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July 30, 2005

IPTV, Netflix, Hollywood, the Short and Long Tales

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Once upon a time there was Wonder Bread. Wonder Bread and its competitors were the ultimate short tail product. Americans liked the idea of getting a packaged good that was fresh and didn't go stale in a day; they also liked the colorful and hygienic packaging and the convenience that came with a pre-sliced and uniform format. Judging from common parlance, it might be safe to say that they found sliced white bread to be a great thing. 
To make things even better, everybody went out and bought electric toasters. And thus toasted white bread became for many the second greatest advance of the Twentieth Century.


What happened in bread was matched in other daily pursuits. Where once there were Hudson, Packard, Studebaker, Kaiser, Jeep etc., there remained Ford, Chrysler and GM  And for a while these giants manufactured a wide range of brands and models but, alas, over time, and consistent with a new bean-counter logic, they'd reduced that choice to a few simple bodies and chassis differentiated by a little chrome, and
a lot of hype boosted by tailfins and leaning girls in shorts, one hand on the hood ornament.


But  lowest common denominator marketing didn't stop with molecules. The spectrum was also consolidated as thousands of local stations were marshaled into the columns of  three major networks. Likewise for print, so whereas a city might have had 5 daily papers, the count dwindled down to one or two.


Market-share dominators, it seems, like first and foremost the idea of managed, predictable choice for their customers. From this perspective it's good that at the multiplex this week you were choosing, say, among Wedding Crashers and the Island or going back to see War of the Worlds for the third time. Quite simply, the supply side dominates this equation.


But this long, hot summer, after a string of good money years, there's a cold shadow hanging over Hollywood and once again we hear talk of a crisis in the industry. Could it be that Hollywood, long shielded from real competition, has become the last of the "white bread" or
short tail
  industries?  Like white bread, with Hollywood you always are supposed to know what you are getting-- sometimes they throw in raisins and cinnamon, sometimes a dose of  poppy seeds, sometimes the loaf is round, sometimes it's square but the proven
formula stays true.


For people in the biz, the quality of the product is not the problem they most often cite in the face of declining seat sales. In a TV interview with one of the producers of the Island, this week,  pirating and its impact on time to DVD were given as the main reasons for the slump. She might as well
have got her talking points from the music arm of one of the studios.


Concurrently, virtual DVD store, Netflix, announced that it now has available more than 45,000 titles for its customer base. Netflix subscribers pay a monthly fee for the privilege of being able to choose among those 45,000 titles and to have a certain number of DVD's on hand at any given time --at Netflix you can keep a disc for as long as you want; when you are finished with it you mail it back to them and they send you out another. Given the reliance on choice, in contrast to Hollywood and the Network owners (BTW,one, Viacom, owns brick and
mortar competitor, Blockbuster),  Netflix is the ultimate new economy or long tail company. If you feel like hunkering down with a season of Tony Soprano, just let them know by putting
those discs at the top of your queue.  Netflix's policy is to have what you want on hand by the time you are ready to have them sent out. Netflix has clearly learned a lot from Amazon,
another long tail success story.


 The customer chooses from this wide variety, and importantly, rank what they've seen. Mining this feedback, Netflix can then let one customer know what other people
with similar tastes have also recommended or rented. Recommendations lead to other recommendations and as you browse, you find yourself adding ever more films, you may have known
little about, to your queue.


In perspective, with all of its 45,000 titles, Netflix has been able to gather and retain a subscriber base of little over 3 million people. Their recently reported quarterly gross revenues came to just over $146 million, the
typical three week gross of a single semi-successful film. Clearly, Netflix, in its present form, resembles more the fly in the ointment than the 800 pound gorilla in the room. But there are also rumblings that Netflix is busy this summer building the technical infrastructure to pave the way for its holy grail, the downloading of films on demand.


What this opens up to is something more broadly called IPTV, or, TV over the Internet.  At present day Internet speeds, even the fastest DSL, IPTV is mainly a novelty, no more relevant, say, than VOIP, or voice over the Internet was, back in the early days of dial-up Internet access. But what it will mean eventually for the cable companies, is real competition. 


Nonetheless, at present network speeds, we are far from IPTV. Still, that hasn't stopped a rapid acceleration in activity lately. 


So much so,  that long before we get to the high speed broadband that makes it really fly, there's already a flurry of activity: thousands of regular video bloggers (vloggers) turn out original content in all forms and shapes, streaming video is a
regular feature of NYTIMES.com coverage of major events, eyewitnesses capture video on their mobile phones and upload it to grassroots news sites that scoop the network, regularly providing the most striking shots of dramatic events as
they unfold; and most recently major players like the BBC, the Associated Press, CNN and CBS have all announced streaming video services on their websites. And just last week, a record number, nearly 450,000 people watched the launch of
Challenger via live streaming video  And for the two companies that most profit from a long tail world, Google and Yahoo, it was no time too soon to announce extensive additions to their video search and play services. In typical
Google fashion, this ia a "beta" site http://video.google.com but it also includes a downloadable video viewer. Google video not only locates
potential videos but lets the searcher know if the actual video is available on line as part of the search result.


Other groups, in a race to gather content, have announced that they will host downloadable video files on their servers at no cost to the content owners. And formats like Bit Torrent have
been developed that help to speed up downloads of (more compact) higher definition video formats.  On university campuses where 2nd generation high speed broadband networks
are available, pirated and copyright-free long films are being distributed.  The other day, for instance, someone made available, legally, the silent German expressionist film the Cabinet of Dr. Caligari,which apparently is old
enough (1918) to escape the long fingernails of the Sonny Bono copyright extension act.


The history of the Internet is the story of the long tail. Analysts often forget that Google, EBay, Amazon and Yahoo (the four great dotcoms still standing), owe their success to the long tail.
Google, of course, devours content as fast as it appears and spits it out in small, manageable doses. Their business model goes: you supply the content and we deliver it decorated with paid ads-- we get paid, you get traffic.  EBay, of course, no longer just sells the long tail remains of old attics, closets and cellars. Buyers often nowadays go on it looking for items so new they haven't yet
been imported much less hit the shelves of stores. The Internet works even in its most mundane manifestations because it is the anti supply-driven channel. Can't find a handle you are looking for in Restoration Warehouse, Expo
or Lowe's, just go onto the web. It's there somewhere, just Google it and off goes UPS.


IPTV requires next generation bandwidth.  Right now, that means the cable guys and the telephone guys, period.  Maybe IP over electric lines will work, who knows.  Maybe high bandwidth across spectrum will function and there will be
some sort of competition, though as we noted above, even three players, isn't usually enough. There is also a role for Congress in pushing to speed up Internet 2.


If it stays at only two, Hollywood will eventually be forced to team with those two main future high-speed distributors, Cable and Telco.  Yes, cabin fever will always be with us, especially for the young, but as we can see
already today in the percentage of business DVD now delivers, big screen, surround-sound, home-entertainment centers will provide more and more of the seats for the movie industry and video on demand will become the main source of
paid entertainment.  It should be noted that already Cineplex seat sales represent only about 50% of the revenue that a movie brings in.  Not too long ago, that number was 85%. High price
tickets, the string of in-theatre ads, baby-shit smelling popcorn, kinky babysitters and choked roads make getting out of the house less and less of a viable alternative for many people. Hollywood will have to look
past the pox-faced kids in the multiplexes and try to figure out what the Gen X,Y and boomers at home will want to download. The year of IPTV? No, not quite but the decade of
the long tail, you bet!


So where does IPTV (or, better, the future) leave Netflix?  Netflix faces the perennial middleman problem, owning neither the content they move nor the distribution channels.  Their real value is in knowing who their
customers are (not terribly important in a two player broadband world, where the Cable and Telco's own the customers) and in the original content they have gathered from their customers through their rating and buying patterns.  There's value there, but not a home run. In our eyes that makes Netflix a buyout target and the future of the long tail, guaranteed. If Rumsfeld can understand it's time to
switch business models in Iraq and start pulling the troops out, Hollywood will probably get the message, too. That's the real value of being a dinosaur, you don't have to be too sharp.  Most of the time, you can count on the other
guy screwing up and as you finally do swing around your tail, that most critters have no choice but to duck and get out of the way.  Tune in later for more on tail.


Posted by dymaxion at 01:37 PM


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July 10, 2005

Spectrum and "The Last Granny"

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On January 1, 2009, television as we know it, will go dark forever if proposals now before both houses of Congress are approved. The final Bill will most directly impact that 19% of the population who get their TV through direct broadcast without the mediation of Cable or Satellite delivery. It's estimated, however, that as many as double that number of households still tune in directly through sets located in areas away from wall attachments or reception boxes.

What's at stake here, however, is more than the last granny or what is commonly seen in the hi-tech world as the unshakable legacy customer who won't upgrade until forced to do so. Granny or gramps may not have very good eyesight or a long attention span and therefore couldn't give a hoot whether the picture on their sets has 480 lines or 20 million. The trouble is that granny and gramps aren't alone when it comes to not lusting after that crisp and bright picture. Long before good ol' TV gets its final pink slip from Congress, the supply of new non-digital capable sets will be cut off. A way back, Congress passed a law that directs manufacturers to outfit all sets under 32 inch sold after July 2007 with HDTV receivers. The law also set January 1, 2007 as the date in which all broadcasters have to transmit in HDTV as well as traditional NTSC. That law, after some muscular lobbying, however, left a gaping loophole for the local broadcasters. It is unenforceable unless 85% of the sets in a given viewing area are HDTV ready.

In a political elite that professes to worship at the altar of "market forces" you also have to wonder what is going on that has Congress, fresh from taking a shellacking on Social Security, battling the old folks over their TV sets. Clearly, there's a whole bunch more at stake here.

At the heart of it is valuable unreal estate that happens to belong to the public.  It turns out that back in the dark ages when TV was being invented, nobody gave two hoots for spectrum. It was nothing you could see, feel, smell, much less bottle. Spectrum was just there and the only people who wanted it were broadcasters, civil aviators and the military. And there was so much of it to go around there was no need for efficiency or to put much of a value on it. As a legacy, radio and TV broadcasters to this day don't pay a single penny to the government for the privilege of using the airwaves and when their licenses come up for renewal they are asked to give back even less today --in public service air-time--  than they once did for the privilege.

Traditional TV, it turns out, is a huge spectrum hog. Getting the TV stations onto a digital signal that can be highly compressed and thus take up less spectrum space will allow the broadcasters to pack much more programming onto a much tinier band. As a result, highly desired bandwidth --something that in the age of cell phones and Blackberries can be auctioned off for an estimated 20-30 billion dollars and undoubtedly foster a whole slew of new businesses and applications-- will be freed up.

Not surprisingly, the military and police also want their share of this surplus bandwidth. From our perspective, there's a pretty easy way to get around the legacy problem. Hand out to granny and gramps as many free converter boxes as they want. That would probably drive the price of a converter down to about $20, while siphoning less than $100 million for the multiple billions that the spectrum auctions will yield.

HDTV can be good for everybody.  So let's look at what's really interesting here. What is it about the market in this case that just isn't working? After all, the consumer gets a better picture and more services, the broadcasters get the opportunity to package more content into their signals, the set-makers get to sell more TV's, the cable companies get to package DSL and telephone into their services, the government gets money for nothing and the citizens get police and firemen able to communicate with each other.

But it turns out that on the ubiquitous smaller sets there isn't that great a difference in the picture. Sure, everybody looks at those HDTV-ready LCD and Plasma sets in the stores and likes the crisp and bright pictures they see. The problem is that as nice as the newer sets are, thus a no-brainer for anybody who can afford the $3,000 plus price-tags, once you get them home there's a major gap in what HD programming you get. Even the major broadcasters have not yet switched over all their new programming to HDTV, local stations are lagging even further behind in their efforts and in some communities the cable companies can't support digital broadcasts even if they originate in HDTV. To make matters worse, DVD's, the big home theatre motivator, do not meet HDTV specifications.

So what's the takeaway?  People like improvements in technology, and if the pain to gain ratio is reasonable, will move along with the crowd. So the problem with HDTV emigration is not that nobody notices the difference but that, most importantly, the move is still too costly. Finally, there's far too much confusion and far too little information. Take the set-making industry's refusal to bundle receivers into the sets they sell. Sure the typical gal who goes out and spends $3,000 and up is probably going to subscribe to Cable or Satellite or both, so she only needs a "monitor'.  That is, until the day her cable service goes down and she finds out she can't just switch over to her antenna.  Put an HDTV receiver into every set you sell, folks! The price will come down to nothing and you won't notice the difference. Michael Dell, it appears, has got this message.

Next, the confusion: somebody has to get honest with people and tell them why this is going on. For example, "straight-shooter" Senator McCain, who recently introduced a Bill that sets the digital transition deadline --cutting off granny and gramps-- for December 31, 2008, cited homeland security concerns, according the WSJ. It's hard to expect Congress to level on their interests for the money and those of the lobbyists around them and this is an area where the MSM (mainstream media) have a big stake, too. But who's left to help us sort this out?  Maybe we should also be debating just what it means to lease or auction off this public resource and where the money will go from the receipts.  The public has to wake up, too, every once in a while.

When the market refuses to budge for all the reasons we mentioned above, there's always the big stick of lawmaking. Maybe Microsoft ought to take heed of this when they finally get around to rolling out their new operating system, Longhorn. Left to their own devices, it may take a long time to wean the public off of XP. And if there is too much pain, some folks, not granny and gramps, for sure just might take the opportunity to switch over to a nicely bundled Linux product. It's a long shot but MSFT might just get the horns. Bill, rev your lobbyists!


Posted by dymaxion at 12:57 PM


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July 04, 2005

Oilrony

Last week we got President Bush's Iraq War status report. True to form, Bush evoked 9/11 and “terrorists” wherever he could. Ironically, neither petroleum nor WMD was mentioned once.

It's little wonder that Bush clings to 9/11 and the War on Terrorism. Prior to 9/11, his court-decided presidency was floundering. Since that defining event he has managed to sustain a highly successful across-the-board attack on civil society shifting balances in wealth, health, education, intelligence, the courts, information flow and civil liberties. From the perspective of analyzing a situation by "cui bono", or who gains?, 9/11 might take on sinister overtones.

Let's start by filling in the boxes: The box Saddam Hussein was in back then, was, of course, the boycott imposed by the UN and enforced by the US and UK air forces. What most rankled the Neocons at that time was the failure of the boycott to topple Hussein and in essence, put into play the huge oil reserves that lie underneath Iraq's territory.

Ironically, one of the major problems US rebuilding efforts have faced in Iraq is the sorry state of Iraqi infrastructure. From hospitals, to electric plants, to water purification systems, Americans tasked right after the invasion with getting things back to pre-war levels complained that Saddam had basically jerry-rigged a system woefully lacking boycotted replacement parts. In other words, the blockade had actually worked more efficiently than is given credit. The boycott also hamstrung Saddam’s military and all of his WMD projects. No wonder he was reduced to the lowly profession of writing fanciful novels to occupy his time.

Another irony is that through Bush’s efforts, Saddam's Iraq, once anathema to al Qaeda has now become a bono fide front in the War on Terror. According to a recent CIA report, Iraq today is a center for terrorists who get daily real-life training in waging an urban battle against the most modern equipment and techniques developed for countering these types of insurgencies. This could have dire consequences later on when the front moves to Saudi Arabia, bin Laden’s stated target.

The box that Bush has put us in now, of course, is the “status quo” in Iraq.  In the most important way Iraq is not like Vietnam. A pullout from “Vietnam was traumatic for the United States, domestically, but Vietnam was not strategic then and is not strategic today. But the Persian Gulf is strategic. It’s where the oil is.

Bush was adamant the other night that he would not pull out of Iraq during his presidency. Still, implicit in what he said about US troop levels –no measurable increase in the footprint—is that the enterprise depends on getting something called a united Iraqi nation in place that can command a loyal army of several hundred thousand native soldiers, policemen and paramilitaries from various regions of the country.

But that will be a Herculean task. People living within the Iraqi borders see themselves primarily as members of tribes, sects and major religious and nationalistic divisions. Beyond direct tribal affinities they are Sunnis, Shiites and Kurds. And among these groups they break down into a wide spectrum of Islamic religious affiliations that go from urban and rural fundamentalists to secularists.

In such circumstances, something like a loyal all-Iraqi army will be extremely hard to field. The true dynamic of the country is to spin apart into small well defined, armed militias. The Sunnis and their pan-Arab allies are fighting the insurgency. But the Kurds in the North have not disarmed nor have the various Shiite militias, including the fundamentalist militias under al Sadr.

Another box is the political timetable. In a little over a month, Iraq is supposed to have agreed upon a constitution that will define the country going forward. In this vortex of colliding secular and political interests, a committee that only recently got its final membership is supposed to agree on the most fundamental aspects of the new country's shape and makeup . The August 15 deadline was part of the timetable Bush did offer in his speech. In reality, it probably deserves as much merit as his list of the "coalition's 30 allies and the pool of foreign financial contributors. It's as if saying it makes it true.

For our next box, let's follow the oil. It’s no coincidence that according to the NYTIMES, people surrounding Ahmed Chalabi, former main supplier of ginned up intelligence and Pentagon favorite to replace Saddam Hussein, have now moved their activities into the oil rich southern Iraq area around Basra. They have begun a political push to create a “state” with the same degree of autonomy that the Kurds have established in the North, which also just happens to control the Kirkuk oil fields.

And so it seems, in this box there already is a plan B in play. In this “federation” scenario --something that could never be agreed to in the proposed constitution--the bulk of the population in Sunni and religious-Shiite controlled areas get the sand, heat and broken down infrastructure and the guys most closely aligned to the US in the North, and who split the difference between Iran and the US in the South, end up getting the oil. Chalabi's abilities to work both ends against the middle successfully are not to be underestimated.

So much for the spreading of democracy and freedom box. The fight for Iraqi oil has only just begun.

Posted by dymaxion at 12:51 PM


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