Global Trend

Convergence Scrambles the Media Status Quo

Despite all the hype of “media convergence” since the late 1990s, until recently the reality has fallen short. Convergence was supposed to bring all of the digital technologies together. Because of this vision, billions of dollars were lost on bad business decisions.

During the frenzied days of the Internet boom, venture capitalists seeded startups that mentioned the magic word, “convergence” despite the fact that their business plans couldn’t explain how the business would turn a profit.

In January 2000, AOL and Time Warner announced a $165 billion merger, claiming that the combined company would emerge as the first dynasty built on convergence. According to the plan, consumers would watch AOL content on their televisions, and they would view content from CNN, HBO, and Time magazine on the Internet. But the deal was a disaster, and the combined company’s stock lost 70 percent of its value over the next 30 months, leading to a $2.4 billion shareholder settlement.

Once the hype settled down, convergence became a subject for ridicule, as all the wires from PCs, TVs, and stereos continued to sprawl in different directions.

But now, as The New York Times1 reports, those premature visions of convergence are finally starting to become a reality. Today, people watch videos on their cell phones. They listen to music on their laptops. And they download TV programs and view them on their iPods.

What has changed since 2000 that suddenly makes convergence possible? The driving force behind this trend is the rapid adoption of high-speed Internet connections.

According to a study by the Pew Internet & American Life Project,2 39 percent of American adults in urban and suburban areas now go on-line at home with high-speed Internet connections. And even in rural areas, 24 percent of adults are using fast Internet connections. With faster connections, it’s possible to download large digital files, such as movies, television programs, and songs, in minutes rather than hours.

At the same time, the Consumer Electronics Association predicts that Americans are accelerating their adoption of the electronic devices behind convergence. For example:

- Sales of MP3 players will reach $4.5 billion in 2006, after a 200 percent gain in 2005, and nearly one in three MP3 players will allow users to play videos.
- Wireless phone sales, which grew to 104 million units in 2005 and sales of $13.5 billion, will surpass $16 billion this year.
- Digital television sales will increase to 18 million units this year, and 85 percent of them will be high-definition TVs.

At the most basic level, all entertainment content ? from movies to songs to photos to TV shows ? can be reduced to digital bits. With fast Internet connections and wireless Bluetooth connections between devices, the lines between media are rapidly blurring.

Consider that the most popular paid download on iTunes during the first week of 2006 wasn’t a popular song. It was a file of ESPN’s video highlights of the Rose Bowl.

Or this: Seventy percent of visitors to ESPN.com watch at least one video clip on the Web site each month. Only a year ago, just 20 percent of visitors did so.

We’ve been tracking the evidence of convergence as it comes in from a variety of sources. Here is an overview of six developments you can expect to see:

First, cable TV content providers will increasingly post their programs on the Internet, where the potential for profits is less limited. For example, according to BusinessWeek,3 MTV, which already pioneered the convergence of music with video in its cable network, is now looking to bring music videos to the Internet. MTV’s on-line revenue today is $150 million, but the company expects revenues to more than triple to $500 million by 2009. Michael J. Wolf, MTV’s president, sizes up the opportunity this way: “The Internet is no longer about text. It’s about video. We produce and own more video than anybody.”

Second, as users become more comfortable with viewing TV shows on their iPods, programmers will create original content for them. Production companies will develop shows specifically for viewing on miniature screens. Plus, although the networks are making only a few of their current programs available for downloading, we expect media companies to place their entire archives of television programs for sale on iTunes and other sites.

Third, expect brutal competition from Internet powerhouses as they fight to control the market for on-line television viewing. According to the Entertainment Marketing Letter,4 Internet search engine Google plans to sell television shows on-line, starting with programs from CBS and basketball games from the NBA. Yahoo has hired the former head of programming at ABC-TV, Lloyd Braun, to oversee new television projects on its Web site.

Fourth, now that high-speed wireless connections are approaching critical mass, the long-envisioned potential for viewing movies on the Internet is finally becoming a reality. Although a pay-per-view business model seems to be the most viable, one of the first offerings will be Vongo, a broadband subscription service from Liberty Media’s Starz Entertainment Group, which will enable people to watch movies on their computers by signing up for less than $10 a month.

Fifth, within the next two years, the majority of consumers will be able to transfer all of their media content smoothly and seamlessly between their various devices. Some of the moves we’ll see in the coming months from major players in the computer, electronics, and Internet industries provide glimpses of the future. For instance, later this year Microsoft will launch Vista, its new PC operating system. Vista will include Microsoft’s Media Center, which lets people use their TVs to play the videos and other entertainment files that are stored on their PCs. Intel is rolling out Viiv PC technology for the Media Center platform to connect PCs, laptops, TVs, stereos, and video equipment so the content can be sent from one device to another. Hewlett-Packard’s new television sets will let users play videos and music stored on their PCs, or use their TVs to go on-line. And Yahoo is introducing Yahoo Go, which lets users access the personalized features on its Web site, such as their photos, from TVs and cell phones.

Sixth, despite the convergence of technologies, the viewing audience is diverging. The mass media is vanishing and is rapidly being replaced by the “me media.” The central roles of the TV network, the record company, the newspaper or magazine publisher, and the movie studio are dwindling in importance with every passing day. Anyone today can easily publish or broadcast any information. For example, blogs give each individual a forum to create new content or combine existing photos, video clips, and text into new ones. According to Technorati,5 a site that monitors blogs, it is currently tracking 30 million sites and 2.1 billion links, and another 70,000 new blogs are started each day. A Pew Internet study estimates that 50 million Internet users read blogs regularly. The challenge for marketers is to find powerful new ways to reach consumers with their advertising messages in this environment; it’s likely that the most effective techniques will be the ones we outlined in Trend #1 this month.

References List:
1. The New York Times, January 25, 2006, “Convergence,” by Saul Hansell. ⓒ Copyright 2006 by The New York Times Company. All rights reserved. 2. To access the Pew Internet & American Life Project research on home broadband users, visit their website at:www.pewinternet.org/pdfs/PIP_News.and.broadband.pdf 3. BusinessWeek, February 20, 2006, “Can MTV Stay Cool?” by Tom Lowry. ⓒ Copyright 2006 by The McGraw-Hill Companies. All rights reserved. 4. Entertainment Marketing Letter, January 15, 2006, “The New Convergence.” ⓒ Copyright 2006 by EPM Communications. All rights reserved. 5. To find out more about Technorati, visit their website at:www.technorati.com