August 23, 2008

Google and Verizon search partnership - a win-win for all

According to The Wall Street Journal, Google and Verizon are partnering on a comprehensive search deal that will make Google the default search engine for all mobile subscribers of Verizon, the #2 carrier in the U.S. by subscribers (68M subs). This is a win-win deal for all stakeholders - Google, Verizon and its subscribers - and has the potential of supercharging mobile search in the U.S. It should also be a big boost for data revenue, which would be the main revenue driver for wireless carriers, as discussed earlier.

Google created a whole new industry by developing an innovative advertising-based business model around Web search. The Verizon deal may allow Google to do the same with mobile search, which thus far has been sadly lagging its true potential. According to comScore M:Metrics, 93% of mobile subscribers do not use search on their phones today. Carriers have been trying their organic efforts and/or partnerships with smaller technology startups in order to have a lockdown on the economics and the user. The fear of the Web search giants taking a big piece of the lucrative mobile search revenue prevailed. Carriers' own efforts have failed because they haven't got either the product or the user experience right. Using search on a cell phone today requires booting up a mobile Web browser, finding your way to the search site/function, and then entering a search. The Verizon/Google deal envisions placement of a Google search bar on the screens of all Verizon handsets - a smart move. Users will be the winner from the convenience of an integrated search engine and with both the parties focusing on their individual strengths - Verizon striving to provide subscribers the best wireless network/coverage and customer service, and Google providing the best search experience and monetization potential through its vast network of advertisers, especially local advertisers which are more relevant for mobile search.

Mobile advertising in the U.S. is expected to explode by 28x over the next four years - from $244M in 2008 (per eMarketer) to $7 billion in 2012. As Web search has played a big role in online advertising, mobile search, an untapped potential today, is expected to be a major component of mobile advertising revenue.

No wonder Web search companies have been locking in carriers with exclusive deals during early days of mobile search when users are likely to use the default search engine on their phones. Google has a similar partnership with Sprint, and Yahoo has locked in AT&T. Google is also the default search engine on Apple's iPhone. Yahoo! is working with OEMs too, signing up Nokia to put the Yahoo! oneSearch shortcut on the home screen of Nokia series 60 phones. As user behavior evolves and phones open up over time, users are expected to pick up their search engine of choice as they do today on their PCs.

Google, the dominant Web search engine on the PCs, has also managed to take an early lead in mobile Web search. According to comScore M:Metrics, around 16.7M people in the U.S. use mobile search today. Of these, 63% use Google, 34% use Yahoo, and only 25% use carriers' search product. This does not add to 100% because some users are using multiple products. Google's early lead, without help from carriers, indicates that most users (me included) are simply typing into their mobile Web browser to get to the search engine. The above carrier partnerships should help Google to further extend its lead.

The Google/Verizon partnership seems more extensive compared to other similar deals. Google would be able to distribute other products through its search bar on the phone screens (Google Maps, Gmail, etc), as well as extend its search product on Verizon's Web portal and its FiOS TV service.

August 1, 2008

On-demand is the future for content distribution

As I've long argued, the ultimate power of the Internet lies in the fundamental & differentiating ability of this new medium to provide social, interactive and non-linear experiences. A non-linear experience, unlike a linear experience that distributes content one after another in a time & date sequence based on a programming schedule dictated by the content provider, makes all offered content available to users at all times. Users pick what they want to consume and when. Unlike appointment-viewing (e.g., The Office will air at 9PM on Thursdays), a non-linear approach delivers content on-demand and therefore transfers the control from content provider to content consumer. Why should I rush back from the party to be home by 10PM to watch my favorite show, when I can get it on-demand an hour later or next day.

In 2006, most major U.S. television broadcast networks started putting their popular primetime content online to allow free, ad-supported, on-demand video streaming following programming's on-air broadcast. Content owners at the time were hailed for their open-mindedness in making this radical move, which essentially was an experiment to test user demand and the new channel's monetization potential. The premise was that by increasing choice for users and making more content available through more distribution channels, content owners would increase the total revenue pie as opposed to cannibalizing any existing, more lucrative, distribution channels & business models. Distribution partners (cable and satellite firms) flinched with some discomfort because online streaming could potentially dis-intermediate them if users cancel their cable/satellite subscriptions in favor of free online streaming. In the absence of online video's proven business model, content owners at the time clearly considered their online experiment as an additive opportunity that would not adversely impact their more lucrative TV viewership.

Over the past two years, online video streaming on networks' web-sites has been constantly increasing at a rapid rate, with now millions of full-length episodes streamed every month. Hulu, a joint venture between News Corp. and NBC Universal, publicly launched earlier this year as an largest online aggregator of premium entertainment content developed by major content owners, quickly jumped to one of the Top 10 U.S. online video properties within a few months.

This coincides with the growth of personal digital video recorders (DVR) that allow users to record live TV programming and watch it at a later time that is more convenient to them. The ability to fast forward commercials on DVRs is an added bonus, not the primary reason for device's adoption. DVR penetration in the U.S. has now grown to almost one in every four households.

I'd argue that users view the availability of long-form television content online as a proxy for personal DVR. Why would you otherwise watch a one-hour episode of Heroes with ~$2-3M worth of special effects on your small PC screen as opposed to your 50" plasma TV in your surround-sound home theater. Imagine if all programming (that is not live) on the television was available on-demand for free (ad-supported). It is safe to assume that online video consumption on networks' sites will drop significantly.

The above trends clearly point to the unstoppable power of on-demand content distribution, driven by control and convenience offered to users. Live events and sports, obviously, would be an exception to this.

A new report from Integrated Media Measurement Inc. this week dis-proves the widely held assumption that online streaming of TV programming is not affecting live TV viewership. It points to the shift in the way some users are consuming long-form video online. IMMI reports that about 20% of all traditional television content is viewed online
- not a revelation, in light of observed consistent growth of video usage on networks' sites. The real news was about how users are viewing that content. The IMMI report shows that for the first time, a substantial number of viewers are turning to the Internet as a replacement for TV viewing.

According to the report, 50% of online viewers classified their online video watching as a "TV replacement," with 31.3% classifying online video watching as "catch-up viewing," and the other 18.7% saying they watched long-form video online as "fill-in viewing" (fill-in their free time, say, between meetings).

Other major findings of the IMMI report are:

- Comparing online viewers to live TV viewers, the two largest groups are 25 to 44 years old, making up 58.4% of the audience streaming primetime shows online. Surprisingly, as opposed to the popular view that young viewers are the primary consumers of online TV programming, IMMI shows only 19.1% of 13 to 24 years old watch primetime shows on the Internet.

- Women (55%) are slightly more inclined to watch primetime TV programs online than men (45%).

- Online viewers would be more sought after by advertisers because they've higher education levels and earn more money compared to that of live TV viewers.

The IMMI report was based on the media consumption pattern of 3,000 teens and adults who made up a single panel across six major U.S. markets of New York, Chicago, Los Angeles, Miami, Houston and Denver. Panel members were given a cell phone that tracked their media use during the month of May 2008.

The above findings, coupled with the fact that the primary reason for the growth of long-form content consumption online is content's on-demand delivery method, point to the fact that media companies need to respond to the tidal wave of the upcoming future of on-demand video. Content owners and distributors need to develop new business models more pro-actively than what has been done thus far. Distributors are primarily to be blamed for their lack of innovation in this regard. In fact, one of the reasons content owners were pro-active in putting their content online was to increase pressure on distributors. The IMMI report should provide distributors a good proof point that the tide is turning against them (distributors don't get a share of online advertising revenue from networks). They'll have to go beyond being a dumb pipe owner to becoming an innovative service provider which can offer, for example, a rich and wide slate of on-demand offerings, multiple-room DVRs, user-friendly video search & recommendation features integrated with their interactive programming guides, etc.

For content owners, the dilemma is clearly captured by the actions of The CW Network, which has gone back and forth on its decision to put its biggest show and the
highly popular teenage series, Gossip Girl, on the Internet. The show was initially offered for free streaming online. However, mediocre on-air ratings consistently lagged the show's tremendous success online, where it consistently ranked as the #1 downloaded show on iTunes and hundreds & thousands of users streamed it on the CW website. Instead of figuring out how to cash in on this new way of watching television - 24-hour conversation with the young & tech-savvy audience instead of appointment television- CW made the unfortunate decision of shutting down the online streaming with the hope of pushing online fans to television. When on-air ratings still did not improve, and CW witnessed an instant outrage from Gossip Girl's fans following its experience online, the network decided to bring the show back online when the new season starts in September.