Month: December 2006

The other flurry of media mergers

With Hugh Tobin

The media is big business. Organisations such as Microsoft, Google, Apple and Yahoo! are rapidly manoeuvring themselves into competition with the traditional services. They exist in an unregulated online environment where innovation is rewarded and there is no limit to the acquisition power of companies.

In a short time, many Internet companies have grown to be even larger than the regulated traditional media players with which they compete. For instance, Fairfax’s market capitalisation of US$3.43 billion is dwarfed by Google’s US$139.1 billion. In the US market, Yahoo!’s market capitalisation is larger than CBS’s.

These companies are genuine competitors, and represent one of the greatest challenges to the incumbent leaders in the media industry since the introduction of broadcasting.

Like their traditional counterparts, the new media players have recently been undergoing dramatic structural and ownership changes. The big names — Google, Yahoo!, Microsoft — are buying up smaller entities which have developed recognisable and popular products, in order to integrate them into broad suites of products united under a single brand.

The quickest way to fortune in 2006 is to develop a Web product, build a strong and supportive user base, and sell out to Google.

The social networking video site YouTube, which gathered headlines around the world when it was acquired by Google for $2.2 billion in October 2006, is the most famous example, but it
is by no means alone.

A typical story in this era is Writely, a word-processor which runs within a browser, created by the Silicon Valley start-up Upstartle. At the time it was acquired by Google, in March 2006, it had only four employees. Google has since merged it with a spreadsheet program it developed independently, a product which most commentators believe signals a direct challenge to Microsoft’s dominating Office software suite.

Indeed, the often reported YouTube acquisition is just the tip of the iceberg. In the same month that Google acquired YouTube, it also acquired JotSpot, a collaborative document service, which will also integrate into its Office competitor.

In November, Yahoo acquired Bix, an advertising/contest service, MyBlogLog, a blogging aggregation tool, and KenetWorks, a service for mobile phones. Since 2002, Microsoft has bought 24 individual Web services, Yahoo! 25, including the bookmark-sharing Del.icio.us and the photo-sharing flickr, and Google has bought 27.

Online media is still in its early stages of development. But this ‘flurry’ of mergers and acquisitions seems to indicate that online media can now directly challenge incumbent broadcasters and traditional printers.

It was only in 1998 that NetFlix — a US subscription mail rental service which combined the two relatively new technologies of DVDs and the internet — was inaugurated. Bigpond Movies,
Telstra’s clone for the Australian market, is even younger.

But both of these services have already been made obsolete by offerings from Apple, Microsoft and Google — all released in 2006 — which provide films and television programmes for download or streaming at home. These services are an example of the competitive threats
that are now facing the traditional media.

But they also highlight the amazing benefits that increased competition brings for consumers.

Diversity — as far as it has any useful meaning — will survive any manner of media mergers or acquisitions, even in the unregulated online environment. It is now more useful to look at the media as an integrated market consisting of all the players mentioned above rather than the segregated silos of print, broadcasting and online which seems to dominate the analysis of the commentariat.

There is money to be made on the Internet, and there are serious businesses online. If only the traditional media were as dynamic.

How significant is online news?

The two opposing cases in the debate over ownership deregulation of the media can be quickly summed up. The first group argues that the case for deregulation is buttressed by the explosion of choice available on the Internet, and the second group counters that the influence of online media is exaggerated.

This second group commonly cites a series of polls indicating that the most commonly trafficked sites for domestic news are owned and operated by the proprietors of existing media businesses. Fairfax, News Limited, Channel 9 (in its ninemsn partnership with Microsoft) and the ABC top the list, with ‘new media’ sites such as crikey.com.au and Yahoo! News struggling to compete. Not only this, but fewer people than it is often assumed gather their news online—in one such survey, 75 per cent of people were either unable to name an online news source they visited, or did not do so.

The news revolution and the deregulation it inspires, is, argue the critics of reform, a myth. Of course, none of the data is surprising. In 2006, established media organisations can far easier produce news content, with their network of in-house journalists and associations with news services such as Reuters and Associated Press. Obviously not everybody is comfortable yet with browsing the Internet for their news; established patterns are hard to break.

But there are problems with these one-dimensional measurements of news site popularity. It is arguably more interesting that, in the 2005/2006 poll displayed on this page, in fifth and sixth position are Yahoo! and Crikey, archetypal Web start-ups. Bigpond comes in seventh—before the Internet, how many people could say they primarily sourced their news from Telstra?

Drawn from a series of interviews and extrapolated to the population at large, the polls also appear to underestimate the traffic at these sites. The 2005 poll reports 190,000 visitors to the Crikey Website per month. Crikey itself claims double that — 355,000 unique visitors to their Website, with 41,000 readers of the daily e-mail.

Internet statistics are an amazingly problematic enterprise. The differences between hits, page views, visits and unique visitors are arcane and technical, but can dramatically raise or lower sites in the rankings. Whether the user is on a home computer directly connected to the internet, or through a corporate network — which could mean that a couple of thousand employees only register as a single visitor—adds to the challenge. Whether you identify unique users by tracking their IP address, with a cookie, or by imposing a registration system on the site itself, further complicates the issue. Unfortunately, trying to ascertain traffic by interviewing consumers doesn’t really cut it.

The diffusion of knowledge about current affairs is not as linear as these surveys imply. As these metrics measure ‘news only’ sites, they ignore a large number of sources of news and opinion available both on and offline. Outlets which are not classified ‘news only’ are often rich with references to current events. Online services run by traditional proprietors are richer with content and opinion than their print or broadcast counterparts, and in many cases, by linking to other sources, encourage consumers to explore alternative outlets.

News consumption is shifting from a hit-driven culture to a niche culture, as consumers spread out across a suddenly massive array of media outlets available online.

By leaning on surveys such as these as a crutch, opponents of media deregulation miss the point. Media use has rapidly and irreversibly changed. Whether consumers visit Fairfax Digital or an obscure blog — or more likely, both — they have not just shifted format, but shifted their approach to news gathering.

The media is now more than ever intensely competitive — the ABC, ninemsn, News Limited and Fairfax aren’t resting, confident in their status as most popular news sites, but are instead being chased by hungry start-ups and competitors eating away at their bottom lines. Media regulation has to change to suit.

Software design by competition law

Europe is providing a steady stream of wrongheaded and counterproductive regulations — good for anecdotes, bad for Europeans.

When Windows Vista, the long-awaited successor to Microsoft’s operating system Windows XP, is released to the general public on January 30, some consumers around the world will have an additional product available. But, if the sales records of Windows XP ‘N’ are any indication, then Vista ‘N’ will be Microsoft’s most unpopular product in a long time.

The ‘N’ series is a special variety of Microsoft’s operating systems designed specifically to comply with antitrust rulings in the EU and in South Korea, which also has aggressive competition laws. In order to do so, XP ‘N’ shipped without Media Player, the free video and audio player which, for users outside these jurisdictions, is bundled with a standard XP installation. Both versions, ‘N’ and the bundled package, were available to European consumers at the same price.

Unsurprisingly, there have been no reported sales of XP ‘N’ to consumers since it was released in mid-2005. It would be hard for a market to reject a product any more entirely.

As has been argued, as long as competition is a download away, the law has done its job. But a steady stream of regulatory intervention and litigation in the computer industry over the last ten years disagrees.

Microsoft has been a staple target of antitrust authorities across the world. In 1998, the US Government sued the software manufacturer for tightly integrating its Internet browser with its operating system. The litigants alleged that their victory in the ‘browser wars’ — a period of vigorous competition between Microsoft’s Internet Explorer (IE) and Netscape Navigator — was due to IE being bundled with XP. Both products were free — but free and bundled can’t compete with free and downloadable, the critics alleged.

Experience suggest otherwise. Mozilla’s Firefox, the heir to Netscape Navigator, is rapidly gaining a share of the browser market. Firefox’s success has largely been due to a perceived lack of security and performance with Microsoft’s bundled product. Consumers are fickle enough to choose between competing products.

Indeed, there is good reason to suggest that the death of Netscape Navigator in the late 1990s was not due to predatory bundling by its powerful competitor, but to consumer disappointment with the software itself. Navigator had undergone a complete rewrite, and was buggy and bloated. When consumers were looking to upgrade their browser for the new features and web specifications becoming available, Internet Explorer was simply the better choice.

In the highly competitive computer industry, technological change makes pronouncements of such-and-such company as ‘anti-competitive’ laughable. IBM is no longer the terrifying anti-competitive monster that prosecutors described it as in the 1970s — in part because of Microsoft’s aggressive marketing of MS-DOS in the first years of the 1980s, and then the Windows 3.1x family of operating systems.

The 2004 competition actions in the European Union against Microsoft were encouraged by organisations such as Real Networks, which publishes a competing product to Windows Media Player. Again, Microsoft’s rivals allege that the competitiveness of their product is harmed by the product bundled with Windows. The EU regulators forced Microsoft to provide European consumers the option of buying XP ‘N’ — without the bundled Media Player. Microsoft wanted to call the package ‘Reduced Media Edition’ until the EU objected.

But again, reality intervenes. While Real Networks may have been disappointed with the popularity of their product, many of Microsoft’s rivals should not be. Apple’s iTunes, for instance, has ridden the popularity of its portable music player, the iPod.

In 2006, before it has been officially released, Windows Vista is under heavy fire from its competitors, and they’re going to the European Union for help. The new operating system includes an array of new features for which, presumably, Microsoft foresees a demand. Producers of anti-virus and security software object to the new low-level enhancements to security—a feature that consumers have desperately sought for a long time. Adobe, which invented the PDF document format, objects to the new document format XPS — a more dynamic format than the now standard PDF.

The EU fined Microsoft €497 million for bundling Media Player with XP, and it has been remarkably vague about Vista’s prospects when it comes before the European regulators. While Microsoft is already obligated to produce the Europe – only Vista ‘N’, the European regulator’s role, the EU argues, is not to give a ‘green light’ before Vista is available to consumers. If Adobe and others have their way, Microsoft could be lumped with another massive fine or have its product crippled for providing new features that consumers demand.

The nineteenth-century French liberal economist Fredric Bastiat divided human activity into two categories: ‘harmonious’ and entrepreneurial, or ‘antagonistic’ and rent-seeking. Unfortunately, as the vibrant, innovative technology industry becomes bogged down in competition litigation, too many are showing themselves to be the latter.

Containers and their enemies

A review of The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger by Marc Levinson (Princeton University Press, 2006. 392 pages)

Strictly, the father of the modern international shipping container, Malcolm Mclean, didn’t invent his own invention. It wasn’t even new.

When the shipping container was first deployed on McLean’s converted World War II tanker Ideal X in 1956, experiments with its ancestors had been being conducted for nearly a century. British and French railway operators tried using custom-made wooden boxes for household furniture shipment in the second half of the nineteenth century. After the First World War, entrepreneurs experimented with interchangeable truck bodies and steel containers for railroads.

The problem was simple: none of these efforts ever demonstrated any cost savings to transport. Malcolm Mclean’s innovation was not the box itself, but the systematised, standardised, international network of shipping containers, freighting massive quantities of goods speedily and efficiently across the world.

Marc Levinson’s The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger illustrates clearly how great risks are taken by entrepreneurs when entrenched interests and government regulators conspire against them. Even after these opponents are dispatched, technological and economic uncertainty plague the entrepreneur just as much as the vaunted ‘first-mover advantage’ blesses him, perhaps more.

The story of the shipping container is the story of the opponents of innovation.

Unions

Before the shipping container, the job of a longshoreman was brutally physical. Longshoreman could utilise winches to load and unload ships, but, as the unsorted cargo was dumped on the dock after its trip by railway or truck, and squeezed into every irregular space in the ship’s hold, human force was resorted to more often than not. Levinson quotes a former pier supervisor: ‘Because they had to bend over to do that, you’d see these fellows going home at the end of the day kind of like orangutans. I mean, they were just kind of all bent, and they’d eventually straighten up the next day’.

Not only this, but as pallets were packed and unpacked to squeeze into irregularly shaped cargo holds (the shipping fleet used after the war was mostly converted military surplus, not custom-made cargo vessels) damage — and ‘damage’ — were common. Longshoremen would pride themselves on such skills as the ability to tap whiskey form a sealed cask supposedly stored deep in the ship’s hold.

Automation, in its full-blooded shipping container form, came as a shock to the highly parochial and defensive maritime unions. Containerships could be loaded and unloaded in one-sixth of the time it took for traditional cargo ships. Sealed containers dramatically reduced theft. More disturbingly, containerisation required one-third of the labour. When the first shipping line asked to hire a smaller work gang in New York, the unions announced boycotts. The industry was to become bogged down in union disputes for ten years after the Ideal X first sailed.

Levinson details carefully the internecine rivalries of competing unions and the negotiations needed to relax the rigid contracts which had dominated maritime work. The radical changes that were re-negotiated slowly modernised the docks, but also spurred a massive boost in productivity for non-containerised cargo loading, as employers were suddenly given the capacity to change previously entrenched work practices on the docks. The casual conditions and practices were, in the ensuing decades, converted into highly paid, highly structured and highly secure jobs. But one unionist lamented: ‘the fun is gone’.

Regulators

Unions desperate to preserve existing work practices present a huge challenge for entrepreneurial innovation, but, as Mclean and other adopters of the shipping container discovered, the challenge posed by regulators can be even larger. By the mid-twentieth century, the United States’ Interstate Commerce Commission (ICC) had developed a firm regulatory structure which was being undermined not only by the nascent shipping container, but also by the increasing dominance of trucking.

The ICC, which regulated the rates and services of both trains and interstate trucks, struggled to adjust its regulations to the new dynamics of trucking and shipping. Rates were previously set depending on the commodity being carried, but in an era of homogenous containers distinguishable only by weight, this rate-setting principle began to make less and less sense.

But the ICC’s primary error was not practical but philosophical. The ICC’s brief, which was reiterated in the Transportation Act of 1958, was to block the chimeras of unfair or destructive competition. In the highly dynamic transport industry of the 1950s and 1960s, this instruction encouraged the ICC to protect existing operators from innovative practices such as the shipping container, and ‘piggy-backing’ — that is, placing a truck’s body on rail for the long legs of its journey.

A regulator briefed to defend an industry against ‘destructive’ competition — a phrase which is antithetical to an entrepreneurial economy — is not uncommon. It is just as antithetical to economic growth. Regulatory frameworks which are built around specific technologies or business models have no reason to promote innovation within that industry, and firms which benefit from the confines of those frameworks have every reason to prevent or resist change.

After a lengthy series of court decisions and regulatory pronouncements, the full influence of containerisation, which both ripped up the transport industry and pumped up the world economy, is obvious.

Levinson spends time trying to tease out the quantitative benefits of the box — as he notes, ‘a near impossible task’ — but he quotes Edward L. Gleaser and Janet E. Kohlhase who argue that, ‘it is better [now] to argue that moving goods is essentially costless than to assume that moving goods is an important component of the production process’.

Levinson convincingly credits McLean’s shipping container as a major, if not definitive, cause of the boom in world trade since the 1960s.

Ports

There was a boom for the international economy, but like so many economic revolutions, the benefits were diffuse. There were definite losers, particularly if you were a mayor in a town traditionally based around a port. The new breed of ship quickly outgrew the available space in ports designed before the container. Furthermore, older ports tended to have entrenched unions with just as entrenched antagonism towards change.

But some of the largest problems for older ports stemmed from the rapid change in business models caused by dramatically cheaper ocean transport. Immediately, the cost advantages of a factory location in New York, right next to the port, were eliminated. Between 1967 and 1976, New York lost a quarter of its factories and one-third of its manufacturing jobs.

In 2006, with ‘essentially costless’ transportation, it is possible to distribute the production of goods across the globe. The sudden rise of ports at Busan in Korea and La Havre in France and new ports at Felixstowe in England and Tanjung Pelepas in Malaysia, capable of processing super-sized container ships is just as much a factor in the deindustrialisation of the Western world as is industrial relations.

Once the impact of containerisation was clear, traditional port cities unleashed vast sums of money during the 1970s and 1980s to upgrade their infrastructure. In some cases they were successful. Seattle’s docks saw 10 per cent less cargo in 1960 than 1950, but had managed to resuscitate their traffic by the 1970s. Others, such as New York, tried and failed to do so.

But by the 1990s, not even the largesse of government was sufficient to make or break ports. Seven of the top 20 ports in 2003 had seen little or no traffic in 1990. Tanjung Pelepas, which now handles three and a half million 20-foot containers a year, did not exist in 1990. These new ports are mostly privately financed and managed — as Levinson describes them, ‘investments in globalisation’. As container ships inevitably grow, new ports will be built to service them.

In 2006, the revolution in international transport is obvious, but not complete. All innovation is incremental; steady computerisation and automation is cutting down the time spent at port and streamlining the processes. Reduced paper handling in Australian ports, and the reduction in manpower and human error it has brought, has already brought greater productivity for shipping lines. The upheaval brought about by containerisation has cleared many of the entrenched obstacles to change.

For the dock culture in the old, traditional, highly-unionised ports, the fun may be gone, but the benefits to all consumers brought about by costless shipping are clear.