Fluxe

Time to Start a Newspaper?

adamdshaw@gmail.com (Adam Shaw) — Sat, 25 Jul 2009 16:56:49 -0700

Although this sounds like it goes against all conventional wisdom, it is worth considering. There are several key factors to consider:

The competition is broken.

A start up would be free of the legacy costs weighing down current papers.

Talent, could be lured away from their current failing employer.

Technology and innovation will change the business model.

Broken Competition
Newspapers across the country are struggling. Burdened by debt and an unsustainable business model, they are either folding, scrapping the print edition, or scrambling to adapt. This is the best time to enter a market.

Legacy free
Similar to what Southwest did in the 80's, a start up could set up operations without incurring the burdensome and unnecessary costs that most newspapers carry. The costs of running a printing plant and a distribution network are massive and not easily shed. In 15 years, these operations will be non-existent, but unwinding them will prove complicated and costly.

Luring talent
The most talented editors and writers are working for ships that are either sinking slowly or going nowhere. The opportunity to be at the helm of something new and relevant (not to mention equity in a potential growth vehicle) will be compelling enough in many cases to lure top talent. In addition to being great writers and reporters, the best talent brings with it a built in audience who will follow him/her. If Tom Friedman were to leave the NYT, a significant portion of his readership would follow him to his next destination.

Technology and Innovation
It is just a matter of time before physical papers as we know them will no longer exist. But people are not going to give up the enjoyment of reading a physical paper. Rather the physical paper will just be in a different form. If you could walk into your den and pull a complete paper off your printer as opposed to walking out onto the front porch to get it, is that not a reasonable if not preferable option? Why no one has introduced this feature (similar to Mr Coffee) is surprising but surely to change. Doing so completely eliminates the need for the traditional and wasteful distribution model that exists today.

Additionally, newsstands across the country will follow suit. The notion of being at an airport in the early morning before the papers were delivered is archaic. So is buying a paper without sports results that ended after 10PM. Soon you will be able to walk into your airport newsstand and buy a paper fresh off the printer.

Another innovation is the Kindle. While electronic readers won't save the newspaper business, they will help. The idea of paying for content is reasonable and will become more prevalent over the next period of Internet evolution.

Moreover, Cable and Telco companies currently charge you $60 for cable television and redistribute 35% of that to the cable channels that create the content. They charge you a similar amount for high speed web access and don't share a dime with the content creators. This iniquity is sure to change over time. The ramifications for this are far greater than for just newspapers, but newspapers will factor in.

Digital newspapers are digital content, not any different from the other entertainment and information you consume over your high speed connection. The unwillingness for consumers to pay for newspapers is largely tied to their unwillingness to pay for content ala carte. The same spending pattern would be true for cable television if ala carte were ever to be offered. But when a great sum of content is bundled and offered as an up-sell on a bill that they are already paying, one's likelihood to pay for that content goes up dramatically.

If every newspaper started charging $10/mo for digital access to their site; and if your ISP offered you $40 for basic web access but $45 for access plus access to every newspaper you wanted, it would seem like a great deal. And that is where things are heading, so long as the consortium of newspapers can collectively decide to charge and they can convince the ISPs (Comcast, Verizon etc) to find a pricing model that works.

The fact that the number of parties controlling newspapers has been narrowed to a select few makes this possible. Perhaps it would be seen as collusion, but that wouldn't stop it from happening. And if there are a few holdouts, it is no different than today where several papers are free.

Finally, as interactivity on the web is better adopted and understood by advertisers, the cpms paid by the advertisers will increase dramatically, further increasing the revenue potential.

Sure there will be naysayers. Warren Buffet recently declared he wouldn't touch newspapers. But keep in mind he was talking about buying a paper, not starting one.

The Impact of Apps on iTunes

brian@fluxe.com (Brian Lakamp) — Wed, 13 Aug 2008 22:24:53 -0700

Without question, the launch of the 3G iPhone has been a commercial triumph for Apple. Staggering sales estimates are well published. Anecdotally, I often still see a line outside Santa Monica's Apple store.

And, the broader ecosystem around the iPhone platform is booming. The Application store is a huge success... The pace of development around the iPhone platform rivals that witnessed during the opening of Facebook's platform.

Though evolution of the iPhone platform (and development thereon) will continue at a furious pace for some time, it may be worthwhile to examine the implications of two early successes, Pandora and last.fm. Both are music services and have ramifications to Apple's core music offering.

An interesting question arises...

If consumers can stream any and all the music they desire from online music services, are they still going to buy music? Or put another way... What wins in the end, the ad-supported stream or the purchased download?

For today's discussion, I'm pleased to include Bill Rosenblatt to add his perspective and some conversational color. Bill is the editor of DRMWatch, a highly respected publication that has insightfully chronicled the evolution of digital media for over 5 years. Thanks for participating, Bill.

Bill Rosenblatt:

Brian, thanks for having me on your blog. It is one of my must-reads. I suspect were going to disagree on some issues, but Im sure I join many of your readers in saying that I have great respect for you and your views.

There are several issues you raise in your intro: music apps for the iPhone other than iTunes; streaming vs. download; paid vs. free. What Ill do is state my opinions on each of these and see how you react.

Music Apps for the iPhone

Bill Rosenblatt:

When Apple released the SDK for the iPhone and iPod Touch, it signed a death warrant for iTunes.

Think about it: iTunes is a very nice app but it is based on an obsolescent notion of an anemic device and the use of side-loading and cables, which are a kludge, though admittedly a kludge that Apple taught users to put up with. If you can do everything you want with music on your portable device, why should you bother with an app that puts 90% of the power on a PC or Mac?

No, iTunes is going to look a lot less attractive in the face of iPhone-friendly music apps one or more of which may even come from Apple.

Brian Lakamp:

I fully agree that the iTunes model needs a major revamp. The notion of needing to go back to your PC to sideload updates to an iPod is silly. Really silly. Imagine if we still had to take our Blackberries back to our PCs to synchronize our email.

When I was working to startup Fluxe / MediaMaster we were looking to solve exactly that problem, but the grayness of copyright law and the fear of music publishers holds that evolution back. Im hopeful that the recent Cablevision ruling clarifies a number of the associated issues and lights the way forward.

As far as iTunes goes, though, I dont think its the death of the application or the store. Just like most still use Outlook to manage email on our PC, I think most people will want a robust PC client for managing music. And, I think people will go to the iTunes store to buy media for many, many years to come.

Streaming vs. Download

Bill Rosenblatt:

People feel the need to own [and download] music because thats their experience with physical music products. But if people can be educated to get their music digitally, then its one more step to educating them to rely on their music being available on some great celestial jukebox. The record labels arent in a position to do the educating, so that task will fall to ISPs, carriers, etc.

Im not saying were there yet, but I see this coming 5-10 years down the line. In my own case, the very few music albums I have bought over the last year and I am a voracious music hound are those that arent available any other way. Like Frank Zappas catalog on Rykodisc, now owned by Warner Music Group.

Brian Lakamp:

To me, stream vs. download is an issue of how you access content to which you hold rights, rather than an issue of ownership. In Brians world of the future, consumers will keep their media collections in the cloud, sometimes streaming on-demand (when theyre connected) and sometimes downloading files (for offline, disconnected scenarios).

As for the ownership model, I think were going to see that continue a lot longer than you suggest. I believe that humans are fundamentally collectors, who like having stuff they own and control. (How else can one rationalize the extent of DVD sales at $20 per disc, when there is a rental market readily available?) I'll wager that consumers will continue to buy media, but look for increasingly robust means for accessing their stuff.

Paid vs. Free

Bill Rosenblatt:

People wont pay for just the bits of music for too much longer. Look at the stats that BigChampagne just released on Radioheads much-ballyhooed name your own price scheme: apparently at least an order of magnitude more users got that Radiohead album from illegal P2P networks than from Radioheads own site, even though Radiohead made it possible to name a price of zero.

The music industry is in the process of capitulating on this. Now that everything is going to MP3 for permanent download, and all of the major sites have essentially the same catalog, there is going to be little to differentiate among retailers except price. That plus the powerful downward pull of illegal P2P equals prices on permanent downloads that drift down to the price of manufacturing and distribution, i.e. zero.

My view is that the major labels see this coming, so they are pinning their hopes on a combination of ad revenue (MySpace) and subsidies from device makers (Comes With Music). People will pay for value added services, but even then more and more of them are going to be free.

Brian Lakamp:

I take a different view of where things are headed. As I mentioned above, I think people will continue to pay for bits where they find value. Unfortunately, the music industry and the studios still haven't resolved the gulf between perceived value and pricing. Thats the reason consumers turned to alternate, often illegal, venues for acquiring their content.

Perceived value is highly tied to DRM and access rights. I think were going to see Hollywood hit speed bumps through that education... the same ones that the labels hit.

And, both the labels and Hollywood have yet to fully understand the ramifications of network-centric media. The lawsuits against MP3Tunes and Cablevision underscore that.

The pressure is on the copyright holders to figure out the new model fast, before consumers, technology and the courts take their leverage away entirely. Or, before Apple does.

And, to address your comments about P2P... The labels, government, and ISPs will eventually figure out a way to keep P2P to an acceptable level, just like Visa and the banks found an acceptable level of fraud. Its a natural part of the system that can be minimized, but not eradicated. Ubiquity of product across a broad number of legitimate outlets will also help with the P2P problem over time.

Predictions

Bill Rosenblatt:

As far as new iPhone/iPod Touch versions of services like last.fm and Pandora are concerned, I think they will gradually eat into iTunes sales. The fact is that very few people buy tracks from iTunes continuously over long periods of time; they buy some music, then stop, then get tired of what they have, yet dont like the idea of having to pay a buck (or equivalent outside the US) for each new song.

Services like last.fm and Pandora (and others) are where these users go. They great examples of the power of social networking applied to music, and they deserve their growing user bases. Its just highly unlikely that the music industry will ever get people to pay for any of these services; theyve lost the window of opportunity.

By the way, Brian, I totally agree with your statement Perceived value is highly tied to DRM and access rights. The problem is that in giving up on both DRM and more and more paid access models, the music industry is undercutting its own ability to create such perceived value. Hollywood, at least, has some breathing room in the years to come.

Brian Lakamp:

Bill, you're probably right about where things end up, but I believe it'll be a much longer haul than you suggest. I'd guess that these services will have a net positive impact on iTunes sales in the next year. The iPhone does a great job of expanding music discovery through such services and making the iTunes store readily available at the "aha" moment.

Human behavior changes slowly and technology seldom evolves as fast as experts predict. To wit, cell phones still haven't obviated the need for land lines. And like cell phones to land lines, services like last.fm and Pandora may ultimately eat into iTunes', but not for some time.

That brings today's topic to a close. Many thanks again to Bill Rosenbaltt for joining me today. Hopefully, we can get Bill back on future posts to add his perspective to Fluxe.

Cablevision's Seismic Ruling

brian@fluxe.com (Brian Lakamp) — Thu, 07 Aug 2008 13:41:55 -0700

Monday, the Court of Appeals for the 2nd Circuit overturned a previous ruling against Cablevision that deemed their RS-DVR to be a violation of copyright law. The reversal is an important one. So important, that Craig Moffett of Bernstein Research referred to it as seismic. I agree.

First, a little background.

In 2006, Cablevision announced a new service named RS-DVR (Remote Storage Digital Video Recorder). The service enabled Tivo-like functionality for subscribers without requiring them to buy a new set-top-box with a hard disk. Cablevisions technology achieved this by moving storage of recorded programs into the network. In order words, when a consumer clicked Record on a program, the recording was kept on dedicated storage at Cablevisions server farm, rather than on the consumers local set-top-box.

Hollywood didnt like that and filed suit. Hollywood argued that Cablevisions service infringed their exclusive rights to reproduction and public performance, granted under Copyright Law. Last year, the District Court for the Southern District of New York agreed with Hollywood on both counts.

The 2nd Circuit overturned that ruling. With regard to reproduction, the 2nd Circuit found that the versions of the programs that resided in Cablevisions buffer (prior to making the permanent recording for consumers) did not amount to a copy. And further, the 2nd Circuit found that Cablevisions system was essentially the same as a VHS machine, controlled by the consumer, so that the bits simply flowing through Cablevisions system did not constitute copies made by Cablevision.

With regard to public performance, the 2nd Circuit ruled that by limiting the playback of a specific copy to a single subscriber, Cablevisions implementation did not rise to the level of public performance.

Interestingly, the court specifically noted that it did not address the issue of contributory infringement, leaving that door open for Hollywood. Further, the court was clear in stating that the holding did not generally permit content delivery networks to avoid all copyright liability by making copies of each item of content and associating one unique copy with each subscriber to the network, or by giving subscribers the capacity to make their own individual copies.

Nonetheless, those notes aside, the ruling is a huge win for Cablevision, system operators, consumers and technology companies. Time Warner Cable has already announced plans to launch a similar service on its network if the ruling stands. And, industry analysts are widely predicting rapid adoption of these offerings.

Looking more broadly than just PVR capabilities, the ruling creates new thresholds for services that manage network-based media. It certainly has ramifications for online storage providers like Carbonite, synchronization tools like Avvenu, and online media lockers like MP3Tunes, MediaMaster and Anywhere.fm (imeem).

I find the impact to online lockers to be the most interesting. The ruling offers some clarity on the legality of such applications and the thresholds that must be met to avoid liability. It opens the door on these applications, and we may not be far from a day when consumers can, without legal ambiguity, store their music collections in the cloud and access them from registered devices. Flickr for music, with a couple nuances.

It gets even more interesting when one starts to think about the long-term implications for video. The ramifications of the Cablevision ruling, paired with those from the recent Kaleidescape case, make for an interesting future possibility Some future operator might (with a creative implementation) offer consumers the ability to store their entire DVD collection in the network and retrieve streamed versions of their titles through registered devices. Pretty cool.

Short story, the ruling starts mapping out what network-based media solutions will look like. And, for my $0.02, it thankfully allows us to move the conversation up from home networks (yawn) to personal networks that realize the promise of the Internet. Web 3.0.

For those of you interested, heres a copy of the Cablevision ruling.

The End of an Age

adamdshaw@gmail.com (Adam Shaw) — Sat, 02 Aug 2008 07:17:00 -0700

The golden age of the cable network is over. It was a fantastic run, but a downturn in core economics is looming.

The heyday began in the 1990's when the cable network finally overcame a negative bias relative to its cousin, the broadcast network. Thereafter, cable networks trailblazed new content offerings and stepped forward as the revenue and profit driver in many companies media arsenals.

But the maturation of the Internet as a video delivery vehicle will have profound effects on the business model of content delivery, most notably for cable networks. While a dramatic downshift in the importance of cable programming is unlikely, in the months ahead, events will play out that will significantly pinch the lofty margins that leading cable networks now enjoy.

To understand that, lets first look at the evolution of the cable networks underlying business model.

Evolving from an affiliate process put into place by ESPN in the late 70's, cable networks receive subscriber fees from cable operators for every home that receives them. They also receive advertising revenue, which like affiliate revenue, is tied directly to the number of homes that receive their programming.

As the cable and satellite industries competed and thrived, and the subscriber base grew from 50 to 100 million households, the cable networks benefited handsomely. The costs to program the networks remained relatively constant but the revenue pie kept getting bigger. While a good portion of increased profits were invested back into the networks in the form of original programming, a steadily increasing amount was still left over to fall to the bottom line.

The rise of online video is going to change that trend.

The catalyst is not from families who receive cable today ultimately deciding they dont need cable anymore. Habits are hard to break. The issue at hand is todays youth. Todays college students spend a tremendous amount of time online. And the majority is well aware of the glut of entertainment choices that are available.

From news to user generated content to new entertainment portals like Hulu, there is an inexhaustible amount of content available free on the Internet. When this generation of users become heads of households in a few years, why would these individuals pay $75/month for basic cable?

Of course, there are a few reasons commonly given:

Because they will want to watch programming on their 42 inch plasmas

Dont forget, this generation was raised on their computers. Watching video on a laptop is natural. Plus, undoubtedly, in two or three years, a myriad of seamless solutions will exist that bring online content onto one's plasma or LCD. Misfires from Apple, Akimbo, Vudu and others will soon be forgotten.

Because they will miss out on water cooler programming

A tremendous amount of top tier content is already available online and the inability to receive one or two shows will not make a difference. For the last 15 years, a full seventy percent of the country opted out of HBO to save $10/month rather than be able to chime in about Tony Soprano's latest whacking or Carrie Bradshaw's dating flaws.

Because of live sports

There's always the option to visit the local pub or sports bar, not to mention the amount of live sports that is being offered on line, including MLB, the NCAA tournament, the Olympics and the NFL's recent decision to simulcast Sunday night games online.

So what does this mean? It means that the number of multichannel homes (cable plus satellite plus telco), after steadily increasing for 40 years, is peaking. And when, inevitably, the number of households begins to decline, so will the revenue pie for cable networks.

MSO's like Comcast will have to adapt, and that will have significant reverberations. As households decline, the fixed costs for these operators will be amortized across a smaller base, pressuring margins. Cable operators are going to be forced to selectively drop channels in order to make the point that affiliate fees must come down.

The most exposed are cable networks with limited corporate backing, the so-called Independents. (While the majority of cable networks are part of network groups owned by major media companies, there are still some that have chosen to go it alone.) These Independents will find themselves in the weakest negotiating position, and thus first to face the changing landscape.

But soon after, even the big network groups will have to face the reality that in a world of infinite choice, and in a world where most programming is available online, the threat of pulling a network from a cable operator will not have the strength that it once did.

As cable succeeds in lowering costs by negotiating lower affiliate fees, they will also try to compensate for lower cable revenues by monetizing video accessed over broadband. There are two ways cable can achieve this. They can create packages based on levels of usage, whereby those who consume more data over the Internet pay more. Or they can create premium packages of content that is exclusive to their walled garden.

There is a third way, which is to charge the companies that are pushing out the content (e.g. YouTube) rather than those who are consuming it. Doing so, however, conflicts with a principle entitled Net Neutrality, a topic that is already being scrutinized on Capitol hill, and is clearly the most thorny.

If cable succeeds in creating a revenue model for Internet delivered video, they will inevitably be compelled to share that revenue with the content creators, which will lead to an increase in the quantity and quality of video produced specifically for broadband distribution. Cable television as we know it will no longer be the only game in town. This increase in competition will put additional pressure on cable networks' ability to charge high fees.

So what does all this mean? Today cable operators benefit greatly from video content on cable but find Internet video costly. In a few years this gap will narrow, as the economics shift. And as thousands of new content choices populate the world wide web, and cable designs an optimal way to harness some of these economics, the days of cable networks as pillar of predictable revenue growth for media companies will be a thing of the past.

Whither DRM? (Part II)

brian@fluxe.com (Brian Lakamp) — Fri, 01 Aug 2008 08:28:00 -0700

Recently, Yahoo announced the shuttering of its Yahoo Unlimited Music service. Unfortunately, the move left Yahoo with a consumer problem and highlighted an issue with selling DRM tracks... Purchases are forever, and consumers get ticked when a store stops providing licenses for encrypted media they've purchased.

Sony ran into the same issue when it closed its Connect store, as did Microsoft ran when it announced plans in September to turn off licensing servers. In Microsoft's case, consumer backlash ensued, and Microsoft was forced to keep the servers running until 2011.

To address their consumer issue, Yahoo offered to replace the tracks via Rhapsody credits. Presumably these credits can be used to buy unencrypted versions of the songs.

But, think about that. Stores open and close all the time. Either consumers get screwed, or a failing enterprise is saddled with an enormous burden. Imagine if Tower Records had the same overhang when they closed their doors after decades of music sales.

The obvious answer to this problem is to sell consumers music in a format that doesn't require a company to maintain licensing servers indefinitely... aka DRM-free. In fact, this dynamic is one of the major reasons why I believe that purchases are headed to DRM free. (The other major reasons are device interoperability and Apple's Fairplay-protected control of the marketplace.)

To be clear, I'm not saying DRM itself is a problem. DRM is necessary and appropriate for time-limited models of media consumption, such as rentals or "access pass" subscriptions. Simply, it isn't for purchases. Even for movies.

To oversimplify, here's a diagram representing my view of where DRM ends up for different consumer models...

Many in Hollywood will argue that movies always need to be encrypted, otherwise the market will be decimated. I take that point, and understand the fear, having spent several years at Sony Pictures thinking about exactly this problem.

It's worth noting that the music industry made the same plaintive cries. Frankly, I'm surprised that we haven't seen more discussion about music's lessons as they pertain to video. The driving dynamics aren't really different, despite what some Hollywood rationalizations may assert.

That said, there may be some nuances to how sell-through for movies evolves. I could see a scenario where Hollywood effectively windows DRM by bundling future, DRM-free download rights with protected offerings that are immediately available, such as HD pay-per-view. We'll see.

For those of you that are interested in further discussion about the DRM-freee evolution, I highly recommend listening to a recent speech given by David Pakman, CEO of eMusic. David is a friend and colleague, who has been insightful, with uncanny accuracy, far ahead of most industry observers, including yours truly. You can download the speech here.

As for timing of the broad transition to DRM-free, it's going to take Hollywood a while to get there. Despite the reality that the music industry is the canary in Hollywood's coalmine, the lessons are ones must be learned first hand.

That education will take time and several failed experiments. It'll start with TV content and then work its way up the chain.

The Video Games

brian@fluxe.com (Brian Lakamp) — Wed, 30 Jul 2008 10:31:00 -0700

The relentless march of convergence continues. Two weeks ago at E3, both Sony and Microsoft announced new video capabilities for the PlayStation and XBox gaming consoles...

Microsoft announced a partnership with Netflix to stream titles directly to the box. Microsoft also added Universal NBC content to the XBox video marketplace.

And, Sony launched its video service on the PlayStation. Using the service, consumers will be able to rent and purchase titles (TV & movies) from MGM, 20th Century Fox, Lionsgate, Warner Bros, Disney, Paramount, Turner Entertainment and Sony Pictures.

The moves put Wii on its heels, forcing it to identify new features to compete and differentiate. It'll also put pressure on Apple to offer a better solution than iTV 1.0 for getting iTunes content to the TV. (We've mused before that an Apple/Wii connection could be a powerful marketplace disruptor, if differences between the two corporate cultures could be bridged.)

The long and the short of it, though, is that the moves are a significant step toward bridging the computer/TV gap in a mass market way.

Let's take a look at the value that each of these capabilities individually brings.

The NetFlix deal is the most notable of the announcements. It's good for consumers, and it's good for both partners. NetFlix gets a new distribution outlet for its digital offering that has access to 12 million XBox Live customers. And, XBox gets a differentiating content offering with 8 million subscribers that helps address the Blu-Ray advantage that PlayStation has enjoyed. (With that in mind, I do find it is curious, though, that Microsoft requires consumers to be Gold Level members of XBox Live to take advantage of the NetFlix capabilities.)

The rental capabilities are definitely nice additions to the platforms. We'll see consumers renting in modest numbers.

The sell-through offerings are the least interesting. Frankly, they won't change anything. I'll wager that sales on these platforms are going to be virtually non-existent.

Why? Consumers aren't going to buy a title (for permanent ownership) if the future ability to play it is in question. (Sony's abandonment of Connect and Microsoft's flip-flop on support for DRM'd music tracks don't help there.) In other words, consumers are too savvy to buy a DRM'd product other than Apple's.

Plus, consumers are looking for a media solution for their libraries, not separate solutions for music and video. Do we really think consumers are going to buy music from Apple and then commit to buying videos on a completely different platform from Sony or Microsoft... especially given sales of the iPhone? No way.

If I were working at either PlayStation or XBox, I'd step back from selling DRM'd content and start identifying video content that can be sold without DRM. The first platform to get there will make some waves, though the advantage will likely be short lived, unless the deal is an extended exclusive.

Anyway, back to the main point. I'm a big fan of the moves by both platforms because they create new vehicles for getting premium IP-delivered content on the TV.

Up next, getting those offerings integrated directly into the TV. Sony is showing the way with its upcoming experiment with Hancock on Bravia TVs.

Hollywood and Net Neutrality

brian@fluxe.com (Brian Lakamp) — Fri, 11 Jul 2008 07:07:00 -0700

Monday, Anthony DiClemente, a Lehman research analyst, downgraded expectations on major media companies including CBS, News Corp, Disney, Time Warner, and Viacom. DiClemente noted the impact of digital media on the traditional business, and made comparisons to the music industry. DiClemente went on to question Hollywoods preparedness for the coming environment in digital.

DiClementes point is well taken. In fact, we believe that the history of the newspaper and music industries are great predictors of the challenges Hollywood will face. Whether or not Hollywood can better tame the momentum of its physical media business to react differently remains to be seen.

Hulu is certainly a good sign, an indication that a couple studios are willing to make unconventional, aggressive moves in the new arena. The studios position on Net Neutrality, however, is not.

Let's take a look at Hollywood's position, but let's start with two definitions:

Net Neutrality

Download Caps

While I believe that Net Neutrality (and avoidance of Download Caps) are in the publics best interest, I also believe that the network operators have the right to monetize their assets. And, it is up to consumers and 3rd parties to advocate strongly for an open Internet, using all their wiles and persuasiveness to convince network owners to rethink these strategies.

Strangely, of all the players that Id expect to line up for Net Neutrality (and against Download Caps), Hollywood is going the opposite way. It is supporting the network operators and opposing Net Neutrality.

Hollywoods reasoning goes something like this If we support the cable companies on this, theyll support us on implementing anti-piracy measures. (Heres a link to an article that further describes the MPAAs position.)

Uhh sure. The cable companies crossed their hearts and double pinky swore, so its a done deal. Right?

The experience of Virgin Media should be educational. Last month, Virgin Media paired with the BPI to send out warning letters to its broadband customers who appeared to be engaging in illegal file sharing. After consumer backlash and a PR mess, Virgin was forced to backpedal and state that they would not cutoff their users. (For those interested, heres a link to an article about the Virgin Media situation.)

The CEO of Carphone Warehouse, a Virgin Media competitor, distanced himself from Virgins move and quickly responded to the situation,

I cannot foresee any circumstances in which we would voluntarily disconnect a customer's account on the basis of a third party alleging a wrongdoing."

Thats instructive of how this might play out in the US. Hollywood may be banking more heavily on support from the network owners than it should. Worse, download caps may actually end up giving the network owners incentives to support P2P, which generates traffic and thus $$.

The possible insincerity of network owners aside, Hollywoods position against Net Neutrality is also problematic because it dampens development around digital video.

If DiClementes report underscores anything, it is the need for Hollywood to embrace the digital world aggressively and deal with the disruptive technology head-on. To do that, Hollywood needs to invest in next generation services like Hulu and drive innovation in the area.

Hollywood owns the heaviest bits on the Internet, getting even heavier as we move to HD. To spur innovation, Hollywood needs an open Internet where those bits move as cheaply as possible. Maintaining Net Neutrality is important to services like Hulu, NetFlix, Vudu and CinemaNow, who would otherwise face much less attractive margins.

By lining up against Net Neutrality, Hollywood is effectively agreeing to a tax on bits and constraining growth of the digital business. Can you imagine WalMart or trucking companies getting behind a highway tax based on load weight? I cant.

Itll be interesting to see this evolve. The cable companies are pushing hard to preserve their position in the future, and you cant fault their capitalistic incentives. But, from where I sit, Hollywood doesnt appear to be doing the same.

Analog Dollars and Digital Pennies

brian@fluxe.com (Brian Lakamp) — Mon, 07 Jul 2008 09:02:33 -0700

A couple weeks ago, John Malone took aim at Hulu, accusing it of turning analog dollars into digital pennies. Coming from a guy who has his hands in almost every aspect of the content business, that's worth exploring.

Malone's beef As Hulu catches on and PC/TV connectivity improves, Hulu stands to undermine multiple, billion-dollar, content distribution businesses...

With Hulu, why watch Fox when it is broadcast? It's not on demand and has a lot more advertisements. Why pay NetFlix $12.99/month? Hulu's library of TV and movies runs deep enough. And, why bother shelling out $80/month for programming from the cable company?

That's the problem with Hulu. It's a great deal for consumers. It has plenty of shows to watch - good ones. It's easy to grab shows and embed them in blogs or social networks. And, the interface is intuitive and free of clutter.

Last night, I watched Rob Roy full screen on my laptop, which sat at the foot of the bed. In other words, a "lean back", not "lean forward", experience. Think about that.

And, as I'm writing this, I've been watching Arrested Development. Check it out if you like

Frankly, it's hard to find fault, other than perhaps some holes in the content offering. Even those gaps are forgivable as soon as you find something else to watch.

But, Malone's beef isnt with the quality of the offering. It's with the economics. Hulu doesn't make much money. (For a detailed analysis, see the Silicon Alley post on Hulu economics.)

Short story, Hulu only airs 4 ads in the typical half hour show. (When broadcast, that same show contains 16 ads.) Worse, Hulu fails to capture subscription revenue that other, competing content outlets secure.

So, Malone's right. There's real money and business at risk. But, his comments dont address two key aspects Eyeballs are straying to the web anyway. And, Hulu probably hasn't locked its business model.

Whether YouTube or something else on the web, consumers are moving entertainment hours online and looking for alternatives to their hefty cable bill. Hulu is doing a great job of retaining those mainstream eyeballs that are at risk of wandering elsewhere a much better job than the labels have done to date with their consumers.

And, there's no reason to assume that Hulu has locked on a business model of one ad for every five minutes of airtime. I could easily see Hulu incorporating a subscription model perhaps something like $5 / month for deeper library, instant access to shows (simultaneous with broadcast) or HD access directly from your Samsung TV.

We'll see this evolve. Hulu is building audience, and thus, leverage. They'll use that leverage to extend the platform and monetize it.

It'll be interesting to see how the rest of Hollywood reacts. There's been press about Disney forging ahead with ABC.com, but I doubt it will be able to compete apples-to-apples in the long-term with an aggregator like Hulu. It takes scale and content from multiple sources.

Hulu may be earning digital pennies, but according to Silicon Alley Insider it's racking up roughly $70 million worth of them in its first year. That's a great start. Perhaps Sony, CBS and Warner should quickly consider banding together for a "Me Too" offering, so there's a credible competitor against an emerging gatekeeper.

Lala's New Model

brian@fluxe.com (Brian Lakamp) — Tue, 17 Jun 2008 08:45:55 -0700

A couple weeks ago, Lala announced a deal with Warner Music Group (one of its investors) to try a new model for selling music. It would offer consumers "stream only" music tracks for $0.10. Unlike Amazons download model, Lala's tracks cannot be downloaded, requiring that consumers be online to access their collection of purchased music.

Compared to $0.99 at Amazon and iTunes, $0.10 sounds like a pretty good deal. But, consumers have access to free, streamed music through a bevy of other outlets such as Last.fm and MySpace. In a blog post, Michael Robertson made that observation pointedly,"You can get full length streaming versions of U2's Pride on Napster, Imeem or even better your choice of 6 videos from YouTube for free. So what would convince someone to buy the Lala version?"

Robertson's observation aside, what really strikes me about the whole Lala experiment is the differential in price between the Lala model and the MP3 downloads. At $0.99, MP3 downloads are priced at 10x of the "stream only" price.

That difference implies one of the following: the utility of downloads is vastly superior to "stream only", supporting the price differential, or downloads are overpriced.

Since pricing tends to invite highly subjective views, we'll spend today examining the relative utility of the two models.

Let's start with what a consumer can do with Lala tracks. A consumer can... go to Lala.com and stream their track.

Hmmm. That's not that useful.

Here's what that misses. I can't burn MP3s to a CD for listening in my car. I can't put a copy on my iPod. I can't play my music through my Tivo or Sonos. I can't listen to my music on the frequent flights that I take. I can't scrobble Lala tracks with Last.fm. And, I can't (pleasurably) listen to my music on my cell phone, because it lacks a satisfying browsing experience.

Sure, somebody will say, "Brian, cell phone interfaces are improving everyday, and wireless will soon be everywhere."

I disagree. We're 30+ years into the wireless revolution and almost everybody I know still has wireline service at home. Point is, wireless is improving steadily, but ubiquity is a long way off.

And, while most devices will connect to the network, many will not have a browser. Instead, they'll incorporate some optimized experience on a customized UI.

Access to my Lala collection on such devices requires Lala to do individual deals with the manufacturers. I'm not yet prepared to bet that those deals will get done.

Put another way, the Lala model is highly proprietary, and thus highly restrictive. That's not what I'm looking for, even at $0.10 per track.

MP3 downloads are open, which is why so much momentum has built around them. I'd much rather pay $0.99 for an MP3 (that I can keep forever), than buy into a new silo... particularly one whose future is uncertain.

NetFlix Taps Roku

brian@fluxe.com (Brian Lakamp) — Thu, 22 May 2008 15:24:09 -0700

Most have you have probably heard about this week's Netflix announcement, a partnership with Roku to distribute a new set-top-box through which Netflix titles can be streamed.

With the device's highly palatable $99 price point, Netflix and Roku are receiving adulation and praise. Most pundits and press are hailing it as the second coming, a pivotal point in digital media.

Here's my beef. I don't want another set top box.

I'm trying to consolidate under my TV, not expand. My cable card Tivo made me happy because I have 1 device now where there used to be 2. PlayStation3 made me happy with its decision to bundle a Blu-Ray player. I'd rather not add yet another device that serves only one purpose.

Past experience demonstrates how hard it is to get consumers to adopt new set-top-boxes... Tivo, Akimbo, Vudu, MovieBeam, Media Center Extenders and iTV, to name a few.

Can't Netflix do a deal to consolidate with an existing platform, like PlayStation, XBox or Wii? Or maybe work the service directly into the TV, with some enterprising manufacturer. I understand they tried that strategy with Tivo, and it fell through, but there has to be a solution.

Don't get me wrong. I'm a fan of Netflix; I've been a subscriber for over 3 years. It's a great service.

Regardless, as much as I like Netflix, I'm not going to buy a dedicated box to get the service on my TV. Even at a price as low as $99. But, if you build Netflix into a Wii, you've got me. On both counts.

Speaking of which... Why hasn't Apple purchased Nintendo to solve its iTV problem and to get under millions of TVs? Seems that'd be a savvy move. Sure there'd cultural clashes between the two companies initially, but Steve could use his Jedi mind tricks and reality distortion field to make that combo the next big thing.

Examining MP3 Sales

brian@fluxe.com (Brian Lakamp) — Wed, 21 May 2008 09:06:08 -0700

An article in Digital Music News today reported on music sales figures in 2007. The piece referenced IFPI figures that show a 5.6% decline in global sales figures for the music industry over last year. According to the IFPI, total revenues for the industry slid in 2007 to $29.922 billion.

Of course, the continuing decline is a difficult situation for the music industry. But, where things go from here is a matter of debate. Optimists predict that gains in digital will soon overtake losses elsewhere, halting the slide. Pessimists paint the picture of an industry with ever declining sales, on the slow slide to zero.

Frankly, I'm an optimist. I'd wager that the year-over-year declines will slow down, and we'll reach an equilibrium in the next 24 months.

Sitting on the other side, players like Bob Pitmann (and several close colleagues) suggest that tracks are headed straight to $0.00 (and should be given away), with the premise of eking out a business on the back-end (in concerts and merchandise).

No way that's true. Concerts and merchandise will certainly make money, but sales (CD and digital download) will be a large portion of music industry revenues for a long time running. I'm pretty sure I'll buy a lot more music than I'll ever pay for concerts.

And, the Pitmann model doesn't offer a believable accounting of how up-and-coming artists get from obscurity to being a LiveNation prospect. How does an aspiring new artist get to that level without the development, distribution and marketing that the major labels offer?

Sure, there are the Ingrid Michaelsons that break without a label, but I believe that the Ingrids of the world are anomalies; the exception, not the rule. For every Ingrid Michaelson, there are many artists like Sara Bareilles... an incredible talent, who was challenged to break out of the LA scene, until SonyBMG catapulted her into the national limelight.

Back to music sales. I know that many will disagree with me, but I believe MP3 sales are a business with real room to grow. Granted, it's slowing at the moment, but that's because we've reached the limits of what Apple can do as a single outlet, without the broader marketplace having yet been ignited.

In response to yesterday's post, a respected colleague of mine asked me how the MP3 experiment was going. The somewhat cynical tone of the question conveyed his belief that the move to MP3 has failed to generate any new growth.

There's no doubt that we have yet to see real growth in track sales. Yet.

Amazon has only been open for business for a couple months. I'd wager that Amazon is doing respectable sales for its first six months, on par with iTunes over its comparable period. Remember, iTunes started slowly... It only sold 12 million tracks in its first six months. Very seldom does a venture generate $100M sales right out of the gate.

The MP3 market is in its very early stages. Napster just opened up yesterday, and Wal-Mart still doesn't have a full catalog. MP3's need to be made much more widely available before we'll see it hit its mass market potential.

I suspect we'll see a slew of MP3 deals over the next 12 months. There are a number of web outlets where it'd be great to see a seamless integration of MP3 sales:

- Social networks (MySpace, imeem, Facebook)
- Discovery networks (Pandora, iLike, Last.fm, the Filter)
- Portals (MSN, Wikipedia, YouTube)
- Radio Station Sites (CBS, Clear Channel)
- Retailers (Wal-Mart, Buy.com, BestBuy, Target, CircuitCity)
- Search Engines (Google, Ask, Yahoo)
- Wireless (Jamster, Motorola, Blackberry, carriers)

Growth of the MP3 market will be driven by ubiquity of the product, but it will also be impacted by the seamlessness of the experience. Amazon's effort is a good first run, but there is still room for improvement... possibly via browser plug-in, a more elegant interface for the MP3 store, or both.

And, players like iLike, Pandora and Last.fm could make the experience of buying MP3s much, much more integrated. Right now, they ship users to Amazon, which is downright clunky. Consumers get worked up, in a frenzy of discovery, ready to buy the first of a handful of songs, and then they get shipped to someone else's site?

A big part of the problem there boils down to economics. Selling MP3s is a break-even business at best. Of a $0.99 track, the labels take roughly 70% and the publishers take roughly 9%. (Of course, those numbers are dependent on volume discounting.) But, the short of it is that there's no room for an emerging retailer to make a return. It takes massive scale.

So, players like the iLike and Pandora made a simple business decision... punt their break-even business to Amazon and Apple.

The labels could influence that by playing with splits. That is, offering new retailers licensing terms at something around $0.60 (rather than $0.70), while holding consumer price at $0.99. It'd be interesting to see what adding 10% to retailer margin would do to the marketplace incentives.

If prices are headed to $0.00, as the pessimists suggest, it'd seem to be pretty low risk. Nonetheless, it's doubtful that the labels will take such an approach.

Coming back to the overarching point... Talk of the demise of the music track marketplace is wildly exaggerated; there's a healthy, vibrant marketplace to be had. I believe we'll see that take shape in the next 12 months.

Whither DRM?

brian@fluxe.com (Brian Lakamp) — Tue, 20 May 2008 06:29:44 -0700

Over a year ago now, EMI and Apple announced DRM-free music downloads. Ignited by EMI, the trend spread to all the major labels by January of this year, when Amazon started offering a full catalog of unencrypted MP3s.

At this point, there's no going back, and with today's announcement by Napster, the steady migration to DRM free (for purchased tracks) continues.

Interestingly, the move to DRM free has proved far more palatable than the dire predictions. Bill Rosenblatt, author of DRM Watch and an expert on content protection, notes, "The industry has finally been able to get some hard data about how removing DRM restrictions from legitimately purchased tracks affects piracy... The statistics show that there's no effect on piracy."

That's an incredibly important takeaway.

DRM has been pushed by content owners to protect markets, often to the detriment of consumer usage allowances. If DRM is not protecting a market or business model meaningfully (as it does with subscription or rental models), there's little reason to impose a frustrating experience on consumers who purchase content through legitimate channels.

Even within the iTunes ecosystem, which is one of the least intrusive DRM implementations, consumer frustrations exist. And that's before we start talking about more maddening implementations, usually protected by Windows DRM. In fact, I'm willing to bet that Bruce Banner purchased a couple Windows DRM tracks.

So, the question of DRM for purchased content turns to Hollywood. (Despite the Hulk reference, I'll set movies aside for today, and focus on TV content.)

For all intents and purposes, TV is broadcast in the clear. There's no shortage of sources to populate pirate networks with TV content, and not surprisingly, pirate networks are overflowing with deep libraries of TV content.

Looking at music's experience, I'll ask the question.... Does it make sense to protect TV shows that a legitimate consumer wants to acquire?

Probably not.

Given the volume of TV content on pirate networks, it's unlikely that offering TV shows unencrypted would add to the piracy problem -- any more than offering unencrypted music has. In all likelihood, the sale of unprotected TV shows would accelerate the legitimate market somewhat, because the utility of the legitimate product would be higher, comparable with the utility of content acquired illegally.

Here's my prediction... We're within 18 months of a world in which an enterprising licensing executive strikes a deal to sell unencrypted TV shows through a prominent web outlet. It may be billed as a trial or test, but it's coming.

Clouds on the Horizon

brian@fluxe.com (Brian Lakamp) — Sun, 18 May 2008 10:47:48 -0700

For those of you that havent read Bernsteins latest research report, And Now for the News The Emperor Has No Clothes, I highly encourage you to find a copy and do so. An honest and hard-hitting report, it examines the forces driving the death of journalism and the decline of major news media.

Pushing the analysis beyond news media, the author of the report, Craig Moffet, notes that we are headed down the same self-destructive road for other kinds of traditional media, as well. The report highlights two key learnings related to video over the Internet, First; consumers wont pay for content on the web, so it will have to be ad-supported. And second; it wont be ad supported.

Funny, but troubling too.

On the positive side, iTunes offers $4,000,000,000 of evidence that there is some propensity of consumers to pay for content on the Internet. Sure, iTunes growth has slowed somewhat, but its certainly not all bad news on the sell-through front.

And, It wont be ad supported is an overstatement. While ad revenue alone cant carry the entire load, ads will certainly help recoup a great deal of the cost of production. But, without doubt, some other incremental revenue stream needs to be identified.

To the point, the Bernstein report notes that assuming identical CPMs for web video and TV, and after accounting for lost affiliate fees, a 30 minute program on the web with two minutes of advertising yields approximately 1/8th as much revenue per viewer.

Certainly not a pep talk.

Years ago, Saturday Night Live aired one of their faux commercials for a new financial institution called Change Bank with a very simple consumer proposition -- They make change. If you have a $20 dollar bill, theyll give you 2 tens or 400 nickels, depending on your specific change needs. When asked how Change Bank makes money, the bank manager responds, Volume.

The SNL skit humorously conveys a simple truth... You cant take an underwater business and just multiply it by a big number to get it over the hump.

Unfortunately, the problem doesnt stop with a shortfall in ad revenue. Moffett makes the point that a la carting (aka VOD) is another major issue, In fact, the actual economics of web-based video are far, far worse than this. Our 88% decline ignores the corrosive impact of à la carte on traditional video economics.

That is, by offering shows on a VOD basis, Hollywood is accelerating the unbundling of the episode from the season and the channel. Those "bundles" allow studios to use revenue from the winners to underwrite the production costs of their entire production portfolio, including the losers.

And, we have a good comparable for the impact of unbundling on an industry the music labels. Theyre still struggling mightily to recover from the unbundling of the track from the album.

All in all, the Bernstein report is a sobering piece that speaks to significant challenges ahead in the media industry. Though sobering, it really is a worthwhile read, a superbly structured discussion.

As good as it is, the report fails to offer possible solutions to the challenges it highlights. With challenges come opportunities, and, ever the entrepreneur, I plan to spend more time examining those opportunities. Nonetheless, one is thing is certain Its time for the broadcasters and Hollywood to truly innovate.

Dancing with the Devil

brian@fluxe.com (Brian Lakamp) — Mon, 12 May 2008 08:00:00 -0700

Weve seen this play out with the labels.

The deal that the studios just did with Apple is going to prove to be a problem.

The studios gave up on some long-standing copy protection requirements, but, more importantly, may have just handed a virtual monopoly (in digital sell-through) to Apple.

On the copy protection side, the studios pushed hard for years to include watermarking and Macrovisions ACP technology as part of the deal to go day-and-date with DVD. I havent heard much about either being included in Apple deal, so Im assuming that that both asks fell by the wayside.

Much more important, going day-and-date means that the studios have given up on reserving that release window for more open solutions. Now, the studios have to create a new digital window prior to the Apple window if they want to advantage a competing solution.

Of course, pricing is also an issue. The studios probably feel that theyve won because they are getting their standard wholesale rates (above Apples retail), but Apple plans to eat margin on every sale and offer $14.99 uniformly for new releases. That should be a big red flag.

Heres the rub. Its hard to imagine a real competitor (for digital sell-through) to Apple at this point. Any would-be competitor needs to offer an integrated proposition across PCs, portable media players, cell phones and set top boxes. To lure consumers, that solution needs to be better than the iPod ecosystem. Thats a tall order, even for players like Sony and Microsoft. And, then you have to consider that any such competitor would have to warm-up to the idea of offering all new releases at a loss. Yikes.

Of course, understanding this problem, the studios may accelerate their efforts to push a more open solution in the marketplace. However, unseating Apple will require serious heavy lifting and necessitate concessions by the studios on pricing, window, or, most likely, DRM.

Grab some popcorn. Its going to be an interesting show.

Smashing Windows

brian@fluxe.com (Brian Lakamp) — Sun, 11 May 2008 19:57:17 -0700

Over the last 30 years, Hollywood built up its system of release windows for motion pictures. The system worked roughly like this

First a movie came out theatrically. 3 months later, airlines and hotels offered the title. 4 to 6 months after theatrical, the DVD was released, available to purchase or rent. 60 days after the DVD release, pay-per-view / VOD operators offered the movie, and 90 days after that, it was available to pay television subscribers through channels like HBO, Showtime or Starrz. Eventually, a title would find its way onto broadcast networks, but usually not until a year or more later. When Internet rental and sell-through arrived recently on the scene, the studios slotted it in a new window 45 days after the DVD release.

Pay TV has some nuances, like exclusivity and a second window, about 6 months after the first Pay TV window. The exclusivity clauses are interesting because they disallow a studio from licensing its titles to any other network subscription business during that period. So for example, when Universal movies are on HBO, those titles cannot be offered by NetFlix for viewing over the Internet which is why Netflix actually has holes in its online offering when a title hits its Pay TV windows.

I know it sounds confusing, but its really pretty simple. Click the thumbnail below for a pictorial representation of the traditional window.

The studios built these release windows into several multi-million (if not billion) dollar businesses. Now, technology is dismantling these windows, much in the same way that it unbundled the track from the CD.

In the past week, weve seen departures from the traditional system of windows on 2 fronts Apple and Time Warner Cable. In Apples case, all the major studios except MGM agreed to move the digital window up 45 days, day and date with the DVD release. And, Time Warner struck a deal with Time Warner Cable to offer its movies on VOD basis day and date with the DVD release as well.

Thats significant. Were actually watching the collapse of windows the proverbial Larsen-B ice shelf of the media licensing. The model is morphing into that depicted below.

Where does it go from there?

I see two additional changes on the horizon... changes to the pay TV windows and a new, high-definition pay-per-view window.

As did the labels, the studios will find it necessary to get digital subscription solutions out there more broadly. Thatll require studios to address the exclusivity clauses with their Pay TV partners, whichll happen in one of 2 ways.

Most likely, one of the studios will buck convention in 2010 or so, and decline to renew the exclusivity provision of their Pay TV deal because the NetFlix opportunity overshadows the Pay TV upfront. Or, before then, an enterprising studio executive, finds a way to grant a Pay TV operator an earlier window in exchange for a concession on exclusivity. Either way, the Pay TV windows are likely to move up slightly and exclusivity is likely to vanish.

I also see the emergence of a new, high-definition pay-per-view window. Bob Iger was blasted by NATO (the National Association of Theater Owners) for suggesting as much about a year ago, but hes right and its going to happen eventually.

The studios are certainly leaving money on the table with consumers that want to watch hit, new release movies at home on their high definition TV. I, for one, can imagine paying $49.99 tonight to watch Iron Man at home with a couple friends. In a concession to NATO, the theatrical window will probably remain 2 to 4 weeks prior to the HD PPV window.

In sum, I can imagine a world that settles on the release model below.

Granted, I dont foresee this world for at least 4 to 5 years, but Im willing to bet its whats coming.