When Will We See “Virtual Cable”?

Media types are abuzz about the revelation that Disney and CBS are interested in partnering with Apple on its efforts to build a subscription iTunes offering.  Following on the heels of rumors about a YouTube subscription service and paid Hulu, this development prompted a newly coined word that struck me the other day: the virtual MSO.

The concept is pretty simple in theory: a company – i.e. Apple, YouTube, Netflix, Amazon, Hulu, whoever – aggregates enough quality, digitally-deliverable content to replace consumers’ need for cable.  One flat fee could get you all the shows and movies you want, and ideally enable a range of means to consume them – on your television, on the web, or on your phone or tablet.

The way I see it, there are two big hurdles here.  The first is to actually aggregate enough content to provide a comparable alternative.  To date, building a sizeable library has proved to be an uphill battle in movie streaming – Netflix has been at it the longest, and their selection remains laughable.  Hulu’s movies section is basically a repository for older titles that can be monetized in nearly no other way.  Apple has been able to put an impressive set of television shows on iTunes on a download-to-own (DTO) basis, but the price point is pretty steep, considering most users only watch a program once, and a season of their favorite series probably costs nearly half of the yearly television portion of their cable bill.  At a couple bucks per episode or $30 or more for a season, it makes a lot of sense for content owners to put their material on iTunes.

An all-you-can-eat subscription offering is clearly going to be a harder sell, and I wonder what it’s going to take to move the content owners.  Apple, or any other “virtual MSO” for that matter, would have to replace two streams of income: cable subscription fees (anywhere from a few nickels to a few dollars per subscriber per month) and advertising revenue.    I believe the expectation is that a subscription service would be ad-free, but I could envision a subtly ad-supported service developing over time.  Unfortunately, striking a balance between attractive value propositions for both content owners and subscribers may indeed be insurmountable in the short term.

The other major hurdle is a high-quality, user-friendly interface for delivering the collection of content to home televisions and displays.  While the set-top replacement options currently available are underwhelming, and range from hard-drive to display interfaces (Western Digital’s WDTV, Apple TV) to more streaming-oriented devices (Roku, web-enabled TVs), I believe we will see these approaches converge (more on this in another post).  More flexible and capable devices are necessary to make virtual cable possible, and subscription services will have to be deliverable to a broad array of devices to reach a substantial portion of consumers with a seamless experience.

Where do we go from here?

I believe we will see “virtual cable” services launched soon, but won’t see a viable replacement for cable for a couple years.  The first iterations will have subsets of major broadcast and cable networks’ content and a cadre of smaller cable networks with less to lose.  But the major content providers will demand comparable subscription fees, and eventually, the virtual cable company’s costs would add up to a number that won’t make for a price-based competitor to traditional cable.  I would expect streaming devices to remain fragmented in their capabilities in the short-term, while Apple works to revamp Apple TV and tightly integrate it with any upcoming offering.

I hope I’m wrong, because I think it can work.  Here’s how.

Will Social Location-Based Services Ever Appeal to the Rest of Us?

As the hype has built for social location-based services (LBS) over the past couple of years, I have struggled to form an opinion regarding their mass market potential.  Reading about Stalqer recently finally nudged me in to the skeptic’s camp I was leaning towards all along.

I must admit that Loopt and Foursquare have sounded pretty cool to me at one point or another.  I totally understand their appeal, and believe that they will be able to monetize their userbases pretty effectively with high-value, hyper-local ads based on what users and their networks are doing, saying, and using.  The stampede to invest in Foursquare was completely understandable, especially considering the eventual valuation was about $6M post-money.  In my opinion, this compares pretty favorably to other social mobile apps with high valuations and less potential (exhibit A: Bump, $10M post-money). 

Yet I continue to believe that the market for these apps remains extremely limited.  My experience with social location-based services may be anecdotal, but I believe it is telling.  Living in New York until very recently, I had an extended circle of friends I saw regularly that probably numbered 50 to 75.  Everybody was in their 20s, well-educated and well-employed, going out several nights a week, and using either an iPhone or Blackberry.  Not one of them used Loopt or Foursquare.  Exactly two of them used Google Latitude for Blackberry.

The bottom line is that most people don’t want to broadcast their location.  Socially speaking, most people have different agendas on different days and nights, and prefer to locate each other and make plans via voice, text, or Blackberry Messenger (BBM).  These means of communication are close enough to real-time but allow everyone discretion in choosing who they want to see and who they do not.  I could envision some of my friends playing Foursquare for fun, but I can’t see it lasting.

This is a classic example of the early adopter community being unable to see past its blind spots and failing to understand the way the majority of consumers operate on a day to day basis.  What sounds groundbreaking to the savvy members of the insular tech/startup scene merely sounds cool, and often less than relevant to the masses.  Even if the masses are smartphone and social network enabled.

That is not to say that Foursquare, Loopt, and the like won’t evolve into successful companies.  I suspect that they will.  I just don’t believe that the majority of the market is anywhere near ready to include them in the fabric of their day-to-day social lives.

Shelf Life, Participation Value, and Television in the 21st Century

Sometimes Mark Cuban really nails an issue with a point of view that is simple, overlooked, and right on.  Last week, he did it with an opinion on the DVR that I have long shared with him and have been waving my arms about to whoever will listen.  This week, it’s sports ratings and the relative value of live televised events.

He’s absolutely right about the added value of events that are better watched live and lend themselves to discussion.  The media world has a lot to learn about driving audiences to “premiere” airings and encouraging participation.  In addition to reducing time-shifting and the subsequent fast-forwarding through ads, larger audiences tuning in to a given viewing create the opportunity for free “buzz”, higher CPMs, and cross-promotional opportunities. 

To that end, the networks should be doing everything they can to foster television as a shared, live experience.  The obvious answer is social networking and real-time discussion as a way to do that.  Anecdotally, I can tell you that my CBSSports.com fantasy football league definitely tunes into more live games than we would otherwise because of the automatic chat room we are entered in on the live scoring page.  We talk about the games, what they are doing for our fantasy squads, and are way more engaged with the television than we would be otherwise.  And about half of these games are aired on, you guessed it, CBS.

To date, sporting events and reality TV (American Idol and other competitive reality shows in particular) are the only really good examples of this that I’ve noticed.  But I believe this principle can be incorporated into standard serials and sitcoms, too.  Sure, Fox has a 24 message board on its website.  But where are more advanced interactive features, like live chat rooms, or polls and contests encouraging viewer feedback on which character is the next to die/switch sides/whatever?  Where are the live Twitter updates with Seth MacFarlane side jokes to accompany first showings of Family Guy?

And where are advertisers on this?  They should be doing way more to make their ads interactive, engaging, and more relevant when seen live.  It won’t work everywhere, but interactivity and time sensitivity in advertising has the potential to squeeze more out of the ads people are watching and discourage time-shifting and subsequent fast-forwarding when deployed in conjunction with short shelf-life, high participation value programming.

There’s obviously a limit to the applicability of these ideas, and to some extent, that limit is the result of the newness of today’s social mediums.  But that doesn’t mean broadcasters shouldn’t be investigating and experimenting with everything they can to increase their live audiences and the value of their ad inventory.

The Downside to Market Expansion, Revisited

Last spring, I speculated about the difficulties Nintendo would face in sustaining growth after expanding the video game market with the Wii.  While the company did a fantastic job of turning casual gamers into Wii owners, the nature of these casual gamers is that they aren’t likely to buy lots of games and accessories.  After the initial revenue and earnings bump, growth was certainly going to be difficult to maintain without catching lightning in a bottle again and again.

Sure enough, Nintendo’s first-half numbers reflected this reality.  Revenue was down 34.5% year over year, with profit down a staggering 52%, primarily due to softening Wii demand.  While Xbox 360 and PS3 price cuts and the strong yen are certainly partially to blame, I believe that the fundamental issue with the Wii’s userbase remains crucial.

Unfortunately, the public markets only reward expansion of the overall pie once, and with a bigger pie comes the increased difficulty of expanding it again the next year and the year after that. 

To quote Kurt Vonnegut, “so it goes.”

The Great Talent Dispersion

A lot has been made recently of the exodus (both forced and voluntary) of talent from Wall Street and what it means for other industries, with some highlighting senior moves to academia and others predicting a blossoming of entrepreneurship.

I, for one, am more interested in what will happen to the aspiring masters of the universe than your typical BSD.

For the last several years, many of the brightest college students have been laser-focused on entrance into a bulge bracket analyst program as part of a track they were brought up to believe was fairly standard: a summer internship, followed by a two-year analyst program, then off to riches at a private equity or hedge fund.

I have seen this myopia first hand, often among the smartest and most driven of my peers. I always found it bizarre, though. Most of them had studied investment banking guides until they could recite a textbook answer to any interview question, but held little fundamental interest in the actual business they were so devoted to entering. Needless to say, most of them are now unemployed.

Everybody always points to the easy money promised by a career in banking or trading, but I think there is more to it than that. For a spell, it seemed as though pursuing a career in finance was just the cool thing for an upper class kid to do. Many aspiring BSDs seemed to me to be just as motivated by the entitled work hard/play hard lifestyle of bottles, models, and deserved arrogance (so humorously parodied here) as they were by the money.

But aside from the lack of jobs, I think that the daily vilification of bankers everywhere has caused Wall Street to lose a lot of its luster among today’s ambitious youth. This is a good thing. I couldn’t tell you what the next hot industry among twenty-somethings will be, but my guess is that there will be several that really benefit from the redistribution of young minds (cleantech, philanthropy, and education are a few that come to mind).

While my own anecdotal evidence suggests that graduating students are simply traveling or ski-bumming until the economy turns around, I would bet that a great many will in fact turn to entrepreneurship, which is clearly seeing a revival in coolness following the success of young entrepreneurs like Mark Zuckerberg and the media’s love affair with Twitter.

Post-college employment is in many ways a numbers game. With so many fewer finance jobs to be had, many of the smartest and most driven students are going to find work in other fields. Many others are not, and will use their talents to help or teach others, or to create new fields. This movement won’t get the same due as fiscal stimulus, but I believe it will be a healthy, important component to a long-term broadening of the American economy.

Of Course Entrepreneurs Still Need VCs

A few weeks back I caught some back and forth going on surrounding a report by the International Journal of Entrepreneurship Education suggesting that the crumbling barriers for entry on the web have rendered venture capital unnecessary for many entrepreneurs.

While it is true that starting a web business is dirt cheap these days, scaling a primetime web service is decidedly not. Sure, the costs are variable, but entrepreneurs need to be out in front of scaling needs to protect the user experience, and more often than not, that requires real dollars.

More importantly, most entrepreneurs need the guidance of experienced, outside directors to see future challenges and address them responsibly.

I say most because there are of course serial entrepreneurs out there that have scaled businesses successfully and are capable of dealing with the potential pitfalls along the way. They probably also have deeper pockets and more extensive angel investor connections to boot. But this is not the norm.

For the majority of entrepreneurs, good VCs’ insights (and Rolodex’s) are extremely valuable in guiding growth strategies – when and how to make the right hires, managing expenses, adjusting strategy in response to market changes, choosing the right partners, and (hopefully) achieving profitable exits. Missteps in any of these areas can be ruinous to a growing business – and can squander market leads, competitive advantages, and that precious investment capital you needed from them in the first place.

MetroPCS and the Psychology of Recession

MetroPCS, the provider of flat-rate, all-you-can-eat (talk, text, or picture message) mobile plans, is absolutely killing it in this market.

MetroPCS is a company I absolutely love, and have followed for a few years because of a relationship a portfolio company. They came from humble beginnings in Dallas, went public, expanded westward to LA, and is now rolling out aggressively in New York, Boston, and Philadelphia. The company has over 6M subscribers in 14 of the top 25 US markets, and with packages ranging from $30 to $50 per month, it’s not hard to see why.

As AT&T and Verizon have concentrated on driving ARPU (average revenue per user) with faster networks and feature-rich, data-enabled devices, MetroPCS is keeping things cheap and dead simple for consumers who just want to talk and text. Perhaps more importantly, however, is the fact that MetroPCS subscribers pay month to month with no contract.

I think this aspect of their plans will continue to be crucial to their success in a down economy. Psychologically speaking, consumers today are wracked with uncertainty, increasingly averse to long-term financial commitments, and delaying all major purchase decisions. This is especially true in the middle to lower ends of the market, where unemployment is highest and labor needs are more cyclical. MetroPCS offers a sensible alternative to prepaid phones and an attractive replacement for Verizon and AT&T when contracts are up. And now that the company is beginning to offer dirt cheap ($50) Blackberry plans, they are poised to capture share in the form of middle market consumers upgrading to data enabled devices.

Of course, the downside to this strategy is high churn (5% of subscribers are canceling each month), though I’d argue that these are customers that are likely to come back when they can, without posing a credit risk to MetroPCS.

I believe that the peace of mind MetroPCS is offering will continue to drive growth in both new and existing markets, and that the other major providers are going to be forced to respond. AT&T, for its part, is offering comparatively expensive, $3/day service without annual contracts. I wouldn’t be surprised to see contract-based service companies (telecom, cable, etc.) offer opt-out options for subscribers that lose their jobs, similar to what some car companies are doing. And I think it makes sense for companies in all industries to evaluate how they can appeal to their target customers’ fragile psyches in this environment.