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Apple, Google, NewsCorp and the Future of Content: Interview with Michael Whalen

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Apple, Google, NewsCorp and the Future of Content: Interview with Michael Whalen

The Institutional Risk Analyst

December 7, 2010

In this issue of The Institutional Risk Analyst, we speak to
Michael Whalen,
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 than has
saved thousands of young atists 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 bell weather 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 archein21@googlegroups.com 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 seen
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.


Questions? Comments?



info@institutionalriskanalytics.com



 

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Wed, 12/08/2010 - 08:10 | 788297 spinone
spinone's picture

Tora tora tora on the anniversary of Pearl Harbor?  Poor taste.

Wed, 12/08/2010 - 07:32 | 788259 Hot Shakedown
Hot Shakedown's picture

Great piece. Nasdaq 100 about to take out 2007 high

Wed, 12/08/2010 - 03:09 | 788187 twittering as s...
twittering as stocktradr's picture

"Resistance is Futile. You Will Be Assimilated." sucker the mindless masses. trade accordingly. twittering as stocktradr

Wed, 12/08/2010 - 02:02 | 788154 tony bonn
tony bonn's picture

this is interesting especially the part about the traditional content creators such as the studios losing control over content....it reminds me a bit of the debate over open source vs paid software....

the problem with the ocean argument is that you get an ocean of crap....youtube style content will have a place at the table but like bad money driving out good the same will occur in content and the tableau will be razed and started again....

as amusing as schmedlap's youtube video might be people will grow tired of it and want quality which means that the traditional studio/financing system will be needed to produce it....

there are clear limits to the ocean argument....it's not misplaced but it has limits.

Wed, 12/08/2010 - 01:08 | 788109 Atomizer
Atomizer's picture

Its rather easy to define the alternative motive.

My passion of warning J6P is dead. Over 10 years has tired me, you will learn the hard way.

A remix of what was past & has now become present & future.

We Want Your Soul

http://www.youtube.com/watch?v=V98VbyqQ0yw

In summary | PIL - Order of Death

http://www.youtube.com/watch?v=VEC5GFDbgl4


This is what you want
This is what you get
Here now
Night light
Windows
Waiting

Weakness
Waitin.
Silent
Payment

Guilty
Hauntin.
Calling
Claiming

Here now
Ending
One life
One knife

-John Lydon

Wed, 12/08/2010 - 00:05 | 788003 yellowbear
yellowbear's picture

Great article!  I am trying hard to identify who are the content delivery guys that we need to identify for this space...

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