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The Future of Zombietown


 “Thanks to the condo kings there's cable now in Zombietown
-         Billy Joel Lyrics


May 8 2013 -- I am sure some people have very interesting lives, people like the President Barack Obama or Brad Pit. But for the working people in my neighborhood life looks a lot more like the opening sequence of the Simpson’s, where middle class America waits for the whistle to blow so they can rush home to watch the tube.

It is that huge middle American home audience that makes the pay-TV industry is one of the largest and most lucrative segments of the entire U.S. media ecosystem, but trouble is on the horizon.

Hardware developers such as Roku and Western Digital have had success selling new set top boxes, with content streamers including Netflix, Hulu, Amazon Prime and YouTube moving into the sector. Similar capabilities are in Samsung's newest smart TV and Blu-Ray players. They offer a cheaper, Web-based video service, bypassing conventional pay-TV suppliers.

In its latest earnings report, Netflix said 2 million U.S. customers and 1 million international customers had been added to its streaming service, for a total of more than 36 million streaming users. Meanwhile, research firm Nielsen reported that traditional TV ratings have been falling in the past 12 to 18 months.

The Game Changer
In February 2013 Netflix Changed the business model of streaming content by releasing “House of Cards”, a mini series only available to Netflix subscribers. Netflix are looking to the HBO model, where quality dramas like Game of Thrones and Sopranos air commercial-free, in their original form.

The difference is that, by making every episode available at once, streaming services like Netflix eliminate the need for viewers to make an appointment each week to watch, and then wait for the next episode the following week. Eliminating the wait is a potential game-changing play.

By offering exclusive content Netflix creates a great value add that differentiates there service from other would be entrants.

"The launch of 'House of Cards' provided a halo effect on our entire service," Netflix Chief Executive Officer Reed Hastings and Chief Financial Officer David Wells said in a letter to shareholders. Hastings, in an interview, said "House of Cards" provided a "very modest, positive impact" on subscriber growth in the first quarter, and its value would increase with future seasons.

That is really some Halo -- with staggering prior losses and near record short interest - Netflix has the amazing PE ratio of over 500! The reason is simple, investors are paying for the "future" growth of technology and business model lead Netflix has. 

We've Seen this Movie Before
The Columbia Pictures empire and Tri-Star pictures were sold on in the fall of 1989 to electronics giant Sony for the amount of $3.4 billion. Many felt that the merger was a bad idea and that Sony paid too much for the acquisition. The goal for Sony was to move out of low margin electronics and into controlling the content. Sony, hurting and bitter from the defeat of its Betamax video recording system to the technologically inferior VHS system, began looking for other ways to ensure its future technologies would find widespread adoption in the media industries. Sony’s management came to believe that proprietary media, made through Columbia, would ensure industry standards for future generations of digital video technology.

HBO began as the dream of Long Island entrepreneur Charles Dolan. In the summer of 1971, as he cruised
to France on the Queen Elizabeth II, he came up with the idea of a pay-cable channel. At the time, those major networks – CBS, ABC and NBC – accounted for 97 per cent of all television watched in the US. Dolan thought there might be a way of creating a subscription channel that people would actually pay to watch. If he attracted enough subscribers, he wouldn't need to battle it out with the network behemoths for advertising revenue. He concluded that uncensored, uninterrupted films would provide the biggest attraction for viewers.

Dorland, a loud, garrulous figure (he was once described by Esquire magazine as 'the man who ate Hollywood') wanted his channel to be more than just the home of other people's content. He envisaged HBO as a brand; not just an alternative to network television but a form of entertainment that was too cool to be without.

The Web Will be Everywhere
This could spell trouble for cable TV, yes they control the high speed internet   access for most, but perhaps not or long. In the coming age of the web cloud, Internet data will be ubiquitous. Free Wi-fi is common in hotels, coffee shops, malls, airports and most homes. Plans are in place for Wi-fi in the clouds on
commercial airlines, But more is coming some wired cities like Victoria BC the internet is available all over town for free. It's part of a growing movement in cities worldwide to provide free Wi-Fi to residents and tourists. In Canada, Fredericton pioneered free Wi-Fi, setting it up almost 10 years ago. There, it is viewed as part of the municipal infrastructure. Even if you can’t get wifi, new 4G plans are offering unlimited data under $10 per month.  It is entirely possible that the web will evolve into a kind of massive “ public drinking fountain” with state sponsored micro-cells offering seamless connectivity to your phone, tablet and car. Clearly there is no guarantee for cable companies, or any ISP that they even have a future.

Set top boxes are not needed either, not only can you play the Netflix app on your computer, media players (like roku) but they are also built right into some smart TVs. I often watch web content on my TV through my iPad that has a TV dock. The lines between what is a phone, a computer, a tablet and a TV are blurring.     


Streaming may one day help people finally cut the cable completely. Many people I talk to have trouble understanding this concept, because they have been on cable so long they forgot this. TV “broadcasters” are called that because they do also transmit their signals in major metropolitan markets for free. Just like your local FM radio, your local TV can come over an antenna just like it did in the 1950s. Yup you can by a high def antenna and put it on the side of your house, run a wire to your modern flat screen TV and get 5 – 10 local channels for free and often in a higher definition signal than cable offers.  For details click here

What I am say here is that the business of delivering signals could be gone, and all the matters is the content. People have started to cut the cable. That is good for Paramount, not so good for Comcast.

Netflix Was First
Management at Netflix see why Sony and HBO saw content as key. Netflix has shown that not only is the future about streaming data it is also about differentiation through original content. Anyone can stream, but can you show me something special. That strategy of in house production takes deep pockets, but there are many new players who understand this too. HBO itself has a digital streaming strategy called HBO Go. Of course there are a few 10-ton gorillas in the wings planning their own strategy. Apple has started very modestly with Apple TV, but they have over 137 billion in the Bank, Goggle has well over $50 billion in cash reserves and of course owns YouTube. The YouTube videos have always been free to viewers and layered with advertising, but the company is experimenting with a paywall-like plan that would allow some content providers to offer their libraries for a monthly fee. Microsoft has over $60 billion in cash and Bill Gates was talking of this idea back in 1995 it was called WebTV and it could be time for a come back  Of course the company that understands data as entertainment the most is Amazon there first trial is called Amazon Prime Instant Video. Also the big three broadcast networks, the major Hollywood studios, cable TV companies and even firms like Richard Branson’s Virgin Group will want to be part of the multi-billion dollar party.

One of Many Apple Data Centers
Both Amazon and Apple have built massive data centers in multiple locations, which have far too much capacity for their current offerings.  Look at that photograph -- that is one of two twin Apple data centers in North Carolina. That massive building is 338,000 sq feet -- full of “blade servers”. There might be over one million servers in there. There are more centers in places like Reno NV too.  Obviously video requires big data centers and the investment would make perfect sense if that were their ambition.

There was once a product called Lotus 123, it dominated the spreadsheet market, until Microsoft crushed it with Excel. So Netflix is the visionary with a clear lead. However, this is a very important market and this eventually could be a case of  "It is the second mouse that gets the cheese". 

We Are Going to Entertain Your Butts Off
Big budget Sports like the NFL, MBL and NHL  will not sit back and just wait for ESPN to act, expect content to be flowing from all sorts of sources. Dying print media companies have already started streaming highly focused video media from brand names like the New York Times, National Geographic and the BBC World Service.  Bloomberg and CNBC are well along in streaming media to financial community. Even the hard of thinking can view UFC on a streaming ap. New independent online only TV stations are popping up filling niche markets from Survivalist tips to golf.  

But the real blow your socks off change will come when these tech firms go to war -- like the battle we saw in cell phone technology. There is going to be more video content produced in the next 10 years than in all history. I predict a flood of high production value, quality programming, like we have never scene before. Imagine Apple producing 250 mega budget motion pictures a year. They could afford for each production to have a $250 million plus production budget. Then envision the same production volume flowing out of any combination of the 10 of the above-mentioned potential players. My god I need to buy some stock in Con Agra Foods* (yes, they own Orville Redenbacher)  





* ticker CAG on the NYSE

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