With respect to content, Part 1

When telcos and broadband service providers begin to move from the idea stage to the actual execution of their TV and broadband content delivery plans, they will quickly find out two basic facts. First, content acquisition is a major challenge for telcos. Second, content distributors are still reluctant to provide their media properties to anyone other than cable, and don't treat telcos with consistency.

Although you never hear anyone actually admit this, much of this reluctance is likely to be a result of the massive vertical integration within the media industry. Admittedly, some reluctance is also attributable to the fact that they are not familiar with the point-to-point nature of telco broadband networks and therefore skeptical of the ability to secure the content against piracy, but frankly this is more a red herring than a real barrier to successful content acquisition.

When people outside the media industry look at the business as a whole, many are surprised at how truly pervasive this vertical integration really is. Not unlike the concept of plate tectonics, the past ten or fifteen years has seen the emergence of giant media conglomerates that control everything from the development of the original content all the way through to the customer premises; even extending to ownership of the technology platforms that control and secure content delivery from beginning to end. If this sounds far-fetched, let's look at some examples. 

Everyone knows AOL Time Warner to be the result of the merger between Time Warner and America Online, one of the largest mergers in American business. But did you remember that the AOL side of this conglomerate acquired Netscape a few years back? This gives AOL both web client and web server technologies. Netscape donated the code for its Navigator browser to the open source community, and the result, just this year, was Mozilla 1.0, an open source Web browser that happens to be used in a number of set-top boxes to render the subscriber user interface. Yes, I suppose you can argue that because Mozilla is open source, it isn't Netscape's anymore, but the apple doesn't fall far from the tree, either. 

Meanwhile, the Time Warner side of the company consists of everything from Time magazine and CNN and HBO to Time Warner Cable to Warner Bros. studios and much more. Not to mention the WB television network and Sports Illustrated. Quite a range. If you were to arrange the different components of AOL Time Warner along the continuum of content creation to content consumption, you will in fact find very few gaps. And both the readers of Time and users of AOL Internet service have long been subject to rampant cross-selling from the entire AOL Time Warner empire (and whose movies get the best reviews?).

Less well known, and less successful, has been the effort by Microsoft to enter the TV media business. Starting with the content from MSNBC, distributed over the MSN network to PCs running the Windows Media player and tightly integrated with the Microsoft .NET strategy, it's easy to see the reach to computer users. On the TV side, Microsoft has made upwards of $30 billion in investments to TV networks and cable operators in the Americas and Europe, including $5 billion to AT&T Broadband. This was to predispose them toward using Microsoft's own Microsoft TV middleware in their networks. After all, virtually all of the major set-top box suppliers have made their products compatible with Microsoft's TV middleware client.

Vivendi has been in the news lately also. Though Vivendi started as a water company, it now owns Universal Studios and Canal Plus, the French TV network. Canal Plus has a unit called Canal Plus Technologies, which makes interactive television middleware and content-security software. In other words, yet another vertically integrated company that has content, distribution and technology that knits the whole equation together from creation through consumption.

Due to space restrictions, I won't go into all the others, but here are some highlights. News Corp. owns Fox and NDS, a content-security software company. Although the AT&T Comcast deal went through in July, AT&T still has stakes in radio stations via Shaw Communications and in TV networks, movies and music via its stakes in AOL Time Warner (not to mention the fact that it runs a little long-distance telephone business that some of you may have heard of). 

We can't forget Liberty Media, which owns USA Networks, several sports franchises, a large stake in Sprint, both the Discovery Channel and Animal Planet, a cable and satellite franchise that serves 19 million subscribers in Europe and even 5% of Primedia, the publisher of about a hundred magazines, including Telephony. Liberty also acquired interactive TV technology companies ACTV and OpenTV during 2002.

When one reflects on this knowledge, it becomes much easier to understand the reluctance that some content sources might have, and easier to understand why there would be a perception on the part of the media companies that content sales to telcos and other broadband carriers might eat into the profits of different units of the parent media companies. 

How do we turn this perception around? The greatest determinant is probably going to be diligence on the part of the telephone industry, to convince the media companies that there is incremental revenue in the telcos - certainly no net loss by using telcos as distribution channels to the home. Further, the cable television industry is more focused on major urban markets than they are on rural and secondary markets. After all, that's where cable operators have been testing VOD, and that's where they have been focusing most of their capital expenditures on digital upgrades. Therefore, the ability for telcos and other broadband operators such as PUDs and municipalities to serve subscribers in these outer markets is more likely to represent incremental business than it is a competitive threat. 

Some of the other current challenges surrounding content acquisition include the acquisition of movie content for VOD service, and the acquisition of local and network television programming. These areas deserve their own column, so I'll write about them in the near future.

By the way, there are a few interesting media distribution options available to creative telcos entering the media business, wherein they can do things that the big media companies are not nearly as likely to do. One is to support the self-publishing efforts of an increasing number of musicians and other "creatives" who have begun to distribute their own content rather than publish through one of the big media conglomerates. This phenomenon certainly benefits from broadband, an area not foreign to telcos, and might be particularly interesting to telcos that offer Web-hosting and other online community services for their subscribers. Would a publisher give a percentage of proceeds sold via a telco's merchant portal to the telco? Maybe so, if it's looked upon as a type of transaction fee or revenue-share, as is the case with online merchants.

This may be a radical thought for an RBOC, but maybe it could be received with open arms by the kinds of entrepreneurs that run the smaller independent telcos looking for creative ways to make a few more bucks while striking a blow against the empire.

Steve Hawley is principal consulting analyst of Advanced Media Strategies. He may be reached via his Web site, http://www.tvstrategies.com.