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Behind Time Warner-Fox and Cablevision-Scripps: The Titanic Clash Between High Tech and Content

Within a brief period of time, we've seen two clashes in the cable television industry. First, Time Warner (TWC) and News Corp. (NWS), in the guise of Fox, had a public spat that was part of negotiating brinkmanship. Then Cablevision Systems Corp. (CVC) and Scripps Networks Interactive (SNI) continued their fight, with 3.1 million subscribers losing access to HGTV and the Food Network as the battle for payment levels rages on. But this isn't a story about television. It's just an extension of what we've been seeing in other guises and shows one of the looming business battles of the coming years: high tech companies versus content producers.

It may be a bit simplistic, but people generally make money in one of two ways. They either sell something they make or they sell something that someone else makes. A consultant provides ideas and insight for a fee. Facebook offers a service to let people communicate and then sells the availability of screen space to advertisers. Sometimes you have a hybrid, like Best Buy (BBY) retailing electronics from third parties as well as having its own private label lines of products.

In high tech, the product may seem like hardware and software, but it's actually information. People are either peddling information that others want or enabling the manipulation of information from one form into another that is more useful. But the core information and its value is really what drives the entire high tech economy, and, largely, the content and processing have come from two separate types of companies.

That was fine for years. However, a few inherent problems have reared their heads, interacting in a dangerous way:

  1. For various reasons, content providers made their money from controlling access to the content. Newspapers had a practical lock on reaching consumers in their area with advertising messages. Broadcast television knew that viewers would have to tune in at specific times to see the programs they wanted, and would have to sit through advertisements. Book buyers had to go to stores that had little competition. Music lovers had to buy entire albums to get single songs. They conditioned people to assume that the cost was for scarcity of supply, not expense of production. But the combination of digital forms of content and the zero marginal distribution cost afforded by the Internet let consumers, who associated price with distribution, expecting much for little.
  2. High tech companies played a different game, riding the ever increasing power of semiconductors and rising demand to slash prices and increase functionality. Eventually, the ability of computers zipped far past what people needed and there was much competition, because the cost of getting into the business dropped. Software companies got onto the "sell cheap and keep getting money for new versions" mentality, essentially getting paid for a single unit but hoping to get a subscription model. Over time, the cost of both hardware and software have plummeted and now making money is ever more challenging, to a point that many are trying to understand how to make a "freemium" model pay off.
  3. The current economic system puts a premium on high tech companies that are constantly growing, and the growth has often been put ahead of sound long-term finances. (Otherwise known as every tech bubble that eventually pops.)
  4. Customers, whether corporations or consumers, are willing to spend only so much money to get the information they want in the form that is useful. The little they're often willing to ante up now must be split among all the companies involved in making the information delivery possible.
So we have a new market dynamic. Consumers are holding fast to their money, fueled by a weak economy and long-developed expectations that eventually everything becomes free. On the other side, both content and tech companies are driven to keep growing. However, only a shrinking pot of money is available, so they will increasingly slug it out to take as much as possible of what is available. We've seen it in a number of ways:
  • Print publishers demanding a share of the money made directly or even indirectly by tech companies from content. No surprise that it was News Corp.'s Rupert Murdoch threatening to pull his company's sites off Google (GOOG).
  • The recording industry has assumed that going after file sharing sites and consumers would help them keep people locked into an old system that ensured a flow of money, even though that system is as solid as a badly cracked dam with a river running through it.
  • Twitter has parceled out its data to Microsoft (MSFT) and Google as a way of making at least some revenue -- a necessity when a company wants to insist that it's focusing on providing a service, not on making money.
  • Wolfram tries to claim copyright in the presentation of data provided by the numeric work of its Alpha search engine and demands a commercial license for "[s]ystematic professional or commercial use of the website, or use for which you are being specifically paid."
These are only a few of the early examples of something that, by economic necessity, will turn into a broad and powerful industry trend. There is no value to consumers in gadgets by themselves. There is no value to consumers in out-of-context information that's unusable. There is value when you bring information and technology together, and that means that two camps have to split what people are willing to spend. Let the war games begin.

Image courtesy Erik Sherman, all rights reserved.

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