What Apple does and doesn’t do

For a clue to how Apple approaches the video market, you need look no further than how it’s dealt with every other part of the media ecosystem to date: It creates good user experiences across an ecosystem of great products that publishers can sell their content on.

It introduced the iPod and iTunes and allowed the music industry to sell their songs on the platform, and it took a cut. It introduced the iPhone and the App Store and allowed developers to create games, utilities, productivity tools and the like, and it took a cut. It introduced the Apple TV for the Hollywood studios and TV networks to rent and sell their movies and shows to consumers, and it took a cut. It introduced the iPad, iBooks and the Newstand and allowed book and magazine publishers to sell digital versions of their titles to consumers, and it took a cut.

You notice a trend here? Product, platform, revenue share. That model has been extremely profitable for Apple, in part because it’s had to bear little risk to collect whatever revenues and profits come from its partners’ content sales. What Apple does not do is pay upfront to have the luxury of carrying content and then shoulder all the risk while attempting to create a sustainable new business model for its partners.

The economics of the situation

But let’s talk about the actual economics of subscription pay TV. Time Warner Cable announced in its earnings Thursday that it paid somewhere around $25 a month per subscriber in content costs last quarter. Think Apple could do better? It can’t. Any new entrant to the pay TV market acquiring content licenses does so at rates higher than what others have previously negotiated. This was true when the satellite TV companies entered the business, it was true when Verizon and AT&T began offering IPTV services, and it will be true for anyone that attempts to create a virtual cable company.

Starting costs for Apple — or anyone else for that matter — to build a subscription TV service will be in the mid-$30s at the very least. Which means it’s not going to roll out a $25 or $30 subscription service or undercut your local cable company on price anytime soon.

You know how every quarter analysts dissect however many billions of dollars Microsoft has lost in its Internet services business? That would be Apple TV’s media business, quarter after quarter, if it decided to go down this road. Sure, Apple has a lot of money. And sure, Apple could bear those costs. But why would it? What’s the actual benefit for Apple or its investors?

The misplaced dream of a la carte

“But what if I don’t want all of the channels? That’s where Apple could really disrupt things!” It’s a familiar refrain to hope and wish and pray that a company like Apple will be able to do what others have failed at so far, and negotiate a la carte pricing for individual networks. That sure sounds good, and I’m sure consumers would love it! That is, until they saw the price tags associated with each of the networks that they would want to buy.

Even if Apple were able to convince Disney, for instance, to separate ABC, the Disney networks and ESPN’s sports networks from the bundle, it would be just like breaking up any other bundle: the cost to sell each network separately would be egregiously expensive. Prohibitively so.

As a consumer, would you pay $5 just for ABC? Another $5 each for CBS, NBC and Fox? Then $15 or $20 for ESPN? And $25 for HBO? It’s not like these guys are just going to give those channels away at a small premium over what they get from cable. If they’re going to break the subscription bundle, they’re going to want to get paid to do it. In that world, how many channels do you think you could buy before the cost became more than what you already pay for a cable subscription each month?

The actual market opportunity

Put all that aside, though, and the truth of the matter is that streaming video is still a relatively niche market. How many people are out there who actually have an interest in a streaming TV service? In theory, the addressable market is every broadband household that also pays for cable service. But take a look at the number of Apple TVs that are out there (just 4.2 million) or the connect rate on smart TVs today, and you see that very few people are actually taking advantage of broadband-delivered video. That could change with the introduction of the mythical iTV, but it seems pretty tiny today.

Sure, Apple created the modern smartphone market with the iPhone or the tablet market with the iPad. But it’s not into creating new services. And it seems unlikely that Apple would introduce a new service like this, especially one that is likely to be risky, unprofitable and targeting a market segment that doesn’t yet exist.

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Half a year ago, Netflix was only available on around 450 devices. But it’s not only the number of devices that’s changing; usage patterns are shifting as well. Netflix has traditionally seen most of its device usage on game consoles. Network management specialist Sandvine reported last year that the PS3 alone was responsible for more than 30 percent of all Netflix traffic. On Wednesday’s call, Hastings highlighted a few device categories that didn’t play as much of a role just a year ago.

Asked about the possibility of an Apple-made TV set, he said he doesn’t know what Apple has in store for the TV market. He did, however, emphasize that the existing Apple TV set-top box has been “really successful” for Netflix. Apple sold 1.4 million units of the device in the fourth quarter, which brings the total to 4.2 million units sold. As a frame of reference, Roku has only sold 2.5 million devices so far.

Hastings also talked about the growing importance of tablets, which are especially interesting as a mobile device to Netflix because most people use them via Wi-Fi, so video viewing doesn’t collide with carriers’ data caps. And people are using their iPads, Kindle Fires and Android slates a lot for watching Netflix: “We do see people enjoying a lot more of their viewing on tablets relative to the PC,” Hastings said. That’s significant, because PCs used to account for close to 20 percent of all Netflix traffic just a few months ago.

The last device category highlighted by Hastings was Smart TVs. It looks like consumers are finally connecting their TV sets to the Internet, if only to watch Netflix: “Smart TVs is one of our fastest growing device categories,” Hastings said, adding that the long-term trend for connected TVs is “very positive.”

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However, the company may have another interesting product in store for its streaming subscribers: 3-D movies. “On streaming, that is definitely something we can do and we will be looking at,” Hastings said. The company is already offering 3-D Blu-rays for rent, but hasn’t said how well these titles are doing. Subscription plans for physical discs have been declining sharply, and Hastings said during the call that he expects these numbers to decline quarter-over-quarter “forever.”

What else can we expect from Netflix in the next few months? Hastings said that it will finally start offering separate streaming queues for families this year, and it looks like the company is continuing to roll out Netflix for Kids on connected devices. Most recently, it rolled out the kids-focused UI on Apple TVs, and Hastings said that the device has been “very successful” for his company. Netflix will also continue to work on other devices, with a special focus on tablets. “We do see people enjoying a lot more of their viewing on tablets relative to the PC,” Hastings revealed.

Image courtesy of Flickr user bark.

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Netflix had 21.76 million subscribers at the end of the fourth quarter, which is 220,000 more than in the previous quarter. Internationally, it now has 1.86 million subscribers. The number of DVD subscribers shrunk to 11.17 million, down from 13.93 million in the third quarter. That means for the first time ever, streaming plans outperform DVD rentals by a ratio of close to 2:1.

The good news for Netflix is that even with its steep decline in DVD rentals, the overall number of customers is growing again. Netflix lost 810,000 U.S. subscribers in the third quarter as a result of its unsuccessful attempts to spin off the DVD business into a separate company, as well as a price hike earlier in 2011. In the fourth quarter, that combined subscriber number once again grew by 610,000.

Netflix executives have long said they see the company primarily as a streaming video provider, with DVDs being part of a legacy business that will decline over time. However, the accelerated rate of decline could spell trouble for Netflix’s bottom line: The company has been using the shrinking but very profitable DVD rentals to finance its international expansion, which it put on hold until international profitability returns after launching in the U.K. and Ireland in January. With DVD customers canceling by the millions, that could now be further away than previously estimated.

Netflix CEO Reed Hastings wrote in a letter to shareholders (PDF) that he expects DVD subscription cancellations to level off this year, with an expected 1.5 million customers saying good-bye to the iconic red envelopes in Q1 of 2012. From the letter:

“While contribution profit from domestic streaming will grow sequentially, it will not be sufficient to offset the sequential decline in DVD profits (~$50 million), and the sequential increase in our international losses (~$50 million), as well as cover our global G&A and Technology & Development costs. As a result, we expect modest quarterly losses, as well as losses for the calendar year.”

In other words: Netflix won’t enter any other territories in 2012, and might have to work on making more money with streaming if it wants to keep expanding in the future, because DVDs may not be around for much longer.

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Aside from making the speech available in other countries, the captioning is also meant to make it more accessible to viewers within the United States that primarily speak a different language, as well hard-of-hearing viewers. The Newshour team is working with professional translators on some of the subtitles, while others are collectively done by volunteers through Universal Subtitles’ online tools.

Universal Subtitles was founded in early 2010 by the Participatory Culture Foundation (PCF), an open-source media initiative that’s also known for its Miro video player. PCF co-founder Nicholas Reville told me in an email that the Universal community has subtitled 56,000 videos since it launched its web-based captioning tools in August of 2010.

The site has gotten help from 22,000 volunteers transcribing videos and translating subtitles, but is now looking to make its technology available to commercial clients as well. “The launch of the Newshour team represents the full rollout of our enterprise services for companies and organizations,” he wrote via email, explaining that the enterprise edition of Universal Subtitles uses both paid staff and volunteers as well as integrates paid transcription and translation services. He added:

“It’s amazing how many companies are getting in touch with us about managing their subtitles and setting up volunteer teams. I think the value of video is finally being recognized by a lot of companies and they want to make it searchable and accessible for more viewers.”

Some of the money invested by PBS will also be used to extend online videos with additional information, much like the White House did with its enhanced SOTU webcast Tuesday night. PBS Newshour will use Mozilla’s Popcorn player to add news and Twitter feeds as well as viewer-submitted commentary to videos of this year’s election cycle.

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That’s worth noting for a few reasons:

1. Apple is clearly outselling the competition. Apple TV might be a hobby, but it’s already the top-selling device in its class. The next-best-selling Roku streaming boxes have sold 2.5 million units over the past three years, compared to Apple’s 4.2 million units in about half the time.
2. There’s pent-up demand for the mythical “iTV.” Apple is expected to introduce a connected TV soon — possibly later this year — and Apple TV’s sales show that users are already interested in the company’s user interface and services that would likely be available on it.
3. Users want Internet connectivity and access to streaming content on their TVs but might not be willing to buy a new set to get it. Last week, I wrote about how the latest batch of connected TVs from manufacturers like Sony, Samsung, Vizio and others probably won’t convince consumers to upgrade in the near term, but software improvements are likely to come soon. In the meantime, Apple TV is a good stopgap for those not quite ready to jump on the connected TV bandwagon.

All that said, let’s put things into perspective: The Microsoft Xbox 360 sold nearly a million units in one week alone during the holiday quarter. The Apple TV is far from a mass-market device, but its sales numbers show that even in a relatively small market, Apple dominates the competition.

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ABC, CBS, Fox, NBC will all broadcast President Obama’s speech live, as will CNBC, CNN, Fox News and MSNBC. Many of those channels will also have live streams of their networks available; for instance, ABC News, CNN and CSPAN will all have make their feeds available online.

For the official online feed of the address, tune into the White House’s live stream at www.whitehouse.gov/sotu. In addition to the stream of President Obama’s speech, the White House feed will include an enhanced version of the broadcast that will include charts, stats and other data that will provide additional backing for how he makes and defends his policy decisions.

There will also be live streams for those on mobile and other devices. The Official White House iPhone app and Android app will broadcast the video live to mobile users. Viewers watching at home who might not have cable can also tune into the State of the Union live through WSJ Live’s connected devices apps, which can be accessed on the Apple iPad and Apple TV, Boxee Box, Roku, Vizio, Panasonic Connected TV, Samsung Smart TV, Sony Internet TV and Yahoo! Connected TV platforms.

Finally, for those looking for the Republican response to President Obama’s address, Speaker John Boehner will stream the rebuttal on his YouTube channel.

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Show notes for this episode:

• Boxee’s Live TV dongle costs $50 and comes with a small HD TV antenna. It can be connected to better antennas or to your cable TV connection.
• Boxee specifically markets the product as a cord cutting solution, and the company’s website even includes a calculator telling you how much money you’d save if you cut the cord.
• GigaOM first broke the story about Boxee’s live TV tuner in early November.
• Check out our previous episode about over-the-air HD TV.

Please share your thoughts about Boxee Live TV in the comments, get in touch with us on Twitter (@cordcutters), Facebook or Google+ or email us at cordcutters @ gigaom.com.

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Last January, Encoding.com made Vid.ly available to the general public as part of a public beta. The service enabled anyone to upload a video for free and get a universal URL that would automatically detect whatever device or browser a viewer was using to access it, and would serve up the correct format. The idea was that publishers would no longer need to worry about managing encoding or storing multiple video renditions themselves, nor would they need to keep multiple URLs depending on a user’s device. Instead, Vid.ly would seamlessly handle all of that.

Emboldened by a successful beta run, Encoding.com even launched a Pro version of the Vid.ly service, charging customers based on the number of URLs and the amount of storage and data they used. It also gave them access to the Vid.ly API, enabling them to integrate it into their existing workflows.

But Encoding.com CEO Jeff Malkin said that maintaining two separate technology, product and marketing lines ultimately didn’t make sense. And so the startup is integrating Vid.ly functionality into its existing cloud encoding platform. Encoding.com will offer Vid.ly capabilities to the service as a preset for its customers, giving them the same automatic transcoding and access to APIs that were available as part of the individual platform.

In addition to the encoding of videos into 24 different current video formats, the newly integrated service will also introduce “future-proof” encoding to its service, As a result, files will automatically be transcoding into new formats as new devices are introduced that require them.

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Vimeo’s new video pages are optimized for viewing with a 960×540 video player at the top and related info — comments, likes, tags, etc. —  hidden below the fold. For viewers who want to navigate other related videos, Vimeo has added a tab for “More Videos” that unveils related videos along the top of the page. By doing so, Vimeo has eliminated a lot of the clutter that was visible on the old site.

The site also has a consistent look and feel, across video pages, category pages and the like, which is designed to improve navigation throughout. Vimeo has also added a new recommendation engine that will enable viewers to find interesting relevant content while browsing videos. It’s also improved the search mechanism and added keyboard shortcuts to make browsing and navigation even easier for its users.

Not all changes are purely cosmetic: While much of the focus has been on improving the site visually, the Vimeo team was also able to speed it up considerably. According to Vimeo CEO Dae Mellencamp, whom we met with a few weeks ago, the site now loads about 50 percent faster than it had previously. Most improvements come from making the site more dynamic and not fully reloading pages whenever someone clicks a new video or requests new content. And that will also improve Vimeo’s ability to make updates to the site as time goes on.

Behind the scenes, Vimeo has made changes to the site to enable faster uploading of video files with a multiple file uploader. And it’s added advanced features that will let users hide their activity streams or block users from being able to comment or otherwise interact with their videos.

Vimeo’s not the only high-profile video site to get a redesign lately. Last month, YouTube unveiled its new site, which added more social elements and an increased focus on a user’s subscriptions and playlists, with less attention paid to the video player itself. By contrast, Vimeo has put the video player at the center of its experience.

“We’re forging our own path, not following anyone else’s path, Mellencamp said. That’s good news for Vimeo’s user base, which tends to appreciate things like a good, clean design. As a result, the update should give its producers even more reason to stick with the site as the place to showcase their creative endeavors.

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“The big thing that has changed… is that just about every media company has an HTML5 player out or on their roadmap,” thePlatform CEO Ian Blaine told me in a phone interview. “I can’t think of a single company that hasn’t adopted HTML5 as part of its mix.”

Blaine says that HTML5 has better cross-device support than other options, especially when you take iOS devices into account. The problem is that, although the HTML5 video tag is widely supported amongst all modern browsers, it’s also rendered differently depending on which browser a viewer is using, and in some cases, on which version of a browser that’s being used. That means that publishers frequently have to put extra effort into setting up HTML5 players to ensure that they work as designed.

It’s that sort of individual browser tweaking that thePlatform hopes to eliminate with video players that will work in any browser. Customers can build players with the thePlatform’s Player Dev Kit and view changes in a real-time preview pane. And once a customer has customized its player, it will work over a number of platforms without any further development necessary. thePlatform’s smart player will automatically detect the device and browser being used and automatically serve up the correct video assets in Flash or HTML5 depending on the viewing environment.

thePlatform’s offering also has one advantage over some other video players, in that it has figured out how to make mid-roll ads work in HTML5, which has proven to be a stumbling block for some publishers. According to Blaine, that meant publishers were either stuck monetizing their content only with pre-rolls — which basically was leaving money on the table — or stitching ads into the videos, which removed the ability to serve up dynamic or targeted video ads, neither of which was an acceptable outcome.

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Be open

The beauty of YouTube, and its greatest strength, is that anyone and everyone can publish to the platform. There’s no hierarchy of decision-makers reviewing scripts and greenlighting projects. There’s no need for an agent. And most importantly, there’s no cost involved with participating on the site. All anyone has to do to become a YouTube publisher is to upload a video to the site.

That’s why YouTube gets an hour’s worth of video uploaded to the site every second. And it’s why people keep coming back, despite YouTube not having much of the Hollywood content that can be found on Netflix or Hulu. YouTube is a democratic platform for distributing and consuming content. Its stars are discovered not by a studio exec, but elevated and popularized by its own users.

Be global

Another strength of YouTube its availability to users around the world, who are able to enjoy all the same content regardless of their location. Anyone with an Internet connection pretty much anywhere can watch the same videos that you and I enjoy. That’s important, especially as most YouTube views come from non-English speaking countries.

It’s also something Hollywood has been bad at managing as the world has gone digital. Much of piracy occurs simply because digital copies of films or TV shows are available online long before they make it to international markets. By geofencing or geoblocking certain content, today’s media companies are missing out on an opportunity to reach audiences directly that are turning to piracy instead. By being global, YouTube is addressing the largest possible audience at all times.

Be multiplatform

This is different from being global, and speaks more to targeting the wide proliferation of connected devices that have come into consumer’s hands than anything else. YouTube is seeking to make its content available on as many mobile and connected device platforms as possible, which will help its publishers reach audiences regardless of the platform they’re using.

That’s been another failing of today’s entertainment industry. On the studio side, there’s been no easy way to purchase movies that will work across devices until recently. While the UltraViolet initiative seeks to solve that problem, it still has a ways to go. And for the broadcast and cable TV networks, making shows available on new platforms means distributors generally having to secure new rights. That’s led to a hodgepodge of some networks and some shows being available on some devices, while others are not. Once again, the end result is that those publishers are limiting the addressable audience, at the same time that platforms like YouTube are enabling content to be viewed nearly everywhere.

Let’s not kill Hollywood, but offer something better

Some have suggested Silicon Valley should kill Hollywood. I think it’s naive to believe technology companies can or should destroy the current entertainment industry. But at a time when the technology and media industries are grappling over the issue of piracy, the success of YouTube can be used as an example of how other technology companies could make something better.

After all, the advent of self-publishing tools like WordPress or Blogger hasn’t killed the New York Times or Wall Street Journal, but has enabled a great number of independent blogs and technology news sites to also be influential in shaping the news. In the same way, YouTube is enabling video publishers to reach audiences at massive scale and creating a situation where in aggregate, those independents can rival the traditional Hollywood regime.

Being open, being global, and being multiplatform really just translates to being wherever the audience is. It’s about enabling viewers access to more content, not less — which is the real impetus behind YouTube’s accelerating growth. That could be a lesson to other tech companies seeking to offer an alternative to today’s entertainment offerings, or it could be used as a blueprint for some more innovative companies in the existing media regime. Take away the limits to accessing your content, and more likely than not you’ll find more people actually consuming it and more opportunity to monetize it.

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Nikki Finke’s news empire launches YouTube channel

PMC, which owns digital news sites Deadline, Movieline, TVLine and Hollywood Life, has officially launched their entry in the YouTube channels initiative, Entertainment News TV (ENTV). The channel is currently updated several times daily with short news updates collated from the PMC news network, and while most of the videos are anchored by easy-on-the-eyes talent, there is one interesting exception: Famously reclusive Nikki Finke provides narration for several videos. So if you’ve ever wanted to hear Hollywood’s most notorious critic bash Ricky Gervais, now is your chance.

White Collar Brawlers get loaded on tequila

Portal A, the production company behind award-winning documentary series White Collar Brawlers, launched a new branded series for Tres Agaves Tequila. Tequila Academy, set to run eight episodes, features Brawlers stars Kai and Nate traveling through Mexico and learning about the firey liquor. Fans of Brawler‘s high-def cinematography can expect more of the same.

Do good using YouTube

YouTube has released a new playbook of best practices (link goes to PDF file) for causes and non-profits, with tips including how to involve your audience in your cause and integrate Google Checkout to ask for donations.

Teaser for viral ad goes viral

In case you’re wondering what kind of world we live in, a teaser for a new Star Wars-themed Volkswagon ad has racked up over 3.2 million views in two days on YouTube. Note: This is not the actual commercial. This was an ad about the commercial, which will premiere during the Super Bowl.

According to the YouTube description, “Keep an eye out for our 2012 Game Day commercial—it will all make sense.” What, a bunch of dogs in Star Wars costumes bark the Imperial theme? That will make sense? I look forward to whatever unique twist this idea deserves.

Speaking of Star Wars…

Emmy-winning Star Wars Uncut has been posted to YouTube as one complete two hour film, AKA “The Director’s Cut.” Director Casey Pugh, having seen every single scene, personally selected the scenes that would make for “the most entertaining experience.”

When asked about the 4:3 formatting (as opposed to 16:9), Pugh said via email that “Most people don’t have HD cameras, so from the beginning I made it clear the end film would be in 4:3. If I were to do it again in 2012, that’d probably be a different story.”

Any other news we missed? Let us know in the comments!

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Kilgore had been Netflix’s marketing chief for 12 years, but the company suffered a number of setbacks in 2011. They began with an announced price hike that angered many customers as the company raised prices for joint DVD-and-streaming subscribers by as much as 60 percent. But the bad news kept coming, as Netflix came forward with plans to separate those services and spin out its DVD-by-mail business as a standalone service called Qwikster that never actually launched. Along with the news that Netflix would not be re-upping its Starz streaming deal in 2012, caused many subscribers to reconsider whether they wanted to stick with the company.

While Netflix might have moved too quickly to separate streaming from its DVD business, the real issue is that the company mismanaged communications with its customer base, which up until recently had been pretty loyal to the company. For years, Netflix was named among the top companies in terms of consumer satisfaction, but a number of stumbles in a short period of time caused the company to lose subscriber and investor support.

Netflix lost 800,000 subscribers in the third quarter, and its stock has fallen from more than $300 a share to as low as $62 over the past six months. While it’s been trading up recently — and has stabilized around $100 a share — it’s still a long way back to where things stood in the early part of last summer.

As a result, a shakeup in marketing and communications shouldn’t be too surprising: After all, Netflix doesn’t just depend on advertising to get people on board. It depends on positive word of mouth from its subscribers to start growing its domestic membership again.

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Arbor Networks said it saw traffic begin to drop fairly sharply in Europe after about 7 p.m. GMT and 2 p.m. EST, when the site was estimated to have been shut down on Thursday. I’ve asked if it also saw a spike in other types of traffic, such as peer-to-peer traffic that might indicate that burned MegaUploaders were turning to BitTorrent, but a spokeswoman said so far, Arbor hadn’t seen anything like that.

Meanwhile, Sandvine has released data showing MegaUpload was indeed one of the more popular sites on the web for storing and sharing content. It ranked as .98 percent of the total web traffic in the U.S. and 11.39 of the total web traffic in Brazil. It garnered 1.95 percent of the traffic in Asia-Pacific and a less substantial .86 percent in Europe. The chart below shows how it ranked among other services of similar ilk:

Sandvine also showed the abrupt fall-off in its traffic after the raid:

We’ll update this story if more companies report back.

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The TrueView format, which launched a little more than a year ago, has quickly taken over as the dominant unit for video ads that appear on the site. With TrueView, ads generally play for about five seconds before viewers have the opportunity to skip them. The beauty of the TrueView ad is not only that viewers can ignore them, if they don’t find them relevant or appealing, but that advertisers don’t pay for skipped creative.

The incentive is then on advertisers to make good creative, and on YouTube to target the ads appropriately to increase engagement. So far, that appears to be working: Wojcicki said engagement ranges from 15 to 40 percent when viewers choose to actually watch an ad all the way through.

As a side note, CEO Larry Page noted that YouTube still had a lot of growth ahead and expected an increase in advertising on the site. But Page said that growth wouldn’t necessarily come at the expense of TV budgets, as advertisers generally weren’t shifting spend from other parts of their video budgets when committing to YouTube.

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