execution, and she was sent packing.  Kevin's brisket - more flawed perhaps than either of Jen's two offerings - was not seen to indicate a lack of focus or skill, and he lives to fight for the honor of Top Chef.

Comcast shifts the media landscape

Synopsis: Comcast's planned purchase of NBC-Universal from GE has the potential of changing the nascent coalition structure of the video-delivery ecosystem.  Barring any regulatory hurdles or other last-minute difficulties, Comcast will soon become a major player in the content area, giving them the ability to make credible strategic moves which weaken the hand of the coalitions of which they are not a core member.

In my last post, I discussed the movement of the video content delivery market toward a set of coalitions sharing a growing market for portable, digital consumption of media, often without a television.  For content providers such as TimeWarner or Disney, generally their dominant strategy is to put their content on as many platforms as possible.  Fear of piracy as well as a lack of control of the delivery side drive them towards the disparate coalitions who create software allowing for legal content delivery to popular consumer devices such as the PC, Mac, Xbox, PS3, or iPhone.  To create a more controlled environment favoring the content creators, NBC-Universal created the successful Hulu site along with their partners.  However this content-coalition is now under threat, because a company on a vastly different side of the content-delivery spectrum, Comcast, is apparently in the final stages of engineering a purchase of NBC-Universal from its current owner, GE.

What would a Comcast-NBC merger mean for the two coalitions directly involved?  For TV Everywhere, probably not much, at least in the short run.  In fact it could strengthen this initiative, because now a major 'over the air' network, NBC, could participate sooner rather than later.  At present most of the coalition's minor partners are all cable networks.  However, it must be pointed out that it also gives Comcast credibility to threaten to take their content - and their vast delivery network - and run into the arms of Hulu, which they will also have a huge stake in after this potential merger.  TimeWarner, at least in the short run, will not take such a threat seriously because Hulu isn't profitable or at best barely so, whereas Comcast makes billions selling ads to the local markets where their cable systems are in place.  In the longer run, though, it could drive better concessions and shift the balance of power in the TV Everywhere relationship in Comcast's direction.  However, Comcast must be wary of TimeWarner turning to DirecTv or its former cable division (now a separate entity) in order to roll out the authentication scheme.  Thus the TV Everywhere coaltion is likely to remain stable in the short run regardless of the results of this merger.

Hulu, on the other hand, may struggle to survive this merger.  As mentioned above, Hulu could be a useful foil for Comcast were they to make a strategic move, but the economics don't really work in Hulu's favor - and there is no guarantee that they ever will despite its popularity.  After all, You Tube is widely used but even Google has trouble monetizing it despite their massive expertise in web advertising and analytics.

What about the other coalitions, such as iTunes, Netflix, and Amazon, all of whom sell or rent Universal pictures (the movie arm of NBC?)  In my opinion they are under the greatest threat, because TV Everywhere now has Warner Bros, New Line and Universal studios in its coalition, assuming Comcast/NBC stays in.  If TV Everywhere can get Sony, Disney and few other major movie houses to join it, then the studios could potentially defect from one or many of the online movie stores.  None of the online providers would be particularly appealing on a broad basis should they lose access to most if not all the major Hollywood studios.  At the very least, it is likely TimeWarner and NBC-Universal should be able to improve the pricing they squeeze out of Apple and the others who use the online store delivery/rental model.

Coalition Building to Control Content Delivery across Devices

Synopsis: Consumers demand access to video content across their disparate media devices, and crave portability. Coalitions are forming between content providers, technology providers and telecommunications companies in order to control, monitor and monetize the consumption of media. The coalitions are not naturally stable due to the competing interests of each party involved in providing legal content for viewing, but since this is not a constant-sum game there is room for more than one coalition to thrive.

The King is Dead, Long Live the King!

So television's time has passed, all hail the new king of content delivery, the bitstream. Well, not so fast. The majority of Americans still have a cable, dbs (satellite) or fibre-optic system delivering subscription content to their homes. Despite the success of content-delivery sites such as YouTube and Hulu, which are overwhelmingly consumed from a personal computing device, for most consumers in the US television is still king. Although a small, but rapidly growing, segment of Americans have cut their cable ties and download or stream content on demand to their media centers, Apple TV's, Xbox's or Roku's, television is still very much in command of what content gets viewed by consumers (albeit much less in command of when since the advent of the DVR.)

Consumers increasingly seem to want to take their content where they go, or watch content stored on a single device to be available to them in another room or on another device. Content portability is creating simultaneously the greatest opportunities as well as the biggest headaches for content providers. On one hand, content providers have the chance to grab more eyeballs or mindshare, while potentially adding new revenue streams, by providing the means by which consumers can view content whenever and wherever they may be. On the other hand, providers struggle to control piracy or monetize digital content across all various platforms and devices, many of which may not be connected to the potentate of the American living room, the flatscreen television.

With the recognition that savvy consumers, especially the much-coveted 18-35 demographic, are knowledgeable enough to discover and consume the content they crave, whether of dubious origin or not, content providers are moving to enlist partners who can give them a degree of control over - and, of course, what they deem to be a 'fair' share of the revenue created from - these shifting consumption patterns.

Although one could speak of the cat-and-mouse between 'soft' (convenience-driven) or 'hard' (will never pay or just enjoy the challenge of , say, cracking encryption) content pirates and content providers as a game, this analysis is concerned with the strategic game between major content providers, technology providers, and telecommunications companies. Each one of the players in each category needs help from at least one in another category in order to share in a piece of the video content pie. For example, a content provider needs a secure delivery mechanism, which may involve partnering with a technology provider to create a secure authentication scheme, or a phone company who has a pipeline to consumers homes as well as devices in them to make content available.

Here are some of the major players by category.  Note that players involved in more than one category, are placed in the category which is most associated with their primary line(s) of business:

Big Content: TimeWarner, Disney, Viacom, NBC-Universal, Sony Pictures

Technology/Service: Google, Apple, Microsoft, Netflix

Telecommunications/Delivery: Comcast, DirecTV, AT&T, Verizon

Coalition One:

TV Everywhere. Pay for a content subscription once, get access to that content from anywhere via an (opaquely defined) authentication scheme.

Current Players: TimeWarner, Comcast

Benefits: Does not attempt to alter radically the existing economic system (in fact it attempts to defend it), which is that content providers get paid by content deliverers (e.g. cable companies) as well as advertisers for their product. In turn, the delivery companies sell advertising locally as well as get subscription revenue from consumers. As Mark Cuban points out, someone has to pay for all this great content, and indeed most consumers already are doing so.

Cons: It's unclear at this time how this will actually solve the platform issues, because there is no clear technology provider at this time, or any promises as to specific platforms or devices which will end up being supported. Only one Big Content provider is 100% behind it, and rollout to the delivery stage is in an early phase.

Stability of Coalition: Very stable unless the economics of the industry are undermined or radically shifted by consumer behavior and technological interruptions, which seems to be occurring but perhaps not on a grand scale (yet?)

Coalition Two: Netflix Anytime

Current Players: Netflix, Microsoft, Viacom & other content providers

Benefits: Allows consumers to use PC's, Mac's or view content on their televisions by streaming from Netflix's servers, connecting the TV via a computer, Xbox, Sony PS3 or Roku device (not to mention the traditional Netflix DVD or Blu-ray delivery via post.)

Cons: Does not solve portability completely, as mobile devices are left out at the moment. The iPhone is a big problem here if Apple blocks access.

Stability of Coalition: Stable, but vulnerable to interruption. Content providers could leave Netflix in order to destabilize this service or promote their own pet solution. Delivery providers are cut out, so they will work hard to see their own interests preserved. Microsoft could force Netflix off the Xbox in favor of their own streaming video service or another party's.

Coalition Three: iTunes on AppleTV, iPhone, iPod Touch & Mac/PC

Major Players: Apple, Disney and other content providers

Benefits: Can view content on televisions, Macs & PC's, as well as the iPhone/iPod Touch juggernaut. Consumers can rent or purchase content easily from an integrated store. Rumored subscription model would allow for bulk content rental, but it's not clear this will actually occur.

Cons: Is dependent on content providers to license content; said providers are wary of Apple after they took the upper hand from the music companies, also via iTunes. The Disney relationship is relatively strong due to Steve Jobs being one of their largest shareholders (via the Pixar purchase by Disney), but other content providers could choose to defect.

Stability of Coalition: Same as with Netflix - good but vulnerable, largely cuts out telecom providers.

Coalition Four: Hulu

Players: NBC-Universal, Disney, News Corp and other content providers

Benefits: Allows consumers in the US to discover and stream content to a PC or Mac.

Cons: No dedicated devices nor even available on most living room gadgets, no subscription service (for consumers to access more/specific content in a more timely manner), selective content available, not useful on mobile devices. Attempts to change the prevailing economics since Big Content 'owns' everything and thus denigrates content providers to 'dumb pipe' companies instead of partners.  This last point also risks the currently quite substantial subscription revenues cable channel owners get from their Delivery partners.

Stability of Coalition: Very stable for the content providers as they control everything, having acquired the technology which powers the website via an acquisition. Telecom companies will work against this solution unless they can get some kind of revenue from it.

Clearly, there are more solutions available than even these four (the Amazon video service comes to mind, as well as Google/YouTube), but this isn't meant to be an exhaustive review of every possible solution to the delivery problem. Rather, we can see that certain players are involved in several coalitions while others are shut out of many of them, in particular the telecoms. Since telecoms are a hugely important delivery stream as well as revenue source, the content providers have to tread carefully when promoting their own self-interested content delivery services (e.g. Hulu.) It's no accident that NBC was the primary driver behind Hulu, because as an over-the-air station they are not as dependent on cable or satellite compliance for either revenue or delivery (cable companies are required by law to carry local stations, for example.)

Over time one would expect the number of solutions, and therefore coalitions, to decrease as consumers choose the solutions which best suit their preference for convenience, portability and cost. However this may take many years, so I would predict many new entrants before any shakeout occurs. In any case more than one of these coalitions can survive, as each creates value differently to different parts of the media ecosystem (with the exception of Amazon, iTunes and Netflix, who are all dependent on content partners and create value from rental models.)

I will post further on these topics, including looking at strategic moves individual players might make in order to further their specific interests.

Full disclosure: Blogger is an employee of TimeWarner, completely uninvolved with the TV Everywhere initiative. Comments do not necessarily represent the views of TimeWarner.