Charlatans and Shakedowns

Have you ever felt like an utter charlatan?

I try to avoid this each time I teach college students; they can sniff out BS faster than you can read this.

But I almost fell into a charlatan role as I was preparing to speak at last month’s Iowa DTV Symposium. Run by Iowa Public Television, the symposium had invited me after an organizer read my column “Variables in the Digital Video Logjam."

In that column, I argued that the crowded field of broadband video providers (players such as AppleTV, Vudu, Netflix and others delivering streaming TV and movie content) would be winnowed by four variables: device, library, pricing, and catering to volatile consumer viewing behavior.

As I prepared to speak, a conviction that had been growing for some time suddenly crystallized: none of those variables would matter if the economic meltdown steamrolled weak business models.

Speaker after speaker at several panels, including the keynote by Gary Shapiro, head of the Consumer Electronics Association, had delivered glowing assessments of the digital transition and consumer uptake of HD devices.

Some were not so sanguine.

“Many of the new set-tops delivering TV over the Internet will fail,” said Phillip Swann, president and publisher of TVPredictions.com, who added that Apple will dump its AppleTV project, and others will soon be “gathering dust.”

Of course, Swann also predicted HD set sales will increase in December and January.

It’s a forecast I’m sure he’d love to retract now. As this issue went to press the Dow continued its dizzying downward spiral and consumer confidence fell to record lows. The consumer confidence index dropped to 38 in October, down from 61.4 in September (in contrast to a glowing 95.2 index a year ago), as reported by the Conference Board’s Consumer Research Center.

Those numbers, say analysts, will likely make this holiday season unremittingly gloomy. But for providers of broadband video, the shockwaves will take their toll.

Grim Reaper

Simply put, any service that isn’t braced for the storm will likely fail in the coming months.

For some, like AppleTV and Vudu, which charge $300 or more for their set-top boxes, the upfront cost to the consumer will be a massive turnoff. The lowest-priced entry, a $100 Roku player, can stream movies from the Web to the TV, but has been limited in its library access with partner Netflix Watch Now service.

Others, particularly Vudu, which have no major studio or technology financial backers, will flameout. Vudu has already cut staff by 20 percent, sacked its CFO, and resorted to adding nudie titles and 99-cent flicks to its offerings.

A third group laden with debt, such as telco players like AT&T’s U-Verse and Verizon’s Fios, will be under even more pressure to add features to their DVRs and subscribers to their bankrolls. For example, AT&T’s new U-Verse Total Home DVR, at up to $99 per month for service, offers connectivity from up to eight TVs to a DVR with 133 hours of SD programming and 37 hours of HD. But AT&T is little more than halfway to its year-end goal of 1 million subscribers, while Fios counts little more than 1.5 million.

Shotgun Marriages

One benefit of the economic bust is that it will drive a frenzy of partnerships that have been slow to form, particularly marriages of content with device providers.

Roku, for example, has announced it will open its box to stream content from any provider. Netflix, meanwhile, has trumpeted deals to offer CBS and Disney Channel TV shows through Watch Now, and said it will team with Microsoft to stream content to Xbox 360 gaming consoles (a player I labeled a dark horse in July’s column).

Netflix, along with established cable operators, are the most stable of the broadband video providers. But even Neftlix, which has been profitable in its mail-order business, just weeks ago downgraded its subscriber growth forecast to hit about 9 million by year’s end, an announcement that sent its stock to a 52-week low.

This is the new reality, and it contains only two silver linings I can see, both hypothetical.

The first, speculated on several times at the Iowa symposium, is that the digital transition confusion will cause consumers to throw up their hands and subscribe to cable or satellite (note to U-verse and Fios: NOW is your best chance to boost subs).

The second is what some grandiloquent academic might label the Economic Hibernation Entertainment Syndrome. If consumers hoard their dollars by withdrawing to the comfort of their (non-foreclosed) homes, they might watch more TV.

But for now those are mere conjecture, something only charlatans specialize in.

New Deal for Broadband? Obama Promises Hope, Hype

The layers of irony are thick.

Our new President, who ran the smartest, most tech-savvy campaign ever to win a sweeping public mandate, has now called for boosting broadband access as a major component of his economic recovery plan.

There’s no doubt Barack Obama understands the Internet, even if, unlike Al Gore, he didn’t invent it.

Obama mobilized the Web to engage social networking and other convergence platforms in brilliant fashion, winning over hordes of young, hip voters. But he also won because his troops on the ground brought lower-income supporters to the polls.

It’s the latter group Obama appeared to be concerned about in a December radio address outlining the role technology will play in his stimulus plan. “Every child should have the chance to get online… because that’s how we’ll strengthen America’s competitiveness in the world,” he said.

He knows that during his predecessor’s two terms the U.S. has fallen from 4th to 15th in broadband penetration, according to the Organisation for Economic Cooperation and Development (OECD). Obama also realizes that when more than 40 percent of the nation’s homes lack broadband connections, it impedes our ability to compete globally. Indeed, a 2007 study by MIT and the Brookings Institution calculated that each percentage point gain in broadband penetration would create 300,000 jobs.

In November the U.S. economy experienced its worst unemployment increase in 34 years, shedding more than half a million jobs.

Stick a Spade in It
So Obama’s call for “21st century schools” for our children certainly makes for “shovel-ready” projects, the term in vogue to describe infrastructure programs worthy of the proposed $400 billion stimulus. Throw in support for public libraries, and you’ve certainly taken giant steps toward addressing the digital divide.

It’s the steps beyond those, however, that worry me, because they only set up a titanic clash between public and private interests.

Stimulating municipal wireless broadband, rolling out rural broadband, and ensuring net neutrality are all necessary elements to any 21st century American competitiveness.

All three areas faltered under the Bush administration, despite its lofty insistence on promoting broadband, because it mainly served the private interests – to which so many of its officials are now turning for industry and lobbying jobs.

Cable and telco operators, the primary broadband providers, lobbied successfully on issue after issue. In numerous state legislatures they won the right to statewide franchises, without making even the slightest concessions to the public interest (state lawmakers in Wisconsin, for example, allowed my local cable operator in Madison, Charter Communications, to push the city’s public access channels so high up in its lineup no one will ever find them).

At the national level, they have pushed around the Federal Communications Commission, stalled on net neutrality, and fought any type of accurate broadband penetration reporting.

It took major PR debacles, such as the Comcast rate throttling charges raised only after an Associated Press investigation over a year ago, for the FCC to even issue a reprimand.

And now these very companies are wallowing in debt, while ranking among the worst in customer service in all industries, according to Forrester Research’s recent annual Customer Experience Index.

The St. Louis-based Charter, the nation’s fourth largest operator with more than 5 million subscribers, makes an excellent Exhibit A.

Its stock is worth pennies, slowly crushed by a $20 billion debt load. Meanwhile, the 4,500 consumers Forrester surveyed rated Charter the absolute lowest of 114 companies in customer service.

Is This a Private Fight?
But as abysmal as its performance has been, Charter and its peers, including telco providers, can claim they made the largest private infrastructure investment in U.S. history by spending tens of billions over the past two decades building out the nation’s broadband plant.

They did so in a regulatory environment that ensured private sector stability with a minimum of public sector interference. In short, they built the pipes to make money and now they’re almost broke, despite what they charged us (much of which, don’t forget, went to media conglomerates as fees to carry their ESPNs, CNNs and MTVs).

So what’s our audacious crusader to do with his public mandate and the precedent established by his predecessor’s $70 billion public bailout of the financial sector?
Does he pull an FDR and publicly steamroller the problem, cutting into private sector profits, or does he try to collaborate with the broadband industry?

Silicon Valley bigshots are holding Obama to his pledge to name the nation’s first Chief Technology Officer to coordinate investments and research, which means we may finally have something approximating a national broadband strategy.

Also, as this went to press, lame-duck FCC chairman Kevin Martin announced he is looking for two votes to join him at their final meeting January 15 to give free broadband a boost. The FCC’s Advanced Wireless Services (AWS) plan would auction off frequencies to a bidder ensuring up to a quarter of the spectrum would be allotted to free broadband, with a 768 Kbps minimum download rate.

Hope or hype, Obama’s broadband promises will soon be tested, as he names his own FCC and readies his broadband shovel.

- Wilbr

Hulu THIS, Baby

Lately it’s become de rigueur for news outlets documenting hip tech trends to run articles on cutting the TV umbilical cord.

Always told in the first person, these accounts often adopt the tone of some turn-of-the-century Antarctic explorer venturing off into a frigid, hostile wilderness: Unable to download the client player to properly handle such daunting tasks as frame rate and web streaming, I nonetheless decided to push on.

Though laughable to younger, more tech-savvy viewers, such tales do illustrate a primary task facing Web-based broadband video services trying to reach the mainstream: how do you make it easy to access high-quality content traditionally found on TV? And of course, since these outlets must also make a profit, the other half of this problem is getting users to pay for it, either through subscriptions or advertising.

There is only one service that is solving both halves of this problem, in spectacular fashion: Hulu, the webchild of NBC Universal and News Corp.

The Winning Combination
In a mere six months since its launch last March, Hulu has witnessed a meteoric climb in usage, to rank #6 in overall video streams with 142 million in September, according to Nielsen VideoCensus. It’s done this, in part, with an impressive lineup of compelling content, including most TV shows on both Fox and NBC (The Simpsons, The Office, Saturday Night Live), shows on partner networks (The Daily Show with Jon Stewart), older TV programs (Friends, Buffy the Vampire Slayer), and even older movies.

But its smoothly functioning web-based player and ease of content access also get rave reviews from several friends and students I talked to who are big fans. They don’t own a TV, wouldn’t dream of paying an arm and a leg for cable, and hate ads.

Hulu users are responding in ways that indicate a new brand in the minting. Nearly 80% of them give the service high ratings, with a staggering 98% saying they would recommend it, according to a Hulu-commissioned survey by Insight Express.
Other fascinating tidbits: 38% of Hulu users watched a TV show they had never seen on TV, while 20% watched an episode they had missed from a show they normally watch on TV.

But the heart of Hulu’s success that contrasts so greatly with its competition lies on the advertising side. Simply put, they’ve built a better business model.
Their survey shows a whopping 93% of Hulu users say it has the “right amount” of ads in exchange for free video viewing.

Think about that, for a second. Hulu viewers don’t think its ads are too much or too intrusive? Pinch me.

Meanwhile, their own research indicates advertisers are receiving brand awareness boosts on par with television ads, and some major categories have been flocking to Hulu’s banner.

Loser Lineup
No competitor has the magical content and ease-of-use combination Hulu has.
AppleTV, Vudu and others requiring the purchase of a pricey set-top box, as well as a steep pricing plan for individual rentals or purchases, scream money pit. Several also focus too exclusively on movies. (Netflix, though, should survive the coming shakeout).

ABC.com, Joost, Veoh and other streaming services have limited content or annoying advertising or pricing. (ABC.com requires users to click on a program after an ad ends in order to resume streaming).

While some of these outfits are backed by powerful corporate parents, the recession is sure to knock several out. Joost, Veoh and Vudu all experienced layoffs in the past year, while Apple has been mysteriously not advertising AppleTV – quite the contrast to its iPhone marketing.

Google-owned YouTube, the dominant provider of user-generated content (UGC), has yet to make the transition to longer-form TV content, or upgrade to a higher-quality player, though both are on tap. However its distinct users, 82 million in October, far exceed Hulu, in second place with 9 million, according to Nielsen Online.

Hulu Hurdles
Hulu still has its work cut out in several areas.

First and foremost, it risks alienating NBC and Fox TV affiliates. They are not going to stand by idly while Hulu cannibalizes their most coveted youth demographics.
Second, Hulu needs to find a way to make it easy for users to stream its signal to TV sets, a headache which can certainly make a user feel like an Antarctic explorer.

Already, a flood of new technologies are available, or near launch, that will integrate web streaming and other types of video downloads easily viewable on HDTV sets with wireless connectivity.

Finally, Hulu’s success risks the sincerest form of flattery: imitation.
Several new web video services are partnering with deep pockets and creative talent to strike new media gold. ON Networks, backed by AT&T and others, has inked SNL star Amy Poehler and director David Lynch for new shows, while Next New Networks and Revision3 are also generating some buzz.

Still, Hulu’s long-term prospects are excellent. According to research firm eMarketer, by 2013 web video will account for 11%, or $4.6 billion, of the overall $42 billion projected online ad spending.

Those numbers should ensure continued migration of content and viewers to the Web, with serious implications for TV.

Up until recently, I thought digital video recorders would spell doom for traditional TV. But Hulu has changed my mind.

-Wilbr