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Convergence: Expanding the Big Picture

Talk about convergence. At the Solomon Smith Barney/Broadcasting and Cable Big Picture Conference, held earlier this week in New York, the list of speakers read like a who's who of both traditional and new media: Top brass from NBC, News Corp., Hughes Electronics, Sony, AOL Time Warner, Viacom and others, came to discuss the issues surrounding the convergence of their worlds. Over the low hum of discussions about the weakened economy, the softening ad market, and the bursting of the dot-com bubble, hung a roar of optimism, driven in large part by a continued and accelerating merging of new media and old.

The big message for those of us that focus on streaming media was that the Internet remains an integral part of the growth strategies of the major media, cable and consumer electronics industries. Here, we offer an overview of the key developments announced, denied, or hinted at during the conference.

Broadband: A Catalyst for Convergence

Lanny Baker, an Internet and online media analyst at Solomon Smith Barney, called the current quality of Internet content "shoddy," but echoed the general industry sentiment that broadband will open the Internet to more traditional media companies.

"The big opportunities in media are mass and the United States just hit 50 percent penetration of Internet users (across both broadband and dial-up)," added Baker, noting that the average AOL user is logging on for over an hour each day now, while viewership of TV and all other traditional media remains stagnant or declining.

"Its not about the TV, PC, phone or stereo, but all of them together."

Steve Case, chairman of the board at AOL Time Warner, added, "the next five years really will be the broadband years." Case likened the rollout of broadband to that of analog modems, and noted that modems didn't really take off until PC manufacturers bundled them within the PCs themselves. Likewise, Case added, "Its not about the TV, PC, phone or stereo, but all of them together."

Case also noted that the gap between dial-up and broadband Internet services is about to narrow - though perhaps not in the way one might expect. Case said that a rate hike for AOL's dial-up service is imminent, as it has been over three years since the price has increased. Meanwhile, broadband access prices are coming down, in general.

Niraj A. Gupta, managing director for Solomon Smith Barney, suggested that cable modems, in particular, are likely to be extremely recession-resistant, and predicted that cable investment in broadband will remain strong.

Online Advertising: An Optimistic View

Internet media has a 5 percent share of the entire media market, according to SSB's Baker. But Baker foresees a 25 percent yearly growth curve in the sector. Over the course of the next year, he said, the supply side of the Internet curve will be in sharp correction through mergers and closures, so that by 2002, the dot-com drag will have abated. The surviving online media leaders, Baker said, will then have increased pricing power for advertising, especially for those that have "cornered" audiences.

"I don't get why people are thinking that advertising is causing some sort of disease."

Mel Karmazin, president and chief operating officer for Viacom, pointed out a fact much ignored of late: as long as companies are releasing new products, they'll need to advertise, at which point it becomes a matter of delivering the demographic advertisers want. "I don't get why people are thinking that advertising is causing some sort of disease," he said.

Baker expects online advertising to experience a reduction from last year's $8 billion to a level of $6 billion this year. These numbers represent a higher take-up rate among traditional advertisers though, as half of the $8 billion flowing into online advertising last year was from dot-coms themselves.

Bob Wright, president and chief executive officer of NBC, added that although network television audience numbers are in steady decline, "If you link television, radio, Internet and print, then you have a wall up against your margins."

SSB's Gupta stated that television will face one of its weakest upfront advertising markets in 10 years, but predicts that CBS, Fox, and Univision will fare the best.

It's the Devices, Dummy

Satellite services and electronics company Hughes Electronics has big plans to move toward providing consumers with a networked, whole-home entertainment server solution, according to Eddy Hartenstein, corporate senior executive vice president, consumer sector. The idea, Hartenstein said, is to use Hughes' expanding DirecTV home-satellite service, combined with DSL service provided by Telocity, a company Hughes is currently in the process of acquiring, to offer huge amounts of content along with access to the Internet.

Hughes is also at the center of recent acquisition buzz. But while Hartenstein was seated next to Peter Chernin, president and chief operating officer at News Corp., there was no official word regarding News Corp.'s bid to buy DirecTV. Hartenstein merely muttered, "We'll see."

Meanwhile, Sony Corp. of America chairman and chief executive officer, Howard Stringer, took the opportunity to plug Sony's new Airboard. As part of a home network, the Airboard - which looks a little like a high-tech Etch-a-Sketch and features a 10.4-inch monitor — will allow one to wander the home watching high-definition television or surfing the Internet. "The people that make it the easiest will win," Stringer said, speaking of home networking.

Does Progress Threaten the Bottom Line?

Convenience also has its potential downsides, however. The coming wave of convergence devices and services, such as personal video recorders TiVo and UltimateTV, has some reviving a concern first raised upon the introduction of the VCR - that consumers will be encouraged to skip over the commercials, thus minimizing the impact of advertisements.

However, NBC's Wright, who serves on TiVo's board of directors, dismissed the issue. "If advertising is something that people don't want to see in 30-second spots, then it will simply get into the program itself," he said, adding that if this turns out to be the case, future Seinfield's will be drinking Coke instead of generic cola in the future.

"VOD and ITV are absolutely coming and we want to be prepared."

News Corp.'s Chernin feels that PVRs should have a positive impact on the quality of content, as consumers will have more choice. Chernin believes that hits will get bigger, and bland, middle-of-the-road programming that people used to watch by default, will disappear.

Shifting consumer tastes and competition are also forcing companies to spend money in preparation for interactive television and video on demand, according to Jamie Robbins, president and chief executive officer of Cox Communications. "VOD and ITV are absolutely coming and we want to be prepared," he said.

Gerald Levin, chief executive officer of AOL Time Warner, believes that digital production and distribution can change the margin and dynamics of the motion picture and music businesses. "We made a little announcement yesterday," Levin joked regarding the company's highly publicized MusicNet deal, in which Warner offered up its catalog and AOL its distribution network to build a subscription-based music service.

Levin also hinted that AOL Time Warner might be looking to acquire DreamWorks, stating, "You can never have a content library that's too large."

DTV's Bumpy Rollout

Regarding the rollout of digital television, the group of executives was less optimistic, saying that the government mandated deadline of 2006 for the rollout of DTV is upsetting the balance of market forces. Dick Wiley, former chairman of the Federal Communications Commission, said that the 2006 date is highly problematic due to disagreement among broadcasters over aspects of the standard and the resulting poor quality of first-generation receivers.

"Congress can mandate this or that, but you can't force people to pay $1000 for a new television that they can't run home and set up immediately," said NBC's Wright. He also noted that the DTV rollout requires a tremendous amount of ancillary investment with no obvious return, and added that NBC has already invested close to $50 million, without a penny in revenue.

Wright also noted that in some cases consumers need more than one box on their televisions to get digital reception and all of the channels they are accustomed to receiving. Stringer believes that until all related devices — from digital set-top boxes to the TiVo's of the world — can be incorporated into one box, as some of the higher-end DirecTV receivers are today, the wide-scale adoption will be inhibited.

"Consumers are resistant to too many devices in the home and remotes that look like the cockpit of a 747," Stringer said.

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