A Killer App for Digital Video

It’s probably in your living room right now

I’ve wanted to opine on the state of digital video sales on the Internet for some time, and thanks to a chat with a friend today I feel inspired to follow through with it. But before we get to video, you need to understand the state of music first.

No surprise here — Apple is the digital music industry. They’re over 80% of the market (Apple’s numbers, but I believe them), but not even that stat can capture Apple’s power. The rest of the digital content sales industry bases everything they do — pricing, marketing, new technologies — on Apple’s moves. For instance, we’re stuck with $0.99 songs and $2 videos until Apple changes their pricing — that’s how much power Apple has in the industry. (You can argue that Apple is at the whim of big media who set that pricing, but that doesn’t matter. The rest of the digital content industry won’t budge until Apple does.)

Video seemed like a natural progression from digital music sales. However, the experience of music listening versus video watching is very different. Music can be (and usually is) enjoyed alone — a pair of headphones and you can tune out the world to your Walkman, iPod, or digital media device of choice.

Video has two major differences. In most cases, people seek out collective watching experiences like at movie theaters or sports bars; there’s something about being part of an audience — sharing the experience. For all video, people like to enjoy movies, TV, sports, and other video content in the comfort of their homes on a big TV with big stereo.

And thus begins the rush to video on portable devices. Apple lagged behind other portable video offerings but had a store to go with the device when they launched. However, Apple did not have a TV offering that matched the bad-assness of the iTunes Music Store. Apple has Front Row and that’s about it. Therefore Apple didn’t immediately corner the video market, and so it’s still up for grabs.

For the reasons I just mentioned, portable devices are not the platform that will drive the future of digital video. Video is a living room or movie theater, big screen experience. Any video killer app has to start there. That’s why I say the killer video app is in the cable box. You can watch hundreds of channels from around the world, in multiple languages, and across every imaginable genre. Many boxes are DVRs and record on hard drives so you can watch them at any time. And On Demand shows and movies mean we can watch whatever we want right at that moment.

And so if Comcast, Time Warner, and the like can get their shit together, they can corner the digital video sales market in one fell swoop. Make videos purchasable and downloadable onto your DVR via the cable box, let people then download them onto a computer or iPod, and reap the profits. Besides Apple, cable companies are the only companies that have the infrastructure to do video right and do it right now. (Note Google was not in that sentence — they’re still behind Apple like everyone else). And remember, Apple has Front Row. I’ll bet it won’t be long until you can buy an Apple set top box either from Apple or your local cable company.

On a related note, TiVo has been ahead of the video curve for some time — recording shows, new advertising models, downloading to computers and iPods and PSPs, even will let users swap shows over the Internet (to the anger of every TV and movie company). TiVo has Live365 support (Internet streaming radio), and I don’t think it will end there. I’m willing to bet that TiVo incorporates a video store in their next version (or version following — I don’t keep up with TiVo version numbers). Kudos to them if they make that deal with Apple to integrate iTunes sales into TiVo. If TiVo dies (and sadly I believe that’s the most likely outcome) it will be because they didn’t make enough deals with the cable and satellite services. Why buy a TiVo and pay $10 a month when you can pay the cable company $5 a month for the same thing? How the mighty have fallen.

Because of TiVo and the dominance of cable and satellite DVRs, I think Apple doesn’t want to get into the set top box game right now. The only things that can bring Apple into the set top market are 1) a viable iTunes Movies Store (note Movies, more than just Video) and 2) CableCARD support so that anyone can use an Apple box with encrypted HDTV cable offerings. TiVo and Microsoft Media Center are planning CableCARD support soon too. If the cable companies can’t capitalize on digital video offerings, expect Microsoft, TiVo, Apple and others to jump on it and fast. The first computer CableCARD offerings should start appearing this year. I should add that the cable companies are tied to the big networks — Viacom, GE (NBC), and so on — making an already complicated landscape more complex… (Think of how the RIAA (may have) influenced Apple in their pricing, DRM, etc.)

The next two years will be highly transformative in the digital content business because of video. Video sales will not scale up for at least a year or two, and companies are only now getting the infrastructure in place to handle video. Any company that doesn’t migrate towards video will find themselves obsolete; the customers and the content will go elsewhere. Also the cost of building this video capability is very high, so companies are going to start pouring money into video. In either case, some companies will go bankrupt. The shakedown starts now.

How many companies will survive this? Dunno, but Napster looks like they might go soon . Despite the positive PR spin of their 500,000 users, I’m betting against them. By comparison, Rhapsody’s music subscription has around 1.3 million users and is making deals with high speed Internet providers to increase their subscription base. There’s Yahoo! too. Yahoo! is trying to undercut all the subscription services — well, tried to and then jacked their prices up . I don’t know how many users Yahoo has, but they’re using the music service as a loss leader — undercutting the competition and hoping that either the music subscription market grows or that competitors will close up shop.

Let’s talk mobile video too. Nobody wants mobile video. I love this study from the UK — 36% of people who have mobile TV watched it at home. Why? Because they wanted to compare the TV on their phone to a real TV set. I’m amazed they couldn’t figure that one out. Mobile TV is dead until the cost of that service and the phones that support it plummets. The kicker is that if everyone who could buy mobile data and video plans subscribed to them and used them, the cellular networks would overload. Can you hear me now?

Good.

Everyone — and I mean EVERYONE — wants a piece of the pie. Even the good old telephone companies are making deals with content providers to ensure rapid and high quality delivery of goods, at a cost of course. In short, a two-tiered Internet. Decent service for most, great service for those who pay — ‘those’ being consumers, companies, or anyone who will pay for it. While some folks argue that we really need this, others think it may bring about the demise of the Internet (no links here — I won’t give these Chicken Littles any cred). This is what happens when your Internet is regulated by market forces. These moves are especially relevant because… *drum roll* — phone companies want to start offering cable TV service too. Broadcast over IP. Like I said, everyone wants a piece of the pie. Everyone.

It’s a turbulent time to be in the digital content business. I’m sure there will be more fun stories to come, but at the least you’re now a little more informed about this complicated landscape. Keep an eye on video. What happens with video will single-handedly transform the Internet.

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