Internet Outsider

Jason Jones on Yahoo/Right Media, VUDU, Amazon

Guest analyst Jason Jones weighs in on Yahoo/Right Media, the new VUDU box, and Amazon's S3 (the business that everyone's now prematurely salivating about):

Yahoo/Right Media: It seems to me like a lot of money to pay for a very young company that passes 90% of its revenue onto to its publishers and seemingly low barriers to entry.  $680m for 80% indicates a total value of $850m, which is larger than 24/7 Real Media's total enterprise value of $478m.  While TFSM does not directly compete in the advertising exchange model, it a profitable public company with a global platform in the media network, technology ad serving, and search engine marketing space and it is expected to do $270m in revs in '07. While Right Media has the first mover advantage, I find it hard to understand how they have a sustainable competitive advantage over companies like TFSM and DCLK that can leverage their ad serving technology and media networks to successfully enter the ad exchange space.  Perhaps that is why RM sold out.

That Cool New Movies-On-Demand Box--VUDU: Does the world really need another set-top box?  I think Vudu needs distribution.  TIVO is best positioned with its Comcast and Cox partnerships. Give it another 6-12 months and the spotlight will shift back to TIVO as the industry leader.  VUDU needs one of the major set-top box manufacturers to buys it or it must make deals with the MSOs for distribution.  Otherwise it isn't that interesting.

Amazon S3: In this blog post, SmugMug lays out the details of how much money his company has saved by switching to Amazon's S3, the new web-services service that Wall Street is all hot-and-bothered about.  On the call, Bezos said the service's contribution to Amazon's performance was immaterial.  Based on SmugMug's post, moreover, it seems like a very low-margin business.  So, is this really a good business for AMZN? AMZN is selling $423k of services for $84k? I am sure AMZN has some scale advantage but it seems like this is likely another low margin business.  If I was Smugmug, I would be concerned that AMZN would raise prices after standardizing on their platform.

VUDU: NetFlix in a Box

One of the most successfully secretive start-ups in recent memory finally came out over the weekend...and now the promise of true TV-based VOD (anything you want to watch, whenever you want to watch it) seems a step closer to reality.  According to Brad Stone in the NYT, the VUDU TV box will allow owners to watch any of 5,000-plus movies instantly, instead of playing roulette on cable Pay-Per-View, waiting for Netflix discs to arrive, interminably downloading full-length films to their PCs, or, god forbid, driving to the video store.

The VUDU box apparently stores the beginning of all movies locally, which allows for the "instant" viewing, then downloads the rest from a peer-to-peer network of other VUDU boxes.  Owners pay about $300 for the box and then $6-$10 for each movie.  Several studios have already signed up to distribute movies through the box.

Thoughts:

• The future--a world in which TV and movie viewers are no longer "programmed" and, instead, can always watch what they want to watch--is, slowly but surely, arriving.  VUDU is the next step.

• Unlike YouTube, Joost, and PC-based movie-downloading services, VUDU is attacking a TV problem through the TV, as opposed to through the PC.  Downloading and watching movies on a PC will never be a big hit with consumer, and today's PC-to-TV solutions are klugy.  VUDU starts with device on which most movies will and should be watched: the TV.

• The early incarnation of the VUDU functionality, which will require yet another TV box and remote, seems clunky and inconvenient.  Sooner or later, however, the functionality will likely be built into other boxes (the way TiVo is/was).

• The early reported business model--$300 for the box and $6-$10 per movie--is not likely to be as successful as a subscription model (all-you-can-eat or a Netflix-like tiering).  Consumers hate to be nicked for every action, and the per-movie charge will discourage use, no matter how convenient it is.  (If Netflix users got discs for free but had to pay every time they used them, the service would be far less popular).

• This said, the movie studios that have rushed to sign on with VUDU would likely be more wary of a subscription model, and have likely forced the company to go with pay-per-view. The fact that the studios have signed up so fast is, on the one hand, positive: They are finally embracing some change.  On the other hand, the fact that they have signed up so quickly indicates that, from their perspective, the change may not be that radical.  Unlike analog media, digital media is a high fixed-cost, low/zero variable-cost business.  Monthly subscriptions would/will ultimately make far more sense for both producers and consumers.