July 24, 2008

Data services will drive the future of mobile business

AT&T, the largest wireless carrier in the U.S. measured by number of subscribers, announced its second quarter earnings yesterday. The results include some key pointers to the future of wireless consumer services.

At $30.9 billion, AT&Ts total consolidated revenue for the second quarter ending June 20, 2008 grew by 3.6% compared with revenue for the second quarter of 2007. Comparatively, its wireless division revenue grew by 15.8% over the same period to $12.0 billion, spurred mainly by data services.

I believe data will be the main driver for wireless carriers' profits in the future. Increase in competition to gain subscribers will make voice a commodity business with limited margins. This is true for most global markets, including China and India, soon projected to be the top two mobile markets in the world. U.S. has been behind on advanced data services compared to more evolved markets in the Orient and Europe, but with the launch of iPhone (exclusively on AT&T in the U.S.), American consumers are getting a taste of the data-driven wireless future. And their initial response indicates bright prospects for these services, as a killer gadget influences mass changes in the behavior of American users who thus far have primarily used their cell phones for calls.

Mobility, broadband connectivity and integrated services that encompass voice, data and video are driving a new world of communications," said Randall Stephenson, AT&T Chairman and CEO, during the company's earnings announcement.

Let us take a closer look at the performance of AT&T's wireless data services:

- Wireless data revenues grew 52.0% versus the year-earlier quarter to $2.5 billion, reflecting continued strong adoption of services such as Internet and data access, e-mail and messaging.

- Wireless Internet access revenues more than doubled versus results for the year-earlier second quarter, while revenues from e-mail, messaging and data access all delivered greater than 50% growth.

- Text messaging volumes tripled versus totals for the year-earlier quarter, and multimedia message volumes increased more than 170%.

- At the end of the second quarter, approximately 18% of AT&Ts postpaid wireless subscribers had an integrated device, up from 8% one year earlier. On average, these subscribers have ARPUs roughly double the company average. AT&T customers have 13 million 3G devices between them.

- AT&T expects continued strong growth in wireless data services as more customers choose data plans and advanced wireless devices such as the new iPhone 3G, which was launched as an AT&T U.S. exclusive on July 11. In the first 12 days following launch, sales of the iPhone 3G were nearly double levels achieved in AT&Ts 2007 iPhone launch.

These are pretty impressive results, especially in the current U.S. market that lacks many mobile applications or services due to carriers' stronghold on the mobile ecosystem with few incentives for content owners and technology companies to innovate. This should change going forward because the recent auction of the new wireless spectrum in the U.S. binds winning carriers to keep devices and services open. Additionally, industry's efforts like Android, the open source software development platform, should ensure that the world's second largest mobile market by subscribers can match services offered by its smaller rivals like Japan and South Korea.

July 8, 2008

Digital media will be too disruptive for the traditional media industry: Lehman analyst downgrades the sector

The television and the video business is heading for a nasty downturn within the next couple of years, says a Lehman Brothers analyst. Anthony DiClemente at Lehman downgraded the entire entertainment industry on Monday and cut down the forecasts of its five major player in an alarmingly bearish report on the sector.

The stocks of all major public media firms, Walt Disney, News Corp., CBS, Time Warner and Viacom, fell slightly more than the broader market by the close of the day.

The takeaway from his report: digital media is proving too disruptive to the film and TV industries. He blamed the Internet for the broken video business models, specifically citing digital distribution, audience fragmentation and widespread file-sharing as the primary technology-enable culprits that are eating into television network and studios' profits, which may evaporate forever. The big winners will be technology companies enabling digital distribution, such as Apple (iTunes) and Google (YouTube), as the power shifts from content owners to distributors.

"We believe the feature film and TV content businesses are on the verge of structural changes that appear to impact the core revenue and profits of entertainment business models," wrote DiClemente. He compared the scenario to that faced by the music industry earlier in the decade.

While most of the findings in the report are consistent with my views on what traditional media firms need to do to succeed in the digital world, DiClemente's analogy with the music industry is not entirely true. While the technology shift came as a surprise to the music industry, which was too slow to react to the changing reality and held on to its traditional business model for too long, the video industry has the advantange of learning from the music industry and not repeating the same mistakes. How fast will the video industry move in terms of experimenting with new business models and adopting new technologies remains to be seen.

paidContent has a good coverage of the Lehman report.

July 3, 2008

Television in India needs quality content

I'm currently in India due to a family emergency. My dad was hospitalized after a heart attack, so I came over to spend some time with him and am staying over for his bypass surgery. On the brighter side, I've been able to use the free time while staying in his hospital room to catch up on my reading. I've also been watching a lot of TV (or trying to) in order to evaluate the much talked about Indian television promise first-hand.

While the exponential growth in the number of TV channels is amazing (couple of hundreds from just a few when I left India in '95), the vast majority of the content is pathetic, so say mildly. There is lack of quality programming in all the three major content categories: news & information, sports, and entertainment.

The state of the News programming on Indian television is particularly shocking. We make fun of 24-hour cable news channels in the U.S. and their coverage of un-important matters in order to fill their programming, but their Indian counterparts have pushed the boundaries to insane levels. In order to attract viewers, almost every news story is labeled as "breaking news." There is unnecessary, and sometimes distasteful sensationalism. Ethical standards of journalism are pitiful. A maniacal focus on economics seems to be driving the news coverage in India. E.g., while covering tragedies involving deaths, instead of showing dignity for the dead or for the family & loved ones who are suffering from the pain of the loss, the pursuit by TV channels to get that exclusive interview/footage at whatever price is appalling. Investigative journalism needed to expose the truth has apparently become secondary.

I've always held the belief that News should not be treated as a profit center by media companies. The age-old practice of keeping a Chinese wall between the business and editorial parts of a news organization has fallen apart in today's bottom-line focused approach of media companies. Even in the U.S., it's not uncommon to learn that a news organization has more staff in the Hollywood than in Washington DC.

For the next content category, sports, it's all about cricket in India, by every stretch of imagination. There is coverage of soccer and tennis that coincides with major global sporting events (European Cup, Wimbledon, etc), but the inability of India to produce world class sports persons in any mass sports except cricket will continue to restrict wider advertiser interest & therefore media focus in developing Indian sports programming beyond cricket.

Entertainment, or the General Entertainment Channel (GEC) space, as it is known in India, has seen a lot of activity with almost a dozen major players operating GEC channels in the country. Zee, Sony and Star (News Corps) are the dominant players. The #1 GEC channel, STAR Plus, has more viewers than the combined viewership of the next two in the category.

However, the GEC programming is still dominated by Bollywood (the Indian film industry), soaps, and reality shows based on imported formats. The ability of GEC operators to develop original entertainment programming of quality that can sustain the content and audience in the long run is still questionable. For example, India is yet to see TV drama franchises of the quality of Lost, 24, Heroes, that attract record audiences in the U.S. season after season. Granted that it can cost up to $3M to produce a single episode of these programs, I believe the economics will work out in India given the growth in its television industry and a deep demand amongst audience who are thirsty for quality entertainment options on the television. The GEC category already gets the largest share of the TV advertising dollars in India. The state of the GEC space in India seems to be where the industry was in the U.S. in late 80s.

The GEC also needs to invest in quality programming to compete with cricket. As expected, the Indian Premier League, a recently launched domestic cricket tournament, made a massive dent on the ratings of prime-time entertainment programming while the tournament was on. Almost all GEC channels lost audience to IPL, which purposely scheduled games during the prime-time evening slots. Some channels maintained their ratings by shifting programming to daytime slots. Clearly a more sustainable strategy that involves disruptive content with clear differentiation is required by GEC operators in India.