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What the Diamond Rio Told Us

In 1998, MP3 players were pretty crappy. With 32 MB of flash memory, my little Diamond Rio could hold only a handful of songs. Few people had the foresight to envision a world with a better device, with more memory, let alone to predict how such a device could upend the music business. Everyone assumed the labels would rule the world forever (indeed their revenues peaked two years later).

In 2003, SMS messaging traffic was burgeoning in Europe and Asia, and beginning to offer European and Asian wireless carriers at fat, margin rich stream of revenues. Symbian semi-smart phones were just coming on to the market, but few people had the foresight to envision a world with a better device, one open to the Internet, let alone foresee how these devices might give rise to a world of replacement services like iMessage and $19B apps like WhatsApp that would obliterate the carriers SMS rents. Everyone assumed the powerful wireless carriers would rule indefinitely.

Here we are in 2014, and you see similar dynamic playing out with the television. Today’s tablets and connected TV devices are  the Diamond Rios or the Symbian smartphones of our day; if you’re paying careful attention, and have some vision, you can get a glimpse of the future. But some of the smartest analysts remain unpersuaded by these early developments and are the most bearish about the prospects for change (I’m thinking particularly of Peter Kafka & Ben Evans, both of whom I admire).

The argument they make for the status quo can essentially be paraphrased as follows:

  • Television network & cable executives know change is afoot, they’re smart (“unlike the labels”) and they’re not about to let someone eat their lunch.
  • They control the good content, and the distribution networks, and aren’t about to turn over there business to some upstart interloper (c.f., Intel Media).
  • Consumers haven’t really changed their habits that much; they seem to really like TV and continue to watch a lot of it.
  • Ipso facto, change is unlikely to come.

Their skepticism has some merit. Having been at this for nearly 20 years, trust me, I understand it.

*****

Change rarely arrives in the form we expect; not some zero sum disruption of  new winners and displaced losers, but usually something more complicated and nuanced. The iPod and iTunes store did transform the music industry, but did so with the labels (who, while much smaller than they were, continue to exert dominant influence on the business).

The iPhone and Android have given us new messaging apps like WhatsApp, Line, and WeChat, and demolished the carriers margin-rich SMS revenues, but in many ways they’ve only deepened our dependency on our wireless networks and the carriers who operate them.

Foreseeable changes in distribution transformed these businesses, gave rise to new empires, and co-opted or bolstered old businesses at the same time. This is the fate that awaits the television business.

As we begin to connect the Internet to billions of TV viewing screens (not just TVs, but also tablets) the television business will be transformed. It would be a mistake to conclude that because the future isn’t yet here, change is unlikely to come.

But it won’t come in the tidy zero-sum disruption narrative we’ve been told to expect. Old businesses will continue to thrive as they take advantage of and in some ways co-opt the new distribution platform.  And big new companies will be birthed.

Indeed, one already has; it’s called Netflix.

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