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Apple vs. Comcast vs. Player-to-be-named-later

On Halloween, I expressed some skepticism over on my old blog about Apple hitting the million-videos-sold mark, and how meaningful that was.

Today, Apple announced (among many other things) that they had sold 8 million videos.

I admit error, and that Apple is doing somewhat better than I would have guessed. I was expecting a more linear, sampling phenomenon, and announcement of between 5-6 million videos sold by the opening of MacWorld. Having played with the video-enabled iPods since Halloween, I can better appreciate the appeal in certain specific scenarios, for certain content. Consistent with Apple’s success in music, the video iPod without a doubt provides the best overall consumer experience of any portable digital video device.

I’ll also note, and admit for the record, my previous skepticism was probably driven by my direct, personal experience with the push for mobile video while at Real, by good smart folks inside the company as well as cheerleaders outside. They kept telling me just how huge it was all going to be — in 2002, in 2003, in 2004, in 2005. I’m still waiting. I was wrong to conflate the mobile video business with what Apple was trying to do with the iPod. It’s an altogether much, much, much more compelling experience (the iPod).

But now that I’ve admitted error, let’s really step back, do the math, and put this all in context. Because once we do that, I think we’ll find the growth is not yet that terribly stunning. All of the folks out there running the digital media businesses at “old media” companies like Viacom/CBS, Disney, News Corp, the sports leagues and the movie studios need to do some pencil sharpening and calculator work before they stake their companies’ futures on a distribution deal with Apple for the iPod. I’ll take my bait and do a little of the math for them.

First, consider the run rate for the Apple video sales. The key denominator to look at is installed base of video-enabled iPods. Apple didn’t say today exactly how many video iPods they’ve sold to date, but they did announce 14 million units moved during the last three months. Let’s assume that 40% of those were video enabled (the lower denominator actually helps the hypefest case, so I’m picking that to make the argument more fair). That would be 4.8M video iPods.  If that estimate is right, that would mean each video iPod owner purchased an average of 1.67 videos over the three month period, less than one video purchase per month per iPod owner. Dangerously close to sampling behavior (meaning, get the video ipod and buy a video for it) and much further away than the addictiveness they have going with the iTunes store. Trend that out in 2006, with optimistic scenarios for continued video iPod sales, and you don’t end up with a huge industry.

Contrast this with what is happening with Comcast digital cable users and VOD. Comcast told analysts (ed., link to Comcast investor PDF) at the Citigroup Media conference this week that in December 2005, there were 140 million VOD “views” by their digital cable consumers. I can’t totally nail down Comcast’s total number of digital cable homes, but based on another presentation (another comcast pdf) they made last fall, I think it’s about 9.5 million (add up the digital cable subscribers on slide 5). That’s an average of 14.7 views per digital cable subscriber per month, or 44 every three months, some twenty-six times the rate of consumption of paid-for iPod videos.

Now, some might step in here and note that a significant number of those VOD streams offered by Comcast are “free” as part of the cable plan. Well, that’s true if you remember that these folks are paying on average $60-80/month for their digital cable service (almost half pay over $100/month). Further, that perception of “freeness” (despite the monstrous monthly charges for cable) actually helps to make my point, in that consumers with digital cable who really like VOD will find more value in the Comcast VOD offering than the $1.99 or $2.99 per video price that iTunes and Apple are pushing, and a better experience (unless you really want or need the content to be portable). Consumers will feel like they are getting the VOD programming as part of their cable or satellite service, and unless they’re willing to disconnect their box totally, and get their video programming only through the Internet or traditional broadcast or Netflix or some combination thereof, they’d be right.  (The math: If the digital cable add-on expense works out to about  $10-15/month, the average cost per VOD is around a dollar given average usage. Of course, Comcast would remind us that digital cable subs get other benefits, too).

The more that consumers rely on things like Comcast VOD (or similar services from DirecTV, or other cable cos and telcos), the less time and money and interest they’ll have in services from Apple, Google, Yahoo or others. The big question is whether services like those from Comcast end up being “just good enough” — enough programming, at a fair enough price — to capture the marginal dollars and time consumers are willing to put towards more video programming. For now, the answer seems to be: yes.

To sum up, it is doubtful the current strategies of Apple or Google will persuade most customers to abandon these “good enough” services from Comcast and others anytime soon (I know, this runs counter to the conventional wisdom that Comcast and their ilk are dead). If the Internet is going to be the next platform, the challenge will have to come from a player-to-be-named later. Yahoo? Skype/eBay? Someone else?

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