On the Future of Tech, Media and Entertainment

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Business Week is reporting that in mid- September Apple’s iTunes Music Store is going to begin selling movie downloads. http://www.businessweek.com/bwdaily/dnflash/conten…

This isn’t unexpected, but it’s a big deal. For years pundits have been predicting that Hollywood would have to start distributing movies digitally or watch pirates hollow out the industry with the same ferocity as they went at the recording industry. But Hollywood and its partners have only dug in deeper. Theatre chain owners and DVD retailers like WalMart, who are the keys to the studios’ distribution system, see digital distribution as a direct threat to their profitability. For every movie you download, they believe they will see one less DVD sale or movie ticket.

Now, Apple is going to change all that, and chances are, it will be as big an earthquake for the movie business as it was for the music business five years ago. The Business Week piece isn’t specific, but this is obviously the first shockwave from  the Disney-Pixar merger earlier this year. You should expect to see a portion, if not all, of the Disney library available for download after the announcement. 

Why am I so sure? Unlike other studio heads, who live in fear of pissing off their distribution channel, Disney CEO Bob Iger has been infatuated with the possibilities generated by digital distribution for years. Who is his largest shareholder thanks to buying Pixar? Apple CEO Steve Jobs. http://money.cnn.com/2006/01/27/technology/plugged…

Will anyone follow them? I doubt it – at least immediately. If you’re a studio head why jump off the cliff when Bob Iger is eager to go first? But count on them following Disney’s lead eventually. Studio heads are addicted to crowds and buzz, and few have proven more adept at attracting crowds online as Steve Jobs.

John Heilemann has an interesting piece in Business 2.0 this month about the New York Times’ online efforts. http://money.cnn.com/magazines/business2/business2… He makes the unpopular, but in my opinion correct, point that despite the paper’s recent troubles financially and editorially, few other newspapers are embracing the online world as aggressively and successfully.

What makes the Times’ efforts so notable is that it is the first big general circulation paper to have gotten readers to pay for web access. Times Select, which puts the paper’s columnists and archives behind a pay wall, is turning out to be a big hit. After about nine months, it had 530,000 subscribers, 190,000 of whom are paying $49.85 a year. Times Select is free to subscribers.

This seems to validate something journalists like me have long hoped was true: That readers will pay for top quality content. You may hate the New York Times, but its importance is not debatable. Its access is unparalleled, and its stories – not withstanding its screwups – are, in aggregate,  among the best.

The financial power of having top notch, unique content is often overlooked in debates about the future of the newspaper industry. What people forget is that for papers like the Times, with content that is in demand, the Internet is the most incredible distribution mechanism ever invented. It costs next to nothing to deliver the online version of the New York Times. It costs billions to deliver the actual paper.

What this means is that on some level the New York Times isn’t worrying about the day that people stop reading newspapers. It would like it to happen tomorrow. Then the paper could just deliver all its content electronically.  Roughly 80% of its costs are in printing and distributing the paper. Eliminate those costs and the Times may generate less revenue but take on the operating margins of a software company and become more profitable.

The hitch to this thinking, of course, is that for now no paper including the Times is indifferent about whether its readers consume its content online or in print. They still need readers to pick up the paper because online revenue is not yet big enough to support a newsroom. Internet revenue at the Times is now $66 million. That’s still only a quarter of what it will take to pay for the Times’ newsroom.

But with the success of Times Select it’s clear that the Times, at least, now has two online revenue streams – advertising and subscriptions. That clearly means its online edition will cover its newsroom costs faster than we all think.

Henry Blodget has a good take on just how far Google has come in a very short time.

http://www.internetoutsider.com/2006/07/google_apprecia.html

It is tempting to roll the eyes at all the buzz and hype Google generates. No company can grow this fast for this long without growing pains creating dysfunction, right?

Perhaps. Then again, when was the last company that single-handedly forced a complete rethink in not one, but TWO of the world’s biggest industries? Thanks to Google, both advertising and software – industries each with revenues in excess of $100 billion – are being forced to radically change. What was the last company that had that much impact? You know the answer. Microsoft.

Google $10 billion

Apple $8.3 billion

Ebay $3.3 billion

Yahoo $2.7 billion

Amazon $1.3 billion

There are lots of fancy ways to analyze and compare Internet companies, and you’ll read about lots of them in the coming days as they all report second quarter results. The list of numbers above is an elegantly simple way to compare them. It’s their current cash position.  In mature companies there is a healthy debate about the prudence of hoarding cash. Many claim it’s better to give some back to shareholders as dividends. But in fast growing technology companies, where R&D is the coin of the realm, more cash is almost always better. Does the ranking on the cash list track with your outlook for these companies? It tracks mine.

Saw Jon Fine’s piece in Business Week about Yahoo and newspaper publishers mulling a partnership.

I think this is big, big, big. Up until now the publishing industry viewed Yahoo and all the online news outlets as their mortal enemies. I’ve had lots of conversations with Tom Curley, the president of the AP about this. He sees it first hand because the AP is owned by its newspaper members but is also selling the AP feed to Yahoo. Many of the big publishers are angry at Curley about that and have not been shy about telling him so.

So why the thaw? Simple, both sides are concluding that each has something the other wants. The print guys – especially those at Media News and Hearst – are finally realizing that they are not going to be able to stop Yahoo from stealing their readers and advertisers. A year ago the print guys were talking about setting up their own portals and advertising networks to take Yahoo on. Now they clearly realize that they don’t have the time or the technical wherewithal to make that happen. Yahoo News gets roughly 5 million readers a day, making it one of the three largest daily sources of news in the US. 

Yahoo, meanwhile, has realized that if it wants to make a dent into local advertising it’s going to need more than just a web presence. It’s going to need people to go call on the dry cleaners, body shops and restaurants. They don’t have that kind of salesforce; but newspapers sure do.

Lastly, both Yahoo and print media increasingly have a common enemy: Craigslist. Craig Newmark’s company has been slowly but inexorably eroding newspapers’ high margin classified ad business. At the same time, it also has been making mincemeat of  Yahoo’s Hot Jobs division.

Don’t expect to see the New York Times doing a deal with Yahoo any time soon. The Times is that rare paper that has such a national and international brand that it has a shot at pursuing a go it alone strategy. But clearly the folks at Hearst, which owns the SF Chronicle, and Media News, which will soon own the San Jose Mercury News, are concluding that such a strategy for them is suicide. It’s about time.

Here’s the link to Fine’s piece:

http://www.businessweek.com/magazine/content/06_30/b3994023.htm

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