Pop Goes the MP3

Cable World, Sept 11, 2000 by Andy Grossman

The broadband fallout and cable

All in all, it wasn't a great week for the broadband content business or for people who want to forget the 1980s. But the news that video streamer Pop.com was shutting down after throwing away $9 million worth of Paul Allen's pocket change and that a federal judge just about put MP3.com out of business reminded me of the bad old days of the cable industry.

The only difference between Pop.com and the old CBS Cable is that Pop.com didn't have a chance to waste millions on programming and throwing oasis parties at trade shows.

Last week's closing of Pop.com, which wanted to stream short films and animation down broadband pipes with the creative support of Steven Spielberg, Jeffrey Katzenberg and Ron Howard, carries a stern warning about the short-term future of streaming. Yes, it's the rage of the moment, but as sure as CBS Cable lost $50 million, there will be more blood on the streets of the Web. Cable is right in the middle of it all.

The parallels between Pop.com and the cable industry circa 1982 are uncanny. Pop.com launched last year with the same sort of fanfare that accompanied some of the higher-profile networks of the time. Media outlets hyped early cable efforts, such as CBS Cable, The Entertainment Channel and Daytime, much the same way they pump up videostreaming-fueled broadband content startups today.

For example, the Orange County Register of June 27 depicts streaming video as "the phattest, hippest, hottest hangouts for aspiring artists and auteurs, like, well, maybe, ever." (When the mainstream press starts using words like "phat," you know it's already out of style among real hipsters.)

What about the non-existent economic model that crushed Allen, Spielberg and company? Not to fear. The Register describes a short film called "The Barbiecist," made by Jim Hollander. "Last month, The Barbiecist went up on Ifilm. And people watched it. Hollander didn't make any money -- it takes a bewildering amount of hits to earn even $500 -- but his reward was the thrill of knowing his work was seen."

So that's what Wall Street wants! Forget about profits. Money, fame and exposure are the real currency of the broadband content world. Artists might be happy starving, but companies need a source of income.

Just as cable networks found out in the early 1980s that they couldn't live on advertising alone, content startups have cratered trying to succeed on just banner ads. Subscriptions? Maybe if they offer porn films or hire Cindy Margolis.

Cable networks like TEC and CBS also found out that without a hard-wire to a solid distribution platform the best notions in the world won't blossom.

"A good idea isn't enough," says Stuart Lipson, a former cable executive who now runs a company dealing with emerging businesses. "One way to provide an economic rationale is to provide a connection."

Like cable networks in the early 1980s, broadband content providers lack that connection -- access to enough homes. CBS couldn't make a go without more cable homes. Too, the networks had to change the business model and exact license fees from operators. "Pop.com would not be an issue if there were 50 million broadband homes and they had a deal with providers to get access," Lipson notes.

In the 1980s, the Discovery Channel was a good idea. But John Hendricks got nowhere until he partnered up with TCI, Cox and Continental, which gave him the distribution to go forward. Pop.com had no such opportunities, especially since broadband's reach extends to a mere 3 million homes.

What about MP3? Same problem. The company would not have been hauled into federal court on copyright violations if it had made a deal with Universal Music. All the parties in the chain have to agree. Discovery found the cable operators, but MP3 tried to circumvent the middleman and paid the $250 million price.

A lesson here is that until broadband becomes a greater part of our lives -- either through high-speed Internet connections or the PC-TV convergence through digital set-top boxes -- broadband content companies like Pop.com and MP3.com will lack a sustainable economic model to go forward.

Because of that, cable operators once again hold the cards. Just like they rescued Discovery and a host of other networks, operators -- along with Excite@Home and Road Runner (which, like the networks, enjoy huge cable operator backing) -- can control the future of broadband content.

This position of power is a double-edged sword, just like cable's monopoly position was 10 years ago. Already cries of "open-access" have found widespread political support, and content providers are lining up outside the doors of cable executives trying to get favored status in MSOs' set-tops.

In the future the hopes of the Pop.coms and MP3.coms of the world will rest largely with Excite@Home, Road Runner, AOL (see Time Warner) and the cable operators. It's a big responsibility.