HBO Go or No Go?

HBO’s announcement about launching a streaming only version of their popular service has been received with great joy and serious apprehension depending on which side of the fence you sit. For many years now consumers, specifically people who have cut the cable cord (cord cutters) have been clamoring for services like HBO and ESPN to go rogue. Cord cutters have said that they are willing to pay a monthly fee for these premium services if they were stand-alone and not part of a cable bundle; one that includes hundreds of channels nobody wants to watch. So for cord cutters and consumers like me, who currently live in both worlds, this is a big win and giant step in the right direction towards a la carte programming.

However, on the other side of the fence sit the cable and broadband companies who have balked at HBO’s move because it will disrupt their lucrative and outdated business models and threaten the uncomfortable status quo. Incidentally, the business model the cable companies are trying to protect is akin to going to a restaurant and being told that in order to eat your favourite desert you will have to order, and pay for, all the deserts on the menu – I doubt you would be eating there again! Comcast’s CEO recently publicly rebuked the HBO announcement; “Mr. Burke warned that, whatever HBO’s intentions, ‘it’s going to be a challenge for them to not cannibalize what is already a really, really good business’.” (Source: Wall Street Journal). It is worth noting that if Comcast’s proposed merger with Time Warner Cable gets approved by regulators, they would control 70% of the broadband market; and interestingly HBO will need to rely on broadband providers like them for the high speeds and massive bandwidths they will need for this gamble to succeed.

The reality is that when most established and entrenched companies make proclamations about changing their business model or radically disrupting the status quo, it is often a knee-jerk reaction to competitive pressures and therefore rarely ever thought through. Take for example CBS’s announcement, on the heels of HBO’s, about launching their own streaming service for $5.99 per month. CBS like other broadcast networks is free-to-air. This means that unlike cable channels all you need is to buy is an over-the-air-antenna and plug it into your TV and you can watch all the networks, as well as numerous local channels and public broadcasting stations like PBS; all in HD and all for free (Source: Lifehacker).

CBS also makes a lot of money by negotiating hefty “re-transmission” fees from cable providers, which form part of our monthly monster cable bills. So the first question is why would the cable companies continue to pay these hefty fees when CBS is making the same content available through other means? Additionally, from a customer standpoint, live sports like NFL games are not included in the streaming service. Let’s face it, CBS hardly has a reputation for stellar and premium content that people are willing to pay extra for; not sure many people are doing high fives about the fact that “Two Broke Girls” will be available to watch via streaming. Also, if I want to watch the first six seasons of the Good Wife, I can do this for free as an Amazon Prime member, or see them on HuluPlus under my current subscription (where I can watch many other shows), or simply download 2 seasons at a time from iTunes for roughly $65-$70; which is still cheaper than paying for one year of CBS’s ‘All Access’ streaming service  — you do the math.

HBO on the other hand is not like a CBS (other than the misfortune of having Time Warner as it’s parent company). It has always been an entrepreneurial company with innovation as part of its core DNA. It single-handedly changed the television industry; lifting the quality of content and thus saving us all from a TV-hell filled with nothing but the Kardashians. However, the quality of content that forged HBO’s brand reputation also forced the rest of the industry to raise its game, and many have followed-suit by creating their own original and award winning programming. AMC has had huge ratings and critical success with “Mad Men”, “Breaking Bad” and “Walking Dead,” while Showtime has given us “Dexter”, “Nurse Jackie” and “Weeds”. Even Netflix has gotten into the content game with “House of Card” and is now stepping fearlessly into the feature film business with a recent four movie deal with Adam Sandler (Read my take here: “Netflix, Data, Drunkard’s and Adam Sandler”).

So unlike CBS, I believe HBO is doing this for the right reasons and more likely to think it through and get it right, now that they have woken up to and accepted the new consumer realities. This I suspect also led to their decision to go ahead and piss on their powerful cable partners whom they did not care to inform ahead of making their announcement.

HBO knows that they can no longer distinguish themselves on quality of content alone. As a result they would be competing (with the likes of Netflix) with one hand tied behind their back as long they are relegated to being stuck as part of the traditional cable bundle.

Second, they have read and accepted the tea leaves on the changing pattern of television consumption. Online video has been growing for some years but the acceleration has been marked in the last year. An Adobe study shows that for the first time online video viewing habits are going mainstream and no longer relegated to tech savvy early adopters and cord cutters; “Researchers tracked 165 online video views and 1.53 billion logins over a year, and they found that total TV viewing over the internet grew by 388 percent in mid-2014 compared to the same time a year earlier — a near-quintupling.” (Source: Wired Magazine). This means that even people who have regular cable subscriptions are choosing to watch more of their TV and movies online via internet connected devices.

Most importantly, HBO is clearly paying attention to their customers changing viewing habits that have decimated the old Nielsen TV rating system. People no longer want to watch shows based on a Fixed Point Chart (industry jargon for the TV schedule published by a channel). Instead, they prefer to watch it a few days later or simply binge watch an entire show or season during a weekend or long haul flight.

While I do not have a crystal ball and cannot predict the success of HBO’s standalone service, I do know a couple of things. It is certain that they, like Netflix, will face tremendous opposition and hurdles from movie studios, cable operators and broadband providers; all interested in preserving their lucrative status quo. However, HBO will also have the wind in their sales based on the fact that customers are demanding a breakdown of the straight-jacketed cable model and getting more used to consuming content in an a la carte, anytime, anywhere, pay as you watch model.

My money is always on companies that try to deliver on their customers’ needs and focus on making life easier for them, rather than try to force customers down a path driven by the company’s myopic goals and bottom-line greed.

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The Trouble with Monetizing Facebook

Aside from the fact that the CEO is a very young man who wears a hoody, I believe there are few other fundamental impediments to Facebook’s future success based on the very reasons that have made it so popular.

Think about what Facebook is at its most basic – a self-aggrandizement platform that is entirely built around feeding our obsession with me, me and me. From status updates about myself, to wall posts about things I like, to the latest gossip I want to share – it is nothing more than a one-way megaphone to the world; a modern day digital soap box for the one billion people who now use it.

I believe this has in large part been the reason for Facebook’s astounding success; it feeds into our most basic human desire to have our voice heard, in a completely unadulterated manner. Often while never having to listen or pay attention to other opinions. It is the modern day equivalent of “I post therefore I am,” as Descartes might have put it. It is as if the act of posting today guarantees the existence of self, for this socially driven over-sharing generation that has never known the world without the internet and Facebook.

Arguably, we are all better at talking than listening. We humans have always yearned to be heard, preferably without anyone offering an opposing argument or opinion. Well, there is no better place or platform to fulfill this need, than Facebook. However, this does not exactly make Facebook a great platform to get my attention as a marketer, or to try to sell me stuff when you think about it in this way. So it is not surprising to me that among the hundreds of people I know, who use Facebook regularly, not one person who has ever clicked on (other than accidentally) or bought something after seeing an advertisement on Facebook.

The other fundamental issue with Facebook and the notion of social commerce that it is trying to tap into is that people don’t buy simply based on what they see their friends or family buying. Also, not everyone wants to broadcast their every purchase, publicly. We may go see a movie that has been recommended by a good friend or perhaps have our interest piqued about one being discussed on Facebook but I know that I will never buy an i-Pad or a new car just because one (or many) of my friends bought one and advertised it on Facebook. Not to mention the fact that it would become incredibly tedious (and sometimes embarrassing) to see a continuous list of purchases made by my friend list – find me one person who enjoys seeing each and EVERY song being played by their friends…

The fact that Facebook has always been free for users also poses a challenge when it comes to monetizing any of their features or services. The New York Times is struggling to gain paid subscribers after being free for so many years. Once you set such a basic expectation with people it will be viewed as a betrayal to try and charge for something they have come to consider a right. Facebook just started to offer the ability to pay to “promote” posts, this after a failed experiment in New Zealand, where they tried charging people a nominal fee to ensure that their friends could see what they wrote on their wall posts. Not surprisingly the pay per post experiment was a complete disaster because of the transient and self-obsessed nature of the information posted on Facebook; in my estimation. Not only is it societally worthless but certainly not valuable enough to people posting it, to pay to have it seen.  Think about how many of your status updates and posts on Facebook you think are worth paying to share with your friends?

The final part of Facebook’s problem boils down to behavior and human programming. Think about how we function in our daily lives; from brushing our teeth to the brand of toothpaste we are loyal to. The rituals and routines we develop happen over time and are formed due to comfort, familiarity and a level of trust that, over time, leads to an automatic-ease and unconscious behavior.  I go to Google to search, to Amazon to buy stuff, to a news site for the latest news – why do you go to Facebook?

Facebook: Not $$$ocial Enough?

Earlier this week General Motors decided to stop advertising on Facebook. GM made this announcement “after deciding that paid ads on the site have little impact on consumers’ car purchases” according to the Wall Street Journal (“GM Says Facebook Ads Don’t Pay Off”). Albeit, the total amount, $10 million, is but a tiny fraction of Facebook’s whopping $3.15 billion in reported 2011 ad revenues, the timing was not great. It was less than one week before Facebook’s much vaunted IPO.

So while the revenue loss is paltry, there are two larger concerns for Facebook. One, GM is the third largest advertiser in the US and their announcement might lead other advertisers to re-evaluate their advertising spend on Facebook. The second more worrying thing is that it is a major blow for a young company trying to convince the world that “social advertising” is not only effective but provides Return on Investment (ROI). In the short-term the impact may not be that great simply because Facebook is about to reach 1 billion active users (approximately 14% of the world’s population); and this number alone is hard for most advertisers to ignore. But as a public company, with shareholders, they will soon need to prove that they are worth their high valuation, in revenue terms.

Every company feels compelled to have a social advertising budget, even though there is scant evidence that these dollars generate any sales, or return on investment. The advertising and social marketing industry will have you believe they are effective sales drivers but the reality is that there are few independent studies or evidence to support this hypothesis. If you think about the number of times you have clicked on a Facebook ad or decided to make a purchase based on seeing someone’s status update (or wall post), you will likely reach the same conclusion. Facebook’s ad revenue actually fell in the first quarter of 2012 from the fourth quarter of 2011.

Here is something to ponder about Facebook’s current IPO valuation. According to Anant Sundaram (of Tuck School of Business at Dartmouth) the average price to earnings ratio for the majority of US companies, over the last one hundred years, has been around 15. Apple is at 15 and Google is apparently a little bit higher. However, Facebook’s price-to-earnings ratio is 100.

He goes on to say that “at current levels, it would take Facebook 100 years to generate enough profits to pay for itself. That number is so high because investors are betting Facebook’s profits are going to explode. Sundaram says, judging from this price these investors seem to believe that the company’s profits will double, and then double again, and then double again — all within the next few years. For that to happen, Facebook will need to attract 10 percent of all advertising dollars spent on the planet “across all media – print, billboards, radio, television, Internet.”  To put this in perspective he adds that “Facebook had just over $3 billion in global ad sales. TV ad sales in the U.S. alone last year were $68 billion.” (NPR: “Is Facebook Worth $100 Billion?”).

Facebook recently tried a new revenue generation experiment in New Zealand by charging people two New Zealand dollars (US$1.53) a post to ensure that their own friends see what they write (Wall Street Journal: “Facebook Gets Religion for Revenue”). Are your status updates and posts on Facebook valuable enough to start paying to share it with your friends? I know mine are not and never will be.

Let’s just say I am holding off buying Facebook shares because I don’t believe they have a real revenue model, yet. That is not say that they will not find a Google like search cash cow but let’s just say ad banners on the site are not the Holy Grail that Mark Zuckerberg wants us to believe.