Convergence is hitting the IT industry, there’s no doubt about that. More accurately, it should be said that convergence is involving the IT industry in its process. The whole idea of convergence is that industries which used to be separate are becoming competitors, as the differences between their respective fields fade with the advent of greater communications technologies like the Internet.
There are three major players in the convergence of IT with other industries. These are content producers, broadcasters and Internet service providers (ISPs). These three sectors are both trying to jealously guard their traditional money-making roles in the global economy while attempting to sneak into the roles of the others. Broadcasters are becoming ISPs, ISPs are creating content, and content producers are broadcasting. Each one has a different reason to do what they do, and each has a different perspective. Unfortunately, if any of their individual perspectives win out, the consumer loses. The only way for the consumer to win is for traditional business roles to lose.
In order to understand the situation, it is important to examine each industry’s perspective in order to know why they are acting in such a way. First, we can examine the content producers, and find out why they are still jealously guarding their products. Then, we can take a look at broadcasters and find out why they are trying to maintain their traditional distribution channels. And finally, we can look at ISPs and find out why they are trying to take over the other business models.
Content producers seem to be in the most difficult position. These are companies such as movie and music studios represented respectively by the Motion Picture Association of America (MPAA) and the Recording Industry Association of America (RIAA). Because of the high demand for their goods and the exclusive contracts they have obtained over the years, they have created a multi-billion dollar industry in selling their products for extremely low prices to a worldwide audience. The cost in creating these products, however, is extremely large. Movies routinely cost over US$100 million to make, and a single music album can cost from $100,000 to $1 million to produce as well. This involves an extremely large commitment for the respective industries to a new work. However, when stores sell an album it is invariably $15, and when theaters sell movie tickets the cost is between $6 and $10 per person. The disparity between the investment by the companies and the investment by the consumers has created a culture of unequal valuation. Movie producers consider movies to be somewhat on par with constructing a skyscraper, while consumers consider movies to be the price of a good meal, with dessert.
This valuation disparity didn’t used to be a problem, because the content producers had all the distribution channels locked down. There was almost no way that a consumer could get a copy of the content without paying for it. However, the Internet has become a distribution channel over which content providers have no control. A distributed, non-centralized network of peers is extremely difficult to control indeed, and the content has escaped from its traditional channels and is now running wild on the decentralized network we call the Internet. Content providers see their cash cow getting away, outside of the fences they have set up for it, and want to catch it again. They want to control the Internet and are therefore trying to figure out ways to become a part of the Internet and offer Internet services like an ISP in order to control this new distribution channel.
For a long time broadcasters had a pretty sweet gig too. They got paid at least once, sometimes twice, for doing their job. First, they got paid by advertisers who wanted to reach their vast and captive audiences, and if they were especially good they got paid by those audiences as well for the privilege of watching what the broadcasters gave them. They just had to provide a totally secure and reliable channel for content providers and they were golden. Movie theaters, television channels, video stores – they all did well.
However, the rise of the Internet hit broadcasters twice. First, they got hit once in the advertising business – as the Internet’s ability to track and determine the effectiveness of each and every ad revealed the shocking truth that advertising is surprisingly ineffective. Banner ads on the Internet, while they can be displayed millions of times per month, only attract the attention of 1 percent or 2 percent of viewers. This was a big shock to many advertisers, who stopped spending millions of dollars on online and offline advertising alike.
Broadcasters also got hit in the monopoly department – the Internet has become a distribution channel which they are not a part of. Broadcasters have been slow to realize this, but some of them have begun experimenting with distributing content in multiple formats. At the Korea Communications Conference for instance, Carlson Chu of PCCW in Hong Kong spoke about his company’s experiments with content distribution. He announced that two weeks ago his company launched a handheld TV device that could receive 170 TV channels, and they were expecting it to be a great success. This is a step somewhat in the right direction, however the Internet has gotten people to stop wanting to have channels at all. A net-savvy person can find and download their favorite TV shows and watch them whenever they like – it is even a popular pastime for some consumers to save up a number of episodes of a TV show they like and to sit down and watch them all at once in a marathon session. These consumers who used to watch tightly controlled and regulated channel television now want to watch what they like, at their choice of time, and in a quantity of their desire.
So broadcasters have also seen their customers slipping away. In order to appeal to them again, they have been trying to create content of their own – getting in on the content producers’ game. They poll their customers and begin to provide specialized content to them based on unique niches. High-quality live news has been one niche that broadcasters can fill, providing something that no one else can. Also, subtitled and/or dubbed content that appeals to specific language audiences has been a success story for broadcasters as well. They realize that in order to succeed, they must also become content producers to appeal to their customer base.
Broadcasters have also been trying to get into the ISP business, most importantly because they have content distribution networks already set up. This has been best illustrated with the advent of cable Internet. Cable TV providers have large, extensive high-bandwidth networks already set up, and in order to exploit these to appeal to their customers the most, they have been using them to provide Internet connections. Also, some broadcasters have become mobile phone operators in order to offer their services to people on the move.
Internet Service Providers
ISPs did not have any sort of business model before the Internet – instead they simply are the Internet. Their business strategy is the one most in alignment with Internet users of today – they want their customers to have the most content available to them in the easiest manner possible, because the more content someone can access from the Internet, the more customers will be interested in it. It is in an ISP’s best interests to have complete movies and albums available for download, because more people will want to sign up for their service. Also, most ISPs offer tiered levels of speeds, so users who are interested in higher speeds to get more content end up paying more money to the ISP.
But a good ISP knows that simply providing a connection is not good enough. Everybody in the industry does that. An ISP needs an edge in order to compete, which means it is interested in either providing unique content to its users – acting like a content provider – or providing high-quality content for its users – acting like a broadcaster. Smart ISPs have tried to start doing both, and have broken into the business of broadcasting and content. Because the ISP also offers free access, theoretically, to the content of other broadcasters and content providers, this has some content providers and broadcasters a little miffed.
How to Win
If content providers had their way, a consumer would pay each time they saw or heard something. They would pay a higher fee for each different media format they saw or heard the content on, and they would like it. If broadcasters had their way, they would charge a small fee and play quite a few advertisements for exclusive access to highquality content doled out in tiny increments at moments of their own choosing. If ISPs had their way, all content would be freely available on its network and its users would share everything. However, each of these scenarios is a loss for the consumer. The first is too expensive, the second is too restrictive, and the third means that the only content available would be guys recording themselves wiping out on their skateboards on YouTube. In order for the consumer to win, there has to be some sort of compromise. There has to be some sort of true, innovative convergence. Hopefully we will see that happen in the next five years.