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Paul Sweeting is founder and principal of Concurrent Media Strategies, a Washington, DC-based consulting firm specializing in digital media, technology and policy issues. A former journalist, Paul covered the intersecting wolds of technology and media for more than 20 years for such leading... More
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  • The Facebook OS

    The addendum to Zynga’s S-1 filed with the SEC yesterday is raising eyebrows for what it reveals about the extent of Zynga’s dependence on the continued goodwill of the social network.  But content creators and publishers should also take note of what it reveals of Facebook’s own ambitions.

    Exhibit G to the addendum sets out (partially redacted) terms of the agreement between the two companies for something called the Zynga Platform. Zynga’s precise plans for the platform are not revealed in the document (they may be discussed in redacted portions). But it would appear to be a quasi proprietary game-development platform built by Zynga that would sit on top of the Facebook platform and allow third-party developers to create games that leverage Zynga’s deep integration with Facebook.

    At the heart of the Zynga platform will be a “Facebook Zynga SDK:

    As used herein, “Facebook Zynga SDK” means a software development kit that Zynga develops for distribution on the Facebook Site in accordance with all the SDK Requirements solely (1) to facilitate the development of games on the Zynga Platform that use the Core Social [i.e. Facebook] APIs and (2) for the purpose of caching, instrumentation, graceful degradation, performance, security, logging, infrastructure or statistics related solely to the Core Social APIs.

    [snip]

    As between the parties, Facebook retains the sole right to distribute the Facebook Zynga SDK to third parties, and Facebook will provide a summary description of the Facebook Zynga SDK in the developer section of the Facebook Site with a download link to the developer portion of a Zynga Property for the Documentation. The Zynga Platform may make calls to Core Social APIs on behalf of games, provided that the Zynga API provides only substantially different functionality than the Core Social APIs and does not combine any such functionality(ies) to serve as a replacement for any of the Core Social APIs.

    One way to read that is that Facebook is laying the groundwork to enable multiple development environments to emerge for social media content and applications, all of which would hook into the basic Facebook platform but are free to innovate and develop their own ecosystems and APIs so long as they remain firmly tethered to the mother ship.

    That’s basically an OS strategy, not just a social networking strategy. It might also help explain why Facebook and Microsoft have been so…well, friendly of late. If there’s one thing Microsoft can learn ya it’s how to run an OS strategy.

    Tags: MSFT, Facebook, Zynga
    Jul 19 4:21 PM | Link | Comment!
  • Netflix: DVDs sold separately

    You almost get the feeling that if Netflix thought someone would buy its DVD operation it would gladly sell it. Yesterday’s abrupt and dramatic pricing change was obviously designed to force Netflix subscribers to choosebetween streaming-only and DVD-only plans, neatly segmenting its users into two distinct groups. The company also created a separate management structure for the DVD business “solely focused on DVDs by mail,” according to aNetflix blog post announcing the moves, and headed up by an operations guy, chief services and operations office Andy Rendich, not a sales and marketing guy.

    The moves are also feeding expectations (probably reasonable ones) that Netflix will begin soon breaking out its financial results into separate DVD and streaming segments. That’s getting pretty close to creating a separate P&L around what looks increasingly like a non-core asset — the easier to sell it.

    As Netflix made clear in its blog post (albeit not in so many words) mailing DVDs to streaming users has become an expensive inconvenience, the costs of which are not covered by the $2 a month premium Netflix was charging them as part of its $9.99 a month, one DVD out and unlimited streaming package. “Given the long life we think DVDs by mail will have, treating DVDs as a $2 add on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs,” is how marketing VP Jessie Becker actually put it.

    By forcing streamers who also want DVDs to pay the full freight for DVD service Netflix is now putting the DVD business on firmer, self-sustaining financial footing, which also would tend to make it more attractive to a buyer.

    The U.S. DVD operations are also likely to become ever-more the odd-man out in Netflix’s portfolio. As the company’s streaming-only international expansion goes forward the share of its global subscriber base still getting DVDs by mail can only decline, and with it the DVD operations’ contribution to cash flow.

    So, would anyone ever buy Netflix’s DVD operation? Probably not. There probably isn’t enough upside left in the DVD business to justify the price Netflix would need to get for the business, given its current valuation. Moreover, the most valuable piece of Netflix’s DVD business at this point might well be its recommendation engine, which Netflix would be foolish to sell. Even if Netflix weren’t mailing out DVDs anymore, the IP and the business intelligence embodied in the recommendation engine can surely be leveraged for the streaming business. But without that piece, it would be hard to get a price for the DVD business.

    Still, if I were running Coinstar, which owns Redbox, I might at least find an excuse to put in a call to Reed Hastings anyway, just to see if drops any hints as to what he’s really thinking. Redbox might be able to improve the economics of Netflix’s DVD business somewhat by shifting some rentals to its near-ubiquitous kiosks, thus saving the costs of mailing DVDs back and forth without significantly increasing its own costs of servicing its kiosks, which it has to do anyway. It might also give Redbox enough market share to squeeze some better terms out of the studios, including perhaps reversing the 28-day window.

    Charlie Ergen of Dish Network also might want to invite Hastings along to some charity golf game or something just for a little schmooze time. Dish recently bought Blockbuster for a song, but its strategy for the video rental chain is still unclear. Maybe combining Netflix’s DVD subscriber base with Blockbuster’s brick-and-mortar real estate would add up to something.

    You never know.

    Tags: NFLX, DISH, OUTR
    Jul 13 12:28 PM | Link | Comment!
  • What if no one buys Hulu?

    Chief Mouseketeer Bob Iger insisted Wednesday that Hulu’s owners are committed to selling the video streaming service.  But what if no one is committed to buying?

    Of the half-dozen companies known so far to have been invited in to kick the tires by Hulu’s bankers, only one, Amazon, strikes me as a plausible buyer. The rest seem to have been chosen simply because they have deep pockets (Google, Microsoft, AT&T, Verizon), or, in the case of Yahoo, because it has already expressed interest.

    Google: Hulu is owned by the same networks that blocked Google TV from accessing their online content and have largely refused to license their content to YouTube. Given that history, I’m skeptical they would now agree to let Google buy Hulu. Google has also been attracting increased scrutiny from regulators, including the FTC’s current anti-trust investigation of Google’s handling of search results. That could make a sale to Google a tough, or at least time-consuming deal to close, which I can’t image Hulu’s owners wanting to get into. I suspect Google is in there as a stalking horse to try to spur higher bids from the rest of the field.

    Microsoft: Why? Microsoft’s strategic strengths in the online video space are as a platform provider, via Xbox Live, where Hulu is already available, and in voice- and gesture-based TV navigation (Kinect/Bing). How would buying a programming service like Hulu add value for Microsoft? The object of owning a platform is to commoditize content so that more of the value in the ecosystem flows to the platform provider. You don’t commoditize content by buying it at a premium. CEO Steve Ballmer might be tempted to do a deal just to change the subject from having major shareholders calling for his head, but that wouldn’t make it a good move for Microsoft.

    AT&T, Verizon: As major broadband service providers, buying a programming service like Hulu would be a red flag for regulators. Especially when that programming service competes directly with Netflix, the poster child for net neutrality. The FCC’s net neutrality rules could ultimately get tossed by the courts, or overturned by Congress, but in the meantime any deal involving a broadband provider and a programming service will face regulatory overhang, adding uncertainty to the valuation. Why would Hulu’s owners want to go there?

    Yahoo: Yahoo started this process by making some sort of unsolicited overture to Hulu’s owners, so it’s obviously interested. And of course, Yahoo needs to do something to give its own beleaguered shareholders a reason to believe. A deal with Yahoo would also come with none of the regulatory baggage that some of the other candidates bring. But if Hulu’s owners had wanted to sell to Yahoo they could have done so when it first approached them. The fact they didn’t suggests Yahoo is not their first choice. Perhaps they’re hoping to spark a bidding war to get a better price out of Yahoo, but Yahoo was already the bidder most likely to overpay.

    Amazon: The most plausible of the known candidates. It recently started its own subscription streaming service to compete with Netflix and adding Hulu’s current user base and content deals would give Amazon’s fledgling service an immediate boost. Hulu CEO Jason Kilar is a former Amazon exec so there would be a familiarity factor that could ease the integration of Hulu into Amazon. But if Hulu’s current owners are concerned about the power of Netflix — and these days who isn’t? — they should prefer to have as many viable Netflix competitors (and buyers) in the marketplace as possible. Why let Amazon take one off the table by buying Hulu?

    DirectTV and Dish (two of my picks based on strategic fit and need) apparently are not in serious contention (too rich for them?) at least at this point. But that still leaves open the possibility of Hulu becoming a standalone entity, either via IPO or perhaps some sort of management-led private equity spinout (my pick).

    That raises the question of valuation, of course. And Hulu’s bankers (and current owners) apparently are convinced they can get a better price for the company by conducting a private auction instead of a public offering. Perhaps so, but the pool of potential buyers may not be as deep as they think.

    Here’s what a buyer of Hulu would actually be getting: Non-exclusive rights to current season TV shows that will likely need to be renewed in 18 to 24 months; a large but not particularly loyal base of users of your free service; a small but growing base of paying subscribers; a virtual distribution channel via the Hulu embedded app on CE and mobile devices; a pretty good ad-targeting system; about $500 million in current revenue, and a perishable window of opportunity to leverage its access to current-season TV content to carve out a viable niche alongside (but not directly competitive with) Netflix.

    For most of the potential buyers that have surfaced thus far, one or more of Hulu’s assets either conflicts with at least some of what they already do, or merely duplicates it, in which case, why pay for it again? Those with the fewest internal conflicts with Hulu present strategic or regulatory problems for the sellers.

    I’ve long believed that Hulu needs to be a standalone entity if it’s ever to grow up. It has been trying to compete with one hand and a leg tied behind its back, due to the conflicting strategic priorities of its parent companies. Selling it to another existing distributor would merely recreate many of the same conflicts that hobble it now.

    Hulu is a programming service. It needs to find a way to make itself valuable to consumers, advertisers and platform providers simultaneously, to extract maximum value from each. The best way for it to do that is to be unencumbered by other strategic priorities. I don’t know finance well enough to say what the best to capitalize it as a standalone entity would be, whether through the sale of equity on the public market or through private investment. But in terms of its organizational structure it needs to be free of the nest.

    After its parent companies have tried everything else, there’s always the option of doing the right thing by Hulu.

     

    Tags: DIS, NFLX, GOOG, MSFT, YHOO, VZ, T
    Jul 06 7:00 PM | Link | 1 Comment
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