Hulu Plus was supposed to be the video site’s strategy to generate a second revenue stream to complement the free, ad-supported site that launched in 2008.

The idea is that paying subscribers get access to a deeper catalog of TV shows and movies than what the free service offers, as well as the ability to watch Hulu on devices like Apple’s iPhone and iPad, Microsoft’s Xbox 360 game machine and Internet-connected TVs from Samsung and Sony.

But a price cut would indicate that consumers haven’t bought in to the pitch. That shouldn’t be a shock, considering the other video options that consumers have, and the limits that Hulu’s content providers have placed on the service.

At $8.99 a month, for instance, Netflix subscribers get access to a very deep catalog of movies and TV shows delivered on DVD, and a growing number of titles delivered to their PCs, phones or iPads.

But Hulu Plus is limited primarily to current  broadcast shows from its three owners–Disney’s ABC, GE’s NBC and News Corp.’s Fox–as well as other shows that have stopped running on TV. (News Corp. also owns Dow Jones, which owns this site.)

And tensions between programmers and cable providers mean that Hulu won’t give subscribers access to current cable shows from those same partners–even though some of them are (barely) available on conventional Hulu. “It’s a broadcast-focused service,” in the words of CEO Jason Kilar.

Hulu declined to comment about the service, which is still officially in beta mode.

Bit.ly has now raised about $14 million in a couple of years, but so far has only a nascent revenue stream: About 4,000 different companies have white label versions of Bit.ly’s URL shortener (the New York Times, for instance, uses Bit.ly to create addresses like this: http://nyti.ms/bm8lk2). But only some of them pay for that service, at a rate of $1,000 a month.

The real business, which Betaworks CEO John Borthwick says the company will begin to build out with its new money, is turning Bit.ly’s data set into money.

People clicked on six billion Bit.ly links last month, Borthwick says. And he imagines that all sorts of folks, from Google (GOOG) on down, would be willing to pay to license the data.

It’s worth noting that Yahoo (YHOO), among others, has been doing some tire-kicking around the service–maybe more, depending on whose story you’d like to listen to.

Other investors in this round include OATV, Mitch Kapor, Founders Fund, SV Angel, Joshua Stylman, Peter Hershberg and David Shen. The New York Times (NYT), as I have previously written, picked up a piece of Bit.ly this summer as partial payment for its work in in News.me, a yet-to-be-launched social news service for Apple’s (AAPL) iPad.

Last week, Canaccord Adams analyst Peter Misek warned that a bottleneck at Apple’s manufacturing partner might limit initial availability of the device or delay its launch. Then yesterday, Digitimes–not the most reliable of sources–published a report suggesting there would be no such inventory issues or delays.

Now, ThinkEquity analyst Vijay Rakesh has issued a note echoing Misek’s claim.

“Our checks in Taiwan indicate some minor delays on the iPad,” Rakesh writes. “The manufacturing of the iPads was supposed to pick up in February, but volumes even in March are still low. Current volumes are much lower than the market expected but most checks are indicating minor delays.”

Rakesh says his checks suggest that iPad production volumes are currently at about 200K to 250K for the month, but should ramp up to 800K to one million per month by April or May. “We believe this is just a minor hiccup in a longer-term entirely new revenue stream and product roadmap for [Apple],” he says.

Who best to believe, if we are to believe anyone at all? Honestly, I have no idea. As I mentioned, Digitimes doesn’t exactly have a great track record when it comes to Apple (AAPL) rumors. Neither does Misek, really. That said, the fact that channel checks conducted by two research houses both found production issues in Apple’s iPad manufacturing, suggests there may be something here.

The movie studios have worried that Redbox’s $1-a-day rental model, which now accounts for nearly one out every $5 spent on DVDs, undercut every other revenue stream they had. But several big studios–including Sony (SNE), Lionsgate (LGF), Disney (DIS) and Paramount, a unit of Viacom (VIA)–have figured out how to live the company.

Meanwhile, three others–Time Warner’s (TWX) Warner Bros., News Corp.’s (NWS) 20th Century Fox and GE’s (GE) NBC Universal–have been fighting Redbox in court.

Make that two others. Warner Bros. just announced a settlement with Redbox. And given Warner’s size and clout, you have to wonder how much longer the two other studios will need to keep fighting.

This settlement looks an awful lot like the one that Warner and Netflix agreed to earlier this year. Which is to say: Warner got pretty much what it wanted–protection of its 28-day DVD sales “window”–and the other side argues that it’s okay, really.

The theory is that by giving up the ability to get movies to consumers right away, Redbox saves money on the DVDs it does get and will have access to a wider selection. Redbox also says this will help the company if its wants to get into digital distribution. Though unlike Netflix (NFLX), Redbox is a long away from being a plausible player in digital.

But make no mistake. This is a costly window and one that Redbox wouldn’t agree to unless the studios had regained the upper hand. From Pali Research’s Rich Greenfield, via a clairvoyant note (title: “It’s Not Easy Being Redbox, with 2010 Set to Get Even More Challenging; Provides Hope For Movie Biz”):

While Redbox management declined to answer a question related to whether there business would be impacted by 10% from a 30-day window (that Redbox agreed to and stopped pursuing workarounds), we believe 10% is far too low. Redbox relies on the new-release business, if it did not, it would not be suing three studios. We suspect the impact is closer to 35-50% than 10% (albeit Redbox’s cost per DVD would come down), particularly as once a window is established the studios will spend heavily to hammer home to consumers that movies are available other places before Redbox (which generate higher gross profit dollars to the studio per transaction than via Redbox).

Release:

WARNER BROS. HOME ENTERTAINMENT AND REDBOX ANNOUNCE A MULTI-YEAR DISTRIBUTION AGREEMENT

Companies Agree to 28-Day Window for DVD and Blu-ray Titles

BURBANK, Calif. And OAKBROOK TERRACE, Ill, February 16, 2010 – Warner Bros. Home Entertainment Group and redbox today announced a new multi-year distribution agreement that will make Warner Bros. new release DVD and Blu-ray titles available to redbox customers after a 28-day window. The agreement also marks the end of the lawsuit that redbox filed against Warner Home Video in August 2009.

“We are very pleased to have had the opportunity to sit down with redbox and negotiate an arrangement that benefits both parties and allows us to continue making our films available to redbox customers,” said Kevin Tsujihara, president, Warner Bros. Home Entertainment Group. “The 28-day window enables us to get the most from the sales potential of our titles and maximize VOD usage.”

The new arrangement provides redbox with reduced product costs, sufficient quantities of product and optimal stock levels four weeks after street date as well as extends redbox’s access to Blu-ray titles, which redbox is currently testing in select markets. The agreement also provides Warner Bros. the opportunity to maximize the sales of new release titles as well as video on demand and other forms of digital distribution.

“This agreement enables redbox to fulfill our commitment to providing consumers affordable and convenient home entertainment,” said Mitch Lowe, president, redbox. “By agreeing to a delayed release date, redbox can now acquire Warner Home Video titles at a reduced product cost, preserving value for our consumers and increasing customer access to Warner titles at redbox locations nationwide.”

Warner Home Video and redbox will be implementing delayed availability during the month of March and will reach a four-week window by March 23 with the release of The Blind Side. The new agreement will run through January 31, 2012. Redbox has also agreed to destroy Warner Home Video content following its lifespan in kiosks.

“The 28-day window for redbox balances the economics of our relationship while continuing to offer great value to their customers,” said Ron Sanders, president, Warner Home Video. “This accord establishes a mutually beneficial relationship that will foster an ongoing and productive partnership.”

Warner Bros. is currently a leader in many home video categories including total video (DVD and Blu-ray combined), Theatrical Catalog video, TV on DVD, and Blu-ray and will ensure the DVD rental company access to sufficient quantities of Warner Home Video titles including The Time Traveler’s Wife, The Box, The Informant!, Where the Wild Things Are, The Blind Side, and Sherlock Holmes.

It’s important to remember this whenever you see stories about Hollywood’s resurgence, measured by box office receipts. Because box office receipts don’t do that much for Hollywood’s bottom line–that’s the role of DVDs.

It’s also important to remember this when you see stories about Hollywood’s conniption fit over “windowing” and the lawsuit/hardball deal combo the studios have used with Redbox and Netflix (NFLX). Because the studios’ desire to wring every last penny from DVDs is what’s driving those moves.

Ditto for Hollywood’s desire for a 3-D boom: The studios are in desperate need of a new revenue stream to replace the disappearing discs.

So here’s the one-sentence story I promised, which illustrates the collapse. It comes via Edward Jay Epstein’s dissection of MGM’s blowup, published on Defamer (nice get!):

In the US alone, MGM’s net receipts from DVDs fell from $140 million in its 2007 fiscal year (which ended March 31, 2008) to just $30.4 million by 2010.

That clarifies things, no?

Yes, you can add plenty of caveats if you’d like. For instance, MGM has been more or less dormant except for its Bond films the last couple years, and studios rely on new releases to juice DVD sales. And the DVD slump hasn’t hit all studios equally–Disney (DIS) and DreamWorks Animation (DWA) have done less poorly, because parents still need to buy stuff to occupy their kids.

But that’s still a staggering 78 percent drop in a couple years. So even if you’re running a studio whose DVD sales don’t look that bad, you’re looking at plummeting sales. Scary stuff.

The music labels love iTunes because it gave them a new revenue stream while CD sales withered away. And the music labels hate iTunes because it helped CD sales wither away by giving consumers the chance to replace $15 discs with $1 songs.

But now, as Apple prepares to launch e-book sales along with its new tablet, the company seems to be taking a different tack. It’s letting book publishers push their digital pricing up instead of down.

The Wall Street Journal reports that Apple (AAPL) was still haggling with publishers Tuesday night, but says the gist of Apple’s offer is this: Publishers can set their e-book prices at $12.99 or $14.99, well above the $9.99-or-less price point Amazon (AMZN) is pushing.

Apple’s terms would actually generate less money per sale for publishers than Amazon currently does, but publishers are so worried about digital cannibalization that they seem willing to take a hit in order to protect their paper-and-ink products. WSJ:

In adopting the Apple model, the balance of power would shift at least partly back to publishers, which regain control of pricing. In setting higher prices, they could provide a level playing field for all e-book retailers. The potential for publishers is that the device may generate greater volume for e-book sales.

But note that Apple isn’t offering publishers complete control of their pricing as it does with developers on its App Store. And while Apple is giving publishers more latitude, it is being more aggressive than ever with the TV business, reportedly by pushing the networks to cut prices for their shows.

The other big caveat is that if Apple does want to sell e-books for 30 percent to 50 percent more than Amazon, those e-books are going to have to be pretty special. Simply adding a dash of color and some graphics won’t cut it–these things will really need to be “enhanced” to justify the premium. Figuring out how to do that while keeping margins intact is a whole other story.

Plenty of time to hear about that later, though. For now, let’s see what Steve Jobs has to show us today.

Digital Daily’s John Paczkowski will be reporting live from the Yerba Buena Center starting at 1 pm ET; head over to his liveblog to catch the action in real time.

The publisher hasn’t said how much it will charge readers and isn’t offering many other details for now. But subscribers to the print edition will be able to access the site for free.

By adopting the “metered model,” the New York Times (NYT) is emulating the Financial Times, which lets readers peruse up to 10 stories a month before forcing them to buy a subscription to the online paper.

That model isn’t all that different from the subscription strategy employed by News Corp.’s (NWS) Wall Street Journal: While much of the Journal is theoretically behind a pay wall, it’s a fairly permeable one designed to give both casual readers and search engines access to the content. (News Corp.’s Dow Jones owns both the WSJ and this Web site).

Both are have-cake/eat-cake strategies: Generate as big an audience as possible to sell to advertisers while extracting a second revenue stream from hard-core readers. The Times, which is reportedly generating $100 million a year from Web display ads, wants to do the same thing.

The paper has tried a pay wall before. In 2005, it rolled out “Times Select” whereby it cordoned off access to op-ed columnists like Thomas Friedman and to archived stories and other features. That strategy generated around $10 million a year. But it was considered a failed experiment, and the Times dropped the wall in September 2007.

Now, of course, $10 million a year sounds like a nice boost for a paper that lost more than $35 million in its most recent quarter and saw print ad revenue plummet throughout the year.

A New York Magazine story published on Sunday predicted the timing of the announcement, even though New York Times executive editor Bill Keller told me the piece was “long on speculation.”

The New York Times Announces Plans for a Metered Model for NYTimes.com in 2011NEW YORK, Jan 20, 2010 (BUSINESS WIRE) — The New York Times announced today that it will be introducing a paid model for NYTimes.com at the beginning of 2011.
The new approach, referred to as the metered model, will offer users free access to a set number of articles per month and then charge users once they exceed that number. This will enable NYTimes.com to create a second revenue stream and preserve its robust advertising business. It will also provide the necessary flexibility to keep an appropriate ratio between free and paid content and stay connected to a search-driven Web.
Through 2010, NYTimes.com will be building a new online infrastructure designed to provide consumers with a frictionless experience across multiple platforms. Once the metered model is implemented, New York Times home delivery print subscribers will continue to have free access to NYTimes.com.
“Our new business model is designed to provide additional support for The New York Times’ extraordinary, professional journalism,” said Arthur Sulzberger, Jr., chairman of The New York Times Company and publisher of The New York Times. “Our audiences are very loyal and we believe that our readers will pay for our award-winning digital content and services.”
“This process of rethinking our business model has also been driven by our desire to achieve additional revenue diversity that will make us less susceptible to the inevitable economic cycles,” said Janet L. Robinson, president and CEO, The New York Times Company. “We were also guided by the fact that our news and information are being featured in an increasingly broad range of end-user devices and services, and our pricing plans and policies must reflect this vision.”
More details regarding the metered model will be available in the coming months.

[Image credit: etoile]

Google’s video site has been trying to convince the TV industry to let it stream individual shows for a fee, multiple sources tell me.

YouTube already lets users watch a smattering of TV shows for free, with advertising. Now it envisions something similar to what Apple and Amazon already offer: First-run shows, without commercials, for $1.99 an episode, available the day after they air on broadcast or cable.

Sources say the site’s negotiations with the networks and studios that own the shows are preliminary. But both sides seem optimistic, since models for such deals already exist. No comment from YouTube.

The biggest stumbling block may be consumers. That’s because Google (GOOG) is talking about streaming the shows instead of letting consumers download them to their computers, as both Apple (AAPL) and Amazon (AMZN) do. But the networks and studios, which control pricing, will want to sell the streamed shows at the same price as downloads; they fear that offering them at a different price will force them to go back and rework their existing deals.

Executives at YouTube and TV insist that the disparity is simply a perception problem and cite studies showing that most people who download TV episodes only watch them once, anyway. But that’s a tough sell.

It’s also possible that YouTube may skirt the issue by launching a TV rental business without the big hits that Apple and Amazon offer. One possibility: The video site could start by moving immediately to long- and mid-“tail” shows and videos that aren’t available other places and don’t have to match existing prices.

No matter how it proceeds, YouTube is likely to be just one of several outlets trying to get consumers to pay for TV on the Web in 2010.

Among others: In addition to its a la carte offering, Apple is trying to create a monthly subscription service. Hulu, the free TV site co-owned by News Corp.’s (NWS) Fox, GE’s (GE) NBC Universal and Disney’s (DIS) ABC, is expected to launch a subscription service of its own. And cable operators like Comcast (CMCSA) will be launching different versions of “TV Everywhere” services, which give subscribers expanded access to online shows.

TV executives are generally enthusiastic about all of the above, since they are meant to create additional revenue streams without threatening the industry’s existing business. That is, they’re supposed to protect existing business from the digital disruption that has ravaged music, newspapers, etc.

But while Web users have an insatiable appetite for video, they’ve yet demonstrate much interest in paying for it. If any of this is going to work, that will have to change.

But Condé, like other publishers, says Apple (AAPL) won’t actually talk to the company about its plans for the device, or even acknowledge that it has plans.*

Condé’s plan, meanwhile, is to create digital versions of its magazines that will work on all the upcoming tablets, using new software from Adobe (ADBE). Those tablets aren’t actually on the market yet, but the publisher says it’s confident that we’ll soon see multiple versions of machines featuring large color touchscreens and wireless connections.

So who’s going to make those gadgets? Condé Nast CEO Chuck Townsend says his company is working closely with Hewlett-Packard (HPQ) and that it has also been communicating its plans to Apple. But Townsend made a point of saying that Apple executives themselves refuse to acknowledge that they’re actually planning a tablet: “They’re not talking to anybody openly,” he says.

Adobe is creating a publishing tool for the new format, as well as magazine-reader software that may come pre-installed on the devices or may require a download. The software company says it is working exclusively with Condé now, but will offer its tools to other publishers next year.

[Important technical point several readers have brought up: Adobe says its new reader software will run using its AIR platform, which works on multiple operating systems, including Apple's desktop system. But neither AIR nor Adobe's flash software works on Apple's iPhone, so if the new mystery device runs on that operating system, there's a problem. I'm following up with Adobe to see what it has to say. UPDATE: Here's Adobe's response.]

Condé says its work with Adobe won’t preclude the company from joining the “Hulu for magazines” storefront/distribution joint venture it has been discussing with Time Warner’s (TWX) Time Inc. and other publishers. “Those discussions are ongoing and important and imminent,” Townsend says.

Okay. So what will Condé’s magazines look like once the tablets appear? The publisher has been showing a demo video to advertisers, industry executives and employees, and I’m trying to convince the company to show it to the rest of the world. (UPDATE: Here’s a partial, low-quality version of the video).

But until then, you can get a sense of it by checking out the publisher’s first attempt to port a magazine to the iPhone, which was released today at the iTunes App Store.

Like the iPhone version of GQ’s December issue, Condé says its tablet magazines will feature the same content found in the print versions, including original advertising, with the ability to view pages in their original form or in formats designed specifically for the device. They will also import multimedia content, like videos, and offer the ability to synch up with social networks and other Web sites.

Condé also thinks the business model for its tablet mags will mirror that of its iPhone app. The company intends to charge readers for each title, and it plans to convince the Audit Bureau of Circulations, the magazine industry’s standards board, that its online sales are equivalent to newsstand sales. That will allow Condé to charge advertisers the same rate as for print ads.

If all of this works, it’s a dream scenario for Condé and other publishers. The magazine industry gets to keep the revenue streams its print publications generate without having to make the “analog dollars for digital pennies” discount that the Web requires. Meanwhile, Condé gets to bask in the benefits of digital–lower distribution costs, more engagement with readers.

Or put another way: Publishers hope the new devices will repair all the value destruction the Web has wrought.

But all of this assumes that consumers, who’ve shown no inclination to pay for this stuff on the Web, will be willing to pay for it once it appears on devices no one owns yet. We’ll find out soon enough.

*One possible exception is the New York Times (NYT), where editor Bill Keller refuses to talk about possible talks with Steve Jobs and company.

That’s the pitch Apple has been making to TV networks in recent weeks. The company is trying to round up support for a monthly subscription service that would deliver TV programs via its multimedia software, multiple sources tell me.

Apple (AAPL) isn’t tying the proposed service to a specific piece of hardware, like its underwhelming Apple TV box or its long-rumored tablet/slate device. Instead, the company is presenting the offer as an extension of its iTunes software and store, which already has 100 million customers.

A so-called “over the top” service could theoretically rival the ones most consumers already  buy from cable TV operators–if Apple is able to get enough buy-in from broadcast and cable TV programmers.

That’s a big if: Apple has told industry executives it wants to launch the service early next year, but I have yet to hear of a single programmer that has made a firm commitment to the company, which has tasked iTunes boss Eddy Cue with promoting the idea.

Industry executives believe that if anyone jumps first, it will be Disney (DIS), since CEO Bob Iger has shown a willingness to experiment with Apple and iTunes in the past: In 2005, Disney was the first player to sell its programming on iTunes, via a-la-carte downloads. And Apple CEO Steve Jobs is Disney’s largest single shareholder, a result of Disney’s 2006 acquisition of Jobs’s Pixar animation studio. Apple didn’t respond to requests for comment.

Network executives I’ve talked to are intrigued by the idea–they are eager to find new revenue streams–but are also wary, for several reasons.

Cable networks, for instance, don’t want to threaten existing relationships and subscription fees from cable providers like Comcast (CMCSA). And programmers are also worried about the effect a subscription service would have on advertising revenue: Even if the service didn’t distribute TV programs until after their initial air date, that could cut into ratings, which now measure viewership over the course of several days.

But the move to deliver TV and movies over the Web is already well under way. Netflix (NFLX), for instance, already bundles free streaming movie and television along with its disc-by-mail subscription service. iTunes and Amazon (AMZN) rent movies on a one-off basis, and Google’s (GOOG) YouTube is trying out the same thing. Meanwhile, Hulu, the joint venture between GE’s (GE) NBC, News Corp.’s (NWS) Fox, and ABC, is figuring out how to launch a paid service that may include rentals, paid downloads or subscriptions.

So Apple’s proposed subscription service, which the company has floated in the past, is no longer a huge stretch. Says one executive briefed on the company’s plans: “I think they might get it right this time.”

This one isn’t a total shock, as EMI and Grooveshark had supposedly been close to a deal prior to the lawsuit. And it wouldn’t be the first time that a label sued a Web company: See Warner Music Group (WMG) and Imeem, as well as Universal Music Group and News Corp.’s (NWS) MySpace, among others.

No details on the deal from EMI or Florida-based Grooveshark, which offers free streaming music, a la MySpace Music, Imeem, Spotify and others. Unlike those services, though, Grooveshark doesn’t appear to have licensing deals with three of the big four labels and plays their music anyway. But with the exception of the EMI suit, it has remained unmolested. Interesting.

For the record, here’s the release (Inside baseball note to Grooveshark guys: Please don’t attach press releases as PDF files. Really cumbersome. Thanks.):

Music streaming service Grooveshark signs deal with EMI Music and EMI Music Publishing
Gainesville, FL–Today, digital music service Grooveshark.com announced it has entered into agreements with major label EMI Music and EMI Music Publishing that will give Grooveshark users access to content from EMI’s roster of current and legendary catalog artists and EMI Music Publishing’s songwriters.

Grooveshark offers music fans the ability to stream songs for no fee from a vast catalog of music. Fans can enjoy Grooveshark’s music without having to download client software or register. The basic service is free to fans and supported by visual advertising. Fans who opt for a $3 per month premium service can enjoy unlimited ad-free streaming music. The site was recently named the best way to listen to music on the web by Rolling Stone, and just surpassed one million registered users.

“EMI Music and EMI Music Publishing have collaborated with us to create a mutually sustainable deal which represents the future of digital music,” says Grooveshark CEO Sam Tarantino. “We will continue to deliver the best music service on the Internet to our users, and we will expand our capacity to strengthen fan-to-artist connections through our technology.”

“We think services like Grooveshark offer great music discovery options for fans,” said Mark Piibe, EMI Music’s Global Head of Digital Business Development. ”In turn, Grooveshark offers a new revenue stream for our artists and will help us learn more about how we can better connect different types of fans with artists.”

While Squires solves that riddle, he’ll leave his day job as head of the “news business unit” (Time, Fortune, Money, etc.). In his place will be… Moore, who is already running the company’s style group.

I chatted briefly via email with Squires, who is good-natured about the assignment. But I have to take issue with him (and everyone else who uses this example) re iTunes. Apple (AAPL) didn’t prove that people are willing to pay for content online–we’d already seen that (at The Wall Street Journal, among other examples). Apple proved that people are willing to pay for portions–that would be songs–of products that were previously only sold in bundles–that would be CDs.

You can debate whether this was terrible for the music industry or simply the least-bad option. But I don’t think it makes sense to compare the experience of the music industry with news and other Web content that people aren’t used to paying for in any form.

Here’s my Q&A with Squires:

MediaMemo: I’m struck by Ann’s “genie” reference–are we meant to take that in a tongue-in-cheek way, or do you folks really think you can put the free-content genie back in the bottle? Or am I misinterpreting that?

John Squires: We’re not unrealistic about the challenge, but iTunes showed people will pay for something attractively packaged and fairly priced that they once got for free….We also wanted to get your attention. So I guess we’re genies.

MM: Do you imagine that Time Inc. will be taking content that’s currently available for free online and putting it behind a pay wall? Or are you more focused on creating new products you can charge for?

JS: This is part of what we’ll be testing. Certainly some online content will remain free because we’re eager to keep our large online audiences (over 26 million Nielsen uniques) and successful advertising model. Some other online content may be subscription-based. And the content we create for mobile readers will be a completely new experience, with different design and functions that we think consumers will want to pay for.

MM: Haven’t heard Time Inc.’s voice in the “Google isn’t playing fair” chorus. How much, if any, energy are you spending on getting the search engine to help you/take less from you, etc.?

JS: We’re not part of that chorus at the moment.

MM: Is this a permanent assignment or will you go back to News at some point?

JS: We’ll see what comes out of this assignment.

And here’s the companywide memo from Moore:

To:       Time Inc. Employees

From:   Ann Moore

Re: How to Put the Genie Back Into the Bottle; Special Assignment for John Squires

It won’t be a revelation to any of you that the publishing business is changing rapidly. While print magazines are not going away, and while we have built vibrant websites with over 26 million unique visitors and 750 million pages views each month, it’s increasingly clear that finding the right digital business model is crucial for the future of our business. We need to develop a strategy for the portable digital world and to refine our views on paid content.

Given the magnitude of the opportunity, I have asked John Squires to take on a new role and devote his full time efforts this summer to developing the best business plan for the future. John’s qualifications for this assignment are ideal. He has a strong background in consumer marketing and digital content and has stature in the publishing industry, as well as with digital software and hardware companies. It is likely we will be seeking partners and allies in our quest to ‘put the genie back into the bottle’.

As many of you know, we are currently pursuing four related initiatives:

1.    Evolving our current website businesses by identifying and developing consumer revenue streams.

2.    Accelerating the creation of applications for smartphone platforms.

3.    Developing new products and business models for portable digital readers.

4.    Exploring partnerships with other publishers to develop the optimal retail store for our digital products.

John will need the support of many, including Consumer Marketing, Legal, Strategy and Business Development, and the Time Inc. titles. Please pitch in with all your resources available when he calls.

During this assignment, similar to the role I’m playing at the Style and Entertainment Group, I will assume responsibility for the News Business Unit.

A.M.

Wait a minute: Hadn’t big media finally gotten religion and agreed to give us, the demanding consumers, everything we want, whenever we want it? Nope.

Hollywood in particular–which still has a big, if declining, business showing movies in theaters and then in other formats–is still interested in protecting its big analog revenue streams for as long as it can.

Translation: Netflix (NFLX) will show you just a slice of the of the 100,000+ movies it has in its regular catalog on its streaming service, because the studios aren’t eager to cut into their DVD sales and rental businesses. Which are way, way bigger than what they’re getting from digital outlets. And even movies that are available for free rental may disappear after a certain period, because the studios have other revenue “windows” to protect, as CNET explains.

The same thing goes for Apple’s (AAPL) iTunes: Even the mighty Steve Jobs can’t force the studios to give his customers unlimited access to their catalogs. This applies to multiple studios, by the way, and both new and old movies. “The Fifth Element” belongs to Time Warner’s (TWX) Warner Bros. studio, and came out way back in 1997, back when Netscape was a big deal. “Michael Clayton” is a Sony (SNE) movie that came out last year.

And by the way, that George Clooney movie really is good–like the excellent 1970s paranoia films brushed up a bit for modern times. And even more poignant after the past few months. I recommend seeing it even if you have to watch it on a screen other than your laptop. Which is exactly what Sony wants.

An open-ended timetable for an employee stock sale program.

Perhaps it’s the same “open-ended timetable” Facebook’s using for that mythical liquidity event, hmm? Without a silver bullet business model and no stable revenue stream to speak of, investors were bound to question Facebook’s perceived valuation sooner or later. And, apparently that’s exactly what happened, according to Valleywag’s Owen Thomas. “Facebook’s common shares…have a value that put the whole company’s worth at around $4 billion,” Thomas explains. “Or they did. A source close to potential investors said they wanted to buy shares from employees at a lower valuation, or with guarantees similar to Microsoft’s. To reward a small number of employees who had enough shares to benefit from the program, [Facebook] would have had to give away something for nothing.”

Huffpo’s newest round values the company at about $100 million, which means its investors think it will be worth much more one day. That’s the same value, more or less, that investors place on TheStreet (TSCM), even though it generated some $65 million last year and has about $80 million in cash on hand. McIntyre:

Huffington has several important advantages over TheStreet. For starters, it does not rely on one person for most of its traffic. If Jim Cramer left TSCM, the company would be in real trouble.

Second, Huffington has diversified beyond it political news base. Over the next year or so, it will become clear whether that was a good idea or not. Adding “style” and “entertainment” sections puts it into competition with a lot of other online success stories.

Third, Huffington aggregates a lot of content from around the web. The cost of doing this is remarkably low. The company pays little if anything to most of its bloggers. TheStreet has a relatively large staff and produces most of its own content.

The final difference between the two companies is probably the most telling. At its current rate of growth, which could be hurt by the end of the 2008 election process, Huffington may double in size again over the next year or so, if its efforts to diversify its content works.

It would be hard to find analysts who believe TSCM is going to expand its audience or revenue at a rate of 100%.”

I can think of some counter-arguments to this, but they’re half-hearted: TSCM’s affluent readers should be worth more to advertisers than Huffpo’s; TSCM still has a revenue stream from subscribers to buffet it from ad market turmoil; Huffpo’s aggregation model isn’t unique and could be replicated by anyone who wants to hire some devilishly clever Web editors, etc.

But better to acknowledge that the HuffPo crew have built something very big, very fast. And that anyone who does that gets rewarded for it, even in an econalypse.

A report in the Times of London in which Microsoft would buy Yahoo’s search business in a convoluted $20 billion deal that would include well-known Internet execs Jon Miller and Ross Levinsohn, is–in the words of one key player–”total fiction.”

Actually, that’s Levinsohn speaking, on the record. But that’s also the essential word from all key players regarding the Times’s report.

BoomTown has spoken to top sources at Yahoo (YHOO) and Microsoft (MSFT) too and all scoff at such a deal now taking place or that either side has been in any such discussions of late.

Yahoo’s entire market cap, in fact, is only $16 billion.

Rumors of Microsoft buying all of Yahoo have popped up regularly since it abandoned its failed takeover bid, all of which have been untrue.

That’s not to say there will not be some search deal between Yahoo and Microsoft, which seems more than likely at some point.

It makes sense on many levels and is supported by Carl Icahn, the Yahoo board member who upped his money-losing stake in the company last week.

That stock purchase should be enough of a reason for there to be no Microsoft-Yahoo search deal imminent, given Icahn would be more than well aware of it and buying up almost seven million Yahoo shares–now at historic lows–only days ago would smack of insider trading.

Still, the report in the Times has an unusual level of detail, involving Microsoft giving large gobs of money to Levinsohn and Miller.

Wrote the Times:

Under the terms of the proposed transaction, Microsoft would provide a $5 billion facility to the Miller and Levinsohn management team. The duo would raise an additional $5 billion from external investors.

This cash would be used to buy convertible preference shares and warrants which would give it a holding in excess of 30% of Yahoo.

The external investors would also have the right to appoint three of Yahoo’s 11 board directors. The talks with Yahoo involve Microsoft obtaining a 10-year operating agreement to manage the search business. It would also receive a two-year call option to buy the search business for $20 billion. That would leave Yahoo to run its own e-mail, messaging, and content services.”

Sounds good, except it’s the first time Levinsohn has heard of the plan, he said. Sources at Microsoft and Yahoo also said there was no deal like that in the making at this point in time.

Earlier this year, there was also another deal involving Icahn, before he gave up his proxy fight against Yahoo in exchange for a board seat, which did involve Levinsohn and Miller taking over Yahoo.

But, as has happened to many schemes involving Yahoo, it never came to pass.

Interestingly, there was also a similar investment deal as the one described in the Times, many months ago, just after Microsoft had walked away from its takeover battle for Yahoo.

It involved a very complex transaction involving Microsoft buying a large stake in Yahoo shares, running Yahoo’s search business for a time period and giving Yahoo a huge guaranteed revenue stream.

But that deal had already been spurned by Yahoo for the search-ad deal with Google (GOOG), which collapsed recently under intense regulatory scrutiny.

That has focused a lot of attention back on a possible deal between Yahoo and Microsoft, the No. 2 and No. 3 players in search, both of which have been chasing Google without any success.

Microsoft, despite spending billions, has been lagging badly behind Yahoo, which has more than doubled its share.

And that is precisely why it has long been interested in acquiring Yahoo’s search business.

Microsoft CEO Steve Ballmer has said the software giant is not interested in buying Yahoo many, many times, although he has not ruled out a search deal of some sort.

But Microsoft, many sources said, has been waiting for Yahoo to get another CEO in place, after Yahoo CEO Jerry Yang recently said he was stepping down to make way for a new leader.

Yahoo has also said in recent days that it is not currently engaged in any kind of talks with Microsoft, even about a more likely search deal.

At least in this chapter of the drama that has engulfed Yahoo over the last year, believe them.

[Full disclosure, though run separately, The Times of London is owned by News Corp. which also owns this Web site.]