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Content,
Infrastructure and the Internet
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
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: http://www.wave-report.com/2000%20Wave%20Issues/wave2057.htm On-Demand
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 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. |
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