• by Diane Mermigas , June 26, 2009

The double-digit sales of smartphones and notebooks during the worst economic downturn in half a century are more evidence that connectivity has reached utility status with a force that is profoundly shaping content and advertising.

Too bad there is a major disconnect between consumers' engagement with their nondiscretionary devices and the digital content and commerce they crave. While a torrent of apps help bridge the gap, too many content and service providers are not fully embracing connectivity to reinvent themselves -- and connected consumers are taking off without them.

Respondents recently surveyed by Pew Internet & American Life Project said they were twice as likely to cancel their cable TV service or cell phone plan before dropping their Internet service. Even as service prices increase, U.S. home broadband adoption approaches 65% -- cutting across all age and income demographics, and appearing to be "largely immune to the effects of the current recession," Pew concluded. Even in this downturn, consumers will pay for content and services they deem most relevant and valuable.

That should be fertile ground for print publishers, television and film producers, distributors and related service providers to generate new revenue. Unfortunately, too many are focused on salvaging rather than reforming their legacy businesses. The rollout of connected services especially can be slow and awkward.

The launch of Canoe Ventures' long-promised addressable advertising and TV Everywhere's proposed multi-platform paid-access model are already stymied by technical and legal connectivity snafus. At least Time Warner and Comcast, the major cable operators behind the efforts, are trying to adopt a new connectivity mindset.

Too many media-related companies mistakenly believe their conventional advertising, subscription or even free business models will simply transfer over to a connected marketplace. They won't.

The advertising backbone of 20th-century media (representing 37% of all content revenues-or $1.1 trillion annually -- and nearly half of all video revenue) is going to be less important in a connected world. Advertising's new, more powerful extension will include connectivity-powered target marketing, recommendations and e-transactions supported by safe, universal payment.

To the point, advertising is expected to comprise only one-quarter -- or about $1.6 billion -- of $7 billion in revenues from domestic online video (the "new TV") by 2012, up from $1 billion today. "The economics are simply not there for advertising to support online video, given rising variable costs and limited scale," notes UBS analyst Matthieu Coppet.

While that spells disaster for broadcasters, it also presents a formidable risk to all forms of subscription-based video, including cable and satellite. It's also a risk to advertisers generally seeking to directly translate what they do to the Web without considering the core role and function of connectivity.

Mining connectivity in enterprising ways that uniquely cater to the needs of individual consumers is media's only reliable and potentially substantial new source of income -- and its least-explored option. Just look at television. TV networks remain riveted on the yawning gap between online and TV video advertising unit prices while the bigger problem is video and revenue compression. It could result in at least a 6% loss in overall television revenues by 2012, Coppet says. Others predict that lost revenues could rise into the double digits, given the number of commercials you can jam onto Web sites, even at higher unit prices.

While online video usage is expected to remain relatively small (less than 10% of U.S. prime time and total professional video viewing within three years), the backdrop of traditional video outlets will continue to shrink and shift. Affiliate fees from basic cable networks may generate 15 times more than online advertising -- or $17 billion by 2012 -- and paid content will likely replace the revenues lost from declining DVD sales and rentals, VOD services and syndication.

But overall, "the paradox of choice" could actually result in less content consumption when options overwhelm viewers, Coppet says. The only effective solution will be creatively using connectivity to "rehabilitate" channel surfing in a non-linear environment by giving individual users more of what they specifically want.

Material new revenues can be developed within five years from customization, mobility, e-commerce, storage and electronics cross-subsidies if content creators and distributors and electronics companies and online retailers work together. Authentication could trigger new payment tiers from full online access to individuals involving catalogues and non-pay TV rights. Dramatic increases in demand for storage capacity could be a revenue game-changer.

Broadcast and cable TV's pedestrian response so far has been to seek more bulk user content fees with little regard for the compelling paid services that can be born of connectivity -- including advanced business-to-consumer models (subscription and a la carte) and B2B models, such as e-commerce and advanced search.

Coppet contends that living-room connectivity (which will only extend to one-third of U.S. households by 2012) "is the most important driver for establishing a real online video market and offering an alternative to pay TV."

Credit Suisse analyst Spencer Wang insists that mobile connectivity via the iPhone and smart wireless devices "can help solve the issues related to user interface, ease of use and access to content across multiple content platforms." PCs, TVs and mobile devices will be seamlessly integrated to sync software updates, content and services, storage and communications to order.

Television's fragile ecosystem will especially need new revenue options for long-term survival. The failed math of their efforts to sculpt online video in legacy fashion is already disconcerting. Subscription and pay-to-play access do not begin to offset the 64% less revenues per broadcast series episode and 36% for a cable network episode that can be currently generated by higher-priced online advertising units.

Television -- like print and even film -- must start anew, using connectivity as its norm. This means that resulting core metrics and monetization will resemble aggregated per hour of content consumed across all devices and platforms. That process begins with every company closely studying the how, why and wherefore of consumer connectivity. That means letting go of the status quo and making connectivity a top priority.