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When I saw Napster (NAPS) secure over 50M users at the turn of the century, I wondered what the music studios would do to gain the edge on the Web. Apparently, not much, as their apathy let AllofMP3.com become a force to be reckoned with, to the point that the labels filed a whopping $1.65 trillion lawsuit to try to shut the Russian-based music service.

Ad Agencies Disguised As Media Companies
The studios and networks too are trying to determine with how much or how little content they should put online. It’s a tricky dilemma: audiences are rushing to the Web and on average they spend 25% of their time online, yet marketers only spend 5% of their budgets online. Despite this, TV is a $75B ad market while the Web is now a $15B market. Of course, if that 25/5 divide adjusts and Web advertising quintuples, then that $15B ad market becomes a $75B one: as large as TV advertising.

Of course, there is no guarantee that that will happen, and while radio, print advertising levels are falling, there’s no sign TV is too. But the fact remains, more dollars are being shifted online. One would think that content companies would be migrating aggressively online, yet judging by newspapers and magazines, they are not.

The thing is that magazines and newspapers are basically advertising companies. Sure they also generate subscription revenue, but their main revenue drivers are advertising-based.

But what is starting to become clear is that media companies who own rights to music, film and sports programming can choose to maintain their business model or embrace a new one, at least online, based on advertising revenue. We need to realize that while the online and offline worlds will increasingly mesh with one another, the two worlds can also live along different models.

"Do People Still Buy CD's?"
Yesterday I saw hordes of people standing out in the snow, waiting to go into a music store and buy CDs. My wife asked: “Do people still buy CDs?” I guess so. Yet Universal Music Group and other companies sue one another instead of getting proactive. Warner Music (WMG) has done some things to promote music online, but why don’t these firms simply get aggressive with putting music online for free to generate a new revenue stream.

After all, those same consumers who were waiting in line can get music illegally online. If they could get music legally, they might still want to buy CDs. If they choose to get it legally online, they would either pay a monthly fee or get it for free but generate revenue in the form of advertising for the label. Music is, after all, the most sought after type of content, in my opinion (I personally find people to be more passionate about music than sports or movies). Instead, they let Apple (AAPL) walk away with the upside by thinking defensively and enforce their offline business model.

It’s not limited to music; film and TV is even more interesting given the nature of the content.

Take sports, a live event that is perfect for the Web. In other words, what narrowcasting and broadband allows for is to take sports, music and film and create experiences that will be ad-supported. There is nothing new or earth-shattering here: Napster decided to launch a free, ad-supported model; MSN.com (MSFT) has been doing this as well; ESPN is increasingly offering free programming. Even video game makers are tuning in to in-game advertising.

Powerhouse Potential

We chose Walt Disney (DIS) as Media Stock of 2006, but Walt Disney owns ABC and ESPN and could simply become a massive powerhouse online if they bundled their sports programming and made it all free online. It would really not take away from TV. It would be incremental.

Major League Baseball got the idea when it decided to go it alone and put more and more content on its website. MLB.com is a winner. To MLB, the revenue from advertising is not material because it’s a sports league. But to a media company who owns the rights to sports content, generating more revenue from ads off the website is certainly not immaterial. Sadly, when ESPN took this concept and applied it to mobile, it went too far: it got attached to a piece of hardware that was not widely adopted (read more on that here). This proved that until rightsholders think “open” they will lose to new players.

Even when they do think of putting stuff out there for free and generating ad revenue, it is something that remains on the fringes. I get the sense that this is yet not a major priority. It should be.

Sports leagues should be aggressively playing games on their websites. They can apply blackouts if they wish in select markets (ie. can’t see NY teams on the Web in NY so as not to reduce the TV value). But why media companies who own the rights to the sports coverage do not plug these online beats me.

Case in point, TSN.ca is providing live, crisp and FREE coverage of the International Junior Hockey Championship on their sites. This is win-win.

The irony is that these companies shake in their boots when companies like Google (GOOG) comes knocking, often signing deals with Google that give the Internet giant an edge. Google’s edge did not come from technology, it came when its advertising became a force to be reckoned with.

Media firms who own the rights should wake up and try to unleash their content online as they try to conquer the digital advertising divide.

Source: Media Companies Slow to Bridge the Digital Divide