Davis Freeberg’s Digital Connection

I know that I’ve been critical of DivX’s efforts to woo Hollywood in the past, but I’ve also got to give them credit for a win when I see one and I think they knocked it out of the park when it comes to Paramount.

Recently, Paramount announced that they were going to be distributing content on USB sticks. At the time, they didn’t say what format it would be in and even on DivX’s conference call there was no mention of this realization of their strategic vision, but Electric Pig is reporting that the Paramount movies will in fact be encoded in DivX.

With only 20,000 memory sticks for sale and at a price of approximately $33 US, Paramount is still clearly in the testing phase, but the fact that they choose DivX demonstrates the clear advantage that DivX has over all of their other digital competitors. They have the only real solution for brick and mortar retailers.

If Paramount tried to do this with a proprietary solution, it wouldn’t work because it wouldn’t give them a way to get that movie to the television. They could try to do it with Apple, but Apple doesn’t have the same reach to the TV, especially in Europe where this is being launched.

To date, most of my thoughts on DivX’s courtship of Hollywood have centered on the futility of trying to win enough support, so that online retailers could adopt their technology for digital distribution. If you can’t get a Disney or UMG to license DivX’s format, it makes it tough for someone like Netflix or Blockbuster to use their codec even with the other 80% of the content owners on board.

The beauty of the USB distribution strategy is that they won’t need 100% industry support in order to move their plans forward. Shelf space is limited as is, all they need is for a single studio to want to take advantage of this and there will be more than enough titles to tempt you with while you are waiting in line at the cash register.

Now I know what many of you are thinking, movies on USB are pretty lame. When Paramount made their announcement, there were more than a few commenters who zinged them for being out of touch with current trends. While there’s no doubt that the world will go digital, I also realize that the major studios aren’t going to abandon the retail partners that deliver the majority of their profits each and every year. It may end up becoming super easy to buy movies straight from your home, but if you have millions of consumers visiting a store each day, you can bet that the studios will want to reach those customers where they are hanging out. The shelf space is too valuable to be abandoned.

DivX on USB also opens up new business models for the studios. Instead of selling three DVDs, they could package all the Godfather films on one stick to justify a higher price tag or they could offer an entire season of television on an 8GB stick instead. If a retailer can sell something for twice the price, they will take smaller margins from the studios for the larger transaction. With the studios under pressure to develop new revenue streams, this will be too tempting for them not to exploit.

There’s no doubt that DVD is moving to Blu-Ray, but DivX memory sticks allow their Hollywood partners to reach consumers who may not have upgraded to high def just yet. With the industry in a state of flux, being able to sell a device that can be read by any computer and over 200 million devices gives DivX broad reach when it comes to the world of disconnected playback.

Paramount may be approaching this market cautiously, but I think people have greatly underestimated the size and the impact that USB films will have. It may not be cutting edge technology, but there are too many powerful companies who need it to succeed for it to fail. At the birth of this industry, it’s encouraging to see Paramount actively supporting their partnership with DivX, instead of just taking a licensing payment and then ignoring what their technology can offer.

USB movies won’t necessarily solve DivX problems with their shifting business model, but it does underscore the significance of the platform that DivX has built. As much as DivX is threatened by the obsolescence of the DVD, they can also benefit from the format shift. So far, they haven’t done a very good job of managing this transition, but this deal proves that even an old dog can learn new tricks. If retailers start asking for DivX as a weapon against Blockbuster and Netflix, other studios might also understand the benefits of using open and popular technology to make more money.

Over the last decade, internet video has come a long way, but it’s been a bit of a clunky experience. Competing standards, DRM turf wars and fear of giving the consumer anything and everything for a song has held the industry back. You may be able to get your digital video to your television, but there’s been plenty of roadblocks to deal with. Luckily, consumers have had options and have been able force the content industry into the digital realm, even if it did take a bit of kicking and screaming.

Over the next decade, it’s clear that things will improve, but I also worry that we’ll repeat some of the same mistakes. As the industry moves past early adopters and into the mainstream, it will have a profound change on the entertainment industry.

One of the biggest drivers of that mainstream adoption will be the rise of the internet television. A year ago, it was hard to find them outside of tech events, but television manufacturers have started to embrace the concept and now there’s at least a high end market for internet enabled TV sets. The New York Times, has a good article on this trend as well as some appropriate criticism,

“we’re still a long way from being able to order any movie we want to watch whenever we want to watch it. Film studios are loath to release what they perceive will be blockbuster DVDs for digital distribution, for example, until months after release, and there are many more held back by copyright issues and concerns about piracy. And even the movies you can rent digitally from Blockbuster or Amazon are often subject to the dreaded 24-hour window, which means if you don’t finish watching on the same day you started viewing it, you’ll have to pay an additional charge. Still, the option of streaming a movie from anywhere — Netflix, Amazon or whoever — is a major leap forward. It frees viewers from the yoke of the one-store-only approach taken by cable companies and products like Apple TV.”

While I agree that consumers are foolish to enter into one-store arrangements like AppleTV, I also don’t feel like any of the TV manufacturers have differentiated themselves with what they are offering. Whether you’re talking Samsung, LG, Panasonic, Sony, Mitsubishi, Sharp or Vizio all of them seem to be going after a small handful of Hollywood partners.

Don’t get me wrong, Netflix, Amazon, Blockbuster and Sony all have great content, but in such a tightly controlled eco-system, the consumer doesn’t really have very many options. If you don’t like a restrictive 24 hour window, then you just have to deal with it. There’s also a lot of content that isn’t available on these new services. Whether we’re talking new releases or material that is more appropriate for adult audiences, consumers can’t access it, without some kind of alternative device.

Limiting your audience makes sense if Hollywood is the one buying your televisions, but is a poor strategy to employ when you want consumers to buy your TV sets. At one point I had hoped that DivX would partner with one of the TV makers to give consumers more flexibility, but so far they have struck out when it comes to the connected television. I don’t know why the internet TV has been such a tough nut for DivX to crack, but I suspect that it has something to do with why they have been so hell bent on partnering with Hollywood. The sad part is that in order to win over these studio partners, DivX has already started to ignore their consumers.

Take for example, DivX’s recent acquisition of AnySource Media. Ideally, this software will accelerate DivX’s plans to the TV, but even if they are successful it doesn’t necessary mean that consumers will win. In an article for NewTeeVee, DivX CEO Kevin Hell said that “content partners of the new entity will not be required to offer video in the DivX format, and the platform will support a wide variety of codecs.”

If DivX is truly committed to being “a digital media company that enables consumers to enjoy a high-quality video experience across any kind of device”, then how could they even consider creating a device that doesn’t support the eco-system that their fans have built their entertainment system around? Making such a sacrifice may be seen as necessary, in order to get their piece of the connected television, but it would be self-destructive to their brand and only highlight the sacrifices that they seem willing to make just to be another me too provider of digital content.

Instead of partnering with Hollywood, DivX should be arming consumers so that they have the tools to force content owners to accept a digital revolution. How many TV sets could DivX sell, if they provided support for MegaVideo alone? With over 1% of all internet traffic, they get more hits then Amazon.com, let alone Amazon Video or what if DivX’s software supported free streams from any of the adult websites that regularly appear in the Alexa top 100 listings? People may not want to admit it, but the adult film industry is almost as large of the regular film industry. Samsung may not want to splash a XXX logo on the front of their TVs, but if DivX;) could offer this functionality, I guarantee you that there would be demand for it.

Getting down and dirty with copyright thieves and alternative content providers may not be DivX’s grand ambition, but I’d rather see them comprise their morals in this regard, then to see them knife their own customers and still not end up on any connected televisions. The development of the internet TV is an exciting chapter in the transition to digital, I just hope that consumers don’t get trampled on in the rush to fight over the same old content.

Normally, I tend to think that most regulations are bad. In a free market, businesses should be allowed to operate with a wide degree of latitude. At the same time there is a pragmatic part of me that understands there can be exceptions to this. Everyone should have the right to free speech, but that doesn’t make it right to run cigarette ads on Saturday morning cartoons or to claim that you’re a Doctor when you only bought your degree from an internet spammer.

For the most part, the television world has been forced to accept reasonable restrictions in exchange for the public bandwidth they use to deliver their content. In the internet world though, the content rules are more like the old west because consumers are opting into the service by paying for it. As long as you have the quickest draw, your behavior doesn’t matter as much and so far companies like Netflix have been more concerned about digital market share, then doing what’s right.

Maybe this is because internet audiences are still small compared to television or it could be that it takes time for rules and standards to develop and emerging markets don’t tend to care about these things. Whatever the reason though, there are parts of the television experience that aren’t making the jump to the internet.

Specifically, I’m talking about closed caption data. For years, television studios have been legally required to provide this information, so that people who are hard of hearing can also enjoy the content. While there are some technical issues associated with adding this kind of data to a movie file, technology is at a point where it could easily support this. The Matroska container for example, is able to include optional sub-title information along with video and audio data. Alternatively, because online delivery can microstream to people, files with the embedded sub-titles could made available to viewers who opted into them. This would involve keeping multiple copies of the same movies though and so far the digital movie industry hasn’t wanted to bear this cost.

While I’m loathe to suggest new regulations on a burgeoning industry, I also feel like we have a responsibility to consider the needs of everyone. It costs companies extra money to include wheel chair ramps at their physical locations, but we pay for that as a society because we want to treat everyone as equally as we can. As the traditional line between telecommunications and entertainment becomes blurred, it’s important that we don’t leave behind those less fortunate in life. Having a law that requires subtitles in order to qualify for DRM legal protections wouldn’t be popular with the entertainment industry, but it would fill a void that the market isn’t interested in addressing. Personally, I don’t know whether or not I’d actually support a legal mandate for firms like Netflix, Amazon and Apple to require this data, but I am interested in hearing your thoughts on the issue.

Update – Interestingly enough, I found out that the FTC is actually hosting a hearing (not sure if there was a pun intended) on this topic on Friday Nov. 6. It sounds like the entertainment industry’s position may not be represented, but they will have several prominent members of the deaf community weigh in on the topic. The event will run from 9am – 1pm EST and will be broadcast on the web at the FTC’s website.