Here’s to Bamboom (now Aereo)!

We are very excited today to announce our investment in Bamboom Labs (now Aereo).  This opportunity brings together all things one could ask for in a venture investment – a great team, a big, disruptive idea, a large market, and a cool web site.

Bamboom was started by Chet Kanojia, an entrepreneur I had the great fortune to invest in and get to know for many years at Navic Networks.  Navic was an outstanding company bought by Microsoft in 2008 in a very successful outcome.  They were one of the few positive, large exits in the interactive television space, and Chet’s leadership was a big part of that.  Chet’s last round of capital came just after the bubble burst in 2001, and he managed it brilliantly until our ultimate exit.  Joining Chet at Bamboom as CTO is Joe Lipowski.  Joe is a brilliant technologist and RF engineer we’ve known for a long time as well.  We backed the spin out of Celiant from Lucent, and Joe was the CTO at Celiant (acquired by Andrew for $470MM).  When Chet began to talk to us about his idea, it was a no-brainer to put the two together.  The team around these guys is equally talented and truly best in class.

The idea is quite simple yet technically complex and brilliant.  Bamboom wants to enable customers to experience broadcast TV, over the Internet, to any device, without all of the headaches associated with accessing it today.  They have combined brilliant RF engineering with wonderful software design to create an incredible consumer experience.  More details will emerge as we roll out of closed beta, but suffice to say it looks fantastic.  This is what a next generation television experience should look like.  Fully integrated, portable, native social integration, rich interactivity.  As consumers shift television consumption online, we will see new content, commerce and advertising opportunities that we can only begin to imagine.

We are delighted to partner with Chet and our co-investors on the journey!

The Real Culprit Behind TimeWarner’s Pricing Strategy

TimeWarner Cable made a lot of news over the last few weeks when they introduced their tiered pricing strategy for high speed data services.   The plans ranged from $15 to $150/month depending on the amount of bandwidth consumed.  Their argument was that:  1) as a facilities based provider, the growth in network usage is forcing their costs to go up, which they need to recoup;  and 2) this should reduce the bill for the many customers that don’t use even the lowest level of usage (so the poor user saves) and affect the super users who extract massive benefits for the network (and the rich user pays).   From TWC’s COO, “When you go to lunch with a friend, do you split the bill in half if he gets steak and you have a salad?”   I’m not opposed to the rationale in concept, but I do think there are several issues with it. 

Plenty of people have talked about how the magic of photonics over fiber based plant has reduced the marginal cost of adding bandwidth fairly significantly.  Bandwidth has an advantage over Moore’s law, in that it has two dimensions which can demonstrate improvement:  concurrency of streams (number of waves sent over a medium) and rate of modulation/encoding of those streams (10Gb/s, 40 Gb/s, 100 Gb/s, etc).  That multiplication creates huge drops in the cost of providing an incremental bit. 

More telling to me is how vehemently the Cable industry fought a-la-carte pricing for television.  This was the idea of forcing the MSOs to allow consumers to pick the channels they wanted to subscribe to and only pay for those a-la-carte, rather than the current model of buying a monolithic stack of hundreds of channels, where the vast majority are never consumed.  In the interest of philosophical consistency, wouldn’t the a-la-carte argument be just as eligible for the “consumption based pricing” label as the data plan argument?  I tend to think so, and can only reason that it’s simply not in their economic interest to offer that argument. 

Clearly, the industry has no interest in shooting its cash cow in the foot.  It is only natural to fight the mandated a-la-carte pricing.  But the industry can also not be blind to outside threats.  The availability of premium shows online in high quality over the Internet, the rise of on demand time and place shifted viewing, and the high broadband penetration rate has created a competitor to the proprietary, linear world of COAX.  I tell many people that if ESPN360.com were not blocked by TimeWarner, I would have little reason to pay the $160/month I currently pay for cable television and high speed data.  I’d be able to watch live streaming sports via ESPN360 or CBSSports for March Madness, and I’d watch the 5-7 shows I DVR online at HULU, Boxee, or some other destination.  All of a sudden, my $160/month bill would be compressed to just over $40 for unlimited data access. 

I’m sure the executives at the various cable companies have also done that math.  And I believe they see customers doing it at a much more rapid pace.  What better way to ensure one’s revenues are not cannibalized, and in fact be allowed to thrive, than to introduce consumption based pricing for data.  In order to stream a few HD shows a few times a month would automatically push one into the $150-200/month category group of consumer.  At that price point, the MSOs are absolutely indifferent to whether I watch my shows over their proprietary network or over the Internet on my data pipe.  You can go a-la-carte but pay them just as much.  In fact, they probably are incented to switch me over for revenue generation and cost efficiency gains – it’s way more profitable for them! 

The path ahead will be tricky.  TimeWarner has already rescinded plans for testing of tiered pricing, because of the consumer fury it has set off.  If they move too quickly, they risk net neutrality legislation being thrust upon them.  Better to let consumers think they won and come out with another plan, lest their hands get tied.  But I think we are crazy to think tiers won’t be introduced somehow in the future.  The MSOs are too smart to let their analog dollars get turned into digital quarters.

What do you think?  Am I being too skeptical?

Advertising in 2009

As many of you know, Ad-Tech is in NYC this week.  It’s a great conference that brings together some of the leading traditional and digital thinkers to explore the latest topics affecting the industry.  The timing of this Ad-Tech was particularly interesting given the broader market environment. 

I had the pleasure of being on a panel entitled “The Digital Economy” with David Moore of 24/7, Bob Raciti of GE, Imran Khan of JP Morgan Chase, and moderated by Henry Blodget.  Much of the discussion focused on the state of the online advertising market.  I thought I’d share some of my predictions:

·      2009 will mark a very, very tough year for overall advertising, and I would not be surprised if the total ad market (which exceeds $230 billion) declines by 10% or more.  Mary Meeker had put out an interesting analysis that showed the correlation between GDP and advertising spend at 81%.  Based on that analysis, at a 0% GDP growth rate, one would see a 4% decline in overall advertising.  With a 2% contraction in GDP, one would expect to see 8% decline in advertising.  I believe 10% is a real possibility.

·      There will be a continuing rotation of dollars from legacy advertising markets to online advertising.  The overall online advertising market (which is only $25 billion out of that $230 billion pie) will grow, though at much more muted levels than the 15%+ currently predicted by the market.  More likely is mid single digits overall.  History shows that advertising eventually follows the user, and given how woefully behind ad dollars are to the time spent online, growth should be expected.  This will be offset by declines in the unit pricing, both on a CPM and CPC/A basis.  Clicks or actions won’t matter if the consumer cannot ultimately convert because they don’t have the money.   

·      We will not see the 25% drop that we saw between 2001 -2003, for two reasons:  1) Overinflated tech startups are not buying from other overinflated startups.  Online is mainstream and touches nearly every industry in a meaningful way.  2)  The inventory being offered has evolved from display only many years back to display, search, SEO, email, lead generation, affiliate, etc. 

·      This contraction could put MAJOR pressure on the traditional media players.  In particular, I worry about the newspapers, who still generate over $38 billion in advertising, with content that is often readily available from hundreds of sources, including blogs of which many are viewed as more “authentic” to young readers.  I think we can see some major failures over the next few years.  Those who produce premium content, or content that has a high cost of production, controlled distribution, and long shelf life (eg the networks, film studios, etc) will have to work through their transitional issues and the current tough environment but will survive and thrive online.  

·      Within online advertising, consistent with prior recessions, we will see retrenchment to direct response/performance oriented spending.  Search will grow much faster than display, as people will release dollars only to the extent they are certain they will see them back very shortly. 

·      Other areas of robust growth will include online video and in gaming advertising, as people increase time on leisure entertainment.  Online video will get even more compelling as we get beyond the pre-roll only.  There is such a rich opportunity to make advertising within a video context so much more engaging and real-time.  You can engage the users with calls to action, can make real time “hot lead” phone connections, can offer incentives to induce immediate behavior.  We should watch for some exciting innovations.

We are still early in many aspects of the online revolution.  One of my companies, Conductor, just released a report that showed over 75% of the Fortune 500 have no presence for their keywords and brands in the natural search domain.  Consistency of measurement has continued to prove a challenge to unlocking more spend.  We have plenty of data, just no good idea how to agree on it.  Increasing fragmentation in the sources of online spend in a market where people had enough to do with just TV and newspapers will require much more robust technology for automation.   The whole concept of de-portalization and free flowing content will necessitate a re-writing of all of our Web 1.0 and 2.0 tools.  There is still a lot more innovation needed to move the rest of the $200 billion or so that is not yet online, and so while the short term market looks tough, the long term opportunities remain exciting.