DrunkenBlog

The Content Squeeze

Every once in awhile, I'm just bored with what the hot topic de jour is at the moment. Judging by my inbox, and my constantly seeing it recycled via my feeds, right now the big buzz is about the rumored upcoming Apple Movie Store.

If you're fairly new to the site, you may be scratching your heads as it isn't as though I talk about the iPod all the time.

However, every once in awhile I do come down from the mountain carrying stone tablets, and I'd have to imagine that's why my inbox is a "Mac Movie Store and TiVO" clearing house right now. Almost a year ago to the day, I wrote C.K., and its Redux, which was an attempt to be a lazy kick in the head to a bunch of editorials and such I was seeing at the time.

It's hard to go back in the wayback machine and remember what was going on at the time, but it was all about Real Networks and their Harmony service, Apple opening their DRM, and the mythical iPod phone. Most of what was being said was so out of the bounds of reality, which can be confirmed that none of it has really been borne out.

Almost nothing has changed in my thinking since then, which is why I get bored with the iPod so easily, as everything I hear gets filtered through:

• Does it change the equation?

• Does it affirm the equation?

• Is it just more of the same until the end-sum of the equation?

If we skip back to the iTunes Music Store, the only real credible variable that's made my radar has been the addition of satellite radio to the mix, and podcasts, so we'll knock out Satellite Radio, Podcasts and the iTunes Movie Store in one swoop which will hopefully do us for another year...

Judging by what my friends are buying, satellite radio is probably going to extract its pound of flesh from services like the iTunes Music Store at some point, and if you see them move towards offering an additional subscription service it probably won't be because of Real, it'll be because numbers like the 300-400k+ people per month that are buying the receiver hardware and signing up to pay a subscription fee from Sirius or XM Satellite Radio.

If you haven't seen these things, they're a little receiver about the size of an iPod where you pay $x per month and have access to a gazillion channels of targeted content. Just about anything you're interested in, from talk to techno to grunge to top-40 to weather to a Frank Sinatra channel... all the time. There are something like 30 channels devoted to sports alone, which is a big deal. And yeah, it's pretty cool to turn on the radio and hear Sam Kinneson screaming.

You can drop that receiver into your car, or your home, or your work. About the only bummer is that well, the receiver has to able to um, receive. You have a little antenna you can lope out of it, which means its not as fun to throw in a pocket as an iPod, and you generally clip it to your belt or your sleeve.

When you're on the subway you're not going to really get a signal, but the makers of these little things were smart enough to give them 5 hours of recording life or so, which means you can record a few stations or shows and listen to them when the service is unavailable. This isn't that big of a deal, as if you're on a subway for five hours you probably have bigger problems than listening to Howard Stern, and it allows you to keep a couple of hours of 'Air America' around to make you feel better about the quality of podcasts.

There are pros to cons to both approaches, otherwise a bunch of people wouldn't be plunking down the cash for the hardware and signing up for the subscription fees, but from what I can tell the real common denominator is how much content you have to start and how much content you'll be buying per month.

Someone I know picked up a Delphi MyFi not long ago to use with the XM service, which at $299 isn't cheap by entry-level iPod standards, but it didn't really matter.

For $12.95 per month they get over 150 channels with no commercials, and if you have a kid or significant other you can pay $7 and hook up another receiver for them. In the case of my friend, this ended up being a no-brainer.

They didn't have a whole lot of CDs to start, which means their 20-gig iPod would be fairly empty as they didn't have much by way of illegal music. They simply didn't own enough music to make use of an iPod, and $12.95 a month won't buy you a lot of music. They could easily be spending $100 per month just to have access to fresh content either via the iTunes Store or their local music shop.

People will often try to say "Yeah, but in 5 years you could end up paying more by using a subscription", they're being myopic and leaving out the fact that paying a little more over 5 years, but in little bites, is much more agreeable to most -- both psychologically and in terms of also needing to buy groceries -- than a big lump sum.

To give you an idea of the growth, the XM had well over 4 million subscribers back in may, and it took them about 5 months to jump from 3 to 4 million, while it took them almost two years to get the first million subscribers. They're pulling in the lion's share of the market, as well as the partnerships with people like Napster and AOL, and will probably be pushing 6 million subscribers by the end of the year.

Sirius has somewhere around 2 million, and has some fun coming online via Howard Stern, but while the services are just getting started (it's estimated there are ~190 million traditional radio listeners, so there is a lot to suck off of), XM clearly has the lead and is making most of the rules. From what I remember, Sirius doesn't even have insurance on their three satellites, so lets just say they're a long shot and a... risky... investment.

Now, you may be saying to yourself: "4.5 million times $12.95 per month is only..." and well, you'd have a point. It isn't a huge rolling wave of cash coming in, but there is a reason why so many software companies keep trying to get you to move towards subscription software. Every new subscriber is cumulative revenue, which is just lovely. From month to month you might drop a few, but remember people are paying at least ~$100+ for access to the hardware to even subscribe, so they have some investment there, so there is low attrition for the subscription service.

I.E., Apple may sell you 1 album per month, or three per quarter, and make $30 in revenue (not profit) for the quarter. In order to maintain their growth via you they have to sell you another 3 albums the next quarter. When they get a new user, they have to try to sell them 3 albums, but more often than not they'll sell one person one album, and another 4, etc., and growth is herky jerky.

With Satellite, you're in for $12.95 per month, or almost $40 per quarter, sustained. If they add on a new subscriber, it's another $40 per quarter. It's much smoother, and it is so much easier to crunch the numbers on how much you should make the next quarter, and only gets smoother and more delicious as your numbers grow even barring things like speciality channels that add extra revenue.

This can get confusing, but it's generally why Apple talks in "cumulative songs sold", even while they are seeing real growth in songs sold. I.E., in cumulative songs sold:

1. 2003.05.05: 1 million

2. 2003.05.14: 2 million

3. 2003.10.16: 13 million

4. 2003.12.15: 25 million

5. 2004.03.15: 50 million

6. 2004.04.28: 70 million

In about a year, Apple sold 70 million songs, growing by some 6900% for the year. In revenue, you're talking ~$69 million. However, you have to remember Apple only gets a small cut of that, as the vast majority goes to the record companies. If we assume Apple gets a cut of about $0.10 per song, they made about $700,000 in revenue from iTMS for the year, minus operating costs and such.

Apple's numbers get a little skippy and aren't broken out by month, so lets skip a few months and look at the next grouping which goes to present day, and is again about a year:

1. 2004.07.12: 100 million

2. 2004.10.14: 150 million

3. 2004.12.16: 200 million

4. 2005.01.24: 250 million

5. 2005.05.10: 400 million

6. 2005.07.17: 500 million

We have a growth rate of about 400% for another year, which is pretty awesome, and at ~$0.99 per song, they raked in about $396 million over the year. If we again assume Apple is making about $0.10 per song (It could well be less, but could be a little more, too) Apple made about $40 million in revenue for the year from the store itself.

It's an awesome percentage of growth, but not a whole lot of revenue in Apple's pocket for the year, and obviously that percentage growth has to (and is) stabilizing some. Even with say, $1 billion in sales per year sometime in the near future, Apple's cut will really only be $100 million or less, which will come in handy to remember later, but shouldn't be too surprising because everyone knows the big thing surrounding music sales is that it pushes iPods.

This isn't everything, but it should be enough to give you the idea.

Yeah, they are bleeding some cash, but watch the stock, which similarly to Apple's has about quintupled over the last two years. It's doing that for a reason, because there is magic in this business, and XM (I'll admit I blew them off mentally for awhile) is showing they can pull it out of the hat.

XM, with their 4.5-ish million customers, assuming ~$13 per month: $58.5 million per month. Assuming little to no growth, that's $702 million per year going forward, again assuming little growth.

When I last looked, XM added well over 640k new customers in the last quarter, and their 'churn rate' is about 1.4%, so we can practically consider it a rounding error of little significance because it's held steady. The clear thing that low churn rate shows is that people like the service, and stick with it, which is a big deal when acquiring the subscriber might cost you $50.

You've made your cash back after several months, but you need them to stick around for quite awhile to make the profit, and you need them to stick around longer to make back your initial cash outlays, which in satellite radio can be significant.

XM basically has a few things going on:

• Some large initial outlays, like, you know, throwing up satellites. Pricey things, those.

• Some big expensive content, which they've paid out a lot of cash for in order to draw in subscribers, like Major League Baseball and NASCAR. I could care less about this, but my friend basically got it because he could listen to the Cubs games wherever and whenever, as well as other stuff.

• A whole slew of relatively cheap content which, barring some major change in how the laws work, will continue to stay cheap. They're able to throw a cool DJ who knows the music at a specific subset because having them do it isn't expensive, it just would be if they only had so much analog bandwidth available to go out over the airwaves. As long as it pays for itself in subscribers, adding it is a no-brainer.

Assuming Apple is able to keep the growth of the store going and going (It's going to taper off, simply because the jump from say 1 billion songs per year to 2 billion is huge, but it's still going to grow well), it could be looking at a good chunk of cash coming in from the iTMS store eventually.

However, something like XM radio is potentially on a whole different level, as while you have some major upfront costs to lay out, instead of say just calling Akamai for bandwidth, once you're there it costs you nothing to add on more subscribers, and one you reach a certain level you are just raking it in which allows you to:

• Return that profit to your investors

• Use the larger revenue to lower your prices even further because it's further spread around

• All of the above, and more

The problem for something like the iPod is that its strengths can eventually be co-opted by these satellite radio devices (download your own content to them, etc.), but unless Apple starts throwing up satellites or we have pervasive WiFi clouds they can't really do the same.

And there is just the content equation, which Apple is having a hard time working around, but we'll get to that in a bit as right now you're wondering...

Theoretically they well could, but it would completely mess up their current strategy of locking you in via DRM. Napster is trying an offline-subscription model, which may well work out for them eventually, but Napster is scrabbling for purchase in the market.

The thing about the way it currently works is that every song you buy from Apple further locks you in, because every song is an investment you'll lose if you move to a different service, something other than iTunes, or an iPod. If your iPod dies, you are buying another iPod. If your computer dies, you are getting something that iTunes supports.

With subscription, it doesn't really work that way, if your iPod dies and you have had a hankering for something 'more competitive', you would simply throw your iPod in the recycling bin and pick up with whatever else is out there. This is, as you can probably imagine, not allowable to Apple because that DRM lock-in is really their push on you for whatever else they have coming.

Basically, DRM is everything to Apple right now, and ignore the people going on about the Pentium-D and such, as they don't get that Apple's DRM doesn't use it now and is going perfectly fine while just being software and server related. When it comes to copy-protection, the trick isn't to be full-proof, the trick is to be enough-proof that only an exceedingly small percentage will go through the hassle.

Of course Apple has a major problem, in that they have to get you to buy songs to increase your 'sunk costs' should you decide to leave, and this is where we wrap around to the content squeeze yet again because if you leave with one thing, this is what you have to keep in mind.

The vast majority of consumers will never, ever fill up a 40-gig iPod with (legal) music, let alone 60 gigabytes, and as we talked about back in This one goes to Eleven, color is basically just a fun feature and the photos are just a way to help fill up the space as no one really uses them as they're supposed to after awhile.

To fill up a 20gig iPod with songs from the iTunes store would cost almost ~$5,000, and I'm not even going to think about the 60gig version. Even if you were going and picking up $5 used CDs from the college bookstore, at ~10 tracks per CD you're looking at $2,500 to fil 'er up. Even if you say, double the bitrate of what you're ripping, you're still looking at $1,250.

Horrifying, when you could just spend $12.95 and have access to more content than you could ever use, even if there is a bit of the 57 Channels and Nothing on syndrome. However, when you're on the beach and want to listen to Sinatra, you can, and when you stop by a friends and want to listen to 70s or popular Rock, you can plug your receiver into their stereo and do that too.

I really wish the people saying "Yeah, but over time you'll pay more..." could wrap their heads around it, because they are the same ones that would yell about how if someone bought a $5,000 Mac they'd end up paying less over 5 years than if they bought a $1,000 PC. The numbers they were using -- showing a higher total cost of ownership for the PC over a lifespan -- weren't wrong, but these people completely ignored how few people have $5,000 sitting around to buy a computer.

The content squeeze is real, as stocking one's iPod is almost prohibitively expensive now, which is why Apple just cut the line to 20gb and 60gb: At these sizes you don't care about the difference between a 40gb and a 60gb drive, so if you want more than 40gb, you're paying for it. They can try to give you more ways to fill it up, and video content could theoretically go a long way towards that eventually, but right now it's out of whack.

Well, duh. And if iTMS dies?

This is entirely circular logic, because you aren't buying the music, you're paying for the ability to have access to gobs of content you couldn't normally afford to buy on your own.

In the case of satellite radio, you're also getting access to content you simply can't get via something like the iPod, like up-to-the-date weather information or news.

Oof, yeah, there are times when I just need to hear Weird in My School or U-Mass, and right now you want an iPod for that, and of course Apple is aware of it. However, these satellite receivers are really in their first generations, and they are practically made to be completely independent of the computer. You can record songs or channels, but don't have a lot of control over things like playlists or adding your own content.

However, if you look at the deals XM and such are making with AOL and such, it's only going to be a matter of time before you can plug your MyFi into your computer and throw your ripped songs onto it, and probably only a matter of time before you'll have the option to purchase whatever you want digitally and slide it over.

This is actually an area where someone like Napster has an edge over satellite radio with their unlimited listening schemes, because if its in the system you can suck it down to your player and listen how you please. Of course you are still in your own world, and have no clue if say, Osama Bin Laden gets caught, which is (gasp) why Napster and XM entered into a long-term partnership to whip up a store where someone can be listening to new music, tag it on their player and later download it via a purchase.

And of course, this is why XM is partnering with Samsung to whip out MP3 players that have satellite radio receiving built-in. The lack of local playback of MP3s and such, even DRM'd content, is really only a blip as these have been rolled out.

And of course the iPod already has this stuff, and all it's really missing is oodles of content beyond what you can afford to pay for yourself, which is where Apple is a bit stuck. At this point, launching a bunch of satellites would be humorous, even if they would look cool.

If we had Wi-Fi clouds everywhere, Apple could just add an antenna and stream its own channels to you, except of course we don't have Wi-Fi clouds. And where else is there a bunch of free content they can just jack you into... Oh right.

If you have any doubts about the content squeeze, or the pressure Apple can see is about to build on them here, you really only have to look at their haphazard push on podcasts and the very specific language they're couching it in: Radio Reborn.

Remember, satellite radio is supposed to be the next evolution of radio, or, um, radio reborn. Assuming you're looking, Apple has some really lousy 'tells' when it comes to these types of things.

You may have also noticed that Apple has angered almost the entire podcasting community with how they've handled the roll-out, and how they've continued to handle the roll-out, and this is almost entirely crouched in the understandable yet mistaken belief that Apple actually gives a rats ass about 95% of those with a podcast.

Jobs had to back-peddle a bit from his "Wayne's World" comments, but to Apple, in the context of the content squeeze, Limbaugh sells podcasts, not "Jake rambling about his mother or something technical." Those are basically thrown in there because:

• It doesn't cost Apple anything really to throw them in. You're paying for the bandwidth, after all.

• More numbers gives more of an impression of some big grassroots thing that might be cooler than other things, which might increase the chances of more established radio presences releasing them and if someone is looking at choosing between a satellite radio dealy and iPods, podcasting might sound cool enough to stem that tide.

• They might get lucky and find something cool in the chaff, and Jake may end up spouting "Cream of Some Young Guy" and leaving me in stitches, because I'm funnier to watch laughing like an idiot at Wayne's World than the actual movie is.

I mean, if you're a podcaster and along comes this big corporation that says what you're doing is the Next Big Thing™, that must be affirming and make you feel cool, but then it must be confusing when they're as dismissive of you as a used Q-Tip. Actions speak louder than words, and you're basically just around -- and being pushed -- to hopefully stave off the content squeeze.

It's worth noting that I have nothing against podcasts, but we have to be honest about everything that bubbles up in the hype cycle and look at why it's being pushed, because once you've been around long enough -- and seen Next Big Things™ littering the side of the road -- every time a new one comes along that rhymes with an old one you have to ask why it's different this time, and if the differences are big enough to tip the balance this hype cycle.

In this case, podcasting rhymes with internet radio, which was supposed to be the big future of radio way back when. If we ask ourselves what makes the situation different this time, when internet radio was supposed to create a huge new groundswell of jockeys, all I can come up with is:

• Bandwidth is a little cheaper.

• The learning curve for getting one up is easier; You no longer have to install a streaming solution. Some of these were free and all, but you still had to have some skill to know how to install it on the server or your ISP had to do it for you, and then paste in the streaming code. Right now, you just have to paste in the RSS 2 code so its sucked down as an enclosure.

• iPods and MP3 players exist so you can listen offline when you jump into your car.

Just about all the other caveats still exist; It's hard to be a cool internet DJ when you have to pay x fees to license the music, much of the content we access electronically doesn't carry well over audio, and most people are just people talking. I mean, I could do one where I just get progressively drunker throughout the podcast, but you know, I'd be dead outside of a month.

If you love doing podcasts, by all means do them, whatever the hell they are, because that's how cool things happen, but I wouldn't pretend this probably won't turn into another small niche of cool stuff some people love, but eventually a niche all the same. Now you know why Apple wants it to be big, but if you're into this at least just tell me how it really differs from the prior hype cycle, instead of why you want it to be different, before you go trumpeting Via La Revolution.

Luckily, La Revolution, brings us back to the iTunes Movie Store...

Man, it seems like everyone is gnawing on this right now, with all kinds of analysis around the rumors, so it'll probably be boring to say it's basically done. The technical challenges aren't really an issue now (to computer, not iPod), aside from trying to get H.264 content to play decently on a Mac Mini.

Right now, the real holdup is licensing.

Forget how I know, but if you put your ear to the rails of a few companies, the buildup for the whatever the movie store will be called has come and gone more than once. There are a few things going on here:

• Apple is doing very well with their iTunes service and FairPlay DRM, and some of the content holders are concerned they're doing a little too well. When it comes down to it, as long as there are credible options, Apple can't ask for too much.

• You have no idea how leery some people are of getting into business with Apple in any way right now. When it comes to agreements like this, Apple has accumulated a nasty track record, and if possible you dive into their pool when it is the only real option.

• The various rights surrounding films, and how they're financed, are often horrifying elaborate and a company can't just say "Hey, sure, you can throw it up online for..." without a hell of a lot of math taking place, or it becoming exceedingly expensive.

  I.E., a film may well be financed by one company getting distribution rights in the USA, another company getting foreign distribution rights, another company getting USA DVD rights, with another company getting foreign rights excepting Australia or Germany, with several other Angel investors holding shares of the main box office shares...

  One day this will be easier and simpler, but right now its not, and these elaborate schemes need to be accounted for. Apple can't just grab a stack of DVDs as they become available and ship them out, because they'd just be Netflix, and they can't just digitize them and let you download...

• Let's say you're someone like AOL/Time Warner, Sony or even Disney, where you have two major interests wrapped up; the hard decision you're faced with is whether to go it alone using your own technology or to throw in with Apple.

  On the one hand, you control everything and reap most of the profits and can theoretically use Time Warner's content to boost say, AOL's broadband service. On the other, for a service to really take off, you don't want to be going to one for Warner Bros. movies and another for Disney and another for Sony. For someone like Sony, their content division may be all for it, but do they really want to give Apple's FairPlay another nudge over their offerings, or look at something else?

From what I hear, it's pretty much the same fiasco I mentioned going on with the telco's back in Convergence Kills last year, where it's all about licensing; Everyone trying to get their cut while trying to keep the pie from crumbling.

Keeping the pie from crumbling is something that really has to be kept in mind, because while there is profit to be made and somewhat of a need to fill right now (Personally, I think the need is much greater in TV and TiVO functionality), while you can maybe charge a little more than someone like NetFlix because you're on demand and not making them walk to and from the mailbox, you can't go charging people $15 a viewing to make sure everyone in the process gets their cut and whether or not 5 others might be watching in the same room with you.

Unfortunately, all of the above means the 'Movie Store' is really boring right now because, uh, licensing and board room shenanigans are boring until we get the tell-all book 10 years from now, so it's a little beyond me why people keep going on about every single rumor because one of the main problems with this is that there is no major pending pressure to do it.

Something like Netflix, or hoofing it down to your local video store, isn't as elegant as a nice pervasive on-demand system might be, but it isn't the screaming need that portable MP3 players were once we'd ripped our music.

Which doesn't mean there aren't fun aspects to say, a new iPod model or something, but once you know it's a matter of when, not if, it'll become a cell phone if it'll survive, it's just hard to get interested in the day-to-day tidbits that come about unless they directly affect how it'll get there, and thinking about how pervasive DRM is becoming just gets depressing.

Anyways, 'till next year, 'less something comes up.

 Posted by drunkenbatman
    July 31, 2005, at 09:52 PM