The Failure
of New Media
August 2000
The media business has invested a
lot of money and hope in the Internet over the past
three years. So far, it has been a disappointment
LAST year, NBC’s Internet strategy
was the envy of the media world. The American
broadcasting network had started investing early and
amassed a portfolio of assets while Internet share
prices rocketed. In November, it rolled them together
and floated them as NBC Internet.
![[Image]](cwb864.gif)
There
the celebrations ended. This year, the stock has fallen
by 89%. Earlier this month, NBC Internet said it plans
to shed one in five of its employees. The company lost
$152m on sales of $31m in the second quarter,
advertising revenue was slowing, and break-even, which
was expected in 2002, has been delayed indefinitely.
Until recently, the Internet was seen
as the making of the media business in the 21st century.
It was going to slash costs: media products, unlike most
retail goods, can be delivered directly down wires, so
the Internet would eliminate the need for factories and
distribution networks. It was going to boost revenues:
previously inaccessible markets would become reachable
and data collection would make advertising more
valuable. And it was going to lower barriers to entry,
generating a crop of healthy new companies.
But the Internet has not lived up to
these hopes. Other entertainment groups’ experience
has been similar to NBC’s. “To date,” says Ted
Leonsis, president of the Interactive Properties Group
at AOL, “digital entertainment has been a failure.”
Given that AOL, the world’s biggest Internet company,
bought Time Warner, the world’s biggest entertainment
company, in January, that seems a surprising thing to
say. But AOL, according to Mr Leonsis, bought Time
Warner principally because they are two consumer
companies that can cross-promote goods, not to sell Time
Warner’s content over the Internet.
Still, as billions of dollars of
investment show, plenty of entertainment-company
executives have had higher hopes of the relationship
between the Internet and entertainment than has Mr
Leonsis. So what’s gone wrong?
Part of the problem lies in delivery.
The Internet is pretty good at delivering music and text
to customers, but not video, which makes up the biggest
slice of the entertainment industry’s output. That is
largely because video does not work with narrowband
connections, and broadband deployment has been rather
slower than expected. At the end of 1999, according to
Broadband Intelligence, an industry newsletter, only
around 1.5m American households, around 1.5% of the
country, had broadband Internet connections.
Broadband has been slow to catch on
partly because cable companies have been slow to upgrade
their networks. Even now, broadband is available to only
around a third of cable customers. But there is also,
says Cynthia Brumfield, publisher of Broadband
Intelligence, “a chicken-and-egg problem”. Because
the content isn’t there, people are not rushing to get
the connection; but without the connection, there is no
market for the content. That, she reckons, is one reason
why only 6% of those to whom a broadband cable
connection is available have taken up the offer, and
fewer than 1% of those who could get a telephone
broadband connection have one.
Novella or novelty?
For the delivery of books, the
question is more one of uncertain demand. When Stephen
King, a horror writer, posted a novella on the Internet
in March this year, some 400,000 people downloaded it
within the first 24 hours. Electronic publishing, it
seemed, had come of age. But cynics in the publishing
business assume that most people did it for the novelty
value, and did not read the book. “I am two of those
people,” says Youngsuk Chi, chief operating officer of
Ingram Book Group, America’s biggest book distributor.
He downloaded it at home and at work, and read neither
copy.
Consumers may like the idea of
Internet books for free (as Mr King’s was) but nobody
likes reading on a computer; nor does anybody want to
print out hundreds of pages and carry them around in a
plastic bag. Still, hardly anybody has bought the first
generation of portable devices that can store books
downloaded from the net. This autumn, a second
generation will be coming out, and Adobe and Microsoft
have produced software to make the type more readable—CoolType
and ClearType respectively—so the market may take off
this Christmas. Or it may not.
The final, considerable, difficulty
involves making money. Music, for instance, is easily
delivered over the Internet, at a reasonable quality,
and as the astounding growth of Napster, a file-sharing
site, shows, there is plenty of demand—but the record
companies have not found a way of getting people to pay
for stuff. The music, consumer-electronics and software
industries continue to struggle to agree on an
encryption system for protecting copyright-owners. As a
result, there is little music available on the net that
consumers could pay for if they wanted to.
Getting people to pay for content is a
problem for other businesses, too. The online editions
of several newspapers, such as the New York Times, and
other content sites, such as TheStreet.com,
started off charging subscriptions, but most have
deserted that model. They found there were too many
rival services available free. It may be that, as
start-ups burn through their cash, free content will dry
up; but even if sites try to charge, consumers may not
be willing to pay.
Advertising—the media industry’s
other revenue stream—has also disappointed. Overall
advertising spend on the Internet has been growing
fairly fast, but that is because the number of sites is
still growing swiftly. Individually, many sites are
suffering. “Click-throughs”—the proportion of
surfers who bother to click on an advertisement—have
fallen, according to Brian McCarter, managing director
of new media at Zenith Media, from 1% three years ago to
0.4% today. And, he says, advertising rates have also
fallen, though not by as much.
The naked truth
Some of the products of the media
business evidently do work on the Internet—those that
are time-sensitive, data-driven or dodgy. News thus
flourishes on the Internet. According to a report
published in June by the Washington-based Pew Research
Centre, 15% of Americans say they log on to the Internet
for news every day, compared with 6% two years ago; a
third of Americans read news online once a week,
compared with 20% in 1998. The heavy-on-data Wall Street
Journal is the only big newspaper successfully running a
subscription model. Sports, which are both
time-sensitive and heavy on data, work well. And, of
course, there is pornography, whose vulnerability to
censorship always puts it in the vanguard of new
distribution technologies.
But for the many new media companies
that set themselves up to distribute general
entertainment over the Internet, life is difficult. Most
screen short films. At current advertising rates, a
short that costs $10,000 (a standard budget) needs to
get 100,000 hits to break even. Very few do.
Some general-entertainment sites have
already gone under. Digital Entertainment Network, which
spent $60m seeking to fulfil its stated mission to put
the “boob tube zombie television” out of business,
filed for bankruptcy in June. Others have shifted their
strategy. Ifilm
has moved from being a showcase for shorts to trying to
establish a portal for the film industry. Pop.com,
backed by Steven Spielberg’s studio, DreamWorks, in
which Bill Gates’s former partner, Paul Allen, has
invested $50m, was due to launch in spring this year. It
has yet to appear.
The good news for the incumbents in
the entertainment business—Disney, Time Warner, News
Corp, Viacom, and so on—is that they are not under
siege from the expected rush of web-savvy competition.
The bad news is that their Internet businesses do not,
by and large, look much healthier than the upstarts’.
Disney, for example, has a hit in its ESPN.com,
the website that complements its sports network; but its
other Internet properties, bundled into the Go Network,
have not worked. Go lost some $250m in its first quarter
as a quoted company, and Disney is estimated to have
spent around $2.5 billion on it altogether. Earlier this
year, it gave up trying to build a portal, to
concentrate instead on creating a general-entertainment
site.
All of which leaves the media
companies facing two unattractive alternatives. They can
pull back now, lose their early-mover advantage and let
others work out how the Internet can become an
entertainment medium; or they can go on pouring billions
of dollars into what, so far, has proved to be a very
interesting drain.
© Copyright 2000 The
Economist Newspaper Limited. All Rights Reserved
Related Links:
Read the June 2000 report
on the Internet and the media from the Pew Research
Center. Visit Stephen
King’s site and join the throngs who have
downloaded “The
Plant”.
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