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As a 22 year veteran of the intersection of media and technology (going back to the interactive video disc days) I have many views on the subject. Having been doing this for as long as I have, I have a different perspective on it than many bloggers. This is where I opine.

Thursday
Jul142011

The New Reality of Netflix

There have been a ton of comments online about the Netflix price changes. Many of these comments are along the lines of “the postage costs are hurting Netflix”. I’m going to take a different view and point more at the streaming business. We’ll break this into two sections, delivery costs and content acquisition costs.

Netflix DVD by Mail Business Delivery Costs

Netflix runs a profitable business renting DVDs by mail, largely because they know their maximum exposure is metered by the speed of the postal service and their own turnaround time (which they will adjust if you’re getting too many discs). Netflix is totally in control of this maximum exposure.

If you’re on the one-disc-at-a-time plan you pretty much max out at 8 discs a month, and you really need to work at it to get that many. Furthermore, whenever I get near 8/month going, “the post office” always manages to take a few extra days to make a return so I end up with 7 that month. I imagine Netflix breaks even or loses a little money with one-at-a-time customers who turn 8 discs a month. I also imagine fewer than 5% of Netflix one-disc-at-a-time customers come anywhere near 8 discs a month.

Netflix Streaming Business Delivery Costs

First of all, we need to understand that Netflix does not stream anything itself. It hires 3rd party companies called content delivery networks (CDNs) to do the streaming. Akamai and Level 3 are example of some of the CDNs Netflix works with. CDNs don’t charge a flat rate per user, they charge for traffic through their network. There are some price breaks as the volume increases, but basically the graph is linear. CDNs have huge capital infrastructure and bandwidth expenses and are not cheap at scale.

With unlimited streaming, Netflix’s maximum exposure is not in its control. Netflix modeled its streaming business based on a volume of usage it experienced in the DVD rental business. For a long time, that model worked well. Streaming usage was light, expenses were under control. But streaming has taken off. People are streaming much more than Netflix expected, and unlike in the DVD rental business, there’s no way for Netflix to meter the usage on its side to control its maximum exposure. If I want to stream Netflix 24/7, I can, and I’m going to eat up the portion of my subscription fee allocated to content delivery in CDN costs pretty fast if I do.

But content delivery is not the only expense 

Content Acquisition

Netflix is one of the largest buyers of DVDs in the world. This gives it enormous leverage in negotiating prices for content. The content owners it is negotiating with to buy massive quantities of DVDs at really high margins are the same people who own the streaming rights to the content.

One of the reasons you see so much crap on Netflix Streaming is that the studios throw in the shitty movies and failed TV shows for cheap (or maybe even free) because Netflix is such a good customer buying DVDs (which are quite profitable). This is also why you see the SAME shitty movies and failed TV shows on Amazon VOD; Amazon also buys a boatload of DVDs.

So streaming is taking off and people are loving the convenience, but they think the programming sucks. Now Netflix is discovering that the good TV shows and recent movies are not just free add-ons that the studios are willing to throw in to sweeten an order of 1,500,000 Dark Knight DVDs. What happens when Netflix wants to buy fewer DVDs because more of its customers are streaming? It LOSES leverage in streaming negotiations. WB is not going to throw in as many old movies and TV shows for free if Netflix only wants to order 250,000 Dark Knight DVDs.

Netflix is also competing against a different set of players -- it is suddenly bidding against companies like HBO. HBO is owned by Time Warner. Time Warner also owns New Line Cinema and Warner Brothers. So when the negotiations for the Harry Potter 1-7 streaming rights happens, who wins? Netflix or HBO (and their HBO Go streaming service)?

Finally, the structure of streaming rights is very different than physical rentals. The laws regarding rentals of physical media are well defined and quite mature. That all got hashed out in the VCR revolution in the 1980s. Once Netflix owns a disc, it can rent it out for as long as the DVD physically lasts without paying the content owner any more money. With streaming rights, the studio wants to get paid every time the movie is streamed.

So what is going to happen here?

There are a lot of possibilities. The CDNs are going to make a fortune. As the content gets better, unlimited streaming is not going to last at a reasonable price. Netflix is going to work hard to be able to control its maximum exposure.  Until it does, look for prices to keep on rising.

Tuesday
Apr122011

Someone Else is Suing Facebook (and they're full of shit too)

So just as the Winklevoss thing dies down something else pops up.

Some guy from upstate NY claims that Mark sold him 50% of thefacebook.com in April of 2003. There's a few problems with that idea.

thefacebook.com was not registered until January of 2004. So we are expected to believe that Mark Zuckerburg was out there raising money for a company called thefacebook 9 months before he even bothered to register the domain name? Sorry, that is simply not believable. The first thing you do is make sure you grab the name you want.

The other issue is that if Ceglia's claims are true then the Winklevosses were totally and completely bluffing. Their claim which Facebook settled for $60 million was totally full of shit. If Mark had a single line of code written, or a single documented mention of thefacebook prior to meeting the twins in November of 2003 he could have had their claim summarily dismissed. Instead Facebook Inc litigated with these guys for five years and paid them $60 million.

 

 

 

Wednesday
Oct272010

Why Yahoo Connected TV is a Fail

Encapsulated in a single screen shot

When I'm watching a baseball game I don't want to suddenly browse my photo albums. The TV widgets I want are TV widgets that augment the experience of watching TV. Y! Connected TV Widgets will never be able to do that because they have no idea what you're watching. There's no connection between the data layer and the video layer.

It's nice that they got to reuse all the konfabulator code (Y! TV widget are based on konfabulator desktop widgets) but it has cost them the chance of doing anything interesting with the product. Sometimes the best product decisions are not the easiest decisions. The lack of product leadership at Yahoo! is the single biggest reason for their demise.

Monday
Oct252010

The Death of Cable TV? "Cord Cutters" are Not the Threat.

We might be further from mainstream cord cutting than some people would like.

With Apple TV, Google TV, Boxee and a host of other streaming video services launching, there’s a ton of talk in the connected TV space about “cord cutting,” or dropping your TV subscription and getting all your TV programming over an IP data connection.

According to a report in Engadget over 20% of peak internet downstream bandwidth is Netflix streaming. Let me start out by saying I am somewhat skeptical of this data and they don’t publish the research methodology. But for the sake of discussion let’s take it at face value and extrapolate a bit.

Netflix recently published their Q3 numbers. They have 16 million total subscribers. 11 million of them use streaming for at least 15 minutes a month. Now 15 minutes a month is a pretty low threshold. For the sake of argument, assume 6 million of these people are getting most of their video programming though Netflix On Demand and using most of that bandwidth. I consider myself a pretty heavy Netflix On Demand user and I use it maybe 20 hours a month, and that is well under half of our TV viewing. In the average American household, the TV is on for ~250 hours/month. So 6 million people getting most of their programming via streaming is almost certainly an overestimate.

There are 300 million people in the US, and the market penetration of TV is effectively 100%. Therefore using the 6 million number, roughly 2% of Americans are getting their programming via Netflix on demand. The 115 million TV household number is not really that relevant as most houses have multiple TVs. When little Sally turns on the TV in her bedroom while mom watches in the living room, the household bandwidth doubles.

These 2% are using up 20% of the available downstream bandwidth.

Netflix streaming grew 145% in the last year. If it does that again in the next 12 months Netflix will use 50% of the available downstream bandwidth.

What happens when video streaming goes really mainstream and 50% of Americans start becoming heavy streamers via Netflix? Assuming there is no other growth in bandwidth demand (very unlikely) it will be necessary to have a nearly sixfold (580% increase) increase in downstream bandwidth to keep the same level of service we have now (500% of current bandwidth to support video streaming and 80% of current bandwidth for everything else).

So what does this all mean?

It means that the mainstream adoption of streaming will require massive capital expenditures in infrastructure to support, and it’s not Netflix’s infrastructure that will need most of the upgrades. It’s the local MSO, the one who is getting less revenue from cable TV subscriptions. How will this get paid for? Higher fees for data. Unlimited data will go away. Metered data will become the norm.

At the end of the day, there’s no free lunch.

Friday
Jul232010

Flipboard

Flipboard, Apple, and why a single channel distribution is a scary place to live

 

I like Flipboard. It's very well executed and quite cool. After a rough first day scaling-wise, they are the talk of the digerati. There are unknown issues regarding the appropriateness of content scraping rather than using syndication feeds, but I will leave those conversations to others.

Flipboard raised a boatload of venture capital -- reportedly $10.5 million -- from very top tier firms. It got me thinking about what the due diligence must have been like, especially in terms of competitive analysis. I am not seeing many barriers to entry for a whole slew of competitors. The application itself is clearly the descendant of Pointcast, a late 1990s screen saver that stylishly fed you headlines and data (in a snazzy, late 90s kind of way). There is a screensaver built into macOS (RSS visualizer) that is reminiscent of what Pointcast built. It's like a tablet version of Pointcast, with some social media spin thrown in. There is no real reason that many others could not pretty much clone what Flipboard has built.

The one competitor I would be worried about is not a start up. I would be worried that Apple likes the application so much that they build a version of it right into iOS. Think about it for a moment. This is a core tablet app. It takes the web and feeds and formats it in a manner optimized for tablet consumption. Now roll into the mix that this is an iPad app, and Apple is the sole distribution channel for the software, and you have got a potentially perilous situation.

Apple could offer to buy Flipboard, but as Apple is the only distributor, they would have a ton of leverage in the price negotiations (and if you raise 10.5 million, your investors are expecting a grand slam). Say Apple offers to buy Flipboard for $10 million. Flipboard would naturally say no that offer (they probably raised money at a $40 million post-funding valuation). Apple says fine, clones Flipboard, rolls it into iOS and then pulls Flipboard from the app store because it duplicates iOS functionality.

At the end of the day the content scraping issues may be the least of their problems.

 

Tuesday
May182010

What Does "Watch TV" Mean?

The average American household consumed 8 hours and 21 minutes of TV per day in 2009.
-Nielsen

There are three different usage paradigms for television: active interaction, passive consumption, and background consumption.

Active Interaction
People have been working on cracking this nut for a long time with little consumer success. I was working for an interactive TV start up in 1990; we did classified ads, sports scores, photo albums, and weather. Recently TV widgets have become a hot new meme -- they're just another take on the same interactive TV ideas that consumers have already rejected. Television watching is in its essence a passive medium. All the wishing in the world is not going to change that. The only real success in active interaction with the TV has been the console-based video game business. From a real world perspective, this consumption paradigm is de minimis and I expect it to remain so.

Passive Consumption
Passive consumption has some brief interaction at the beginning of the session to start or select a video, followed by a long period of passivity. Over the years, this interaction has changed from choosing a channel, to putting a tape in the VCR, to starting a DVD, now it's becoming manipulating the VOD interface (either a local DVR or a streaming service). This brief interaction is followed by a long period of passive, albeit engaged, consumption. If the capability exists in the delivery channel, users often skip commercials. This is what is generally considered "watching TV," but it does not constitute the majority of the TV consumption in the US. This is the consumption paradigm that most "TV start-ups" are focused on. This business has been disrupted many times since 1975, when Sony introduced the Betamax. Each time, the programming selection method changed, and each of these changes was a disruption that was predicted to bring down TV. None of them did. TV consumption continues to grow. It will be disrupted further but this disruption, like the previous ones, will not change the majority of television consumption.

Background Consumption
The vast majority of television consumption in the US (better than 75%) is background consumption. Background consumption is what drove the average daily household television viewership in 2009 to 8 hours 21 minutes. Since 1997, despite a fracturing media landscape, despite dozens of new consumption channels, the average American household consumes ~20% more TV now then it did before the internet revolution. Americans are NOT watching less TV because of the internet and online video: they are watching more. Many Americans leave the TV on in the background at home during all their waking hours. They briefly engage with it and go back to other tasks. It's companionship. It's serialized, interrupt-driven content snacking. They leave the TV on while the cook, or eat, or clean the house, or surf the internet, or tweet and play on Facebook, or play World of Warcraft, or have sex. Commercials are not skipped in this use case. Attention is shifted away, attention is shifted back. The influence is subliminal but very real.

Finally, the expected default behavior of television is not to wait for user input. You turn it on. It makes noise and shows you pictures. It does not start an interrogative. If you like what it's showing you, you leave it alone. If you don't, you change the channel.

Wednesday
May122010

Google Games?

Someone sent me this job listing. 

Product Management Leader, Games

I was the guy who led the team that launched and built Yahoo! Games into the number one online gaming site. It's not my focus these days, but it is what a lot of valley people remember me for. I have some experience integrating gaming into existing online services.

The way this job is outlined seems to reveal a certain strategic direction and plan. I infer from the language that Google wishes to internally create hit games. This is not the strategy I think Google will find successful. The games business is funny. The popularity of games, even hit games, is ephemeral. Most games are not hits.  

The reason Y! Games succeeded is because we combined Y!'s brand recognition and distribution with the brands of established games (blackjack, backgammon, poker, chess, spades and so on). I was able to add community around those games (ladders and tournaments and the like), back in the baby days of social media. Once we had built this audience, we were able to start creating new games. Popular games are a hit or miss business, and we missed as much as we hit. Building a brand for a new game is expensive and difficult. Even if you're wildly successful, the game will have a brief shelf life.

I would recommend Google do something similar, but take it a step further (what I would have done if I had stayed at Yahoo! longer). I'd love to see them acquire one (or several) gaming engines and basically open source them (Yahoo! acquired a one person game company called classicgames.com which provided the basis of our efforts). Create a core set of Google branded games with these tools, but internally only spend resources building a suite of games that come with built-in audiences and brands. Just this will create a significant gaming audience. Do these essentially as reference designs. Make sure your reference designs show off the platform capabilities. Give away a powerful gaming development platform, and then let developers create terrific games. 

I wouldn't take development and brand building risk of new games myself; I would allow third parties to do that. Give away an awesome tool set. Own the enabling technology. Own the distribution channel. Own the platform. Own the transaction services (both in-game and out). Own the monetization channels. Own the metrics. When something starts to get traction, promote the hell out of it. Allow advertisers to skin games easily. Allow the developers to share in monetization using one of Google's most significant strengths -- advertising driven by user data.

Users think of Farmville and Mafia Wars as Facebook games, not Zynga games (greatly to Zynga's dismay). Zynga may have a terrific valuation, but I bet Facebook makes more money from Zynga games than Zynga does. How many of Zynga's broad catalog of games provide anything more than de minimis revenue?

Google should not be aiming to get into the game business.  They should get into the gaming platform business.

GO is my favorite board game. Pure strategy built from nothing. A great game for any founder.

Wednesday
Apr282010

Founders as CEOs

This is a staggeringly good article by Ben Horowitz.

http://bhorowitz.com/2010/04/28/why-we-prefer-founding-ceos/

Best bit...

The technology business is fundamentally the innovation business. Etymologically, the word technology means “a better way of doing things.” As a result, innovation is the core competency for technology companies. Technology companies are born because they create a better way of doing things. Eventually, someone else will come up with a better way. Therefore, if a technology company ceases to innovate, it will die.

These innovations are product cycles. Professional CEOs are effective at maximizing, but not finding,product cycles. Conversely, founding CEOs are excellent at finding, but not maximizing, product cycles. Our experience shows—and the data supports—that teaching a founding CEO how to maximize the product cycle is easier than teaching the professional CEO how to find the new product cycle.

Tuesday
Apr202010

Synchronize.TV

A little more about my new project.

Synchronize.TV is a start up focused on improving the living room media consumption experience by delivering different types of media through delivery channels optimized for those specific media types. We then Synchronize those presentations locally using our patent pending technology. It's a different take on interactive TV. There are lots of people working on various VOD applications. There are also lots of people working on TV widgets that run independently of the video behind them. We are working to synchronize the datacasting of widgets and the broadcasting of video (or on-demand video, makes no difference to us).

We're not in stealth mode but we are in designing and building phase and not publicly discussing a lot of details right now.

If you're in the connected TV space, especially on the presentation layer side, we'd love to talk with you about what we are working on and how we might work together.

Sunday
Mar212010

A New Project

I've recently started working on a new project. I'm not sure if it will end up a new start up or I'll try to accomplish what I want to do within the framework of an existing company (there are several companies I'm talking to about this). Right now it's in the wireframes and prototypes and white paper phase. 

It's a big idea.

Thursday
Apr302009

Nantucket Conference

I'm on the ferry to the Nantucket Conference. There seems to be free wifi on the ferry!

The Nantucket Conference is a small entrepreneurship and technology conference. I'm looking forward to a lot of great conversation and networking this weekend.

Monday
Mar302009

Foneshow in BusinessWeek

Foneshow is featured in an article in BusinessWeek today focusing on competitors to Sirius.

Another option: Foneshow lets any phone with text messaging capabilities to catch custom talk radio programming, like Bill Press and Thom Hartmann. Whenever a new show segment becomes available, your phone receives a short text message with a link. You hit "Send," and your phone starts streaming audio, which you can pause, skip or forward to a friend. Foneshow sells advertising, unlike Sirius.

We're honored to be included with other great companies like Pandora, Stitcher and Slacker.

Thursday
Feb122009

Google is Leaving Radio

Google is bailing on radio.

I predicted this in this blog post a few weeks back.

I actually predicted
Google would fail with CPM based radio ads exactly two years ago.

Tuesday
Feb102009

XM Sirius Files For Chapter 11

Satellite radio is in deep trouble. XM Sirius, after finally merging, has just filed for bankruptcy protection.

I'm here at the Radio Ink Convergence conference, the response to the news was a cheer.

A few thoughts...

Debt is what killed XM. Anything that involves spaceships to get up and running has some serious capital expenses.

But debt is what's killing terrestrial radio too, so terrestrial shouldn't get too smug.

Both of them have decent cash flow.

Audio media in trouble is bad for all audio media.

These are just my first thoughts. I'll write more later.

Sunday
Feb012009

Foneshow in the Boston Sunday Globe


Foneshow got a pretty big mention in Scott Kirsner's article today on the changing media space and how entrepreneurs are trying to find new ways to create and monetize an audience.

I suppose I should go find a hard copy of the paper.

Wednesday
Jan282009

Cycles and Waves

There's and article in the Times today about the state of Venture Capital. The gist is the economy is tight and things are bleak. They see a shakeout coming in the VC industry and amongst startups.

There's no question that times are challenging.

I can't even describe the roller coaster week we've had and it's only Wednesday.

But bad times can build great companies that build value for investors. Buy low/sell high is far more lucrative and less risky than buy high/sell higher.

I started in the technology business in 1989. 1989 was a bleak time in the sector, you had to love what you were doing and believe in your product to work for a start up then. Jump forward until the late 1990s, I'm working at Yahoo! in the epicenter of the internet revolution. A different kind of person came to came to work at Y! in '98 and '99. They came not because they believed in what we were doing, but to stick around long enough to vest, flip their shares and cash out a million or two. The same thing happened in the VC industry, in a bubble all kinds of new VC firms show up to try to ride the wave. Most of them fail.

I do a little surfing (funny I write that as we're getting another foot of snow). To get on a wave you need to paddle before the wave starts to break, once a wave is breaking, it's too late to ride.

If you're for real, now is the best time to do a start up. It's a lousy time for wannabes to do a start up. It's also a lousy time for wannabe VCs and investors (and there are as many of them as there are wannabe startups).

This is not the time for a quick flip. This is the time to identify a business problem and solve it. This is a time for patient founders and investors to build important companies.

Wednesday
Jan212009

Google Abandons Newspapers


Google is giving up their newspaper and magazine print ad sales business. Will google be abandoning their terrestrial radio ad sales experiment next?

When I spoke at Radio Ink Forecast last year one of the mantras of the executive leadership of the industry was "well at least we're not as bad off as the newspapers". Truly, as bad as things are for radio, (Clear Channel fired 10% of their work force yesterday) the newspaper industry is in worse shape. The question really boils down to whether radio in on a different road than newspapers or the same road, just not quite as far along.

Newspapers and radio have very similar problems, neither on of them have any real accountability of the efficacy of the ads they run for their advertisers. This is the fundamental mismatch between google and both the newspaper and radio industries. The reason people advertise using google adwords is because you know precisely how effective your campaign is. I wrote about this nearly two years ago.

Both newspapers and radio have another similar problem. Both are distribution channels that are fundamentally becoming obsolete (the newspaper guys understand this better than the radio guys, there are a lot of tower huggers in the radio business). Both are in process of switching to new distribution channels (newspapers faster than radio). Both have a big mismatch between the cost structures and business models of the old channel compared to the new. Both have been hurt by an abysmal understanding of their traffic (or in their parlance, their cume/circulation). Both have been hurt by expanded expectations of both their audience and their advertisers.

The newspaper industry understands that the "dead tree" distribution channel is coming to an end. They have done a good job of leveraging their core competence (writing and photography) to the web. They have lots of web traffic. Their problem is monetization.

To understand newspaper's monetization problem we have to look at why print newspaper ads are seen and online newspaper display ads seem invisible. The answers are mainly templates and search. How do you find something interesting to read in a print newspaper? You turn pages and scan headlines, when one catches your eye, you stop and read it. Interspersed in an irregular pattern are advertisements. Your eye is forced to see those ads because of the page layout. Since they're not always in the same location you scan the whole page because you can't predict where the ads will be and it becomes harder to train yourself to ignore them. The behavior is very different reading an online newspaper. First of all, you tend to use search to find what you're looking for. You're not leafing through pages and scanning headlines. But the real problem comes from the templated nature of web design. If the ad units is always in the same places on the page it becomes easy for your eye to ignore them. This is the problem that the newspaper industry needs to solve to become viable online.

The lesson there is monetization techniques do not always transfer from one channel to another. It's easy to end up with a meatball sundae.

In many ways the radio industry is not learning the lessons of the newspaper industry. They are far behind the newspapers in leveraging their core competence to a new distribution channel. Sadly many people in radio see their industry in a temporary downturn rather than a fundamental paradigm shift (kind of like the newspaper execs myopia 5-10 years ago). It is not merely an issue of radio moving to a narrowcast model but how to monetize the audience once they get there. Listeners are moving online and to mobile, but the types of ad units that are effective in a linear broadcasting environment are not effective in an interactive narrowcast world.

These are the challenges that radio must solve or they will end up hanging out with newsreels, town criers, and print newspapers in the dustbin of obsolete media.

Wednesday
Jan142009

Text Message Spam


Text messaging is a core part of the Foneshow experience. Text message notification of new programming and leveraging that as a menuing system is key to how Foneshow works and is better than our competitors (it's also where we have our patents). To use the short code system in the US the cellular carriers insist that you have to adhere to some very specific rules about sending messages as far as verifying users and not sending unsolicited texts. We spend a lot of time and energy jumping through hoops that the cellular carriers put up to protect their subscribers from SMS spam.

So yesterday when I read that AT&T sent unsolicited text messages to a "significant number" of it's 75 million mobile subscribers reminding them that American Idol (a show that AT&T sponsors) I was pretty surprised. The previous Idol voters who got texts I understand, I'm sure that in the fine print of Idol voting you opted in for those. But AT&T also sent Idol texts to "heavy texters" who had never participated in American Idol. That is simply spam.

AT&T claims the fact that they don't charge for the text and that you can then opt out means it's not spam. That's bullshit.

If we we started sending unsolicited texts to users who had not opted in they'd shut us down so fast it would make your head spin.

Thursday
Dec112008

Radio Ink Forecast

I was on a really terrific panel at Forecast 09 in New York last week (I snarfed the picture from Eric Rhodes' Radio Ink site). My fellow panelists and I had a spirited conversation about how new media fits in with the radio industry.

Thanks to Eric Rhodes for organizing the conference and my fellow panelists; Gerrit Meier (COO, Clear Channel Online Music & Radio), Deborah Esayian (Co-President, Emmis Interactive), Bruce Falck (Director, Google Audio Ads), and John Rosso (Senior VP/Digital Media, Citadel Broadcasting).

More pics here

Monday
Dec082008

Music Sales to Save Radio?


I've heard quite a few very senior radio execs talk recently about retail music sales being a way for radio to generate additional revenue. They want to put a transaction "button" on radios that allow for upstream communication to enable a listener to buy a song that is currently playing. This is real "out of the frying pan and into the fire" thinking. The music business is one of the few industries more messed up than radio.

Let me share a quote from Phil Schiller, SVP at Apple...

"The iPod makes money. The iTunes Music Store doesn't,"

Apple and their music store are currently dominating the music industry. Apple runs ITMS at break even so they can sell iPods at 50% gross margin.

Music is a loss leader for Apple. Copying the loss leader product of another industry to save your industry is not going to fly.