Revolutions of the past involved angry mobs of people running amok. Revolutions of today tend to be quiet affairs spurred on by technology changes. In fact, revolutions today tend to be so quiet, they go on without notice or understanding by most people.

The Internet revolution is one such quiet storm. We saw the first wave in the late 1990's with a lot of hype about "new economies" and jokes about how Bill Gates "missed the Internet." Here in 2007, we are at the start of a second wave which is much larger and more tangible.

There is a growing digital media revolution which will have a tremendous impact on the system and many of the companies that we have grown up with for decades. Despite its significance, few people seem to notice or stop to think about the changes as they gradually appear. This post is an attempt to outline that system and the forces of change.

ingredients of a revolution

In essence, the new media revolution involves changing the ways we receive old forms of entertainment and it involves the emergence of totally new forms of entertainment with no analogs from the past. The deepening revolution is a double-whammy for the status quo which involves some of the largest media companies in the world and big brands that we have grown up with. The motivation for the lawsuits and the stock prices we read about in the paper revolve around the fact that the media system is BIG money, involving over $100B a year in revenues.

I have already written a bit about this growing change from the customer's perspective but now I want to talk a bit about the structure of the system itself and how the money flows.

in the beginning

I am not a historian but I do know that radio, television and cable TV were all created with government help. In order to start those new industries, the US government lent a hand with either free assets or legal monopoly protection.

They gave broadcasting companies free access to the airwaves on which to broadcast. (This is what we now call "spectrum" and what the government now sells at auction for billions of dollars to cell phone companies and satellite companies.)

Similarly, the cable TV industry was created with a guarantee of monopoly by the federal government. By granting legal monopoly status, it was easier for companies to raise money to build the cable network because it gave investors confidence that their investment would be safe from unwanted future competition.

Most of us have grown up with these systems in place so we probably never questioned them or the role of government aid to what became enormously profitable businesses. What was the government's motive for its aid?

Radio and broadcast television provide a service to consumers (ie taxpayers) for free (at least to consumers). Consumers get to watch entertainment and they get news and information; in time of emergency or war, they also get crucial emergency notification. Cable TV is slightly different because they offer the same benefits as broadcasters in addition to more channel choices and better picture quality. Cable TV is also different because the consumer does pay for that service.

Broadcast television has been enormously successful. Nielson estimates there are 110 million households in the USA that watch television and roughly 73% of those households have cable TV.

the system: a three-leg stool

As Americans we know that there is no such thing as a free lunch so if the consumer is not paying for this service, then who is? To answer that question, we need to look at the three-leg stool again and ask what each of the members wants and gets.

As it turns out, traditional media serves three unique sets of customers and one of those customers essentially pays for the other two.

• Consumers watch the media out of the desire to be informed and entertained.
• Entertainment or content companies get paid to provide the shows that consumers want to watch.
• Companies, working through advertising agencies, pay for the whole system in order to tell consumers about their products or their company; they pay the broadcasters enough money to pay for both the broadcast network itself and for the content.

It turns out the broadcast system is a stool with three legs. One leg gets served for free; the second leg gets paid to entertain the first leg; and the third leg pays for it all in return for the chance to reach the first leg. The system is an example of the network effect (the system gets more valuable with every new person involved) and leads to quaint sayings like "paying for eyeballs".

As we examine the revolution and think ahead, one critical thing to remember is that the three legs are co-dependent. The wants and needs of each leg depend on the other two legs. If you remove any one of them, the system becomes unstable (or at least less valuable) and may well collapse.

follow the money

It turns out that one leg of the stool, the one that represents companies, is paying to keep the whole thing together so lets look at it for a second.

Companies want three things: to make people aware of them or their products, to change the way people feel about them or their products, and to influence behavior so that people buy their products. These are the three goals of advertising and that is what companies companies hire advertising agencies to do.

Advertising agencies come up with those commercials and posters and such as well as the strategy or plan behind them. In order to sell more product, advertisers have two goals of their own: targeting and scale.

Advertisers want to target their ads to reach relevant people and they want to reach a lot of them. If they want to sell prostate drugs, they want to reach men over 40; if they want to sell sugar cereal, they want to reach kids under 18, etc. Reaching lots of the right kind of people is the heart of advertising.

Since companies that want to make more money from selling products or services invest in advertising to reach more customers. They pay the advertisers for the ads and the strategy and they pay the broadcasters for access to the consumers - all those millions of people who showed up for a TV show but are also looking for sugar cereal and prostate medicine.

It may seem complex but it is really a very simple system. Broadcasters buy content that people want to see in order to build an audience that advertisers will pay to reach. And did I mention this involves a lot of money? In 2006, companies paid broadcasters roughly $60B for television and cable advertising.

value in connecting the dots

Another way to look at this system is to think about it in terms of relationships. There are millions of consumers out there. There are tens of thousands of companies who want to reach them. It is very hard for those companies to reach millions of people (that would be a lot of phone calls). Instead they reach out to a handful of massive broadcasting companies. These broadcasters have a product that can send messages to millions of consumers and that one-to-millions relationship is key to the value broadcasters provide (and charge for).

root cause of change: serving the customer(s) better

Now that we understand the three-leg stool of traditional media and all the money involved, let's look at the digital media revolution. This revolution is driven by the ability of new technology to better satisfy the demands of both the consumers and the advertisers.

customer #1: consumers

Let us first look at the consumers of entertainment, people like you and me.

If I asked you to take 5 minutes and imagine the way TV would work for you in a perfect world, what would you tell me? Im willing to bet that whatever you come up with would barely resemble the system as we know it today.

In my ideal TV system, I could watch any show I wanted whenever I wanted to. It would remember where I was when I last watched and continue from there. There would be no commercials during the program and only a few at the end. Moreover, it wouldn't try to sell me tampons or cialis or a Dodge truck or any number of items that I would never buy. I could watch 2 to 5 minute shorts as well as movie-length material. And don't forget sports: I only want to watch the teams I care about and it had better be in hi-def.

My ideal system is a mish-mash of features from PBS, DVD's, hi-definition TV, and download services like iTunes and YouTube. Your ideal is probably similar albeit with different content choices. And the exciting, amazing thing, is that these changes are actually coming to life thanks to the Internet and the companies pushing digital media.

Although it is large and generates a lot of money, traditional media is basically a one-size fits all product which pleases everyone some of the time but pleases no one all the time. Its main strength has been its status as the only game in town and its weaknesses become more and more apparent in the face of competition.

traditional media: movies & TV

Whenever there is something new, people immediately ask how they can do what they used to do but in a better way. For instance, the VCR and TIVO are basically products that empowered consumers to watch the same TV shows but in a more convenience way, ie on their own schedule not the broadcasters.

Although it has been brewing for a while, there is a lot of action right now in the Internet space around digital delivery of movies and TV. iTunes, Amazon, Netflix, Wal-Mart and others are all trying to offer Internet downloads of DVD movies. At the same time, content companies are struggling to find agreements and systems that allay their fears about piracy and loss of traditional revenue.

The important thing here is that companies are trying to provide the same content we are used to but over the Internet rather than broadcast or cable.

the new media: LonelyGirl15 and Internet TV

While most companies are struggling to move existing content (ie TV and DVD's) into a digital media form, there are also a few pioneers who are looking at what digital media can do and reinventing our ideas about entertainment. After all, why stick to products that were shaped by the limitations of broadcast when the Internet can do things that traditional media never could?

Companies like YouTube and Joost (those Kazaa/Skype guys) and content creators like LonelyGirl15, Ask A Ninja and zeFrank are out there trying to do something totally new and that is where the real power of digital media is coming from.

Not only can digital media provide the products we are used to in a better way, it can also do things we never could do before because the Internet is not a broadcast system - it is a massive peer-to-peer communication system. Anyone can upload their own videos, or send email, or instant message or participate on message boards.

Executives at traditional media companies are watching their own children and trying desperately to "get it" by adding these Internet things to their shows but the new media pioneers are trying to invent something unique and new that is built around Internet communications from the ground up - something the broadcasters simply cannot duplicate.

The end result is going to be old content like TV shows but shown in radical new ways as well as new entertainment forms that never existed before (and probably make no sense to people over 45 :).

customer #2: advertisers

The second big are of change involves the people who pay for it all: the companies that need to advertise and are willing to pay good money to reach potential customers. This important group of customers is largely taken for granted by media companies because there wasnt anywhere else they could go but it turns out that the Internet can offer a feature that broadcast cannot match: accurate measurements.

Why is Google worth $140B??? Most people have no idea ("I thought they did search?") but the answer is actually pretty simple: their new media system provides more value to advertisers than broadcasters do because it is so measurable.

The dirty secret of the status quo is that measuring the benefits of broadcasting is terribly accurate and involves a lot of faith. Because of the nature of a broadcast medium, broadcasters have no idea who is watching their shows. They put it up there and hope for the best.

Advertisers pay for reaching target audiences and they naturally want to know who and how many people their commercials reach. In order to measure those results, companies like Nielsen do surveys and statistical estimates to determine ratings. That $60B spent on advertising every year revolves around Nielsen's ability (or inability) to calculate the audiences.

Remember that the main leg of our stool is the companies that pay for advertising because of their desire to reach people who might want their product. Broadcasting has been the main tool in their toolbox for decades but it turns out to be a very blunt instrument.

The Internet on the other hand creates one-to-one connections between the content supplier and the content user. It turns out that this one-to-one relationship is much more powerful than the broadcast relationship because we can learn a lot of things about the viewer, starting with what they actually view. In fact there is a whole list of things one can measure about a user's behavior and demographics, such as a history of what you watch, what your search for, and where you live.

Thus the Internet provides completely new and accurate tools for measuring advertising effectiveness and for targeting ads to the right people to begin with. This is the real value of the new media companies and traditional broadcasters have no way of competing with this detailed consumer data.

Since the primary value of the broadcasting system is its ability to reach millions of consumers and the Internet does the same thing but in a much more measurable way, it stands to reason that broadcasters will get less and less advertising dollars as the digital media companies get more and more. The new media companies just have a better, more measurable, more targetable product and that means more bang for your advertising buck.

As of 2006, AdAge estimates that traditional broadcasters get $60B a year in advertising revenue while Internet companies only get around $7B but we can expect that difference to change.

the new structure

The new media system supplements or downright replaces broadcasters with the Internet. Instead of going to CBS or CNN, new media users tune into thousands of blogs, websites, and downloadable content services. Digital media changes the connection between companies and consumers but there are also some new problems.

One big problem for the new media companies is recreating that 1-to-millions connection that broadcasters provided. Remember that it is hard for companies to reach millions of individuals on their own which was one of the key benefits that broadcasters.

To address this issue, advertisers are looking for the new media companies that can effectively reach millions. This explains the attention and hype around companies like YouTube, mySpace and Google. We are also seeing new companies appear as aggregators; you sell advertising to them and they connect with thousands of websites and blogs that in turn reach millions of people. The Internet space is a very fractured one but there will be some superstars because they provide value.

The other big problem is content. Digital media companies need to sign legal deals with the major content companies, many of whom are owned by broadcasters who are pretty happy the way things were. The record industry put Napster out of business and video content companies have been very reluctant to push into digital media.

The early media providers are likely to be new media pioneers and lower quality products in the public domain but the writing is on the wall. Eventually the big media companies will embrace the digital media realm becasue that is where the money is going. This is bound to create increasing pressure between content studios and broadcasters which may result in some mega-breakups.

the future

One of the most intriguing questions about this new media revolution is how things will look when it is over. Like any real revolution, there are going to be winners and losers. The changes will be painful and will involve structural changes that are likely to kill the companies that cannot adapt.

The broadcasting system involves a massive amount of capital, like a local broadcasting station complete with its own oddball weatherperson in every city of the US. Is that system sustainable with a lot less revenue coming in? Can the 3-leg stool still stand with one short leg or will it collapse under its own overhead? The idea of a broadcasting collapse is an extreme case but it is one reason why I call this change a revolution rather than an evolution. Whatever happens, it is bound to be messy.

For consumers, the changes are slow and evolutional but for the system itself and parties exchanging money, the new media represents a revolution that could change everything.

• In the new media system, there is little demand for 1-size-fits all broadcasters since everyone can be their own broadcaster on YouTube.
• The new media system will unleash the wisdom of crowds as people, not a corporate Vice President of Programming, determine what they want to watch.
• The new media system will know more about you and what you want so that you get ads you care about not just ads for the companies with the most money.
• In the new media system, you wont even have to see as much advertising in many cases because your money will support the content you want and not 247 channels of kruft you never watch anyway.

Whether you understand why the changes are happening or just enjoy the benefits, the new media world is coming. Five to ten years from now, television may be totally unrecognizable from the "TV" of your youth. And that is probably a good thing.