Thursday, September 08, 2005


SiliconBeat: On Vint Cerf, Google, dark fiber and video

GOOGLE IPTV. I know, Google calls the service I have downloaded the Google viewer and watched a few short clips. The potential is huge; virtually unlimited video available on demand.

The linked SiliconBeat article helps the reader appreciate why Google is raising $4 Billion more cash. It is not just VZ, SBC and BLS who are spending billions installing high speed cable. The key revelation in the article is that by owning its own fibre network, Google expects to deliver high speed video to the home for next to nothing. The costs will be so low that Google will serve up full length TV shows and movies to the consumer for "free". Certainly, there will be a charge for the recent movies, hot shows and popular sports content, as dictated by the content providers. However, most content will be provided in exchange for a share of advertising revenue. Would you like to stop paying your cable TV bill and your ISP bill and your phone bill? If you missed your favorite game or show, would you like to see it at your first convenient time? Would you like to watch the news after dinner?

The concept of the long distribution tail is a part of what makes this work. There are literally millions and millions of hours of video available that thousands and thousands of people would like to watch at a convenient time. Only recently has it been true that more time is spent watching non-network TV than network shows. The big audiences watch the popular shows but all the little audiences add up to more hours watched. After Google and Yahoo make millions of hours of other content available, the number of hours spent watching the major network shows will decline dramatically in relation to total viewing; no wonder Viacom is upset with Google.

Content owners would be foolish not to allow Google to serve up video. Content owners will receive advertising revenues off shows that have been canned. In an earlier blog, I used the example of William Boyd. His family owns the entire collection of Hop-a-Long Cassidy. I would love to watch these old westerns again. If Google makes them available and distributes them for a small share of the advertising revenue, why shouldn't the Boyd family be willing to share?

Much more variety will be available. Cooks will have innumerable cooking shows to watch when they like. Sports fanatics will be in hog heaven.

In a few accounts, I have sold NFLX and TIVO. NFLX at more than 100% long-term profit and TIVO at about a 20% short-term loss. If Google is building a high speed video serving network and if INTC is making media computers that will do all the TIVO functions, it is hard to see how TIVO can compete. TIVO could eventually be purchased by Comcast to make a rival network. However, consumers have shown an affinity for Google search. If one can search Google to find a wide variety of shows and play them on demand, does one need a TIVO box? Google understands Moor's law; the cost of storing and distributing digital content is dropping like a stone. Within two or three years, Google will be able to store millions of hours of content and serve it up for one or two cents per hour!

Content is important. Perhaps Yahoo has enough deals in place to make a lot of content exclusive. However, it seems that most producers would want the widest distribution possible. Most providers will offer several choices. For example, ESPN might offer many events for advertising revenues only. It might offer other events at a monthly subscription rate or on a pay per view basis and it might offer special events on a pay per view basis only. We have seen satellite radio companies pay big for the exclusive rights to NASCAR, Baseball, Howard Stern and others. One could argue that similar TV deals already exist and will be continued. However, there is a major difference with the Google model; it will be easy to charge per show and still pick up advertising dollars. The question becomes how will the providers maximize their revenues? Even if NFL football renews a particular deal with ABC, would the NFL not want to allow re-run viewing for additional revenue? Viewers will vote with their mouse (remote control). It seems entirely possible that Google will offer high speed internet, phone, internet TV, web hosting, email, news and more for "free". Can you see yourself ordering a product or a service with just one click of your remote control?

Lamar Jones, CPA, Registered Investment Advisor and good friend, is concerned that folks might resist allowing Google to learn every detail of our lives. Google has shown sensitivity to this concern and allows folks to "hide". On the other hand, it is the consumer who benefits.

I want Google to learn what I like to watch, read, listen to and buy. I want Google to know my favorite actors, my music taste and the products I buy. I want to be able to hit a button to pause my show, hit another to order a pizza and hit another to resume watching. I will not object if when I get ready to click the button for a Papa John's Pizza if the TV screen shows a extra special offer available from Dominos. I do not mind viewing advertisements about things I am considering for purchase. I love to watch classic movies but I hate to spend three hours watching a movie that has been cut to one hour and 30 minutes with the last hour being composed of 20 minutes of show and 40 minutes of ads. I am very used to watching Bloomberg or CNBC while reading the text during the show. Advertising does not have to be obtrusive to be effective.

The word is getting out that Google is going to be much, much more than a search engine. Seventeen more companies have signed on to the secondary offering syndicate. Google will have no problem raising $4 Billion dollars. The stock has moved up several percentage points in the past few days. Viacom, News Corp, Disney and others are not going to roll over and play dead. This market is competitive. It is also huge. Analyst who have questioned how big Google revenues can get have probably not factored in a significant portion of TV advertising revenues.

The US economy has entered the "growth boom phase". This is the phase after the economic recovery that is also called the expansion phase. Inflation and interest rates tend to rise during this phase. In this particular cycle, I expect inflation to be relatively moderate for several reasons. One of them is because the convergence of services will put many providers up against significant competition. Another very important reason is the millions and millions of valuable, relevant, timely, contextual advertisements that will be delivered.

For many a year, marketing 101 has included a standard debate as to whether advertising raises or lowers the price of goods and services. My answer is unequivocal. On average, advertising lowers prices. If any business engages in a poorly structured advertising campaign such that his margin costs exceed his marginal revenues, he is going to pay for the mistake. Advertising is designed to increase total sales and advertising needs to be suspended when its cost is greater than its benefit. Google performs an incredible service for the buyer and the seller by increasing the efficiency of the advertising. The consumer can buy the best product at the best price only by knowing the deal is available. The producer can lower price and increase sales by only paying for effective advertisements.

The expansion phase is typically a time for the strong; only the strong survive. The expansion phase is the time time to invest in BIG CAP GROWTH STOCKS. Note that rather than push toward an IPO, Skype has shopped for a "Big Daddy Warbucks" takeover. Enough people were burned in the previous hot IPO market that companies simply cannot command the high premiums of the past. This is one of the reasons that earnings continue to surprise on the upside. Existing companies are generating excess cash and many are using part of this cash to buy back shares. It is going to be interesting to see if Vonage can fetch big bucks at a time when the majors are jumping into its business.

I will read as much as I can to get a better handle on the Google time table. I suppose, each time Google adds a high speed route to its network, it is able to lower its transmission cost. When Google adds a line, it will carry its own traffic plus the overloads of other providers. Each time Google carries this overload traffic, it will in effect earn a credit toward payments to others. The situation is a bit like a country that allows private toll roads to be built and the bigger trucking companies decide to build their own private roads.

Other providers (most do not own any toll roads) are building their video networks around a projected cost of about 10 cents per video hour served. Google is building based on about a 1 or 2 cent per video hour served. The small player will not be able to compete with Google on price. Google has been paying the current higher costs but of course search and email have not used nearly the bandwidth required by Google Talk and Google Video. I don't know the numbers but I'm sure 100,000 emails would costs less to send than one full length movie. AS Google builds out the network, it will immediately enjoy the savings on current activities.

Google is the General Motors of 1922 to 1929; AOL is the Ford Motor of 1914; ABC could turn out to be the Nissan Wagon Works of 1912. Actually, I believe the networks will adapt and survive. However, the number of people who will sit down at exactly 6:30 to watch the evening news including 12 minutes of 30 in non-relevant advertising is about to see a dramatic decline.

IMPORTANT NOTE: YHOO and GOOG are going after this market extremely hard but each with their own approach. I am a Google nut but my family also owns YHOO . Comcast has been the top cable TV company. However, the value of any particular city franchise seems to have eroded. Philadelphia, Chicago, Corpus Cristy and many other cities offer or plan to offer city wide broadband connections. These will enhance the value of Google search but will devastate the value of the local cable franchise. In cities where SBC, VZ or others begin to offer IPTV, the value of cable franchises will be diminished. Cable companies will be able to discontinue the payment to the cities for the franchise but the loss of revenues should exceed the savings by a wide margin. Comcast and TWX own much programming and content. These assets may be enhanced in value. On the other hand, if all the high school football games in the entire country were televised, even on a delayed telecast, how many total hours of viewing might be switched from a TWX movie or show to the local game of the week? My attitude is to avoid the major phone and cable companies.