Here is the video of a panel I hosted at NATPE in Miami on January 28th. It features Rich Greefield from BTIG, Betsy Morgan CEO of The Blaze, Chet Kanojia CEO of Aereo, Alex Carloss from YouTube and Kevin Beggs CEO of Lionsgate. Great conversation about the disruptions facing the TV industry.
It’s finally happening. The Internet is taking over TV. It’s just happening differently than many of us imagined. There are two major transformations underway.
- The Rise of The Internet Distributors. Led by Netflix, the group of new distributors includes Amazon and Microsoft now, but maybe Apple and Google later. They are largely distributing traditional TV shows in a non-traditional way. All the content is delivered over IP and usually as part of a paid subscription or per-episode EST (electronic sell-through). Important to note that all of this content contains no advertising and is available entirely on-demand. This content falls into the “non-substitutional” cotent bucket. To watch it, you don’t need to be a cable TV subscriber.
- The Rise of Alternative Content Producers. Thanks to YouTube’s Channel strategy and investment in hundreds of content providers, new producers of content are emerging and offering non-traditional programming, usually in shorter form. This content is marked by dramatically different production economics than traditional TV content, taking advantage of an expanded labor pool and low-cost cameras and computer editing. This alternative content is chipping away at long- and mid-tail viewership on traditional networks (the “filler” and “nice-to-see” buckets.)
Both of these transformations are successful to date and will only become more-so. Rich Greenfield has a nice summary of why the TV industry suddenly loves Netflix. (Disclosure: I am long NFLX and have been a stockholder for some time.) The first transformation takes advantage of the massive pressure MVPDs place on traditional cable nets to not offer their programming direct-to-consumer. In this case, the HBO’s and AMC’s requirement that you authenticate your existing cable subscription in order to watch their programming over IP successfully persuades the cord-nevers to just avoid the programming on those networks until the hit shows are offered through Netflix or EST. Netflix, once again, looks like the hero. Those empty threats by Jeff Bewkes that he will never work with Netflix turned out to be, well, empty. The second transformation will take longer to fully prove out, but I believe it will happen. As more of our viewership takes place over IP, we lose our allegiance to networks as the point of distribution and allow new distributors to guide us towards content choice.
There is a third budding area of transformation, but I don’t yet see evidence that a business exists: trying to re-package cable TV bundles and sell them over IP. Companies like Aereo and Nimble.TV offer versions of this. I believe we live in a show-based world. Consumers aren’t looking for networks (with the exception of ESPN and regional sports nets) so much as they are looking for shows. Shows delivered over IP allow for the slow unbundling of television. One of the many challenges about this model for traditional broadcasters is that there is no advertising in this world. The traditional cable net business model enjoys two great revenue streams: affiliate fees and ad dollars. In IP-delivered shows, there are no ads.
Who are the winners and losers in this model? Well, show creators continue to flourish. The new distributors enjoy great success. Of course, ISPs, who are often the same companies as the MVPDs, do fine in the ISP business, but I believe the decline in total cable subs will continue. In a world where shows do not contain advertising, why do we need Nielsen? They have been a measurement standard for decades largely because advertisers needed a third-party validator of viewership. You can see why they have a vested interest in insisting TV ad viewership is not on the decline (despite everyone’s experience to the contrary.) I don’t think cable nets are in immediate trouble. They enjoy a great business model now, and also get to reap EST or licensing benefits after the shows air. But the Netflix House of Cards effort shows that consumers will now expect to be able to watch shows whenever they want and not be bothered by inconvenient broadcast schedules. The day is coming when the cable nets will have to respond.
For startups, one of the wide open spaces seems to be in cross-provider discovery. Now that my shows are spread among Netflix, Amazon, YouTube and on my DVR, I would prefer one interface to reach them all. Companies like Dijit’s NextGuide, Peel, Squrl, and Telly are taking cracks at this important space.
It was an honor to be asked to address the 2007 Penn Engineering class as their commencement speaker. The video has been posted on YouTube for years, but I was recently asked to post the text. While it is several years old, I don’t believe the message is out of date.
Good afternoon. I know exactly what you are thinking; what is a guy that you have never heard of doing up here delivering your commencement address? Well, truth be told, I am wondering the very same thing. In fact, when Dean Glandt asked me to be here with you, my fist reaction was, “No. I have not accomplished enough to stand in front of such a distinguished crowd. What wisdom do I have to empart to them?” Well, I will do my best today to share something meaningful with you. Let me assure you though, this is not where I expected to be when I was sitting in your seat 16 years ago, thinking, “now what?”
When you got into Penn Engineering, your parents, like mine, probably breathed a sigh of relief. “At least he’ll have valuable skills and a career – and not just some vague liberal arts degree.” Well, I have some bad news for your parents. Engineering is the new liberal arts. It is the lingua franca of the next generation. Technology has become so pervasive, particularly in western cultures, that we engineers are no longer the geeks in the corner – we are now responsible for nothing less than the economic, media, and communication underpinnings of society. But the good news is, if you speak this new universal language – and all of you do – then your opportunities to contribute – not just to your own success but to society at large – are limited only by your drive, your desire, and your ideas.
When I sat in your seat 16 years ago, I of course knew exactly where I was headed. Had it all mapped out. I wanted to be a rock star – a drummer in a rock and roll band. Granted, that is not the most expedient path to becoming a CEO of a digital music company. But please don’t be misled by my title. Yes, I realize being a CEO opens some doors. It gives me the platform to accomplish things that I might never otherwise do. But CEO is the least important aspect of my career trajectory. It is representative of the fact that I have merged my two passions into my career. And that’s what I’d like you to think about today.
What are your passions and how can you incorporate them into your career? How can you utilize these newfound skills? How can today become a jumping off point for tackling the things you deeply care about?
When I graduated from Penn Engineering, I had two passions: I was really into computers and I was really into music. Like many of you, I was tuned in constantly. I played in bands around campus and here in the greater Philadelphia area. I left the engineering lab as often as I could to practice and play gigs. Yes, I was a musician. But I was also an early adopter of technology. Penn helped open my eyes to that. It was clear where the music was headed – computers – to compose and mix, electronic drums, all the new tools of the trade. But I think I knew then that making a career out of my rock and roll aspirations was a long shot.
I came away with a couple of takeaways from this experience. For one thing, I learned that I had somewhat radical intentions from a very early age. The straight and narrow probably was not going to work for me. But the biggest lesson – and the most empowering one of all – was that it is possible to do what you want to do. Maybe not play Madison Square Garden to 20,000 fans. But I was hopeful that I could combine my passion for music with my keen interest in technology.
So I took the same degree that you are receiving today and I went to work at Apple in California. At that time, Apple was still a huge underdog and its future was by no means certain. I fit in with the culture perfectly. Apple embodied the rebel mentality. It was, pardon the expression, marching to the beat of a different drummer. Working for an underdog and innovator like Apple was a great influence. I learned to “think different.” I learned that consumers will reward you for innovation. And most importantly, I learned that technology could be terribly disruptive to incumbent industries.
Remember the phrase “desktop publishing?” Because of the Macintosh and laser printers, an entire business was upended. Apple (and eventually Microsoft) reaped the benefit. It turned the print industry on its head. I saw a chance to take that very same disruptive psychology and apply it the music industry.
When I was a student here, Penn was an early contributor to the development of the Internet. It was clear that as information and entertainment became digitized, the businesses of distribution and retail of entertainment would be transformed. I already knew that music was my true north. So I devoted my career toward working to accelerate, and hopefully reap the benefits of this transformation in the music business.
After joining the first digital music company and then founding another, and trying multiple times to build a business which would be pivotal in the transition of the music industry, eventually, with some partners, we bought eMusic, an abandoned dot-com company in disarray. Long story short? We turned it around to become the number two digital music service in the world. Second only to my old company, Apple. It’s success is due to the fact that consumers, not the music industry itself, forced a format transition from physical goods to digital goods. All enabled by technology. While the incumbent music industry feared, and even ran from this inevitability, I welcomed the disruptive nature of technology and knew it would fundamentally alter the entertainment industry,
However, I don’t want to set up false expectations that if you stick with the drums, you’ll end up CEO of a music company. Dean Glandt did not ask me here today to talk to you about playing in a rock and roll band. So I asked myself, what can I possibly share with a group as educated and informed as you that would be original and have any possible value whatsoever? I labored over this and as I did, it struck me. It’s not about technology or engineering. It’s about the disruptive nature of it.
You see, you all are sitting in the catbird seat for the next industrial revolution. You can join existing industries and work to build them bigger – or you can be the disrupters. The shapers. The policymakers. Every last one of you can land a job in any technology role. At the biggest and most successful companies! You already speak the language. But is that enough? Do you want to get out of bed every day just to log on? Or do you take this incredible genius you possess – this mastery of bits and bytes – and use it for something that matters to you? Something transformative?
There is an ambassador who comes to mind who also got his start like I did, in music. His name is Bono. You’re probably sick of hearing about him. Why does a scruffy singer from a small country in the North Sea have so much clout on the global stage? Because he took a common language, mastered it, and made it his platform for change. It begs the simple question. What is your platform for change going to be? How will you disrupt?
I understand – you might be scratching your head and saying, “C’mon, it’s happened already. The billions have been made – with Microsoft, Google, Yahoo!, MySpace, YouTube. All the big bets have been placed. Everything has already been disrupted.” But in fact I don’t think that’s true. Those companies are just the building blocks for the next wave. These companies, these web players did not exist 30 years ago. No one knew where it was going back then and honestly, we don’t know, today. That’s where you come in.
How do you take these Goliathan companies and their all-encompassing technologies and turn them on their head? How do you wrap your arms around this knowledge and do something that no one has thought of yet? How do you take this “language” Penn Engineering has taught you and make it stand for something you care about?
My understanding of the digitization of music gave me an inkling that someday the songs I grew up with would be available in formats we could not imagine as kids. The model was changing and I saw that and embraced it and tweaked it and now I get to wake up every morning and spend my days guaranteeing that people can buy it. Any kind of music on any kind of player. Period. That’s what I believe in. That’s where I staked my tent.
Although I’m a computer scientist by degree, I am no quantum physicist or nanotech engineer. I didn’t invent something that is going to save the world. I foresaw a market trend in a field I was passionate about and was fortunate enough to get on board at the cusp of the transition. Sniffing out market trends? This is a very good skill to hone. And you’re not going to find it in any book. Turn to your instincts on this one.
Here are some more examples: Sergey Brin and Larry Page – the guys who figured out how to do “search” better? They got it. Andreas Pavel? How many of you know THAT name. He and his girlfriend tested a new musical device he’d invented, on a snowy day in the Swiss Alps, listening to a Herbie Mann/Duane Allman composition – outdoors! – while they walked! The Walkman was born. Transformational! The way we listen to music has never been the same. And Steve Jobs can’t take all the credit on this one.
Nick Negroponte from MIT media Lab? One laptop Per Child! He is going to change the way children learn and he aims to do so one laptop at a time.
And it won’t just change the way children learn and think. It will change the way countries pull themselves out of poverty. The way emerging markets become self-sustaining. One man’s vision – and the language of technology – is going to change the lives of kids who never dreamt of having a chance – from Angola to Myanmar to Kazakhstan. These people are all using technology to disrupt the natural order, and making something better for consumers – for people – at the same time
Does this mean you have to invent the next big idea? if you have it, fantastic! But I think your mission is greater. You see, as I said at the outset, you are the new liberal arts generation. Technology is now omnipresent in society and you speak the common language. However, there are a lot of you speaking that language and believe me, the pack is closing in. You’re going to need more. You’re going to have to be aggressive, disruptive, and visionary.
I know many of you are thinking about the jobs you will start tomorrow. If I could spark one thought in you today, it would be to look five years out. Ten years out. Ask yourself, what are your kids are going to be listening to? What are they going to read, and watch? What’s their world going to look like? And how are you going to shape it? What industries are going to be completely disrupted by the inventions of today, and how can you, and society, benefit?
So I offer you a challenge. Look at yourself today, and ask what’s going to matter to you tomorrow. Which one of you is going to use your remarkable talent to feed Africa? Who’s going to tackle global warming? Does any one of you really believe, 20 years from now, that we’re going to still be running our cars on thick black crude pumped 2 miles out of the ground from a desert?
You are the 2007 graduating class of Penn Engineering. But engineering is merely the platform for the future. You will be more than engineers. You can engineer the shape of our society and shape the destiny of our lives. You will be inventors. Designers. Architects. Engineers. But through your ideas and design and architecture, you will become the de facto policymakers of the 21st century. You will define our society, all because you understand technology better than everyone else.
Call it a grave responsibility, or the greatest road trip you’ll ever undertake. Either way, you are empowered. There is no turning back. You are truly on the launching pad.
In closing, I offer these words. Follow your passion. Question the status quo. Bang a few drums. Don’t be afraid to make some noise. Take this awesome new language you speak and use it. Put it to work. We truly are on the cusp of a revolution. Get out there and be disruptive. Be responsible and give a damn. And lead. Show us where we’re headed next. It really does matter.
With my mind fully stretched in various different directions, a bunch of thoughts are coalescing, coming out of another fantastic TED. Three main points are loosely stitched together in my mind and they point to a bunch of future opportunity.
First, we heard convincingly from economists like Robert Gordon, Erik Brynjolfsson and Andrew McAfee that America’s manufacturing jobs which, for so long, powered our healthy middle class, are not coming back in any big numbers. Many of us scratch our heads to understand how to fill this enormous hole. At Venrock, largely informed by a similar Hunter Walk observation, we believe this dirth of fruitful middle class employment is leading to so much of the activity in the shared resources sector (AirBNB, etc.), in the peer to peer marketplace sector (PoshMark, etc.) and in the digital labor market sector (Uber, TaskRabbit, etc.) as income supplementation. This will help and is a highly investible opportunity. But still, is this enough?
Second, we marveled at Elon Musk and his unrivaled appetite to tackle the planet’s largest problems through commercial endeavors filled with enormous risk (SpaceX, Solar City, Tesla). He is an international treasure and it simply begs the question…why aren’t there more of him? Of course, there are many fantastically successful entrepreneurs and we celebrate them all. But how many Elon Musks are there on the planet? One hundred? One thousand? Ten thousand? Why aren’t there ten million? What are the specific experiences, personality traits, education paths, parenting, and DNA necessary to produce the planet’s super humans driven to defy the odds on such interplanetary scale? It is clear the planet needs more of them, and so why aren’t we unlocking the answer to the question of how to make more? A speaker reminded us of the Chinese proverb…
If you want one year of prosperity, grow wheat. If you want ten years of prosperity, grow trees. If you want one hundred years of prosperity, grow people.
We need to grow more Elons (and Steves and Bills, etc.)
Finally, Sugata Mitra delivered a compelling argument that our schools are simply obsolete for the task of turning out the kind of people we now need in our modern society. He argues for far more self-organized small learning groups of kids with cloud-based tools and light direction from a teacher. That may be part of the solution, but it is likely only a part of it. If our future doesn’t need line workers but needs more inventors, creators, risk-takers, builders, and makers, where will they all come from? Surely there is no natural limit on the number of people with these strengths in our species, right? Surely we can teach and encourage more people to excel in these areas, right? In order to do that, just how much of our society needs to change? Isn’t it more than just our schools? Isn’t it the goals we set for our kids as parents? Is the over-whelming emphasis on organized team sports in our suburban communities part of the problem? When we reward kids at spelling bees, perhaps the ultimate test of rote memorization, are we not helping? Shouldn’t every kid on the planet be playing Minecraft? How deep must we dig to get at the real root here?
I suspect this is perhaps the greatest issue we face as a society. How do we produce more entrepreneurs?
(Special thanks to fellow TEDster Juliette LaMontagne for the helpful brainstorming.)
I was invited to testify in front of the IP/Competition/Internet Subcommittee of the House Judiciary Committee on the state of internet music licensing. I presented the following testimony today:
Testimony of David B. Pakman
U.S. House of Representatives Committee on the Judiciary
Subcommittee on Intellectual Property, Competition and the Internet
Hearing on “Music Licensing Part One: Legislation in the 112th Congress”
November 28, 2012
Chairman Goodlatte, Congressman Watt, and Members of the Subcommittee:
Thank you for inviting me to testify today regarding the state of internet music radio licensing. I am a venture capitalist with the firm Venrock. We invest in early stage internet, healthcare and energy companies and work to build them into successful, stand-alone, high-growth businesses. We look to invest in outstanding entrepreneurs intending to bring exciting new products to very large and vibrant markets. Our firm has invested more than $2.6 billion in more than 450 companies over the past 40 years. These investments include Apple, Athenahealth, Check Point Software, Intel and DoubleClick.
Although I was previously a multi-time entrepreneur in the digital music business, we are not currently investors in any digital music or internet radio companies.
As venture capitalists, we evaluate new companies largely based on three criteria: the abilities of the team, the size and conditions of the market the company aims to enter, and the quality of the product. Although we have met many great entrepreneurs with great product ideas, we have resisted investing in digital music largely for one reason — the complications and conditions of the state of music licensing. The digital music business is one of the most perilous of all internet businesses. We are skeptical, under the current licensing regime, that profitable stand-alone digital music companies can be built. In fact, hundreds of millions of dollars of venture capital have been lost in failed attempts to launch sustainable companies in this market. While our industry is used to failure, the failure rate of digital music companies is among the highest of any industry we have evaluated. This is solely due to the over-burdensome royalty requirements imposed upon digital music licensees by record companies under both voluntary and compulsory rate structures. The compulsory royalty rates imposed upon internet radio companies render them non-investible businesses from the perspective of many VCs.
The internet has delivered unprecedented innovation to the music community and allowed more and more artists to be heard unfiltered by the incumbent major record labels and terrestrial radio stations. I believe more people listen to a more diverse set of music today than ever before in our time. However the companies trying to deliver these innovative services are unsustainable under the current rates and frequently shut down once their investors grow tired of subsidizing these high rates and elusive profits fail to arrive at any scale. Pandora is a company that has done an amazing job of trying to make their business work at the incredibly high rates under which it currently operates — but their quarterly earnings reports make abundantly clear why they are virtually alone in this category. Regretfully, I cannot point to a single stand-alone business that operates profitably in internet radio. In fact, in all of digital music, only very large companies who subsidize their music efforts with profits from elsewhere in their business currently survive as distributors or retailers of music.
There was a time when the record companies were part of conglomerate media companies which also distributed and licensed the music they controlled. These joint “owners” and “users” of music appreciated the need for healthy economics on both sides of a license. Once the internet emerged, new distributors or “users” of music grew outside of major label ownership. Perhaps in response to their failure to prosper as internet distributors of music, the major labels took a short-term approach and refused to license their music on terms that would allow the “music users” to enjoy healthy businesses. To this day, more than 15 years since I first entered the digital music business, I remain baffled by this practice. In my opinion, it is in the long-term best interest of music rights holders to encourage a healthy, profitable digital music business that attracts investment capital, encourages innovation, and indeed celebrates the successes of the licensees of its music. A healthy future for the recorded music business demands an ecosystem of hundreds or even thousands of successful music licensees, prospering by delivering innovative music services to the global internet. Yet the actions of the RIAA seem counter to this very goal. They have appeared on the opposite side of every issue facing digital music innovators, opposed to sensible licensing rates meant to achieve a healthy market. Regretfully, and perhaps most upsetting to all of us, the artists are the ones who suffer most. They depend on the actions of their labels to encourage a healthy market to grow and have little influence on the decisions of the RIAA.
I am a believer in the value of open and unfettered markets and generally prefer market-based solutions. Unfortunately, the music industry is controlled by a mere three major labels, two of them controlling about two-thirds of all record sales. That amount of concentrated monopoly power has prevented a free market from operating and letting a healthy group of music licensees thrive. That said, I do believe there has been great value in compulsory licensing regimes such as the one governing internet radio. This structure has allowed internet radio companies to license the catalogs of all record labels and tens of thousands of independent artists, not just the dominant majors, bringing unprecedented exposure and revenue to the vibrant long tail of indie music — often where music innovation itself gestates.
The problem is simply that the rates available to internet radio companies under this compulsory license are too high. They frighten off investment capital, prevent great entrepreneurs from innovating, and kill off exciting attempts to bring great new music services to consumers. American entrepreneurship and innovation require vibrant markets unburdened by artificially high rate structures. I am hopeful you will see through the rhetoric often employed in this debate and make sensible policy based on sound economics. I would like nothing more than to invest in the many entrepreneurs we have met who have great ideas about the future of music. With a sensible rate structure in place, our focus on this market could return.
Please note: the views expressed herein are my own and are not necessarily those held by Venrock or other individual partners at the firm.