Broadband’s rising tide lifts all

Apr 30, 2001  •  Post A Comment

The bad news is a prolonged economic slowdown could retard the rollout of broadband services, which, in turn, could delay the transformation of the Internet into an interactive video mass medium.
And that could negatively impact the fortunes of a lot of people.
The good news is while shaky economics might slow the broadband train, nothing can stop it.
The Internet might look like an albatross that traditional media companies are wrestling with in bad times. But over the next three to five years, high-speed broadband connections will transform the Internet into an entertainment and communications extension and competitor.
Morgan Stanley Dean Witter’s Richard Bilotti goes so far as to suggest that with Internet advertising pricing being a quarter of that of television, or less, rich media could evolve as a serious competitor to broadcast and cable networks.
“We believe that the increase in usage volume and the ability to distribute rich Internet media provided by high-speed connections could pose a significant threat to television’s status as a pre-eminent provider of household entertainment,” Mr. Bilotti says in a recent report to clients.
With half of U.S. households expected to have high-speed data connections by 2005, clearly a lot of important groundwork is being laid for the coming broadband explosion even during these economically uncertain times.
Watching and surfing
For instance, recent studies demonstrate that as many as half of all Internet users watch television while they are surfing the Net. As online entertainment begins looking more like traditional entertainment, as online usage grows and as waning consumer attentiveness to conventional television is quantified, broadband will begin changing the way broadcast and cable TV do business.
It’s already happening.
In the quarter since its historic merger, AOL Time Warner already has demonstrated the potency of monetizing its user base-those 130 million-plus subscribers to AOL’s online service, Time Inc.’s magazines or Time Warner Cable.
There’s a good reason the new powers that be at AOL Time Warner refer to them as “customers” instead of as “readers” or “viewers.” That’s because they are, first and foremost, consumers to whom services and products can be successfully pitched and sold.
That’s one of the most significant fundamental changes AOL Time Warner already has imposed on the media world, harking back to the most basic relationship: the one between the consumer and the advertiser. In other words, content may be king, but it’s all about the sales connection, stupid.
The potency of that change has been somewhat diminished by an economic downturn that has blunted advertiser and consumer spending. This recessionlike lull has taken the edge off of what otherwise is nothing short of a revolution: a redefining of the commercial links connecting merchants and service providers with consumers-links that are the economic backbone of most media.
It is redefining advertising: how to grab a targeted audience, sell to it, and seal the deal using interactive broadband applications that are as much about communicating as they are about entertaining.
The chat rooms, instant messaging, e-mail and Web surfing are the kinds of interactive functions that will transform old-fashioned ad pitching into a sales opportunity of enormous proportions, as soon as interactive devices are in the hands of enough consumers who will use them multiple times throughout the day. That will make soft upfront market woes a thing of the past.
But right now, broadband is in search of the mass market.
It’s nothing a genuine economic recovery can’t fix.
Consumer, advertiser and corporate confidence must be boosted before spending can increase.
Only time will tell whether the recent better-than-expected quarterly earnings for Viacom, The Walt Disney Co., AOL Time Warner and USA Networks reflect real, sustainable growth even in tough times, or lowered expectations simply being met.
Choice content from Time Warner, Disney and Viacom is the engine that can drive advertiser and consumer spending even in tenuous times. Perhaps the most potent demonstration of that will come later this year with Warner Bros.’ release of the first Harry Potter movie.
Digital services growth
But whenever and however they come, we are witnessing two important underlying shifts that, in better times, will become transforming factors in the media world. One is the interactive reshaping of the sacrosanct connections among advertising service providers, merchants and their consumers.
The other is the interactive redefining of content: what it is and how it is used to generate multiple revenue streams from existing television, feature film, radio, music and newspaper platforms. Eventually it will yield a robust streaming media syndication market that will license content to a variety of online video portals.
At the heart of it all is the broadband rollout as a connecting base.
A recent report by the Yankee Group, a Boston-based think tank, found that delays in upgrading communications networks such as digital cable and telephone systems, and growing consumer hesitation to pay higher fees for premium online access services, are working against quicker broadband rollout.
While cable operators touted the growth of new digital services last quarter, they are holding their breath about whether consumers will so easily part with their discretionary income the remainder of the year.
Hopes of a payoff
That is no minor detail, considering that telephone and cable companies have invested dearly in hopes of a big payoff. The telephone companies spent an estimated $100 billion during the past century to wire the United States with copper and will spend $10 billion to deploy broadband Internet access, according to Lara Warner, analyst at Lehman Brothers. The cable industry has spent nearly $50 billion in the past five years to completely rebuild its networks to offer interactive digital services.
Today’s 4 million broadband Internet subscribers could easily quadruple in the next several years, bringing with them “an entirely new breed of media content services and communications-related applications” that will redefine the interactive media market and, indeed, all of media.
However, broadband will only make the leap to mainstream by offering content and applications that are unique and less expensive than what can be found anywhere else.
That is precisely where an all-out AOL Time Warner merger, a more casual NBC-Microsoft Corp. joint venture and other marriages among content and software developers and distributors are positioning themselves to be.
The magic of high-speed broadband is that it will be possible to create and deliver repackaged audio and video content while allowing for new forms of media such as online distance learning, more robust interactive gaming and instant messaging systems that ultimately will streamline all one-on-one communications.
The little guys
In a blunt, eye-opening address at the National Association of Broadcasters annual meeting last week, Sanford Bernstein analyst Tom Wolzien characterized where all of this leaves grass-roots broadcasters.
While cable operators push through their final round of digital system upgrades and their first round of broadband interactive services, broadcasters have yet to ensure themselves the interactive return path that would give them access to future growth business, capital and local advertisers and consumers. Even then, consolidation of small to medium-sized broadcasters and newspapers may be the only way to compete with or even acquire content from media giants such as Viacom and AOL Time Warner.
In a market where stock prices and advertiser spending will likely remain depressed well into 2002, the dynamics are working against the little guys when you consider that the estimated $165 billion market capitalization is equivalent to such other giants as Viacom, the Walt Disney Co., News Corp. and Clear Channel Communications.
“What amazes me is that in over a decad
e of talk about digital television and opportunistic data … there has not been any push at all by television broadcasters to swap bandwidth to the home for bandwidth going the other way,” Mr. Wolzien said.
The need for scale, for catalysts such as goodwill accounting changes and for the liberation of deal-makers like John Malone’s Liberty Media Group will fuel more consolidation deals in the next 18 months, experts agree.
The energized wheeling and dealing of a hybrid such as AOL Time Warner can only facilitate movement in all media sectors as long as there continues to be enough economic incentive to pursue a mass media broadband market with unabated zeal.
In the process, the Internet becomes a means to an end: another distribution platform for advertiser-supported media that relies on branded content as a consumer magnet.
Wall Street is so hungry for these transformations it is heralding their arrival even in the midst of challenged earnings optimism.
In a recent report to clients, Bear Stearns analyst Raymond Katz equated AOL Time Warner with CBS in its Tiffany heyday in its ability to aggregate an audience that is then sold to marketers. Even at this early juncture, Mr. Katz points out that AOL mustered $2.4 billion in advertising and commerce revenues in 2000, or about 68 percent of the estimated advertising and commerce revenues generated by the CBS Television Network.
Mr. Katz calculated that CBS monetized its audience at a level of $2.27 per user per day in advertising revenues compared with AOL’s $0.53 per user per day. Time Warner’s content and complementary distribution platforms, such as cable, broadcast television, films and magazines, will make up the difference because of the power of broadband.
But to get there it has yet to work out tricky but significant Internet service provider agreements and plans for broadband interactive services, although sources say AOL Time Warner is close to announcing the details of both.
Even without unaffiliated ISP agreements, AOL’s broadband penetration will increase from 4 percent to 23 percent in the next several years simply by mining Time Warner’s broadband cable plant.
It’s the steady push for ubiquitous broadband distribution that warrants watching amid the economic turmoil, because it is the broadband revolution that will lead traditional media and telecommunications out of the quagmire and into a more lucrative, enterprising state.
Media companies of all kinds need to focus on and build toward that long-term view. Recent indications in companies’ quarterly earnings reports about growth bursts in DVD, digital pay cable and high-speed data services are proof that even guarded consumers are ready to embrace the change.
Companies such as AOL Time Warner will keep pushing the interactive, cross-media platform broadband envelope until better economic times, and consumer and advertiser acceptance helps bridge the gap between it and other media players.
Clearly, the sooner all media players begin investing in and planning for a very different future, the faster the industry will begin to realize the benefits of the broadband bonanza.