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Not so sick after all?

This may seem an odd topic, but stick with me. Yesterday Disney’s ABC television network said it was licensing two canceled daytime TV soap operas to a production company that would be moving the shows to the Internet. I seem to be the only one who thinks this is a brilliant move. In fact it might be the Internet’s next killer app.

All My Children and One Life to Live as killer apps? Yes.

A killer app, remember, is the Silicon Valley term for an application that all by itself justifies to certain users the acquisition of hardware needed to run that app. People will go down to the store and buy hardware just to be able to use that application, whatever it is. VisiCalc was the killer app for the Apple ][, Lotus 1-2-3 was the killer app for the IBM PC, Halo was the xBox killer app, and Bonanza was the killer app for U.S. color TV.

Every new platform needs a killer app to get beyond the early adopters and reach a broader audience. Some experts are arguing that Netflix is the killer app for Internet TV, which might be right. But I think it might just as easily be All My Children.

ABC had nothing to lose in this deal. The two soaps in question were already canceled, winding down their casts and story lines. I’m sure they were acquired for a dollar each or less. If moving online saved ABC some costs from closing-down the series they may have actually paid Prospect Park to take the shows off its hands. So these iconic brands were cheap to acquire.

But they are expensive to produce, right?

Not so fast.

Nobody outside the shows and their networks knows for sure but a $50 million figure is often thrown out as the annual production cost of a major soap, so let’s work with that.

Fifty million dollars is $192,000 per episode or $4,370 per finished minute based on 44 minute shows. That’s a lot of money but a lot less than primetime TV budgets. It’s also the absolute most any soap has ever cost with most costing less. Certainly there are some savings to be found in there. Let’s claim a 20 percent labor savings from moving to the Internet, bringing per minute costs down to $3,496.

Actually, there are plenty of additional savings. Some savings will come from lower labor costs as actors accept smaller paychecks as an alternative to retirement or unemployment. But an even greater savings will come from any Internet soap’s ability to offer online every episode ever broadcast — the long tail — at an effective production cost of $0 per hour.

If a third of Internet viewers are watching old episodes that drops the effective cost of new episodes by a third, so we are down to $2,342 per finished minute.

Don’t forget potential subsidies from hardware companies. As a killer app for Internet-connected TVs, for example, All My Children might get some cash from TV manufacturers. Bonanza got money from RCA that way and many popular shows were moved to HD production with financial support from HDTV makers. Why not the same for Erica Kane?

Our All My Children budget is now down to $26.8 million per year, so let’s figure $4 million of that might come from Samsung or Panasonic or maybe even Google TV if any of those platforms can be somehow uniquely linked to the shows, possibly through additional or interactive content.

Heck, what if All My Children could be accessed solely through its Facebook page? How much would Mark Zuckerberg pay for that?

I don’t know what Zuckerberg would pay, but I do have one number to work with — the rumored production budgets at YouTube’s upcoming professional channels. According to Variety, YouTube will shortly bring some professional channels to its service with budgets of $1000-$3000 per finished minute.

Our straw man budget for All My Children, which now stands at $22.8 million per year, just happens to work out to $2000 per minute — right in the sweet spot of those rumored YouTube numbers.

I am not saying that All My Children and One Life to Live are headed to YouTube as the basis of a Soap Channel, but I am saying that they’d be profitable both for their producers and for YouTube if they were headed there.

Each show has about 2.5 million daily viewers — each a potential buyer of an Internet-connected TV. That’s $2.5 billion worth of TVs and well worth a $4 million production subsidy.

If YouTube or any of its competitive services could reliably get 2.5 million viewers per original episode they’d see that as well worth the money, too.

This is long form video with commercial breaks going to a dedicated audience which can now be global (that last part could be huge). Remember 2.5 million viewers of a 44-minute soap opera is the equivalent of 36 million typical three-minute YouTube video views. As professional content with a 40 year heritage that’s an easy sell to advertisers — a no-brainer for P&G.

So contrary to all the skepticism, moving soaps to the net could easily become a goldmine — one with a lifespan far longer than that of VisiCalc.

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These boys need bikes!

New York Magazine wrote recently that YouTube was planning to throw large sums of money at celebrities who would then make short form (three minute) videos for the site. The numbers mentioned were staggering (up to $5 million per celebrity channel) but the business model is crazy. It’s the three minute thing that makes no sense. I’m sure if YouTube is planning something like this it is specifically for videos that are not three minutes long.
Youtube already owns the Internet market for three minute videos. While there are probably instances where YouTube might throw some significant money into getting the odd celebrity to do something in this space, it is traditional TV-length videos and movies where Youtube actually needs help.
Looking at total video views, Youtube is the clear winner, but when it comes to longer-form videos, both Netflix and Hulu have more viewers than does Youtube. And Youtube can’t really afford to lose this battle, hence the emerging strategy.
Now let me tell you exactly where this is going, because if you are a couch potato it is important.
The big risk (or big opportunity depending how you look at it) has always been that Apple would spend $1 billion optioning TV pilots and by doing so effectively grab control of television. I’ve written about that right here. But somehow Steve Jobs was too cheap or didn’t have the confidence to know which pilots to choose (I suggested buying online rights to ALL of them, solving that problem). Only now it’s YouTube, not Apple, and it’s Netflix and maybe Hulu because once one does it they’ll all have to do it — even including Apple.
And the one to dominate in this land grab will be the one that spends the most money, with the key being to grab control of longer formats. YouTube already controls the three-minute video. It’s Netflix- and Hulu-length videos they’ll want next.
New York Magazine says Youtube is putting $100 million into such productions, but I can’t believe it will be that little, especially if other players choose to compete. We’ll easily hit that $1 billion number.

If that happens, the TV industry in the United States will be thrown on its head, because producers will be selling online rights first, denying those to the traditional networks. That opens the possibility that TV series may succeed online while never even making it to TV. Or they could succeed online and only later make it to TV.
In one sense it is the beginning of the end for traditional broadcast and cable TV, though visionaries might see it more as the end of the beginning. That’s how I see it.
The result will be an even more fragmented video market that will see lots more hits of all sizes from little vertical shows aimed at specialty audiences right through to Glee-sized hits that will work well because they have global reach over the Internet and can aggregate huge audiences without having to be a hit everywhere.
Some see emerging ISP bandwidth caps working against this but I don’t. AT&T is the first to impose such a cap in the USA for hard-wired customers but I am sure we’ll see exceptions for AT&T-provided content. Just as Comcast has bought NBC-Universal, AT&T will get in the content distribution business, too, if only to better compete.
Netflix is already rumored to be commissioning a TV series from Kevin Spacey. I’m sure we’ll see a lot of this happening and I think it is all good. After all, more video outlets probably means more Cringely, and all three of my kids need new bikes.

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My last column generated a lively debate on the prospects for various business and technical options for the delivery of Internet TV so it makes sense to continue this topic and build it into a more full-featured model.  I used to write quite a bit about this back when I was trying to get NerdTV going.  The core of what I’ll write here can be found in a couple dozen columns from back then — columns that would seem to have been for the most part forgotten given the direction last week’s discussion took.  You see the future of television IS Internet television.  There is no other in sight.

No business or technology exists in a vacuum.  They all have customers, users, competitors, and make use of resources in an environment that is not one of total abundance.  This means that if there is going to be something like television in the future it is going to adapt to the distribution model that offers the highest price/performance, which is to say the highest performance for the lowest cost.  That is not how one would traditionally describe the Internet, but then times are changing.

Whatever country you live in there are generally four models for live entertainment video distribution — broadcast, cable, satellite, and Internet.

Broadcast is a limited local resource and therefore more highly regulated than the others but it has traditionally featured the lowest cost per marginal user.  That means it costs a lot to build and maintain a TV station but additional viewers within the service area can be added pretty much for free.

Cable offers more channel capacity than does broadcast but requires building a distribution network that’s fairly expensive.  While one could imagine a cable TV “station,” the way the industry has grown is through cable operators becoming content aggregators offering many services over their expensive networks.  That’s the most efficient way for cable companies to serve the broadest audience and the only way that enables them to sell extra-cost services like pay-per-view, premium movie channels or, indeed, Internet service.  Remember, though, that cable operators pay for nearly all of the content they carry, which is different from broadcast, where a lot of content is free to the broadcaster and some content even comes with money attached.

Satellite operators pay for their content, too.  Satellite initially used wireless technology to offer cable content in rural areas where it was too expensive to build a wired network.  Having gained economies of scale in the rural markets cable couldn’t compete for, satellite has come to town competing generally on price.  But satellite offers no practical Internet service.  I know there are some and I tried one years ago (Starband) but they don’t work well.

Internet TV is different from all these others.  It began as a parasite on telephone and cable networks so the cost of building the network generally wasn’t there, having already been covered for the most part by those earlier services.  Internet TV is less of a network than a conduit; at present the Internet Service Providers don’t pay for video content but then neither do they get paid for it.  Yet this common carrier attribute also makes Internet service often more profitable for telcos and cable companies than the core services those companies were established to provide.  Whatever you pay for Internet service, it is mainly profit for your ISP.

The important lesson to learn when it comes to these competitive services is that the first three — broadcast, cable, and satellite — are all going up in cost to their providers while the cost of providing Internet service is going down.  In the USA, broadcast viewership is dropping, which means the cost per viewer is rising.  Same for cable where viewers are stagnant, viewership is declining (number of hours of viewing) and the cost of content is rising.  Satellite has been growing marginally but that could end at any moment and it shares the same content cost increases as cable.  Meanwhile Internet service just gets faster and cheaper thanks to a Moore’s Law double whammy.

Remember Moore’s Law works in two ways.  It makes digital products ever cheaper AND ever more powerful.  This has profound meaning for Internet TV because it continually increases the bandwidth we can get for the same dollar while giving our devices the capability to do even more with the same bandwidth.

Here’s an example.  My primary Internet connection is an 8 megabit-per-second business cable line with a service level agreement and static IP addresses.  I pay more than you do but then I get more, too, though even my service is crap compared to what you can get in Japan, Korea, and much of Europe.  My primary computer WAS a Mac Pro G5/1.6 circa 2004.  I should have replaced the G5 a couple years ago, I know, but my kids are in private schools and I keep buying airplane parts. I finally replaced the G5 last week, though, with a dual-core Mac Mini 2.0.  Both the old and new computers had four gigs of RAM.  Though my Internet connection can easily carry one or more 1080p H.264 video streams, there is no way that old G5 (which cost me $1999 in 2004 dollars) could play it.  It didn’t do much better with 720p for that matter.  But the $750 Mini (small drive but lots of RAM) can easily decode 1080p.

This is the trend, then: our available bandwidth will go up while our devices will become more powerful, making better use of the bandwidth.  The result, as always with Moore’s Law, is either better services or lower total cost or maybe a little of both.

What this means for the future of television is that we’re approaching a point where Internet service will equal and then be lower than the marginal per-viewer cost of the broadcast TV model.  This crossover will inevitably happen with the only question being when. That’s a function of bandwidth costs decreasing at 50 percent per year and processing power increasing at 50 percent per year.  My calculations suggest the crossover will happen around 2015, which used to seem like a long time away but no longer does.

When Internet TV becomes dramatically, unequivocally, and inexorably cheaper than the other three distribution models, those other models will quickly go away.  That’s why I argued in PBS meetings to forget about spending $1.8 billion to upgrade local stations for digital TV and instead sell or lease that spectrum for commercial data use and throw the resulting $3 billion (lease revenue plus the $1.8 billion savings) into rebuilding the network solely as an Internet service.

Nobody listened.

So there is a cliff rapidly approaching for television.  Five years from now local TV stations will have the same complaints that local newspapers have today as many of them go out of business.  Cable TV operators will become ISPs, period.  Phone companies will be ISPs, too, and analog voice service will be gone completely.  The regulatory implications of these changes should be interesting.

Who, then, will be the players in this future TV?  For the most part they will be the content providers, which probably doesn’t mean traditional networks.  And the networks know this, by the way. Hulu.com isn’t called NBCFoxABC.com and TV.com isn’t called cbs.com for a reason. Networks will go away.

But content will endure, bringing new value to I Love Lucy episodes and almost anything else people like to watch.

The TV networks are throwing their lot together.  CBS chairman Sumner Redstone will come to his senses one day and merge tv.com into Hulu, I am sure.  Their big competitors will be Google, Apple, and a player yet to be even founded (definitely NOT Yahoo OR Microsoft).

Google will differentiate itself as always through technology.  Those shipping container data centers I first wrote about in 2005 exist not just because they are easy to stack inside big Google plants.  Why botehr with weatherproof containers if they are to be used exclusive indoors? Because they are even easier to put in the parking lot at the telephone company central office or at the cable company head-end, both of which will by then be strictly ISPs.  Google will proxy content at every major ISP in America.  And they’ll do this because Google has no idea what people want to watch on TV, nor do they particularly care.

Apple, on the other hand, cares.  Following the content development scheme I laid out last time Apple will attempt to become the dominant content provider to the 20 percent of the market that spends 80 percent of the money, with margins high enough to use Google distribution and still come out ahead, leaving to Page and Brin the 80 percent of content that generates 20 percent of revenue.

But wait, isn’t Apple just a maker of hardware?  Don’t they do iTunes just to sell iPods?

No.

Apple is a software company that has traditionally packaged its software in attractive hardware boxes.  The fact that any new Mac is essentially a Windows computer proves that.  But price points have been eroding in every hardware category and will continue to do so.  Microsoft right now makes more profit from every Windows PC than does the maker of that PC.  Apple is not immune to this trend.  So the company needs to find ways to sell more and more software.

Content is software.  TV is software.  And the great thing about entertainment is that it is software we can be induced under some circumstances to buy over and over again like those teenage girls who paid to see Titanic dozens of times.

What does that leave, then, for that player to be named later?  I’ll get to that next time.