Google Speeds Cable Disintermediation Via YouTube Celebrity Channels

After reading a piece in the Wall Street Journal yesterday concerning Google's $100MM bet on celebrity channels on YouTube. It reminded me of my old mentor, Gerry Weiss' insights into competition and colliding arenas.


Gerry and his colleagues developed the concept as strategic planners at GE under Jack McKittrick. Essentially, a technology that is at the core of one entity in one 'arena,' or business area, uses said technology to expand into a new business. The entity's technological and/or other business model attributes strike at a vulnerability of existing occupants of the new business, causing a radical upheaval.


That's what seems to be about to occur at Google/YouTube.


I've been writing about the disintermediation of cable television for a few years. Now I realize that Google's recent staking of various media celebrities to $100MM worth of channels for their own creative usage will only speed that disintermediation. The Journal article cites several actors having broken into work on cable television programs via viral YouTube videos.


I've contended for several years that a writer/producer like Larry David would be foolish to bother putting his next series on cable. He could easily go right to streaming video from a website.


Then Glenn Beck departed Fox News for his own website-based media empire.

The Journal piece ended on a cautionary tone, noting that Google isn't likely to be earning revenues from any of this YouTube effort anytime soon. But offered a silver lining that in just three years, its Android cell phone alternative has grown to take half of the smart phone market.

My own sense of Google and YouTube is that, in the simplest case, they get eyeballs on which to earn advertising revenues. Then, over time, as viewers are trained to watch streaming web videos as their natural way of viewing heretofore broadcast- and cable-only frequently-aired (i.e., weekly programs) content, the step to paying for new content from a bankable talent like David or some other writer will be simple.

At that point, it wouldn't be a stretch for Google to be straying into signing and backing new talent, would it?

Even if not, just by migrating more and more viewers to their streaming video, they'll drain the last drops of life from broadcast network television, while accelerating the problems at cable providers.

That's one of the hallmarks of arena competition. Whether it's smart or not, the new entrant can afford to subsidize its intrusion into the new business with profits from its existing businesses. In Google's case, they aren't unconnected. But its targets don't really have multiple revenue sources on which to rely in the coming video content sourcing battle.

Time Warner's Big Cable Decision

Yesterday's Wall Street Journal featured an article in its Marketplace section which reported that Time Warner is seriously considering unloading its cable holdings. CNBC, as it often does, due to its alliance with the newspaper, featured a discussion of the article. At least one fairly on-air-headed anchorperson wagged her tongue about the 'fat cash flows' from Time Warner's cable businesses.

That, of course, misses the point. Public companies are not run for cash flows, because, in a capital market which is liquid, cash can be borrowed. Shareholders rarely seem to buy stocks for dividends, as they did thirty years ago, when transaction costs were exhorbitant. Instead, stocks are viewed with an eye to total returns.

There was one key passage in the Journal article that says it all about Time Warner's situation,

"For years, Time Warner has believed in wedding its movies and television programs to powerful distribution networks- primarily its cable operation- as a way to ensure that their content wouldn't be blocked by rivals. But with the Internet increasingly serving as a home for TV and film offerings, content companies may feel they no longer need to control old-style distribution networks such as cable or satellite TV."

In prior posts, here, and here, plus a handful of others you can find by searching my blog for the term 'Time Warner,' I have argued that old media, as represented by Time Warner and the networks, have ignored the coming, now at hand, disintermediation of broadcast and cable channels by direct URL access.

My post yesterday concerning H-P's entry into the hardware product/market space for this missing link portends just how broad this disintermediation is likely to become- quickly.

Taking all of this into account, I can only marvel that Time Warner has dawdled as long as it has to come to the realization that its cable assets are about to become as 'valuable' as the old Bell System's local copper loops and land lines. Being a common carrier is simply not likely to earn consistently superior returns in the future of direct video content access from URLs on the internet to a TV.

Beyond that, Time Warner's strategy of attempting to own both the distribution and the content was never fated to work well. It never has, and never will. I've written about this as recently as February of this year, here. Essentially, superior content will always find a market. Superior carriage will always command a premium and have supply. Owning a mediocre combination of both assures that, in time, both will fail to provide consistently superior returns.

I've included a Yahoo-sourced chart of Time Warner's past five-year stock price performance, compared with the S&P500. It's pathetic. The firm's stock price has ended up essentially flat, having plunged early on, plateaued, then rose, and now sunk again. It has woefully underperformed the index over the period. It's hard to believe the firm's senior management and/or board has been attentive to its long term prospects.

The Journal article alleges that the two-pronged strategy involving holding cable assets is CEO Parson's preference. That figures, since Parson's has pretty much bumbled the management of the combined Time Warner-AOL since he took over from Gerald Levin. Parsons is a lawyer with no evident grasp of business strategy.

Thus, it's no surprise that Time Warner might be as much as five years too late in exiting cable systems and using the resulting funds to buy into online properties at lower prices than today's.

Network TV's Bright Spot: Charging Cable for "Free" Programming

Yesterday's Wall Street Journal featured a piece describing how broadcast television networks are charging cable systems for carriage of what the public may view for free on those networks and their affiliates.

It's a non-trivial issue, when a major cable system, such as Comcast, is faced with an ultimatum to pay, or be unable to deliver the Superbowl telecast to its viewers.

Will it matter in the long term? My guess is that it will not. Right now, many sources of video content come to the broadcast networks first. And events such as the Superbowl have been loathe to sell the rights to a cable-only network, thus freezing out 'free' viewers. Talk about bread and circuses.....

However, this describes the current state of affairs.

Won't cable look to new programming sources? Will production still go to network exclusively?

Is it not possible that, whenever the Superbowl carriage rights are up for renewal, the NFL might sell only the broadcast rights to CBS, ABC or NBC, and reserve direct cable carriage for a negotiated fee directly from each cable network?

Is that not disintermediation? The article mentions the growing power of broadcast networks, as groups of stations are now allowed to be owned by a single entity. Markets being what they are, would not content providers also feel some pinch from that, and seek wider distribution alternatives?

Could television-focused video content not go the route of the Hollywood studio distribution model, treating various markets- US cinemas, cable movie networks, overseas, DVDs- separately?

Seen in this light, we could well be seeing the common occurrence of vendors in a shrinking product/market raising prices as the category becomes extremely mature. Faced with fleeing consumers, demand is relatively inelastic, so raising prices is the theoretically 'correct' choice to maximize profits.

In this case, however, it could well accelerate the development of vibrant alternative distribution channels around broadcast television. The recent Viacom-YouTube non-agreement, leaving the former to demand removal of its content from the latter's site, only reinforces how broadcast is raising the drawbridges and hunkering down with its legacy content.

My consultant friend S opined last year that one of the best things to have happened to all this old video material, such as Viacom's content, was to be seen, for free, on YouTube, thus rekindling consumer interest, for no advertising expenditures, in old bands, television programs, movies, etc. There's bound to have been some uptick in demand for some of that content on a paying basis.

Google, of course, is perfectly familiar and comfortable with this revenue model. Give content away for free, and run the most efficient advertising program available around it. Old media can't quite get it's head around this, and, since it can't control the vehicle, is simply refusing to play by the new rules.

My sense is that this burst of network demands for fees to distribute "free" content will last only so long as the average life of the existing content's exclusivity to network distribution. Then, watch out. Disintermediation is bound to run rampant, with devices such as XBox and AppleTV to facilitate streaming bespoke video content right off your high-speed connection, through your video switch..ah...sorry.....computer...over your wireless network, to a server (the Xbox, AppleTV, etc.) connected to your television.