Entertainment's Tech Boom: The Internet Has Been Assimilated

There has not been for decades, maybe centuries, a more exciting time to be part of and invest in the entertainment industry. Yes, I know that the Great Recession has hampered or hammered nearly every corner of the entertainment arts world. But consider this. Even during and seemingly despite the biggest economic downturn in 80 years, the entire infrastructure that delivers entertainment is undergoing an unprecedented technology revolution.

I’m talking about the technologically intertwined incendiary combination of wireless broadband, smart phones, iPads, digital cinema, 3D, and Cloud services. It’s techno-froth once again, with recent headlines like In Silicon Valley, Investors Are Jockeying Like It’s 1999. Imagine what will happen when the brakes finally come off the economy. The 20-20 perfection of hindsight will look back at this time as the decade when a new entertainment boom started. Bear with me.

First, let’s deal with the debate over the primacy of entertainment’s two symbiotic domains: content, and delivery. Start with content – the mother’s milk of the arts world since, well, at least Homer and The Illiad nearly three millennia ago. It has been said by many, in various forms, that Content is King. You first have to have an idea, something to say, a story to tell, and put it together in some compelling way, from written form to video. As anyone who studied even a soupçon of Shakespeare knows, the play’s the thing – or its equivalent.

No less stellar modern masters of content than former Disney chief Michael Eisner, and former Microsoft chief Bill Gates have weighed in on the regal role of content. In a hard to find essay titled Content is King, written in 1996, Gates presciently wrote: (For context, in 1996 only 15 percent of people had a cell phone and the Internet was a sliver of its current self.)

• "Content is where I expect much of the real money will be made on the Internet, just as it was in broadcasting."

And

• "For the Internet to thrive, content providers must be paid for their work. The long-term prospects are good, but I expect a lot of disappointment in the short-term as content companies struggle to make money through advertising or subscriptions. It isn’t working yet, and it may not for some time

Perhaps not coincidentally, some years later in a 2010 interview Eisner said

• "My bet has always been what is more important, content or distribution; distribution companies tend to be more and less relevant with the waving of a wand. People still underestimate the value of content. If you have ownership of high-end, exclusive content, end of game. That’s where you need to be."

Gates foresaw and Eisner experienced the commoditization of the technologies of delivery – "distribution" in movie/entertainment parlance — and chased the high-value-add of content. But while delivery ’just’ enables content to blossom, how easy is it to wave "a wand" and get more delivery? Certainly during the times between technological revolutions, the magic of content delivery appears to be a pedestrian block-and-tackle low-value commodity business.

But what about when the game changes with technological magic creating inflection points in delivery, and collaterally drags content into entirely new domains and opportunities? There aren’t many such inflections in history.

Guttenberg’s 1450 printing technology unshackled not just The Book — the Bible — but books in general, arguably unleashing fiction as entertainment. In 1576, Shakespeare’s time we saw the delivery technology of the first Amphitheater, called The Theatre, which revolutionized the business of delivering the play — where Shakespeare was an investor and thus owner of both distribution and content. Pittsburgh lays claim to deploying in 1905 the first cinema, the first building dedicated to showing motion pictures, called the Nickelodeon. (The Odeon, for history buffs, was the Greek name for their theatre; the nickel the cost.)

From silent, to talkie, to computer-graphics, to 3D, wave after wave of technological improvements enhanced the delivery of content, expanded the suite of tools for content creation – and brought social and cultural revolution. And created a multibillion dollar entertainment industry.

For the first two-thirds of the 20th century, radio waves, plastic LPs and tapes, then CDs, brought the next wave of delivery technologies that amplified content, benefiting music in particular. Then David Sarnoff (RCA’s founder) found a way to put video over those electromagnetic waves, unleashing yet another content amplifier, and enabling again the creation of new classes of content – the SitCom format, for one, pioneered by Lucille Ball. (And the talk show, the series, ’news’ shows, etc.)

All of this technology accelerated as well through innovation from black & white, to color, to high-def to mega-flat-screens. And, as with each grand cycle of entertainment technology, creating yet another multibillion dollar industry.

All of these great waves of delivery technology expansion created their own industrial supply-chain for the hardware that had to be manufactured, delivered, maintained, operated – enormous underlying infrastructures. Interestingly, the print, broadcast, and cinema industries operated for years in parallel technological and delivery universes – and often content universes.

The Internet started to change all that. It is serially assimilating music, sports, broadcast, the book and of course video. And we are only at the earliest stages of unleashing the power of the wireless broadband Internet that is now creating the great entertainment conflation, the mother of all delivery revolutions. Bellwethers abound, but consider a few.

Star of "24" Kiefer Sutherland recently produced an Internet-specific video fiction series, "The Confession" targeting distribution to both tablets and desktops, via Hulu – owned by News Corp., Comcast Corp.’s NBCUniversal, Walt Disney. Google [NASDAQ: GOOG] just announced a plan to revamp YouTube (which, if you were asleep, they bought four years ago for $1.65 billion) to organize content around channels.

Then there’s MTV, the progenitor of music videos, a successful 30-year-ago conflation of delivery and content that was later eroded by new technologies. But it’s alive and blossoming again from, yes, clever content, but primarily because of new technologies of delivery using such things as 360-degree user-controllable views, and jump-off-the-screen high-res graphics and so forth. Credit goes to both Google and Intel, and others similar in the tech world. Most major music companies now channel video through Internet player Vevo, which is the Web’s biggest supplier (to YouTube and Facebook) of music videos at over 50 million viewers. Vevo CEO is quoted as saying: "We want to restore the premium luster [to music videos]." No doubt, restore the profits too. This is enabled by the Great Conflation of delivery technologies.

I know what you’re thinking. All the technologies that comprise the wireless broadband Internet revolution have many uses, or were created for other purposes, not just to deliver digital video to desktops and tablets. To be sure. But, to coin the phrase, the video is the thing.

Big picture, consider what Cisco is telling us in their insightful Internet traffic forecast, and what we know from personal experience, about what the broadband and increasingly wireless Internet is used for and will be used for. Let’s calibrate around the relevant indicative fact set. Internet traffic today is 10 times what it was just five years ago. In five years, there will be more traffic on the Internet in five minutes than there was all year in 1996. Practically all of the growth comes from video transport. Video will comprise by 2014 over 90 percent of all consumer internet traffic, and two-thirds of all mobile data traffic.

Does anyone seriously think that all this video traffic is for business, or for telecommuters? It is utterly dominated by entertainment in all its marvelous forms, from the resuscitated music video, to Kiefer’s dramatic ’shorts’, to MLB and the invasion of traditional TV distribution by Netflix and others. Face it, even FaceTime on the iPad is fun, entertaining, it’s not essential for old-fashioned communication. It’s taken all this time, all this technology, to unleash the idea behind the failed-to-thrive 1964 AT&T picture-phone. There will also be unexpected and unintended, and surprisingly valuable business uses for wireless broadband video – just as many businesses are already finding uses for the iPad, for which it was neither designed nor intended. But entertainment is the driver, the big Kahuna.

We know two things then: first, content is being amplified – exciting times for both the artists and all the hangers-on in content creation; and second, delivery mechanisms are just beginning explosive growth – exciting times for tech-dweebs and hyperbolic investors. The former is enabled by the latter. And the latter is driven by the former. No doubt about either. And we’ve just started the biggest physical expansion of the content delivery system in the history of the human race.

The evidence of an old fashioned animal-spirits infrastructure boom is seen in the first quarter 2011 reports from tech companies in this ecosystem. Consider two big bellwethers; IBM reported [NYSE: IBM] their highest revenue growth in a decade, Intel [NASDAQ: INTC] saw 25 percent revenue growth. The big equipment and component providers like HP [NYSE: HPQ], Dell [NASDAQ: DELL], Cisco[NASDAQ: CSCO], Juniper [NYSE: JNPR], and Apple [NASDAQ: AAPL], are all hot, as are the stats showing data center trends for firms like the builders and operators of the Clouds, such as Rackspace [NYSE: RAX], Akamai [NASDAQ: AKAM], Equinix [NASDAQ: EQIX], DuPont Fabros, [NYSE: DFT], and Savvis [NASDAQ: SVVS].

You see evidence of this tectonic shift in entertainment delivery as well in the hyperbolic pre-IPO valuation expectations for the social media Web companies, the well-known Facebook, Twitter, Groupon and others. Some of these are commerce-centric, but most are, in any real sense of the word, entertainment-centric. You also see the froth in venture capital stats, where investments were up in 2010 for the first time in three years, and Q1 2011 was up 76 percent over the same period last year. Even IPOs are back – not like the old heady days, but back. An iconic example; last year’s successful IPO of RealD Inc [NYSE: RLD], one of the enablers of 3D, the newest tech-delivery that is only in early phases.

The arts & entertainment industry is already a bigger part of America’s economic pie than the entire food & beverage industry. The latter can grow roughly only as fast as the population (and, of course, our waist lines), while the former can grow as fast as leisure and wealth. If we count more inclusively the economic output of all sectors relevant to this entertainment paradigm; audio & video equipment manufacturing, radio & TV broadcasting, telecom, and the performing arts companies – we find something on the order of one-fourth of our total economy. Maybe the leading indicator of our economic recovery is the progress of this un-named sector that has assimilated so much of our economy. It is a sector without a simple name (yet), like "the movies," or "radio," or "broadcast TV."

For investors, this is another rising-tide opportunity with a broad spectrum of plays from the infrastructure’s hardware and software suppliers, to delivery, and of course content creation. It is a very eclectic, and very American universe of technologies and companies. And it is now centered around entertainment.

Let’s just hope that regulators don’t get the bright idea that this newest, inevitable bubble needs to be "managed." We see some evidence of that in the flap around the trading in still-private Facebook shares. It won’t be the last such. The hubris in attempting to moderate or regulate this next tech gold rush should be obvious just by virtue of its diversity and complexity.

Anyway, the social engineering and regulatory impulse to perfectly manage technology, to put a legal limit on unbridled growth, is as doomed as trying to manage the weather. Only in stories, and plays, can we do that, as in the delicious lyrics sung by the late great Richard Burton in Camelot:

• A law was made a distant moon ago here: July and August cannot be too hot. And there’s a legal limit to the snow here. In Camelot....
• This piece originally appeared in Forbes

This piece originally appeared in Forbes