VCs Down on Carriers as ‘Middlemen’ in Video Explosion
BELLEVUE, Wash. -- The arrival of Apple TV, Google TV and other services to deliver programming directly to consumers threatens cable companies’ business model, venture capitalists said Thursday at the Network Computing Architects Security & Technology conference. Carriers will also have to re-think business models as data-intensive applications, such as video, swamp their networks, VCs said. The backdrop to the discussion was Cablevision’s fight with Fox over carriage fees. Fox briefly blocked Cablevision subscribers Saturday from its programming on Hulu, and on Thursday was still denying Cablevision customers in New York and Philadelphia wired access to Fox TV stations.
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Cable companies have “huge profitables” from video and can make more from providing “bits or bytes over the top” a la carte, said Alan Bezoza, research analyst for Janus Capital Group. But as Netflix and others circumvent cable companies, “the content guys are afraid, because they make so much money from the crap that nobody watches” in cable packages, he said. ESPN on its own would probably cost $10 a month, Bezoza said. Consumers are less likely to spend ever-increasing sums for their connectivity and content than to shift spending from “middlemen” such as cable, Bezoza said. Mina Faltas, investment analyst for Viking Global, said over-the-top video probably will be “complementary” to current video consumption near term, not a direct threat.
The reliability of the network delivering content becomes much more important as a result, said Bill McAleer, managing director for Voyager Capital. He said he looks for startups that provide “enabling technology,” such as more efficient streaming capabilities, and is generally skeptical of business models dependent on a carrier. Faltas said providers of networking systems, network security and content delivery networks will be the winners as video is decentralized. “The prisoner is running the prison,” he said, referring to iPhone users overwhelming AT&T’s network and giving the device a reputation for unreliability.
Consumers pay for bandwidth as if it’s water pressure, a “terrible” economic model as data use grows, Bezoza said. “The Internet would crush itself” if even 10 percent of video subscribers started watching shows online exclusively, he said. Bezoza said carriers will have to increasingly adopt metered service to pay for bandwidth upgrades, especially because new wireless standards don’t provide much more efficiency and the growth of tablets like the iPad will pose new bandwidth crunches. Device makers could help by incorporating dual-mode functions, so devices can automatically hand off connections to a Wi-Fi network from a 3G network -- but that option isn’t economical for wireless pure-plays that would have to pay the Wi-Fi provider for the handoff, he said.
The tech landscape experiences a “sea shift” roughly every 14 years, McAleer said. Today’s shift is “ubiquitous computing,” but just as importantly, consumers are increasingly driving the changes, he said. Thanks to the “consumerization of IT,” businesses can add new technologies to their operations with fewer frustrations, such as adding a Mac to a PC office or running Citrix for remote access, Bezoza said. “Right now, I think, IT managers aren’t dealing with it,” because the simplification of IT functions threatens their budgets.
The “commoditization” of hardware through virtualization and the popularity of tablets presents challenges for carriers because data can move much more easily, Bezoza said. Tablets may also have negative effects on unrelated industries, such as printing services and paper suppliers, as people increasingly view and share documents on portable screens, Faltas said. Startups founded by engineers or product specialists often fail to explain how customers can easily use their product or service, getting too excited about showing VCs how cool their technology is, McAleer said. What draws VC interest is showing how a service can simplify the consumer experience -- something as simple as formatting a Web service for a mobile device, launched by a screen icon, Bezoza said.
While VCs look for “disruptive” technologies and how to fix “pain points” in technology, deciding whether to fund a startup often comes down to a “gut feel,” McAleer said. He reads college newspapers and blogs to get a sense of how students feel about technology, and he said he had his children play with one startup Voyager is considering, a “time-limited” mobile location service that helps people find each other. McAleer said about half of Voyager’s deals ultimately fail. For every 10 investments, “ideally we get one home run” or a few doubles, he said. Bezoza said he ultimately considers “sentiment” when evaluating a potential investment, paying special attention to “well-hated” ideas. “Sometimes it’s business psychology more than anything else.”