Can the likes of Google and Apple overthrow the cable TV establishment by creating a simple way for customers to access content directly through web browsers? Colin Brown believes so
If you are talking location and sex appeal, the hamlet of Maiden is about as far removed from Hollywood as you could get in the US. Yet this rural backwater in North Carolina is shaping up as a key battlefront in the fight for home entertainment hegemony.
Maiden is the site of an anonymous hulk of a building which comes online this spring. Built at a cost of $1bn, Apple’s 500,000 sq ft server farm is the world’s largest single data storage and processing facility. The best place to see this enormous slab of white concrete is a local church cemetery, a vantage-point steeped in metaphorical significance. If Apple prevails, this will be the graveyard for any number of set-top boxes, not to mention packaged film media as we have come to know it since the advent of video cassettes and shiny disks.
Officially, Apple says this data centre will be deployed primarily on its iTunes and MobileMe services for accessing and storing music, movies, photos and other content. But that tells only part of the story: a hub this size only makes sense if Apple is planning a full-scale media assault based around content streaming as well as simple downloading. Apple customers would have constant on-demand access across any viewing device to both their media libraries and an endless storefront of new material available for purchase, probably through impulse buys and tiered subscriptions. Gone is the headache of keeping pace with changing technologies and formats, and ensuring everything is retrievable in the networked household.
In effect, North Carolina becomes the mother of all media lockers, providing customers with a permanent back-up of their collection in the cloud. It also paves the way for an on-the-fly live streaming future in which real-time social networking comes ready-baked into the viewing and listening experience.
Apple already has one major ace up its sleeve. When CEO Steve Jobs took the wraps off the new iPad 2 in early March, he revealed Apple has more customer credit card details than anyone else on the web. More than 200 million customers can buy content with just a single iTunes click.
‘It wouldn’t take a lot for the consumer to go elsewhere if the amount of choice or the presentation of it excelled somewhere else’
Tom Rogers, TiVo
To put that number in perspective: Netflix has slightly more than 20 million subscribers in North America; while PayPal has 94 million active accounts globally (Amazon does not publish its numbers). That massive customer base has already made Apple the biggest player in individual digital film transactions, with more than 60% of total transactions. Apple now generates more money for Hollywood studios than many traditional cable television operators including Time Warner Cable. By 2014, it will surpass Comcast as the largest provider of video-on-demand.
In March, Apple struck a deal with Warner Bros to create a new app edition of two films, The Dark Knight and Inception, for the iPad, iPhone and iPod touch. Customers can download a free app which allows them to buy the films for unlimited streaming, without going through iTunes — crucial to reach those viewers in territories without an iTunes store, such as China and Russia.
As is the case with music, iTunes has become a nascent distribution point for movies unable to attract decent offers from more traditional outlets. Edward Burns’ Purple Violets, a $4m feature which premiered at the Tribeca Film Festival in 2007, was the first to bypass the cinema circuit in favour of an iTunes premiere. “My style of film-making is dying on the vine,” explained Burns at the time. “These small, talky movies have a hard time finding an audience theatrically, so you need to adapt.”
While offering a lifeline to indies, Apple poses major problems for the TV ecosystem and all the various Hollywood studios, cable operators and network conglomerates which feed off it with high-margin subscriptions. Customers no longer have to access programming bundled together to maximise profits, but can choose instead from a self-service kiosk with personalised menus and no real hierarchies.
Apple is just one of several heavyweights threatening to upset TV’s lucrative bundling paradigm in favour of an individually customised approach. Joining the fray of high-tech video aggregators are Amazon (owner of LoveFilm), and the one arch enemy with arguably more computer-crunching power: Google. Armed to the teeth with data centres — including a $600m facility of its own in North Carolina — the search giant is already a force in the video world as a result of YouTube, which now plays full-length movies. Now rumours suggest under Google’s entertainment czar Robert Kyncl, YouTube wants to go one further and spend $100m acquiring content for a Netflix-style unlimited subscription service in Europe, which would start in the UK.
Matching content to viewer
In the meantime, there is Google TV. By embedding its Android operating system into internet-enabled HDTV sets, Blu-ray players and other boxes, Google wants to bring web-like search to traditional channel surfing. Who needs programme schedulers and content packagers when you can simply type in what you are looking for and let the algorithms work their match-making magic?
“Search by its nature is the enemy of bundling. It’s user-centric, idiosyncratic and inherently a la carte,” notes Paul Sweeting, an analyst at the US’s GigaOM Pro. “Google TV’s integrated search, combining results from the web and from traditional sources in a single user interface, encourages the user to separate the content from its source, or at least to treat the source as irrelevant.”
This has not gone unnoticed among Europe’s cable television operators, judging by comments at the recent Cable Congress in Lucerne. “It’s an existential threat, in the sense that it leads to cord-cutting,” said Shane O’Neill, chief strategy officer at international cable operator Liberty Global, referring to the threat of customers deserting their high-revenue subscriptions for so-called ‘over-the-top’ TV providers which provide content directly through web browsers. “Google, Apple, these are powerful, well- financed companies that have started to stray into our path and it behoves us to pick up the pace of innovation.”
“Cable has to look over its shoulder in a big way,” agreed Tom Rogers, the CEO of TiVo, the digital video recording service. “Cable operators are the largest providers of content and choice, but it wouldn’t take a whole lot for the consumer to go elsewhere if the amount of that choice or the presentation of it would excel somewhere else.”
Crucial here is the proven ability of Google, Apple and Amazon in designing effortless user interfaces for navigating vast inventories of content and information. Even now, smartphone wands and touch-sensitive tablets make for far more intuitive devices when controlling televisions screens than the clumsy TV remote control.
Unless cable improves the user experience with features such as social networking, Rogers warns the TV establishment “will be overcome by Google, Apple and others who want that customer relationship the cable operators have built up over the last couple of decades”.
Devil in Apple’s detail
That relationship with customers has become something of a flashpoint as a result of Apple’s new rules for selling subscriptions through its phenomenally successful App Store. Not only does Apple take a 30% cut of all such transactions, it is refusing to hand over the personal details of customers making in-app purchases/subscriptions without the permission of those customers. This is a serious double-whammy for the digital content publishers: 30% in perpetuity would wipe out most profit margins for wholesale suppliers of video and music content which have to license those titles from studios and producers. And for decades, publishers have relied on that precious customer data as marketing lifeblood and advertising goldmine.
Apple’s closed walled-garden approach has made Hollywood loath to play along with any ambitions in the content streaming arena — other than now Warner Bros and perhaps Walt Disney, where Jobs is the largest shareholder. Studios are insisting Apple opens up its tightly knit universe of hardware devices and software systems to accommodate competing outlets.
“The studios are very concerned they’re going to get roped into somebody’s proprietary platform,” James McQuivey, a media analyst at Forrester Research has noted. “They want a world where consumers have a relationship with the content and not with the device or the service.”
‘Games consoles are really going to take off as a device to watch films and TV’
Simon Calver, LoveFilm
The attitude does not get much warmer towards Google, despite its competing One Pass subscription service for Android-based devices, which takes just 10% from publishers. There the fear is Google’s ability to unpick the advertising business using the same data-harvesting skills which have created an online bonanza based around search words. Google could make TV ads potentially much less expensive, leveraging pay-per-click pricing, says Sweeting — a boon for independent film-makers looking to market their films, but a nightmare for ad-supported networks which underpin film studio economics.
So entrenched is the fear over Google and Apple that some believe change will be ushered in by a different Trojan horse. “My view is that games consoles really are over the next two to three years going to take off as a device to watch TV and films,” Simon Calver, chief executive of LoveFilm told the Financial Times digital media and broadcasting conference in London this March. “A lot of it is completely backwards compatible, so the day you launch, you’re in millions of homes.”
Even then it promises to be a slower evolution then many have imagined. As Peter Fader, a marketing professor at the University of Pennsylvania’s Wharton business school observes wryly: “Some superpower tries to take it over and set it straight, but the people don’t want to be taken over. The digital living room is a lot like Afghanistan.”