Apple Schooled Music Execs -- Lessons Learned for Online Video?

I wrote this post for TechCrunch, which published it today -- on Super Bowl Sunday of all days (a bit overshadowed, don't you think?)! I actually really like this one -- and put some real time into it. It covers all the bases of my perspectives from my 20+ year careers. The content owner/licensor's perspective (my time at major studios like Universal Studios), and the online distributor/licensee perspective (online music pioneer Musicmatch, and online video innovator Sorenson Media).

Apple’s all-in-one physical flat-screen iTV is coming, make no mistake. And, when it does, it will represent Apple’s attempt to reinvent the television experience in much the same way it did for music. But, while media execs were hopelessly naive in Apple's presence back then, they feel they are ready this time. They are determined not to let Apple rule the premium online video world like they did (and still do) for online music. The question is, do they have the will?

Apple will, of course, follow its established playbook – which most CE companies inexplicably still do not follow -- and seamlessly marry its beautiful hardware (the iTV) with its underlying software and services (in this case, movies and television) in the same way it did with music via the iPod and iTunes. Apple’s goal is to be the center of the online movie and television universe for consumers (just like it is for music). Yes, content is king to Apple, but only because content serves as the Trojan Horse consumers ride into Apple’s kingdom of riches (initially Macs and iPods, and later iPhones, iPads and the inevitable iTV).

There’s the rub. The content king-makers – motion picture and television studio execs – now know this. They have seen this movie before, and this time they are determined to monetize content more directly for content sake – for themselves. Apple transformed itself into the #1 most valuable global company and juggernaut that we see today precisely because those media execs handed Apple the keys to unlock music value in the online world. Steve Jobs wooed them with his charms, pitched a great story, and established the rules of the online music licensing game. Apple’s massive growth in the past decade all started there with its iPod-iTunes 1-2 knockout punch. That, in turn, led to the resurgence of Macs, which led to the iPhone, then the iPad. Apple would be a very different company today if didn’t get the music it needed 10 years ago.

And, how did Jobs’ playbook work out for the labels and musicians? Not so well. Online music sales (and royalties) were an asterisk next to iPod sales. Don’t get me wrong. Rampant piracy – and the music industry’s misplaced attack strategy – destroyed significant content value. Nevertheless, the music industry’s negotiations with Jobs one decade ago resulted in a massive transfer of value and wealth to Apple.

So, what lessons have media executives learned from this past decade?

Lesson #1 – Dictate the Rules of the Game, Rather Than Have Them Dictated to You.

Music execs were on their heels reeling in fear when Jobs approached them a decade ago with the promise of iTunes. They had no real experience with the Internet. They certainly had no experience with technology (many still do not) – and how it could be used for both good and evil. Piracy was rampant. Napster ruled the day (the bad one, not the good one). Kazaa’s Niklas Zennstrom was public enemy #1 (now of course he is a media insider with Skype, Joost and others). The music industry was understandably panicked.

Jobs promised a way out – under three conditions. First, Apple must be able to sell individual tracks unbundled from albums. Second, its price for those unbundled tracks must be $.99 each. Third, Apple must define and control the entire online music experience. The music industry capitulated, and these 3 commandments are fundamental rules of the game that still largely rule the day.

Well, those rules haven’t worked out too well for music creators and owners. Lesson learned. So, one decade later, media execs are striving to proactively dictate the value of their content and support multiple online experiences and business models. But, even now, they frequently significantly under-value their content. More on that later.

Lesson #2 – Never Again Put Too Much Power in the Hands of One Distributor.

Prior to iTunes, piracy was rampant, and only relatively small players (including my former company, Musicmatch) played legitimately in the online music world. Amid this backdrop, media execs empowered Apple to be the first and only established online music source and experience. As a result, iTunes incredibly still commands 60-70% of all online music sales. That represents incredible power in the hands of one. It represents a downright monopoly.

Media execs are determined not to allow that kind of power in the hands of any single player in the online video world. They instead are committed to fostering an eco-system of as many legitimate distributors as possible. They actively license their prized motion picture and television assets to all those willing to pay.

That’s why we already have myriad established behemoths in the premium online video game. We have Netflix, Amazon Prime, Hulu, Google/YouTube, Comcast. The list goes on and on. Apple too is on that list, but it is behind the curve this time. Those same media execs who ceded control to Apple ten years ago have refused, thus far, to broadly license their crown jewels on Apple’s terms. But Apple – or more accurately, Apple’s massive hoards of cash – can be very persuasive. More on that later.

Lesson #3 – License Broadly & Make the Licensing Landscape as Confusing and Opaque as Possible.

Media execs aren’t panicked this time. They have a decade of learning under their belts. Yes, piracy continues to be rampant, but they now understand that it cannot simply be litigated into oblivion. The best defense truly is a better offense. Support better customer experiences, make your content available broadly to those legitimate distributors willing to pay, and experiment with business models and terms.

That’s why we have over-the-top (OTT) “Internet TV” models in which content is monetized via paid downloads, subscriptions, and ads. We also have big cable’s “TV Everywhere” models in which consumers must continue to pay their monthly cable fees. And, coming soon, Google and others will become virtual cable operators that will also distribute live linear programming like ESPN. Apple too wants to be on that “virtual MSO” list, because that is the kind of premium content that ultimately moves mountains of consumers. Case in point – DirecTV’s “NFL Package.”

This melange is great for the studios. No two content licensing deals are the same. Each negotiation takes place in a black box. No clarity. No certainty. Just the way media execs like it (I know, I have been there). Now THAT's power! Right? Up to a point. More on that later.

Lesson #4 – Be Audacious – After All, Content is King.

Jobs ultimately taught music execs one fundamental truth – that content is THE key to unlock tremendous value online. The corollary to this is that without content, value is lost. That’s why all the deep-pocketed tech titans are lining up for a chance to play in the premium online video game. Just as it is for Apple, premium online video distribution is strategically central to their business. Apple? Sell its hardware. Amazon? Sell more goods and services. Google? Sell more ads. Comcast? Hold onto those cable subscriptions. Netflix? Survive!

These players have inked a steady stream of significant licensing deals just in the past few months, the financial terms of which are almost never disclosed (remember, just the way the studios like it). But, one telling deal’s terms did slip out – Netflix agreed to shell out nearly $1 billion to stream shows from the CW Network. Think about that – if the CW can command those kind of numbers today, think about the price tag for real “premium” content like ESPN. And, we are still in the early innings of this premium online video game.

Apple – with its head-spinning $100 billion war chest – is a lock to win (or at least be a massive winner in) the online video game, right? Most likely, the answer is yes. The inevitable iTVs will fly off the shelves. But, Apple isn’t alone this time. It is playing on a crowded field with other deep-pocketed and committed players (including CE guys like Samsung). Even more importantly, to really hit it out of the park, Apple’s coming iTV must be an experience. That means Apple must offer an extremely deep pool of compelling video content from the start (including sacred programming like ESPN). Otherwise, consumers will find holes, get frustrated, and look to fill those holes with programming offered by others.

Each frustrated customer represents real significant loss, which is especially magnified in Apple’s case because of its closed product eco-system. For Apple, it’s not just about a single product sale (like an iTV). That sale, instead, marks the beginning or continuation of a long-term lucrative purchase relationship, which is the key driver of Apple’s stratospheric growth. That’s why Apple will be willing to strike very different content licensing deals with media execs this time around.

Of course, Apple doesn’t control the content – the studios do. So, who really holds the cards here? Will the studios be as audacious as Steve Jobs was one decade earlier and demand terms that they believe reflect the true value their content creates for distributors over time? In Apple’s case, one truly audacious idea could be to seek a share of revenue for every iTV sold. Remember, not every license deal must be the same. Value means very different things to different players. If Apple, or any other online distributor, refuses to play, then they lose out. No soup for you! There are many others (including the studios themselves), but only one ESPN!

Or, will media execs instead go for the quick-fix of easy money? After all it’s hard to say “no” to someone writing a big check. If they do go this instant gratification route (which is more consistent with their DNA), at least they should realize that their prized motion picture and television assets will be worth significantly more than they think in the online world over time. Avoid long-term deals!

So, yes, media execs have learned their lessons well. Content is, in fact, king. Apple will continue to wear the crown, however, unless media companies have the will and creativity to take it back. After all, Apple made $46.3 billion this past quarter alone, a number that dwarfs global motion picture box office receipts for the entire year. Apple could buy Hollywood. But, will Hollywood let it?

Our New "Fitness/Team-Building" Benefit -- Recommendation to All Entrepreneurs

I just recently wrote about several team members from Sorenson Media's San Diego office participating together in last week's grueling 8.6 mile Spartan Race. It was an incredible experience to behold (I had to sit on the sidelines due to injury, which killed me).

It also was an incredible example of the power of fitness -- and team-building. From the time we announced that we would do this together (which took all of 30 seconds after learning about this race), we talked about the race incessantly -- we also trained incessantly (and talked incessantly about our incessant training). We immediately shared a common fitness goal -- and we commit to doing it together.

That got me thinking. Why not build this type of experience directly and permanently into our company culture by providing a "Fitness/Team-Building" benefit to each member of the team? Why not build a benefit that both promotes (1) a healthy/active lifestyle, and (2) a healthy/active team that works together and builds overall esprit de corps both on and off the Sorenson Media playing field?

So, that's what we did. This past week I announced a new $500 annual "fitness/team-building" benefit for each member of the team. It is a "use it or lose it benefit" -- essentially each team member can sign up for a "qualifying event", and the company will reimburse them up to $500 for the calendar year. A "qualifying event" includes a race (like the Spartan Race), a walk (like a benefit walk for Epilepsy), or even membership to a gym. And, the goal is to sign up together with others in the company -- and "just do it" (the event) together.

I can tell you this -- this new benefit earned unanimous rave reviews from the team. There is deep appreciation. They consider this to be an extremely cool -- and differentiating -- benefit.

And, look at what this simple gesture promotes. Great physical and mental health. Great team-building. This is all good for each person (including myself), and for the company.

I urge each entrepreneur who reads this to do the same. The benefits are myriad -- including increased productivity.

Meet Sorenson Media's Executive "A" Team -- Talented, Dedicated, Passionate

I have how had the pleasure to work at Sorenson Media for 3 full years -- and with an extremely talented, accomplished, passionate and dedicated team throughout this time. These are also just good old "good" people. This is a team that innovates, develops and creates to make the lives better for our customers -- and, in turn, for our customers' customers. It is a team motivated by passion -- both on the job and off (just one recent case in point -- just this past weekend a number of the team participated in the grueling 8.6 mile Spartan Race in San Diego -- where 2 of our guys finished in the top 18 overall out of over 2,000 hard core racers! Andrew Ashbacher #3, Doug Cebik #18).

This includes Sorenson Media's executive team, some of whom have been with the company for over a decade. I can say that -- across the board -- this executive team defines passion. Passionate to out-innovate all others in our space. Passionate to "win."

We have just updated our bios on our website -- so, meet Sorenson Media's executive team by clicking on this link.

Forget Facebook's IPO, Apple's "AirPlay" Is Cool

Yes, yes, yes -- everyone is talking about Facebook's upcoming $5 billion IPO. (See this "must read" analysis by industry guru Om Malik about what Facebook's IPO means to the rest of the tech community.)

But, you know what's cool? No -- not $8 billion -- that is an absurdly unfathomably big number. Apple's AirPlay feature is cool, way cool. I know AirPlay has been an iOS feature for some time, but for some reason I simply never tried it.

Here's what AirPlay does for those who have an iPhone/iPad and Apple TV in their homes -- it allows you to DIRECTLY stream your videos, pics and more directly to your flat screen TV in your living room. That means, among other things, that you can capture HD videos on your iPhone and then immediately -- and, I mean immediately -- watch them on your large flat screen from your living room couch. No fuss no muss -- no need to connect your iPhone/iPad to your Mac first. No need to upload anything. All you do is click from your device and -- voila -- it is right there for your viewing pleasure! Cool. Very cool.

If you have an iOS device -- and an Apple TV in your home -- you gotta check it out. I absolutely believe that easy viewing of your HD captured "home" movies (family, friends) in your living room is a massive consumer use case that still is largely untapped. Add one-click sharing of your mobile HD captured videos directly from your "phone" to your family and friends for their immediate in-living room viewing, and you really got something. Apple still doesn't have that piece of the puzzle.

But, Apple certainly is well on the way to solving it. Listen up CE guys!

Content Is King -- Especially in the Cloud

[NOTE -- I recently participated in a "content in the cloud" panel at CES. Some of my thoughts below were reflected in that panel. And, this post was just featured in the DCIA's weekly newsletter.]

The era of long-predicted video ubiquity is now upon us. It has been inevitable. Now here it is, thanks in large part to the power of the cloud. This new reality is welcome to both consumers and to premium video content owners and creators (including the major studios).

For consumers, cloud-based access to premium motion picture and television content gives tremendous freedom and flexibility to buy once, consume anywhere, anytime, on any device, and even seamlessly shift viewing from one device to another.

For content creators, the cloud opens up tremendous new power to reach those consumers -- anywhere, anytime, and on any device. This means that premium video content can touch - and touches - all of our lives more relentlessly than ever before. And, this means that cloud delivery opens up unprecedented new ways for content owners to drive (and monetize!) significantly broader video consumption. While this may surprise some, content will be king like never before.

It is no wonder then that major premium content distribution outlets like Netflix and Apple already have been joined in the scrum by Amazon, Google, Wal-Mart (Vudu), Hulu, Comcast and a host of others large and small. Others, like Redbox, are waiting in the wings to pounce soon. The core strategies of these companies are founded on, or at least significantly influenced by, the need to be a force in video distribution. Much is at stake to "win" in the distribution game.

Due to competition from these behemoths to button up and market the deepest pool of scarce (unique) motion picture and television content in a never-ending quest for differentiation, major studios and other content owners and creators are starting to see the first real green (as in money) shoots sprouting up in this brave new cloud-enabled world. Just recently, most of these over-the-top (OTT) and "TV Everywhere" providers have ponied up big bucks to license necessary rights to distribute that premium video content. As just one example, Netflix ponied up nearly $1 billion to stream shows from the CW Network. If the CW can command those kind of numbers, just think what real "premium" video content (like ESPN) can fetch! And, we are still only in the early innings of this online video game.

In this midst of this cloud distribution revolution, yes, there is significant disruption to existing business models. As examples, the major studios and cable operators have long relied upon established and cozy business terms which ultimately limited access to premium content to those consumers willing to shell out significant fees for programming packages. Cloud-based distribution challenges these established rules of the game and overall economics. Why? Because consumers are demanding it for all the reasons noted above.

That means there absolutely will be new winners and losers here. For one, "big" cable likely will lose its power over time as a principle source for premium video content - and likely will fall instead to the long-feared "dumb pipe" status (although fear not MSOs, more OTT distribution requires ever-fatter pipes!).

For content owners, this fundamentally different cloud-based distribution model leads to ever-increasing complexity. New video formats. Variable network conditions. New mobile devices. New smart TVs. And, a new "renting" versus "owning" delivery paradigm that means less direct control over how all of this happens. There is tremendous freedom in "letting go" of all this complexity and handing it over to a service provider, of course, but there is also justifiable ambivalence. Can the service provider give the studio the security it needs? Is the service provider buttoned up with regard to all licensing and patent issues? Even more fundamentally, is the service provider funded for the long term? As President & CEO of a company that has been on the leading edge of the online video eco-system for more than a decade, I have seen that scenario play out time and time again.

We here at Sorenson Media have all of these issues covered for content owners of all stripes (including media companies large and small) so that they can focus on what they do best - their craft of video creativity. Our job is to handle this ever-increasing complexity. That is our expertise. Our cloud, on-premise and hybrid cloud/on-premise transcoding and delivery solutions offer content creators the quality, power, flexibility, ease and automation they need. And, they are cost-effective, which is a fundamental hallmark of any compelling cloud service.

That's what we do.

Sorenson Media -- WE ARE SPARTANS!

Today was San Diego's "Spartan Race" -- the grueling 8.6 mile mud run/obstacle course that took place in Temecula. If you never heard of it, and if you are into fitness at all, you should. It is absolutely grueling. And, today was hot, very hot (80+ degrees!) -- the course was steep, very steep (and all-terrain of course), and there were 28 different "obstacles" -- including crawling under barbed wire -- and getting bloody doing it; jumping over walls, crawling under them, hauling heavy weights up hill, and getting pummeled by Spartans at the finish line just when you think you were done!

5 brave Spartans from Sorenson Media were in the very thick of it -- Andrew "the Animal" Ashbacher (who finished 6th out of over 1200 with an incredible time of 1 hour and 47 minutes!); Doug "I'm An Ironman -- I Can Do These in My Sleep" Cebik (who finished 2nd in his age group overall just 9 minutes behind Andrew); Josh "I Mock Pain" Ettwein (who had blood pouring from his eye after being hit with some barbed wire); Bruce "Zeus" Carlson (who through the javelin like a lightning bolt from the gods! Hwas the only 1 of the 5 who made the Javelin stick -- and thereby avoided doing 30 burpees); and Kirk "Killer" Punches (who stared the flu in the face and said, "No Time for You!"). It was an amazing spectacle -- and am very very proud of these guys.

We started with 8 of us (including me) who had signed up about 3 weeks ago and trained hard. By the end of our training, and before race day, sadly, 3 of us (including me) had injured ourselves. But, the others persevered. On a glorious 80+ degree day at Vail Lake outside Temecula, they came, they saw, they conquered.

The pics speak for themselves ....

Sorenson Media -- Spartans all!

Apple's $100 Billion -- Will Be Used to Build Its Differentiated iTV "Experience"

Apple has an insanely amazing $100 billion cash cache. Ponder that for a while -- your head can spin. So, what can it do with that cash to really move its next needle?

Stock up on premium online motion picture and television content for its coming iTV experience, that's what. TechCrunch's Editor Erick Schonfeld writes a similar POV today in his post "What Apple Should Do With Its $100 Billion Cash: Buy Hollywood!", with which I absolutely agree. You see, Apple's playbook -- taken to the next level brilliantly with the iPod/iTunes 1-2 punch -- is to create a revolutionary consumer experience buy seamlessly marrying its beautiful hardware (in this case, the coming iTV) with great software and rich services (in this case, motion picture and television content).

For Apple's iTV to be the juggernaut it has the potential to be, it must be a true differentiated Apple-like experience, not just "TV." That means that Apple must build a deep and differentiated pool of video content -- including premium linear TV programming channels like ESPN (yes, Apple will become a virtual cable operator). And, cash is king, of course, to the Hollywood content king-makers. So long as Apple puts up -- and they certainly have lots to put up -- they will get what they want.

And, if they do, Apple will be the true kings of content, just like they have been in the online music game for a decade. Remember, Hollywood's gross box office receipts for all of 2011 were significantly less than that number (in North America, gross movie receipts were about $10 billion). Apple's revenues just for last quarter were $46.3 billion! Content, to Apple, is just the Trojan Horse for consumers ride into their kingdom of riches -- Macs, iPad, iPhone, iPod ... and its inevitable iTV.

The question is -- will studio execs take the easy money from Apple, or will they shake things up to capture more of the value they create for it?

More on that later ....

"Big Cable" Rolls Out Lower Cost "TV Economy" Packages -- Because They Must

Yesterday, it was reported that cable operator Cox Communications is rolling out a low-cost $35 monthly "TV Economy" package as one of its customer options. Comcast and Time Warner are following suit. Although these lower cost TV content packages exclude higher cost channels such as ESPN and other regional sports networks, they include many of the programming stalwarts. Bottom line -- finally "big cable" is beginning to respond (albeit slowly) to consumers' basic need NOT to pay for channels they don't want.

So, why are Cox and the others finally beginning to go this route? Because they must -- they have no other choice. Despite skeptics, cutting of the cord is becoming a reality for consumers who are increasingly getting only the shows and programs they want by other means -- the Internet, in particular. As I have written several times before, the MSOs are trying to beat back the inevitable consumer march toward other significant competitive movie and TV distribution channels a la Netflix, Amazon, Apple, Vudu, Google. Cable's long fear -- of becoming more and more simply the "dumb pipes" that deliver the video content from other distribution sources -- is in process as we speak.

But, here's the good news for cable. As consumer demand for high quality Internet-delivered premium video programming continues to accelerate, so will their need for faster and faster broadband. "Big cable" can be the provider of these fatter pipes -- and margins for broadband service provision are significantly higher than margins for distribution of motion picture and television programming.