***Content, Infrastructure and the Internet
By Amanda Rogos
In the last year, in part, due to the Internet market downturn, a
debate has arisen surrounding Internet content and
infrastructure. In 1999, the market put its faith in content, and
predicted that broadband would foster even larger increases in
subscriber growth for the Internet because it enabled more and
richer content. This is now being challenged. Analysts have
concluded that content does not make a venture successful, but
instead infrastructure drives usage – and therefore broadband,
instead of merely increasing subscribers, will actually drive the
whole market not just content.
The main issue revolves around the role that each of the
following play in driving the market: content, infrastructure and
functions. The debate can also be described with the following
questions.
Is content alone enough to attract consumers?
Does infrastructure drive subscribers regardless of content?
Will applications need infrastructure partners to compete?
4th Wave has followed this debate and this article frames the
issues by defining content, examining the business models in
traditional media outlets and Internet business models. We will
also look at the role of broadband and infrastructure in order to
determine their importance in market acceptance and the future of
the Internet.
Content
Originally, content was created by traditional media outlets - TV
networks, publishing houses and/or Hollywood studios. Most of the
content was distributed in broadcast or printed form with
limited, if any, personalization capabilities. Even the Internet
began with limited content distribution methods. With the advent
of personalization services like My Yahoo, Webclipping.com and
peering services like Napster and EarthcamTV, consumers have
begun to build their own content. This has fundamentally changed
content distribution and affected the range of business models
present in the market. Our market research characterizes this as
Casual Media. This is media that the individual has a substantial
role in creating. A result is that the value to the individual is
much higher. The best illustration is voice over a telephone.
Napster, as a form of content distribution, had 10 million
registered users after only 8 months online. It could be said
that the driving factor in Napster's success was the free
component but we believe that peer-to-peer has the potential of
being an enduring means of media support because it also supports
the concept of casual media.
On the video side of the market, the NPD Group estimates that 1.3
million PC cameras (still-video cameras which operate only while
connected to a PC) were sold between January and October 2000.
During the same time in 1999, 425,000 units were sold. Granted
some of these cams may have been for business use, but it proves
that building content – especially interactive and video content,
is happening. Note again that this usage model is supportive of
the notion of casual media.
Subscriptions
In traditional media outlets, specifically print media and cable
television, subscription services have been very successful. On
the Internet, except for adult content sites, the model has been
more difficult to build. On one hand, the efficiency with which
the Internet allows information to be updated, supports the
subscription model. Yet, the fact that residual content, if left
online, may devalue each individual piece of content – has
restricted subscription use.
Another facet of the subscription model, pointed out by George
Bell, Chairman and CEO of Excite@Home during a speech in November
was that consumers can only handle so much content. For example,
in a cable system, when the first 20 channels are introduced,
people become loyal to, on average, 3-4 of them. When the next 20
channels are introduced, people will add 1-2 more channels to
that preferred set. When channels 40-60 are introduced,
displacement begins, and instead of adding channels, existing
ones are replaced. A churn rate of 20-40% per year (typical of
HBO and Showtime) adds to the consumer retention complexity.
We note that AOL has announced that it will release a flat rate
subscription fee for streaming audio on their site. This may
represent one approach to the future of online subscription.
According to the Online Computer Library Center (OCLC), the total
number of unique websites on the Internet has grown 170% since
1998, from 2.6 million to 7.1 million in 2000. What is going to
happen to a consumer's preferences with this amount of choice?
Success story: Consumer Reports is the number one subscription
site on the Internet. The site made its online debut in 1997 and
currently had over 502,000 paid subscribers in November 2000. It
also is one of the few online sites that boasts positive
revenues. Executives at the organization attribute the
organization's success to its independence from commercial
interests, which includes prohibiting advertisements and
endorsements on its sites, buying all test products through
consumer channels, and refusal to except donations or demo
products. The site charges $24/year or $3.95 for a month's access
to the site's information. More about Consumer Reports Online can
be in the WAVE Report's Issue #2057:
www.wave-report.com/2000%20Wave%20Issues/wave2057.htm
On-Demand Media
Video on demand, although promising, has not reached its market
potential. With limited content choice and continuing conflicts
with the content owners, the service has been only moderately
successful in luring subscribers, even in its early tests. Pay-
per-view, on the other hand has proved more successful, but
provides less of an opportunity for everyday video rental. PPV's
draw is in events that provide here and now entertainment.
Replay and TiVo entered the market intending to change this by
selling Personal Video Recorders (PVRs) that use a hard drive to
store movies and television shows for a mock, VOD experience.
Costing between $499-999 for about 10 hours of content storage,
market acceptance was lukewarm. Cahners In-Stat estimated that
the PVR market would barely break 300,000 units in 2000.
Consequently both companies have shifted business models in
recent months. The companies will position themselves less as
consumer hardware and service vendors by licensing their PVR
technology to set-top box manufacturers and cable service
providers.
In its November announcement, Replay also released the news that
its CEO had resigned and that the company would layoff up to half
its work force (company has 260 employees total). Rumors
circulated that the company would be sold. The company, which has
sold 20,000 units, also announced software licensing trials with
Time Warner, Comcast, Charter Communications and AT&T. A
development agreement with Motorola was in the works.
A potential stumbling block for on-demand media is the fact that
as storage capacity increases, consumers need to renew less and
less content. "On-demand" therefore turns into "saved for life."
This has copyright implications as well business ones that will
need to be resolved before the market really evolves.
Peer-to-Peer Networks
With the advent of Napster, peer-to-peer networks were brought to
the forefront of the Internet space. These networks allow large
amounts of data to be shared and accessed at very low cost – and
potentially at no cost at all. The music industry initially
fought to eliminate Napster, then in October 2000 a deal was made
with Bertlesmann AG, the parent of label BMG Entertainment, in
which the company would instead attempt to harness the power of
peer-to-peer communication. Bertlesmann agreed to drop its part
of a lawsuit pending against Napter, if the company would create
a commercial, subscription-based program that would generate
royalties for the artists. If a program was developed,
Bertlesmann also offered to buy a stake in Napter. Napster is
planning to launch the system this summer.
The recent (February 12th) ruling from an appellate court
accusing Napster of encouraging copyright infringement and then
profiting from the practice, could shut down the system until the
new program is released. The circuit court panel backed a
district court injunction holding Napster liable for violating
music labels' copyrights, and directed the district court to
modify the language of its ruling to more explicitly describe the
limits of that liability.
This represents an opportunity for the industry as well as a
sizable challenge – how to get paid for IP-based services that
can be shared between users with little control?
According to a report from DFC Intelligence, video streaming on
the Internet grew 215% in 2000 to over 900 million total streams
accessed. Broadband streams made up almost 29% of total accesses.
If peer-to-peer networks were to expand to video streams, the
possibilities could be significant. Sharing would be greatly
increased, but potentially so would pirating of content. The Net
Economy Magazine, in an article entitled, "The Value Addled
Proposition," posited that due to these types of networks and
pirating techniques, content will be greatly devalued on the
Internet. Their conclusion? Becoming a gatekeeper is a much safer
proposition.
Viacom's Chairman, Sumner Redstone disagrees though arguing that
solid entertainment programs were what the masses wanted. He
believes that people don't watch technology or distribution, they
watch content. Therefore what will ultimately propel the Internet
as an entertainment medium will be creativity – not technology.
Bill Roberts, secretary-general for NAB also gives a pitch for
content. Citing Viacom's $46 billion purchase of CBS and AOL's
$164 billion merger with Time Warner, Roberts claims the high
valuation put on content in today's market proves his point. He
quotes Viacom's Redstone as saying that the Internet will
represent a new form of distribution for television, not a direct
competitor and said that, "Technology paves the way. But make no
mistake: content is the fuel that drives this industry forward."
Infrastructure
Networks, whether fiber, copper or wireless are important real
estate as companies begin to integrate the functions of the PC,
television and telephone. Dell has estimated the size of the
Internet infrastructure market for server and storage hardware
alone could be as large as $180 billion during the next 5 years.
Forrester and IDC predict that the total infrastructure market
could hit $1.5 trillion in 2003. There are many proponents of the
equipment that allows the networks and communications to function
– devices, routers, gateways, the networks themselves.
Infrastructure plays would also include ISP/network partnerships
and the formation of always-on broadband connections. But does
infrastructure drive subscribers regardless of content? Industry
opinions are listed below.
In January 2000, during the World Economic Forum's Annual
Business Summit, a panel discussion focused on this same subject
of technology or content, and AOL's Stephen Case argued for
technology. Case stated that success will arrive when the
Internet is a fundamental part of people's lives, which will only
be accomplished when the PC, television and telephone are
contained in a more unified environment. This union is
irrespective of content, and although content is important, the
union must come first. AOL's merger with Time Warner plans to do
just that – combine Internet services, news and entertainment in
an effort to capture more users.
At a TV Over the Internet Conference sponsored by the Columbia
Institute for Tele-Information, participants agreed and cited Ron
Howard and Steven Spielberg's Web site and Oxygen Media, which
had very appealing content but did not succeed (Oxygen Media is
an ongoing Web site, but is struggling to find a niche) as
examples of content that lacked the correct conduit.
They posited that infrastructure and service marketing are worth
much more than content. Without broadband connections, no
household is going to want to watch television over their PC and
most will not want to play games or search for simple items –
like movie listings or telephone numbers. These applications will
only be successful when a broadband always on environment is
provided and the timeframe for widespread broadband is an unsure
guess at best.
Functions
Yet another argument exists, this one for functionality – the
content delivery, applications and ease of use of these
offerings. Functions include control of appliances and physical
devices through remote usage and automation, voice recognition as
well as content on demand. The question here is will these
applications need infrastructure partners to compete?
In its June 2000 issue, Red Herring claimed that the real issue
is content delivery. The magazine found that participants at the
Capacity Wholesale Market 2000 Global Conference, were equally
focused on the content as they were on the conduit. Nick Jeffery,
managing director of international and partner services for Cable
& Wireless stated that, "It's essential for carriers to gear up
their networks to support new users and data types, and any
carrier who ignores content does so at its own peril." To this
end, Cable & Wireless has shed some of its voice-related concerns
and purchased a number of small European ISPs to increase its
content-hosting and delivery options.
Marcus Bicknell, president of CMGI's European division stated
that, "Content is not king, but functionality and consumer
friendliness will reign." He went on to explain that although
content was not king, giving consumers the content they want,
when they want it will determine the viability in the carrier
market of the near future. Bicknell cited the AOL/Time Warner as
an example and believes that this type of partnership will become
the norm in the future.
This view was shared during the Next Generation Networks 2000
Conference, by George Bell, Chairman and CEO of Excite@Home. In a
presentation, Bell said that the company is in the process of
marrying @Home and Excite (content+acess). He stated their belief
although that people have little awareness of the delivery
mechanism, they have a very deep awareness of the content,
therefore content will drive usage. Yet in Bell's mind, companies
must change the paradigm towards a content experience enabled by
functionality – and therefore the two are interchangeable and
dependent on one another for success.
Assessment
The jury is still out on whether content, infrastructure or
functions will become the driving factor in the Internet market.
We believe that the combination of these offerings will be the
key to a product's success. No household will watch movies with
their 56k modem – infrastructure is important. But providers
selling broadband connections need compelling content to make a
$40/month sale. And content can only benefit from the addition of
key applications – streaming media partnered with voice
recognition software to facilitate remote tuning; videos on
demand partnered with applications that let the consumer watch
the video on whatever device is convenient etc.
The bottom line is that consumer value both tangible and
entertainment will drive content. Content with poor delivery has
limited value and thus cannot stand on its own. The Internet as a
delivery means for content, infrastructure and functions is years
behind its promise.
Wave Issue 0109 2/15/01 Article 2-01