Our Take

Spotify signed a similar deal with Telia in Sweden in 2009, so Spotify using networks as a distribution channel is nothing new. Spotify presumably has the data to prove to networks how these type of deals can be turned into a win-win situation. The more interesting aspect of the deal is the networks angle.

We first heard of Virgin Media launching music services three years ago, but the launch was abandoned after Virgin Media couldn’t economically secure the rights with the major music labels. The fact that Virgin Media is launching now indicates that the music labels are being far more reasonable in their terms.

The bigger picture is the political agenda in the UK around illegal filesharing. Virgin Media now have a reasonably priced carrot to offer to their consumers. The stick is that Virgin Media will soon be forced by UK law to suspend or even terminate customer connections who obtain content illegally whether music or video.

Two of the other ISPs, BT and TalkTalk, have been fiercely resisting the passing of this law, challenging its progress in the Courts. This resistance has irked both politicians and content owners. It will be extremely interesting to see whether they eventually develop a music offering. The other major, Sky, is a large content owner in their own right through their parent company NewsCorp. Sky launched a music service called SkySongs which was quickly abandoned as uneconomic.

The road for profitability for online music services is difficult, but they should be seen as part of the wider political battle to prevent illegal access to copyrighted content.

Video: Hulu Up For Sale

Bob Iger of Disney, a Hulu shareholder, has confirmed that it is up for sale. The LA Times’s Company Town blog has the low down on the sales process and the growth in Hulu $8/month subscribers.

Our Take

We are not surprised that the shareholders having taken this moment to put Hulu up for sale. The timing probably is the best evidence yet that we are in the middle of a tech valuation bubble. The media owners seem to believe that they can get more now by selling up than through long term profitable growth in the business.

Hulu is still an early stage company with expected revenues in 2011 of US$500m, 1m $8/month subscribers (compared to 23m at Netflix) and the #1 USA video property, serving up 1.3bn ads in May alone.

The bidders face an awkward dilemma: the more they pay to Hulu owners (including Disney, Fox and NBCUniversal), the more other content owners will demand from them when their content deals are up for renewal and therefore the harder it will be for Hulu to reach profitability. In auction theory, this is termed the Winner’s curse.

We remain short new online aggregators (Hulu, Netflix and YouTube) and long on traditional cable aggregators.

Cable Networks: AMC Spin Off from Cablevision

On June 30th, Cablevision spun off its programming arm AMC networks to existing shareholders. This effectively mirrors the move made by Time Warner in 2009 when it separated its cable business from its content business.

Multichannel News has the breakdown.

Our Take

It is always fascinating to watch how the media conglomerates evolve - acquiring and disposing of properties along the value chain - and it is hard for analysts to generate hard and fast rules on how to create shareholder value. For instance, NewsCorp is currently seeking to acquire full control of its’ UK DTH property, BSkyB, and heavily investing in its minority held German DTH property, Sky Deutschland.

What is apparent is that cable network programming is a highly profitable and cash-generating business. In 2010, AMC networks had revenue of just over US$1bn and operating income of US$280m. The AMC networks suite of channels (AMC, We TV, IFC and The Sundance Channel) aren’t the highest rated cable channels by a long way.

Gaming: 2011 Gartner Ecosystem Forecast

Gartner has published its 2011 Gaming Ecosystem report and it contains a few surprises.

Our Take

We are not surprised that Gartner is forecasting overall industry growth to US$112bn by 2015. The rise in Casual Gaming witnessed by Zynga and their partnership with Facebook has been phenomenal. Penetration has still a long way to go and somehow Zynga and their competitors throughout the world will find a way to monetize those eyeballs probably from a combination of advertising or virtual currencies.

We believe that dedicated Gaming Hardware will come under increasing pressure from multi-functional devices whether phones, tablets, laptops and even connected TVs. We have already seeing evidence of this, as handhelds such as the Sony Playstation Portable are declining in unit sales. People seem to be happy with playing games on their iPhones, Android and the like. Additionally, the logic for buying dedicated gaming consoles becomes a lot more strained as more games move online and TVs become connected. The outlook is not rosy for dedicated hardware.

Software is difficult to predict because the value is undermined by cheap “good enough” hits such as Angry Birds from Roxio available at never seen before price points in Mobile Application Stores. Also, the traditional method of distribution through DVDs at specialist retailers is under pressure from online delivery. In five years time, we believe that all games will be delivered online. These two trends will put software unit pricing under pressure. However given the boom in overall people playing games online, we believe overall volumes will increase sufficiently to offset this price decline.

In short our directional forecast is that Online Gaming growth will be huge, much faster than Gartner indicate; Gaming Software revenues will be under pressure as unit prices decline, but unit growth and the sale of subscriptions will probably mean that Gaming Software as a category will increase; but dedicated Gaming Hardware will suffer as people migrate to playing their games on multi-functional devices such as phones, tablets, PCs and laptops.

In short, we agree with Gartner’s overall direction, but not on the make-up. It is not a good time to be in either Gaming Hardware or Specialist Gaming Retail.

Publishing: Amazon punts on The Book Depository

Amazon has made an agreed offer for the UK-based The Book Depository, which is a online bookselling competitor with a turnover of around £120m of which the majority is for overseas shipments.

(Via The Bookseller.)

Our Take

We are surprised that Amazon is trying to make this purchase. It is hard to believe that The Book Depository brings any technology or distribution skills that Amazon does not already have. The transaction must all be about the market consolidation. Amazon has already voluntary referred the transaction to the Office of Fair Trading (OFT) which exams monopolies in the UK. The Booksellers Association and Publishers Association have already said that they will formally oppose the merger.

The good news is that the OFT will publish its findings and thinking into the public domain and we might finally get some insight in the inner working of the Amazon machine.

We think Amazon might have just shot itself in the foot.

And Finally: Twitter Twits trying to get more money The Wall St Journal broke the story that Twitter is trying to raise more money at a US$7bn valuation barely seven months after raising US$200m at a US$3.7bn valuation.

Our Take

Way back in 2009, we published “Twitt-o-nomics: Can Twitter ever make money?” and came to the conclusion that Twitter’s business model seems to be the familiar - “Web 2.0 Flip” - build an audience and sell to someone who thinks they can monetize it. Two years later, we are still of the same opinion with the added caveat that Twitter is now so expensive we doubt that anyone would be able make a return on a US$7bn investment.