Media – Andreas Goeldi's Blog

FCP X: Apple’s strategic focus and the consumerization of video editing

The “consumerization of IT” is a trend that started about 5 years ago and that has been reshaping the world of information technology quite radically. Consumer technology such as smartphones, lightweight web-based applications and now tablets has invaded more and more enterprises, to the shock of IT managers everywhere.

The biggest winner of this trend is of course Apple, which now has a market cap close to that of the old Wintel (Microsoft/Intel) monopoly. Apple basically owns the high-end laptop market, even though MacBooks are still not considered “enterprise technology” by most IT departments. It totally dominates tablets, and it makes more than 50% of all profits of the mobile phone industry, even though its market share is still small.

Consumerization is what took Apple from a barely surviving also-ran to the dominant technology company of our time. Is it surprising that Steve Jobs and his lieutenants are focusing all their resources on this successful strategy? For instance, Apple recently killed its pro-level server business (Xserve), effectively exiting the data center market.

The latest victim of this strategy is the Final Cut Pro (FCP) line of video editing applications. FCP Studio is probably the most popular suite of video production software in the market. It started small a decade ago as a cheap alternative to Avid, but it is now the choice of many high-end editors in broadcast TV and even Hollywood. Nowadays even editor legend Walter Murch uses FCP, which once was ridiculed as a toy by the movie tech intelligentsia.

The new version of Final Cut, FCP X, caused a major sh*tstorm in the editor community when it was released two weeks ago. It gets only a 3-star rating in the App Store, attracting comments such as “FCP X = Windows Vista” (which probably is not meant as a compliment). Countless articles complain about all the missing features that professional editors can’t do without, not least the baffling fact that FCP X can’t import projects from older versions of FCP.

So what’s going on here?

First of all, FCP X is a great product, if still a bit 1.0. I’ve been playing with it for a couple of weeks now, and I certainly won’t go back to the old FCP or any of its clones (such as Adobe Premiere Pro). FCP X reinvented quite a few things in how editing is done, and most of the changes are really great, speeding up the editing process considerably.

But FCP X also asks you to relearn a lot of things. It can do practically everything FCP 7 could do and a lot more, but many tasks are just done very differently. There are a lot of “WTF?” moments when you switch to FCP X, but once you discover what the new way of doing things is, it all makes a lot of sense. I’ve only encountered one or two things that I still find more elegant in the old FCP.

To use a metaphor from my other field of work: it’s like learning a new programming language. When you switch from something like C++ or Java to Python or Ruby, a lot of things look strange or even ridiculously simplistic. But after a while, you don’t miss the overhead that the old tool required you to deal with. You recognize that the irritating, seemingly amateurish simplicity is actually productivity-enhancing elegance.

That’s great for prosumers and lone-wolf freelancers, but it’s no consolation for the high-end editing pros who depend on sophisticated, highly specialized workflows. Relearning everything and reorganizing your corporate workflow is not a great proposition for somebody who constantly works under tight deadlines.

So is Apple trying to consciously scare off the high-end pro market? In some ways, yes. Every successful business has to decide what its focus is, who its customers are. Even for a giant company like Apple it’s incredibly difficult to serve entirely different target markets.

High-end video production houses and broadcast stations often run their video production infrastructure like traditional enterprise IT: A central department decides which platform to use. Then internal technical people and consultants implement the system, endlessly tweaking every detail, and the maintenance of the whole system takes considerable resources. Individual workers don’t get to choose what tools they want to work with, but have to adapt to the rules of the organization (Don’t like our Avid system? Go look for another job).

Apple is great at selling stuff to people who make their own purchasing decisions, be it consumers, freelancers or even employees of larger corporations who have enough authority to choose their own tools. Apple is not very good at dealing with IT departments and at adapting its products to the myriad specialized requirements that larger organizations have.

The old FCP clearly suffered from feature creep that was dictated by larger customers, and that made the product difficult to use for the broader prosumer market. It looks like Apple made a clear decision with FCP X: It’s going after the big mass market, and if that means it’s going to lose the high-end segment, so be it. There’s really no other good explanation for the fact that Apple released FCP X without some crucial pro-level features.

Always remember that software is a tiny piece of Apple’s business, and the pro segment is even tinier. But pros are a tough crowd to please, and Apple probably just decided that this can’t be a priority anymore. It looks like it will deliver some of the missing features, but probably not on the scale the pros hoped for. Tough for the professionals who invested a lot in FCP, but this kind of gut-wrenching change is the reality of technology markets. Remember IBM selling off its PC business? Didn’t please a lot of people either.

Without a doubt Apple will lose a lot of fans in the video editing community. But it now has an editing product that is years ahead of everything else, perfect for the big and growing market of serious hobbyists, freelance editors (particularly in online media), independent filmmakers and corporate marketing users. It’s a big bet, but it could pay off.

Google+: Finally an end to the social media duopoly?

I can’t help myself, but I think the past few years of social media market development have been a bit of a disappointment.

What once was a bustling ecosystem of blogs, forum sites, multiple social networks, video and photo sharing sites, social bookmarking services and so on has more or less turned into a boring duopoly of Facebook and Twitter.

MySpace? Delicious? Digg? Dead, or almost dead. Blogs? The frequently updated ones are mostly run by professionals. YouTube? Very successful, but only for passive viewing and not social interaction. The many, many forum sites that run on vBulletin or phpBB? Only relevant for tiny niches. Location-oriented services like Foursquare? Feel increasingly like a short-lived fad, easily copied by the big players.

Helped by the always oversimplifying mainstream media, the only social media channel most consumers really use is Facebook, and maybe they have heard of Twitter and use it passively.

It’s a pretty sad state. How can the complexity of human interaction only take place in two venues? It’s like having only a choice of two restaurants, maybe McDonald’s and Olive Garden (which, come to think of it, might even be the reality in some small towns). And don’t get me started on the walled-garden nature and constant privacy issues of Facebook and the lack of innovation at Twitter.

The launch of Google+ finally brings back some hope for more interesting times in the social space. Google has botched all its previous attempts at going social, but G+ feels surprisingly right. It’s not only powerful and flexible, it also offers a great, mainstream-compatible user experience, definitely on the level of Facebook. Oh, and Google finally figured out that it should leverage the heck out of its search dominance. Putting G+ front and center in Webmaster Tools and Google Analytics seems like a no-brainer in retrospect, but Google somehow missed out on this aspect with earlier social projects.

After just one week, it looks like much of the Internet elite has moved on from Facebook to G+. Even Twitter seems to see a noticeably reduced post volume from the usual early adopters. It’s very understandable. Twitter’s 140 character restriction has its charm, but it’s extremely limiting when you want to share deeper content. Facebook’s overcrowded feed that mixes relevant content with puppy pictures and Farmville invites is just too distracting for serious content sharers. People who liked FriendFeed are probably already on G+ now.

So, is G+ a Facebook/Twitter killer? No, and it doesn’t need to be. But Facebook probably has already lost the elite, and if Google makes some pretty straightforward improvements (API, anyone?) it could easily take away much of Twitter’s fanbase.

G+ is a huge step towards a more diversified, use-case oriented social media environment. McDonald’s doesn’t go broke just because there’s a hip new restaurant in town. Different social environments attract different people. There’s no reason why social media should be any different.

Scarcity and the world of digital media

The favorite discussion topic of the media and Internet elite is currently how the economics of content will develop in our digital age. Several big media conglomerates recently announced that they would start charging for online content. This was mostly greeted with ridicule from the digerati, who are still high on the radical ideology outlined in Chris Anderson’s book “Free”.

Brad Burnham pointed out in a recent blog post that both sides probably lack a deep understanding of the fundamental economic shift that is going on here. He mentioned the work of pioneers like Herbert Simon and Michael Goldhaber on the economics of attention as a framework for better insights.

I think it’s correct to say that we are currently experiencing the rise of something like a parallel economy, driven not (like our currently suffering traditional economy) by money and scarce physical goods, but by information and scarce attention. However, probably nobody really understands yet what this economy will look like as it matures and how its interaction with the “real world” will work. Obviously, the two will have to coexist, because last time I checked, my local supermarket didn’t accept hyperlinks as payment for groceries.

We are all so deeply rooted in the principles of the traditional physical economy that it is easy to forget the basics. The good old economy as we know it revolves around scarce physical goods and (more recently) around scarce services. The goods are scarce because considerable work has to be invested into their production, starting from the (often scarce) raw materials that we find in nature. Services are scarce because most of them require some kind of skill, and acquiring these qualifications needs time, which is limited and therefore valuable. Humans trade these scarce goods and services amongst each other because of course not everybody can produce every type of good or service. And then there’s of course money, which provides a more efficient way to trade stuff by separating value from a lumpy physical item or perishable service. Money is basically condensed value, which stems from physical scarcity.

So far so good. But how is the digital economy different?

Most importantly, value in the Internet economy is detached from the physical world and its limitations. For instance, a digital text can be valuable without having a physical manifestation. Sure, all these bits have to be stored somewhere, but the storage medium is a reusable commodity, not bound to this particular piece of information. Digital information can of course be copied without loss of quality (this doesn’t exist in the physical world) and distributed over a network, instantly reaching every corner of the world. And all of this is remarkably cheap nowadays.

The result is a huge abundance of information. And this changes what is scarce: Not the actual product (information), but the capacity for consumption — attention. Every day more free information is made available to the world than a human being could consume in a lifetime. Obviously, human attention is finite, and therefore it’s the scarce factor in the digital world.

That’s why many Internet users can’t understand that media companies want to charge for their online content. Aren’t they already getting the most valuable thing that an Internet user has to offer, his or her attention? And obviously, attention can be converted into real money through advertising, so what’s the problem?

At this point the discussion typically breaks down, because media companies, and newspapers in particular, have a very hard time financing their costly content production just from online advertising. There are probably two main reasons for this problem:

First, on the cost side, newspapers still apply the old principles from the physical world to their content production process. In the old media world, news has to be distributed physically (or through scarce airwaves), and therefore it is most efficient to produce local newspapers that cover all the important news in one single information product. This results in probably dozens or even hundreds of editors slightly rewriting the very same news agency report, adding almost no value. In a digital world of ubiquitous information, that’s completely unnecessary.

Furthermore, a key value proposition of newspapers is the context that they create by selecting the most newsworthy content. Again, this process is duplicated for every single newspaper. In the online world, there are far more efficient and sophisticated ways to provide this value, even though most can’t exist without at least some human intervention. But frankly, semi-automated aggregators like Memeorandum often provide a better view of what is going on in the world than most newspaper homepages.

About 50% of the total cost of a newspaper goes into physical production and distribution, the rest into actual content production. But if you subtract the obsolete and redundant editorial work that most newspapers are still doing, what would be left? Maybe 5%, maybe 10% of the cost base? Most probably, it’s even less. The percentage of truly original reporting in most traditional media is surprisingly low. But in the digital world, there’s no mechanism to finance the unneeded redundant production of information, because there’s already so much information out there.

Secondly, on the revenue side, advertising is a very unsophisticated and inefficient way to convert attention into money. Today’s advertising models are still built on the scarcity models of the past — the type where ad space is scarce, not attention. If you wanted to reach people in a certain local market with your commercial message, your only option was to advertise in the local newspaper or on local TV and radio stations. Even in big markets, there were only a handful of channels available, with very limited and therefore expensive ad space. Targeting was only very basic, because reaching many people with a lot of wastage through mass media was still more efficient than other methods.

That’s of course fundamentally different in the online world, but ad agencies and publishers are still stuck in old thinking. Most online publishers complain about the low rates that they’re getting for display ads. But that’s not surprising, since online ad inventory is almost unlimited. The trick is to reach the right audience at the right time. But ad agencies still think in big demographic clusters, not in the situation-specific micro-segmentation that the Internet could provide. It’s therefore not surprising that paid search is by far the most lucrative form of online advertising, since Google and its competitors can convert very specific attention (somebody searching for a certain topic right now) into commercially relevant results.

So what needs to happen to make the attention-driven online media economy viable?

Clearly, media companies have to become leaner and more focused. They need to concentrate on original content that really adds value and therefore is worthy of people’s attention. That’s frankly only a fraction of the current media production. All the other fluff, as well as the fat corporate structures on top of the actual content production, will simply not be viable online.
Also, media companies need to recognize that unique context, filtering and editorial selection are more essential than ever in dealing with people’s limited attention. This will be a great way for media brands to get competitive differentiation. But today’s typical news homepage is still built on an old, generic one-size-fits-all model that is neither cost-effective nor customer-friendly.
Publishers and advertisers have to experiment with new ways of converting attention into commercial value, i.e. building the bridge from the attention economy to the monetary economy. I think we currently stand at the very beginning of this process. Traditional advertising is becoming increasingly ineffective. But new ways to channel people’s attention in order to sell them something are still embryonic. Almost certainly, there will be many ways to do this, but no silver bullets.
Media companies have to recognize and deeply understand that attention is the scarce commodity in the digital economy and therefore is a currency in itself. The current conflicts between Google and newspaper publishers show that old media executives are starting to get this, although most of their actions go into the completely wrong direction.

But at the end of the day, attention has to be convertible into money somehow, since people still live in the physical world, where scarcity is a reality and money is needed. Companies and their executives will continue to be measured by their financial success, not by the attention they accumulate. Determining the monetary value of intangibles like attention, intellectual property, brand assets and customer loyalty is a thorny problem, and it’s unlikely that there will be a commonly accepted solution anytime soon.

However, people working outside of the traditional corporate framework might be willing to forgo at least some of this conversion. Under some circumstances, people tend to value attention more than money. Let’s be honest: Most people in the Western world already have more material things than they need. Particularly the richest European countries are increasingly turning into post-material societies that don’t necessarily try to optimize their GDP, but instead the general well-being of their population. And getting attention is something of fundamental importance for humans.

So it wouldn’t be surprising if more and more people would add value to the digital economy without getting paid for it in monetary terms. The open source ecosystem is of course a great example of how this can work. And most bloggers blog (and Twitterers tweet) because they like the attention and the good things that can result from it, not because they get paid.

Another example: Craigslist provides fundamentally the same value as the many classified sections in newspapers that it basically killed, but it captures only a fraction of the monetary value. Does that make any sense at all? Yes, because Craigslist created a top 20 website that commands a lot of attention with minimal resources. It provides a valuable service and gets paid with huge amounts of attention and loyalty, as well as with quite a bit of money. It is wildly profitable in monetary terms, but obscenely profitable in attention terms. That’s bad news for the people who used to make a living selling classified ads, but good news for Craig Newmark.

Welcome to creative destruction, attention economy edition.

(Picture: Josh Sommers, CC license)

The End of Substance, or: Is Blogging Dead?

A worrying trend is becoming increasingly obvious: Many of the very best and most interesting bloggers are writing less and less.

Some examples: Nick Carr is down to maybe a couple of posts per month, and there’s a similar pattern on the blogs of Dharmesh Shah and the always controversial Andrew Keen. Jason Calacanis recently decided to send out his more substantial pieces through his e-mail list only, and his former blog is now just a photo stream. Marc Andreessen and John Hagel seem to have disappeared entirely. And online PR guru Steve Rubel just officially gave up blogging and instead wants us to read his “lifestream” on Posterous — which is nice, but hardly a replacement for his deeper analytical posts.

It’s a striking pattern that particularly well-known tech bloggers (i.e. real thought leaders) who specialize in longer analytical pieces (i.e. real substance) are pulling back. It feels like well thought-out content is increasingly replaced by noisy, relatively random short bursts of information on Twitter, FriendFeed, Tumblr and similar platforms.

What’s going on here? Based on my own experience as a much less important blogger, I think there are three main reasons for this trend:

1. Blogging is hard work. Twittering is not.
Let’s be honest: I can easily reach about three times as many people on Twitter (and, through a feed, on Facebook) as with this blog post. And the ratio is probably even more dramatic for A list bloggers. Writing a smart Tweet that will grab people’s attention takes seconds, writing a good blog post takes hours. And the difference in the level of attention and positive feedback you’re getting might not be large. Twittering and lifestreaming are simply a more efficient way to get attention. And yes, people do blog to get attention.

2. The quality of feedback on blogs decreases with audience size.
One of the most motivating things about blogging are the comments and resulting discussions with the really smart people who read your blog. When you have a couple of hundred readers, the quality of this interaction tends to be very high. Unfortunately, it always seems to decrease as you get more readers. Suddenly “trolls” show up, you get more and more spam, and in many cases people simply seem to comment because they want to get some attention for their own blog, not because they have something to contribute. This kills one of the most important reasons for blogging.

3. You don’t necessarily get rewarded for quality.
I still remember what a thrill it was to get my first blog comments or get linked on other blogs. On Rivva.de, the German equivalent to Techmeme, I was for a while in the Top 15 most influential blogs and news sources, with a higher ranking than some well-known mainstream news outlets. How cool is that? Blogging can be very rewarding. I guess most people feel the same, even if they’re well-known authors. Traditional media doesn’t offer the same kind of instant gratification feedback loop that blogging provides.

But, you know, it gets old. And what’s even worse, the positive feedback doesn’t necessarily increase with the quality of your output. Commercial blog publishers (one of which I’m a co-founder of) know that the pure posting frequency is often more important for success than the quality of your posts. And most bloggers probably have experienced that a really strong post that they put a lot of work in hardly got any feedback, while sometimes the more fluffy pieces get picked up like crazy.

So it’s not surprising that quality-oriented bloggers in particular are looking for the next mountain to climb, the next reward curve, the next shiny new toy. And that’s not necessarily just in social media. Several popular bloggers have published books recently, are working on their speaking careers or are focusing on their startup projects.

For a while, blogs were probably the best source for breakthrough thinking about technology and entrepreneurship issues. I think this short era is coming to an end, at least for some time.

Social media, and maybe online media in general, is currently in the cambrian explosion phase. We see new concepts and channels almost every day, and the market is changing very rapidly. It probably will need a few years to settle down, for the winners to emerge, for more constant structures to evolve.

People who contribute substantial content to any medium don’t just do that because it’s fun, but because they can expect certain rewards, either in money or status. The reward equation in social media is currently changing too rapidly. That’s fine for some experimentation, but in order to create long-term incentives for deep thinkers, the ecosystem has to cool down quite a bit. In the meantime, read a good book.

What will the news media of the future cost?

(This post is a translated version of an article that I wrote for netzwertig.com, the leading German tech blog)

The media industry is in the middle of a deep transformation, and nobody knows what the successful business models of the future will look like. Sometimes it’s useful to look at this kind of situation from the perspective of good old-fashioned economic laws, because they apply even in the digital age.

The current discussion about the future of media is shaped to a large part by ideology and wishful thinking instead of rational analysis. There seems to be little common ground between Internet prophets (“Information wants to be free”) and traditionalists (“Good journalism deserves good money”). Some online pundits seem to think that media companies should never, ever charge for their products again, while many managers of traditional media businesses would love to see the Internet shut down altogether.

Unfortunately, this whole discussion typically doesn’t address the heart of the matter. The future of media business models will not be decided by ideology and idealistic visions, but by simple market laws. And to understand these, a bit of economic analysis typically works much better than idealism.

Obviously, most traditional media companies, newspapers in particular, currently have a revenue problem. Print circulations (and ad sales) are falling rapidly, and users seem to be unwilling to pay for online media.

Broadly speaking, this trend reflects a change in the supply situation. To use a bit of Economics 101: The price that can be achieved for a certain product is a result of the relationship between supply and demand. Economists like to illustrate this with supply and demand curves:

The supply curve S shows that suppliers will produce more units of a product (x) if prices (p) are higher. On the opposite site, customers will buy more of a product if prices are lower. The demand curve D therefore is sloped in the opposite direction. Since we’re talking about media here, the demand curve is pretty steep. This reflects the fact that people can’t consume much more media even if prices fall. There are only so many hours in a day, and attention is limited. The point where the supply and demand curve intersect is the market equilibrium that determines the market price and the volume of product sold.

The increasing popularity of the Internet as a news medium has pretty severe consequences for this equilibrium. Since Internet-based media have a much lower cost of distribution, suppliers can provide much more of their product at the same price. The supply curve shifts down (from S to S2). As a result, the volume of media products sold increases a bit, but prices fall pretty dramatically. That’s exactly what we’re currently experiencing in reality, although reality is of course more complex than this very simple model.

Now for the important question: Is this new position of the supply curve (and therefore the much lower price level) sustainable, i.e. can it remain at this point in the long run? That’s not obvious, because supply behavior often overshoots a sustainable point in technological revolutions — just think back to the dot com era. Business models need some time to find a stable new point.

But the way to a new long-term equilibrium is not linear and depends on a lot of factors, not least of all the interaction with traditional market segment. In news media, it is currently rational behavior for newspaper companies to offer their content on the web for free. But that’s only true as long as the traditional print business is healthy. Let’s play a bit with some numbers to show the idea behind this claim.

Each supplier obviously has to consider at which price he wants to offer a certain amount of his product. Without going into theoretical details: roughly speaking, the supplier has to consider his marginal costs, i.e. the costs that are caused by producing another unit of a product, and the average costs that in the end have to be covered by revenue.

And now we see the fundamental difference between traditional media that are bound to physical distribution, and the digital world: Each information product initially creates costs for the production of the actual content (for instance, salaries for journalists). But when it comes to the costs per unit — the marginal costs — analog and digital media are fundamentally different. The costs for the production and distribution of a printed newspaper are substantial. But serving an additional reader on a newspaper website costs almost nothing.
Now let’s look at a simplified model case for a hypothetical newspaper company. Let’s assume that the production of content costs $250,000 every day (not unrealistic for a major newspaper). Let’s further assume that the printing and distribution of a newspaper costs 50 cents per copy, but serving another reader on the newspaper’s website costs only 5 cents (caused by the need for additional bandwidth and server capacity).

If we look at average costs for different audience sizes, we’ll see the following picture:

The first unit of a newspaper is incredibly expensive, but the more copies you produce, the better initial content production costs are distributed over all readers. The more circulation grows, the more the average costs per print copy (red curve) approaches marginal costs.

But what happens if the company publishes the same content both in print and on the web? Since the additional costs for the web channel are low, the total average costs for both media taken together (green curve) rise only slightly. If we assume that revenue from the print business already covers the costs of the newspaper, the Internet can potentially be very profitable for the media company. Even if online ad sales are relatively low, they can easily cover the small additional costs, and the rest is pure profit.

But: If the print business starts to fail — because readers migrate to the online edition — and the web channel has to carry initial costs alone (blue curve), we get a different picture:

Of course, costs for a pure web offering are much lower, but they are way higher than zero, particularly if the number of readers is relatively small. As soon as the cross-subsidy from the print side falls, the Internet channel has to provide much higher revenue to finance the initial costs of content production. And in many cases, it could be difficult to achieve this from ad sales alone.

Some Internet prophets seem to think that media companies should never again charge for content. That’s a pretty naive view. This approach only works as long as there is a healthy traditional (print) business. And obviously, this traditional business is eroding.

So what can be expected if the print business fails altogether? The harsh reality is that many media companies will not survive it. That’s why overall supply of news will start to decrease, and prices for news will rise.

More specifically: The phase in the development of the news business that we are currently experiencing is not sustainable. I’m convinced that the era of a huge oversupply of free news will come to an end sooner or later.

Media companies with a well differentiated product will start to charge for their content again, and users will pay if they can’t get the same quality content elsewhere — and that will increasingly be the case with shrinking supply. Online news subscriptions will be much cheaper than their paper equivalent, but they will cost something, probably around 10-40% of a newspaper subscription.

The economic characteristics of online media have another important consequence: The big players will have a huge advantage, since it’s economically crucial to distribute initial costs over as many readers as possible. Print media experience scalability problems at some point due to their physical production. But the Internet is largely free of these concerns.

The world of digital news will almost certainly be bi-polar. On one side there will be a few giant media conglomerates that will produce news for global markets. Almost certainly, they will offer their products in different versions for different price points. The freemium model, which is already popular in the software market, could very well be the model of the future in media. And these media conglomerates will make sure that the oversupply of news will be kept in check.

Next to this, there will be plenty of space for small, often semi-professional providers that can publish their content for free, thanks to low production costs. Advertising will be the typical business model, driven by an increased selectiveness of advertisers who want to reach certain interesting target groups in focused way. There will be a few segments where small media companies can established paid content franchises, but this will be a niche phenomenon.

The situation will be tough for the group in between: The medium-sized publishers that have to carry a substantial cost base from the print era, but don’t have the scale to reach a huge audience. Realistically, the model of the medium sized regional publishing house will very likely vanish. The economic structure of digital media doesn’t leave much room for this type of company.

Again: The current situation of the media industry is an anomaly that is not sustainable in the long run. This conclusion is not about ideology, but about market forces. We all will have to get used to paying for high quality news, probably pretty soon. It will be cheaper than the good old newspaper, but not free forever.