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Summary:

The unbundling of telecom resulted in free-ing of last mile, which in tandem with rise of Internet resulted in destruction of the voice-minute economy. The Media landscape is going through similar unbundling, thanks to the Internet, which takes away controls over distribution networks.

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One of the biggest stories of my career — as someone who covered telecom industry — happened fifteen years ago: The 1996 Telecom Act was the start of the liberalization of an industry that had been vertical with very little competition. What followed was an amazing transformation of the staid calling industry — not necessarily for the better.

One of the basic tenets of the 1996 Telecom Act was unbundled access to the telecom facilities of the local phone companies, which meant competing phone companies could access the so-called “last-mile” that led to people’s homes over the incumbent carrier’s network. The change in law created an insane amount of competition, and turned the economics of the business on its head. It led to kamikaze-style pricing of phone minutes. Voice had been the primary source of revenue for phone companies for nearly a century.

The increased competition was coupled with the arrival of Internet and Internet-based telephony. That allowed rivals such as cable companies to further take away voice customers. Skype, Vonage and others only added to the phone companies’ misery. Today, phone companies are happy to give away voice-minutes as long as you buy data from them.

Why do I bring that ancient history up?

Mostly because as I sit in the crowded Virgin America red-eye flight to New York, I’m thinking about the media business and the parallels I see between it and the media industry. In the media industry, we’re seeing an unbundling of a highly vertical business, with the most lucrative parts being siphoned off by Internet-based low-cost rivals.

Indulge me, for a minute. For longest time, things were quite cozy in the traditional media world. The large newspaper and magazine companies managed to survive the arrival of radio and television.

When competition got too intense, different types of media companies merged. It was something that made perfect sense. Time Inc., CNN, HBO — all became Time Warner — and it was a good example of such cross-platform synergy. When they applied the same logic to Internet by buying AOL, it blew up in their face. You’ll see why.

Many of us confuse the media companies as creators of media and content. In reality, their barrier to entry was ownership of distribution platforms. Just as telecoms of the past maintained their near monopoly by controlling the last mile of the network, the media companies maintained their money machine by controlling the distribution network: trucks, radio waves and television frequencies. The arrival of cable loosened their grip, but not as much.

Then came the Internet, which meant the distribution network was no longer under control of a select few. This saw the rise of new media entities such as CNET (now owned by CBS, an old media company.) And just as the distribution network was accessible to all, new open-source tools such as WordPress (see disclosure) came to market, making it easy for anyone to become a publisher of their own newspaper. With that began the great unbundling of the media business: something which continues today.

In the past, a typical big city newspaper would have multiple components: national and international news, sports, entertainment, business, travel, food, and real estate. These segments would bring in readers, which in turn would get the much-needed advertising dollars.

Today, the real estate section of a newspaper has been replaced by Curbed, Zillow and RedFin — with real estate advertising dollars flying away from newspapers to these new services.

For sports, you don’t need the back page; after all, you have SBNation, DeadSpin and ESPN. For technology news, you have TechCrunch; for analysis, you have GigaOM. For food-related stuff, you visit Zagat, Yelp, Epicurious, FoodSpotting and Foursquare. When it comes to entertainment news, PopSugar, Gawker, and thousands of other sites will keep you as busy as you want. Classifieds are for Craigslist. The brand advertising has followed, decamping from the pages of newspapers and television screens to these new media entities. In a post last fall, I wrote:

Because these new media are attuned to the needs of a new kind of information consumer, it’s hardly a surprise that media’s single largest source of revenues — advertising dollars — are getting sliced and diced in pursuit of this elusive, always transforming, info-savvy media consumer. Unfortunately, the media is used to selling page views, impressions and massive audiences: metrics as archaic as drinking on the job and smoking in a doctor’s office.

On the flip side, the unbundled television experience providers continue to do well. YouTube and Hulu, which doesn’t reveal their sales are growing steadily. (Hulu has said that it is bringing in over $240 million a year, but had declined to comment on profits.) The growth in their audience — YouTube has 101 million monthly uniques and Hulu with 12.3 million monthly uniques — is a very rough proxy of audience’s preferences.

In 2005, the newspaper industry had revenue of around $47 billion. Today, it is half that amount. The radio and television industry have gone through the same compression. TV advertising declined 21.2 percent from $52 billion in 2008 to $41 billion in 2009, and fell a further 12 percent in 2010 according to the Yankee Group.

Today, no one cares if Rupert Murdoch’s Fox Network or the USA Network carries House. What matters is House. The show has been unbundled from the distribution network, which in turn has shifted the value to the show and the not the distribution platform.

As Joshua Auerbach of Betaworks had earlier pointed out:

Why doesn’t the traditional model work online? In short, the web is too fragmented (millions of videos, millions of web sites), too loosely coupled (countless hyperlinks, embed codes, APIs), and too nascent (too few revenue models, too little clarity about the future) to fit comfortably into a media conglomerate as they exist today.

The unbundling is also forcing a new kind of economics on the media industry. For the longest time, because the media companies controlled the distribution platforms, they could charge exorbitantly high rates for their advertising inventory. There was a lot less transparency in the system at that time, and arbitrary metrics like cost per 1000 impressions (CPM) became standard for the industry.

That CPM has become a millstone around the industry’s neck in this new Internet-centric environment, which has a lot more transparency (though not as much as we think there should be.) Today’s media industry, regardless of individual companies’ businesses, is a slave to page views and video views. Demand Media and the AOL of today are no different from the low-cost and flat-rate VoIP providers: selling cheap, search-optimized pages for nano-pennies.

And just as SMS, IM, Facebook and Twitter started to siphon away conversation minutes away from the traditional phone system, we are seeing something similar happen to the media industry as well. The chase for page views is going to face a whole different set of challenges from the likes of Facebook, Zynga, Netflix and Twitter. These services are siphoning off attention (and thus time) from what we have so far known as media.

Perhaps it is time for the media industry to come to terms with unbundling and re-imagine the definition of media. If it isn’t the medium, then what is it?

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Disclosure: Automattic, maker of WordPress.com, is backed by True Ventures, a venture capital firm that is an investor in the parent company of this blog, Giga Omni Media. I’m also a venture partner at True.

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  1. Good article. I emjoyed it.

    1. Thanks Mike. Appreciate the sentiments

  2. Fantastic article.
    With respect to television distribution:
    There is a last bastion of defense for the networks.
    I call it the “multicast problem” and it has to do with live broadcasts.
    It’s the idea that the if everyone wanted to unicast a live HD video steam (say the superbowl or something more mundane like a presidential speech), the required backend bandwidth and server resources would be astronomicaly high and prohibitive.
    This is not a last mile “bottleneck” but a fundamental physical limitation of at the network hub that won’t be resolved in the foreseeable future.
    For millions of people to be able to watch a high bandwidth video stream simulataneously, the stream has to be multicast and the only entity that can make it happen is the network itself (e.g. the cable company or teclo).
    There has to be a box at each hub that takes one stream and converts it to whatever number is required for all the end points.
    What does this mean?
    “live” content will become super valuable. Cable companies will need it to remain relevant.
    The value of “live” content is in it being live. Most people don’t care to watch a sports event once the outcome is known. So in a sense, the content piracy proof.
    If I were a cable company, I would be buying sports teams to own that content.

    1. I agree and that is why the sports business is so important for tv companies. Fox and Comcast totally understand this. Ironically Time Warner sold of the Braves when they should have been loading up on that and selling off magazines etc.

      Anyway I think there are fewer unicast opportunities left and that is why I see the huge “events” becoming even bigger going forward. Look at the IPL Cricket in India. It is massive because it is must-see-tv

  3. James MacAonghus Thursday, February 24, 2011

    I love the metaphor. Unbundling takes disintermediation one step further. And if your metaphor holds up to scrutiny, the lessons about how telcos did/didn’t cope should be learning points for media companies.

  4. Very interesting parallel to the Ma Bell story. I look forward to a follow up piece – you nailed implications to this seismic shift in the media world, and now there is a whole article on recommendations and possible future scenarios. Thanks for your thought provoking post.

  5. Very interesting parallel to the Ma Bell story. I look forward to a follow up piece – you nailed implications to this seismic shift in the media world, and now there is a whole article on recommendations and possible future scenarios. Thanks for your thought provoking post.

  6. Gregg Freishtat Thursday, February 24, 2011

    Outstanding commentary. I don’t communicate less, I communicate more. I don’t read less news, I read more. Same for music. The unbundling of the “content/minutes/music” from the system of distribution creates the opportunity for new technologies and business models and in the end, lots of money will be made (and lost). Brands and content are getting more important not less important but the technologies and infrastructure to create the new ecosystem are just emerging. In full disclosure – we are working on just that at Vertical Acuity. Great article and perspective.

    1. Gregg,

      Compliments right back at ya. I love your summation/response.

  7. You just figured this out?!

    1. And are you trying to say something?! :-)

  8. Very insightful, with one small twist: AOL bought Time Warner, not the other way around. Yes, it didn’t work out so well and TW controlled AOL. But the actual “merger of equals” was an AOL acquisition of old media.

  9. Excellent detailed overview! 125 years ago in the US, “buggy whip” makes were in every town. They had a good sized chain of suppliers and controlled the market on personal acceleration. Oh, your could use a stick from a dead tree branch with a string or piece of leather attached to it, but the “buggy whip” was the standard. Then one day a man named Henry Ford had a different idea. Nice article!

  10. You Can’t Play a New Media Game By Old Media Rules: Tech News and Analysis « Thursday, February 24, 2011

    [...] Om noted in his latest missive, the media industry is in the process of being unbundled, just like the telecom business has been, and it’s even harder for media and content companies because there is no technological [...]

  11. Great metaphor, boss, but I think TV networks are a little safer than it seems. TV ad spending has been hammered by the recession (and comparisons to an election/Olympics year), but it’s recovering now:
    http://kantarmediana.com/intelligence/press/us-advertising-expenditures-increased-64-percent-q3-2010

    TV networks roles will change, but maybe only subtly. A network can still fund content creation (and own studios), sell ads, and secure distribution (cable and online carriage fees could replace affiliate ownership dollars). They’ll have to get better at promotion as scheduling loses importance to time-shifting and Internet viewing. And they’ll have to get smarter about advertising.

    TV media buying and planning hasn’t changed much from the 60’s. But the measurement companies are working on it, as are targeting technologists like Simulmedia and Canoe Ventures – and even Google. Eventually we’ll figure out which 50% of Wanamaker’s ad spending is wasted, but that’ll make the other 50% more valuable. And expensive.

  12. thanks for thinking out loud. very needed in these crazy times. most are just talking out loud on their bluetooth headset!
    what you say is a truth that is finally making content producers see the value in their creations. dollars flow where eyeballs go.
    good content is the answer.
    good shows will be seen in many places and on many devices.
    keep up this great dialogue and think some more…out loud!

  13. A very good piece, but I think the metaphor falls apart a bit in longterm analysis. Wasn’t the net net of telcom unbundling – a decade later – a re-concentration of pricing control? There may be 2 or 3 providers who will drag that “last mile” of connectivity to my front door, but a) they achieve scale (and thus profit) through bundling, and b) they all charge prohibitive switching fees. I don’t see upstarts offering better quality or customer value-adds because the big boys will eat negative margin on one service to maintain marketshare. The revolution appears to have been re-aggregated.

    In digital media, I think we’re going to see content-centric buyers with cash (Disney/Google/News Corp/Facebook) start to gobble up the Twitters and Yelps. Fortunately this time the consolidation trend will be horizontal. And while this may be less restrictive to end users in terms of distribution/access, it could have a negative impact on editorial.

    1. John

      I think the unbundling was reversed by non-competitive forces — paying off lobbyists and politicians to reverse the rules of unbundling. In the US the bells aggregated, won the battle but lost the war. Look at their revenues — most of them are coming from data on wireless where they control the last mile so to speak. In the wireline world voice revenues have collapsed, broadband revenues are hard to come by because it is a competitive market. The revolution was not re-aggregated in the US, as much as it was re-purchased. Globally speaking, I think unbundling has had a more impact in Europe.

      As for digital media, my contention is that digital media doesn’t mean online version of a newspaper or TheDaily on iPad. Digital media is an entirely different and unique beast. Magazines of yesterday are information services of tomorrow. I wish I could see the future, but let me just say, for now being part of the big shift is good enough for me and my team.

      Thanks for your thoughtful comment.

      1. Totally agree on why telcoms got re-aggregated. Perfect competition only exists when information and influence are perfectly distributed to all. ;)

  14. Om,

    Agree with the unbundling destroying the news business. National and international news have very low willingness to pay and that coverage has largely been subsidized by unrelated businesses of autos, employment, retail, travel, etc.

    Macy’s couldn’t care less about national news. But they advertised in newspapers because that’s where audiences were. It was the cheapest form of distribution for that size of an audience.

    Don’t forget another big change here: distribution doesn’t have to go through an intermediary any more. A travel provider doesn’t necessarily need a newspaper or even Travelocity. They can reach their most loyal customers for free via email, Twitter, etc. And they can do it better than ever before based on the rise of information technology (e.g. a massive database of my travel habits in the form of frequent flier programs.)

    I wrote a post on this a while back:
    http://blog.agrawals.org/2009/04/05/newspaper-companies-cant-unring-the-bell/

    These days, the physical newspaper is effectively a random collection of stale Internet content created by a bunch of people who don’t know my interests printed out and delivered to my door step by diesel-guzzling trucks.

  15. Om,

    You say that metrics like pageviews and CPMs are archaic. I’m curious what you (and fellow readers) think are more appropriate metrics for advertising driven sites?

    Uniques, pages/visit, minutes/visit, click rates on ads are pretty common already. thanks.

    1. Arjun

      Part of a future post :-) I am too tired today and will answer in detail next week. Warmly.

  16. Yes, the telecom industry was unbundled, first in the 70s when phone companies were forced to let people buy their own phones, and then, as you mentioned, with the 1996 deregulation act, when they were forced to provide access to their local copper wiring. But they are erasing all of those gains.

    The wireless carriers are effectively bundling phones with service now, as they (with the exception of T-Mobile) do not charge less for service if you provide your own phone. They use the subsidy as an excuse to lock subscribers into contracts, even though they allegedly have a choice. If the equipment was truly unbundled from the service, there would be a different price for service when you provide your own phone. But there isn’t a lower cost option, much to the detriment of consumers.

    And as phone companies morph into internet access providers, they are attempting to implement the virtual monopoly on access that they enjoyed with copper phone lines pre-96. They have successfully blocked all attempts to limit their ability to keep the internet open, and want to create walled gardens via mobile device-use policies and control of wired broadband access traffic flow. They will succeed at this, because politicians are either incapable of understanding the technology well enough to realize what the telcos are doing, or they like the idea of giant entities extracting far more value from their customers than they provide.

    So if the unbundling of old media follows the path blazed by the telcos, the ability of the populace to be accurately informed and educated is going to be seriously compromised.

  17. Popular on Twitter: Making sense of TBD, condensing Tom Friedman and making J-school more social » Nieman Journalism Lab » Pushing to the Future of Journalism Thursday, February 24, 2011

    [...] The unbundling of Old Media [...]

  18. As KenG notes, I disagree with the premise that the telecom industry is unbundled. It is not, at least not in the U.S. In France and the UK it is, but not here, not anymore.

    On the iPhone, I can buy any kind of app I want, as long as it doesn’t need to insinuate into the telephony stream – apps cannot join calls, divert calls, intercept SMS or anything to do with the telephony side of the phone (other than blindly initiate a call and get out of the loop). But they can play a mighty Angry Birds. No carriers/phones offer such telephony side integration by third parties.

  19. Good article! The 1996 Telecom Act also transformed the yellow pages business. It required telco yellow page publishers to sell listing data to independent yellow pages competitors at a prescribed rate ($.04 per listing). That enabled competitors like Yellowbook to produce high quality directories and offer lower pricing to local business advertisers and win share in the $12B yellow pages industry from Verizon, AT&T, etc.

  20. Content is king?

  21. Very interesting comparison, and it’s certainly true that ownership of the means of production and distribution were big barriers to entry in the past. I think the mistake was that media companies have — and continue to — undervalue the capability of creating first-rate, credible content as an asset. Rather than chasing page views, media companies should lead with their strength: content. In a world when “anybody can be a publisher,” quality content is a real differentiator — and the beauty of the transparency that comes when the barriers come down is that it’s easy to see the difference between quality content and poor content. The marketplace of ideas is amazingly efficient. yes, it’s not the medium any more. It’s the content. Or, I should say, credible, quality content held to some professional standards. but, while it’s too late for many media companies, the re-imagining you call for has already begun — just not by the old media players. While media companies continue to chase the old models — and horribly undervalue the talent that creates the content — new providers of quality content are poised to take their place. The next generation of media company are platform agnostics and understand the value of the content itself.

    1. I agree with you. I think what has happened is that creation of quality content has been mistakenly equated with big and not with good. I think in the end that is the key problem.

      I don’t think tons of money — writers who are good at indie pubs are paid peanuts and still do awesome work — is the key difference. it is about conviction in their own business, and then figuring out a new economics model that fits the new world. It is also about taking a different view of what is media.

      1. yes, absolutely. fascinating to watch. I think after the bubble of 2000, media companies privately declared victory over the upstarts. they misinterpreted the bubble as validation — and settled in to 10 years of status quo re: the model. I have a piece on it at MediaPost that says the next round of media innovation and disruption is being driven by a new class of challenger — the displaced media pro. (you can find it here: http://bit.ly/e322m0 )
        thanks for the provocative post and interesting discussion.
        @jpundyk

  22. MindOnMediaSales Friday, February 25, 2011

    Om,
    Arjun is on to something, and his ideas are near to what I would write. CPMs, etc, may be the ‘millstone around the neck’, true…but it is not one that Web firms necessarily put there themselves. There was, maybe by necessity, some “adaptation” to what was familiar to current buyers of Media, to get those dollars flowing. But we are all starting to see more flexibility, and ‘Engagment’ billing/abilities will be soon be kicking off that millstone; it already is.

  23. OM- great discussion.
    I see it as a constantly evolving marketplace. Consumers want the maximum flexibility (pick my device, my channel line up, my song list, my media) and want to pay as little as possible for it…

    Media companies want to create sustainable advantage and profits. The distribution networks are little toll booths that are incredibility valuable but are constantly getting disrupted by constant innovation. The real problem is the pace of the innovation. In the first hundred years you had phone, newspaper radio magazine and cable. In the last 15 years you added internet, wireless, handheld, tablet, and services like video, social media, location based services.

    Its almost like the business model can’t keep pace with the innovation.
    50 years from now it will be so obvious what happened but its always hard to see it while its happening……

  24. Compte-rendu du « petit déjeuner transmedia  chez Cap Digital « Fragmentation des médias Saturday, February 26, 2011

    [...] Un autre sujet abordé durant les discussions a été celui du financement des projets transmedia. L’ensemble des participants a aisément constaté que le faible nombre de projets transmedia ayant vu le jour en France sont le fait d’initiatives venant des nouveaux entrants du secteur des médias (TNT, cable et satellite). Or, ces acteurs ne bénéficient pas exactement des mêmes capacités financières que les chaînes historiques, ce qui réduit les ambitions des projets ainsi que leurs audiences potentielles. À cela, il convient d’ajouter que la télévision, dans son ensemble, a perdu beaucoup de son pouvoir au cours des dernières années : «Today, no one cares if Rupert Murdoch’s Fox Network or the USA Network carries House. What matters is House. The show has been unbundled from the distribution network, which in turn has shifted the value to the show and not the distribution platform.» Om Malik – Old Media Is Being Unbundled, Just Like Telecom Was [...]

  25. Good luck to all the aggregator leeches when they can’t steal content from real journalists and/or have to pay for it themselves

  26. Fantastic article.
    With respect to television distribution:

    http://www.channelsurf.eu/

  27. Now Starring You, in a Movie About You: Tech News and Analysis « Monday, February 28, 2011

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  28. How can news sites cross the language barrier and appeal to foreign readers? Tuesday, March 1, 2011

    [...] much more comprehensive coverage of Virginia affairs than Time or Newsweek ever could. As Om Malik detailed recently at Gigaom, the internet is creating an unbundling of content, where a publication’s content [...]

  29. Media Unbundling: How Will TV Get “Everywhere”?: Online Video News « Friday, March 4, 2011

    [...] Om Malik wrote about old media being “unbundled,” just like telecom was. In telecom, once broadband came along, phone calls became just another [...]

  30. TV bundling and the future of Netflix | An Aerial Atelier Thursday, March 10, 2011

    [...] Malik wrote a blog post last week that asks media companies to reimagine their content bundling given the popularity of unbundled [...]

  31. What Do Don Draper and GitHub Have In Common?: Tech News and Analysis « Thursday, April 7, 2011

    [...] I am not surprised that Madison Avenue and traditional media companies are struggling to find a way to embrace the current shift from many unique means of distribution to a single network. The new medium needs someone who has the ability to leverage the Internet scale but also have a micro-focus at the same time. [...]

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