Babelgum's Big Bet on Internet TV

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And Joost is far from the only hot, new, online video service. U.S. peer-to-peer pioneer Bram Cohen, whose San Francisco-based company BitTorrent unleashed a wave of illegal file-sharing on the Internet, went legit earlier this year, striking deals with major content providers to legally offer TV shows, movies, music, and games for rent or purchase on the Internet to 150 million users worldwide who have BitTorrent installed. BitTorrent Entertainment Network, which is about to extend into free, ad-supported programming, has also launched a service for independent content creators to publish their own content. Since the beta launch last year, the company claims more than 100,000 users have published audio and video clips.

A bigger hurdle may come from more established players. Apple (AAPL), for example, which has already sold more than $1 billion worth of digital music, and also sells movies from Walt Disney (DIS) and Paramount Pictures and programs from all the major TV networks, is reportedly in advanced talks with Hollywood's largest movie studios to launch an online film rental service to challenge cable and satellite TV operators.

Time—and Money—to Burn

Scaglia isn't fazed by the competition. He says he has enough faith in his vision and deep enough pockets to take his time to build up Babelgum, which is headquartered in Ireland and has offices in Italy, Britain, and France. It is not the company that gets out of the gate first, but the one that gets it right that will win in the end, he argues. "Remember the story of the tortoise and the hare," says Scaglia, "Babelgum is the tortoise."

It's no accident that entrepreneurs like Scaglia, Zennstrom, Friis, and Cohen, all of whom earned their fame and fortune in broadband, are simultaneously branching out into Internet TV. Broadband uptake by consumers has reached critical mass, the price of servers that can store videos has dropped dramatically and the peer-to-peer distribution services that the broadband barons helped fine-tune in their earlier businesses are expected to become the dominant legal means of transferring video on the Web. The combination of these elements allows the scaling up of Internet TV at little cost, creating what pundits call a perfect storm that will transform television as we know it.

"In the future consumers will be able to watch any video they want—and make no mistake, TV is just video—anytime, anywhere, using the Internet," promises Cohen, BitTorrent's co-founder and chief executive and inventor of the technology. "The fundamental limitations of traditional broadcast technologies simply won't be able to compete and everything will be done over Internet Protocol."

"Audience Companies"

The transformation is forcing content companies to move from broadcast schedules to allowing viewers to watch when they want and on whatever device they want, including computers, cell phones, and iPods. And, it is prompting broadcasters built on the one-to-many model to morph into "audience companies" that engage with their viewers through interactive services and offer services that allow viewers to engage with each other.

Although Scaglia is well known and respected in Italy, he has not yet achieved the widespread fame of the other broadband barons. A trained telecommunications engineer, he left a job as CEO of Italy's second-largest mobile operator in 1999 because he was convinced that Internet Protocol (IP) services would lead the next communications revolution. Scaglia bet all of his own finances and his future on an ambitious project to wire Italy, founding FastWeb, Italy's second-largest fixed-line phone operator and one of the first companies in the world to build a large-scale integrated IP network to carry voice, data, and video. The company, which today has 22,000 kilometers of fiber-optic networks and more than 1 million customers, was sold to Swisscom (SCM), Switzerland's state-controlled telecom operator, for $4.88 billion earlier this year.

Content Providers Want More Outlets

One force that could favor startups like Babelgum is the entertainment industry's desire to see multiple outlets on the Net for their content. Film and TV studios, for instance, are wary of Apple, which now dominates the music download business through its popular iTunes service. "Content is king if there are a lot of distributors but not with one big distributor," says Bruce Benson, FTI Consulting's (FCN) New York-based senior managing director responsible for the entertainment and media industry. "In the music sector, Apple controls 90% of legal downloads and can fix the price," says Benson. "If you are a content owner, you want to encourage as many distributors as possible."

That explains why U.S. television networks are themselves streaming advertising-supported, full-length episodes of their prime-time shows online. Networks are also starting to allow new Internet TV players to distribute content from their back catalogs in exchange for a big cut of the advertising. Warner Brothers Television Group (TWX), for example, said in May that it would launch science-fiction programming on Joost, its first experiment with launching branded services online.

BBC World and Al Jazeera, meanwhile, have agreed to release some of their content to Jalipo, a pay-per-minute online distribution network for high-quality, professionally produced video and television content (see BusinessWeek.com 4/24407, "Jalipo's Pay-to-Play Strategy").

Encouraging Community

Further blurring the lines, the networks are taking steps themselves to actively marry traditional TV fare with the Web. News Corp. (NWS) and NBC Universal (GE) are partnering to launch their own tools and sites for premium online TV content (see BusinessWeek.com, 3/23/07, "YouTube May Have Met Its Match"). For its part, CBS announced partnerships May 24 with community-building Web sites and social-application providers such as Goowy Media, Meebo, and MeeVee to allow Internet users to embed CBS clips into their profiles, Web sites, blogs, wikis, widgets, and community pages.

CBS appears to be embracing Babelgum's premise that professionally produced original programming will attract new audiences. On May 22 the network announced the acquisition of Wallstrip, a professionally produced daily Web show focused on financial news. "CBS recognizes that original Web content—whether it's news, sports or entertainment—is starting to show real traction with audiences, producers, and advertisers," Quincy Smith, president of CBS Interactive, said in a statement. "As CBS evolves from a content company into an audience company, we need to build a team of talented Web producers who 'get' the growing online demand."

The pressure is on. A January report entitled "Prospering Through an Era of Disruptive Change in Media." written by FTI Consulting's Benson, predicts that soon every TV show and movie will be available on demand somewhere on the Web; the browser and the TV will merge in the living room. That will cause conventional TV networks and cable to lose a third of their current viewers, including many younger viewers coveted by advertisers.

From TV to PC

Those changes are already happening. A recent study of 6-year-olds shows that many children no longer distinguish between watching television on computer screens, their living room television, or the screens embedded into the seat in their parents' cars, says new media pundit Palmer, author of Television Disrupted: The Transition from Network to Networked TV and president of the National Academy of Television Arts & Sciences' New York chapter.

Adults, too, are increasingly tuning in on their computer screens. On June 7, Michael Dell indicated his PC company will gradually phase out its television business because more and more people are watching TV on their digital computer monitors. "In Japan, 50% or more of PC users are already watching TV on their PCs," says Dell, explaining that the company will focus on a new generation of products that marry the TV and the PC.

Although questions about fuzzy picture quality and bugs are now dogging new Internet TV companies, those problems are expected to disappear pretty quickly. FTI Consulting's Benson predicts that over the next decade bandwidth will increase tenfold and compression will at least double while delivering higher quality. "At these rates virtually anything can be moved around the Web at consumer-acceptable speeds.

With all the changes on the horizon, "my belief is that media is only 20% invented yet," says Benson, a speaker at a June 11 P2P Media Summit in Los Angeles sponsored by the Distributed Computing Industry Association.

More Episodes to Come

Scaglia doesn't disagree, but he doesn't believe that Babelgum will replace traditional television. "What will change is thematic shows" shown on cable or satellite TV, he predicts. When it comes to shows about hunting, fishing, sailing, or cooking, he says, it makes more sense to watch them in an online, on-demand environment and to share opinions and advice with other viewers.

Such participatory viewing won't happen overnight. It will take time to build up an audience. For that to happen, Babelgum will need to boost the quantity of content available, from the roughly 400 hours available now to 100,000 hours or more. That will pave the way for building social communities around the channels, and for attracting advertisers. Scaglia predicts he may have to pump more than €50 million a year into the company over the next few years, with profits rolling in only by about 2010. "We believe this is a long journey and we are just at the beginning," he says. Stay tuned—well, logged on—for more news.

Schenker is a BusinessWeek correspondent in Paris.