Davis Freeberg’s Digital Connection

Over the past five years, there’s been a lot of debate around the topic of net neutrality and while there have been a few examples where internet providers have tried to favor their own services over the competition, by and large this has turned out to be little more than a boogey man. Don’t get me wrong, I think that it’s important to keep the playing field level, but I also believe that there are bigger issues where consumers are being harmed.

While many media companies would like to see the first sale doctrine done away with, ever since the supreme court established the doctrine in 1908, consumers have enjoyed tremendous benefits from it. The concept, which was later codified into law in 1976, allows businesses and individuals to resell goods that they’ve legally purchased. Without it, companies like Ebay, Craigslist and Blockbuster Video wouldn’t even be possible.

Having the right to resell goods benefits consumers in two major ways. First, it reduces the risks that consumers have to take when making purchases. This ultimately makes things cheaper for all of us, because companies are forced to compete with their own products and consumers have a way of recouping part of their initial expense.

When I first purchased my TiVo series 3 for example, I spent over $800 on the product. While this may seem like an insane amount to spend for television, I was able to justify the cost in part, because I sold my original TiVo on eBay for $200 and knew that one day I would be able to resell my Series 3 (currently worth approximately $400 on Ebay) to recover part of my expense. As a result, I’ve been able to enjoy a premium DVR experience for about 1/3rd what it would have cost me to rent an inferior DVR from my cable company.

The second benefit to the consumer is that by having a robust resell market, it allows more businesses/middlemen to participate. This ultimately increases demand, stimulates innovation, and drives down prices. Redbox for example is able to rent you a DVDs at 1/20th of the cost or what it would cost you to buy the actual DVD thanks in large part to the first sale doctrine. Because Redbox knows that they can get more than 20 people to share the same product, it enables consumers to save money, the media companies to sell more DVDs and for Redbox to still earn a tidy profit in the process.

While the first sale doctrine has been a huge benefit for consumers over the last 100 years, these benefits are rapidly being eroded as media moves digital. Because the first sale doctrine was based on physical goods, it hasn’t aged very well in the digital realm. As a result, consumers have been forced to endure awkward DRM implementations, limited availability of digital content and higher prices for media services.

As the top media conglomerates have sought to seize more and more control over the distribution of their products, they’ve shifted from a world where you have the ability to “own” your media, to one where you only have the option to “license” your content.

For a lot of consumers, this distinction may not seem important, but it has profound implications on the future of digital entertainment. Since firms aren’t allowed to buy products at a wholesale price and rent them to multiple consumers, they’ve been forced to negotiate agreements one by one. This is a costly and time intensive process that has limited how quickly media can migrate online. It has also given the media conglomerates monopolistic control over prices. Instead of being forced to compete in an open environment, they are able to take their ball and go home, when they haven’t liked the terms and conditions that innovators offer them.

The result of this transition from ownership to licensing has increased costs for consumers even beyond the price of media. Take for example, the various hardware devices that we’ve seen released over the last five years. If you want to watch digital copies of old movies and TV shows, you can do it through Netflix, but only if it’s on a device that has a business relationship with them. When Sony decided to release a digital copy of Cloudy with a chance of meatballs at the same time the movie was in the theaters, consumers could only participate on select Sony TVs.

If you prefer to watch new releases from Apple’s iTunes store, you’ll need to buy an AppleTV to easily watch that content on your TV. If you want to watch a DivX file that you purchased from CinemaNow, you’ll need to illegally hack your AppleTV or purchase a DivX certified device instead. It’s fantastic that consumers have the ability to record HD cable TV through TiVo, but if you subscribe to AT&T or Dish Networks, you’ll need additional (proprietary) hardware to decode their signals.

While many of these businesses have come a long way towards opening up their systems and fulfilling the digital dream, they’ve all been limited by what content holders allow. As a result, consumers must face a digital minefield where DRM and file formats are used to limit what you can do with the content that you’ve paid for.

As we continue to move forward into the digital world, I think it’s important that consumers shouldn’t have to abandon the first sale protections that have served us so well over the last century. What I propose is a new set of rules that would allow media companies to control their prices, but would also give consumers (and businesses) a way to move past some of these restrictions.

While the DMCA has been a mixed blessing for tech companies and consumers, it is in desperate need of an update (and one that isn’t written by the lobbyists.) For example, currently, it’s illegal for consumers (or businesses) to circumvent DRM, even if consumers are being harmed by the DRM. This has led to situations where people who have purchased media, later lost access to those rights because a provider went out of business. Situations, where companies are unable to offer lifetime licenses in the cloud, because of exclusivity clauses in contracts with pay TV channels.

What I purpose is that if media companies want DMCA protection for their content, it should come with strings attached. In crafting new rules for a modern first sale doctrine, I would require content owners to set a wholesale price that all businesses would be allowed to buy content at. They could still require minimum purchases sizes and would have complete control over what they wanted to charge for that content, but they shouldn’t be allowed to sell a license at one price to one company and then exploit another company for political reasons.

What this would do is create a level playing field for all of the digital retailers. If UMG wants to charge $50 for a download, they would have the right to do this, but they couldn’t favor one vendor over another and they couldn’t punish innovators for being successful or passing on value to the consumer. This would also bring welcome competition to the pay TV market because media companies wouldn’t be able to play MSO’s off of each other.

For example, I’d love to be able to see every NFL game each season, but I can’t unless I’m willing to subscribe to DirecTV for service. Instead of making consumers fight and choose over exclusive content, everyone should be given fair access to that content. If cable companies don’t want to pay the price of admission, they would be less competitive with consumers. The end result would be more demand for NFL content by consumers and more competition for their dollars. If we allow media companies to continue with exclusive content in the digital realm, it will only makes it more expensive for everyone.

I also think that if the media wants to continue to have DMCA restrictions on their DRM, that they shouldn’t be allowed to use that DRM to discriminate between hardware partners. It’s great that I’ve got the ability to record HDTV on my TiVo, but since cablecards don’t work with satellite or U-verse, it essentially gives Comcast a monopoly on pay television for TiVo households.

As a result, Comcast is able to provide abusive cablecard support without having to worry about competition. If they knew that they had to actually compete for the $50 – $200 a month that they charge, it would encourage them to provide better service and to continue to innovate, (even if consumers decide not to use Comcast’s equipment.) Instead we’ve seen cable companies limit the ability for consumers to take their programs on the go and prevent consumers from accessing VOD services on DVRs that aren’t rented from them, all without having to worry about repercussions.

The same is true for digital downloads. If Apple wants to use DRM to help protect their content partners, they should be allowed to, but not at the expense of consumers. If other hardware manufacturers want to build support for iTunes’ product they should be allowed to license the DRM (at cost) from Apple. This would prevent Apple from offering exclusive downloads that lock consumers into their own hardware ecosystem. The end result would be more devices that could play Apple content and more competition among set top box manufacturers. This competition would cause prices to drop and would encourage Apple and others to be innovative with the features and services that they offer to their customers.

While some may be content to let the media industry continue to grow inside of these walled gardens, I’d like to see a world where someone can legally purchase media and play it on any device that they want to. By creating new laws to help better regulate the abuses of our current licensing system, consumers, businesses and the online video industry as a whole, would be allowed to flourish across many different platforms. Instead of being forced to buy the same content over and over and over again, consumers would be allowed to license their media under fair and reasonable conditions.

HBO may stand for Home Box Office, but it may as well be Hates Being Online given their objections to internet video. According to Time Warner, HBO has over 40 million subscribers and while this lucrative revenue stream allows them to produce some of the most compelling content on television, it also gives them an extraordinary amount of influence on the entertainment industry. Not only is the company owned by one of the major studios, but because of the billions that they take in each year, they’ve been able to outbid small nimble start-ups for access to content. Instead of using this power for good though, they’ve chosen to fight against consumer’s interests by restricting your ability to watch digital content that you’ve legally purchased.

With consumers clearly wanting to access content online, one would think that HBO would be the first in line to embrace this trend, but because of their status quo, they’ve chosen to fight progress instead of helping to usher in the digital age.

Over the last two years, a group of digital and traditional media companies have formed an impressive collective known as the Digital Entertainment Content Ecosystem (DECE). This diverse group of firms includes firms ranging in diversity from Sony to DivX. While each company has their own agenda, the goal of the group is to try and create a media framework that allows consumers to purchase downloadable media and to play it on a wide range of consumer electronic devices.

While I do think that there are some problems with their proposed implementation, I’m also pragmatic enough to see this consortium as our best chance of furthering the internet video revolution. To date, media companies have fought digitization tooth and nail, but this co-op between Hollywood and the Silicon Valley could create an environment where more new release content is made available to the public.

Anyone whose used Netflix’s Watch Instantly program knows that there is a ton of content from the 1980’s, but very few titles from the last decade. One of the biggest reasons for this, is that companies like HBO have used their vast financial resources to outbid them and other digital players for these films. With studios scared to death of upsetting deep pocket partners like HBO, it’s created an environment where consumers must either pirate recent content, set an appointment to see TV or stick to watching it on a disc.

While, HBO has made some of their content available through Comcast’s TV anywhere initiative, it’s only includes their weakest titles and you must be a cable subscriber to get access to the content. Contrast this to Showtime’s digital experiments and it’s clear that HBO is standing in the way of progress.

Like Netflix’s Watch Instantly platform, DECE has proposed a system where consumers can store their media content in the cloud and then stream it whenever (and more importantly wherever) they want to view the film. Yet, according to the industry trade publication, The Wrap (via Inside Redbox), HBO isn’t a fan of this system and is actively trying to block it’s implementation. Since they insist on legal language in their contracts that prevent consumers from accessing digital content while it’s playing on their channel, it’s possible that you could purchase a film and then be blocked from seeing it while it’s playing on HBO.

Imagine paying a steep premium to see a recently released film and then being told that you can’t watch it on certain dates, just because HBO is afraid that you might not subscribe to their channel. Clearly, this isn’t in the interests of consumers and yet HBO is using their financial resources to try and create this very scenario.

“Paying hundreds of millions of dollars a year for output deals with Warner, Fox and Universal, HBO currently restricts these studios from distributing their films digitally during its exclusive pay-TV window. Typically, that window starts six months after a film debuts on DVD and extends for 18 months. It already has presented itself as a challenge for established download sellers including iTunes and Netflix.”

HBO is free to run their business anyway that they like, but I believe that policies that are downright hostile to consumers should not go unpunished. Because of this, I’m asking HBO subscribers to call your cable company and cancel the channel. I know that this may mean giving up some great content, but if HBO starts to feel the sting from a consumer backlash, perhaps they’ll rethink their position and start to embrace the digital revolution. Currently, only 3% of the entertainment industry’s revenue come from online, but if just 3% of HBO’s subscribers were to cancel service, it would have a profound effect on the company’s profitability.

For too long, consumers have been abused by these exclusivity agreements and if you sit back and allow them to walk all over you, then you’re only part of the problem. Instead of rewarding an outdated analog business model, we need to be demanding that studios and their partners join the 21st century and make their content available online.

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.

Anyone who has paid attention to digital distribution knows that P2P is a popular way for people to download content, but how popular it is may surprise more than just angry content owners. Last June, Futuresource Consulting released the results of an in depth survey called “Living With Digital: Consumer Insights into Entertainment Consumption” which examined legitimate and illegitimate video usage in the UK, France, Germany and the USA and came up with some pretty interesting data.

According to their survey’s, 8% of consumers in these countries have admitted to using p2p in order to get content.

With these countries representing approximately 500 million of the 6+ billion global population, it would mean that approximately 40 million people are participating in illegal downloading in just these four countries alone.

In France, where the p2p movement initially got started, as many as 25% of the population admits to downloading illegal content. What is so amazing about this statistic is that it stands in stark contrast to the draconian rules that the French government has tried to impose on their citizens. How elected officials think they can get away with making behavior a crime that one out of four is engaging in, I’ll never understand, but there does seem to be strong political support for banning downloaders from the net.

If you’re a content owner not all hope is lost. Some are taking advantage of this huge audience by encouraging them to share their films with friends, while others are finding that if they put their content online at a reasonable price, plenty of consumers don’t have a problem with paying for it. In fact, according to Futuresource’s report, 48 – 65% of residents in the respective countries mentioned that they watch TV sometimes or a lot on their PC or laptop. This would suggest that as many as 200 -300 million people in these countries are consuming legal internet content.

With more and more people turning to their computer as a television, the popularity of P2P will have a profound effect on video. Already we’ve seen content starting to become more bite sized for the web and smart producers turning towards alternative distribution systems to get their films out there. Competing in a world where you don’t control the entire chain of distribution may be scary for the big studios, but for small independent films, this rabid 8% could be your biggest source of marketing for your film.

Photo by Thomas Hawk

One of my very first jobs was working behind a concession counter for a big multi-plex cinema. It isn’t the sort of place where one would expect to learn a life skill, but early on I learned an important lesson in business, the art of the up-sell.

You see, movie theaters make very little from the box office receipts, so the concessions counter is the lifeblood of the industry. The setup is pretty much the same at every theater, but most people don’t tend to think about it. Because the actual cost of the popcorn and soda is so low, the theaters reap big profits from selling captive customers overpriced snacks and beverages.

One of the problems that theaters face, is that there are a ton of people who tend to order small sizes. It could be that they are trying to save money or that they don’t need oversized portions, but because the containers cost the theater more than the actual popcorn or soda, going from a small to a larger size, tends to be pure profit for the theater.

To help “encourage” movie goers to pay the max, theaters will price their small popcorns at ridiculously expensive levels and then have a minor jump in price from small to medium and medium to large. If you were to price the popcorn by ounce, a small would cost four times as much as a large, but because of the high cost at the small level, it makes it easier to convince consumers to pay a little bit extra for a lot more food.

When I sold concessions, the sales pitch would typically go “hey did you know you can get a large for only 50 cents extra?” That was all it took and at least 75% of the customers would go big.

In thinking about why my theater was so effective at up-selling, two things jump out at me. The first has to do with the way the pricing was set. Consumers got tremendously more value at the higher levels, then the lower ones. It might be tough convincing someone to spend $5 on a bucket of popcorn to begin with, but once they made that purchase, an extra 10% for 200% more, seems small. Secondly though, they had an actual human explain this value to the customer. Concession employees were expected to upsell or suggestive sell on every single transaction. It could be subtle, but management made sure that every employee was at least presenting more options to the customers.

What made me take this trip down memory lane is a recent experience with Real’s Rhapsody music service. Before the internet, napster, and digitization, I used to collect music with a passion. Records, Tapes, CDs, it didn’t matter. I would scour local garage sales and thrift stores looking for bargains, (not to mention all of the BMG and Columbia House memberships.)

When the internet first started to take off, my collecting habits intensified. I’d surf Ebay for favorite artists. I didn’t care about the singles or the greatest hits, I was after the rare B-sides that were released internationally. There is something amazing about listening to an artist’s entire discography in order, but back then, it took a lot of money to buy every single song that an artist produced.

Once MP3’s took off, I abandoned physical playback and spent many late nights digitizing my music. As time has gone on though, I’ve realized what a hassle it is trying to maintain a large digital library. Computers have a way of freaking out once you go over a certain limit, there are countless hard drive failures involving added expenses and I don’t even want to think about the amount of time I’ve spent dealing with buffer overrun errors while backing up my music. The bottom line is that if you’re trying to collect a couple hundred thousand Mp3’s, it’s not only cheaper to rent then it is to buy, it’s cheaper just to store it.

Because I had such a large music collection, I never gave Rhapsody a chance, but as one hard drive failure after another has taken large chunks out of my music library, I’ve found myself turning to the internet for specific artists or songs that I’m now missing.

Over the last year, I’ve signed up for Rhapsody three different times to listen to music that’s disappeared over time. Thanks to their free trial offers, I’ve been able to hear a lot of great music, but never kept my membership for longer than a month.

What surprised me so much about the experience was how much I enjoyed it. Not only can I get the latest top hits for a fraction of what I used to spend, but I also get access to the expensive b-sides that were never in wide circulation. The first time I logged onto the service, I was estactic after discovering an entire album’s worth of material from my favorite artist.

Given how much enjoyment I’ve gotten out of the service, one would think that it would be a no brainer for me to spend a modest amount of money for access to more music then you can even think about, but when it came down to becoming a paying member, Real Networks lost me on the up-sell.

You see, as a streaming internet music service, Rhapsody really is an amazing product, but its lack of a robust download solution, means that if you want to take your music on the go, customers have limited options. Since Real realizes that not every consumer wants downloadable functionality, they price their service in two tiers.

The first is the standard all you can eat streaming music of just about any song or artist you can think of (we’re talking stuff not even on Bit Torrent.) For $2 more though, you can download songs to “approved devices” and rock out using a portable device that doesn’t need to be connected to the net.

As an internet streaming service, I would have been happy to pay their monthly fee for all of the music that they provide, but by offering a download “upgrade”, it makes me keenly aware of a significant limitation to the service. As is, I can listen to Pandora via the internet now, so a streaming only service makes me second guess how much value Rhapsody really has. I wouldn’t even mind paying the $2 more per month just for streaming access, but don’t see enough value in the $2 upgrade to justify signing up for the downloading tier.

Part of this is because I’m not able to download a DRM free MP3. Even if you download your music, you still have to “refresh” your approved device once a month or your songs get disabled. You’re also limited in the number of devices you can play your Real files on.

As much as I prefer downloading over streaming, it simply isn’t worth an extra $24 per year for a weaksauce version of the real thing. Having to connect my cell phone to the net once a month is obnoxious and I’m not particularly fond of downloading music that I can’t play on all the electronic gadgets that I own.

If they eliminated the download tier, I’d probably be a customer right now, but by making me choose, they’ve persuaded me not to sign up for either package.

Not everyone purchased an up-sell when I sold concessions, but during my entire time behind the counter, I never had a single customer walk away without at least buying the small popcorn that they originally asked for. When it comes to Rhapsody though, the different pricing tiers have cost them at least one customer who would have paid, if he didn’t have to choose between streaming only or weaksauce downloading.

I don’t know if Real does consumer surveys, but I bet that I’m not the only one to agonize over this distinction. Instead of using the price difference to highlight their weaknesses, Real would be better off by either raising the price $2 on everyone and then including their downloading solutions with the service or eliminate the downloading tier entirely and focus on being an amazing and comprehensive streaming service only. By trying to straddle between streaming and downloading, they are only confusing customers and highlighting the limitations to their service.

I love Netflix, but more than once their data policies have forced me to reconsider whether or not I should have a membership with them. You see, I believe that when you rate a movie, the data should belong to you. After all, you were the one that spent the time to input the rating and it’s personal to your tastes. In fact, I’d be willing to bet that once you get past 100 ratings, you can’t even find two rating profiles that are identical.

Netflix on the other hand, seems to feel that they own your ratings data and have guarded it closely. This wouldn’t be so important, if Netflix was the only movie site out there, but because they refuse to implement many web 2.0 features, there are many other movie sites that consumers may prefer.

Because I have memberships with about a dozen of these sites, it has created an awkward and cumbersome situation where I’m forced to to maintain a dozen different sets of ratings, instead of being able to sync them all together.

Since even small differences in how you rate a movie can have a big impact on the recommendations that you receive, whoever is able to get a consumer to input the most ratings is given a powerful moat around their subscribers.

For a long time, Netflix kept their silo closed, but about nine months ago, they opened up their API to outside developers. At the time, I saw this as a watershed event because it marked a change in philosophy from one of control to one allowing for innovation, inside or outside of Netflix’s site.

If you go their developer site, you’ll see that they still encourage people to use ratings data to create cool apps.

“The Netflix API allows developers full access to our catalog of movies and actors, and–when properly authorized–subscriber data, such as queues, ratings, rental history, and reviews.”

Regrettably, after opening up this data to outside developers, Netflix has apparently changed their tune and is now trying to take away this feature from their customers. From an email I received from Jinni.com,

“Hi Davis Freeberg,

As always, feel free to get in touch with questions. And stay tuned for new features and improvements that we’re working on now toward our public beta opening!” (Note: Bold added by me)

In the long run, I believe that this will hurt the company. I can understand Netflix’s desire to protect their competitive moat, but as a subscriber this upsets me to no end. Instead of letting me choose the most innovative movie site, they are making it more difficult for other sites to work with their data. This may not seem like a big deal to most, but preventing customers from accessing content in their preferred format, tends to create dissatisfaction. I feel that it also raises questions of anti-trust abuse when you consider Netflix’s market position and the grip that they are maintaining on their subscriber data.

Instead of using their rating silos to stop competition, I’d rather see Netflix forced to compete fairly by creating the best product out there.

I’m not sure that I’ll cancel my account, but taking this kind of a hostile stance against a competitor makes it hard for me to continue to recommend the service to others. I hope that Netflix reconsiders their stance on this issue and allow consumers to take full advantage of the openness of the web.

Update – Netflix responds on their developer forum – “The API Terms of Service don’t allow an application to capture a subscriber’s user name and password, which is required to scrape user data from the site. While we do expose ratings via the API, we do recognized that there isn’t a good way to grab a subscriber’s full rating history. We’re working on the technical and legal details to allow developers to access this info without running afoul of our terms of service nor enabling a unsatisfactory user experience.”

CNET reported this morning that AT&T and Comcast are planning on adopting a three strikes and you’re out policy for P2P users. The move is yet another desperate attempt by the media industry to try and regain control over content distribution. Because most broadband providers have government protected duopolies, they hope to use the MSOs as a chokepoint in their war on privacy piracy.

If you don’t actively engage in P2P sharing, you probably don’t think you need to worry about this, but I think there are already reasons to be alarmed. Even before the program’s launch, we are seeing reports of innocent customers being targeted by Comcast’s DMCA enforcement division.

Recently, John Aprigliano received a letter from Comcast asking him to take down a torrent that he was allegedly seeding. As if hitting him with a bogus DMCA takedown request wasn’t bad enough, Comcast had to insult his taste in movies by accusing him of sharing Cadillac Records, a movie that he had never heard of BTW.

When he called Comcast to figure it out, he got the usual run around. After 4 different telephone calls and an hour of hold time, he was finally able to determine that Comcast sent him the notice because of an old modem that was now being used by someone else.

I find this scary because I tend to move around a lot. Over the course of my life, I’ve easily used ten different modems. Considering how popular Bit Torrent is, there is more than a good chance that one of my former modems is being used pirate media. Why should I now have to worry about getting kicked off the net, just because Comcast can’t tell the difference between an IP and MAC address?

In John’s case, he was fortunate to be tech savvy enough to catch this, but what happens when some little old lady loses her broadband just because of a Comcast screw up? Are most people really going to know that they need to ask Comcast, what they have down for their Mac address? Somehow, I doubt that my Mom would have been able to prove herself innocent in the same situation.

During the RIAA’s lawsuit blitz, there have been plenty of examples where they filed lawsuits against innocent “infringers”. Now the media industry wants to exploit government granted monopolies, in order to take away high speed internet from those same victims. Forgive me, if I’m more then a little pessimistic. Why Comcast or AT&T would even consider such an anti-consumer proposal is beyond me, but the whole scheme is doomed for failure.

The pirates will eventually figure out even better ways to encrypt their traffic and the end result will just be a bunch of ticked off consumers feeling like big brother is breathing down their neck. It’s hard to get excited about having Comcast monitor P2P activity, when they already have a history for screwing these things up.

DivX reported their 1st quarter earnings on Monday and while I’m still waiting to read the actual 10k before digging too far into the numbers, I did want to comment on what I see as a significant shift in strategy. Over the last 7 years, DivX has done an impressive job of building an eco-system around a single file format. The first time that I came across a DivX file, I actually thought that it was some kind of a virus. It took me two weeks before I worked up the courage to download the DivX media player so that I could play the movie, but once I did, I realized that my fears were unfounded. The file not only offered a superior video experience, but it was a lot smaller than the MPEG files that I was used to downloading. Since I was on a dial-up connection at the time, every little byte made a big difference.

As the P2P networks developed, DivX and it’s open source cousin XviD, became an important resource for file sharers. Initially, my own interest in DivX was driven by it’s technological advantages over other video formats, as well as the wide availability of DivX content on the grey market, but as compression technology has evolved, my reasons for using DivX have changed as well. Since I’m no longer on a dial-up network, compression is less important then what I can actually do with my videos.

As DivX gained in popularity, they were able to forge agreements with consumer electronic manufacturers that allowed you to play DivX files on a wide range of devices. Even though, H.264 is a superior standard for internet video, I still prefer DivX files because I know that I’ll be able to play them on the hardware devices that I own.

By creating an eco-system that supports portability, DivX has been able to lock me into their format in the same way that Apple has been able to use iTunes to keep their customers buying iPods instead of mp3 players.

As H.264, Microsoft, Apple and Adobe all continue to creep into DivX’s territory, there has been a lot of concern over how DivX would respond to these competing threats. Microsoft’s approach has been to batten down the hatches by developing their proprietary Silverlight codec. By retaining full control over the video format, they are able to convince people to buy as many Microsoft supported products as possible. These extra restrictions increase the appeal of Silverlight for DRM hungry Hollywood studios, but it also frustrates their customers in the process. Incompatible file formats are the reason why services like Netflix’s Watch Now doesn’t get along with Apple. Since Microsoft (and Apple) refuse to open up their codecs, it gives them a monopoly on the hardware that is allowed to support their video files.

Apple has at least opened up their system a little bit by adding support for the H.264 format, but they’ve still chosen to wrap their h.264 files inside of the Quicktime container. This prevents other companies from supporting Apple H.264 content, without obtaining a license for Quicktime first. This helps to open up Apple’s eco-system to alternative video formats, but still gives Apple control over the companies that are allowed to play nice with their your media.

Similarly, Adobe has also forged agreements to support H.264 inside of flash, but if you want to take your Flash H.264 files portable, you’ll need a device that can support the Flash format. To their credit, Adobe has done a good job of building momentum for downloadable flash by supporting open source initiatives, a new DRM system, and by removing license fees for mobile providers, but despite their early traction with these efforts, there are still very few hardware devices that are actually capable of playing portable flash content.

With so many companies pursuing proprietary video strategies, one would expect DivX to be focusing on locking consumers into the DivX format, but like most things having to do with DivX, their strategy for dealing with the next generation of codecs is also built on a system of openness.

We got our first real glimpse of this strategy last November when DivX announced that they had acquired Mainconcept for $22 – $28 million. The Mainconcept acquisition gave DivX an immediate footprint in the H.264 space, but it also raised some important questions about how DivX could maintain a monopoly on their community, while supporting a format that is widely available to competitors.

Interestingly enough, while discussing H.264 on their latest conference call, DivX CEO Kevin Hell pointed out that the current state of H.264 really isn’t all that different from the MPEG-4 standard that DivX was built on.

“Looking forward, a real opportunity exists for DivX to emerge as the consumer face of H.264, serving as a trusted brand for users who don’t want to concern themselves with underlying formats or technologies. In fact, the current H.264 market resembles in many ways the early stages of MPEG-4 market.

When DivX first emerged seven years ago there were number of different and incompatible MPEG-4 implementations available. Through our strong consumer adoption and the creation of the DivX certification program, we were able to simplify the experience for consumers and provide a solution that just works across any device. We plan to repeat that strategy by incorporating broad H.264 support into both our software and consumer electronics offerings under the DivX brand. We are on track to release a new version of our software in 2008 that supports H.264 and then extend that support to consumer electronic devices that are likely to hit the market in 2009. We believe that this development will help move the DivX brand beyond one single format and toward promise of support for any video content, on any device.”

DivX’s evolution towards H.264 won’t be a clean and easy transition, but it is the right direction for the company. If they can successfully integrate H.264 into their certification program, it will reduce the threat of their codec becoming obsolete and will highlight their certification process as being the real value added for consumer device manufacturers.

Instead of trying to educate consumers on the differences between MPEG-4 Part 2 vs. MPEG-4 AVC (H.264), CE manufacturers can slap the DivX label onto their devices and consumers will know that it will support their digital video libraries without complications. In fact, during the Q&A section of their conference call, DivX discussed the possibility of pushing this envelope even further by adding Flash support to their certification program.

“In terms of how we think about Flash more broadly, the vast majority of content that is downloaded today is in DivX format or variations of the DivX format, so we don’t see that as being a threat in terms of the use case that we’re really providing, which is high quality content delivered through the internet and then played back on a variety of devices. To the extent that Flash starts to get traction in terms of files that are downloaded at high quality and based on the terms, it would be something that we could actually extend into and offer into our certification program as well and that’s what we’d be looking to do.”

Part of what makes DivX such a difficult company to pin down, is their ability to take competitors and turn them into partners. On one hand, Microsoft is one of the biggest threats to DivX, but if they can get them to extend DivX support to the Xbox, they could become an important customer.

Adobe is currently using Mainconcept to power their H.264 support, but they are also trying to establish their own format as the new standard for internet delivered video. These complex relationships are enough to make anyone’s head spin, but DivX has a way of getting their partners to look at the glass half full side of the equation.

On one hand, It’s hard for me to believe that Adobe would be all that enthusiastic about giving up control over their flash content, but on the other hand, a DivX partnership would create a powerful competitor to Apple and Microsoft’s closed systems.

Adobe would gain access to an established community of video fans and would have one more platform that could drive demand for Flash content. Instead of having to worry about the lack of downloadable flash content, they could leverage DivX’s popularity, while slowly introducing their own standard for web video. While I doubt that older DivX devices would be able to support Flash with a firmware update, any new DivX devices would be able to support their content.

For DivX, they would be able to increase the appeal of their brand by offering support for the next generation of internet video. They could also use Adobe DRM as a way of bypassing studio approval for DivX content. While DivX did mention plans to update their DRM later this year, getting in through Adobe’s backdoor could be a lot easier than buying off the studios. According to DivX’s 4th quarter 10k filing, they paid Sony $1.5 million and gave them 100,000 warrants at a strike price of $16.14, in order to get the studio to bless the DivX format. While it’s possible that DivX plans on buying off all of the studios, this could get expensive really quick, if DivX is serious about going legit.

For consumers, it would be the biggest win of all. Instead of being locked into a single file format, they would have the flexiblity to adopt alternative standards without having to abandon their current media libraries. This would pressure Microsoft and Apple to open up their hardware, instead of maintaining data silos.

It’s hard to judge how serious DivX is about adopting flash support from just a few comments, but even beyond flash, having support for multi-formats adds real value to their brand. As new forms of digital transmission unfold, DivX is in a position to attach their brand to a much larger category of web video.

Some of the niche video formats don’t have the ability to negotiate partnerships with the device manufacturers directly, but through DivX could gain access to a much larger audience. If DivX certification suddenly meant that Matroska containers could play on DivX devices, it would open up another community that DivX could tap into and it would change how Matroska fans think about the DivX brand.

Bringing other formats into the DivX program, would add to DivX’s cost of revenue, but it would make DivX certification more valuable to their CE partners. I may enjoy dissecting the nuances between the various competing video formats, but most consumers don’t want to think about it. They want to be able to play whatever file they have without converting it into a single format. By focusing on supporting as many formats as possible, DivX may end up competing with their own eco-system, but they’ll also expand their reach in the process. By taking DivX beyond the codec, it allows their community to move forward with the future, while hanging onto the treasures from the past.

Disclosure – I own shares of Netflix

Over the past few months, I’ve finally started to get a feel for Media Center Vista and while I haven’t tried out every feature in the program, I have played around with it long enough to have some initial thoughts. Before I tried the software, I had low expectations, but after actually using the program, I’ve been really impressed with what the Media Center team has put together.

Media Center Vista allows you to perform some pretty advanced tasks without having to be a computer geek in order to figure out how to use it. I initially had some reservations about the user interface, but it only took about a week, before I found it growing on me. There are still improvements that Microsoft needs to make, but they’ve made a giant leap forward, compared to the original XP version.

Pros

-Media Center Vista is wicked fast at finding new programs. In the XP version, the software was painfully slow at trying to search for shows. As soon as I would start typing in the name of a show, XP would freak out from trying to sort through so much information. In Vista, the program still starts searching immediately, but the indexing has been turbocharged. Instead of having to wait for the menu, the results will appear as fast as you can type. This faster indexing shows up in a number of areas. When you are browsing, you can hit page down and scroll through programs as fast as you can read them. If you want to rearrange the priority of your recordings, you can make changes and move onto other areas of the program without having to wait forever while the system checks for conflicts.

-The interface looks fantastic. Microsoft has done a good job of creating a clean and intuitive DVR experience. The program is easy to navigate and has lots of extra features. On the surface the design appears relatively simple, but you can tell that Microsoft has paid a lot of attention to the little details. Whether it’s being able to double click on the picture in picture window, in order to bring up the full screen or being able to see the DVD art for upcoming movies, there are a lot of subtle features that make for a more enjoyable media experience.

-Vista comes with 30 second skip enabled. TiVo fans know that you can hack your remote to add this feature, but the big studios were able to scare TiVo into disabling it for the masses. In the past, I’ve never really used the 30 second skip feature because it meant giving up the skip to the end button on my remote. After spending some time with it on Media Center, I’ve been really surprised at how much I’m enjoying it. Hitting a button six times is a lot easier than trying to guess when the program is about to start again.

-There is minimal interference between you and your recordings. One of my biggest frustrations with the generic DVR was that it required too many unnecessary steps, before I could interact with my content. It felt like I had to hit ten buttons before I could schedule a movie, delete a recording or even watch a show. With Vista Media Center, it’s an entirely different story. The entire experience is built around the content that you are interacting with. You can’t do everything from all levels of the software, but each step is intuitively linked to the task that you are focused on. If you are watching a TV show, then by right clicking you can delete the program or burn it to DVD. If you are playing music it’s one click to pause, skip, repeat, shuffle . . . .

-You can watch TV while surfing the web. Media Center is really designed for the living room, but I’m primarily using it in a desktop setting. I didn’t think that I’d watch a lot of TV at my desk, but I’ve found it to be the perfect compliment to streaming Netflix and YouTube. This isn’t ideal for shows with intense action and complex story lines, but its perfect for tuning into the news when you see a story break online or for listening to late night talk shows, while you’re multitasking on the web. This feature won’t benefit you, if you plan on using Media Center on your TV, but it’s a good reason to add on a TV tuner, the next time you upgrade your PC.

-You can use the XBox360 as an extender. I’ve read a lot about the Xbox extenders, but I had never actually seen one in action. Connecting my Xbox to Media Center took an extra registration step, but it was well worth the time to get it set up. When I first heard about Microsoft’s extender strategy, I was skeptical that it would stream videos without problems or program lock ups. While I didn’t test the connection using WiFi, my experience using the Xbox was almost identical to having the PC directly connected to the TV. No lag, no stuttering, just instant access to my content on my big screen tv.

-You can watch TV while using the menus. TiVo uses picture in picture technology on their Comcast download, but you won’t find it on their stand alone DVRs. I had forgotten how much I enjoyed this until I started using Vista as a DVR. Whether it’s a live show or a recording, Vista will minimize whatever program that’s on, when you want to dig deeper into the menu settings. This isn’t good if you’ve accidentally stumbled onto a football game and are desperately trying to avoid the score, but it is nice for when you’re not exactly sure what you want to watch.

-It will help you find programs that are on right now. Vista Media Center allows you to search for programs in a number of ways, but its their support for upcoming television, that impressed me the most. When it comes to searching for things like TV series, kid shows, etc., it allows you to browse alphabetically or by date. They’ve also built a separate section for movies and for sports where they’ve packed in some extra bonus content. In the TV and movies section, they offer plugins for various movie download services and in the sports section Vista will let you check the box scores or add fantasy players to track.

-You can skip automatically skip commercials. DVRs make it easy to skip commercials, but Vista Media Center takes things one step further by supporting plugins, that can edit out those pesky little ads entirely. It’s not easy to set up and it’s not something that is enabled by default, but it’s still a pretty sweet feature to add.

-You can placeshift your TV. The Slingbox is great if you have a cable DVR or a TiVo, but with Media Center you can download a free plugin that will let you watch your content wherever you can connect to the net. I haven’t actually used the program yet, but it’s still a great feature to have access to.

-You can burn DVDs. Normally, I’m pretty good about watching all of the shows that I record, but when it comes to boxing, I just don’t have time to see every fighter. It’s my favorite sport, but since I record every fight (even the ones on the Spanish channels), there isn’t enough time/hard drive space, to get caught up. Since I’ll never really know which fighters will end up making it big, I’ve decided to use my Media Center to archive all of the fights. By saving them to DVD, I should be able to go back and watch the fights that mattered.

-It supports external storage. Media Center gives you a lot of control over how you want to set up your storage. Since I’m using it as a secondary DVR, I’ve set it up to record a maximum of 100GB on my internal drive. If I need more, I can add an external drive or increase my internal hard drive allocation.

Cons

-You shouldn’t have to reboot your TV. One of the things that I love about my TiVo is that it just works. You don’t have to be a tech geek to figure it out, you plug it into your TV and it records everything. In the entire time that I’ve been a TiVo customer, I can think of very few occasions where TiVo failed to record my programing. When it comes to Media Center, it’s important to remember that it’s a PC first and a DVR second. Over the last few months, I’ve found the program to be mostly reliable, but it hasn’t been smooth sailing either. Whether it’s been dealing with poor DRM design, troubleshooting a bug that refused to let me download the guide data or having my computer crash while recording television, there have been several times where I’ve missed recordings, because of PC related problems. While I can’t blame Microsoft for all of my problems, it’s still frustrating to miss a show because of technical difficulties.

-Internet video support is weak. Media Center includes support for services like Vongo and Showtime on Demand, but it involves registering and downloading a separate program before you can get it working. As a Netflix subscriber, I was looking forward to being able to use Watch Now inside of Media Center, but Microsoft has left it up to the fans to build support for this. Microsoft includes some MSN internet video content, but they make you watch pre-roll ads before knowing whether or not it’s something that you are interested in. The Xbox may unofficially support DivX, but you can’t access it inside of media center. If you prefer to use a media extender instead, it will support your XviD files, but it’s set up to block your DivX content.

-It won’t record radio. XM may have just settled a lawsuit over their radio DVR, but recording radio shouldn’t be any different than television content. Media Center will let you listen to OTA radio, but it doesn’t let you record any of the programs.

-Fast forward is a little too powerful. It may be, that I’m just used to TiVo, but Vista’s fast forward speeds are hard to adjust to. They’ve got slow, almost fast and then it jumps to hyper speed. I can’t tell whether or not they are using a five second skip back, but when I hit play, I’m usually way past the start of the program. If you stick to the 30 second skip it’s not a problem, but it’d be nice if there was some kind of a way to adjust the timing on this.

-You can’t skip to the middle of a program. One of the things that I like about downloaded video is being able to immediately jump to the middle or the end of a program. Since this is a key feature in Window’s media player, I was surprised to see this missing from Media Center. There is also no way to jump 15 minutes ahead. If you happen to fall asleep during the middle of a program, you’re stuck with fast forwarding in order to get back to where you were at.

-You can’t rate your television. As television continues to involve, it’s becoming increasingly personal. Media Center does a good job of recording TV, but it doesn’t do a very good job of getting to know you. You can sort movies by the highest rated, but its using someone else’s criteria. Because you can’t tell Media Center what you do and don’t like, there are no suggested recordings or personalization.

-It doesn’t support auto-recording of wishlists. I’m a big basketball fan, but I’m really only interested in seeing the Laker games. Media Center will let me search for the next time that they are playing, but it won’t automatically record the game. It would be nice to be able to use media center to record programs that are customized to my interests.
Al pointed out in the comments that you can actually uses wishlists, you just need to set it up from the add recording field. Thanks for the help Al. This one definitely should go in the pro category.

-Vista’s DRM doesn’t play nice with HD. I’m still fuming over this one. I knew that recording HDTV on Vista would be a hassle, so I stuck with standard tuners when I customized my computer. After upgrading to an HD monitor, Vista disabled my Netflix Watch Now and put Media Center into lock down. If Apple’s DRM wasn’t just as bad, I would be thinking differently after this experience.

-It takes forever to burn a DVD. I was really jazzed up over being able to archive shows onto DVD, but the sluggishness of the DVD burning capabilities has me rethinking this game plan. It took me 2 and a half hours to burn a one hour program to DVD. It’d be one thing if I was using lousy hardware, but it takes less then 4 minutes for me to burn a 2 hour DivX film. It’s nice to be able to save your TV, but it should never take more time to burn the disc, than it does to watch it.

-Good for early adopters, complicated for everyone else. Vista Media Center offers a lot of unique features, but it takes too much tweaking to set these up. Placeshifting and auto commercial skipping are available, but it’s up the consumer to find and install these programs. Even if you know what you are doing, the setup can still be complicated. Instead of making consumers seek out these programs, Microsoft should be including them as part of the package. It wouldn’t be popular with the media companies, but it’d win the company a lot more fans.

-The recording quality is terrible. It’s probably not fair to compare a cablecard connected TiVo with an analog cable media center set up, but the TiVO SD recordings on my 60″ screen, look way better than the Media Center recordings on my 22″ monitor. This probably has less to do with Media Center and more to do with the tuners that I’m using, but it still takes away from the user experience. Unless you want to spend the big bucks on a cablecard media center, you may end up having to deal with poor resolutions.

-There’s no turning back once you delete – As careful as I am, sometimes my DVR instincts go on auto-pilot and I’ll accidentally delete a show before watching it. With TiVo I can recover that program, but in Media Center it is gone forever. The file isn’t even in the Recycle bin. Media Center will always ask you to confirm before deleting, but this also creates one more button to push when you are done with the shows that you have watched.

So there you have it, the good, the bad and Media Center Vista. There are some rough spots around the edges, but it really is a fantastic program. I’m hoping that we’ll see better support for HDTV and for online video as the program continues to evolve.