Om Malik reminds me to get off my chest my thinking of why TiVo won’t exist for much longer. Or, to put it another way, why the cablecos are positioned to crush TiVo and the telcos won’t do well at TV either.
Money arrives in the video entertainment business in two buckets. The customers directly pay for content that satisfies their desire for televisual narcosis. And advertisers pay to insert marketing messages to suggestible semi-hypnotized viewers. That’s all.
Now, let’s look at the economics in more detail. You can only increase the amount people pay directly by extending the duration and intensity of their narcosis. The scope for improvement is baselined by the current depth of their TV trance. Before multi-channel cable and satellite, you couldn’t get a good fix on four or so terrestial channels. But given some non-stop movies, sport and cartoons, and you were off. Hence the cable and satellite TV companies made a bucket load satisfying an unmet need.
A TV channel is essentially a bundled product, in the classic marketing sense. TiVo enables you to create your own bundle. (I’m assuming that the pause-and rewind features of TiVo are so obvious and unprotectable that there is no sustainable differentiation and economic advantage in them. The only bit that counts in dynamic programming.) But the incremental improvement from TiVo is relatively small. Why? Because if you didn’t like the bundle you were just watching, you can easily switch to another one. And they’re conveniently labelled for you to make an instant judgement on how likely you are to want that new bundle. The substitute product for TiVo is the raw remote control handset.
Think of it this way. Terrestial TV is like a nice cup of tea. Multi-channel TV is cocaine. Video-on-demand is methamphetamine. TiVo is just washing your meth down with a stiff espresso.
On the other side of the equation are the adverts. This market is essentially bounded by the cost of marketing of All Things Sold Everywhere. Since All Things Sold Everywhere is a Very Huge Number, a small proportion of this is dedicated to marketing is still a Very Big Number. Furthermore, the lower bound of TV marketing effectiveness has been dropping like a stone. Highly fragmented audiences don’t make good targets for mass market adverts. The ad agencies have been going through the business cycle equivalent of a nuclear winter.
So whilst the remote lets you adapt the primary content to your personal tastes, you’re stuck with whatever irrelevant junk they choose to insert in the ad breaks. So there’s a large and growing opportunity to fix the broken ad business. And that’s why TiVo is screwed. The fixed the wrong problem. The issue isn’t getting people to see the right programs. It’s getting them to see the right ads. They screwed up so big, they even gave you a feature to skip the ads. On their epitaph is will say “TiVo. Forgot where the money came from”.
It’s kind of paradoxical, because TiVo is a smart device at the end of a dumb network. By default, you would have thought that a recipe for success. But good technology alignment is no guide to quality of business model.
Some telecom lessons?
Firstly, voice and data telcos that try to get into video distribution are likely to get rapidly incinerated. They’ve no clue as to what makes the content distribution work. Their DNA only understand communications (and is not very adept at that, either). “Never ask a dinosaur to cook a souffle.”
The cable companies are in a good position. The two-way nature of the Internet is lethal to the voice telephony companies. Perfect disintermediation. But it’s almost irrelevant to the cablecos. TV viewers aren’t interactive, they’re passive. The cablecos only run networks because they can’t rely on third party pipes giving them a route to market, particularly when the telcos have such strong political influence.
They really are just content distributors, with their core value being marketing bundled content to customers, relationship management and billing, and supply management from content companies and ad agencies. They orchestrate the value chain already. The Internet is just another distribution network.
And being two-way means they get to collect the valuable data that the ad agencies and marketers needs. Who switched channel as a result of what ads? Who watched longer with a smarter ad mix? Who matches in real time the demographics of the audience to the possible ads?
The cablecos are positioned to make a killing as intermediaries in the intelligent ad business. Buy cableco stock. Sell telco stock. Short the telco stock if you’ve run out.
We can also see why interactive TV is a dud. You’re trying to use TV to get into a trance that isolates you from present reality. In a sense, it’s the ultimate in “presence” — you mentally leave this world and reconstitute yourself as a fly on the wall in the home makeover show. That newscaster is looking directly at you, only ten feet away. Your mind’s eye is in the studio, not in your living room. Interactivity with objects in you living room detracts from the trance. It breaks the continuity of presence to pop up a menu. Interactivity = dispresence. The two-way interactivity only needs penetrate as far as the set-top box in the home that acts as a content distribution hub. No further.
Another irony of all this is the pandemonium of the content businesses about copyright and peer-to-peer distribution on the Internet. But the content that the industry wants distributed and viewed — the ads — isn’t easily available. Why aren’t all the ads on web servers market up with target market segment metadata? Why isn’t every DVR busy downloading ads and swapping them into the video stream of regular TV? Why isn’t video on demand aimed at the ads that pay for the whole system?
What a crazy, messed-up business.
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Very true, as the network becomes more and more commoditized and these specialized telco and cableco networks become just different internet delivery methods, the incumbent networks must rely on a higher-level advantage in the value chain. Well the telcos have no such advantage, voice will become just another free distributed app. Cablecos on the other hand, as you clearly pointed out, engage in a content aggregation and bundling consumer business. I'm with you so far, cablecos yay, telcos nay. For the time being.
You're reasoning, of which I agree, states that for the cablecos to succeed they basically need to be less and less a network and more and more a content bundling offering (with advanced forms of consumer behavior tracking and targetted advertising that the 2-way internet provides).
This seems to me like a clear-cut case of classic disruptive innovation.
The cablecos have so much money invested in their networks and budgeted for future network development (fiber-to-the-x) that simply ignoring it and concentrating fully on content would be both destructive to their ROI and would severely hurt their relationships with their investors. If you invested in a company who's been pouring money and allocating more money to develop these hugely expensive networks, and then that company says these networks don't matter its the content business that will sustain us, will you invest in them again.
In comes a startup. They recognize that bandwidth is getting good enough and strike deals with the content suppliers. They have no network overhead, they subsidize any hardware needed, they charge much less and give many more options, and they have all the added benefit of advanced market data and interactivity.
Posted by: at August 10, 2004 04:15 PMI can see TiVo getting killed. But it's a depressing thought. TiVo serves us, the consumer. It's a product I want. It's too bad there is no place in this world for products that serve the actual user. There is no way that the cablecos are going to provide the level of granularity that TiVo "bundles" give users. I completely disagree that "the incremental improvement from TiVo is relatively small." I might be proven wrong, but I find it impossible to believe, based on past performance, that the cabelcos will ever produce a product/package that gives us, the users, what TiVo gives us. I have 5 TiVo's in my house and each one is higly personalized for its 'purpose', yet they all are in the same household. If it were not for TiVo inventing these features in the first place, would the cablecos have come up with them on their own. Of course not. So it is depressing that the companies that bring innovation and actually serve the customer's needs are doomed to fail. Now there's your screwy messed-up business.
I don't think all Tivo-like devices will get killed. Tivo may, if it "screws its courage to the sticking point" and refuses to budge.
What the argument doesn't take into account of is Tivo like devices like the new Archos AV480. http://www.archos.com/av400/
I'm considering buying something like this to replace my current ageing iPod-like device. An AV400 effectively a Tivo-player that I can watch on the daily train/plane or weekly plane commute. Now what I'm really buying here is portability combined with the ability to time shift-content to match my schedule. The cable company can time-shift like Tivo, but it doesn't move it' end point. At least not yet.
Now given that I want such a device (and pretending I'm a malicious end-point), would I choose one that I can modify to rip out the adverts, or one where I can't?
Now still pretending I'm a malicous end-point, I only care that the advertisers *think* I'm watching the adverts.
Now on the coffe vs. meth, I think this agument is partially flawed. Whether I watch Scrubs on broadcast, tivo, on-demand or DVD, I still get teh same content, only the picture quality varies a little, but the convience varies a lot.
Interestingly, do the same arguments apply to radio and iPod? I guess iPod isn't really a sound-only tivo, but is there an equivalent device?
If Tivo does get killed then it would have to be by a technological/legislative means. I can't see a fast selling device that is popular dying whilst people like using it.
R.