Friday, October 21, 2005

What Do I Want To Be When I Grow Up?

At least I don’t feel alone out there anymore.  People have been reading my blog. Jeff Pulver even contributed a comment so I gave him a link.  Thanks Jeff.

What do I want to be when I grow up?  A service provider (i.e. carrier) or content provider.  That is an easy question to answer:  a content provider.  While Verizon, SBC, and other carriers go to court and argue in the press about keeping their networks closed, it is the people selling the content over these networks that are growing their revenue streams by leaps and bounds.  The economics are simple enough for my 6th grader.  The cost per bit is decreasing faster than the bit rate of the pipe into the home or business.  That means that carrier revenues are decreasing for bit delivery.  Sure there is money to be made in providing bigger and higher quality pipes, but there is even more money to be made selling or distributing content.  

As a consumer, I spend more money purchasing content than I do for the pipe.  My Comcast pipe costs me about $45 per month.  Assume that $5 is for content that they directly provide like NHL games and some audio programs as well as their web hosting.  Vonage gets the largest share per month at $27.  Next comes iTunes at $10, then Real Networks at $6.  I may make other various impulse purchases like albums or movies that add another $25 per month.  When Netflix goes U.S. Postaless add another $16 per month.  There is $89 for content versus $40 for the pipe.  It’s a telling tale.

Owning the pipe gives the carrier the ability to deliver a consistent user experience to deliver content.  It is a differentiator that can be used to attract and retain customers.  As we figure out more ways to pipe bits into the house, the less important the pipe provider becomes.  Is there a difference to the viewer between a movie on-demand or downloaded from Netflix to a DVR over the Internet?  Maybe, because the DVR responds quicker to the remote control.  Technological innovations will find ways around bottlenecks.  

Smart carriers will focus on delivering content to their customers like movies, TV programming, audio programs, music, games, interactive voice (a.k.a. phone) and video, and many other services we have yet to develop.  The real question will be whether the content provider will sell services direct or through distribution.  Apple will wrestle with that question very soon.  The record companies see the success of iTunes and want a bigger piece of the pie.  Jobs wants to keep the prices low to drive the volume and sell more iPods.  Traditionally the record companies rely on indirect channels like Sam Goody or Wal~Mart to sell their products.  iTunes is just another channel from that point of view unless the record companies feel that they can set up their own Internet store fronts and sell direct;  thereby, making more profit.  It is the Cheap Revolution coming into play.

Should BMG or Sony attempt to go direct, why not the TV networks or movie studios?  ABC affiliates are already up-in-arms over Disney/ABC providing content to Apple for the video iPod.  If content providers go direct to consumers, then we will face the battle of the pipe.  Carriers will begin to restrict what runs over their networks so they can attempt to sell as much content as possible and the cost of the pipe will increase.  The last step is legal and regulatory battles like we are seeing with VoIP.

I prefer the distribution model.  Content providers can focus on delivering the best content that they can produce.  This is especially important to the music industry which is producing some of the lowest quality content.  Distributors can focus on bundling and delivering the content to the user.  By keeping each end of the supply chain focused on their core business, they can maximize their revenues and profits.  The corollary is that consumers win as well because they will have a greater choice of content and ways to receive this content.