Old Media Is Being Unbundled, Just Like Telecom Was

One of the biggest stories of my career — as someone who covered telecom industry — happened fifteen years ago: The 1996 Telecom Act was the start of the liberalization of an industry that had been vertical with very little competition. What followed was an amazing transformation of the staid calling industry — not necessarily for the better.

One of the basic tenets of the 1996 Telecom Act was unbundled access to the telecom facilities of the local phone companies, which meant competing phone companies could access the so-called “last-mile” that led to people’s homes over the incumbent carrier’s network. The change in law created an insane amount of competition, and turned the economics of the business on its head. It led to kamikaze-style pricing of phone minutes. Voice had been the primary source of revenue for phone companies for nearly a century.

The increased competition was coupled with the arrival of Internet and Internet-based telephony. That allowed rivals such as cable companies to further take away voice customers. Skype, Vonage and others only added to the phone companies’ misery. Today, phone companies are happy to give away voice-minutes as long as you buy data from them.

Why do I bring that ancient history up?

Mostly because as I sit in the crowded Virgin America red-eye flight to New York, I’m thinking about the media business and the parallels I see between it and the media industry. In the media industry, we’re seeing an unbundling of a highly vertical business, with the most lucrative parts being siphoned off by Internet-based low-cost rivals.

Indulge me, for a minute. For longest time, things were quite cozy in the traditional media world. The large newspaper and magazine companies managed to survive the arrival of radio and television.

When competition got too intense, different types of media companies merged. It was something that made perfect sense. Time Inc., CNN, HBO — all became Time Warner — and it was a good example of such cross-platform synergy. When they applied the same logic to Internet by buying AOL, it blew up in their face. You’ll see why.

Many of us confuse the media companies as creators of media and content. In reality, their barrier to entry was ownership of distribution platforms. Just as telecoms of the past maintained their near monopoly by controlling the last mile of the network, the media companies maintained their money machine by controlling the distribution network: trucks, radio waves and television frequencies. The arrival of cable loosened their grip, but not as much.

Then came the Internet, which meant the distribution network was no longer under control of a select few. This saw the rise of new media entities such as CNET (now owned by CBS, an old media company.) And just as the distribution network was accessible to all, new open-source tools such as WordPress (see disclosure) came to market, making it easy for anyone to become a publisher of their own newspaper. With that began the great unbundling of the media business: something which continues today.

In the past, a typical big city newspaper would have multiple components: national and international news, sports, entertainment, business, travel, food, and real estate. These segments would bring in readers, which in turn would get the much-needed advertising dollars.

Today, the real estate section of a newspaper has been replaced by Curbed, Zillow and RedFin — with real estate advertising dollars flying away from newspapers to these new services.

For sports, you don’t need the back page; after all, you have SBNation, DeadSpin and ESPN. For technology news, you have TechCrunch; for analysis, you have GigaOM. For food-related stuff, you visit Zagat, Yelp, Epicurious, FoodSpotting and Foursquare. When it comes to entertainment news, PopSugar, Gawker, and thousands of other sites will keep you as busy as you want. Classifieds are for Craigslist. The brand advertising has followed, decamping from the pages of newspapers and television screens to these new media entities. In a post last fall, I wrote:

Because these new media are attuned to the needs of a new kind of information consumer, it’s hardly a surprise that media’s single largest source of revenues — advertising dollars — are getting sliced and diced in pursuit of this elusive, always transforming, info-savvy media consumer. Unfortunately, the media is used to selling page views, impressions and massive audiences: metrics as archaic as drinking on the job and smoking in a doctor’s office.

On the flip side, the unbundled television experience providers continue to do well. YouTube and Hulu, which doesn’t reveal their sales are growing steadily. (Hulu has said that it is bringing in over $240 million a year, but had declined to comment on profits.) The growth in their audience — YouTube has 101 million monthly uniques and Hulu with 12.3 million monthly uniques — is a very rough proxy of audience’s preferences.

In 2005, the newspaper industry had revenue of around $47 billion. Today, it is half that amount. The radio and television industry have gone through the same compression. TV advertising declined 21.2 percent from $52 billion in 2008 to $41 billion in 2009, and fell a further 12 percent in 2010 according to the Yankee Group.

Today, no one cares if Rupert Murdoch’s Fox Network or the USA Network carries House. What matters is House. The show has been unbundled from the distribution network, which in turn has shifted the value to the show and the not the distribution platform.

As Joshua Auerbach of Betaworks had earlier pointed out:

Why doesn’t the traditional model work online? In short, the web is too fragmented (millions of videos, millions of web sites), too loosely coupled (countless hyperlinks, embed codes, APIs), and too nascent (too few revenue models, too little clarity about the future) to fit comfortably into a media conglomerate as they exist today.

The unbundling is also forcing a new kind of economics on the media industry. For the longest time, because the media companies controlled the distribution platforms, they could charge exorbitantly high rates for their advertising inventory. There was a lot less transparency in the system at that time, and arbitrary metrics like cost per 1000 impressions (CPM) became standard for the industry.

That CPM has become a millstone around the industry’s neck in this new Internet-centric environment, which has a lot more transparency (though not as much as we think there should be.) Today’s media industry, regardless of individual companies’ businesses, is a slave to page views and video views. Demand Media and the AOL of today are no different from the low-cost and flat-rate VoIP providers: selling cheap, search-optimized pages for nano-pennies.

And just as SMS, IM, Facebook and Twitter started to siphon away conversation minutes away from the traditional phone system, we are seeing something similar happen to the media industry as well. The chase for page views is going to face a whole different set of challenges from the likes of Facebook, Zynga, Netflix and Twitter. These services are siphoning off attention (and thus time) from what we have so far known as media.

Perhaps it is time for the media industry to come to terms with unbundling and re-imagine the definition of media. If it isn’t the medium, then what is it?

App of the Day: 100 Cameras and I

If you like Instagram, CameraBag and Hipstamatic, then you should definitely try out this 99-cent photo app created by Stuck in Customs. 100 Cameras and I gives you access to 100 different effects to add to your old or new photos. It can turn boring photos into elegant works of art, allowing you to pretend that you actually know how to take great pictures. It’s beautifully designed, and the filters are well thought out. I like that you can share photos via email or on different social networks including Facebook.

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Disclosure: Automattic, maker of WordPress.com, is backed by True Ventures, a venture capital firm that is an investor in the parent company of this blog, Giga Omni Media. I’m also a venture partner at True.

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