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Chapter 12

Media Transformation

McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter 12: Media TransformationChapter 12: Media Transformation

- Questions answered in this chapter:• What is media convergence?• What conditions make technological

convergence possible?• How have companies attempted to realize

organizational convergence?• How do new-media companies leverage

traditional media channels?• What are the barriers to organizational

convergence?

12-4Exhibit 12-1: Convergence Exhibit 12-1: Convergence of Digital Economyof Digital Economy

• Network and Media Convergence

Digital Convergence

Radio

DSL

Telephone

Satellite

Cable modem

Wireless

Television

Motion pictures

Music

Print (Newspapers and magazines)

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What is Media convergence?What is Media convergence?

- The media infrastructure includes all of the communication companies and channels of communications such as radio, television, newspapers and magazines.

• Media convergence is the process by which different types of media content are evolving into a single media platform through the internet.

12-6What conditions make media What conditions make media convergence possible?convergence possible?

- The conversion of analog signals to digital signals has been one of the major steps in making media convergence possible. Some of the key factors are:

• Continued advances and decreasing cost of digital technology.

• Low Cost digital network infrastructure.• Media Proliferation.• Media-Usage Fragmentation in American

households.• Forecasted continued Media proliferation and media

usage fragmentation.

12-7Exhibit 12-2: Media Fragmentation, Exhibit 12-2: Media Fragmentation, 1960s to 2010s1960s to 2010s

Source: Data from Elizabeth Lesly Stevens, “The Entertainment Glut,” Business Week, 16 February 1998.

Most Americans watch the Big Three Networks every night.

UHF stations bring more choices, and the fledging cable industry introduces a few new channels, including HBO and Turner’s TBS Superstation.

The VCR becomes commonplace, letting consumers watch recorded shows and movies whenever they want. Cable explodes with new networks, including CNN and MTV.

Digital compression and two-way networks allow cable companies to offer even more channels and services. DBS services grow more entrenched. As TVs are linked to the Internet, new programming can be delivered. The result is 300 choices at any moment.

Broadcasters may use the high-definition TV spectrum to launch more channels. Internet chat evolves into networked virtual-reality games, interactive movies, and other activities being hatched by MIT’s Media Lab and others. News Corp. forecasts 1,000 channels, now called “context windows.”

Direct-broadcast satellites (DBS) that offer hundreds of channels are introduced. Cable systems are slowly upgraded with more channels.

1960s 1970s 1980s 1990s 2000s 2010s

TV faces the worst audience fragmentation of all. Here, News Corp. tracks and forecasts the explosion of TV-viewing choices available in any given hour. Once there were three options; soon there will be more than 1,000.

TV faces the worst audience fragmentation of all. Here, News Corp. tracks and forecasts the explosion of TV-viewing choices available in any given hour. Once there were three options; soon there will be more than 1,000.

12-8Exhibit 12-3: Penetration of Technologies Exhibit 12-3: Penetration of Technologies Into US Households 1990 and 2001Into US Households 1990 and 2001

Source: Data drawn from sales and penetration figures for technologies in New York Times 2002 Almanac.

0

10

20

30

40

50

60

70

80

90

100

Color TV Radio VCR PC Videogames

Cable TV Mobilephone

DVD player

1990

2001

12-9Exhibit 12-4: Hours Spent per Year per Exhibit 12-4: Hours Spent per Year per Consumer per Media, 1992 - 2002Consumer per Media, 1992 - 2002

1992 1997 2002

Total television (broadcast and cable) 1,510 1,561 1,575Radio 1,150 1,082 1,040Recorded music 233 265 289Daily newspapers 172 159 152Consumer books 100 92 97Consumer magazines 85 82 79Home video 42 50 58Movies in theaters 11 13 13Video games 19 36 46Consumer online 2 28 49Total Hours Per Person: 3324 3368 3398

Number of Hours per Person per Year Using Consumer Media

Sources: Veronis, Suhler &Associates, Wilkofsky Gruen Associates, Nielsen Media Research, SimmonsMarket Research, Interactive Digital Software Association Paul Kagan Associates, Motion PictureAssociation of America, Book Industry Study Group, Magazine Publishers of America, SoftwarePublishers Association.

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Media EconomicsMedia Economics

- Each form of media has its own economics and hence a different business model. The most commonly discussed media types are:

• Newspapers• Magazines• Books• Broadcast Television• Cable Television• Radio• Film• Videos• DVDs• Music CDs• Video Game Consoles, and • MP3

12-11Media Economics (cont’d)Media Economics (cont’d)

- Newspapers• The top 4 newspapers in the United States at the end of

2000 were USA today, The Wall Street Journal, The New York Times and the Los Angeles Times with each of them having a daily circulation of 1 million or more.

• The average newspaper reader is older, well educated, and earns a relatively high income.

• Newspaper sales account only for a portion of a daily newspaper revenue with approximately 75% coming from advertisers.

• 45 % of the advertising comes from retail and classifieds and the balance comes from national advertising which represented national accounts such as financial services, airlines and hotels.

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Media Economics (cont’d)Media Economics (cont’d)

- Magazines• At the end of 2000, the top magazines were NRTA/AARP

Bulletin, Modern Maturity, Reader’s Digest, and TV guide.• Approximately 82% of all consumer magazines are sold

through subscription; the remaining 18% are sold through retail outlets such as supermarkets and newsstands.

• Almost all magazines make money through a combination of circulation and advertising revenue.

• Many magazines have launched companion websites as a way to enhance subscriber benefits and to build home delivery circulation.

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Media Economics(cont’d)Media Economics(cont’d)

- Books• The popular subject areas are sociology, fiction,

juvenile and technology.• With the continued proliferation of the Internet, book

publishers are looking at the possibility of going from “print and distribute” model to “distribute and print” model.

• Consulting firm Accenture predicts that e-books will be at $2.3 billion business by 2005, which represents one-tenth of the $2.3 billion book market.

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Media Economics (cont’d)Media Economics (cont’d)

- Broadcast Television• The three major U.S networks are: ABC, CBS, NBC,

each having approximately 200 local television affiliates.

• On an average each network airs 90 hours of programming a week.

• Digital television, which offers lifelike picture and CD quality sound is considered to be the biggest broadcast innovation since color television was introduced in 1950s.

• Introduction of Digital Television(DTV) will increase the number of network channels offered in the future.

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Media Economics (cont’d)Media Economics (cont’d)

- Cable Television• RCA began to transmit programming to independent cable

operators around the country, under the name HBO, who then relayed it to subscribers.

• The number of cable television subscribers has grown from 9.2 million in 1975 to 69.5 million in 2001.

• The cable channels make their revenue through a combination of advertising and subscription fees.

• The top six channels by the end of 2001 were: TBS Superstation, The Discovery Channel, TNT, ESPN, USA Network, and Fox Family Channel.

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Media Economics (cont’d)Media Economics (cont’d)

- Radio• Similar to broadcast television, radio generates nearly all of

its revenue from advertising by delivering a select audience to advertisers.

• At the end of 2001, there were 13,058 radio stations on the air, approximately 78% of which were commercial stations.

- Film• The motion picture industry earned an estimated $8.35

billion in 2001 with various studios releasing an average of 700 films per year.

• By 2000, average cost of movie making had tripled to $54.8 million, largely due to rising actor salaries, increased demand for special effects and other spiraling costs.

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Media Economics (cont’d)Media Economics (cont’d)

- The other important forms of media are:

• Video

• DVDs

• Music CDs

• Video Game consoles, and

• MP3.

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Digital LifestyleDigital Lifestyle

• Bill Gates (Microsoft Corp.) believes that the personal computer, the set-top box for interactive television, and the video-game console will all be important household devices

• Craig Barrett (Intel Corp.) thinks about an “extended PC era”, with consumers adopting PC accessories such as the digital camera, personal digital assistants (PDAs), and digital sound morphers

• Steve Jobs (Apple Computer, Inc.) envisions the PC as the home’s Internet portal, the digital hub, where consumers could edit their own movies or create customized CDs with easy-to-use interfaces

• Howard Stringer (Sony Corp.) believes that personal electronic devices—such as the PlayStation 2 video-game console—will be the future digital command centers for the home

12-19Exhibit 12-5: The Digital Lifestyle Exhibit 12-5: The Digital Lifestyle in 2000 and 2010in 2000 and 2010

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Applications of Broadband TechnologyApplications of Broadband Technology• Broadband technology is usually defined as having a connectivity

speed exceeding 128 kilobits per second, significantly faster than the narrowband speeds of up to 53 kilobits per second achieved over regular telephone lines

• The increased use of broadband technology will allow for more applications—such as video-on-demand, multiplayer games, streaming of audio and video, and software distribution—to be offered over the Internet

• At the beginning of 2000, Nielsen//NetRatings estimated that only 5.1 million American households had access to broadband technology

• By the end of 2005, the Yankee Group projects more than 30 million Americans will have access to broadband

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Internet Service Providers (ISPs)Internet Service Providers (ISPs)

• National/international ISPs: America Online (AOL), EarthLink, Microsoft Network (MSN)

• Regional ISPs: BellSouth, NYNEX, Pacific Bell• Local ISPs: Access Internet Communications in

Cupertino, CA; Montana Communications Network in Bozeman, MO

• By the middle of July1999, there were an estimated 6,000 ISPs in North America

• In December 2000, AOL was the largest ISP in the United States with more than 29 million members, followed by EarthLink, MSN, AT&T, and NetZero

12-22Exhibit 12-6: Connection Type Among Those Exhibit 12-6: Connection Type Among Those With Home Internet Access in 2001With Home Internet Access in 2001

Source: Data from U.S. Department of Commerce, Economics and Statistics Administration, A Nation Online: How Americans are Expanding Their Use of the Internet, February 2002.

Dial-up80.0%

Digital subscriber line

(DSL)6.6%

Other0.5%

Cable modem12.9%

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Digital Subscriber Line (DSL)Digital Subscriber Line (DSL)

• DSL allows for high-speed connections over existing copper telephone wires

• DSL requires special “modems” on each end of the connection, in the user’s home and at the telephone company’s central office

• DSL “modems” send and receive all data as digital data—no translation to analog signal ever takes place—allowing for faster data transmission

• DSL divides the phone lines into several channels which enables to talk on the phone and use the Internet simultaneously—all over a single phone line

• DLS “modems” must be within about 3 mile distance from each other

• Data transmission speed over a DSL line is about 1.5 Mbps

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Cable ModemCable Modem

• With the use of special modem, the Internet can be accessed over some cable TV systems through the existing coaxial cable that carries TV signals

• By replacing the coaxial copper with fiber-optic lines, cable operators could improve signal reliability and reception quality, increase channel capacity, and support the introduction of two-way interactive services

• Cable modems send and receive data at speeds of 2 to 3 megabits per second

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Exhibit 12-7: Internet Connection SpeedsExhibit 12-7: Internet Connection Speeds

Telephone

DSL (ISDN)

DSL (ASDN)

Cable modem3 to 4 megabits per second

1.5 megabits per second

128 kilobits per second

56 kilobits per second

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Satellite TransmissionSatellite Transmission

• Types of satellites used: geostationary (22,000 miles above the earth), medium earth orbit (1,000 to 10,000 miles), low earth orbit (500 to 1,000 miles)

• Require sophisticated subscriber antennas• Downstream access at speeds up to 1 Mbps• Upstream access is available only by modem

or other landline connections through ISPs

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Gateway to the InternetGateway to the Internet

• Devices that are likely to serve as the household command center include the personal computer, video-game console, and interactive TV set-top box

• Currently, the PC is the primary gateway for most people to access the Internet

• At the end of 2000…– Approximately 55 million U.S. households (53%) had

personal computers– Approximately 35 million U.S. households (34%) had

Internet access– There were approximately 62 million individual Internet

users in the U.S.

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Video-Game ConsolesVideo-Game Consoles

• PlayStation 2 is a video-game console with the potential to access a wide range of broadband services on the Internet

• In addition to being a video-game player, PlayStation 2 could function as a SC and DVD player

• With their Play Stations, users should be able to bank, shop, and e-mail through a television set, as well as download, store, and replay digital music and video from the Web

• In addition to a hard drive, the PlayStation 2 has built-in “firewall” ports, which will allow it to transfer data from camcorders, digital cameras, and other PC peripheral devices in the future

12-29Exhibit 12-8: Percent of US Households with a Computer Exhibit 12-8: Percent of US Households with a Computer and Internet Access, 1984-2002and Internet Access, 1984-2002

Source: Data drawn from U.S. Department of Commerce, Economics and Statistics Administration , A Nation Online: How Americans are Expanding Their Use of the

Internet, February 2002.

36.6

42.1

51

56.5

22.8

15

8.2

24.1

50.5

41.5

18.6

26.2

0

10

20

30

40

50

60

1984 1988 1994 1995 1998 1999 2001 2002Per

cen

t o

f U

S h

ou

seh

old

s

Computer Internet access

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Interactive TelevisionInteractive Television

• Currently, AOL and Microsoft offer basic interactive TV services that allow users to access e-mail, chat, and surf the Internet with a set-top box and dial-up modem while watching TV

• Forrester Research projects that by 2005, 40 million households will have access to digital set-top boxes, almost an eightfold increase from the 4.9 million households that had access to set-top boxes at the end of 1999

• In addition to interactivity, video-on-demand will become more widely available, whereby consumers can choose to watch any movie or television show at any time and can even pause in the middle of it

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Media Usage FragmentationMedia Usage Fragmentation

• Forecasters see mobile wireless technology as one of the fastest-growing alternatives to PCs for accessing the Web, especially when it is used as an “electronic wallet” or to check on stock quotes, which requires relatively low bandwidth

• Palm-size computers as well as cell phones are now enabled to receive wireless data through the Internet

• Wireless Web technology will be less likely to take off in the United States, where 55 percent of the population accessed the Internet through desktop computers, compared to 25 percent in Japan

• Only 32 percent of all Americans have cell phones, compared to 45 percent in Japan, and 65 percent in Finland

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Exhibit 12-9: AOL Time Warner SynergiesExhibit 12-9: AOL Time Warner Synergies