‘Smart’ TVs, dumb networks

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Google TV Asked at the O’Reilly Media Web 2.0 conference Monday why the major broadcast networks continue to block access to their online content from Google TV, Google CEO Eric Schmidt was faintly mocking in his reply. “‘Do you realize you’re taking a dumb television and making it smart?'” he said, caricaturing  the martinete mannerisms of an unnamed network suit he had recently met with. “Yes,” Schmidt said he replied, “we are guilty of that.”

The anecdote was meant to illustrate Schmidt’s point that the networks simply don’t “get it.” Marrying TV and the web, he insisted, would cause consumers to watch more television content overall, creating new revenue opportunities that would expand the total pie. The Chrome browser in Google TV, moreover, provided a new platform on which new TV-centric applications can be built, creating yet more revenue opportunities.

“The way to get more revenue is to create more revenue sources, and the way to do that is through things like Google TV,” he said.

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I think the networks get it well enough — intuitively at least if not quite conceptually. The record with digital platforms thus far is that smart devices and applications lead to commoditized media content. It happened to recorded music at the hands of iTunes and it’s happening to newspapers and magazines at the hands of Google and other aggregators. And there are sound reasons for the networks to fear it happening to them.

Once upon a time, content creators ruled the media value chain. Playback and display devices, from turntables to analog TVs to CD and DVD players, quickly became commoditized, severely undercutting their manufacturers’ profit margins. The more of the cheap devices there were in the market, however, the more valuable the content became, especially if bolstered by scarcity or consolidation at the distribution level (six major studios, four major networks, six major record companies, then five, then four). That was the paradigm on which the modern content industries have been built at least since the time of Edison’s wax cylinders.

That changed with iTunes and the iPod. Steve Jobs’ great genius was to figure out how to use digital technology to reverse the traditional commoditization dynamic. Using Apple’s smart devices and new (software) tools, users could create new value propositions for themselves by personalizing their use of music. The result was the music became the commodity and the tools and devices became more valuable. The device maker — Apple — now controlled the value chain instead of the content creators. And Apple reaped most of the rewards.

It pulled the same trick in the mobile industry. It commoditized the network (AT&T) by establishing its own commercial relationship with the iPhone user and then used that network to add value to the iPhone platform, through the App Store and other types of e-commerce, and once again captured most of the value.

While Apple has done that better than anyone, it really is only exploiting a fundamental design principle of the Internet: put the intelligence at the edge of the network and keep the rest of it dumb. Unfortunately for content owners, dumb networks are not very good at extracting value from the bits that traverse them. Smart devices and enabling applications, on the other hand, are excellent at it. But that’s not the end of the business the TV networks are in right now.

Schmidt would surely argue that the times they are a-changing anyway, whether the networks like it or not, and they should get on with the business of figuring out how to thrive in the new value chain. And there he would have a point. Surely, TVs increasingly will be attached to digital networks, and surely they will get smarter over time. And just as surely, that greater intelligence will support new types of applications that let viewers create value themselves by controlling how, when and where they watch video. It will happen because consumers want it to happen, and because pretty much everyone else in the TV ecosystem, from hardware manufacturers, to advertisers, to regulators — to say nothing of technology providers like Google, Apple, Boxee and Roku — are powerfully motivated to make it happen.

Ultimately, trying to re-impose the scarcity of the old value chain on the new one will not be an adequate answer, no matter how much the networks squeeze out of Google today. Unless the networks can figure out how to participate commercially at the edge of the network, instead of in the commoditized middle, it is they who will become scarce.

The question for Google is whether, as a provider of technology to the edge, it too can thrive without something in the middle.