01 Aug 1999

The Financial Times' headline blared "ONdigital Chief Joins Rival." The UK digital terrestrial TV alternative to Sky was losing its CEO, and worse, he was going to join a unit of News Corp, Sky's most powerful owner. Or is he?

Indeed, the picture painted by the FT newspaper article had this 'defection' weakening ONdigital and strengthening Sky. Maybe so. But then, before the ink was dry, ONdigital's erstwhile CEO Stephen Grabiner made a u-turn.

Instead of making the leap to the new e-business unit of News Corp. called eVentures, he decided he couldn't cross the 'Murdoch Rubicon' and join a company he had been fighting so hard against. Instead, he will go to a venture capital firm and look for e-businesses from there.

But the key point is the atraction of the Net. Rupert Murdoch has been by some calculations slow to embrace the Net, but now Mark Booth, erstwhile CEO of Sky until his own 'defection' earlier this year to start-up eVentures, is trying hard to recruit others like Grabiner to find e-deals.

Yes, the TV executives are certainly flying about in this brave new media world, and increasingly all their e-tickets seem to be written for destination Net. Every TV executive I know has been pitched a Net job. My last boss at CNBC Europe left to join a California Net company. My former boss at European Business News is consulting with TV companies trying to become Net companies. "There's a paradigm shift out there. It's all going towards the Net," one TV veteran enthused to me recently, "you agree don't you?"

We're awash with Net successes. Buoyed by the ongoing Bull market, Net IPOs are still making over night millionaires, if not billionaires. The news stand is full of Net stories and Net prophesy is becoming a business in itself. Oh Nicholas Negroponte look what you have wrought.

So, do I agree that the Net is the future? Well yes, but it won't all be smooth sailing. The Net is not really like the traditional TV business or even the newer multi-channel TV business, or even like the newest digital TV business. So, all those TV guys going to Net jobs have to be careful not to apply tried and tested multi-channel TV recipes to Net dynamics.

And that means that however beguiling it is to apply them, TV business plans don't wash in quite the same way in the Net environment. The key reason is that the Net is all about big audiences and tiny, tiny fees.

Even in digital TV there is still a basic recurring connection fee to get onto the service. The lower start-up costs of a Net business are beguiling, but moving from start-up to generating profits is much tougher.

Look at the UK's Freeserve, a classic ISP business that by being the first to offer free Internet access, can pull off a stock floatation valuing it in the billions, after less than a year in business. Freeserve doesn't make a dime and the potential revenue streams are small. Also, its market is being squeezed by others offering free access, but hey, it's the future.

Like most Net companies, Freeserve is betting on its future ability to attract revenues from both advertising and e-commerce. It also receives a portion of the phone call revenues from its telecoms partner Energis. Freeserve's plan is built on the promise of delivering a big audience.

It's true that in the UK today Freeserve is the biggest ISP in terms of users by far, but as competitors gather, can Freeserve keep its audience logged on? That's the billions of dollars question. Will future performance match the IPO fervour? There are already some pretty good rival offers to Freeserve out there. My favourite is themutual.net. Its unique selling point is free Internet access with a kicker: registered users also get options (convertible into equity) in the company when the ISP does its own IPO. So, users have a stake in making the ISP a winner. Now that's a tangible incentive to stay logged on. Maybe ONdigital should stop giving away free set-top boxes and offer new subscribers stock options? As a subscriber to Sky Digital I wouldn't have minded having a couple of options in its recent floatation ... but I digress.

So, how big is the Internet going to be? By all accounts very big. A recent Morgan Stanley Dean Witter study forecasts that the number of adult Internet users in Europe will increase almost 200 per cent to 100 million by 2003. Compare that to a Datamonitor figure that says by the same year Europe and the US together will count 67 million subscribing interactive TV households. And only 11 million of those homes will be able to browse the Web through their TVs.

The Internet's edge is that it can provide interactive, tailored programming to viewers. The only barrier today to full-blown video programming down the Net is infrastructure bottlenecks. These are being eleviated, however, as better networks are built by phone companies, cable operators and as satellite technologies can support two-way services.

Net economics are compelling. According to Xoom.com (now part-owned by NBC) their customers spend on average $60 (#38.55) a month and the gross margin is 30 percent. The cost of acquiring a customer for Xoom is about $15 (#9.40). Compare that to the much higher cost of acquiring a cable or satellite customer.

But as Net competition increases, the stakes go up. Who ever has the best content, the most consumer-friendly site, the most compelling e-commerce and the most interesting advertising, i.e. the most attractive Net environment, will win. That is why classic media companies with content businesses are being drawn onto the Net, setting up sites or getting on (or buying into) major portal sites like Yahoo! or AOL. The portals need the media content. The media players need the Net audiences.

It's an interesting dance and one that is opening up opportunities for traditional TV executives. Not to say that the regular 'ole TV business lacks sex appeal (I mean that in a business sense). Look at the recent IPO success of the rights unit of German kid's TV producer Ravensburger.

Its RTV Family Entertainment unit boasted a market capitalisation in July of €400 million (#261 million) despite generating EBITDA (earnings before interest, tax depreciation and amortisation) of €1 million in 1998. Sounds more like an Internet market valuation than one for a traditional TV business. Bet those executives had stock options.