‘Smart’ TVs, dumb networks

Update: Click through to see the comment thread for more on this topic.

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.

4 thoughts on “‘Smart’ TVs, dumb networks”

  1. This article is interesting, but I disagree with several points.

    IMO, content did not get commodotized via itunes, the risk of commoditized content is not the major risk to established TV players. in the iTune case, good content (with good marketing) still massively outsells poor content with poor marketing – definitely not a pattern that makes me think content is a commdodity. The relationship that Apple has with consumers, and their distribution system removes power from the rest of the music industry. They are forced to unbundle their content and provide it in more granular way so individual bits of good content can be more easily differentiated from the less good content.

    On the TV side, there may be a risk of some unbundling that could be very disruptive to existing TV networks, but the major risk, IMHO, is Google establishing an advertising relationship with advertisers that could disintermediate the existing TV network relationships. Today, TV networks know about their audience, and sell ad space to reach that audience. Google’s business model is to know just about everything you do online. Ad buyers split their ad spend to between tv, online, print, etc.

    At a minimum, if Google has insight to what you do online AND on TV, then they can try to craft a more valuable, more targeted ad placement capability for offline. That threatens the TV Networks share of total ad spend, as it would create incentives to move more ad spend to online. Additionally, if Google develops an advertising capability via Google TV, they then are competing directly with the TV Networks and again have the ability to use the smart device attached the TV to generate better insights about audience behavior — and then combine that with insights from their online operations — and provide a more precise ad targeting service to advertisers.

    Like Apple’s success, this, too, is a form of unbundling. Where iTunes let’s you pick just the song you like off a CD, Google could let advertisers reach just a very precise segment of audience.

    My 2 cents.

    BTW, your observation that putting intelligence at the edge of the network and keeping the rest of it dumb is a fundamental design principle of the internet is just plain nonesense, imo. From the earliest times, the internet has been about relatively dumb device access with intelligence aggregated to the servers that formed the collective parts of the internet.

    To be clear, I strongly favor the movement of intelligence out to the smart devices (aka PCs, phones, etc) that connect to the internet — it’s a healthy evolution, that creates better experiences for consumers and better opportunities for content providers… but hardly a design principle of the internet. Rather, it’s a new form of client-server computing, and a natural evolution of what Microsoft started when it built the first AJAX web site for Outlook Web Access in the late 1990’s.

  2. John,
    Thanks for your thoughtful comments. I don’t think we actually disagree as much as perhaps you think we do, although my eliding of history may have resulted in a lack of clarity. I would consider the unbundling the music industry experienced as an effect, or expression of an underlying commoditization.

    Previously, consumers had very little direct control over how or on what terms they experienced music, in large measure because the tools and devices available for music playback had limited functionality. That allowed the owners of music copyrights to keep their profit margins high through bundling and thus capture the lion’s share of the value embedded in the commercial music ecosystem.

    When new digital tools appeared that increased the functionality available to consumers — first from “pirate” outfits like Napster and later from licensed providers like Apple — that dynamic of value capture changed. Value was now created on an ad hoc basis by end users, rather then embedded in the system by the copyright owner. My intention in using the term “commoditization” was not to refer simply to price, or a lack of differentiation between popular and less-popular content. Rather, I mean to refer to the locus and method of value creation and capture in the system. With iTunes and the iPod, the music itself became simply and input (i.e. commodity) to the process of ad hoc value creation, not the (near-) exclusive carrier of value it had been previously.

    That is the fundamental challenge facing the media companies on digital platforms: value creation happens at the end points (i.e. edge) of the distribution system, not at the starting point. It’s not a matter of value destruction (although it probably seems that way to the media companies) but a shift in where and how the value in the system is captured.

    Generally speaking, the content creators are not well-positioned to participate in the process of ad hoc value creation because they do not have commercial relationships at the right level of the system. Instead, it is those who provide the tools of value creation (Apple, Google, pirate sites, etc.) that are now capturing the lion’s share of the value.

    With respect to Google TV, I agree with you that search- or intention-driven advertising is a potentially powerful new tool of value creation around TV content. And right now, the TV networks are not well-positioned to participate in that process because the do not have the appropriate commercial relationships. If they cannot devise appropriate commercial arrangements, they run the same risk the music companies faced with Apple: their content will become simply a commodity input to a dynamic process of value creation driven by someone else.

    As for what is or is not a basic design principle of the Internet, I fear I’ve wandered into an engineering debate with someone I suspect has far more engineering knowledge than I have (not hard in that I have none). So I’ll demure on that point.

    In any case, instead of referring to Apple “exploiting” the design principles of the Internet, I perhaps should have used a term like “echo,” or “mimic.” The point I was trying to make is that a basic feature of the Internet is that intelligent systems — whether devices used by consumers or servers used to support remote applications — can be added to the network at any point. And it is that intelligence (and the applications or functionality it supports)that is the source of value creation, not the bits of data (or content) those applications manipulate. If the media companies hope to capture enough of that value over the long-term to sustain their business of creating content they need to develop new types of commercial arrangements that put them where the real action is.

    Thanks again for your feedback.

  3. Hi there, and thanks for the dialogue. Rereading my comment, I hope my tone doesn’t come off too harshly. Leaving aside for the moment that I think we have different definitions of what “commoditization” means :), i sort of agree with your observation that:

    “intelligence (and the applications or functionality it supports)that is the source of value creation, not the bits of data (or content) those applications manipulate.”

    I still think you might be undervaluing the value contribution of the content itself. Personally, I see it as a symbiotic relationship… high quality content attracts audience, volume consumption of content drives insight.

    In the end, I do agree with what is probably the most important point — and you’re final sentence:

    “If the media companies hope to capture enough of that value over the long-term to sustain their business of creating content they need to develop new types of commercial arrangements that put them where the real action is.”

    I don’t know if Google TV will catch on, if the trend of people adding Microsoft Windows 7-based Home Theatre PCs to their living room AV stacks will continue, or if specialized devices like ROKU and XBOX will evolve to serve the disintermediating functions (networks might say, “parasitic functions”, as they siphon of insights while bearing limited content creation costs). Probably a mix of all of these and more for the time being. So long as there are not changes on the net neutrality front, significant change for the networks is probably inevitable. Does this mean TV will suffer the same fate as magazines and newspapers (a better analogy than music business, imho), I don’t know… but that certainly seems possible.

  4. I’ve enjoyed the dialog as well. As someone who has worked in and around the media business for the past 25 years I certainly don’t intend to undervalue the content. I agree that it’s a symbiotic relationship. I was just trying to emphasize the importance of having mechanisms for efficiently capturing that value on digital platforms.

    As for Google TV, having played around with it for a couple of weeks my suspicion is that this iteration will not be any great success, at least for Sony and Logitech. Even if it had network content, it’s still a pretty kludgy experience. At this point I think it’s more about Google trying to force the networks’ hand on over-the-top video to the living room and to crack open that market.

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