IP Democracy: More on the TV Transition

In her latest post, Cynthia cites the following from a John Markoff NYT piece:

Microsoft executives defend the way in which the telephone companies are deploying the company’s IPTV technology, saying that if consumers are exposed to the chaos and uneven quality of the open Internet, it is likely to undermine the development of the new services.

Reading this reminded me of something posted yesterday by John Battelle, describing his recent conversation with Jennifer Feiken, who runs Google Video:

Another very important part of this announcement is ranking and relevance. I asked Feiken how Google plans to rank Google Video searches - clearly this ain’t no simple PageRank play. Will they rank by popularity? Profitability? Metadata? “We realize this is a difficult problem to solve and we are definitely innovating in this area,” Feiken told me.

This speaks to Cynthia’s point that we’ve begun a transition that will take some time to evolve. It also underscores another point—that “video search” remains a relatively undeveloped and strategically important piece of “infrastucture” in the new world of Internet TV.

Another aspect of the change relates to revenue sharing. The reporting I’ve seen suggests Google will get 30% of revenue from video sales. That is significant in several respects. One is that it represents a diversification of Google’s advertising-dependent revenue stream. Another is that this 30/70 revenue split establishes a new reference point in terms of video distribution deals. My understanding is that cable’s gross margins tend to be highest on basic programming, but that even its gross margins for distributing movies via premium channels, pay-per-view and video-on-demand are significantly higher than the 30% share Google is expected to receive.

Then there’s the advertising component of Internet-delivered video. Already the cable industry is working on targeted advertising strategies with companies like Rentrak, which compiles voluminous VOD-usage data, and Visible World, which has developed systems for developing and inserting targeted video ads. But, while the top cable operators (and presumably Verizon and AT&T/SBC) are pretty excited about its potential, highly targeted cable advertising remains a nascent phenomenon.

Now we’ve got the dominant force in search and advertising algorithms entering the fray. And, according to Robert X. Cringely, Google has a “Grand Plan to Take Over TV Advertising.”

How often do you see an ad on TV for something you’re currently in the market for? I’m guessing almost never. But imagine if everyone watching “American Idol” only saw ads for things they might really buy? Or, better yet, only saw ads for things they had already expressed an interest in? The value of those same 30-second commercial slots would increase by orders of magnitude.

Google imagines a world where only single people see match.com ads, and people who can’t drive see ads from taxi companies where others see Toyota campaigns. Where fraternities see ads for strip clubs, beer, Cancun weekends and LSAT prep courses, and only seniors (and their adult children) see ads for Alzheimer’s drugs. What would be the value of that increased efficiency, capitalized into present dollars? Ten billion? Fifty billion? I say the value is $100 billion — 25 percent of the total U.S. advertising market and 15 times Google’s current size.

Google is going to let the telco and cable companies burn their capital building out IP-TV, knowing that Google will still be the only game in town for the crux of the whole thing: the ability to show every viewer the specific ads that companies will pay the most to show him at that specific moment. What Google wants to do with these trailers is SERVE EVERY TV COMMERCIAL ON THE PLANET because only they will be able to do it efficiently. Only they will have the database that converts those IP addresses into sales leads, only they will have the servers and disk space close enough to the viewers to feed the ads. Only Google will have the chops to run a constant, real-time auction for the next ad every consumer is about to see, and then serve that ad at the moment the program goes to commercial.

But Google can’t insert ads into an “American Idol” stream. Fox would just sue, right? No, Google will cut a deal with every network to customize their ad spots for every viewer. For a small cut of their ad revenues, Google will handle all customization costs, hardware and software. The networks will all go along because the customized ads will be so much more profitable that it would make no sense for any network to refuse.

Posted by Mitch Shapiro on January 7, 2006 2:42 PM to IP Democracy