SpectatorBytes

A few months back, I wrote about the emergence of the real-time Web and the impact it would have on content publishing. In recent weeks, the news coverage on the Web of the fallout from the election in Iran and the death of Michael Jackson have crystallized for me the impact of the real-time Web on news production and publishing.  We are witnessing the dawn of a new era in news: in fact, I would equate this game-changing moment to that of watching the images of “Desert Storm” on CNN in 1990.

To illustrate the revolution in the news consumption experience, I will share a personal experience from a couple of weekends ago following the news coming out of Iran. I first learned about the election protests when TV-channel surfing early Saturday morning.  I quickly abandoned the TV, turned my attention to my PC, and pulled up two news sites that I rely on for up-to-the minute news, Huffington Post and The Drudge Report. As I began to read the story, my appetite for additional information grew.  So, I went to Twitter Search to get more information, and there I received real-time updates and comprehensive coverage given the number of people, who like me, were following the story.

Once I found myself immersed in “#IranElection” a couple of interesting things happened. First, I found other sites/blogs which fellow Tweeters thought were doing a good job covering the story. There were several that stood out, including the Vigilante Journalist, NYT’s The Lede, and Twubs.com/#Iran Election. I was particularly glad to learn about Andrew Sullivan’s the Daily Dish. He was “live-blogging” the events from Iran in a way that I found pretty interesting. He was “curating” the tweetspehere and sharing what he thought were the most interesting tweets, adding videos from YouTube as they were uploaded, and posting links about interesting articles and news releases. He was updating the content every two to five minutes.

Second, this experience gave me a sense that I was as close to the story as I have ever been to the extent that I began to identify individuals in Twitter whose tweets I wanted to follow. Even though the overall “streaming” experience felt overwhelming at first, I was soon able to determine to whom I should be paying attention pretty quickly. I started to follow a couple of Iranians whose reporting on the events seemed accurate as far as I could tell. I determined this by matching their reporting to the video images that would emerge hours later.  Also, I have to confess that the Twitter community led me to find those people as it provided me with signals on whose reporting to trust via retweets, links and outright recommendations. After just a few minutes, I was getting “real-time” news coverage about the Iran elections protests. I have to say that my TV was still on in the background and I turned my attention to it a couple of times when CNN’s Christiane Amanpour commented on the day’s events.

There are several elements of my new news experience, which deserve to be called out:

- People Rather Than Brand: I found myself following more individuals rather than websites. The live-blogging experience from HuffPo’s Nico Pitney and Andrew Sullivan made me feel that I was sharing the experience with them rather than with the Huffington Post or The Atlantic. Certainly, in Twitter, I was following people, rather than news brands.

- No editor required: I found it particularly interesting that I was able to focus on facts and events that I thought were important rather than what an “editor” thought to be important.  I was creating my own storyline around the news event, relying on my judgment to filter the content I was consuming. This made consuming news a more involved activity but at the same time much more rewarding. For a big part of the day, I was “news hunting.” I guess it unlocked my investigative instinct.

- Bigger news appetite: As I got more involved with the story, my appetite for news grew. I kept on following the events on my blackberry after leaving home. I consumed news of the event for a solid 16 hours.

- Introduction of Live blogging to the masses: This is something that has happened in the digital media industry for several years now. Tech bloggers reporting Apple keynotes, conference gatherings, company layoffs, etc. I have always found the format to be really satisfying. Seeing this construct in action during the Iran election events prove to me that it will be part of the future of news.

- Use of tech tools: My news experience involved using a broad set of the ecosystem of Web tools such as Twitter and Google’s language translators, Twitpic, YouTube, Flickr, and Facebook among others.

This news experience may be unique due to the nature of the news event (as you may know, the international press was prevented from reporting on this event).  However, it does highlight how the news consumption experience is likely to evolve with the arrival of the real-time Web.

Exciting times are afoot for the newshounds in all of us.

Other than the interesting presentations by current industry newsmakers and catching up with industry friends, one of the most valuable things that I took away from Kara Swisher and Walt Mossberg’s D7 conference was a Flip Mino HD camera that I received as part of my gift bag. This simple yet  sophisticated video camera has made sharing memorable experiences with friends incredibly “frictionless.”

This has led me to think about the potential for another explosion in real-time, “social video” sharing over the next few years. Today, social networking activity evolved primarily around “status updates” as a universal behavior.  While sharing pictures and video has also been part of social networking in recent years, the behavior has not yet turned universal. Video sharing has primarily involved TV show clips rather than “social video clips.” However, as new devices and software tools make the producing, editing and uploading video process much more “frictionless,” real-time, I expect social video broadcasting will increase in popularity within social networks.

Video is a powerful mechanism of communication.  I realized this several years ago through a service that a local TV station offered in my hometown. The channel set up video kiosks around town that allowed people to create short-form confessional-like content. The channel would package this video and integrate it into their programming. These videos allowed local community members to discuss social concerns, express grievances with government officials, use their singing talents to complain about city services and in some cases embody the culture of the city via jokes or poetry. The success of this initiative was driven by the fact that the process of creating these videos was completely painless. The local TV network had set up kiosks all over town where any individual could easily record their rant of the day.

Recently, several signs have heralded the advent of this new real-time, video era. A new generation of tools designed to increase the use of video as a form of communication have been introduced. 12seconds.tv is one of the first services which aims to provide a “Twitter-like” video service that enables people to easily broadcast video “snacks’ to the their communities of friends and followers.  I must confess that I found myself unable to think of anything that could in the 12 second window. Facebook’s partnership with UStream, which makes it easier for celebrities to stream video live from their profiles, appears to be another sign around real-time/live video broadcasting.

As video recording-capable phones are added to the mix, real-time, video sharing will accelerate. There are new tools such as Posterous that aim to make uploading videos via iPhones to social networks pretty frictionless. Several other services like Twitvid and Tweettube, are making sharing videos on Twitter as simple as Twitpic has done with photos.

Thus, I expect that over time the same way that people take a few minutes to “update their status,” they may decide to point and shoot at something they see with some voiceover commentary. Needless to say, “video” will always require a bit more involvement than “text.”

Nevertheless, I expect continuous innovation in this area and thus new tools and devices emerge that will enable the process of real-time, video broadcasting much more frictionless than it has ever been.

In the meantime, I will be honing my video communication skills with the help of my Flip Mino HD.

While ownership of digital content in recent years has been en vogue thanks to the likes of iTunes and Amazon, the increasing ubiquity of full or “quasi-broadband” wireless access is likely to make streaming content more dominant over time.

The recent aggressive push by cable and wireless operators to provide fast Internet access to the Web is finally paying off. Similarly, the rapid growth in the number of hotspots has contributed to the sense (or reality?) that Internet access is all around us. In my view, the icing on the cake has been the deployment of Wi-Fi experiences in airplanes. Go-Go wireless now makes flying from New York to Los Angeles, San Francisco or Miami a unique experience.  So, it seems that  ever-ready access to the Web is all around (albeit with some connectivity hiccups which I expect to decline over the next few years if not sooner).

One of the implications of persistent access to the Web is the fact that we can now stream digital content instead of downloading it. This is relevant because streaming content tends to offer a more compelling value proposition for consumers relative to downloads. In many cases, streaming-based products are ad-supported products and thus free to consumers.  In this category, I include music services such as Pandora, CBS Radio/Last.Fm and MySpace Music, and video services such as Hulu, TV.com, and most TV network sites. In other cases, streaming-based products offer compelling premium experiences for which consumers are willing to pay for the bundle. This segment is much more nascent, so these products have yet to prove their mass appeal but show promise. In this category I would include music service such Spotify and Netflix’s video offering on the Web. These premium offerings are particularly compelling to high-consumption users who value access to “comprehensive” libraries of content, “all-you-can-eat” pricing models, and accessibility across multiple devices. As access to the Web increases around us, the number of streaming-based offerings will expand.

This emerging trend will not result in the death of pay-per-download or pay-per use models. This revenue model will likely endure as a segment of consumers will continue to demand “full control and ownership” over their digital assets. However, the increasing availability of connectivity is chipping away at “portability,” which is one of the key elements of the value proposition of “paid downloads.” As a result, we may see a change in the consumption mix relative to the current analog model where retail sales account for a larger portion of revenues in music and movies rather than rental/subscription-based businesses. In television, consumers already prefer a model that can be replicated on a streaming basis. All of this suggests that we may see consumers of digital content preferring streaming-based models rather than ownership-based ones on the Web.

Hence, content owners may want to start experimenting with models, both premium and free, that are streaming-based rather than continue to emphasize “retail ownership”-centric models. This will allow them to understand how to ultimately maximize the value of their content. My sense is that the behavior of media consumers on the Web will become increasingly much more segmented than it is in the analog world. Therefore, identifying how to extract the most value possible from different user segments will be critical to succeed long-term. The set of offerings to consumers will likely need to be more diverse than it is today. Music has certainly proven that now with the myriad of models that have emerged from online radio to limited streaming to streaming with no portability, etc.

Personally, I find myself buying less downloads from iTunes and streaming more from legal and free Websites. I have to confess that the main reason for this has to do with my coast-to-coast travel and ensuing fascination with Go Go wireless.

This does not mean that I will not pay for streaming services, on the contrary, I think that overtime I will pay for them if the product experience, bundle offering, and price point are right. Delivering a compelling premium streaming solution is not easy but I believe it will happen over the next few years. I simply think that these offerings may prove more compelling than paid downloads.

For many years now, I have written off “software clients” or “desktop applications” as viable consumer experiences. To me, the web browser paradigm is much more user-friendly and convenient. However, there are signs that suggest that “clients”/ “applications” are poised to make a comeback with users.

As a consumer, I have never been a big fan of software “clients” or desktop applications, primarily thanks to the continuous frozen screens that have punctuated my experiences with “clients” throughout the years.  To cause further annoyance, many of these clients are difficult to uninstall. Although these downloadable applications were designed to provide a better experience, like many users, I grew to distrust them. The Web browser-driven experiences proved to be much more convenient, frictionless and more importantly, a less risky alternative.

This dislike for “clients” intensified during my years at AOL, where issues with the AOL application drove user dissatisfaction with the service as a whole. However, during this time, I also noticed an interesting usage phenomenon. Core AOL users appear to prefer the desktop application to the Web browser experience. Those users who were satisfied with the “client” found the experience much more tailored to their needs and overall much more efficient. The mail experience was speedier, IM integration was more intuitive, and content sharing felt more natural.

Many developers and entrepreneurs worked over the years to convince me about the advantages of desktop software over browser-driven services. Yet, despite any of the advantages that clients offer, most consumers were reluctant to download applications and seemed to prefer browser-based alternatives.  Client-based products/services would be challenged to meaningfully scale. During this period of time, we only saw a couple of applications that bucked the trend: Skype and iTunes.

However, consumer attitudes towards downloadable applications may be poised for change over the next couple of years. The following are some of the signs and drivers:

- Clients are becoming lighter (i.e., requiring less time to download) and richer thanks to Adobe Air and Microsoft Silverlight. These lighter applications tend to create fewer issues than their heavy versions from years ago. On this, my evidence is only anecdotal.
- The success of Apple’s app store for their portable devices appears to be making users comfortable once again with downloading applications. Firefox “plugin” framework may have also contributed to this change in attitude among users.
- The popularity of Twitter “clients” such as TweedDeck, Twhirl, and Twitterrific provide a strong signal of this trend. These clients account for a significant portion (20%+) of the overall usage in Twitter by some estimates.
- Popular web services such as Hulu are experimenting with downloadable applications to enable a better user experience.
- New businesses are being launched once again around client experiences:  Boxee (video) and Spotify (music). Both of these services are enjoying significant buzz among early adopters.

Based on these signs, I expect client applications to become more popular over the next few years.  The Web browser paradigm is somewhat limiting relative to client applications. If users begin to change their attitudes towards downloads, I would expect developers to grow increasingly comfortable focusing on  developing clients rather than browser-based experiences.  Clients can enable the creation of highly tailored experiences, faster services, and more robust/richer experiences overall. The growing proliferation of computing devices beyond the PC will probably stimulate further the popularity and adoption of clients/applications.

The next-generation Web will evolve around much more sophisticated services than the ones we have seen thus far. I am starting to believe that “clients” will play a big part on the new Web.

The art of developing strategies for digital media businesses has become increasingly difficult. The dynamics of the Web continue to evolve at such rapid pace that media companies struggle to stay ahead of the curve. Changes in the marketplace force digital media players to focus on constant reinvention of their businesses. This is the reason why many digital media companies seem incapable of maintaining a consistent sense of direction for more than 12 months at a time, and why digital media leaders end up spending significant amounts of time restructuring their businesses.

The dynamics of competition in digital media have proven to be dramatically different than in most other industries.  For example:
- Hyper-competitive environment where entry requirements are declining over time (i.e., less capital, open distribution, lower user switching costs, etc.);
- Limited sources of competitive advantage (e.g., most companies struggle to retain asset/capabilities advantages over any significant period of time);
- Rapid cycles of product innovation as the market continues to aggressively fund new projects;
- Nascent revenue/monetization models which have yet to mature (i.e., advertising solutions are undergoing a significant period of change as advertisers are unsatisfied with current offerings); and
- Increasingly difficult to secure user/customer ownership given the high degree of empowerment granted by digital tools;

However, these factors do not bear sole responsibility for the lack of strategic direction by digital media players. In many cases, strategies are developed to fit market conditions at a particular moment in time. Instead, companies should develop the “strategic framework” it needs to effectively adjust its focus without losing sight of long-term strategic goals. Digital media players need to pursue strategies that allow them to rapidly change course when business dynamics change.

Amazon is a good example of a company that has put in place a good strategic framework to drive long-term growth. Amazon’s strategic framework is built around a platform play launched in 2003 with the opening of its inventory data.  The offering now includes third-party vendors via Amazon Web Services. This platform play has given Amazon permission to enter the content distribution business as well as the device business. Underlying Amazon’s success is the fact that they have enjoyed a core business whose financial performance has enabled them to expand into these new areas. Google has enjoyed similar benefits thanks to their rich paid search revenue model.

Without a robust business model, creating a long-term strategic framework and executing against it are very difficult tasks due to the lack of appetite for quick change among key industry constituents. Industry participants remain uncomfortable with the idea that the strategic value of a particular business may only last for a period of years. Advertising networks are a good example. Five years ago, advertising networks offered significant value to large publishers/portals as they allowed them to complement their brand efforts and scale their advertising business. Today, display advertising networks have proliferated and are becoming more targeted to the point that publishers may be better off optimizing across them rather than owning them. Similarly, as digital products become increasingly hit-driven with consumers (as I have discussed in the past), businesses need to constantly be prepared to make changes to their product portfolios on a dime. Sometimes, businesses that were once engines of growth can quickly turn into legacy business in no time.

These unstable dynamics dictate the implementation of a strategic framework that can be malleable but which also provides clear objectives for the organization and external constituents. A good digital strategic framework should:

- Properly anticipate how the market is likely to evolve over the next three to five years;
- Adequately identify core focus areas (i.e., areas of specialization where the company will focus on building competencies) and be specific around elements of the differentiation vs. the competition (i.e., don’t ignore the nuances);
- Provide criteria to constantly prioritize product efforts and assess/review product portfolio composition — e.g., No.1 with consumers, high-margin, systems-driven, etc.; and
- Outline initiatives designed to minimize long-term risk (e.g., hedge against lack of success of core business).

Implementing this type of long-term strategy requires a consistent vision and a focused management team. It also requires being obsessed about business and product nuances as well as remaining pragmatic about changes in marketplace realities.

Most digital media companies have not done so over the past five years, which may explain the challenges the industry faces today.

The growing number of social tools that have emerged over the past few years (MySpace, Facebook, YouTube, Wordpress, and Twitter among others) are contributing to the emergence of new type of users which I call “social leaders.” After all, in a world where we are increasingly “following” our friends, acquaintances, colleagues and celebrities, the “social leaders” are those from whom we are most interested in listening or simply those who tend to consistently “broadcast” or share information with us and their community.

The recent popularity battle between Ashton Kutcher and CNN on Twitter made this phenomenon evident. As of today, two million people are following Ashton Kutchner on Twitter. However, this is not just about celebrities. TV news people increasingly market their Facebook pages. Musicians constant promote their MySpace pages. Sports analysts promote their YouTube channels. Industry specialists blog and Tweet.

This phenomenon is not necessarily new. As communication tools have become easier to use over the past few years, these social leaders find it easier to build and maintain continuous relationships with their audiences. Social leaders can easily share their videos, daily musings, photos, thoughts on issues of interest, etc. Social networking tools have created a new class of users or, as I should say, broadcasters.

Today, the social leaders on the Web are similar to those in our “real” lives. They are our most gregarious friends, most extroverted colleagues or marketing-savvy celebrities. However, as these social tools evolve, I expect that new types of social leaders will be created and the overall numbers of social leaders will multiply. We have already seen leading gamers grow in popularity, good content curators sprout everywhere, new industry thought leaders expand their followings and “dorm-room” stars break through.

The implication of the emergence of online social leaders is that we will increasingly rely on them to help us sift through the abundance of “stuff” on the Web. They will increasingly play the role of curators of content and information for their communities. They will play the role of information editors across multiple dimensions of our lives. The amount of information available on the Web is overwhelming and so far most tools have proven inadequate to help mainstream users discover content and information on the Web that is of interest to them. Portals (Yahoo, AOL) and aggregators (Drudge Report and HuffPo) are still the most popular tools. RSS readers, while useful, have apparently failed to lure the masses.

Typical users need better forms to package information for them. Social tools have helped fill that gap. The next-gen tools such as Twitter, Friendfeed, Tweetdeck, and Twine are heading in the right direction. I expect these tools to continue to evolve and further enable “social leaders,” so that we, the happy followers, can more easily and efficiently discover and consume new content and information.

As web services and open platforms become more popular, the opportunity to change the ways Internet businesses operate is dramatic. Amazon and eBay (among the large players) pioneered these efforts starting in 2003. Today, with open source initiatives such as Wordpress and Open X, more and more companies are leveraging “openness” to enable rapid adoption and product customization.

In 2006, Facebook proved the attractiveness of the open model by opening its services to all developers. This move allowed Facebook to quickly enrich its offering with a diverse set of new features and functionality created by “friendly” third parties.

Recently, Twitter has gone a step further by allowing developers almost unrestricted access to its core functionality, thus enabling the rapid expansion of functionality that’s helping it address the emerging needs of its growing user base.  The best example of the power of Twitter’s open platform occurred a couple of weeks ago when Twitter announced their plans to launch real-time link search, only to learn that a startup called OneRiot was about to introduce an application with essentially the same functionality. The overall Twitter experience for consumers has evolved faster thanks to external product developers than if only the internal teams were responsible for it.

So, while technologists are fascinated with openness, I would argue that business folks should be equally excited. Open platforms allow the deployment of highly scalable and efficient operating models for Internet businesses.

The following are some of the key benefits that can be extracted by creating a service built around an open platform:

Product Development:  Companies can accelerate the development of new features and products. Open platforms allow internal teams within an organization to work more efficiently by eliminating bottlenecks and permission-based technology cultures (i.e., product developers need to ask for permission from most other product/feature teams to innovate). They also allow companies to easily tap external talent/specialists to accelerate product development initiatives.  The focus on highly customized/complex business development relationships should give way to allowing developers to have the freedom to easily access the platform to drive innovation. In other words, openness allows a business to easily access marketplace innovation. Implication: Greater ability to meet evolving consumer needs and deliver product innovation at a faster pace.

Distribution: Open platforms enable the creation of robust syndication initiatives (e.g., widgets, “share this” functionality). Allowing 3rd parties access to the platform can create a distribution army for the open company. This makes it easier for a product to easily become part of the overall Web ecosystem. Beyond syndication, open source can maximize distribution at a rapid rate and at a very low cost. Implication: internal product distribution teams would no longer be necessary.

Marketing: The need for traditional marketing decreases as consumers and the marketplace become more efficient arbiters of winners and losers. Given the lack of friction and inefficiency in the system, successful products do not need to spend on traditional marketing campaigns to secure consumer adoption or distribution. Companies need to seed new products with influencers through smaller, highly-targeted campaigns. As positive word of mouth spreads, open platforms allow early adopters/passionate users to drive adoption of the products. Implication: Limited need to spend on marketing.

Management: Open platforms allow management to distribute control over operations more readily. This leads to a more decentralized organization where the decision making power is in the hands of product owners and thus closer to the end user. Openness reduces the need for an organizational matrix. Smaller groups can be empowered to make decisions since they have limited impact on each other. This approach provides management greater flexibility as it can easily stop failing projects without impacting the rest of the organization.

Sales/Revenues: An open platform allows companies to easily test different monetization models, primarily performance based. Again, third party models can be evaluated with limited friction. This is particularly important because online revenue generating solutions continue to evolve. Implication:  Focus on developing internal capabilities around premium monetization and rely on third parties to handle performance unless your product requires a unique ad solution.

G&A: Lastly, openness allows organizations to be much more widely distributed. For some, distributed may mean inefficient. However, the reality is that distributed models tend to be much more efficient as you can engage productive talent pools, reduce the need for hand-off managers, and time-consuming decision-making processes. Implication: Focus on developing the right set of processes to enable a distributed model to succeed.

I increasingly think of open businesses rather than simply open platforms. Those business leaders who embrace openness are more likely to succeed than those who focus on obtaining cost-efficiencies within closed operational environments.

Please share your experience with open models.

Digital media companies would benefit from embracing technological innovation and taking proactive measures to avoid falling victim to the innovator’s dilemma. The Innovator’s Dilemma is the title of a book by Clayton Christensen in which he studies why successful market leading companies fail when faced with disruptive-innovations (i.e., simpler, cheaper, less functional products/services) in the marketplace.

One of the most compelling (and terrifying) aspects of the digital media and technology industry is the rapid pace of innovation. Every year we witness the launch of game-changing products and services. In some cases, these products capture the mainstream imagination (I don’t need to name these) while others garner the love of a smaller subset of enthusiasts. Consumers can continuously switch or update their portfolio of preferred digital products and services.

In recent years, the pace of innovation has accelerated thanks to the proliferation of competitors, rapidly declining production costs, and the establishment of standards in many areas of the industry. This trend is creating a challenge for most digital players who appear to be struggling to keep their products and services relevant with consumers in an even more competitive marketplace.
Those players who appear to be succeeding (or at least not struggling) have done so by making product and service innovation a core capability. They realize that driving innovation is essential to protect and grow their business in the long-term.

Facebook’s recent redesign illustrates the importance of making and what it takes to make innovation a core capability in the digital marketplace. In a much-publicized maneuver, Facebook completely redesigned their “homepage” experience around a real-time news feed of social activity. Some have described the new design as Facebook’s effort to adopt some of the most compelling aspects of the Twitter experience. A change of this magnitude in the user experience of a product as popular as Facebook is not for the faint of heart. It can alienate users and slow the arrival of new users.

Although this move has invited criticism across the Web from both industry pundits and users, I believe Facebook’s willingness to change its user experience in such a dramatic fashion deserves some praise. Despite its success in attracting new users, Facebook pushed forward to “innovate” its user experience to better serve an emerging consumer behavior, which Twitter seems to have unleashed. Perhaps, Facebook fears that unless their user experience evolves as fast as the market, it would be tacitly allowing the competition to chip away at its users’ attention and engagement long-term. So, regardless of the ultimate outcome of the redesign, the willingness and ability to adapt to changes in consumer behavior and consumption could prove to be one of Facebook’s primary competitive advantages. Many other companies in the space would be unwilling to take a chance such as this.

Some may argue (and probably rightly so) that Facebook was able to take this aggressive step because they do not have revenues that could be impacted by the change. If they had real dollars at risk, it is possible that they would not have taken such a step. This may very well be the case.  Unfortunately, I have seen several companies choose near-term monetization over product innovation, who have suffered for it in the long-term. In this scenario, the quest for monetization becomes a competitive disadvantage.

This has made me think that technology-driven cultures, such as Facebook, may have an edge in driving business innovation relative to their less-engineering driven counterparts. These cultures tend to put the mechanisms in place to foster and reward innovation.  In my experience, engineers are wired to drive innovation much more than traditional business managers. This “innovation” capability is particularly valuable for digital media where consumer behavior and business models are still taking shape.

This aggressive approach to innovation is a capability that media companies need to consider developing/matching. One way of doing so is to increasingly embrace engineering talent as a “core” part of their digital efforts (rather than a peripheral cost center). This implies creating product teams and organizations that effectively mix business and technology talent. It also implies putting in place product managers who have the ability to effectively collaborate with/lead engineering teams. Ideally, management would include leaders with “hybrid” experience in both technology and business. Another way of doing this is to create an environment where acquisitions are effectively leveraged to drive innovation. This approach requires a culture and organizational infrastructure which allow for external innovation to be easily plugged-in.

Doing so would help create an environment where their digital teams would increasingly focus on delivering new products and services that consistently meet the evolving needs of their customers and audiences. Fostering innovation within their own ranks would allow media companies to have a better shot at being able to compete on more equal terms with their “pure” technology counterparts.

There is no dilemma here: companies playing in digital media need to be innovators. However, this is clearly not an easy task.

Over the past few years, we have witnessed the transformational impact of digital technologies on traditional media. The music industry was the first to be overwhelmed. Currently, the digital spotlight is on the newspaper and magazine industries whose business models are under intense pressure. The television business appears to be next in line as consumer viewing and media consumption behaviors appear poised to change significantly over the next few years.

As the digital revolution runs its course, it is evident that the digital revenues for each of these media industries may struggle to offset the decline in analog revenues.  In the case of the music industry, for example, digital revenues have not offset the declines in CD sales. At $18 billion in 2008, total music sales have declined by $6 billion since 2005 and close to $27 billion since 1997. Digital technologies have exposed and circumvented the inefficiencies in the current media models (e.g., price-to-value ratio, distribution limitations, packaging A & B products together, etc.). This leads to consumers paying only for what they want (which is usually less than what they were paying before), and allows advertisers to make their spending much more efficient (which may also lead to lower spending).

As a result, for traditional media to thrive after the digital shake out, companies need to focus on remaking their operational approach. The primary goal is to help maintain robust profit margins. The secondary goal is to create competitive advantages which may allow the businesses to maintain and further build scale.

Current cost structures of traditional media businesses reflect the operational practices and revenue sources where content was scarce and distribution could be tightly controlled. The traditional cost structures are built around a specific ecosystem of distribution channels and distributor intermediaries. Existing models tend to rely on mass-marketing-driven strategies and support product development cycles that work best on less empowered consumers.

The new digital reality requires a new set of operational practices and revenue sources. While streamlining efforts are helpful in managing profits, they tend to emphasize preservation of current practices rather than the development of innovative approaches that can address the opportunities and challenges of the new digital world.
In my experience, successful new operational models tend to:

1. Adopt technology and engineering as a core capability: Engineering teams can develop tools that allow operating teams to redesign their overall practices to increase efficiency, drive up speed to market and foster scalability. For this to happen, engineering teams need to work closely with key product leaders/managers to ensure that there is continuous flow of communication throughout the process. This would allow engineering teams to help innovate operations rather than to simply develop a tool that serves the current operational practices. Most successful digital media consumer services have been developed by teams who value and foster engineering-driven thought leadership.

2. Rethink product development/production processes: Digital technologies have enabled the production of content at much lower costs. This does not mean that quality needs to be compromised. Publishing is probably the area where the greatest innovation has taken place. There are several niche digital publications who have created significant amounts of content with relatively small teams (e.g., Talking Points Memo, Engadget, etc). These new production models are still being developed. Scale remains a challenge for these new players. However, since the downward pressure on production costs will continue, media will be better off by striving to put in place more efficient processes rather than simply preserving current practices.

3. Build/own new distribution channels: Just as TV production companies own TV station groups in the analog world, it is important that traditional media control their means of distribution in the digital world. This is especially crucial because the scale of revenues in the digital world may prove too small to support sharing any economics with third-party distribution services. In the digital world, content/service owners need to retain every digital dollar they can. There are already major distribution platforms that have been created independent of content producers (e.g., Google, Facebook, Digg, YouTube). Content owners would benefit from aggressively developing competing distribution platforms. Hulu is a great example of the type of initiative that is needed.
4. Use a different marketing channel mix: As I have said before, successful digital businesses have not relied on marketing spending to achieve consumer adoption. They have done it by focusing on offering a high-quality product/service to its customers. Digital media businesses should follow this model and  not rely on traditional marketing to drive success. Having said that, digital media should leverage new marketing channels (e.g., social networks, Google, digital publications/blogs) to reach the “influencers/enthusiasts” and kick-start word of mouth campaigns. These efforts can prove highly cost efficient and valuable.

These are some examples of the initiatives that could be pursued to establish new operational models. I am sure others could suggest alternative approaches to tackle the issues in each of the areas I discussed above (please do so in the comments). Yet, in a world where digital dollars may not fully offset declines in the analog media business, the ultimate goal of creating a new operational approach is to establish a low-cost, highly efficient model that can be defensible long-term, and which would allow media companies to retain scale in revenues and high profit margins.

Companies that are able to remake their businesses will enjoy significant competitive advantages over those that are less prepared. These companies will be able to leverage their more efficient cost models to build scale and gain market share. The sooner media businesses recognize the need to set new operational models, the better positioned they will be to reignite their growth and capture value from changes in consumer behavior and overall media consumption.

It used to be that consumers’ mainstream media habits revolved primarily around listening, watching, reading and communicating. However, the results of recent research indicate that gaming has become a mainstream behavior for digital consumers.

According to Comscore, casual gaming sites attracted 86 million unique visitors in 2008 compared to 67 million in 2007. This is a 27% increase and represents a 50% penetration level of total internet audience. The overall time spent playing online games also increased by 42 percent over the same period. Online game playing now accounts for almost 5 percent of all internet time.

Similarly, the Entertainment Software Association annual survey highlighted the growth in usage:
- 65 percent of households in the US play computers or video games
- The average age of gamers is 35 and 26% of gamers were over the age of 50.
- 40 percent were female. The percentage increases to 44 for online gamers

According to the PC Gaming Alliance, several factors seemed to have helped facilitate the growth in gaming activity:
- Continued increases in broadband penetration have enable digital distribution, thus making games (especially online games) more easily accessible to more consumers
- Expansion of retail presence via game cards at major retailers
- Subscription-based MMOGs have proven a hit with consumers and are highly profitable for producers; this has led to growing consumer acceptance of free games with micro-transaction models around the globe
- Increased popularity and improved performance of low-cost PCs

If current behavior among iPhone users is any indication, mobile devices are likely to make gaming a bigger portion of our time spent consuming media. According to Fierce Mobile Content, games lead all iPhone categories with 6,276 titles, or 23.1 percent of total App Store downloads. Today, 11 out of the top 20 most popular applications for the iPhone or iPod Touch are games.

What makes gaming more interesting as a category for media players is that consumers seem willing to pay. According to the PC Gaming Alliance, revenues for subscription and/or micro-transaction based models were estimated to reach $776 million in the North America/Latin America region. Revenues from games sold via download reached $450 million in the same region. Worlwide revenue figures are much higher given that PC gaming behavior is much more evolved in Asia; they were estimated to reach $11 billion in 2007 for PC games alone.

However, significant growth in activity and revenue estimates in the US indicate that gaming is poised to be one of the major drivers of growth in media over the next few years.

Several major media players have invested or are beginning to invest in games. However, the category is still evolving, particularly around online gaming, so they will likely to need to do more to have any meaningful impact.
Nevertheless, I would not be surprised if several of these players make gaming a core and sizable element of their portfolio in the future…as big as print or video.

YouTube’s recent programming and advertising initiatives are pretty exciting. In them, I can see that YouTube is taking steps to unlock the value of online video.

First, YouTube recently allowed one of its content partners, CBS, to use their own video player to broadcast “March Madness” on YouTube.com. The second was YouTube’s experiment with a more compelling advertising format, dubbed “cross talk,” for the film “The Haunting in Connecticut”.

Both of these initiatives indicate that YouTube is focused on expanding its offering beyond user-generated content to include all forms of video experiences for consumers, as well as growing its ability to offer attractive units to brand advertisers. For me, as an investor and big believer in online video, these are pretty exciting developments.

While YouTube’s roots and success have been built around user-generated content, I believe its lasting legacy will ultimately come from being the catalyst for the growth of the online video industry.

To date, YouTube has captured consumers’ attention when it comes to online video. While new competitors have emerged, streaming statistics show that consumers use YouTube as the starting point for video on the Web. According to Nielsen, YouTube has over ~57% share of total streams viewed on the Web in Feb 2009.

Since YouTube has become the de facto “consumers’ choice”, the online video industry could benefit greatly from using YouTube to distribute their professional content. This would happen if YouTube help content producers to both promote and monetize their content. Given that advertisers are focusing their spending on professional content, helping content producers and content networks scale viewership can prove highly beneficial for both YouTube and them.

This has made me think about what else YouTube can do to become an even better home for professional producers (of both short and long-form content). Here is my dream list of initiatives:

1. Enable integration of third-party video players for all of your content partners. While YouTube may not allow just any and all video players, it could authorize the use of a handful of popular players to expand your content universe. This would allow content producers to more easily manage their content, refresh their promos / interstitials, update recommended playlists and integrate their own ad server solution. Alternatively, YouTube could offer producer content players which enables several of these capabilities.

2. Make YouTube a more attractive platform for content owners to offer long-form content/full-length TV episodes. This initiative requires specific promotion of long-form programming on the homepage to let your users know that YouTube is also a place to see full episodes of TV shows or feature films. It would also entail that content owners retain full control over the monetization of their content. This does not mean that they would not agree to let YouTube help them monetize their content; YouTube would of course be compensated for such assistance. I believe YouTube has put already put a program like this in place for some of its partners today.

3. Build out a premium video sales organization focused mainly on selling professional, branded video content. YouTube can use its scale to persuade advertising agencies to spend greater amounts on online video campaigns. Many emerging content producers will likely need a partner to supplement their direct sales efforts. This may require allowing brand advertisers to use formats they favor for professional content such as pre-rolls.

4. Create a formal programming function (incorporating both systems capabilities and human editors) to help promote professional content on the service. This function will establish policies and processes to work with producers to promote their content. This editorial-driven area of the service can be described as such to avoid having a negative impact on consumers.

5. YouTube can also help spur he growth of digital sales of professional online video. YouTube’s pilot efforts in this area are pretty encouraging. If you provide generous economics, you could use this initiative as a way to attract content partners to work closely with YouTube in all of the initiatives described above. Content partners would like to have multiple outlets to sell downloads, especially through outlets that can give their content exposure to a large audience like YouTube.

6. Deploy technology that allows content companies to use clips of copyrighted content uploaded by users to promote the full-length experience on YouTube. MySpace is collaborating with a startup called Auditude on an initiative along these lines.

Many producers may not be willing to use your platform to distribute their content for fear of giving YouTube too much power. However, creating the right conditions may persuade several of them to build a lasting partnership with YouTube.

Further expanding into professional content (and long-form in particular) presents meaningful challenges for YouTube. Making long-form content a core part of its offering without negatively impacting the user experience is certainly difficult to balance.

The recent events I mentioned at the beginning of this piece lead me to believe that YouTube is heading in this direction already. I recognize this is not an easy task and that I may not have the complete context. Yet, I thought it would be helpful to share my dream list of initiatives for YouTube. Again, I applaud YouTube’s efforts.

It would be good hear about other intiatives that I may have missed.

Update: YouTube is expected to redesign its homepage to showcase premium content more clearly.

Over the past couple of years, I have advised the digital companies with which I am and have been involved to minimize their marketing spending. Instead, I have advocated that management teams focus on product development and maximizing distribution, which I strongly believe is a superior recipe for success.

The list of digital products that have gained mass adoption with minimal advertising spending is long and well known. It includes companies like Google, Facebook, Twitter, MySpace, YouTube, AIM, Skype, etc. Many of these companies have focused on offering a great user experience and have been aggressive in securing distribution deals to enable adoption. Google invested in getting an AOL deal. YouTube leveraged MySpace distribution. Skype secured partnerships with portals. More recently “open initiatives” have been used to achieve the same objective. When Facebook opened its platform, it created an ecosystem of products that has both enhanced the user experience and marketed the Facebook brand.

This has gotten me thinking: What if this formula of success extended beyond Web products into other types of businesses (e.g., autos, food, appliances, toys, hardware devices, etc.). This would imply that overall advertising spend is likely to decline over time as companies rethink their approach to the marketing function.

To properly evaluate this thesis, we need to understand why successful Web companies have not required a traditional advertising model:
- User experience and utility have proven to be the main drivers of user adoption for Web products today. Poor quality products struggle to attract and retain users;
- Compelling consumers into using lower quality experiences has become much more difficult. Thanks to blogs, social networks, and product reviews, consumers are increasingly highly educated about the strengths and weaknesses of products;
- Ads are increasingly challenged to break through the clutter. Consumers are not only increasingly skeptical but also turned-off by the abundance of marketing messages. They also now have tools to help them avoid those marketing messages (e.g., Tivo);

These drivers would seem to also apply to non-digital products. Consumers now have access to vast levels of information about all types of products. They also have the ability to easily tap their friends and “friendsters” for advice on a particular product. Product information now travels at warp speed among consumers. As a result, traditional marketing messages will likely have a diminished role in influencing their decision-making.

As a result, companies may be inclined to increase their investment in product development at the expense of brand marketing spend over time. As quality and value emerges as the key factor in consumers’ purchase decision-making, focusing on product development is likely to provide a much more effective way to break through the clutter than aggressive mass-marketing practices. Hence, marketing initiatives can be expected to be much more targeted than they are today as CMOs seek to show increased effectiveness from their efforts. As marketing initiatives become laser-focused on reaching “influencers” rather than blasting messages indiscriminately, overall marketing spending requirements may decline. After all, the Web provides a much more cost-efficient way to reach consumers than other media.

Similar to other consumer-driven businesses, the inefficiencies of current marketing and advertising practices will be exposed by digital technologies. Once this happens, the result is likely to be a decline in overall marketing investment. As a result, the proverbial half of marketing spending that is wasted could be readily identified and eliminated.

The impact of the digital revolution on marketing and advertising spend will not be felt fully for some years. However, digital and traditional media businesses need to begin considering the implications of this trend on their overall business models and cost structure for the future. Thus far, the media industry’s transformation efforts do not seem to have factored in a potential long-term decline in advertising revenues.
I would not be surprised if the overall brand advertising pie could continue declining, even after we get through the current economic downturn. What do you think?

Nowadays, it seems that radio is one of the most unattractive media businesses. Radio stations are facing a significant slowdown in local advertising. The drama surrounding the recent financial difficulties of the merged Sirius and XM highlight the challenges satellite radio faces. However, in recent months, I have found myself listening to more radio than ever before. I have been listening to 1010 WINS (one of the leading news stations in New York), NPR, my favorite radio stations in Colombia, and Bloomberg news.

The reason for my new love of radio is my iPod Touch. Using applications such as AOL Radio, NPR, Pandora, Last Fm and Wunderkind, I am able to access a broad variety of radio content, including music, at all times. You need 3G or WiFi access to be able to experience these applications.

The radio experience via the iPod Touch or iPhone has several compelling benefits over the traditional radio experience:
-    Great sound quality. Anyone who has tried to listen to AM news stations in New York knows that it is very hard to get a crisp signal
-    No geographic constraints. I am able to access radio content available from most places around the world.
-    Reduced interruptions.  Music stations insert only a limited number of ads. I primarily use AOL radio
-    Offer music customized to my individual taste. I recommend Pandora or Last FM for this
-    Touch screen provides an ability to navigate to selections much easier than traditional radio devices

We have already seen the growth of online radio on PCs over the past few years.  Online radio unique visitors grew from 50 million in 2007 to 65 million in 2008. According to research firm American Media Services, 38 percent of adults surveyed six months ago said they expected to listen to radio on the Internet at some point in the future; more recently, the figure was 48 percent. As smartphone and small computer devices like the iPod Touch increase in popularity, consumption of audio content will grow exponentially from current PC levels.  Radio will be reinvigorated once again. This should be good news for embattled radio players.

However, embracing this opportunity will require radio players to rethink their current content production models and overall programming practices.  Similar to other media categories, it is unclear how much advertising share can be captured by online radio. The good news is that this next-generation radio can be built around a lower cost model given that it requires less spending on distribution infrastructure, content can be amortized across larger audiences and produced more cheaply, and marketing spend can be streamlined by using recommendation technologies. Moreover, radio companies could explore extending their ad-supported model to unlock value from other types of audio content such as audio books and educational courses.

Traditional radio companies enjoy significant competitive advantages today given their control over relationships with local and national advertisers, and their ability to promote their brands and content using their antenna radio stations. They should leverage these to become the leading programmers of digital audio content.

CBS has led the way with their partnership with AOL radio and their acquisition of Last.FM. The other players would benefit from following this lead. I promise I will be listening.

Do you listen to online radio? What is your take?

Recently, Techcrunch had an interesting article about the death of digital divisions inside major media companies. Techcrunch argued that the slowdown in M&A will mean that  most digital initiatives will now be led by the traditional divisions rather than by “digital” divisions.

While this may be the case in the short-term, I believe that major media companies will eventually have to continue to invest in their digital divisions or even reconstitute their portfolios beyond having a single digital division. Failing to do so may create the opportunity for new media conglomerates to emerge. Google represents the first of a potential new breed of media conglomerates.

Let’s first understand what may be transpiring with the digital divisions of major media conglomerates. Digital media divisions have a valuable role inside media companies. They…

• Build scale to show traditional media divisions that there is a compelling business opportunity in digital
• Act as a catalyst for the development or acquisition of innovative products
• Adopt low-cost, more efficient business models and operational practices

Despite their value, digital media divisions face significant challenges inside big media organizations. Given that digital divisions most likely challenge existing operational practices and expose business inefficiencies, traditional divisions tend to view them as a threat. Thus, core divisions spend significant time undermining digital divisions. To do so, core divisions either tend to create parallel efforts (i.e., their own digital initiatives) whose role is to demonstrate that they are better positioned to execute or simply  refuse to engage with the new divisions operationally. The challenges confronting digital divisions inside big media reflect the difficulty traditional media businesses are having in adapting to new consumer habits and the overall impact of digital technology on their businesses.

In addition, digital divisions remain sub-scale for most of the leading media conglomerates (AOL is probably the only exception). Revenues are only just hovering around $1B dollars or below in the case of most media conglomerates. This is a small dollar amount given the overall size of media conglomerates. Big media has not invested as much in digital media as they have in the past for other initiatives (again AOL could be thought of an exception but it is not). Consider how some of the major media conglomerates got put together, i.e.,  Time Warner, ABC, NBC Universal and to a certain extent Viacom. These conglomerates are the result of several multi-billion dollar acquisitions. For example, TimeWarner acquired Turner to enter the ad-supported cable network business. ABC did the same thing with the acquisition of ESPN. NBC acquired Universal Studios, which had acquired USA Networks. All of these transactions were multi-billion dollar deals.

So, why are these conglomerates not making the same level of investment to scale their digital businesses? The main reason is that digital business models continue to evolve and are still financially unpredictable. Few consumer digital media businesses seem to offer continued long-term revenue and profit growth. Google is perhaps the only exception. This lack of predictability has made digital investments unattractive to traditional media executives.

Moreover, media companies are still adjusting to the need for sophisticated technological capabilities. Engineering cultures have not been a major part of media conglomerates. This makes acquisitions difficult for Big Media to assimilate and adequately leverage. In many cases, talented technology staffers quickly leave after acquisitions as they find big media cultures uninviting.

Nevertheless, media conglomerates need to reconstitute their portfolio of businesses if they want to survive long-term. Their portfolios need to better reflect where value is going to be created going forward. Reinventing their businesses from the inside is not an option. The required change would be too drastic for traditional media cultures to be able to nurture and scale digital initiatives internally.

This would probably lead to a couple of events going forward. If major portals such as Yahoo and AOL demonstrate a certain degree of business stability, we are likely to see major conglomerates make a move for them. The other players, who are unable to pick up any of the independent at-scale players, will probably let further consolidation take place before they jump in with larger acquisitions.

Having said that, there could also be a scenario in which media conglomerates wait too long to reconstitute their portfolios and allow the digital media companies to gain enough momentum to become the acquirers. Watch out. Interestingly, current stock market prices for big media suggest that investors already believe these companies will not get through the economic downturn unscathed.

This period will be critical for major media companies. Letting their digital divisions die is not an option if they want to come out ahead in the end.

The emergence of Twitter as a major consumer application on the Web has put the spotlight on “real-time” information delivery. Facebook is quickly jumping on the bandwagon with their recently announced updates to its user experience. Real-time news and information delivery has been one of the great promises of the Web.

For many years, real-time content has been offered to audiences in specific verticals such as finance and sports, often with a paying customer base. For example, it was only until recently that real-time stock quotes were made available free of charge. These user segments, fantasy sports buffs or stock traders, had to have the latest information available. This was not the case for mainstream users.

So, what has changed? Consumers now have access to the Web on a 24 hour basis via their both their laptops and mobile devices. With increased access and mobility, people’s ability to consume and appetite for new information has expanded exponentially. There does not appear to be a limit on how many times a consumer can return to their news sources and sites for “fresh” information. Furthermore, many online publishers (bloggers) have contributed to the growth in consumer demand by introducing “real-time” initiatives such as “live” coverage of industry events, award shows, Twitter streams, etc. These trends have helped real-time gain mainstream momentum.

A few years back, we realized at AOL that real-time news and information would be key the differentiator and an engine of usage for the channels in the network. We had witnessed how blogs providing continuous updates were gaining audience versus traditional sites providing daily updates. We felt “real-time” would be the next incremental step. For this reason, in 2006, we purchased a news service for financial institutions called Relegence. Relegence surfaced information across the Web on events, topics, and people that were generating news. The idea was to keep consumers coming back to our site for the most comprehensive and timely news coverage. AOL has now integrated this capability into its core news channels. I have been told this feature has played an important role in growing usage.

I mention this because there were a couple of interesting things that we learned about how publishers can leverage “real-time” experiences to enhance their offering, create differentiation vs. search and drive usage:

Given Google’s dominance, the Web has been mainly a “pull” medium. Real-time services allow the creation of “push” consumer experiences. This means that consumers today tend to actively seek out information rather than to passively receive it. Real-time services can “push” information to users on topics that are being heavily written about or discussed by many people, whose relevancy results from their timeliness and popularity. Consumers can more rapidly become aware of topics gaining importance on the Web but about which they may have not searched. Waterfall is an application on Twitter that seeks to highlight this type of experience.

In addition, real-time services can help highlight topics for which the level of activity is above the norm. For example, Britney Spears is constantly being discussed or written about. This does not mean that she is always making news. Yet, when there is a spike in the number of articles and mentions, these services can surface the news that is actually new.

Lastly, as new topics emerge, these new topics will relate to existing topics. Publishers will benefit from having tools that enable them to establish these new links among topics, events, people and organizations. Moreover, publishers should leverage their library of historical content to complement the new real-time information. Online publishers, which increasingly make real-time information delivery and breaking news the core of their experience, will benefit greatly. Real-time could help publishers increase their leverage in the “starting point” battle. Publishers who treat “real-time” simply as a feature may risk falling behind. Having said that, real-time offerings apply to some categories more than others. However, I expect it to gain in importance as a driver of usage across the board.

The “real-time” trend will have significant implications in other media but I will leave that for another post. It could be that I am too obsessed with my Blackberry and iTouch. Do you have a different Point of View?