If You Build It, They Will Come
Streaming Magazine March 2001
By John Silliman Dodge
The prospectors weren't the ones who got rich during the gold rushes,
you know. The guys who sold the picks, the shovels and the whiskey
turned the real coin. Levi Strauss, the most famous purveyor of his
age, built his denim empire on the butts of the 49ers. Could it be
that the only people making money in today's Internet Economy are
making infrastructure, selling digital tools to new media miners?
Jupiter Media Metrix analyst, Dave Rader comments, "A lot of vendors either have or are developing an enterprise plank to cover them until the consumer space gets going. Entertainment is sexy, it gets a lot of coverage, but it's not the only market out there." Does Dave suggest that the Web is a business-only medium? That the best entertainment we can look forward to is quarterly earnings reports? Hardly. But for the time being fans of streaming media could see a dearth of high production value, high bandwidth, high cost content supported by banner ads.
Content may be king but the king's fortunes are mercurial. Like fashion or music, nobody knows the hits until after the fact. Meanwhile this information is expensive to produce, sensitive to mood swings in the ad economy, and almost instantly outdated upon publication. Even though it pulls a fraction of the audience, the Web is a hungrier place than mass media. Referencing that insatiable demand for everything, all the time, one of the cleverest corporate names in recent memory belonged to the now defunct Web design and content company, FeedTheMonster.
It wasn't supposed to work out this way. Way back in Internet time, oh, five years ago, we naïvely thought we'd save a bundle on manufacturing and distribution costs. We didn't. We figured, people pay $49.95 for a subscription to Time Magazine, they'll pony up for Slate. They didn't. We thought, advertisers will pay double-plus CPM's to target qualified, niche audiences. No. What we got instead is a medium whose future is totally blue sky but whose near-term profit potential is partly to mostly cloudy. Much of this trouble stems from a complex and only slightly stable delivery system that requires expensive components at each link in the chain. Couple this with an audience conditioned to expect high quality, resource-intensive information and entertainment free on demand 24/7, and today people will think you're brilliant when you quote Mel Karmazan and pronounce, "This isn't a business."
In contrast to consumer content production and distribution, the infrastructure business seems less exposed. The thinking seems to be, We&'ll just leave content to the big media brands who have the machinery in place and the pocket depth to shock-absorb the bumps in the road. We'll be the aggregators, the pass-through guys, the dumb pipes. We'll be the FedEx in this relationship and just deliver the packages on time. Or build the tools that content companies require and the functionality that facilitates deeper relationships with their end users. (Excuse me, but could we possibly a more sterile term to apply to customers than "end users"? How about BMU's, Bio Marketing Units?)
So Macromedia, Adobe, Akamai, Digital Island, Inktomi, Intervu, Loudeye, iBeam, RBN, Microsoft, Oracle, Sun, EMC, IBM, and Cisco are making money. What about the guys on the front end? After significant spending on design and deployment, databases, hosting, bandwidth, maintenance, service contracts, storage, value-added vendors, etc., no wonder their house of cards looks a little tippy. Margin-wise, it's a four-story factory that back-ends a lemonade stand. It just doesn"t pencil out.
This from a recent Wall Street Journal article by Thomas E. Weber: "The economics of all the new technology advancements will now be questioned," says Internet pioneer John Sidgmore, vice chairman of WorldCom. He doesn't expect the Internet's performance to degrade. "But the rate at which the performance improves might slow down."
Welcome to the dark side of the business cycle. And just because you sell tools and systems B2B doesn't make you immune to irrational pessimism. When sentiment turns bearish everyone throttles back. Customers sit tight. Layoffs and cost cuts ensue, even in IT. "Just not a have-to-have right now, Frank. We';ll sit out this upgrade and wait for your next major release." For start-ups the time for burning through investor cash in search of a business model is over. Billy Pidgeon, a research analyst with Jupiter's Web Technologies Service group says, "Experimentation isn't a good model in today's financial environment. A lot of these content plays are shaking out hard-Pop.com being the poster child when they pulled the plug prior to launch. It"s just a more conservative climate. And a lot of players who were focused on broadband and video have scaled back their efforts because they"re finding that audio is the better short-term opportunity."
It's not all Chicken Little. This too shall pass. A zoom out of history reveals that businesses are iterated just like technologies; we don't necessarily get them right the first time. Could it be that interactive business models simply haven't been fully cooked yet? The old SAT formula-subscriptions, advertising and transactions-hasn't delivered the kind of cash flow required to make streaming media content uniformly profitable. And web syndication, content's hope for the future, is still in its infancy. Billy Pidgeon again: "We're starting to see more syndication offers. It just makes sense to place content where people already are rather than trying to use content to pull people to someplace new. And looking forward, subscription services will have more uptake because they'7;re easier to tweak." Meaning that we don't have to get everything right the first time.
Truth be told, the Web still can't compete with mass
media. We may be headed for the magic kingdom of one-to-one marketing
where, like the Cheers bar, everybody knows your name and delivers
just the targeted content and advertising you want when you want it.
We'll get there, but we're not there yet. Ad agencies still want tonnage.
They'll accept the waste that comes with broadcasting to get the reach
they crave, the sheer numbers that the web can't yet provide. (Unless
we're talking Victoria's girls in their underwear. Then it';s server-crashing
numbers.) In the meantime, whether you're on the back end, the front
end, or hedging both ends against the middle, profitability is pretty
sexy in the current climate-B2C, B2B, P2P, no matter where it comes
from.