Wednesday, June 27, 2007

iPhone logoApple's iPhone comes out on Friday. Slate is running a contest to find the most "fawning piece of iPhone worship" generated in the media. Go ahead and enter. It won't be hard to find some doozies. As in most Apple product releases, there are eight predictable stages:

1. Pre-announcement predictions ("This is the year for an iPhone!")
2. Announcement excitement ("This is the most amazing thing ever!")
3. Rumors about device's shortcomings ("The battery will last 15 seconds on standby - 5 in talk mode.")
4. Pre-sale speculation ("Does it download songs?" "Does it work with Microsoft Office?" "Can it wax the car?")
5. Pre-sale articles explaining how the device will change the world ("This will change the world!")
6. Backlash ("No, it won't.")
7. Backlash backlash ("Well, maybe it might.")
8. Launch ("I was the first to get mine!")

In this Media 2.0 Intel Newsletter, Terry and I hope to give you a little grounding in what the iPhone will do for our industry and what its true potential and impact is likely to be. It is not going to have the same impact the iPod did. But it is important to look at. And no, it will not wax the car.

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THE iPHONE IS NOT THE NEXT iPOD (BUT IT COULD HAVE BEEN A LOT CLOSER) (Steve)
iPhoneForget, right away, the many times you'll read "Is the iPhone the next iPod?" It isn't. It can't be. It won't be.

The iPhone, even if it is a runaway hit that everyone wants, can't be universal. That's because Steve Jobs threw in his lot with AT&T. To use the iPhone, you need AT&T (the former Cingular, as you are no doubt sick of hearing from the ads) as the wireless provider. The deal is exclusive for three years. So right away, everyone who isn't an AT&T customer - you're out of the iPhone potential market pool.

The iPhone could have made a statement if Jobs had pulled off in telecom what he did for downloadable music. The genius if the iTunes store was that Apple managed to get the major record labels to unify on one platform under one virtual roof at one price. It was a mess before iTunes came along. Here, you had hardware (iPod) and software (iTunes) working hand in hand. Genius.

If only Apple could have done that with the iPhone. There's no technical reason why your phone can't work with any given carrier. It's just that it's always been that hardware manufacturers have cut deals with wireless providers for exclusivity. Had Apple been able to break down that wall, it would have achieved something major.

But even if it had unified the carriers, the iPhone would have faced another problem: businesses. Companies that provide mobile phones for their employees are, overwhelmingly, PC-based. They use their Exchange servers to push email to employee phones. Nobody needs a "professional iPod." But we need enterprise-level phone and messaging solutions. Try convincing companies to switch their backroom operations to Apples so people can have cute phones.

The iPhone is, make no mistake, a wonder of design, functionality and capabilities. The biggest impact the iPhone is likely to have is on the marketplace of cell phones as a whole. It will force its competitors to make better phones. We're already seeing articles about "alternatives to the iPhone," and there are phones out there that do nearly everything the iPhone does. It's just that Apple has always tied together everything so neatly and in such a neat package. Look for overall improvements in cell phone design and functionality in the next year.    <Permalink>

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THE "PHONE PART" IS THE PROBLEM FOR APPLE (Terry)
at&t logoAs Steve and many others have noted, the big downside of the iPhone is its exclusive deal with AT&T, formerly Cingular. You're going to read a lot of criticism of this (it's the top reason I won't be getting one), but let's be realistic about it. Steve Jobs had no choice but to hook his considerable star to only one carrier, because Apple wasn't/isn't in the phone business. In other words, Apple needed a mobile partner in order to make the whole thing happen. AT&T engineers (Cingular engineers) played a huge role in the development of the product, and that wasn't going to happen without a pay-off.

If you have a problem with the device, Apple will fix it (replace it) -- unless it's an issue involving the phone part, in which case it'll go to AT&T. This, I predict, is going to be an issue. If I have a problem with my Motorola smart phone, for example, I get very little help from the manufacturer but great service from Verizon. The same thing will likely happen here.

In Walter Mossberg's review of the iPhone for the Wall St. Journal, he notes that the phone part of the iPhone is "okay...not great, but okay" and that the speaker quality is "okay." The computer itself, he notes, is fabulous, so Apple's end of the iPhone lives up to the hype. But in the mobile phone world, "okay" is a nice way of saying it blows, and that's huge.

People will go to the Apple store and be told they need to see the guy in the blue shirt. Apple has great customer service, but I can't say the same for AT&T. How will it sit with users when AT&T takes them away from their Apple product?

AT&T is going to pour money into their network, especially the third-generation phone technology, and it'll get better (who do you think is likely first in line to get at all that nice spectrum the FCC will have on its hands come 2009?).

AT&T has an exclusive deal on the iPhone, and they will make the most out of it. Meanwhile, the technology of all smart phones will continue to improve, and that's the real story of the iPhone. This is a breakthrough device in the sense that it raises the bar for all companies in the mobile space.

For those of us in the media business, we have to view this as yet another major disruption, but it's nothing shocking. It just makes everything we can already do easier and better, but those are issues that would've been there with or without the iPhone. We all need to make darned sure that our brand extension tactics include the latest and greatest in terms of mobile applications. For example, are your videos available for download in the H.264 format (the iPhone format)? Are your videos available via iTunes? These are the questions we need to be asking today.

What I'm waiting for are the new developments and applications that come down-the-road, because the closer we get to "knowledge in a (portable) box," the greater the potential for disruption at the cultural level. The touch screen alone brings us closer to that, and these are both exciting and frightening times for all of us.    <Permalink>

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ITUNES: THE BIGGEST WINNER IN THE IPHONE UNVEILING (Terry)
While all eyes will be on new iPhone users in the days ahead, those of us in the Media world need to keep our eyes focused on the real prize for Apple in this new world - the further growth and development of iTunes as the aggregator/hub of existing and future media content.

Because Apple owns iTunes, it is disincentivised to offer music or video downloads wirelessly (cellphone wireless), something some observers say will be a problem for iPhone users. AT&T doesn't offer the service anyway; only Sprint and Verizon do. Apple wants people to come to the web (and the iTunes hub) for such activity, and this is an important statement that we all need to understand.

It is seen as somewhat of a gamble by Apple, as outlined in a Washington Post article today:

"Apple doesn't really believe, at least so far, in the model of purchasing music on the go," said Charles Golvin, principal mobile analyst for Forrester Research. "The model that Apple has very steadfastly held to is that your PC or your Mac is the interface for browsing and discovering and purchasing content," he said.
So the iPhone's music and video downloads will come via the web, and Apple is very happy with that. It's their world. But AT&T's 3G EDGE network isn't the greatest when it comes to this, so it's going to be a problem for consumers. The iPhone does wisely come with WiFi, so connecting to iTunes at, say, Starbucks will be a piece of cake. The vision of the phone, however, is one that allows you to take the web with you, and on that, it is not likely to deliver for awhile.

And lost in all this, I think, is the view that music and video on portable devices is the essence of the business of broadcasting, and that what we're witnessing is the relentless gutting of that business model. In the near future, the spectrum that built the industry will go to those who are building a (better) newer version thereof, and there's an awful lot at stake.

We strongly believe that thae aggregation of content (see article below) is a necessary function of local media in the future, so the iTunes/YouTube/web model is critical for us to understand. There's no time like the present to get started.    <Permalink>

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WHEN DO WE STOP CALLING THESE THINGS 'PHONES'? (Steve)
Here is a list of things I can do with a portable device. I want you to tell me what the device is:

1. Keep my contacts
2. Listen to my music
3. Watch my movies
4. Read my email
5. Look at my photos
6. Send text messages
7. Look up maps
8. Surf the web
9. Call my friends

Is it a phone? Is it a computer? What is it? In this case, it's my laptop. It's portable - albeit a little more cumbersome than a laptop, but I can do all of those tasks with my MacBook Pro. I regularly call friends on Skype or through iChat. We don't call those conversations "phone calls," but what's the difference?

The iPhone is an ultra-portable computer. It runs on OS X, just like Macs. Blackberry users know that they check email on their device far more often than they use it to make phone calls. I use my Motorola Q more for email and data than I do for voice. The "phone" part of iPhone may well wind up being used third, behind email and music.

So when do we stop calling these portable thingies "phones," anyway? Heck - on Star Trek, they call their devices "communicators," and all those things do is let you talk back and forth! The new mobile phones can make a stronger case for being called "communicators" than the Star Trek walkie-talkie communicators ever could.

We have been creeping to this point since mobile phones started adding small features. But it has only been in the past couple of years that these have turned into multi-media devices where the user's time is spread across different chores. The iPhone should hammer this home - the device is no longer defined by its use, its primary use or its legacy use. It's a "you device." Whatever you use it for most becomes its primary use.

The mobile web is different from the desktop and laptop web. There are already mobile-maximized sites out there. But these are mostly just lite versions of web pages. The mobile web is different - people using it have different needs. What successful local media companies will pay attention to is how people use the iPhone and its upcoming competitors in new ways. They will build pages and generate content that people using the mobile web will want. And it won't matter one bit to the user if the device they get than information on is called a "phone" or not.    <Permalink>

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THE CURSE OF THE EARLY ADOPTER (Steve)
early iPod torn apartHere's another reason I won't be getting the iPhone: My first generation iPod.

The early iPod, breakthrough though it was, had its problems. Chief among them was its notoriously short battery life. The "non-replaceable" battery spawned a sub-industry of people who would sell you a replacement battery, a small plastic tool to "crack" the iPod's case, and instructions on how to replace the battery. (I did it - it wasn't hard.)

Early adopters are always the ones who get punished the most. It's backwards - we're the people the tech companies should reward. We're the people who make tech gadgets possible. We prove the market. But we're also, essentially, beta testers who pay for the privilege.

My recommendation is this: wait. Within 12 months, there will be a better iPhone. Apple will have worked out the bugs. The upgraded phone will have longer battery life and better design features. It will do more tricks. It will also make the early adopters wish they had waited as well.    <Permalink>

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BEAR STEARNS REPORT: CONTEXT AND AGGREGATION ARE KING (Terry)
A fascinating new study (PDF) of the entertainment industry by Bear Stearns continues their theme that content is not king online and that the title belongs with context and aggregation. This view is absolutely accurate, so this report is critical reading for those trying to get their arms around change.

The study is especially important coming from a company that watches entertainment stocks, and there are some remarkable statements made in it. This one in particular:

...we submit that in an era of theoretically infinite video choice, the greatest value can be created not by producing content but by solving the "paradox of choice" and connecting usersí individual interests with the vast supply of content.
Think about that for a minute.

The report is also bullish on the world of social networks and user-generated content, UGC (can we please find another term?). Text-based UGC (e.g., blogs/social networks) already accounts for at least 13% of Internet traffic and continues to grow unabated. Also, our online video survey finds that UGC is the No. 1 and No. 2 most popular content category among men aged 18-34 and all respondents, respectively.

The company also notes that digital revenues of incumbent players aren't growing sufficiently to offset loses to legacy platforms.

While we are encouraged by entertainment managementís focus on digital, this revenue stream remains small, or 2% of sales for the major media companies (excluding Time Warner and its AOL unit). Even assuming 20%-plus annual growth in this revenue stream over the next five years, this figure would rise to only about 7% of total sales. The risk is that core revenues decelerate faster, which is what has happened with newspaper companies. These firms have grown digital sales at a 34% CAGR (2000-06), while core advertising has declined 0.6% annually. This has led to flat overall revenues.
This leads Bears Stearns to (rightly) project that the value in the media chain is shifting to the middle of the value chain, which means that valued brands will be more important than ever downstream. The reason is consumer confusion over the sheer magnitude of choices.

UGC is here to stay

In the next image, Bear Stearns shows what it believes is the "sweet spot" for media now and in the future, and notice the names listed beneath the "content packaging" arrow.

aggregation is the place to be

While it is true that great content will always attract an audience, this report is quick to note that media companies historically prove that the consistent creation of great content is problematic at best. This is why aggregation is king and why the UGC world is so important for media downstream.

But the report makes clear one other important aspect of all of this.

Strategically, we think there are three basic choices for entertainment companies as they assess their digital initiatives: 1) build it organically, 2) buy (read: acquire) a presence, and/or 3) partner with other players via joint ventures.
Of these three choices, only the first has no "cons," according to the report, and it's why we recommend this route for our clients. We simply must build our own digital operations. We control the revenue that way, and money is what this is all about anyway. But the report finds problems here as well.
...the challenges of building digital businesses organically for traditional media firms is that technology is not necessarily a core competency for entertainment companies. Generally speaking, media companies have historically been slow to adopt new technologies such as VCRs and even television, for fear of cannibalization. Moreover, even without JV partners, strategic planning and organizational responses for media companies (and many firms in general outside of media) tend to be relatively measured and slow. Said another way, it may not be in the "DNA" of media companies to move quickly and innovate rapidly...
The report concludes with five key investment conclusions. Pay attention, everybody:
  1. Will there be demand for UGC? Yes. Survey findings argue for strong UGC demand and at least 13% of online traffic is UGC today.
  2. Can UGC be monetized? Yes. Search monetized text-based UGC and survey findings suggest consumers are not adverse to video ads.
  3. Where will value shift to along the supply chain? Value will shift to aggregators/packagers of content. As video content supply increases, value of navigation/aggregation increases as it did in text-based web (see Google).
  4. Will content remain king? Great content is still king, but very difficult to institutionalize great content creation. No one company consistently creates great content hence variability in No. 1 network and box office per film figures.
  5. Will digital initiatives be enough for incumbents? Probably not. Digital revenues very small as % of total sales. Digital sales for newspaper companies have only offset erosion in core ad business.
My reading of this significant report is that it validates everything Steve and I are trying to say in the evolving world of media both here and elsewhere. As local media companies, we must have brand-extension web initiatives, but they will not rescue our sagging bottom lines and produce the kind of growth needed to satisfy investors. That can only come from jumping into the Media 2.0 pool with both feet.

And so it goes...    <Permalink>