Want Quality Online Content? Pay Up.

The Financial Times reported earlier this week that some YouTube channels may be going the paid subscription route soon.

The obvious question though is, will YouTube viewers pony up? 

That’s important because, while the amounts in question – $1.99, OK, $2 a month, $3 or $4 – don’t represent a lot of money in absolute terms on a monthly basis, YouTube customers aren’t used to paying for content and any attempts at changing that behavior may only be marginally effective. A company called J. C. Penney recently and famously found out how set consumers are in their ways…

At the same time, companies like Google are not dilettantes. They have enormous amounts of historical and research data, and some pretty clever models that must be telling them what their chances of success are with this move. Otherwise why would they bother going to the trouble of launching these new channels in the first place? We’ll find out in a few months just how good those models and their underlying assumptions are. 

Anyway, let me get back to the immutable truth that made me write this post: Quality costs money. Repeat after me, if you’re not already convinced. Quality. Costs. Money. And nowhere is this truer, than online. 

Consider these companies or services (what’s the difference if you’re a consumer?): Facebook, Twitter, Google Search, Gmail and YouTube.

The business model for the first four is based on content created by users, growth via network effects and various creative (and mostly ad-driven) monetization techniques. And that was true of YouTube also, as long as its content consisted mostly of user-made videos of babies, cats and exploding cans of Mountain Dew that didn’t cost much more than a few minutes of someone’s time. 

However, content on YouTube has been evolving over the last couple of years. Tens of YouTube channels have been drawing millions, or even tens of millions of viewers on a daily basis. In fact, one of the many things that the 290m+ views for Gangnam Style on YouTube illustrate is that quality entertainment draws immense audience interest online (or offline, for that matter). 

But…what good are millions of viewers if you can’t capture some portion of the value you are creating for them – and using those proceeds to in turn pay your employees, pay your bills and make a respectable amount of profits?

The Internet does many things. It dramatically lowers your distribution costs. It also significantly weakens the distributors and allows content creators to more directly connect with their consumers. Further, it helps with the content discovery issue. And finally, it meets the needs of the long-tail. 

What it doesn’t do, and cannot do, is to reduce all the other costs associated with creating quality content (original series, anyone?) - actors, writers, editors, AV crews, etc. This is as true of video entertainment as it is of quality journalism and writing, as many magazines and newspapers have also been discovering over the last year or two. 

Unfortunately, ad revenue can only subsidize that content to a certain degree. That’s because the online content market is highly fragmented (blame the long-tail) and the cost for online ads is steadily dropping as the number of online destinations increases much faster than the online population. 

Brian Robbins, the man behind AwesomenessTV, of the Dreamworks acquisition fame, admits as much:

“If we were building a business today solely on advertising revenue from YouTube, I’m not sure I’d be so bullish,” he said. “Eventually, yes. But the opportunity to create IP that’s valuable and that could be valuable downstream in all the other platforms that exist, that’s a big revenue stream.”

[As an aside, I couldn't find a single article or post on AwesomenessTV's profitability. Not saying it wasn't profitable, but this little detail is strangely lacking in all the breathless articles describing its acquisition.]

So with neither broadcast TV’s re-transmission fees nor million-dollar TV-network style ads underwriting quality content, what’s left?

Subscription fees. 

Don’t want to, or can’t pay? There’s always LOLcats on YouTube. 

Facebook’s New Home – The Threat To Google

Facebook’s much-vaunted new “home” on Android turned out not be a new Facebook phone, at least from a hardware perspective. From a software perspective though, it is the closest Facebook can get to creating a Facebook phone without electronics and Gorilla glass.

As most tech followers know by now, the new Android “home” unveiled by Mark Zuckerberg turned out to be a “Facebook Operating System” that sits on top of Android.

For those that install it – mostly die-hard Facebook fans, and perhaps the curious, that may well turn into die-hard Facebook fans also based on how good, helpful and compelling this new App/OS turns out to be – it will probably be the first thing they see when they turn on the phone, and the last thing they see, before they turn off the phone. 

The “in-app” experience provides users with a number of things, as Alexandra Chang explains, on Wired:

(more…)

The Tyranny of Channel Bundling: Who Captures More Value?

A while ago, I compared the plight of someone interested in just one channel on Cable TV to that of a Hershey Special Dark Chocolate Bar fan that has to buy an assorted basket with 99 other types of chocolate, just so he can get what he wants.

Well, bundling is back in the news, thanks to an NYT article that talks about how all Cable TV subscribers in certain markets have to pay more every month, because a sports team (the Dodgers, in this case) is going to charge more to carry its games. So it doesn’t matter whether you are a Dodgers fan or not. In fact, it doesn’t matter if you strongly prefer reality shows to sports.

As long as you live in a market with some people that like Dodgers games and Time Warner Cable carries their games in your market, you get to pay more. Naturally, that offends notions of fairness.

But Matt Yglesias at Slate thinks that this reasoning is naive and instead argues that:

Say your monthly cable bill is $60 –> You only watch 5 channels 99.99% of the time –> Your per channel cost is $60/5 = $12.

He concludes, implicitly, that

a) You value each channel at $12 or more, and are therefore happy to pay $12*5 = $60 for the bundle, regardless of what else is in the bundle that you don’t watch.

b) Even if your bill goes up to $70 or $80 because of other non-watched channels becoming more expensive, you shouldn’t complain.

[He further asserts that unbundling here won't help because cable companies will find a way to charge you $12/channel if they eventually go the a-la-carte route and that the only good solution is to have more competition.]

I get the competition part, sure, but what about the rest of it?

There are two ways to look at it. 

a) Each time the price of your cable bundle rises because of the Dodgers or someone else raising their prices, even if you don’t “consume” their channels, you are giving up some of the value that you previously captured for the channels that you watch (so the gap between “B” and “C” in “B minus C” keeps getting smaller).

If this keeps continuing, eventually, what you pay for each channel is going to be more than the value you assign to it. Naturally, your Cable TV company will likely get you to just under that point so they don’t lose you. That’s the point in having a near monopoly, no? [This is where the competition part comes in.]

b) From an economics’ perspective, with channel bundling, more consumer surplus (the area under those demand-supply graphs, for the more academically minded) is being captured by the companies (Slide 5) and not consumers. Since content creators and distributors “collaborate” to maintain status quo, I doubt if this is likely to change in the near or distant future.

In both situations, since one could argue that consumers are being harmed, should regulators take a close look?

Facebook’s Graph Search – Unfortunate Name, Amazing Potential

“Graph Search” is a very unfortunate name for something with the potential to be one of Facebook’s most useful and valuable features benefits in the future.

Introduced today amidst some fanfare by Mark Zuckerberg and team, it didn’t cause a flutter in the financial markets, at least not for Google, the search behemoth who potentially has the most to lose from Graph Search, if and when it takes off in a big way. Google went up a bit during Facebook’s session but settled down by the time the session ended. The one company that did take a hit was Yelp (-16% by the end of the day). Facebook, interestingly enough, lost 2.xx% (I’m long Facebook, so that wasn’t good).

While the vagaries of the market often times are not a reflection on the medium to long-term future, in this case though I think Yelp will definitely take a hit. Google too, I strongly believe, but not for another year or so, until Graph Search matures. Another company that may take a hit is LinkedIn but the markets don’t think so I guess (just a +0.33% movement today).

Three examples from Facebook’s presentation today to illustrate the value of Graph Search (please…can’t we just call it Social Search or something? Anything but Graph Search).

1. “Thai restaurants my friends like in Washington DC”

This should strike fear in Google’s hearts. Today, you look for a Thai restaurant in DC. Maybe Google Places tells you what’s around or maybe Yelp does. You then look at the reviews and the ratings and think about going or not going. 

With GS, you can instead find Thai restaurants in DC that your friends like. I’m willing to bet that you will try something that your friends like instead of some stranger who rated it or wrote about it. A contrarian article on the Wall Street Journal argued today that no one would try restaurants their friends like and that they would instead look for places prominent food bloggers like. Or some such fanciful theory. Clearly, the writer of the article does not represent tomorrow’s demographic.

2. “Music liked by Mitt Romney and Barack Obama” (Result: The Beatles)

This is similar to #1 above…you can do social searches on music, restaurants, movies, blah blah blah and see what your friends like. Again, I am willing to bit that a lot of people on FB are going to take these results more seriously than a Google result. Advertisers can insert relevant ads based on interest that presumably will be clicked on with a higher degree of probability.

3. “Friends who worked at XYZ who have skills A and B”

This should concern LinkedIn in a big way, in theory. But maybe not. It is plausible that people will upload or add enough of their employment history and skills into FB that GS enables FB to be used as a recruiting tool…but the question is, will people migrate away from LinkedIn (best case) or at least use FB as a duplicate career/profile tool? Not sure…but its intriguing and worth keeping an eye on.

4. “Photos of Atlanta taken before 1990″

This is in the “1001 ways to waste time” category…but guess what? Hundreds of millions of people could each spend tens of hours searching for precisely these types of things on Facebook. And again, what’s better than results that contain strangers’ pictures? Results from your friends and their albums (and their friends and their albums, in turn).

Taken together, these and other “use cases” that will inevitably crop up and be promoted can easily “lock in” (not by force) users within Facebook’s ecosystem where they get used to searching for pretty much anything without leaving its walled garden. And once Facebook has a captive audience, highly, highly targeted advertisements (that capitalize on “purchase intent“, not just interest) can be shown and rake in the moolah.

[Facebook of course knows that GS can't give you great results for every search. To that end, its partnering with ever-improving Bing to deliver results. Yet another reason not to step out of Facebook's garden. And potentially a win-win for both FB and Microsoft:

Graph Search is also beneficial to Bing, who has made no secret of its belief that social data will be a key component of search. Bing Director Stefan Weitz recently told Fast Company that the majority of people doing research on the web--say, on a new product, or a potential vacation destination--won't rely on pages alone. They'll turn to friends and experts to get additional input before making a final decision. The more Bing bolsters its "social sidebar" with increasing amounts of social data, the less you'll be likely to jump around to other sources while putting together your research.]

It will take time and it might take an attempt or two to get it right. But remember that companies like Apple, Amazon and Google, today’s tech darlings (maybe not Apple as of today, but you get the picture) have been public companies for a long time. And it took them a while to get things right too…Facebook is still pretty young, at least as a public company and my guess is that the markets will give it at least 2-3 years to start showing progress if not finalizing a master strategy by then. 

Will we, by then, “Facebook something” as opposed to “Googling it”?

Freeing The Grapes: Amazon’s 3rd Attempt

(Source: www.freethegrapes.org)

As a result of leftover puritanism, some protectionism and potentially sheer official laziness and inertia, the eCommerce revolution which has changed the way consumers in the U.S. buy and pay for almost everything today has more or less bypassed wine.

The result is that “direct to consumer” shipments make up less than 5% of the total wine bought in the US – a surprisingly low number, especially when compared with how online retailing is experiencing double digit growth in other areas. In fact, for Thanksgiving 2012, online sales on Friday exceeded in-store sales for the first time. Or so I hear. 

But the wine market has been a stubborn holdout.

Wine.com, one of the first, and still one of the few players in this market, valiantly sought to lower the barriers to entry (and cut out supermarkets and other players in the supply chain) but it has been a long and painful process, dealing as it had to, with things like this (WSJ article, behind paywall):

The San Francisco-based online wine merchant has been fined by New York state for shipping wine in gift baskets stuffed with food; state law mandates food and alcohol be shipped separately.

As result it is still only a $80 million dollar business after 14 years of existence (and a bankruptcy in between). 

Even someone as tenacious and powerful a Amazon has had to eat humble pie (with no wine to accompany it…). As the WSJ article I linked to above says, both WineShopper.com and its partner New Vine Logistics failed. 

But, like I said, Amazon is tenacious. Not only that, it has deep pockets and can afford to play the very long game.

So its 3rd attempt at creating and capturing value in this market is to create an online market place or virtual storefront where vineyards can display their inventories and sell to consumers. Amazon presumably gets a cut from each transaction.

However all of those buyers are still subject to the same rules and regulations that have prevented eCommerce from disrupting this industry and the best part about this is that Amazon is not responsible for complying with those regulations – the vineyards are!

So at best, in the short term, this is Amazon’s attempt at being a player in this market and capturing some of the dollars currently spent in supermarkets and neighborhood wine stores. But in the medium to long term, as Wine.com, “Free the Grapes.Org” and maybe even Amazon try to pry open America state by state or county by county, Amazon will have gotten a lot of consumers used to the idea of buying wine online via Amazon. 

And at that point, it will do to wine what it has done to books. Or so it must hope.

So what will supermarket chains and neighborhood wine stores and distributors do to stop this juggernaut? Can they do anything?

Groupon To Launch National Restaurant Chain

Not really, but one could be forgiven that flight of fancy, given the moves it has been making in the restaurant (and small merchant) space. 

With its core business shrinking and its management style not really helping, the hunt has been on for diversification.

Attempt #1 a few months ago was Groupon Goods which seems to help merchants – both big and small – dispose off unsold inventory (and possible introduce brands to consumers at lower prices), a la Woot and to some extent, Overstock.com. Its most recent quarterly results in fact indicated that Groupon Goods was growing faster than its core business. On the face of it, this is good strategy – Groupon customers are already used to snagging deals for restaurants, etc., and they might be interested in buying real/physical things off of Groupon too. But unfortunately, retailing is a low-margin, hyper-competitive business. So tech-savvy retailers such as Amazon and its ilk (Amazon is already a major investor in LivingSocial) can be hardly expected to sit idle and it is likely that Groupon Goods may not (be allowed to) grow after a point.

(A pet first aid kit for sale on Groupon Goods recently)

Given the retailing environment then, it makes more sense for Groupon to leverage its existing scale (the number of sales people canvassing local neighborhoods in most major metro areas) and try to embed itself deeper in the neighborhood stores and restaurants space, or what I would call the “local experiences” (restaurant meals, yoga classes, circus tickets and such) space. 

And that is precisely where it seems to be headed by doing two things: (a) enabling more customer-merchant transactions and (b) making those transactions more efficient for merchants. In both cases, additional value is created and Groupon is positioned to capture some of that value.

Moving towards making transactions more efficient, last week, it announced its entry into the payment processing space and instantly took on Square and any number of other players jostling for their share of this market. Since most local merchants are super cost conscious, this gambit aims to cut their costs:

Existing Groupon customers that use the reader will pay transaction fees of 1.8 percent plus 15 cents for cards from Visa Inc., MasterCard Inc. and Discover Financial Services, For American Express Co. cards, fees will be 3 percent plus 15 cents. Card readers offered by Square charge 2.75 percent per transaction, while PayPal has a 2.7 percent fee.

A Reuters article details how Groupon is better for some merchants based on transaction size and how Square is better for others. With no clear leader today (Square is one, kind of, but it doesn’t have an insurmountable lead I think) and given Groupon’s scale, one could expect pretty decent market penetration for Groupon going forward. 

Then, in terms of enabling more merchant-consumer transactions, this week, it announced that it was acquiring an Internet-based restaurant reservation system called Savored - whose “reservations + discounts” model is something of OpenTable meets Hotwire, and

Savored is meant to supplement the existing Groupon Now service, which is aimed at giving customers a list of discounts should they decide to indulge in impromptu shopping.

So, where is Groupon headed? I don’t think it will launch its own restaurant chain, but, I am almost sure it will continue to make other acquisitions in the local merchant ecosystem (it does have some money in the bank, thanks to its IPO). Ultimately,

Groupon aims to reach a size where it will become the “operating system” for local commerce, as Chief Executive Andrew Mason put it earlier this year.

That, is what makes this a very exciting time to be in local commerce.

Mass retailing has see a number of improvements over the years – from Walmart’s highly sophisticated supply chain systems to Amazon’s own ordering and shipping/distribution systems – but local commerce was largely left alone.  Now, with Groupon (and its imitators), aspiring to become the Amazon of local commerce, this should change in the next few years with consumers and merchants both benefiting.