Cloud Computing and the Death of Local TV

I came across a really interesting set of two blog posts on the future of local TV written by Alan Mutter (with whom I am slightly acquainted). Alan is a long-time media executive and consultant who tracks and opines on developments in this area. He has a particularly strong background in newspapers, having worked for them for many years.

A telling quote comes right at the top of his first post:

“The tipping point is not yet at hand, but the economics of local broadcasting may begin to unravel as dramatically — and irretrievably — in the next five years as they did for newspapers in the last five years. The reason in both cases will be the unparalleled consumer choice made possible by a growing mass of (mostly free) content on the Internet.”

He goes on to review the economic wasteland that the newspaper industry has turned into over the past five years — and how dramatic the descent from record profits has been. In 2005, newspaper advertising set a record at $49 billion; by 2009 that number had dropped by 43%, to $28 billion. It wasn’t that long ago that running a local newspaper was, so to speak, a license to print money. In 2000, it made sense for Hearst to pay $600 million for the San Francisco Chronicle; by 2009, things had gotten so bad that Hearst was threatening to shutter the paper if unions didn’t restructure their contracts. Mutter discussed this topic in his blog as well.

Furthermore, given the breathtaking speed in which the newspaper industry has been hollowed out, it might not take long for the same phenomenon to occur in local TV. Noting how the revenue drop has gutted the content of local papers, Mutter fears the same thing will happen to local TV — and, crucially — to local TV news. And, even compared to newspapers, owning a local TV station was really a license to print money, with pre-tax profit margins at 50% or more.

One thing Mutter didn’t discuss is that many of the financial woes of companies in these markets is due to their financial structure — many of them were acquired with high debt loads, because, in a monopoly or oligopoly with stable markets, it makes sense to load up on debt to purchase assets. The Chronicle might not have been reduced to threatening closure if it hadn’t carried so much debt — but in a pre-Internet market, it made sense to finance an acquisition. A local TV station, KRON (yes, formerly owned by the Chronicle), declared bankruptcy after a heavily-leveraged acquisition led to inadequate cash flows.

I am much more sanguine than Mutter about the prospects for citizens when local TV news goes the way of the dodo. Local TV news has always been a sinkhole of histrionic sensationalism mixed with puerile happy talk; local TV news may be deep in the quality basement today, but it descended no very long staircase to get there.

Other Markets Disrupted by Cheap Connectivity

vMuch more interesting is the reason all of this financial travail has occurred. While the financial machinations of the companies themselves didn’t help their situation, what really made them come undone was the change in the market, as less expensive (or free) Internet-based services displaced them. The threat to local TV is only the most recent market disrupted by cheap connectivity and what it enables:

• Telephone Service: VOIP has ripped the guts out of one of the great monopoly markets ever. I continue to be amazed at how I often talk to people in several different countries via Skype all in a single day — at no charge. How long will it be before telephony is included for free with some other, still valuable service?

• Music: The effect of file sharing has been around for a decade, but now online music streaming is coming to the fore. In some ways, having to limit one’s listening to whatever music is on a particular device seems so … retro, when the universe of music is available on an Internet service like Pandora.

• Newspapers: As just discussed, the speed of the breakdown of this industry is amazing. I stopped subscribing to the Chronicle when it became visibly thinner and, at the same time, become markedly more expensive to subscribe to.

• Television: Mutter’s postings discuss this in detail (and you should definitely read them), but the jist is this: if I can download shows at my convenience from services like Hulu (or Netflix, for that matter), why do I need a local TV station between me and the content?

In each of these cases, a formerly wealthy market is being deflated by new entrants built on a new technology ill-suited for the previous economic victors — but well-suited for the way the new entrants come to market. In a sense, a rich profit pool is being drained by upstarts innovating on the back of new capabilities. The metaphor of draining an existing profit pool is one I’ve heard used by both Dell and Amazon, both of which disrupted an existing market by being willing to operate in a different fashion from the then-current market leaders.

Which brings us to cloud computing, in which technology is delivered over the Internet. It is, perhaps, no accident that the initial innovator in the IaaS came from outside the tech industry in the form of Amazon, which clearly likes to identify high-margin markets to enter with less expensive offerings.

Crossing the Cloud Chasm

However, in a way, the replacement of a product by a service is not original or unique to Amazon. In fact, the touchstone of insight in Silicon Valley — Geoffrey Moore’s Crossing the Chasm — notes that late in a market’s life products are commonly superseded by service-based offerings. However, Moore consigns the users of the service-based offerings to the category of laggards, a market segment no self-respecting technology company ever eagerly embraces.

Interestingly, though, while Moore posits a chasm between the stages of a product’s life representing early adopters and mainstream users, he describes the move to service-based technology as relatively seamless, and certainly not the subject of a disruptive experience. In other words, Moore does not see an adoption chasm between mainstream embrace of a product and laggard embrace of the same functionality delivered as a service.

This does not represent how cloud computing is being viewed, one would have to say. People describe cloud computing as a disruption, and many potential users avoid using cloud computing today due to concerns about it fundamental characteristics, which certainly should not exist if it were to represent the last gasp of a well-established technology. Stated another way, there appears to be a chasm between computing used as a product (on-premise hardware and software) and computing used as a service (SaaS and Iaas).

So why does this shift to Internet-based service seem so difficult, especially in light of the rapid adoption in other fields like music and newspapers? I think this question is really important, as we try and map out the potential future adoption patterns for cloud computing. Having thought about it, here are the reasons I came up with:

1. Moore actually sold short the challenge of shifting from a product-based offering to a service-based offering. It’s not surprising, since he was writing a book aimed at a sector always hunting for what another well-known technology book termed “The New New Thing.” Focusing on what happens with laggards is boring compared to how early adopters eagerly embrace new technologies; who wants to focus on the travails of laggards?

2. There really should be a second chasm between mainstream and laggards, based on the reluctance of laggards to do anything with technology. Even if it’s delivered as a service, laggards hang back, hoping against hope that they won’t have to adopt the technology. Of course cloud computing is going to run into resistance, because laggards resist doing anything different.

3. Software is much stickier and difficult to shift from than the other Internet-based services outlined above. While it’s relatively easy for a person to change how he or she consumes news, or music, or television (i.e., there are low switching costs), the move from on-premise to service-based computing is much more challenging. And, since even laggards have a significant sunk cost base in on-premise computing, moving to cloud computing involves writing off investment, which nobody — and especially laggards — wants to do. Besides which, the switching effort is high and better left to a successor.

4. In this case, at least, Moore was wrong, and the shift to service-based computing actually is an innovation, not the late-stage replacement of a mature (not to say obsolete) technology by an easier-to-consume version. Of course the shift is going to be hard, and comparing it to newspapers and music seriously underestimates the effort of making the transition. For today, only early adopters will seize the benefits of cloud computing.

Of all the explanations, I find number four the most likely. To my mind, cloud computing does represent a significant innovation, and the question is how quickly will it spread from early adopters to the mainstream. If we look at the comparison pool of music, newspapers, etc., it might make sense to predict a much longer take up cycle; as noted, it’s much hard to shift compute platforms than it is to get your news from a different source.

On the other hand, there is significant impetus for IT organizations to move to cloud computing rather rapidly. Widespread dissatisfaction with the cost and responsiveness of most IT organizations makes it likely that business units will coerce IT to adopt cloud computing.

I’m betting that the “ten year” cycle being predicted by the pundits for mainstream adoption of cloud computing will be compressed by events and pressures emanating from outside IT. In other words, the adoption choice won’t be the purview of IT on its own; it will move to cloud computing at the point of a budgetary gun wielded by non-IT management like CEOs and CFOs. I’m guessing we’re in one last cycle of hardware replacement. When the next one comes around, the answer from the CFO will be “find another way that doesn’t require huge amounts of capital investment.” The adoption pattern for cloud computing may resemble those for music, telephony and newspapers, notwithstanding the challenges of that adoption.

What do you think?

Bernard Golden is CEO of consulting firm HyperStratus, which specializes in virtualization, cloud computing and related issues. He is also the author of “Virtualization for Dummies,” the best-selling book on virtualization to date.

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