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The rush towards video over the internet is on. Microsoft promises that by the end of the year, its Xbox will become a platform for internet television. Google is hiring internet television software engineers. Even the telecommunications stalwart, AT&T, is updating its network to deliver video to its phone customers. While still in its infancy, internet television appears to be the dominant technology story of the next decade.
Like most exciting technology stories it will be full of disruption, new competition and bad decisions as the established business models for films and television are upended. The story is familiar. Just over a decade ago, the telecoms industry underwent its own revolution as deregulation, technology and competition overturned the prevailing business model. The parallels are instructive. In both telecoms and entertainment, a monopoly system that existed for the better part of a century has collapsed. In both instances, the rise of consumer power and choice is replacing centralised systems. And as with telecoms, the transformation of video entertainment depends on rethinking the network technology that brings communication to the home.
Until internet television, Hollywood never faced genuine competition. The enduring success of the leading entertainment companies has been largely due to their stranglehold on distribution. Without access to thousands of screens, few outsiders stood a chance. The emergence of DVD technology did little to loosen this grip on distribution. Video readily downloaded over the internet has cracked the cartel. The death of the Hollywood distribution model could be vividly seen when, a year ago, DreamWorks, once the most talked-about Hollywood studio, was quietly sold for $1.6bn. Within a few months, that same $1.6bn is what it cost Google to buy YouTube.
Whether Google paid too much or too little is beside the point. What matters is that the tightly controlled, top-down distribution business for films and television has been displaced by a more open, bottom-up system. Last Christmas, high-definition digital video cameras were available for less than $1,000, in effect making high-quality video production another commodity. Today there is much talk about prime-time television over the internet. How long will it be before entertainment that starts on the internet is bought by ABC or its competitors? The fragmented nature of the internet makes it unlikely that the big-budget blockbuster will disappear altogether. But it will face competition from the surging catalogue of material available on the web.
The rise of internet television will unleash a new wave of consumer power. The Hollywood entertainment model has always relied on centralised technology. TV Guide has been emblematic of the system, informing viewers of what content is available and when they must watch it. An internet television business, by contrast, must be built around pull technology. Search, not schedule, will be the organising principle of the new era of entertainment. Building systems around the whims of the customer will be the test for successful entertainment companies. The old phone companies took years to learn this. They watched their system disappear as cheap long-distance calls, mobile phones, customised pricing packages and then Skype enabled customers to design and manage their own communications systems.
Then there is the need to upgrade the network so that it can handle the surge of video traffic. This is less daunting than it sounds. Thirty years ago, no one doubted that AT&T owned the finest telecoms network. But it was designed around voice, not data. In a few short years it was almost completely rebuilt to transport data, largely by upstart competitors.
To move video over the internet, the network has to be reconfigured again. But this time it requires not full-scale construction, but rethinking the components that lie between the existing fibre in the ground and the customer. So while many analysts are focusing on the next YouTube or MySpace, much of the action is happening deeper down, in the plumbing of the network. Here, hundreds of small, unheard-of companies are working on routing, peering, storage, distribution and content-enabling – the blocking and tackling of the video over the internet revolution. The likely result, a few years hence, will not only be more video entertainment streaming over the internet. We shall also experience it in different ways. The creative tools that make the best interactive websites so compelling will increasingly be part of how we watch what we know as films and television.
Making this possible requires blowing up many of the orthodoxies that have long governed the entertainment industry. In the 1990s the telecoms industry went through similar tumult, with most of the telecoms incumbents resisting change at every turn. The test for today’s media incumbents is whether they have absorbed those lessons and are willing to use the technology of internet television to help cannibalise their long-standing businesses.
• Do you agree with the points raised in this article? David McCourt will answer your questions on the challenge that online video poses to Hollywood’s business model in a live online debate this Friday from 1.30pm BST (8.30am EDT). Post a question now
The writer is chairman and chief executive of Granahan McCourt Capital, a private investment firm focused on telecoms and media. He is an Emmy Award-winning producer and chairman and CEO of Narrowstep, a London-based internet television company