More alliances in the online music and video world

News item: Wal-Mart closes its online video store, Apple has struck an agreement with 20th Century Fox allowing it to rent Fox movies on its iTunes store, and Warner has joined EMI and Universal and will sell unprotected MP3 music on Amazon.com website.

Analysis: the first two news are good news for Apple. One less competitor in the online video market and one more movie studio behind iTunes. Warner's agreement with Amazon, although not surprising, is obviously not good news for Steve Job's company. Nonetheless, those three pieces of news show a general trend: Apple is well positioned in the online movie market but on its way out in the online music market.

Now, what's the difference between those two markets, and why would Apple succeed in one and fail in another? Let's first have a look at these markets. They can be divided in three tiers: content, digital distribution and the consumer device playing the content. By device I mean a CONVENIENT device. The computer and the iPod do NOT fall in this category for video. Maybe one day a company will provide an EASY solution to purchase and host songs on the Internet where one can listen to them at will as long as one is behind a computer, but this is not the topic of this column.

True to its core, Apple has come up with a solution as vertically integrated as possible, trying to provide as many tiers as possible. The upside is an easy solution for consumers which is a key factor for broad adoption.

In the online music market, Apple enjoys dominance on the device tier with its iPod. It also has a presence in the distribution tier with iTunes. It however has no presence whatsoever in the content tier. Worse, Steve Jobs has alienated most music majors. Enters consumer's perception. If consumers are naturally inclined to rent movies online (provided the solution is easy), they are reluctant to "rent" music online. They want to own the songs they purchase. In technical terms, this means that DRM is out and MP3 is in. With Warner jumping on the bandwagon, three out of the four big music majors have embraced unprotected MP3 and chances are the last one (Sony BMG) will follow suit. MP3 indeed allows music majors to sell songs to iPod owners without having to deal with Apple, and Amazon has provided an easy alternative solution to iTunes. The iPod has a dominance on the MP3 player market but Steve Jobs cannot use it as a leverage anymore. All because of MP3. And Steve' "colorful" personality.

In the online video market, consumers' expectations are different. They might still be reluctant to purchase a movie in pure digital form, but who cares when you rent it? As long as they don't have to jump through hoops to watch movies. In this market Apple's presence is different from its online music's. Still iTunes in the distribution tier. In the content tier, not only Steve Jobs hasn't apparently annoyed most movie studios (yet?), he brings some content thanks to his ties to the Walt Disney Company. As a result, iTunes can count on Disney's catalog (Disney, Pixar, the ABC TV network and several other movie studios) and now 20th Century Fox's. On the device tier, Apple has a presence with the Apple TV. Although the device has been struggling, it could easily be beefed up to have a real chance. Consider this: the Apple TV contains a connection to your TV, a hard disk, a lightweight version of MacOS X and is Wi-fi enabled. Grant it features that some iPods have such as the possibility to access the Internet on its own instead of having to go through a computer, a Web browser and iTunes. The result would be a device allowing you to easily rent a movie online. Icing on the cake, it would also allow you to surf the Internet. This would give Apple an edge. There might be other online rental services such as Amazon or Movielink (acquired since by Blockbuster), those solutions require to watch movies on your computers. The real winner will be the one providing a powerful alternative to cable TV's "movies on demand" feature. This means an affordable, convenient way to rent a vast selection of movies and watch them on your TV.

Facebook's advertising choices

After Microsoft invested $150 million for a mere 1.6% of Facebook, people start talking about the allegedly $15 billion valuation of the company. Not surprisingly, there's been mounting pressure on the site to show it can live up to its hype and show the money (this is Web 2.0, revenue and profit are in again).

So Facebook decided to use its network as an advertising media. There is nothing inherently evil about this. You have consumers on one hand and advertisers on the other hand. There's nothing wrong with playing matchmaker between the two. Now there are two main ways to do it.

Facebook could have chosen the user-friendly way. It could have followed Amazon.com's example and allow users to leave good AND BAD feedback about the products they purchased, transforming the site into a consumer's guide. Of course, vendors wouldn't have liked it. But Facebook could still make some money. Vendors with positive ratings could pay to add a link to their website. Vendors with negative ratings could pay to be able to contact disgruntled customers to get constructive feedback from them. And there are some products like Coke or Pepsi which are neither good or bad but a matter of personal taste. For vendors who sell low-quality products and know it, well, yes, the site wouldn't be for them.

Facebook however chose a different way. The result was the Beacon debacle that we know - tracking what users purchase even when they are not logged on Facebook, no opt-out option, and worst of all, lying about it. But even this set aside (everybody makes mistakes) this episode is revealing of the company's approach: an advertiser-friendly way. Even after founder Mark Zuckerberg profusely apologized and the company revamped the controversial program, it's the advertisers who call the shots. Sure, users now have more control over what gets collected by Facebook. But last I heard, the site still doesn't allow them to tell whether they actually liked the products they purchased.

Now, one can argue that it's the advertisers who bring the money that keeps sites like Facebook alive, so it has to listen to them. Or does it? A lot of vendors sell their wares through Amazon despite potential bad feedbacks. And Google has built an empire on top of the concept of low-intrusive ads, at a time where everybody else was trying make theirs more in the consumer's faces. "Follow the money" they say. If it's true it's the advertisers who fund websites like Facebook, it's the users who pay for the advertisers. Messing with them is just bad business.

Seeing a replacement when there's none

When it comes to really novel products, we all have a tendency to see them replacing the incumbent solutions right away. For instance, the concept of the paperless office was predicting the computer screen would replace paper in the workplace. The Web was supposed to replace the whole economy with a so-called "new economy" (remember Sun's "the dot is coming and it's going to destroy you" ads?). Oracle's Network Computer was supposed to replace the PC. Linux was supposed to replace Windows. Several e-books were supposed to replace traditional books. We all know how it went.

In reality, successful novel products are, at least initially, targeting only a subset of the current market - users frustrated by the current offering. Those products are also targeting non-consumers - people who do not use the current solutions because they are either too expensive or too inconvenient. And when the novel products do replace incumbent solutions it takes a long time. If microcomputers ended up seriously competing with Unix servers and workstations, it took them 20 years to be a serious threat.

There are several reasons for these grand - but wrong - predictions. For one, experts and journalists alike have an incentive to talk about so-called "revolutions" because it gets more attention. Some companies also have a vested interest. Sun, for example, was playing on the fear of the "new economy" because that was a way to sell its servers. Last but not least, we, the readers, also have a shared responsibility because we fall for the "revolution" trap too easily.

But beyond predictions, the companies launching those new products often TRY to replace the incumbent solutions and position themselves directly in competition with the "old" solution. This often proves fateful.

Here again, several reasons are at play. For one, the incumbent market is the juiciest and sexiest market. A lot of customers who would really welcome a new solution are overshot customers. In business terms "overshot" means "the lowest paying customers". As far as non-consumers go, they are just a big uncertainty because, well, they're not currently consuming so their reaction is up to pure speculation. So a company ran by industry insiders is more likely to target the incumbent market. That's what the insiders know and deem being with going after. That's why Oracle tried to position its Network Computer against the PC. Oracle didn't want to target non-consumers, it wanted to overthrow Microsoft and Intel in order to be considered the dominant force in the IT industry.

A lot of time too the advocates of the new solutions are blindsided. They focus on the one criteria where the new product shines but forget all the other aspects where the incumbent solution fares much better. Reducing paper consumption is good, but a piece of paper is more convenient to read than a screen, you can fold it in your pocket, etc. Likewise, no matter how much Windows users dislike Microsoft, a lot of time a Windows-less solution is considered even less desirable than switching.

This blindside is sometimes fueled by political motives. Consider the energy market. Renewable energy products have too many times been positioned against incumbent solutions for the sole reason they are more environmentally friendly. But incumbent products are far cheaper, more efficient and often more convenient. Not surprisingly renewable energies have mostly survived thanks to public subsidies. There are several niche markets where renewable energies could prosper though. The U.S. Army could be one of them, as it has deep pockets and is always interested in a source of energy in the middle of the desert. But those niche markers are seldom targeted because the promoters of renewable energies don't have the patience to let them grow in their niche market until they reach a stage where they can compete with incumbent solutions.

But it doesn't mean that novel products will never replace incumbent products. It just takes some time and seldom take the expected road. If the paperless office was a bust, the Internet has helped decreasing paper consumption in some unexpected areas: corporate document are still often printed, but people use email instead of sending letters or fax. They also read more and more material on the Web such as newspapers. Last but not least, they read Wikipedia instead of buying a whole encyclopedia. Likewise, Linux didn't replace Windows, but it gave it a run for its money as it turned out to be a very serious competition on the server side. And it is also competing in other markets such as the embeddable operating system market - a market that one day might seriously endanger Microsoft dominance on the desktop (notice the "one day").

In other words, we're often right on the outcome but wrong on the path it takes as well as the timing.