Quick housekeeping note: IF I write an e-letter this week it will be earlier in the week. There will be no letters next week then we launch the first Saturday morning in January with my annual predictions letter. And just for fun, one of my readers said that the title of last week’s letter should have been “Kicking the Grenade Down the Road.” Better check that pin! Now, this week’s OTB.
I am fascinated to watch the world change at an ever accelerating pace. Today’s Outside the Box looks at some of those changes, specifically the future of Apple, Google and media. I found this to be a fascinating exchange. Whether you are an investor in tech or simply a consumer of media services ( and if you area reading this, you are), the world id getting ready to change in ways that boggle my mind at least.
I shot this week’s OTB to my friend David Brin, the sci-fi writer, social critic and one of the world’s leading futurists. Here is what he said:
“John, I found the Whalen interview brilliant and very informative. I always like guys who take the big, big picture. (Note: I bought AAPL in 1983 at 20.... after Splitting twice, it is now at 320, so I am biased by happiness.)
“It does seem to me that Whalen touches on a key point when he says: It will be interesting how this all gets monetized."
“He correctly sees the monopolistic control model of content-delivering "pipes" collapsing into a vast lake of content. Though this won't benefit the content owners, either. Moreover, the makers of specific mobile hardware will matter less and less. Money will still be made by each year's best device maker, but it will remain a hardscrabble, highly competitive world. Device-making will not be a robust business model for steady and ongoing profit.”
This is an interview of Michael Whalen (see more on him below) that was done by my fishing buddy friends at The Institutional Risk Analyst. Chris Whalen is one of the honchos there and he rounded up his brother for the interview. Contact numbers for them (and a free trial subscription) are at the end of the piece.
So put on your thinking cap and let’s jump in.
Your thinking high-speed wireless broadband is the future analyst,
John Mauldin, Editor
Outside the Box
Apple, Google, NewsCorp and the Future of Content: Interview with Michael Whalen
In this issue of The Institutional Risk Analyst, we speak to Michael Whalen, [Emmy] award winning composer and new media observer about the outlook for the business of creating and delivering content. Since graduating from Berklee College of Music, Michael has taught a business for music class that has saved thousands of young artists from making terrible mistakes with content and other contractual rights. Think Frank Zappa and Warner Brothers. And yes, Michael is IRA co-founder Chris Whalen's younger brother.
The IRA: So Michael, let's start with kudos for the call on iTunes years ago. You first gave your brother a heads up about Apple Computer's (AAPL) move into music via iTunes a decade ago, correct?
Whalen: Thanks. Yes...back in 2000 - 2001, I saw that Apple was getting ready to take a monumental step by shifting its business away from just computers and software towards mobile devices. To see how big a deal this decision was, you have to travel back to that time… When people thought of downloadable music the first thing they thought of was Napster (remember them?) and to the general business community the idea of all entertainment being sold and distributed digitally through a SIMPLE platform was "risky" and truly visionary. The music business was all about CDs (still) and the traditional model of physical product. Interestingly, iPod was not first to market. The digital music players that did exist beforehand were clunky and big. In 2001, concepts such as iTunes and the iPod made it look like Steve Jobs and the management at AAPL were crazy or at least losing "confidence" in their core business. People asked with more than a tone of criticism: "why diversify"? "Has Microsoft (MSFT) beaten you"? Now 10 years later, their gamble looks like genius. It was…
The IRA: Indeed. How do you view the AAPL strategy going forward, especially with the apparent decision to let Droid handset take overall share? Is AAPL still well advised to keep proprietary control over the hardware and not allow third-party produces to make handsets that run the AAPL OS? Click here ( http://us1.irabankratings.com/mobile/home.asp ) to see IRA's new digital widget for handsets.
Whalen: I think handicapping the handset/mobile device market with just a hardware conversation is short-sighted, frankly. In my opinion, the near-term future is all about content streaming. The profit margins in these handset devices is so small that staying in the game will be very tough if you are not already in it and buying your way into the market may not pay off because the margins might not cover the cost of entry unless you are hugely successful. For investors interested in AAPL, watch what they do with their huge new cloud-computing center in North Carolina. As already reported in the media, this facility is going to go far beyond simply turning iTunes into a streaming subscription service. AAPL is going to start to be very visibly aggressive with all that cash they have and this location is but a bellwether of other centers and a very interesting future that is unfolding.
The IRA: Do tell. So, to ask the same question from a different perspective, will AAPL push all content to all devices or just the iPhone/pod/pad? Maybe layers? Your reply suggests that the hardware origin no longer matters, even for AAPL.
Whalen: Hardware only matters as a platform for content streaming and customized applications. The future is here right now: the iPad, iPhone and even the new Macbook Air have no hard drives.... they have flash drives which suggests that the data you need to operate the device can live on a flash drive or the data will be usable at the other end of a network someplace. AAPL has aggressively inserted "data pushing" into nearly every app now. So, from now - - look 24 months into the future when the mobile phone companies finally have their networks together here in the USA and we are talking about something ever more huge on the horizon: imagine making broadcast television and radio totally irrelevant - - even to captive audiences like commuters, which has been the life blood of radio. People will be able to stream any kind of content in any definition in real time -everywhere in the United States. Countries like Korea and Japan are years ahead of us in this technology. However, the USA is "entertainment thirsty" and on the move. The real question is how much will this new streaming content cost and where will the market balk when it is so used to getting so much content for free now.
The IRA: So are we talking about the end of proprietary channels and exclusivity, even for companies like AAPL? The Google (GOOG) sponsorship of Droid looks to us like a very smart way to essentially abscond with the relationships of the carriers. AAPL has pushed content onto PCs via iTunes. Will they also attempt to push content to ALL handsets or is their opportunity defined by the AAPL hardware and OS?
Whalen: No, I think AAPL's days of dreaming that they will be the only hardware game in town are over.... They are crushing people with design and marketing now. However, in the last 12 months you can feel a change in the wind. Their stance in the media and in their marketing has shifted as well. They have learned that Droid is real and that iPhone will not dominate the market in terms of total share. They have blown open the tablet computing market with the iPad - but so many other devices are out and coming to market. So, yes, we're talking about delivering content across all platforms.
The IRA: The IRA is now running on a new Droid 2 via Verizon (VZ). Lost the Blackberry and MSFT Outlook all on the same day. Free at last, free at last. OK, so let's open the scope a bit and go back to our conversation last week about Fox, NBC, etc. If the handset is the means of receiving content, what happens to TV or even cable? Our friend Joe Costello on the firstname.lastname@example.org thread reminded us over the weekend of the comment by Level Three to the Bloomberg News report that Comcast (CCS) is going to charge Netflix more for movies. Hello? Was the Comcast/NBC deal an astute way for General Electric (GE) to run away from a declining business?
Whalen: Yes. GE was brilliant in getting out of traditional television now. CCS doesn't yet see that they were wooed by the memory of how profitable television once was. Those days are dwindling quickly. However, I see many TV execs puffing their chests saying how great the upfronts were in the Fall and how the shows they're making are retaining market share. This is simply not true. Have you checked-in with those advertisers lately? The rush of eyeballs leaving TV is amazing. The data hasn't yet caught-up to where the market is sprinting. You'll see in the next 12 - 18 months very popular new content streaming directly from the servers of the people who made the show onto devices - - maybe they'll use iTunes, FaceBook or even GOOG for aggregation and this new show will completely circumvent the traditional television structure for production, marketing and broadcast. Technology has caught up and the game has changed for TV. Said another way, the TV and film businesses are changing as radically now as the music business did (and continues to change) ten years ago. Consumers had to wait for the network bandwidth to catch up before the change in video & film product became feasible. Now it is... As for other TV outlets, you are going to see MUCH MORE leasing of broadcast space - a la "American Idol" or "Survivor". Networks will be leasing the time (space) in "primetime" with certain financial overrides if a show is wildly popular, etc. It will be interesting to see if the FCC starts coming down on networks who are no longer standing by the programming on their digital bandwidth as theirs - but simply a tenant. Imagine a now future where broadcast TV is only truly valuable for live events, captive live programming like "Idol" and sports. The networks don't want to tell you that this future is here NOW. The research data will be here soon - but investors waiting for the eyeballs to be counted before making decisions will be late to the next party.
The IRA: We used to have discussions with Alan Schwartz and the technology bankers at Bear, Stearns & Co. years ago about whether the pipe or the content ruled the model. Now we see that the pipe is becoming an infinite lake whereon we must all learn to differentiate our brand in a sea of brands, brands that have global potential reach as you said. In terms of content delivery, is this just taking our TVs with us in a mobile sense or is it more transformative? Look at Twitter as the extension of AIM on a global scale, but is there a global peer-to-peer network here?
Whalen: There are two ways to look at the end of television as we have known it for 70 years.... The first is that mobile devices killed television because Americans are dealing with life on the run. The traditional picture of the family all gathered with their dinners together in the living to watch an evening's entertainment does NOT happen. If you're not working in TV like me, you may not get what a big deal this is. Television producers are scrambling to change EVERY part of how television is created for an audience whose life is literally on the run.
The IRA: Yes, but can you run, talk and text at the same time? To us, humans are no more able to multitask than computers. Is this really productive? Or are we all becoming insane thanks to the manifold "benefits" of technology?
Whalen: Here's two examples: cameramen are changing shots to work for a 3" screen by reframing distant shots that might look weird on a portable device to use more close-up and medium shots and sound is being adjusted to work for the dynamic limitation of headphones. We have already started seeing two versions of shows - one for TV and one for your handset. This combined with shrinking dollars for production and almost ridiculous competition - it's true that the pipe that is now a lake that is turning into a ocean - very, very fast. Secondly, the TV at home and the home computer are merging - literally. The new GOOG TV product is a pretty good structure for managing the expectations and simplicity needed for a broad-audience. As a music professional, I like the Sony (SNE) Internet TV. It's pretty slick for hardware but it's just a stop on the way to a device that must transform itself from regular TV, high def, a gaming device, straight internet and wirelessly interface with all our mobile stuff at once. I have found it very interesting that AAPL hasn't jumped into this fray given their "digital home" strategy. I think Steve Jobs is waiting for the market to sort itself out before he brings something to market or perhaps I am right and the game on the hardware war is over…
The IRA: Correct, AAPL and GOOG clearly have the advantage of incumbency here. But back to your earlier point, so all of the content creators basically become syndication platforms for all of the "delivery devices" regardless of what OS they are running? And does this help artists, authors and other content creators economically? Is this the final epitaph for the "studio model"?
Whalen: Correct... OS is no longer a marketplace "battlefield" how it was 5 or 10 years ago and the whole notion of what operating system your computer is running has been pushed to the background just as handsets have just been pushed to the background as we discussed before… Therefore - not surprisingly, I believe that we are all content creators in the future we are walking into. I don't mean making videos on YouTube or Vimeo - - I mean that content itself will be made by the audience and the "artists" of our new future will be there to provide inspiration, elements and focus. In other words, all artists will be brands that will have their audiences doing the work of executing content that is inspired by the brand itself.
The IRA: So we are all just virtual brands as in The Matrix?
Whalen: Yes. It will be interesting how this all gets monetized. Just as J-Lo has her name on a perfume now or Madonna opens a chain of Health Clubs (not kidding) - this is just the beginning of the fusion of marketing - licensing - brand imaging - content and distribution. It will test the existing, IMHO ridiculous, copyright laws we have and to the wall. Don't believe me? OK… Well, the future of content/brand creation and licensing is going to shock you even in a few years. That said, I am not sure how all this "helps" artists and creators/owners of content in the short or long terms. One of things I have been saying in my lectures on music business, in my writings and seminars is that this whole digital wave that is breaking is about resetting expectations. We have deluded ourselves for 75 years about what artists, creative people and copyright owners should and can make financially.
The IRA: You said the other day that you see the golden age of American music and film, in terms of the position of artists, going back to the future to the Middle Ages. Could you elaborate?
Whalen: Frankly, I think we're going back to the 19th century in terms of the "status" of artists. They'll be figureheads. Imagine: like Paris or Vienna of the 1900s, we'll have wealthy patrons and small clutches of people who support the art of "real" artists. In this environment, the work we will try to sell is simply a loss leader and an inducement for us to perform or create a "custom" song, TV show or film... Yup, it's all here now... What will be really interesting is what happens next… I am not pretending to be the "Grim Reaper" but I think the record business, the film studio system and the television networks are over as we think we know them. I think there is a new business emerging in gathering creative investment, content and creative marketing.... It will be in a structure that's more akin to a stock market than the traditional structure we've seen for artistic and creative content and the platform for it will be the digital ocean we have already discussed. Based on the "buzz", there will be a "futures" market and the idea is commoditized and funded in days - not months or years. For decades, most record companies and networks have been little more than funding sources for artists - now the truly visionary artist won't even need these ancient businesses - the market itself will generate everything it needs to create content efficiently. It's a little overwhelming the change that is here now vs. five years ago and that will be coming in torrents in the next few years. Amazing.
The IRA: Likewise it is interesting to see the way that the service providers, Verizon for example, and the handset maker, Motorola (MOT) and HTC, in the case of the Droids, are losing leverage to the GOOG's of the world. The entire Droid 2 is GOOG enabled. You don't even need to install the Moto drivers. And VZ pathetically tries to recapture eyeballs via a media player that is also irrelevant. How does AAPL avoid marginalization? Or is that the wrong question?
Whalen: It's a great question and it's a clue to AAPL's strategy in the near term. iTunes is but a platform and you can see that its already outgrown itself and will transform into something new soon... So, the next step in our "digital ocean" conversation is either the savvy investor interested in media will be controlling content or they will try owning the content. So, we've already discussed that owning copyrights is probably irrelevant in the long term - therefore, the future is all about owning the rivers that feed the "ocean" of content. Said another way, Wall Street really needs to get that the future of media is not about hardware or even the proprietary OS... I know we all get enamored of gadgets and thingies. The market is about to make all of that history.
The IRA: We've heard that before. How do you see the delivery/payment relationship changing?
Whalen: Well, you can assert that AAPL's strategy and that spooky HUGE building in North Carolina has something to do with controlling tracts of copyrights without the need of OWNING them. This of course begs the question: how? What if iTunes or whatever AAPL calls their new streaming service is broken into TWO parts - the actual delivery and streaming of the programs, etc. and on the other side - - the administration of the copyrights in the digital realm including collecting fees and licenses from OTHER PLATFORMS. This would be HUGE.... revolutionary and it hasn't happened on this scale since Edison tried to own the whole content "jungle" himself at the turn of the 20th century. Mr. Edison didn't have to deal with 17 companies who will be screaming "antitrust, antitrust" when AAPL wheels this out… In this possible future, the fusion will be complete and unlike any paradigm that we have ever seen.
The IRA: Exactly. You have different models growing in this jungle. Is the AAPL path a fully integrated model? Does Jobs have to have exclusive control over content to monetize his audience? For example, to subscribe to my friend Tom Keene at Bloomberg, you must use iTunes... Do you like the AAPL path or Goog? Or is it too soon to tell? Does Facebook triumph? We have friends who think Facebook eats everyone's traffic.
Whalen: I think everyone is waiting for a GOOG - AAPL face off. It's not going to happen... AAPL can BUY GOOG. In the end, I see the directions of these companies being very different. They have crossover now.... The mobile ad marketplace is particularly interesting area of crossover. But these two companies will have less and less crossover over the next few years. In this new "jungle", some of old players must be removed (bought) or merged and sold off. Isn't it amazing what is happening to MSFT? They are now a gaming company and they are specializing in mobile Internet products for cars. Wow. MSFT didn't play the whole OS thing or software thing very cleverly - did they? But I really do think it's too soon to tell. Facebook is valuable now to people - - I think the next 6 months will be very telling. Facebook is still a new "toy" to many. They will have to figure out how to keep the page relevant as the river of content that we've been discussing steals eyeballs... Maybe the river flows through Facebook? AAPL and Facebook have been talking and they NEED each other. AAPL's Ping social network is a non-starter and Facebook has no real access to content. We'll see..
The IRA: So where does this leave Ruppert Murdoch and NewsCorp (NWS)? And you mentioned the impending changes at the New York Times web site to a paywall model. Our friend Felix Salmon at Reuters has been following the transition with his usual attention.
Whalen: I think Ruppert has to make a major move soon. Hulu is not the move. NWS is OK - now, say the next 12 - 24 months. However, so much of their content is delivered on old formats (TV, newspapers, magazines, Film Studio). He doesn't have his own platform now that will be attracting the audience that would feed on this content. NWS might have more time in some foreign markets - but in the US, Europe and Japan - the content river or lake as you suggested is getting ready to wash his old proprietary distribution empire away. Mr. Murdock might need to sell pieces to concentrate on his "core" - but the real players have been getting ready for this game for 3 - 5 years. Unless he's about to unveil some secret strategy which would have been leaked by now - he will have to pay a premium to be at this table with GOOG and AAPL. That said, the NYT is about to try to MAKE their digital content a tiered paid subscription model with some free views. They must find a way to monetize their sinking ship. But frankly, I think the idea is going to crater. No one wants to PAY for text - and a little video. Even from the New York Times. Their public arrogance as "the world's newspaper" might be covering a private fear for what happens when this "hail Mary pass" doesn't pan out. They have so much debt and their revenues are shrinking. Maybe GOOG or AAPL buys them? They don't NEED to - newspapers don't hold the allure or relevance they once did. Also, in the "fusion" model I outlined before - news will be delivered in a completely new way. It no longer needs to be "presented" by a credible looking news figure. Instead, news will be raw and the "commentary" will be generated by the audience themselves. Imagine the kind of stuff that people write as comments on video clips on YouTube or Facebook now but taken to the 10th power. The audience of the near future doesn't want to be walked through their news. Here's the new context for the new news: 1st person point of view as personal experience. Maybe you could say the news as "video game"? (laughs) Not quite… The NYTs has had a successful career as a shaper of stories - I think that is less important now and will go away quickly. Honestly, I think anyone in the newspaper business should be on Craig's List looking for a new gig.
The IRA: So, neither AAPL nor GOOG wants to own content. Fox has been spending a lot of $$ to create general, business content focused on the web, but they are competing for eyeballs with all of the other "islands" of content. Is NewsCorp, NYT essentially in the same boat as the artists your described?
Whalen: That's an interesting comparison. I think the big adjustment for these massive media companies is that I as a content provider will be EQUAL to them in this new paradigm. Already, my content can draw as many eyeballs as theirs. Regular people have videos on YouTube now that have tens of millions of views. I have a concept that I call "bendable content". In the new "ocean" of content that we will all swim in soon - all content will be "bendable". Bendable means that all media can be played on any device, anywhere, anytime. It also means that that the material can be reordered, edited, manipulated and re-contextualized. Yes, someone at the US Copyright office is weeping now. If you have a sophisticated computer, you can do all this manipulation NOW. In this new future, you'll be able to do this on a handset or a tablet computer and get the content back OUT there - wherever that is! How do you monetize this? We'll see. Investors may have to stop asking that question like there will always be a transaction out there that can be tracked. In the new media ocean - part of the service that you are pay for monthly will be reconstructing content.
The IRA: This returns to our question of the peer-to-peer dynamic, almost a global Napster for all content and free.
Whalen: Yes my brother. All of this kind of talk scares the crap of the TV networks and Film studios who have lasted so long by keeping their grip on content. In the new future - that conversation is OVER because the audience is demanding now that it be over. The future will simply be created by the people for the people - it's nice, isn't it? It's been by controlling content that's been keeping the "big" boys relevant - I'm surprised that they have lasted this long as purveyors to the public with their content and programming and news. The slow economy has slowed down our sprinting towards this future and finishing the work of building the networks that will carry all of this content - especially the wireless networks. But these walls are tumbling down now. What I like about the possible future we are talking about is how it's a VALUE conversation versus a captive one or a proprietary one. The Internet "attitude" has changed the rules for all these players by making content king and choice the other important metric. That said, the digital administration fence that Steve Jobs (or someone able to capture the digital ocean) might throw around "lake" of content may have us move from one kind on controlled experience to another... Will there be a toll taker in this future? Probably… It might even have an AAPL logo on it. We'll find out very soon
The IRA: Thanks Michael.
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John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.
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