Google Touts Online TV Role, Will Cable Buy It?

Stumbling into a business model is not a textbook method for raising investment capital or achieving business success. Yet that is precisely what Google achieved: it “stumbled upon” its business model. Twitter hasn’t quite reached that point, but seems to have reached at least one seriously helpful milestone: search deals with Bing and Google now provide enough money to cover its on-going costs, at current staffing levels.

 

Google’s YouTube operation has not yet made a similar breakthrough in the business model arena. By some estimates, it loses $300 million a year, despite offering advertising availabilities, because most advertisers do not want to place their content next to videos of uneven or undesirable quality or subject matter.

 

But YouTube has made no secret of its desire to serve as a distribution channel for professionally-made television content, where the business model is quite simple: on-demand programming supported by advertising.

 

In fact, with its brand name and reach, Google executives say YouTube would be a better distribution vehicle than Hulu (News - Alert).com, for example, or even the “TV Everywhere” initiative U.S. cable operators are pursuing. That might not apply to movie content, but television material typically is ad supported.

 

“At some point in time it becomes an economic choice by the content owners,” says Nikesh Arora, Google president of global sales operations and business development, and reported by the Financial Times (News - Alert). And in this case, Google simply is more efficient than the broadcast networks, in terms of sales cost. “It’s a matter of core competences,” Arora says.

 

Google also appears to be talking to cable operators as well. One suspects the U.S. cable industry and U.S. programming networks will be unwilling to let Google get too much control or influence, though. The U.S. cable industry decades ago made a similar decision not to let Microsoft become a de facto industry standard for advanced set-top boxes, for example. Microsoft never made headway in the business.

 

Cisco took an entirely different tack, and simply acquired the assets of Scientific-Atlanta, one of two mainstay suppliers to U.S. cable operators, and already viewed as a trusted partner.

 

A betting person might conclude that the cable industry will do the same in terms of its relationship with Google that it earlier did with Microsoft: shut it out. In fact, it is not yet clear that the “TV Everywhere” business model necessarily is aimed at creating new revenue, at least immediately.

 

Instead, it is being positioned as a value-added feature of fixed cable service. Distribution using YouTube would blur the branding, at the very least, and likely jeopardize the planned effort to anchor fixed entertainment video revenues by “giving away” mobile and online access to some of that content.

 

Also, having watched Apple (News - Alert) iTunes reshape music distribution, video networks might likewise be cautious about launching into any deals that might yield a similar result in the online TV content business.

 

That likely will not be the case in the broader telecommunications industry. Despite the concern telecom executives had about Google a couple years ago, attitudes are changing. Though the relationship is complex, at least some cooperation now is occurring between Google and telecom service provider entities, especially in the mobility arena around Android (News - Alert).

 

But telcos are not yet such meaningful players in the entertainment video business. Many observers think they ultimately will be very large actors in the ecosystem. Aside from their own fiber-backed video services, all it would take is for DirecTV and Dish Network to be bought by Verizon (News - Alert) and AT&T, and telcos immediately would secure a significant position in the video delivery business.

 

Still, that likely is a “get to it later” issue for Google. Cable operators and networks are front and center now.

 

Still, there is a difference between the potential decisions either of cable operators or networks. Networks are used to using multiple distribution channels, but not every channel is equally important. As the cable operators hope to do, networks will want to protect their most important channels (DVD, in recent years, but changing) and then add new channels as the revenue attached to those new channels grows.

 

If the right business deal can be struck, networks are used to dealing with distribution partners. Cable is a distribution channel whose role is challenged by online distribution. Right now, the cable industry likely is more interested in protecting what it has got, than in leading a shift of distribution methods.

 

That doesn’t mean it is unmindful of a potentially disruptive shift. In fact, the very steps the cable industry wishes to take will better position it for online distribution, if or when it begins to disrupt existing channels. Some of us would be quite shocked if Google succeeds in striking significant deals with U.S. cable operators.