Content Providers Missing Smartphone, Apps Gravy Train

There is a serious disconnect between the prevailing smartphone and apps hysteria spurred by this week's release of iPhone 4 and DroidX, and the hapless pursuit of paid economics by content players losing billions in new revenues.

Apple sold an estimated 1 million iPhone 4s on opening day at a starting price of $199, defying mounting signs of widespread consumer weakness. Beyond Apple's savvy marketing, brisk sales are driven by mainstream fervor for mobile functionality facilitated by 225,000 free and paid apps instantly providing relevance and personalization. Apps make discretionary high tech a must-have.

Too many content providers fail to capitalize on effective apps as shortcuts to targeted consumers because they insist on controlling access and payment without sharing the spoils.

But television, film and print gatekeepers cannot avoid the app phenomenon, which is less about the bulk reach they are used to and more about the narrow selection, which pays off in a mobile-dominated world.



At the very least, apps can be used to charge consumers a premium for cherry picking, maintaining and instantly accessing a personal library of video and print content from all sources, on all devices. That's far more encompassing than TV Everywhere, which is limited to Time Warner's cable offerings.

The schism between how consumers use their mobile devices and the self-important way that content providers try to cater to them is acute.

Newly profitable Hulu has flatlined at 40 million unique users, according to comScore, and has been slow to launch a subscription service. Such content tollbooths have limited usefulness. The average viewer on YouTube randomly watched 100 videos in May for free, mostly on mobile connected devices. A federal judge this week ruled in Google's favor in a copyright lawsuit filed by Viacom in 2007 on the basis that YouTube is the universal default for exploding online video viewing individually selected by users.

Still, traditional media conglomerates can't seem to help themselves. 

Fox this week launched the subscription video service Bitbop for $9.99 monthly fee, according to SNL Kagan. It assumes that consumers are so wedded to Fox content; they will blindly pay a hefty reoccurring levy. It's the antithesis of Apple's App store (1.4 billion downloads yield about $4 billion in revenues) and pay-to-play iTunes (which generated $1.3 billion first-quarter revenues) Three-quarters of those proceeds went to content providers and developers.

Another quick, effective way to snag consumer attention is through social media. That explains the persistent speculation Apple will tap its $40 billion cash resources to buy Facebook, already a $1 billion-plus annual revenues business -- even before the dominant social network and Apple launch their advertising big guns.

The latest example of geo social content power: C-SPAN says it will provide hyper-local educational tips about U.S. policy, politics and government customized for FourSquare users right down to the ZIP code.

As long as the major content providers -- exemplified by News Corp.'s WSJ, Fox and 20th Century-Film -- hold their brands in higher esteem than consumers' selection process, the gap will persist. Mobile interactive devices and apps will blow past their walled gardens.

The music industry still struggles with that hard lesson. Despite more personalized apps -- such as Vevo's new location-based music app, set to debut next month on iPhone -- the industry has failed to create new business models that recapture any portion of the $7 billion in annual revenues lost when iTunes unbundled album sales.

The loss of revenues to television will be many times greater. TV content generated $140 billion in revenue and had a public market cap of about $330 billion in 2009. About 100 million U.S households pay an average $70 monthly for roughly 300 video channels.

Unbundling with a la carte options for individual channels or videos could result in at least 20% decline in subscription revenues and 75% in ad revenues. All would evaporate completely if all content shifts to the Internet and connected mobile devices, Needham analyst Laura Martin said.

Comcast already sees this coming. Its new iPad remote with Tunefish social media intelligence set to roll out later this year is an effort to transform how users navigate TV and Web content leveraging their social connections, notes BTIG analyst Rich Greenfield.

Apps, which were created just a few years ago by Apple, will mushroom into a $32 billion business by 2015, according to Juniper Research, although it is difficult to quantify the content value they represent. They already are a proven new business model.

But many media conglomerates mostly transfer their existing bulk subscription print and video content and advertising to the Web and to apps (think Wall Street Journal's iPad app) without aggressively monetizing the value of individual content matched with the right consumer. Music, live sports and big events are generally the exceptions.

With the second-largest market cap in the U.S. and a demonstrated mastery of consumer preferences for mobile hardware and distribution  -- to the tune of an estimated $29 billion in overall sales so far this year -- Apple is doing lots right. It offers lessons about connecting with consumers and making money that bare a closer look. 

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