Hewlett-Packard - A Lesson In Why A Strategy Must Respect The Brand

First of all, it's nice to be back online.  I took several weeks off of blogging and tweeting to recharge my battery and simply observe for a while.  Time well spent.  I'll probably start getting back into things a little slowly.  Here's my first thought:

Hewlett-Packard's stock price suffered an historical drop this week.  I suppose they could point to general economic uncertainty, but no one is even trying to make that argument.  This is all about HP's strategy -- make that HP's lack of strategy.

This is not an "I told you so" moment, but back on March 15, I already had some serious concerns.  It was clear to me that Leo Apotheker did not have a good feel for the company.  Again, as I said back then, this is not an attack on Mr. Apotheker.  I'm sure he is a brilliant guy and talented businessman.  You don't get to that level without doing a lot of things right.

However, this is a lesson in why it is critical to understand your brand when you plan your strategy.  Every company is different, and that means that a good strategy for one firm might be a terrible strategy for another seemingly similar firm.  Mr. Apotheker is spending all of his time surveying the market for opportunities, and not enough time understanding HP and how it fits into that market.

I'm not going to pretend to have all of the answers for HP (or any answers, for that matter).  But I do know that the HP brand has decades of history as a symbol of innovation, quality and prestige.  It used to mean something when you spent extra money to purchase an HP calculator.  It added up numbers the same as the cheap brand, but it showed that you cared about quality.

I don't think that history is lost (although the brand has certainly been damaged -- first by some of Carly Fiorina's decisions, and now by Leo Apotheker's).  But a history of quality and prestige has no value in commodity offerings.  To capitalize on a history of quality, you need to do something special -- not jump into the same business models as your competitors.

Let me take a couple of painful positions which actually seem obvious to me.  HP should never have fired Mark Hurd.  I don't know what they were thinking.  He was clearly a talented leader who understood the company.  He made some mistakes, but they could have rehabilitated his reputation without looking like they were condoning his behavior.  Unfortunately, I don't think they can remedy that mistake now.  Hurd has a great new job and he probably doesn't want HP back in its current condition.

The other obvious point is that Leo Apotheker is the wrong guy to run this company.  I'm sure there is another good job for him out there, but he is a really bad fit for HP.  I'm sure this is not news to the HP Board, but the sooner they find a replacement, the better.  And who should that be?  Some talented executive who is focused on innovation and really understands the HP brand.  Or maybe they should just sell it to Google.

New Media Isn't New Anymore, But It's Definitely Different

I can't believe it's been several weeks since I posted.  Some periods in our lives are like that.  We get really busy and time flies by.  Technology is definitely changing the pace of our lives, including how we use media.  It's an impact that all of us in the entertainment business need to understand.

I went to a great program this week at the Screen Actors Guild.  It was a discussion of the New Media business, how people are starting to make real money at it and where it's going.  The first point the panel made is that there is no longer a "New Media" business -- it is just the "Media" business.  Online and mobile content are important sources of entertainment and information for a huge portion of the population.  It's not the fringe anymore, it's the mainstream.

What do content creators need to know in order to successfully participate?  Cindi Rice of Epic Level Entertainment, a very sharp digital media producer, pointed out that the ideal length for an online program now seems to be between 2 and 6 minutes.  This is a very revealing and key piece of information.  In the online media environment, why is the length of a story so much shorter than the 90 minutes we spend in a theater, or the 30 to 60 minutes of a television program?

First, the Internet is a vast universe of content with no real limits, and it's expanding at a mind-boggling pace. Ready for this statistic?  There are now 48 hours of video uploaded to YouTube every minute.  Read that again and think about it.  That is only one website (albeit the largest), and that is every minute.  For all purposes, all of us now have an endless number of online media choices.  We could watch videos 24 hours per day, and we'd only see 1/2880 of what is placed on YouTube.  For all intents and purposes, the choices are infinite.

When you are at the world's biggest buffet, you take smaller portions of each dish because you want to try some of everything before you get filled up.  A bite of this, a taste of that.  That is what the online media environment is like -- people only have so much time, and there are an infinite number of choices.  Given that paradigm, it's an achievement to hold anyone's attention for even 2 to 6 minutes.

Another reason that online stories are shorter might be the way we use digital media.  For many of us, digital media is not really something we do so much as something to fill time between the things we do.  It's the halftime show.  It's the master of ceremonies making a couple jokes before he brings up the next act.  It's like the previews before the movie or the funny ads in between acts of a TV show.  Digital media gives us little bits of entertainment and information that keep us energized before we leave for work or head out to that next appointment.  When you look at it like that, a 2 to 6 minute story is just about the right length.  2 or 3 of those is a nice coffee break, and then it's back to work.

Admittedly, that is the perspective of someone who is older than the typical YouTube user.  I asked my 16-year old son about his online watching habits.  It is a little more of a real activity for him.  He likes to stay abreast of certain video series that he is following.  But he doesn't want to spend more than a few minutes on any one video because he wants to get on to the others.  If he really likes something, he'll go back and watch it again -- maybe several times.  Younger media consumers are perhaps simply becoming used to a faster pace.  They take their entertainment a bite at a time instead of by the plateful.

As content creators, what does this mean for us?  Everyone still likes a good story, but each medium is appropriate for its own type of story.  A complex story should be told in a novel or a film.  A nice three-act story works in a play or a TV show.  In the digital realm, it's all about one good, fast act.  Set it up, deliver the punchline and move on.

As Marshall McLuhan noted so many years ago. the medium is still the message.  And when the medium is digital, that message should be about 2 to 6 minutes long.

Mobile Convergence: The Single Device Solution

Earlier this month, Nielsen released the results of a study that shows consumers moving towards tablet devices, and away from laptops and eReaders.  I commented at the time that this isn't news, but it is an important trend that should not be ignored.

In a recent interview, Jeff Bezos wouldn't confirm that Amazon is going to release its own tablet, but he didn't deny it either.  He did indicate that it wouldn't replace the Kindle, but I don't think I believe that.  He might say that now, but ultimately it won't make sense to sell a device that is great for reading and watching videos and playing games and listening to music and writing documents and drawing pictures, etc etc., and then sell another device that is just for reading.  At least, that makes no sense to me.

The bottom line on this is that consumers want to minimize the number of devices they own and use.  They want things to be simple, but comprehensive.  An iPad or other tablet can do most everything that a laptop, an eReader and an MP3 player can do, and a lot more.  iPad's will eventually work as Bluetooth mobile phones, as well.  I think the only reason they don't do that now is because Verizon & AT&T wouldn't support that model, but eventually they'll have to.

That's what consumers want.  If I can carry one device that literally does everything I need in terms of media and communication, and it weighs a little over a pound with excellent battery life, my Nook will be on eBay in a heartbeat, and my laptop won't leave my house.  And I love my Blackberry, but I'd probably be willing to sideline that, as well.

And all of you will do the same thing.  We are heading for a single device mobile solution.  There will be some resistance along the way (as there always is), but the trend is already undeniably clear.

How Do You Succeed In The Entertainment Business? Basic Economics

You learned everything you need to know about success in the entertainment industry the first two weeks of your junior year in high school.

About 7 months ago, I wrote a blog post about how to capitalize on emerging opportunities in the entertainment industry.  It turned out to be one of my more popular posts, and as I sit here 7 months later, I think I stand by everything I said.  Things are going about like we expected they would.

Based on that temporary success, I thought I would revisit the topic from another perspective.  I gave it a lot of thought (about 10 minutes or so) and I think success in today's media business is simply a function of  basic economics.

I am not an economist, but from what I can tell, there is one essential rule in economics from which everything else springs -- supply and demand.  The value of anything moves roughly in sync with demand for that item, and roughly inverse to the supply.

Here's one example: In the media business, the Internet provides an infinite number of channels to distribute information.  Therefore, owning a website has virtually no value by itself.  Everyone has a website.  But having a website that is one of very few channels to highly desired content is very valuable.  High demand + limited supply = high value.

In specific terms, look at the daily news.  You can't copyright the news.  Anyone who wants to report a story can report it.  There are essentially an infinite number of places to get news, and therefore it has little value.  Studies confirm that most consumers are not interested in paying for online news.

Mobile data provides an example of the other side of the coin.  As millions of iPads and smartphones are being sold, there is a massive increase in demand for mobile content.  A lot of us use free WiFi (like at Starbucks, where I'm sitting right now as I write this on my laptop) to get content.  But the mobility of the new devices has greatly increased the demand for anytime, anywhere access -- today, that means access to a cellular system.

In most markets, there are only one or two cellular networks.  That means the demand for access to those networks is rapidly increasing and the supply is limited.  Consequently, Verizon and AT&T have stopped offering programs with unlimited volume and they are charging for every kilobyte of data that runs through their systems.  And as people download or stream loads of HD content on to their iPads, there are a whole lot of kilobytes moving through the air.

So what's the right strategy?  None of us have the money or proper licenses to build a cellular network.  How do we get in a business that takes advantage of Economics 101?  The answer is to do something special and attractive.

All of us have the ability to create an endless amount of content -- but all content is not the same.  Strive to do something that's truly unique.   That handles the supply side of the equation -- the essence of true creativity is that it inherently limits the supply of what is created.  

On the other side, make sure you create something that will attract an audience.  Understand who you are creating for and what they really like.  If you can do that, then there will be a demand for what you create.  The higher the demand, the more valuable the product.

That's it -- it is truly that simple.  Perhaps so simple that you're questioning the value of the advice.  Is it worth stating the obvious?  I think it is.  Some of us get so caught up in trying to create intricate get-rich schemes, that we lose sight of the obvious.  Just find an audience and give them what they want in a unique way.  That's your best path to success.

Now, if you want to talk about financing films with a combination of two-tiered equity, mezzanine lenders and tax credits, that's a little more complicated.  Maybe we'll tackle that one next time....or not.

"May You Live In Interesting Times..."

The Challenges of Deal-Making During A Digital Revolution


Clearly we live in interesting times; that's not news to anyone.  But being a lawyer, agent, executive or other deal-maker in the entertainment business over the past few years has been especially challenging. In addition to the economic downturn, many challenges are arising from the blurring of lines between the various methods of content distribution.

For instance, there used to be a clear distinction between home video rights and broadcast rights.  Making those deals was fairly easy.  Everyone understood what was being sold, and we just had to argue about the price.  The studios got two checks, and both the DVD stores and the networks made money.  Everyone was happy.

Then, along came downloads, streaming and mobile and all of the old definitions went out the window.  It's like we're all speaking some new foreign language. As a result, deal-making is not so easy, and it's harder to keep everyone happy..

Let's look at an example.  I make a movie.  I sell the home video rights to Netflix, and they stream it down consumers' cable connections onto their TV's. I also sell premium cable rights to HBO, who puts the film on its HBO On Demand service and streams it down the same cable onto the same TV's.  From the consumer's standpoint, it's the same process.  Push the button and watch the movie on your big screen from your favorite chair.  They don't really care how it gets there; they just want high-quality video and sound, delivered at the best price.

But for HBO or Netflix, this new paradigm often represents unexpected competition - especially when both options are available within a relatively short time period (or even contemporaneously).  And it doesn't help that every large Internet player is suddenly in the digital distribution business.  Competition is indeed becoming fierce.

For the most part, these potential conflicts are still being managed pretty well.  Most deals are kept within distribution windows that limit head-to-head competition between similar methodologies.   However, as technology continues to advance, it is getting more difficult. The windows are getting shorter and sometimes rights are being expanded in unexpected ways.

For example, Time Warner and Cablevision both recently initiated services which allow consumers to use their iPad or other tablet as a mobile television.  The studios take the position that this is not allowed under the existing licenses.  They claim that any viewing of content on an iPad is a part of the mobile rights.  They need to maintain that stance in order to sell mobile rights as a separate window.  Who is right?  As is so often the case these days, it's unclear.  There are likely good arguments on both sides.

The bottom line is that a serious struggle of competing interests now exists.  The studios want to parse the rights into as many windows and revenue streams as possible, and exploit them all within a fairly tight time frame.  Exhibition companies want to have as much time as possible to reach as many consumers as possible without being hampered by obsolete definitions that cause their rights to lose value with each technological shift.  Consumers just want to watch the movie on whatever device suits them without paying extra.  And us lawyers are supposed to write contracts that make it all work smoothly -- even years down the road when everything has changed again.  (Have I mentioned that my work has become really challenging lately?)

The guys who might have the best idea run a new company called Big Air Studios. I heard the CEO, Michael Arrieta, speak at a lunch today.  Very sharp guy.  Big Air is a group of experienced executives and producers who are focused on distributing content by every possible means and through every possible device. Their philosophy seems to be to give consumers what they want and then figure out how to make money at it.  I like that.  I don't think anyone ever went broke making their customers happy.

These are indeed interesting times.  As challenging as it makes my work, I wouldn't have it any other way.  I love progress and change.  Honestly, I can't wait to see what happens next...

The Clouds Are Gathering

As Distribution Moves To The "Clouds," How Will It Change Our Business?

In the wake of announcements and presentations at the NAB convention earlier this month, it has become clear that content management is moving to the clouds.  Microsoft, Cisco, IBM, Verizon, HP and others are all aggressively pursuing the development of cloud-based media management systems.  These companies are already pitching broadcasters and other content-owners on the merits of their respective cloud-based services.  So it's not too soon to ask the relevant question: "What are the implications of cloud-based content management for the entertainment industry?"

Let's start by agreeing on what we're talking about.  Cloud-based content services mean that the master copies of a large number of programs owned by various parties are all stored on massive servers operated by technology companies.  All of this content is accessed (whether for purposes of rental, purchase, streaming or download) directly through an interface operated by the third party technology provider.  Each content-owner's portal might be branded differently, but they will all probably operate in much the same way.

The reasoning for moving content to these types of services is pretty logical.   As more content is being delivered through digital streaming and downloads, individual content-owners and distributors will not have the internal resources to store, deliver and manage the greatly increased volume of traffic.  It would require huge amounts of storage and large "pipelines" to handle the fast movement of millions of large files.  Further, by outsourcing the process to technology specialists, the cost of programming and maintaining  a complex software interface could be amortized and shared among many companies.

Economically, it makes perfect sense.  Outsourcing incrementally increasing expenses which are outside of a company's core capability is generally an intelligent strategy.  So, is there a downside?  Perhaps.

I have never forgotten a discussion I had with Regis McKenna several years ago at CES.  He emphasized to me that the user experience is generally the single most important factor in the success or failure of any technology.  The reason that Apple products (and Netflix and Nintendo and Xbox and others) succeed is because they are fun and easy to use.  Successful technology products don't generally do more than their competitors; they just do it in a way that people like.

Applying this thought to cloud-based content distribution systems, I think that content-owners could lose much of their ability to customize the user experience.  If every owner and vendor of content looks and functions in essentially the same way, then the only differentiating factors are the actual programs and the prices.

Think of it this way. What if every store in a mall looked exactly the same, except it carried slightly different merchandise at slightly different prices?  No customized shopping experiences; just a different name on the door.  It would be very difficult to position your brand as a premium brand if you had no way to give customers a unique experience.  That could become a problem if all content distribution is controlled by a handful of companies.

When you commoditize anything, then price wars develop and margins go down.  The money content-owners save through outsourcing might not make it to the bottom line.  That means cloud-based systems could result in better prices for consumers and new profits for technology vendors, but perhaps little benefit for the content-owners.

That's one possible danger I see in content-owners outsourcing their customer interface functions.  Of course, if they can outsource pure technical functions (storage and delivery) and maintain control of the user experience -- and still save money -- that would be the best solution.

How do you see cloud-based systems changing our industry?  I'd love to hear some other thoughts.