Is the NBCU-Comcast deal really about a new business model for cable?

By Tom MacIsaac, CEO, ExtendMedia

MacIsaac predicts Comcast will use NBC to go over the top. Photo: ExtendMedia.

That cracking sound you hear is the walls of the clubby world of cable beginning to crumble. Everything in the media world — ­ especially the world of media distribution –has changed as a result of Comcast (CMCSA) taking control of GE's (GE) NBCUniversal.

Many people think this is a deal to preserve the status quo — that it is no different from News Corp.(NWS) controlling DirecTV or Time Warner's (TWX) ownership of Time Warner Cable (TWC).

As we all know, both of those deals failed to provide the heavily promised synergies between programming and distribution and have been since unwound. That being said, I believe there is a lot more to this story.

Comcast is among the major distributors with a clear long-term world view and digital savvy.  It sees that its core business faces a big challenge in the form of broadband-distributed premium content to the TV–so-called "over-the-top" video; it also understands that over-the-top video is inevitable and full-fledged deployments are on the horizon.

And while plenty of analysts believe consumers won't cut off their cable services — they like the convenience and the linear programming — even cable bulls recognize that a new generation of consumers may bypass cable subscriptions altogether in favor of an over-the-top approach. And so even though Comcast looks like it is trying to preserve its cable distribution primacy by acquiring NBCUs trove of content, the cable operator quietly is making moves that suggest to me that it plans to launch a national "over the top" services in the not-too-distant future.

Going national?

In 2006 Comcast bought the software infrastructure (thePlatform), and then they launched an aggressive IP network infrastructure initiative (Project Excalibur).

Now with the NBCU acquisition, they control a sufficient wealth of premium content that, when combined with web content, will be enough to launch a meaningful "over the top" consumer offering.

When they can't grow their traditional business (already the case — telephone services have been powering their meager growth for the last few
years) they will have the all the ingredients to distribute video over broadband – in and outside Comcast's cable footprint – and it won't need anyone's permission.

The new growth driver will be a broadband distributed service to new geographic markets at a lower price point. At the outset it wouldn't have all the programming customers desire — shows from ABC or CBS, for example — but it would have enough content to drive eyeballs and attention away from subscription cable services.

Time Warner Cable, Cox, Cablevision, Charter: watch your backs and your precious subscriber bases.  It's a risky, potentially cannibalistic move for Comcast, but the alternative is that someone else (Apple, AT&T, Microsoft or Google) gets there first. Even so, it seems a sure bet that Comcast would be ready to be ready to respond very quickly and in a powerful way. In fact, think about Comcast's "On Demand Online" as a dry run for a national "over-the-top" offering.

Operators will unlock cable content for digital distribution, build out the distribution infrastructure, and condition users to access content on multiple devices. All that will be left to do will be to throw the business model switch to out-of-footprint subscription and build out a TV interface (the digital home problem will be solved in parallel via web-connected TVs, special-purpose low cost set-top boxes, etc.)

It's not just about responding to free ad-supported Web offerings like Hulu and Google's (GOOG) YouTube, but also to services that look more like pay TV, like iTunes, Netflix (NFLX), and Amazon (AMZN).  These new video services may have business models that are familiar — subscription, VOD, etc. — but they are unencumbered by geographic footprint.

Comcast's out-of-footprint over-the-top service is inevitability. The media world will be forever changed and the cozy club of non-competing cable operators will be a thing of the past.

MacIsaac is CEO of ExtendMedia, a Boston-based company whose technology enables content providers and distributors to create, deliver, manage & monetize online content offerings over many devices.

Less than six months into his new role as head of News Corp. (NWSA), digital chief Jon Miller has no acquisitions planned. Instead, he said Thursday, he’s going to seed innovation from inside the company and spoke of “putting the house in order” first.

While he didn’t comment on News Corp.’s rumored plans to release a kindle-like digital device (News Corp. has denied that it will) he also talked at length about coming platform shifts and how industries will be experimenting with business models into the fall and figuring out how to adapt them.

Miller expressed faith in the potential for “third screens” like e-readers, to monetize content. He admitted to paying for content on his Kindle that he would be reluctant to pay for online.

But, he said, content producers have to act quickly to leverage their assets. “While you have that market position you need to move,” he said.

Miller believes that media conglomerates like News Corp. and Viacom (VIA.B)  have an advantage because of their ability to both produce and distribute content.

“You have to look at how you get different pieces of the pie,” he said, offering online video site Hulu as an example. The site is a joint venture between News Corp., NBC and Disney.

Miller is becoming “more convinced fundamental changes are taking place” in the advertising industry. As digital media makes marketing more efficient, thanks to behavioral targeting and exploding supply, he said those budgets will shrink. Advertising spending online is lagging behind the time consumers spend with media online.

“You don’t have as much room for everyone to take cuts,” he explained.

Miller sees that pool of digital ad dollars splitting into two categories: premium experiences and commoditized inventory. This second tier can become more valuable, however, through behavioral targeting, which Miller says will provide “a lift out of what otherwise is a big undifferentiated environment.”

Premium content meanwhile will benefit as more brand advertising migrates online, Miller predicts. While 9% of advertising has moved online, brand advertising accounts for only a third. News Corp. is preparing its “processes and environments” for that coming shift.

Another focus for Miller is revitalizing MySpace. In May, the social networking site News Corp. acquired in 2005 for $580 million was eclipsed by rival Facebook in the number of U.S. visitors. Last month the company laid off 30% of its staff after installing new leadership in April.

Profits have fallen short of expectations and in the most recent quarter, News Corp. reported a significant drop in revenue at the unit that includes MySpace. The company reports fourth-quarter earnings on August 5.

Miller has compared his strategy to what Tim Armstrong, his successor as chief of AOL, also faces. It’s about going back to the core of the brand, he said, “and focusing on how to make it relevant today.” That also means concentrating on a few things, he said. “You can’t do everything even though you want to.”

To accomplish this, Miller is committed to building small teams that work on specific product areas. “We have to develop specialized areas and let them win,” he said. “Only then can you broaden out.”

Figuring out which specialized areas to target involves going after new behaviors, rather than trying to play catch-up, he said, mentioning video and games. Awed by the time users spend online playing games, Miller claimed, “Myspace will be an even better gaming platform in the future.”

There are few things Steve Jobs loves more than a dramatic Macworld surprise announcement, but three weeks before his annual keynote speech, someone – my guess would be Rupert Murdoch – just stole his thunder.

Several sources this morning – including the Financial Times and the Wall Street Journal – are reporting that Apple (AAPL) and News Corp. (NWS) have struck a deal for a new video-on-demand service that could change the way digital movies are distributed, viewed and paid for.

Citing an unnamed "person familiar with the situation," the FT reports that the two companies signed an agreement that would allow customers to download the latest 20th Century Fox movies through the iTunes store and watch them for a limited time. No pricing details were available, but earlier reports suggested that Fox and Apple were talking about charging $2.99 for 30 days viewing. That's considerably cheaper than competing services from BlockBuster and NetFlix, neither of which work with iTunes, Macs or iPods.

In addition, Apple is reportedly extending its FairPlay digital rights management system for the first time to another company's product. As part of the same deal, Fox will sell its new releases on FairPlay DVDs that permit customers to transfer, or "rip" the content to a computer or video iPod. As the FT points out, there is software available to rip movies today, but using it is considered piracy and can land you in jail.

Disney is the only other studio that makes new releases available on iTunes, but only to buy, not to rent. Paramount, Metro-Goldwyn-Mayer and Lionsgate sell older library titles. But the tide may be turning, and Apple is reported to be in talks with Sony, Paramount and Warner Brothers.

"Fox and potentially other ­studios are coming around to the idea that there is nobody out there to challenge iTunes," Jonathan Weitz, a principal with IBB Consulting, told the FT. "This deal is a sign that media mobility is coming to the mainstream."

The best instant analysis of the deal this morning is on Silicon Alley Insider, where Dan Frommer seems to have stayed up all night trying to work the angles. See his winners and losers column here and his six questions here. Among the latter, our favorite is No. 6:

How will Blockbuster, Amazon, Netflix, Microsoft, Sony, cable, telco, and cellphone companies, and other rivals respond? Apple's iPod line dominates the portable media player market, and the iPhone is taking a big chunk of the smartphone market. And now, it appears, there will finally be digital rentals compatible with Apple's gadgets. Surely Jobs' rivals haven't been sitting around doing nothing. How will they fight back? Lower rental prices? More portability/less DRM? This should be a fun one!

Two developments in the wake of NBC Universal's (GE) weekend exit from Apple's (AAPL) iTunes store:

Ruport Murdoch's Twentieth Century Fox (NWS) is reported to be "actively negotiating" with Apple to put new releases and catalog titles on iTunes beginning in early 2008. According to Rich Greenfield at Pali Research (link; activation required) several things have changed to break the deadlock, including growing levels of movie piracy and new flexibility on Apple's part in terms of pricing. Greenfield's casual speculation that Apple might be willing to charge $15 per movie download has triggered some interesting analysis (see AppleInsider and Ars Technica's Infinite Loop) but should probably not be treated as gospel.

NBC Universal CEO Jeff Zucker placed his company's digital strategy last on his list of priorities in a luncheon speech at the UBS Global Media & Communications Conference on Monday. Repeating an earlier claim that NBCU's deal with Apple was worth "only $15 million" in profit, he added: "That’s nothing to sneeze at, every dollar matters. But it wasn’t the game changer for us that it was for Apple." He pointed to NBC's video offerings on Amazon and NBC Direct and singled out for praise hulu.com, its joint effort with News Corp.:

We're in the beta test with Hulu and we have 60,000 users, seven major advertisers. The online press wanted to kill it, but it's doing well. Advertisers tell us they want a safe environment. That's what this is about. They don't want a cat on a skateboard, but they do want The Simpsons or a film they like. (see Paid Content's report here)