"?> Davis Freeberg's Digital Connection » HDTV DVDs http://davisfreeberg.com Fri, 23 Sep 2011 19:32:38 +0000 en hourly 1 http://wordpress.org/?v=3.3.1 Coming Soon To A Store Near You http://davisfreeberg.com/2009/11/18/now-come-to-a-store-near-you/ http://davisfreeberg.com/2009/11/18/now-come-to-a-store-near-you/#comments Wed, 18 Nov 2009 16:51:03 +0000 Davis http://davisfreeberg.com/?p=1689 Hollywood DivXI 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.

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DivX On The PS3: Is Sony Selling Consoles or Sabotaging HD-DVD? http://davisfreeberg.com/2007/11/13/divx-on-the-ps3-is-sony-selling-consoles-or-sabotaging-hd-dvd/ http://davisfreeberg.com/2007/11/13/divx-on-the-ps3-is-sony-selling-consoles-or-sabotaging-hd-dvd/#comments Wed, 14 Nov 2007 05:42:06 +0000 Davis http://davisfreeberg.com/2007/11/13/divx-on-the-ps3-is-sony-selling-consoles-or-sabotaging-hd-dvd/ Loving the Playstation 3When I found out that DivX was going to be supported on the PS3, I was pretty much floored by the announcement. I can see lots of reasons why Microsoft would want to add DivX to the Xbox, but with Sony’s studio assets, I never expected them to embrace the format.

While there is no way for me to know what really motivated Sony, I do have my suspicions.

On a basic level, Sony obviously adopted DivX as a competitive strategy for the console market. Announcing support for a popular codec among hardcore gamers, makes a lot of sense, especially going into the holiday season. Whether or not Microsoft ends up adding DivX to the Xbox 360, Sony’s support for DivX will certainly provide a boost for the console.

On the surface, this explanation seems to make a lot of sense, but the tin-foil hat part of me, can’t help but wonder, if this really had more to do with Blu-Ray.

The current state of the HDTV DVD market is a mess. The Blu-Ray and HD-DVD camps seem to have settled for a stalemate and consumers are getting shafted in the process. By choosing a side in this battle, consumers risk ending up with obsolete technology, but that isn’t the greatest obstacle to adoption. The real reason why consumers are sticking with the standard DVD, is because they can’t get all of their content on either format.

It might be great that you can watch James Bond on Blu-Ray, but it’s a serious weakness when consumers can’t watch Universal, Paramount or Dreamworks content. If Sony was only certifying the PS3, I would dismiss these thoughts as paranoid delusions, but at DivX’s most recent investor presentation, they did say that they hoped to announce the first Blu-Ray/DivX chip before the end of the year.

Now I would never expect Sony to come out and openly endorse piracy, but if you think through the implications of PS3/DivX support, you might understand why I think that they are really engaging in a form of HD-DVD sabotage. By supporting DivX, consumers won’t get the same HD experience, but they will get access to all of the forbidden HD-DVD content and that has huge value to the consumer.

DivX support won’t be enough to end this silly war, but it could prove to be an important band-aid for the Blu-Ray camp. By partnering with DivX, Blu-Ray is now able to offer all content, even if some of that happens to be illegal. I don’t believe that DivX support will change the format war, but it will certainly put pressure on the HD-DVD format. Their advantage so far, has been based on the exclusivity of content and if Blu-Ray consumers are denied the programs that they want, I have no doubt that they’ll turn to DivX as a solution.

Whether Sony adopted DivX to help jump start PS3 sales or to gain a guerrilla advantage in the HD wars will remain a mystery, but either way the move is so shrewd, that I’m surprised to Sony make it. After seeing so many failed attempts at trying to maintain a proprietary system, it is a welcome relief to finally see cracks appearing in the Blu-Ray defenses.

While DivX support on the PS3 isn’t an admission that Blu-Ray has failed, I do think it’s a sign of how far Sony is willing to go, in order to win this battle. If both camps would just agree to cross-license their content, we could end this stupid war, but in the meantime, at least consumers will soon have illegitimate options, to get at the content that the studios don’t seem to want to sell them.

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Naturally It’s From Sony http://davisfreeberg.com/2007/11/06/naturally-its-from-sony/ http://davisfreeberg.com/2007/11/06/naturally-its-from-sony/#comments Wed, 07 Nov 2007 07:09:25 +0000 Davis http://davisfreeberg.com/2007/11/06/naturally-its-from-sony/

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Marvell Unveils Redbull For Video HD Microchip http://davisfreeberg.com/2007/09/05/marvell-unveils-redbull-for-video-hd-microchip/ http://davisfreeberg.com/2007/09/05/marvell-unveils-redbull-for-video-hd-microchip/#comments Thu, 06 Sep 2007 04:43:49 +0000 Davis http://davisfreeberg.com/2007/09/05/marvell-unveils-redbull-for-video-hd-microchip/ Qdeo Powered ICThere are a lot of gadget nuts out there, but when it comes to the microchips, they don’t really get a lot of buzz. I think part of why they don’t get more attention, is because you have to have an advanced Engineering degree, in order to understand most of it. Even after hundreds of millions of dollars in branding, I still don’t think that I could tell you the difference between an Intel and an AMD chip. All I really care about is how fast my computer will run and whether or not I can download movies onto it.

As a consumer, it’s easy for me to tune these details out, but as a Technology Enthusiast, I know that these chips represent the forefront of the consumer electronics industry. Before the product launches at CES, before the beta testing, even before the prototype, you need that microchip. It may take years for the buzz to catch up, but the advances that we see today will be the hot products of the future. I can’t admit to understanding it all, but it’s exciting to see the foreshadows of what’s to come.

Marvell Technologies unveiled their own vision of the CE future today and I was lucky enough to sit in on a conference call for the unveiling. During the call, Nikhil Balram, one of the inventors behind the chip, fielded questions from reporters and described how this tiny little device is going to bring HDTV to standard definition downloads.

Marvell has named the new chip Qdeo (quiet video) and hopes to develop the brand into something consumers will recognize. At a very basic level, Qdeo allows you to up-convert standard definition video into an HDTV signal. There are of course DVD players on the market that already do this, but Marvell is trying to take this to another level by providing up-conversion features on all video content, not just DVDs.

Over the last few years, we’ve seen a lot of interest in portable video. While there are many different ways to get video on the go, most of them end up involving smaller/downgraded video files than what’s necessary for HDTV. This isn’t a problem if all you want to do is take high res content you’ve purchased on your TV and minimize it for a cell phone, but if you want to take content you’ve downloaded for your cell phone and put it on your big screen TV, then get ready for quality that looks worse than the camcorder movies that float around on bit torrent.

Because of bandwidth considerations, most portable content isn’t ready for prime time. While there are ways to buy HDTV content for an Xbox360, most downloadable video solutions tend to be compressed for speed instead of quality.

What Marvell’s technology is trying to solve, is the quality problem that consumers face, from having so many different video choices. In order to address this issue, they built an algorithm that can support up-conversion features regardless of the resolution of the original file.

During the presentation, I didn’t have an opportunity to see a video of the chip at work, but Marvell did have several photo examples of the technology in action and I could see a difference. Marvell has more examples on their website, if you are interested in seeing some visual demonstrations of the product at work.

The technology makes three major improvements to the video signal.

First, the chip helps to eliminate the rough edges that you’ll find in a lot of videos. If you’ve ever seen a low res clip on a big screen TV, you’ll know that when you increase the size of the screen, it makes it really easy to see the individual pixels in your content. These show up as uneven lines and make your video look like it’s composed of a bunch of blocks. With the Qdeo technology, they’ve figured out a way to automatically blend these pixels, so that it appears more natural.

Secondly, the chip helps to remove noise from the file. This helps to add more contrast to a video and makes it easier to focus on the subjects in the video. From a consumer standpoint, this is probably the most noticeable improvement. By removing a lot of the white noise, it helps to make the video more vivid and alive.

Finally, the chip includes an automatic adjusting feature for color remapping and contrast enhancing. This was probably my favorite feature during the demonstration. Normally, I have a tough time distinguishing between colors because I am color blind, but even I was able to see how dramatic of a difference there was between an untreated photo and the end product. I don’t know their secret sauce behind this feature, but the end result appears to take areas that are over exposed and shift that light to areas where there are lots of shadows. It also makes the colors more vibrant, but doesn’t adjust the color of flesh, so it prevents people from looking like Oompa Loompas.

For the launch of the chip, Marvell has partnered with Meridian iRIS, in order to create an iPod high definition converter that plugs directly into an HDTV. Once it’s hooked up to your TV, all you need to do is dock your video iPod and you should be able to see high resolution copies of whatever movies you happen to have on the device.

As the market for this new technology develops, Marvell is hoping to expand the functionality into HDTV DVD players, set top boxes, flat panel TVs and media bridge products.

It’s hard to really get a sense of how powerful the technology is without seeing real life examples, but I think that the chip would have the biggest impact for the television market. Because the end result will only be as good as the display technology, even great video signals can be comprised by the wrong television. When I asked Balram as to whether there was a difference in the quality of a Qdeo TV vs. a portable device that connects to a different set, he seemed to feel that it wouldn’t be that significant.

“at that stage, once you are doing the processing at the source device, you’re really bypassing the processing in the TV. So whether at one stage, it actually did the processing or didn’t, at other stages you are simply using it as a raw panel. So then you get into things like which companies make better panels compared to which ones.”

With a longer design time for televisions, don’t expect to see Qdeo in any HDTVs right away. For those who can’t wait, Meridian does expect to have their HD iPod dock available sometime in October. Once we start to see the early reviews come in, we’ll know how good this technology really is, but if Marvell delivers on their promises, it should be beautiful technology to see in action.

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Stage6 Traffic Explodes: Every Dream Has A Price http://davisfreeberg.com/2007/08/10/stage6-traffic-explodes-every-dream-has-a-price/ http://davisfreeberg.com/2007/08/10/stage6-traffic-explodes-every-dream-has-a-price/#comments Fri, 10 Aug 2007 12:03:54 +0000 Davis http://davisfreeberg.com/2007/08/10/stage6-traffic-explodes-every-dream-has-a-price/ Every Dream Has A PriceDivX reported their second quarter earnings yesterday and from a financial perspective, there really weren’t too many surprises. The core business remains strong, but Stage6′s growth is certainly starting to impact earnings. The company ended up beating Non-GAAP expectations by a penny, while revenue came in slightly above the $18 million, that the analysts had anticipated. The company guided toward higher revenue expectations for the 3rd quarter, but reined in analyst expectations for the fourth.

From a strategy perspective, things were much more interesting. Lots of exciting news to digest. On the call, DivX addressed their opportunity to gain market share in their core licensing business, the future of DivX connected and how other emerging technologies could fit into that, and perhaps most importantly, the reasoning behind their plans to separate Stage6 from the larger company.

Of all the strategies discussed, there was one that surprised me the most though, DivX has made the decision to try and bury their hatchet with Hollywood, in an attempt to get DivX DRM blessed by the studios. I’m less than optimistic on management’s chances, but if they could pull it off, it would make DivX Connected a pretty compelling solution.

Trapped Between DVD and VOD

The DVD player market continues to account for the majority of DivX’s core licensing revenue. At the end of March, DivX had 32% global penetration of the DVD player market. This was up from 21% from a year earlier. During this quarter, $14.2 million of their revenue represented royalties from their OEM partners. Sony actually accounted for over 10% of their licensing revenue and I still can’t find Sony DivX DVD players in the US.

At this point, DivX has achieved 90% penetration levels in France, Spain and Russia. In the US, the percentage of DVD players that included DivX doubled over a year ago and is now at 28%. In Japan, they still only have an 11% penetration level, but this is up from 5% a year ago. Over the last year, they’ve been able to successfully renew their contracts with their top OEMs and have been able to maintain pricing levels.

By growing their market share for the DVD player market, it has allowed DivX to continue to post impressive year over year growth, even though it’s clear that the DVD has peaked. Right now is an awkward time for DivX because there are so many uncertainties as to how the VOD market will end up shaking out. There are many pundits who are worried that DivX won’t be able to replace their DVD revenue as it tapers off.

To me, this seems a little foolish and is a bit like being afraid of the boogie man. The DVD market will not disappear overnight, it will live longer than the VCR survived. As people migrate to digital TV, DivX is in an excellent position to benefit from that. If their OEM partners see that there is no more demand for DVD players, it will make DivX certification an even greater necessity for them.

The transition to VOD will eventually happen on a mass scale, but it will still take years before the next generation of TV gadgets hits the mainstream.

When Greenhall was asked about how long he thought it would be, before the public started to move from DVD players to connected devices, he told analysts that because DivX’s ecosystem was so dependent on their OEM partners, that it was hard to forecast the transition, but that when it happens, the revenue will come quickly because their partners produce goods for the mass markets.

Emerging Technologies Will Open New Doors

Part of what makes DivX such a question mark, is the sheer size of their addressable market. They’ve established a nice business in the DVD market, but now want to expand DivX to a whole host of devices. During the earnings presentation, Hell listed the following technologies as a few of the markets that are on their hit list; Mobile devices, set top boxes, digital still cameras, game consoles, portable media players and digital televisions.

Of these potential markets, the cell phones have the most potential. Over this quarter, Samsung announced their second DivX enabled phone and will be selling the phone in the Chinese market. Since their first Samsung phone announcement, DivX has seen a lot of interest in working with other cell phone manufacturers.

Their OEM partners are excited about the technology and are coming to them for access. There will be more models announced in the future and while they didn’t give a time line, management seemed optimistic that the announcements would come soon.

On the set top front, during the quarter Divx announed that both St Microelectronics and NXP were both developing chips for a DivX set top box solution.

The box will allow you to plug in an external hard and play DivX files directly on your TV. This helps to solve the problem of getting DivX content to the living room, but still doesn’t help to add to the DivX content eco-sphere. You can’t take the TV off the box, but at least you can bring DivX to it. Hell also said that there was one more set top chip deal that hasn’t been announced.

Hell also included DivX HD as part of the emerging category. HDTV has been one of the hottest growth areas in consumer electronics. Users are starting to revolt. People love the DivX HD teasers on the stage6 website and from (cough) “others sources” on the innerwebs, but they can’t get it to the TV without some kind of a media center.

DivX wants to license their HD technology on top of HD-DVD and Blu-Ray players, but I think that they’d have a much better shot at convincing their OEM partners to sell a low priced DVD player with “DivX HD.” included. With as much as the studios are charging for the next gen players, a box with DivX HD certification and a dirt cheap price point, would appeal to consumers who know better than to try and pick a side in a Hollywood format war.

DivX Connected: Bringing Partners Into The DivX Community

DivX has talked quite a bit about their Connected initiative, but they’ve always left things a little sketchy on the details. Is it a box, is it not a box? Who could really tell, but after launching a prototype of their connected solution for beta testing, the company is now starting to open up on the details. DivX Connected can be a lot of things, but they see it being a similar experience to Apple TV, except minus the high cost and the restrictions on content.

The whole concept is really a lot larger than the prototype box. It’s about bringing a diverse set of partners together, in order to create a seamless experience for consumers. Hell describe their efforts on the program during the call. “We are engaged in a large cross section of partners to implement DivX connected on existing devices. From connected DVD players and digital televisions, essentially any devices that has connectivity and DivX playback ability.”

This philosophy of openness extends even beyond the hardware devices and includes the companies that are trying to sell internet video, as well as the content producers themselves.

“going forward we will focus on a broad range of content solutions through a powered by DivX model, working with a variety of partners to deliver content. In this model Stage6 becomes one of many partners using our technology. To make this happen we are doing two things, First we are increasing our focus on premium content and re-engaging in discussions with major content providers who want to take advantage of our significant footprint. Secondly, we’re building out our existing video on demand product platform so that we can offer out of the box scalable solutions to any distributor of digital content from online retailers to network operators.”

This is a big shift for DivX and one that could have important ramifications. From early on, DivX has bumped heads with the studio fat cats. In the past, DivX has relied on their users to distribute their codec through the P2P networks, but now that the studios are beginning to warm to internet delivery, DivX is seizing on this opportunity, in an attempt to beef up the content that they can offer their own consumers.

Right now, businesses don’t pick their codecs based on quality, they use the ones that the studios tell them they are allowed to use. People like to complain about internet video services not supporting Apple, but that is because Apple refuses to license their codec to anyone. DivX wants to go the other route to try and work with everyone, but until DivX DRM can get Hollywood’s blessing, they’ll be frozen out of the mainstream market.

I’m skeptical that the studios will be particularly eager to work with DivX, but if they could pull it off, it would open plenty of doors for them and would certainly be a game changer for the company. On the call, Hell said that they are trying to go after this opportunity in two ways.

“First we’re going to be focusing on the studios themselves and other providers of premium content to get adoption and format approval from them. In addition, we’ll also be working with other content distributors, folks like Amazon, Netflix, Movielink, etc. so that we can enable their platforms and again we’re moving into a role here where we don’t want to be a storefront, in terms of the DivX Corp business. We’re looking to power other people’s platform.”

It’d be easy for DivX to try and sell content themselves (in fact that’s part of what Stage6 is about), but this is a low margin business and DivX is better off letting others fight over the content. By charging for access, it leaves room for much healthier profit margins. It also gives them a greater exposure to consumers, than anything that they could accomplish independently.

Right now, Apple wants to lock everyone else out of the market, but this is why AppleTV is such a weak platform. Not only do you pay for it, but then you have to buy only their content. DivX wants to see a world where they can bring Blockbuster and Netflix together and let consumers decide which service they want to use. By maintaining their commitment to keeping their platform open, it improves their competitive position over Apple and Microsoft, but none of that matters, until Hollywood agrees to let companies distribute video content in DivX’s format.

A Start-Up Trapped Beneath The Microscope Of Public Scrutiny

Since the launch of Stage6, it’s been an unbelievable hit. The growth has shown no signs of slowing. Since it’s launch, it’s help to push 35 million DivX web player downloads, but hasn’t generated much in the way of direct revenues. For now Greenhall wants to build up the community, before trying to figure out how to make money off of it.

“Like many sites in a similar stage of their life cycle, we’re not actively trying to monetize this user base, yet. We believe that building a community first will enable us to explore a number of different revenue models in the future, but building the community absolutely comes first.”

Since the the site’s launch, the community has responded enthusiastically to the video sharing portal and what started out as a reasonable $1 million marketing expense during the 1st quarter, has now swelled to a $2.4 million bill for this quarter (of which 70% is bandwidth.) Next quarter DivX estimates that they’ll need to spend $4.5 million and another $5.4 million in the fourth quarter. Stage 6 has about 20 -30 DivX employees that work on the site.

With the traffic and the costs starting to add up, it’s no wonder that the company wants to raise outside funds and operate Stage6 as a separate entity. During the call, their CFO, Dan Halvorson gave the reasoning behind the plan,

“Most businesses, at the same point in their life cycle as Stage6, simply wouldn’t be public or part of a public entity. They need to make investments that don’t have immediate tangible ROI or have too strong an impact on a company’s balance sheet to justify. We believe strongly that Stage6 has built a foundation that not merely be sustained, but rather amplified. As such, our board and management, thought it would be best to value our alternatives and one viable option is that Stage6 would be separated out and run as a private company.”

DivX said tat they’d like to finish the break up as close to the end of the year as possible. I’m not sure if this is for tax reasons or strategic purposes, but in the meantime, they are estimating that they’ll need to put another $10 million into the site. Greenhall wasn’t sure, on how they’d end up valuing Stage6, but was open to possibilities and wanted to do what’s best for DivX shareholders.

They may look for a private equity deal or an institutional investment, but they want to keep their options open. After announcing their intent to separate the the two companies, they’ve already received inquiries from financial and “strategic partners” on making an investment.

Overall, DivX didn’t blow anyone’s socks off this quarter, but they did continue to show that their business is healthy and that their business model is valid. They also continued to demonstrate their commitment toward investing in their growth. The extra R&D may end up bothering some shareholders in the short run, but once they break the two companies apart, they’ll have two businesses exposed to the white hot internet video sector, instead of a house divided.

Disclosure: I own stock in Netflix

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Sony Has Already Lost The Console Wars http://davisfreeberg.com/2007/07/25/sony-has-already-lost-the-console-wars/ http://davisfreeberg.com/2007/07/25/sony-has-already-lost-the-console-wars/#comments Thu, 26 Jul 2007 06:33:06 +0000 Davis http://davisfreeberg.com/2007/07/25/sony-has-already-lost-the-console-wars/ Game Over For The PS3There is no doubt that Sony dominated the second generation of the console wars. Their PS2 platform had an early jump on the Xbox and Sony never looked back. Since it’s launch, the console has sold over 105 million units and has made Sony a video game powerhouse.

Given their footprint, Sony should have had an easy time convincing their customer base to upgrade, but as the latest generation of consoles have launched, Sony has lost their control over the market, after trying to force users to buy a Blu-Ray drive, along with the console. The inclusion of the drive has resulted in high prices, product delays, and limited supply during the launch. Even after Sony has agreed to sell the console at a loss, they still have not been able to get the device down to an acceptable price level for consumers.

As the latest generation of consoles have been hitting the market, Sony’s PS3 sales reflect some pretty troubling numbers. They may have recently celebrated their 1 millionth sale in Japan, but overall they’ve actually performed pretty miserably. According to the latest data from the NPD group, Sony sold a pitiful 98,500 PS3 consoles for the month of June.

Sony is quick to point out that these figures represent a 21% increase over their May sales, but even with the gain, if they continue at this pace, it will take them 83 years to hit 100 million console sales. If Sony was hoping to sell 100 million consoles over the next 5 and a half years, they would need to increase their sales from 98,000 units a month to 1.625 million.

Now to be fair, Sony’s latest price cut on the PS3, has improved sales. The company reports that they’ve seen a jump of 135% since lowering the price by $100. The problem is though, that the price cut is really only temporary and perhaps even worse, it may have prompted Microsoft to consider slashing $50 off of the price of their own consoles.

With the Wii taking half of the market and Sony and Microsoft fighting for the rest, Nintendo has put themselves in an enviable position in the console wars. They’ve not only been able to draw in non-core gamers without sacrificing profits, but they’ve also been able to convince consumers that the Wii can compliment an existing console system. With their innovative game play and their low price margins, they’ve been able to turn single platform households into dual console living rooms.

The addition of the Wii as a 2nd option creates big problems for Microsoft and Sony, because it eats into the profit centers of the video game industry. Because so much of the money on gaming is made on the software, having another competitor in the living room, can have a significant impact on the profit margins for that customer. Nintendo’s ability to not only capture market share, but to also siphon off video game sales from the incumbents, will change the dynamics of the third stage in this battle.

Given Sony’s prices, it’s a lot harder for them to convince a Wii family to compliment their console by adding on a PS3 system. While the graphics are much nicer than what the Wii offers, the extra entertainment benefit isn’t worth the additional cost attached to their super computer.

When Sony could control the video game market, they were able to negotiate gaming exclusives, but now it’s Nintendo that has the pipeline of exclusive titles. There will be those who argue that less price sensitive customers would buy a PS3 over a Wii in a heartbeat, but if you look at the most recent Nielsen’s survey, high end households are actually more likely to choose Nintendo over the PS3.

If Sony is failing to sell their Blu-Ray infested video game console to the least price sensitive customers, it doesn’t make me very optimistic that price cuts will be a very good long term solution for competing against the Wii and the Xbox. While there is still plenty of time for Sony to retake their lead in this latest incarnation of the console wars, I believe that their missteps at the starting blocks have all but assured, that they’ll never be able to outsell their PS2 console.

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Blockbuster http://davisfreeberg.com/2007/06/27/blockbuster/ http://davisfreeberg.com/2007/06/27/blockbuster/#comments Thu, 28 Jun 2007 06:34:30 +0000 Davis http://davisfreeberg.com/2007/06/27/blockbuster/ A Nice Day For A White Wedding

Last week, Blockbuster made a pretty big splash after they announced that they were going to support Blu-Ray exclusively at their retail stores. The move prompted a lot of people to ask if this was a sign that HD-DVD was dead in the water. After all, Blockbuster has a significant retail presence and their support for one format could be interpreted as a sign that consumers are demanding Blu-Ray over HD-DVD.

On the surface, this explanation seems to make sense. Blockbuster even went so far as to tell people that 70% of their test stores were choosing Blu-ray content. Sooner or later Blockbuster was going to have to choose a format and by doing it publicly, they were able to control how that information got out. Irrespective of their motivation, the move was smart on many levels and helped Sony to shift momentum back to Blu-ray, in the never ending format wars.

It could be that this is all there is to this story, that Blockbuster choose their customer’s preferences over corporate interests, but as a conspiracy theorist, I can’t help, but feel that there is more going on, back at Blockbuster HQ.

It’s entirely possible that Blockbuster’s love affair with Blu-Ray was an isolated business decision, but I suspect that Uncle Sony may have brought a shotgun to the wedding, in order to make sure that Blu-ray stayed relevant.

Over the last year, the DVD kiosk market has started to get hot. Consumers may have been skeptical at first, but once they get a taste, they have to come back. By the end of the year, there very well could be close to 10,000 kiosks in North America.

Even though the current kiosks have proven to be popular, Blockbuster and Movie Gallery have largely sat out of the DVD kiosk expansion. It could be that they don’t have the capital to pursue the technology or it may be that they really don’t see a future in kiosk rentals, but I believe, that they’ve been holding out for something even better, burn on demand DVD.

As the DVD kiosk market develops, I think we’ll see two different business models unfold. There will still be the current kiosk that offers a couple dozen choices and an inventory of 500 – 1000 discs and there will be the burn on demand machines that will carry 2,000 – 3,000 different movies that you can burn at the retail level. The current kiosks will be popular because they take a relatively low investment and the owners can control the costs of the content because of the fair use doctrine. If you play your cards right, you can make the kiosk pay for itself in the first year you own it. These are especially well suited for adding DVD rentals to a high traffic locations that normally couldn’t support a video store.

Unfortunately though, for a lot of retailers, the limited capacity of today’s kiosks prevents them from using the technology in more powerful ways. If you can’t replace your entire inventory with a limited number of discs, than it’s hard to convince the video stores and big box retailers to adopt the technology. While today’s technology will play a vital role in the future of the DVD rental market, it will be burn on demand that has the potential to save the video stores from extinction.

To a certain extent, Blockbuster will be interested in using the burn on demand kiosks in order to minimize real estate and cut down on employee costs, but the real benefit of the kiosks will be the new franchising opportunities that will open up to them. As the video store industry has gone into consolidation mode, Blockbuster’s franchisees have had a very difficult time adjusting to the new rental environment. Disagreements over the online program and the end of late fees, has even caused one of their first franchise owners to sue Blockbuster for breach of contract. As the market has collapsed, attracting new capital has been difficult and Blockbuster has struggled in replacing this lost revenue.

One of the problems with the stand alone burn on demand kiosks, is that these will not be cheap. It will take a healthy chunk of capital in order for Blockbuster or Movie Gallery to take advantage of this expanding market. With the introduction of the technology though, Blockbuster can leverage their brand by offering franchisee investors an opportunity to help create a new automated video store network.

This would help to raise outside capital that isn’t dilutive to Blockbuster shareholders, doesn’t increase debt, and would give smaller investors, a direct opportunity to invest in the growth of this emerging market.

When it comes to Blockbuster’s retail stores, I believe that they’ll look less like a kiosk and more like a Kinko’s. Blockbuster would be well served in studying the success that Paul Orfalea has had in building his company. The same concepts that he applied, will be key components for maximizing the success in using the technology. Burn on demand at the store level will need to work like a machine, in order for Blockbuster to provide the optimal retail experience, while minimizing their costs at the same time.

Little things like allowing customers to select a film online and have it available for pick up will matter a lot. They may even be able to charge higher prices by guaranteeing that you can always get the movie that you want. With a server and a couple of fast burners, Blockbuster could reduce the size of their real estate and improve customer selection at the same time.

For Blockbuster the stakes are huge.

Unfortunately though, the stakes for Sony are even bigger and while the technology to deploy burn on demand has been here for a very long time, like anything involving Hollywood, it’s been tied down over disagreements tied to the licensing of formats. Last December, things looked promising, that we might be witnessing the birth of this technology.

Time Warner CEO Dick Parsons said that 2007 would see the introduction of burn on demand technology for their retail partners, the DVD forum even “approved” a standard for the DRM, and in anticipation of the launch, Sonic solutions went as far as to announce that they were launching a commercial and retail solution using the technology. Despite all of these signs of this technological evolution, somehow the licensing discussions got hijacked by the DVD-CCA, and everything started to break down.

While Blockbuster hasn’t publicly discussed their burn on demand ambitions, there have been hints that they’ve had their eyes set on this target. Earlier this month, Lionsgate’s CEO Jon Feltheimer said that the company had digital distribution agreements in place with Best Buy and Blockbuster. Many in the press, assumed that he was referring to a movie download service, but no one stopped to consider whether or not “digital distribution” could occur at the retail level. Later, Feltheimer backed away from the comments, which could be interpreted as a sign of on going discussions.

Many retail and technology companies had hoped that Hollywood could come to a decision, but over the last six months, it’s been nothing but a series of delays. When the group met last April, they still couldn’t resolve their impasse and the decision was put off for another two months, while the studios considered their alternatives.

While there is no way for me to know what goes on behind the closed door DVD-CCA sessions, what I do know from my sources in the kiosk industry, is that the disagreement over the licensing has largely been between the studios, not the consumer electronic companies involved. At one point, Sony was even looking into building their own DVD kiosks, that would burn Sony films exclusively.

This would obviously be a less than ideal solution for consumers and retailers, but it suggests that whatever the core issues are, Sony is concerned enough about them, that they are willing to ostracize their customers, in order to maintain their hold on the DVD market.

What makes me suspect that Sony may have brought a shotgun to Blockbuster’s wedding, is the timing of the announcement of their engagement. It was a week and a half before today’s meeting, where the DVD-CCA, (cough: Sony) will decide whether or not consumers should be able to buy a burn on demand DVD or whether it poses too much of a piracy problem :roll:

Coincidently enough, two days before the meeting, Rimage, also issued a press release where they mentioned their love of “Blu-ray” six different times. Rimage also recently announced a $6.5 million order from an unnamed “national retailer”. Rimage helps to make DVD publishing systems, Sonic makes the DRM.

Now, this is just speculation on my part, but considering that Sony owns half of the patents in the DVD-CCA licensing pool, I’m going to assume that they’ve got some control over what happens with the DVD-CCA. If the DVD-CCA can’t agree on a decision, than it might delay Sony’s digital plans, but it would certainly mean a lot more to a company like say ohhhh I don’t know, Blockbuster? It’s easy to dismiss, Blockbuster’s acceptance of Blu-ray as a day to day business decision, but in the larger context of their digital strategy, I think the move very likely could have been made, to shore up Sony’s support for the burn on demand technology.

While the DVD-CCA did meet today, I haven’t been able to find out the decision. They don’t like a lot of public attention and haven’t posted anything publicly. They did post their support for a law making all DVD copying illegal though. It’s hard to argue with them, I can only imagine how terrible it would be if consumers were allowed to make fair use copies of their content.

It could be that I’m reading entirely too much into this, but after watching Sony destroy their own PS3 with a forced Blu-ray “upgrade”, I wouldn’t put it past the company to try and use their muscle on the DVD-CCA board, in order to squeeze a retail partner like Blockbuster. You can call it payola or you can call it smart business, but it’s hard for me to blame Blockbuster, even if their “support” for Blu-ray may have involved a little tit for tat.

If it unlocks the key to burn on demand, then Blu-ray is a small price to pay, for a real shot at long term survival. Until, the studios can figure out a different economic equation, the video stores won’t survive the commoditization of media.

Update – It looks like it’s official, or at least sort of. I’m not sure if Blockbuster’s support was what it took, but the DVD-CCA finally authorized burn on demand for consumers and retailers. The paperwork won’t be signed until next week, but the move opens the door for a brand new market to unfold. It will take time for the rollout of actual products, but I expect that it won’t take long before we start seeing plenty of retailers adopting the technology. It’s way to early to tell how this market will shake out, but I expect to see lots of competition.

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I Want My HDTV http://davisfreeberg.com/2007/01/26/i-want-my-hdtv/ http://davisfreeberg.com/2007/01/26/i-want-my-hdtv/#comments Sat, 27 Jan 2007 04:26:15 +0000 Davis http://davisfreeberg.com/2007/01/26/i-want-my-hdtv/ Doing The 1080p

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First HD-DVD, Now Blu-Ray – Hackers Set HDTV Free http://davisfreeberg.com/2007/01/22/first-hd-dvd-now-blu-ray-hackers-set-hdtv-free/ http://davisfreeberg.com/2007/01/22/first-hd-dvd-now-blu-ray-hackers-set-hdtv-free/#comments Tue, 23 Jan 2007 03:44:39 +0000 Davis http://davisfreeberg.com/2007/01/22/first-hd-dvd-now-blu-ray-hackers-set-hdtv-free/ It didn’t take long for the hackers to figure out how to get around the new copy protections on the HD-DVD discs and now it turns out that, it didn’t take much longer, to crack Blu-Ray either.

Given how paranoid the studios have been about letting HD content online, I’ve got to imagine that there are more then a few media execs, a little upset right now. Blu-Ray and HD-DVD was supposed to feature the best copy protection that Hollywood has to offer, but like all DRM, it melted against the collaborative intelligence of the web.

I hate the fact that the studios use piracy as a red herring for why we can’t control our content. They pretend that piracy is why we can’t use TiVo HD to go or why they won’t license more films online, but the truth is that they just really want to sell more fat margin DVDs. Their content is already available online because their own copy protections have failed. Instead of hiding behind shallow excuses, they should embrace the digital revolution and offer consumers a way to pay for the content that they can already get for free. The studio fat cats can complain about how much piracy is hurting their business all they want, but it’s hard for me to be very sympathetic when they won’t offer the content online, even for a fee.

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Gefen Introduces USB Support For Upcoming PVRs http://davisfreeberg.com/2007/01/18/gefen-introduces-usb-support-for-new-pvrs/ http://davisfreeberg.com/2007/01/18/gefen-introduces-usb-support-for-new-pvrs/#comments Thu, 18 Jan 2007 17:15:54 +0000 Davis http://davisfreeberg.com/2007/01/18/gefen-introduces-usb-support-for-new-pvrs/ I was watching GeekBrief TV last night and saw that admidst the hubbub of all the CES news last week, I missed an announcement by Gefen that they’ve decided to throw their own hat into the DVR ring and will be releasing two new PVRs next month that should make it easier for consumers to archive and move their content around the digital home. On both their standard definition PVR and their high definition box, they plan on building support for a feature that allows you to export your shows via a USB connection to external hard drives and other portable devices.

At CES, their high definition demo box was still missing USB support, so details are still a bit sketchy, but Gefen told Everything USB that “it is highly likely that it will be implemented before shipping.” No word on pricing, but the boxes should ship sometime in February.

This is very cool functionality for Gefen to introduce, but it’s not likely to be very popular with the MPAA. If it was up to the studios fat cats, you would be required to pay them money for every device that you want to watch content on, so it’s possible that Gefen may have just painted a big sue me sign on their backs, but others have been pushing this envelope for years and so far, have managed to stay out of court.

While technically, it’s not the same functionality, TiVo has been offering TiVo To Go on their series 2 DVR for a couple of years now, but they haven’t been allowed to offer it on their high definition series 3 or HD DirecTiVo boxes. From the very beginning, Microsoft’s media center has always allowed you to transfer content directly to your home network, including both standard definition and OTA high definition content, but once the cablecard Vista machines are released, Microsoft will be forced to disable content portability features, in order to placate the goons at CableLabs, who have somehow managed to put themselves into the position of being able to dictate what features consumers can and cannot have on their home theater systems.

Because Gefen would also need to go through the CableLab certification process, it’s hard for me to imagine that this new PVR will offer cablecard support, but even without access to the HDTV content from the cable channels, the USB export functionality is still pretty sweet. Given the amount of hard drive space that HDTV content takes up, you would need a couple of external drives, but you could easily rotate hard drives on and off the unit and could start creating an impressive digital library of archived HDTV content to watch later on.

As this technology continues to develop, it will be interesting to see how the content owners react and what moral and legal issues are raised by this sort of support. When I first got my TiVo series 3, I signed up for HBO for about 2 weeks before cancelling and yet months later, I’m still watching high definition HBO movies that I recorded onto my 750 GB internal Weaknees drive. Is this the equivalent of ripping mp3′s from an all you can eat monthly music package like Napster or Yahoo! music or ethically is there something different about taking advantage of HBO in this way, because I haven’t stripped out any DRM? To be honest, I’m not sure what the moral high ground is in this situation, but as technology continues to advance, issues like these will eventually need to be addressed, especially given how paranoid the MPAA seems to get about high definition content.

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DivX In The Post Convergence World – An Interview With DivX CEO Jordan Greenhall http://davisfreeberg.com/2006/12/14/divx-in-the-post-convergence-world-an-interview-with-divx-ceo-jordan-greenhall/ http://davisfreeberg.com/2006/12/14/divx-in-the-post-convergence-world-an-interview-with-divx-ceo-jordan-greenhall/#comments Thu, 14 Dec 2006 14:38:00 +0000 Davis http://davisfreeberg.com/2006/12/14/divx-in-the-post-convergence-world-an-interview-with-divx-ceo-jordan-greenhall/ DivX Mpeg 4DivX Mpeg 4 Hosted on Zooomr

Over the last few months, DivX has undergone a pretty dramatic shift. After years of being a closely held private company known more by the underground P2P community then, by the business suits on Wall St., they thrust the company into a wider spotlight by opening up their books and their business to greater scrutiny when they took the company public in a late summer IPO. With the YouTube craze at a fevered pitch and a mainstream audience beginning to seriously think about video downloading for the first time, DivX’s timing was impeccable and as a result, they’ve seen their stock rise by approximately 70% since their debut. While the company was able to raise $145 million in cash from the proceeds of their IPO, it wasn’t without a cost. Because they agreed to take cash from the public markets, it means that they now have to publicly update investors on their performance and disclose details that many public companies would be more then happy to keep as trade secrets. When I saw that the company was going public, I siezed on this opportunity to take a look inside a company that I’ve known about for a long time. As a technology enthusiast and a huge video fan, I’ve used their codec for years and was eager to delve into all of the details that leak out during the very public IPO process.

Over the last few months I’ve documented the company’s progress and have helped to outline some of the strategies that DivX is employing in their quest to make the DivX codec a defacto standard in the digital home. As a result of my coverage, Divx’s CEO Jordan Greenhall reached out to me and granted an interview to someone outside of the traditional press where I could ask some of the questions that I felt the business analysts and mainstream media were missing. As a result, I an excellent conversation with Greenhall, where we discussed DivX strategy with their Stage6 video sharing site, the status on their talks with Microsoft, Sony and Nintendo over bringing support for DivX movies to the video game consoles and the reputation that the company has been labeled with by the open source community over the years. Rather then choosing to provide commentary on the interview or release select quotes, I’ve decided to publish a complete transcription of the interview and the following is the conversation that took place.

If you could tell me about the history of DivX, how it got started, what the birth of this whole thing was up until the point of where we are today?

There are actually two entirely different threads that combine to create DivX. Which are you most interested in?

Mostly the start of the codec itself and how it turned into a business?

Ok, That’s actually two threads, so the one thread is largely mine, the other is Jerome’s, (Gej) Gej was the individual who actually created the technology. He was in Southern France at the time. He was working as a professional video creator and he needed to be able to solve a practical problem in being able to send video that he was creating to a remote location. In order to do it he needed to be able to compress it and he wasn’t satisfied with the tools that were available at the time, so he started looking for better tools and some people on IRC recommended that he take a look at some of the few things that were being done on the intertag standards reports on mpeg4 and he started working with that and he created an idea that he later called DivX. He started calling it DivX by version 2 or so, I’m not sure what package that was. Particularly it just happened to be a very early version of a Mpeg4 asp technology that had to be able to create and maintain DVD level quality, it was really well optimized for D1 resolution and he got it down to a size that could reasonably fit on a DSL line, 784kbs. It was built in an open environment and it included all kinds of technologies to make it happen. He used the .avi platform because there wasn’t a good file format available at the time, and released it out to his various friends on IRC and they sent it to their friends and they handed it to their friends and rather rapidly people started using it a lot. It just happened to hit at roughly the same time frame as Napster, maybe 6 months after Napster hit, it really became known as a phenomenon about a year and a half after the real pickup of mp3. This was largely the community of individuals who had really taken to the mp3 scene. They just took the technology that they were using for audio and took this technology and used it for video.

I actually had a completely different path and intercepted Gej’s path when I was specifically looking for a technology that handled exactly like this. I had a strategic plan in place talking about the convergence and what the new media lens would look like after convergence and an expectation of what would be required to happen for convergence to happen and as it turns out one of the elements that I thought would be needed for this, was a piece of video compression software that allowed you to put images, video and audio that allowed for the reduction in size to the level where traditional mass market pipes, broadband pipes that would be in existence in a reasonable time frame. Even if you had broadband and there were relatively few at the time, we knew that this would be a catalyst, but we also knew we wouldn’t have 10MBs pipes anytime soon.

When you went to look for the DivX codec were you specifically looking for video or for all three formats?

Video, I had worked at mp3 and I saw where audio went and had a good sense that there wasn’t going to be a whole lot of innovation on the technical level, so audio was going to start maturing on the latter side of the convergence arc. Having to do with first the physics of the size and then the transformation of the actual music industry and I was actually spending time with Intervu, which later got bought out by Akamai, and Intervu was the company that built the first distributed network specifically focused on media. At the company I had a lot of insight into what the state of the art was for moving media bits around the internet and when it goes straight to the internet it’s difficult to stretch over the size that pipes had on the overall internet so as a consequence I believed that you needed to have another compression level come in and software is a better solution then hardware, because if you didn’t solve the software problem it could be five or ten years before the hardware and pipe connection could meet the needs of convergence. So that was clearly what I was looking for, so I sent that out to a lot of friends that I knew from prior to it’s inception and a friend of mine said hey there’s this thing going on right now on some of the alternative p2p networks that’s springing up around post Napster, called DivX which is being used for video, so I went and found one called Cutemx, I’m not sure if it still exists, and logged onto a variety of chat networks to check out how this subculture works, got the nomenclature, found somebody who actually had some videos and downloaded a video which was exactly what I had hoped for.

It was not DVD level quality, there was certainly degradation, but it was roughly equivalent to where mp3 was with the audio degradation from CD, circa 97′. There was degradation, but it was eminently watchable and the size was a lot smaller then an original DVD. It was small enough that over the net I could grab it in like 35 minutes, which is very reasonable and at that point everything falls from that.

So at that point I started to go out and try to find this guy, but to a certain extent he’s a little bit like yourself, he was acting under a noms de plume, Gej. I didn’t know who he was so I had to track him down, but I was able to track him down and chat with him on where I thought this thing should ought to go, what kind of system could be built and he agreed and we got together and started working on the project, which we called project Mayo.

How did you pick that name for it?

Initially that was a name that was meaningless, the domain wasn’t owned, and it appealed to his aesthetic sensibilities. We tried lots of code names, but it turns out that those three things are hard to get. Then we recruited these other guys to start the organization up and then about three months later Lee Gomes from the Wall Street Journal had followed exactly the same path to track this guy down and I got an email from Gej saying, uh oh and then an email from Lee Gomes saying we’re writing this story about this new phenomenon of online video sharing around DivX and I’d like to interview you for it, but if you don’t want to interview for it I’m still going to write the story, so we did the story and a lot of things happened after that.

One of the more recent innovations that you’ve been working on has been the launch of your web video site Stage6, can you tell me how that fits into your longer term strategies and what piece of the puzzle that falls into as far as DivX goes?

Let me start at the top with our long term strategy and you’ll see how easily it fits. DivX the company has three beginnings, it’s literally why I was looking for this when I was looking at what does the new media landscape look like post convergence? More significantly there, we have to make convergence happen, so we have two missions, one mission is to understand a better media future, and to do that, on the one hand we are building what we are calling a common media language. Which we believe is the underlying technology layer necessary to enable convergence to happen and you can see that in the codec, in the DRM, things like DivX connect, going into cameras, going into set top boxes, etc.

The other mission is called the new new network, which is building the specific infrastructure that is appropriate to the functions of what media looks like post convergence. We have 20 year plan and we’ve gone through 6 years of it and we’re more or less on track. If you assume and if you are positive that convergence will happen, and by convergence I mean literally the combination of all networks into some form of the internet, mobile, cable etc., some form of open network typology where all devices communicate with that network in a functional way. That is, they’re not tied through medium, through the kinds of content they can consume, rather then a physical typology of their use case, so the cell phone is mobile and small and it fits into certain uses that it satisfies, portable devices, which are mobile and larger have another function it can satisfy. Then you have a very large screen TV in your living room, which is fixed and therefore has limited functions it can satisfy, but they’re not tied to any particular medium so it’s just like broadcast television having immediate control over your TV set.

So thats how I define convergence at large. So a large part of what we’ve been doing over the past six years has been ramping up the infrastructure for this to happen and having a common media language. A set of protocols really that all being complete, can cut across all devices over an open network typology is required for that to happen and that’s a role that we can play. Other requirements of course are the rollout of broadband, the rollout of 3rd generation wireless, affiliated co-married networks and things like that where we really don’t have any synergistic role, so we’re assuming that the market will take care of that on it’s own and we’ll take care of the rest.

A large part of the infrastructure that’s developed around DivX has been from pirated material, do you have any numbers as to what percentage of DivX content today represents pirated material?

I don’t, one of the features of pirated material is that they don’t accurately report pirated numbers. If you take a look at the external numbers of the volume of pirated material over the world, it’s certainly a very large number. I can’t remember what the last report was, but in the music world it still dwarfs the amount of content sold in all collective commercial institutions. I think in the video world, it would be an even larger fraction because online commercial video is still very much emerging whereas grey market online video is rather mature.

Have you talked with any of the major media companies about putting their content on Stage6 and has this issue with piracy complicated those talks at all?

It’s actually kind of a funny story, the very first phone call we got when we started up our office, we had a phone on a box plugged into the wall, was from the MPAA. The second was actually from Disney, so yes we’ve talked with the major media companies for quite some time, in fact the way we first set it up, in an early conversation with one of the CEOs from a major media companies, he said look I think what you guys are doing is great and it needs to happen, but I hope that you understand that there is no way that we’ll be doing any business with you for six years. I said that I completely understand and know the time frame around what was happening, so here’s what I propose we do, what I’ll do is, I’ll say here’s what I’m going to do over the next six months and then six months later I’ll come back and say here’s what I said I’d do, here’s what I actually did and here’s what I’m going to do over the next six months and then just keep doing it. Sometimes what you ask me to do, I’ll do and sometimes what you ask me to do I won’t do, but over a period of three or four or five or six years, you’ll start getting a sense of what we’re about.

When we first said that, we knew that we would be in a position to make a realistic play and that’s more or less how it’s played out. We’ve been involved in all kinds of interesting things with the media companies, we were part of the original high definition standard DVD forum. We were specifically focused on the use of red laser for high definition that took advantage of compression instead of advantage of storage for high definition. That particular initiative didn’t make it off the DVD forum world, so we spun it off ourselves and we’re now promoting red laser high definition in an open market as opposed to a consortium approach.

If someone downloads one of your high definition files from Stage6 and burns it to a DVD, will they be able to get high definition on their traditional DVD player from the HDTV video they download off your site?

If you put it into a traditional DVD player you’re not going to get anything, so at the very minimum it will need to be a DivX certified DVD player, but it would actually need to be an HD certified DivX DVD player to be able to handle high definition files.

How many HD DivX certified players are out there right now?

I believe we have 4 – 6 OEMs who provide these products right now. They are available, they’re not particularly expensive and if you look at the way cycles work in CE, you always go through a cycle where you have relatively high end CE chips which are thick DSP’s on the order of $50 – $60 bucks, which could get you traction to a final cost of $150 – $300 bucks, so you start at $300 and move down to $150, which if you are successfully you can then move into lower cost silicon, which is also a more mass market product. We are now pricing our DivX DVD standard issue with lower cost silicon, particularly with lower cost products, so right now I think the cheapest DivX HD certified device you can buy is somewhere on the order of $150 bucks, but we expect to be able to get that price point below a $100 bucks when the next generation comes out with a lower cost mass market use silicon. Then when you start getting into our approach to high def, we believe that high def is really really cool and great, but it shouldn’t be a whole new product category you have to buy $1,000 worth of hardware, it should be a feature, existing on a product category that you already had that’s relatively already a commodity.

Do you ever see DivX HD Certified competing with HD-DVD or Blu-Ray or do you think it’s designed to do a different thing?

I think we’re competing with Blu-Ray/HD-DVD in terms of content, but I don’t see us competing with those discs in terms of storage. I can imagine and expect to see DivX content, internet and high def on top of Blu-Ray/HD-DVD players, typically because you can fit 10 DivX HD titles on a single Blu-Ray disc just like you can put 10 standard definition movies on a single DVD, but DivX is a global company so we think on a global basis so we are already seeing significant interest in our user base for DivX discs to be sold in retail in high definition in markets where HD-DVD and Blu-Ray don’t even exist at all, especially in regions where it’s just too expensive.

How large is a DivX HD file for a 2 hour movie? Will that fit on a traditional DVD at all?

Yeah, it’s exactly that we can fit a regular 2 hour movie on a single DVD file. It’s exactly targeted for that and at a quality level where you’re probably going to see your Blu-Ray and your HD-DVD. It’s just using better compression.

Can you talk a little bit about some of the recent partnerships that you’ve announced with Canon and Pentax? What’s the strategy there and how does it fit into your overall business plan?

It’s all part of the same strategy for a common media language, so the way we see it is there are two interlocking ecosystems, one ecosystem is unified by the individual consumer’s home. Deal with all the content that they ever play with. The other ecosystem has to do with interlocking between content creators and consumers, so the DVD player for example is in both ecosystems. The consumer will use that DVD player to consume content that you’re ingesting from external parties, from online, retailers, whatever it may be and then you also use that DVD player to ingest content that your getting from people in your relationship circle. Now when you’ve got DivX on your PC and DVD player, if your a consumer who’s going to be getting a camera that will be used to create video, whether it’s a digital video camera or a digital still camera, you as a consumer have a very good reason for wanting that camera to be producing DivX anyway, so that they’ll play in your personal ecosystem. That’s really the beginning and the end of it. We believe what comes with the DivX brand is associated with creating a higher quality media experience, so where a consumer has a reason for consuming a high quality video experience with video cameras, our role is to make sure that if you buy a digital cameras to make video, if it has the DivX logo on it, you’re gonna know that you can create high quality video that’s going to look good and that it’s interoperable, that you’ll be able to play it in all the different environments that play the DivX language.

That’s a broad value proposition that we bring with our brand. You’ll notice that what we’re not doing is a whole lot in the digital video camera space, the DV camera space, we’re really focused on the still camera space. The reason for that is because we took a look at the marketplace and we actually believe that the highest quality user experience is being able to record on the fixed media card, in which we keep all together. It’s very rapid, it’s very easy to use, it’s very easy to store, it’s very easy to load into your hard drive and move around your home, and we’ll be focused on high definition for straight video cameras for the next DivX period.

When your talking about bringing DivX to the mass markets, your talking more about SLR than the traditional video cameras that most of us think about then?

Yeah we’ll hit both categories. We’ll hit still cameras that have video as a mode and then we’ll hit high definition cameras that are standalone video cameras that will preferably and will always shoot to hard drives.

As far as the compact cards go, how many hours of DivX content will you be able to fit onto a 1GB flash card?

You can fit 90 minutes on a 1GB flash card. It is in fact DivX quality so were able to get a lot of content on that card in high quality and interoperable, so you can see how the common media theme runs through everything that we do and it enriches and makes a better media experience, so we can do both simultaneously and make it fit and I think in the future you’ll see that across the board.

One of the things that’s clear from watching DivX’s popularity online is that a lot of people want to know how to get DivX on their Xbox 360, the PS3, even this weekend some industrious hackers figured out a way to bring their DivX movies to the Wii, have you talked to the console companies about officially supporting DivX and how have those talks gone?

We actually talked to those companies back in the PS2 and the Xbox days and back then things didn’t go particularly well. As a company we always have a basic launch where we start with the consumer and work our way back and as a consequence we tend to be more successful in marketplaces that are more influenced by market forces then top down strategies. Which is to say we do better in open vs. closed, so if it’s more open like a DVD player as opposed to closed, like a cable set top box or a cable provider, our systems will have more traction. We found that the second generation game consoles (or technically the fourth depending how far you go back), the PS2 and Xbox and before the gamecube, were still very closed in their way at looking at the world. Increasingly, for a variety of reasons, many which are random as happens to be the cases, we are seeing these next generation game consoles are taking a more open approach the way they are looking at the marketplace and so I have more optimism about our ability to get DivX to those clients, mostly because the consumer is being more vocal in demanding DivX for those clients. We haven’t gotten any concrete announcements about to happen yet, but I do tell people it’s important and I do spend time focusing on it and certainly you can put me on the record as somebody who would be delighted to see DivX in all those media consoles. Also you can put me on the record as someone who recommends that if you don’t currently have a Wii, that you buy one.

As far as the console strategy goes do you think that if Microsoft were to license DivX for the Xbox 360 that Sony would be under a lot of pressure to license the codec as well or do you see an opportunity where Microsoft could differentiate themselves there?

The pressure would certainly be on and then it’s a matter of the politics of each organization. I would argue that on a pure market competitive basis, if Microsoft stepped up and put DivX on the Xbox, they would have a significant competitive advantage and the onus would be on to reduce that advantage by licensing DivX as well, but that doesn’t imply however the Sony would have the forethought to do it.

One of the things that we’ve seen is that people are creating step by step instructions for getting DivX content to the consoles and are utilizing software tools that allow consumers to transcode their codecs in real time. What are your thoughts about these software tools and is this a threat to your business model?

Under the big picture heading of what we do, it may strike you as a little odd, but DivX is actually codec agnostic. I’m as likely to promote using flash as I am for promoting DivX technology. It’s about the appropriate technology for the need that you have and the key is to provide the highest quality consumer experience. My criticisms for these particular transcoder’s approach is that really, what they are is a stop gap. At the end of the day, it’s a low quality experience. It’s not that different from the approach taken in the DV camera market, so it’s clearly a lower entry solution if you were in a more stable system. If you could maintain both the quality, as well as ease of use for whatever the format is in all the way through the channels, but if you’re somebody who wants to watch your DivX content on your TV and you’ve got an Xbox and Xbox has DivX in it, it’s the second best scenario. In any event, I would not vigorously endorse it, but I’m also not completely antithetical because at the end of the day it’s about providing the best quality experience to consumers.

By the way, this is a great segue back to your Stage6 question, Stage6 is our first significant toe in the water on what we call the new new network, the post convergence environment. In our business plan, in our 20 year plan back in 2000, we predicted that you’d see a significant amount of user generated content around the time of 2005. I think YouTube bore that out, although it was a little later then we expected, at the same time it was a little bit bigger then we expected. We specifically predicted that because it would be at the PC, it would be what at the time we called lean forward content, which I think is actually still a useful term. The way we look at DivX the company is that we’re focused almost exclusively on lean back content. These are media experiences where as a consumer you want to become disembodied behind the medium. You sit in the theater and your movie starts and you don’t want to be interrupted by the growling in your stomach until the movie is stopped. That’s the part that we focus on and that’s the part that we think is important and by the way that can be entertainment content, it could be news content, it could be personal content, but it’s lean back content, each one of those segments have different feelings associated with that environment.

The PC is really not the optimum lean back screen. It’s a lean forward screen. It’s spectacularly short content, it’s interactive, your multi-tasking, your checking your blog, your checking your MySpace page, you hit a link, you go to YouTube, you watch a clip, your out, you’re very much involved in that environment, your not hitting play to sit back.

We look at it and say, YouTube is improving the use case and people are aware of it, the time is now ready for us to start sowing the seeds for what this environment looks like in a post convergence environment. Still, we’re a couple of years away from convergence being a true case, but the content language part of our business is now ramping now that you can say with confidence, that enough consumers can consume content from the internet on their television and that there is a materially reasonable marketplace. In the arc of that curve, as the ball is beginning to roll downhill, is that somewhere between now and 2010, convergence will happen and you’ll be able to see a post convergence environment.

Stage6 is specifically focused on creating an environment for people who want to create engaged communities around a content brand for lean back content on the internet using a distribution medium. And that’s what it is, so if you go to Stage6 what you’ll find is that we’re really serious about content. It’s not populated by short form clips, etc., it’s populated by people who regardless of their particular content level are trying to create some form of expression. That may be very very short form or an expression could be done in a second if you do it right or it could be long form and all of it is very high quality, so DVD level quality and high def quality is where things settle out for Stage6, but it’s a different kind of community, kind of culture that is being built there.

Stage6 is actually an exemplar of behavior that we expect to see happening on a much more global basis. The strategy for Stage6 is to not Stage6 be a vertical portal for all people and all content. Rather we want to use Stage6 as a way of showing, anybody who wants to be engaged in a lean back content environment, how they can do it and build an audience and build a marketplace and build other platform technology to make that possible more broadly speaking. So in terms of an open or closed environment, we definitely don’t want Stage6 to be a closed environment, we want Stage6 to be one of many open typologies to turn the entire internet into creating brands and to consume that content.

Community has always been important to DivX and Stage6 is clearly an expression of this strategy, but at the same time, the creation of the DivX codec was also very much a community driven process. What do you say to critics who feel like DivX turned their back on them in terms of taking the company private and not keeping this as an open source product and when people say that DivX took advantage of them, how do you answer that?

Well the first is that we never took advantage of the open source community whatsoever. There is a very interesting set of mythology in that environment. The fact of the matter was DivX, as an original codec that Jerome created, was not open source. When we created the DivX company we very specifically looked at it and made the tactical decision that open source made sense for us to launch the original DivX codec, because we believed that to do it would create a more energetic and healthier environment. When we launched DivX as an open source project, on the one hand, while we did get some contributions from the open source community, it was relatively small in coded content. By far the most significant contributor was a guy named Eugene Kuznetsov, code name Sparky, who we essentially brought into the company on a full time basis, hired him out of the community into what we do, but we ran into an interesting problem which is that a lot of the companies, particularly the electronic companies who we were very interested in having DivX be a part of their environment, would not actually use DivX if it was an open source codec. So as a consequence we created a closed source version of it, which we launched on the DivX website. It became an open source version, you could access the code page on the project Mayo website, so that we could provide the code out to particularly the consumer electronic manufacturers and to a lesser extent, third party software manufacturers like Sonic and Pinnacle and guys like that, who wanted to use the technology, but wouldn’t use an open source technology for a lot of reasons some of which were not rationale, nonetheless were mandated by what we call their GC group.

What we found was that, then the consumer would invariably go to DivX.com where they could download the codec and nobody would actually use Project Mayo in the first place, so we’re working in a fraction of an open source environment, so we just sort of let it die. Actually, we had already disclosed the source vis-a-via the open source project and at that point it sort of just ran out of steam. Then a couple of the guys from the open source community who really wanted to be part of the final project, they said we’re going to keep a copy of the final project and they went out and did it under the heading of XviD. We said, great run with it and in fact they ran into a situation where they had a hardware company that ripped off their codec and tried to close source their codec. We supported them throughout pretty strongly. It’s kind of interesting that there is this sort of mythology of tension between DivX and the open source community, but actually the people who are really the open source guys behind the open source codec, we actually have a pretty good relationship with them, we’ve actually worked pretty closely with them.

DivX is a company that is focused on open as a typology. Open source is open, but only when it’s effective, so if you take an open source strategy and by so doing you either A.) Make it so nobody can use it or does use it or B.) Keep yourself completely destroyed by trying to use a closed source strategy in the marketplace, then you actually fail the primary mission which is to actually maintain an open content typology.

When you are looking at an open vs. closed system, this is a pretty critical part of your business strategy and when you look towards things like set top box developers and iPod’s and all of these different gadgets that are out there, do you think that DivX needs to be in a closed system or do you still see DivX as benefiting more from open products?

It’s good that you mention that, one is that I actually have a strong hypothesis on a macroeconomic level that forces that are happening under the heading of convergence will ultimately lead to open networks across the board. So I’m on the record as saying that if you are in the business of owning closed pipes, you better figure out how to get out of that business at some reasonable time frame. The second question is, which because of the way that we actually approach the marketplace, our value proposition is at it’s lowest ebb in the entirely closed environment, so we’re not really, at the end of the day a technology company. We’re not really a codec company. We had conversations with set top box manufacturers and cable guys in 2001 and 2002, but when they’re trying to license your technology, component video technology, that’s commodity pricing. A penny for a million users in an interactive space, there’s no real value proposition. Compare that to the DVD manufacturers where what we really brought was a community of users who are trained to consumer content over the internet and to have some way to do it without having a set top box or computer operate that particular phenomenon. So the fact that DivX technology is associated with that path is a really interesting physical manifestation, but the reality of the value proposition is that the market, the community itself is a value proposition, so what you’ll find is, if you map our progress on a go forward basis, everything that appears in a DivX marketplace, there’s actually strong evidence that the marketplace is becoming more open.

I’ve heard DivX say that there are efficiencies with being able to record DivX directly to TiVo, Media Center, PVRs and Apple’s upcoming iTV, why wouldn’t they be licensing your codec if they could fit that much more content onto their hard drives?

Well there’s a trade off between storage space and computational complexities. That content is a pretty powerful force, if you can buy the hard drive space for less then the cost of a silicon chip at half the size of the hard drive space, you’re more efficient buying your hard drive space and we find that encoding chips have a slower cycle, then decode chips had, so the computational complexity is a lot higher, for encode then it is for decode. It hasn’t been until very very recently until like the last couple of months, that encode chips have become available for things like DVD recorders and DVRS to use with technologies like DivX. Now that these chips are just beginning to rollout, literally we’re just able to sell these now, we’re seeing an opportunity to break those chips into the OEM cycle for CE products, so it was only a matter of time. There will certainly be an opportunity, but you have to be aware of the limitations of the silicon cycle.

As a bonus to my interview I concluded my questions by subjecting Jordan Greenhall to a series of brutal choices in a lightning round session. I asked him to restrict his answers to no more then short sentences during the lightning round. The following were the answers that he gave during this session of the interview.

- PC or a Mac? (not for the office for personal use) – Mac

- Do You Own A TiVo and If So Which Model? A Series 2 TiVo and 2 high def DVRs through the cable company

- Do You Read Slashdot or Digg? Digg

- Engadget or Gizmodo? Engadget

- Netflix or Blockbuster? Netflix

- Do You Have An iPod? Which is Better iPod or Zune? He owns an iPod and describes himself as a “miniman”, but may move to the Zune if the social networking actually works.

- Xbox 360, PS3 or Wii? Wii, although John Madden could tempt him to look at the 360 or PS3

- Pirate Bay or Torrent Spy? He hesitated on this one, but then I told him I was joking because I knew that the big media companies would be listening and he couldn’t really answer. He said both services are a mess right now.

- What’s Your Favorite Gadget Right Now? The Wii

- HD-DVD or Blu-Ray? Blu-Ray because it has better storage

-Zooomr or Flickr? I figured that he wouldn’t know what Zooomr was, Thomas Hawk made me ask this one, but he said Flickr without hesitation.

- Canon or Nikon? Canon

- MMORG or First Person Shooter? MMORG

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Are Sony’s Entertainment Assets Dragging The Company Down? http://davisfreeberg.com/2006/12/12/are-sonys-entertainment-assets-dragging-the-company-down/ http://davisfreeberg.com/2006/12/12/are-sonys-entertainment-assets-dragging-the-company-down/#comments Wed, 13 Dec 2006 05:12:15 +0000 Davis http://davisfreeberg.com/2006/12/12/are-sonys-entertainment-assets-dragging-the-company-down/ For whatever reason there are always a number of brands that are able to command a premium amidst a sea of generic competition. Apple is a great example of this. Deep down inside they’re just another computer operating system, but unless you are willing to raise advertising money by etching laser designs into your Mac notebook or by promising to tatoo your first born with the Apple logo, it’s insanely expensive. Nontheless, people are happy to spend the money because they get a premium experience that provides value to them.

Not long ago, Sony was one of those brands, but over the last decade their media division has prevented their technology division from taking the necessary steps to protect their brand name in the consumer electronics industry.

When thinking about how to successfully integrate a business as diverse as Sony’s, there are essentially two strategies that they can take. They either want to create a horizontal structure or a vertical one. A horizontal structure tries to dominate a single product or category. Once you achieve critical mass you can save from cost savings and by being in a position to lead pricing.

Sony used to be in that position when it cames to television sets, but over the last decade, they’ve lost their control over pricing and now Sony executives are publically worried that prices on LCDs are dropping so fast that it could have a material impact on the company’s bottom line. Their response has been to threaten no more price cuts even if competitors continue to slash prices and frankly, if they had a premium brand on TV sets, they could get away with this, but consumers are no longer willing to pay premiums for Sony TVs and if Sony insists on not staying competitive, they’ll soon learn the hard way how much value their brand really has.

When it comes to vertical integration, Sony tries to save money by creating products that can compliment and drive demand for other divisions within the company. Their studio division creates music and videos which drives demand for DVD and CD players mp3 players, which ultimately drive demand for televisions, computers and playstation consoles.

While on the surface this strategy seems like a sound approach for Sony to use, I can’t help but wonder if conflicts within the company have prevented an otherwise stellar technology company from better capitalizing on the innovation we’ve seen over the last decade.

Case in point, the Walkman.

It used to be that Sony dominated the portable music industry, yet they were never willing to embrace the mp3 market until Apple put a gun to their head and forced them to innovate beyond those terrible mini discs that they tried to convince consumers to buy. Was this because Sony the technology company didn’t want to sell a new product? Could it have been because they didn’t see the natural benefits of being able to play mp3s or did they really believe that people wanted to buy their media again on a minidisc or carry around bulky CD walkmans that skipped everytime they tried to take a jog?

While I’ve never been privy to the secret Sony executive meetings where they plot their delusions to try and control the media world, my gut tells me that Sony the music studio didn’t want to embrace this crazy mp3 “fad” and was more concerned about protecting CD profits then innovating and bringing an mp3 solution to the market early on. The result of course was that their precious Walkman has very little brand value today and is more recognizable as a footnote of 80′s subculture, then as a portable phone.

In looking at some of the other missteps that Sony has taken, I can’t help but wonder if Sony the technology company would have ever supported rootkit technology if it weren’t for their media division? Somehow I doubt it.

Would Sony’s PS3 divison have given up their lead on Microsoft just so that they could implement Blu-Ray? Who really knows, but Sony’s insistence to include this technology has created a backlash against their PS3, higher prices that are going to be hard for the non-early adopter crowd to justify and delays in the number of units launched.

While it’s possible that even without their media division Sony would have still lost their cool factor long ago, when I see desperate attempts to build buzz by creating flogs for their PSP, it’s clear to me that Sony has lost their premium status in the marketplace. If they can’t get their users to talk about their product on their own, then something is seriously wrong with Sony’s brand. Sony’s sneaky attempt to try and influence the net culture with their fake internet site is a clear sign that the company has jumped the shark.

How devasting this loss of premium status will be to the company’s bottom line is anyone’s guess, but as long as their technology departments continue to answer to their media divisions, Sony will continue to fail when it comes to bringing new innovation to the market.

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Til Death Do Us Part – Getting Past The 7 Year Digital Itch http://davisfreeberg.com/2006/12/06/til-death-do-us-part-getting-past-the-7-year-digital-itch/ http://davisfreeberg.com/2006/12/06/til-death-do-us-part-getting-past-the-7-year-digital-itch/#comments Thu, 07 Dec 2006 05:50:40 +0000 Davis http://davisfreeberg.com/2006/12/06/til-death-do-us-part-getting-past-the-7-year-digital-itch/ During the throes of the tech bubble, Time Warner became enthralled with a little ole internet company known as AOL. At the time, technology was hot, the markets were robust and the media company was eager to take a stab at digital distribution. While Time Warner didn’t know about the blood bath the tech market was about to face, in 2000, they started a romance with AOL and by the end of the year, their lovefest would ultimately consumate in a merger that has proved to be one of the most costly marriages in the history of the financial markets.

At the time, the merger seemed to make a lot of sense. AOL had a growing internet business. Time Warner had a dusty library of archived content that they were eager to release. By combining both companies, they could create synergies that other media companies couldn’t match. The result however, turned out to be nothing more then disasterous and when AOL officially changed their name back to Time Warner, they all but admited that their tech experiment had gone terribly terribly wrong.

Fast forward to 2006. Time Warner has managed to completely transform their company. They’ve ended their walled garden approach and albeit kicking and screaming, they’ve led the other studios in embracing various digital strategies. With 2006 having brought about a profound revolution in online video, Time Warner has given notice that 2007 will usher in big changes for the company’s film strategies.

On Tueday, Time Warner CEO Dick Parsons, sat down with investors at the Credit Suisse Media and Telecom conference and gave a remarkably candid assesment of his company and their plans for the next year. In his conversation, he discussed the format wars, the competitive landscape of the telecom markets and perhaps most importantly, Time Warner’s digital plans in 2007.

In regards to the format wars, Parsons offered very little hope for consumers who would love to see this silly little battle end. When asked about the potential for the PS3 to be a leader in the HDTV market, Parsons downplayed it’s importance and told the audience that the HDTV flat panel displays would be the real driver for HDTV content growth.

“The format war is unfortunate almost by definition. Because it creates confusion in the minds of consumers, it doesn’t allow a big group to line up behind either one of the formats and begin to drive the costs down so these platforms are going to be out of the reach of the mass market. I mean what is the PS3? Like $600 bucks or something like that? However, even there, I think we’re positioned to take advantage of what uptake there is on the new devices because we’re one of the few studios, if not the only one that is putting out stuff out in both Blu-Ray and HD-DVD.”

While I admire Time Warner for being one of the only studios to be format agnostic and leave it to consumers to decide which is the superior format for the future, I nonetheless disagree that this war was inevitable. The only reason why we haven’t seen broad support for both formats is because of greed. Rather then trusting the markets to decide, both Blu-Ray and the HD-DVD camps have attempted to gain a monopoly on the format and it has clearly backfired as a result.

In discussing Time Warner’s cable assets, Parsons shrugged off concerns about competition from the telecoms. He pointed out that even where FIOS has been deployed, the telephone companies have been acting rationally and are already raising rates in an attempt to profit even after a very limited deployment. While he confessed to not knowing how far the telephone companies would take this video war, he was less then optimistic on satellite’s long term chances in the mix of things.

“If you talk to the guys who really sort of understand, at a profound level, the sort of technological space we’re moving into, a Gates or a guy like Eric Schmidt, and they are the guys who have told me that ‘Geez Dick, you guys with Time Warner Cable’ or I’ll say the same thing with Brian [Roberts] and his cable platform, ‘you don’t understand how far ahead of the rest of the market you are with your platform, it is just that much more robust, it’s going to take these other guys 5 – 6 years to catch up, if they make the investment.’ It turns out they’re right. The cable platform is, in terms of delivering bytes into the home and giving functionality to all of the things you can now do in a digital world, it is just four, five, six years ahead, in terms of it’s robustness and it’s capacity to deliver the telco platform and unless somebody invents something that doesn’t exist today, it will be permanently ahead of the satellite.”

Over the years, we’ve heard an awful lot of noise about FIOS, yet here we are today and there still is less then 1 million households subscribing to fiber in the US. While this is clearly important to the telephone companies, it won’t easily replace the cable systems that have developed over the years. In the long run consumers will benefit from being able to choose between one or the other, just like they benefit from choosing from DSL or cable internet access today, but Parsons may be right that the future of everything on demand may be much further out then anyone expects. While this would undoubtably help Time Warner as a company, I can’t help but feel just a tad disappointed, that the technology is still so far behind where I wish it could be.

After Parsons’ presentation was over, he opened up the conference to a question and answer period. This has always been my favorite part of financial events because often times, this is where the biggest bombshells are released and this event was no exception. When asked about the narrowing of digital release windows between downloads and DVDs, Parsons offered up far more information then I was expecting and mentioned that 2007 will likely be the year that we see burn on demand technology make it’s way into retail stores.

“I think that you’ll see next year, our studios and possible others, going to a download to burn format. The reason we haven’t done it yet is because this has to be worked out and done in cooperation with our existing channel of distribution, I mean you don’t wanna go around the people you’ve been working with in terms of builiding this business at this point in time, so we’ve just seen Walmart for example, go with these little kiosks, it’s all experimental now, these little kiosks in the store where you can actually go and have a download to burn experience instead of having the physical disc and if we do this right, it’s a win win win for everybody. It’s a win for the distribution channel because they avoid a lot of inventory costs and shelf space. It’s a win for the studios, because you avoid a lot of manufactuering costs and you get your product out there more quickly, and it’s a win for consumers because they can get it when they want, how they want and in the format they want it.”

I’ve been fascinated with the DVD kiosk ever since I first had an opportunity to inteview DVD Station and they showed me a DVD kiosk that already had burn on demand technology built into it. While I walked away impressed at the technology, I knew that it would still take years for the studios to embrace a solution this radical.

With the DVD rental stores having been slaughtered in the financial markets and with retailers clearly upset over Apple’s digital download plans of their own, it was only a matter of time before we saw the studios warm to the idea of bringing burn on demand to the retail store level.

By incorporating burning technology into kiosks and retail spaces, video stores and retailers could potentially stock 70,000 films and never have to worry about running out or about it taking up too much floor space. The idea is powerful, the economics could save the DVD industry for another decade and if Parsons’ statement that Redbox is already testing this functionality at Walmart is correct, it may be coming sooner then even I expected.

While it’s taken years for the studios to come up with a sound digital strategy and while I expect that it will likely take even more years to work out an HDTV digital strategy, nontheless I find it very exciting to see these developments. With 2007 marking the 7th anniversary of the AOL and Time Warner meger it is nice to know that consumers will finally be able to take advantage of the synergies that were promised when AOL and Time Warner first said that fateful I do.

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Sony’s Big Gamble On Blu-Ray http://davisfreeberg.com/2006/11/16/sonys-big-gamble-on-blu-ray/ http://davisfreeberg.com/2006/11/16/sonys-big-gamble-on-blu-ray/#comments Thu, 16 Nov 2006 17:18:48 +0000 Davis http://davisfreeberg.com/2006/11/16/sonys-big-gamble-on-blu-ray/ Research firm iSuppli has reverse engineered the PS3 and has estimated that it will cost Sony $805.85 – $840.35 for each unit sold. With Sony pricing the console at $499 and $599 depending on the model, it means that they will be eating a loss of between $241 – $306 everytime someone upgrades to their new console. Ouch, don’t expect Sony to respond to the console price war in the near future.

While subsidizing hardware in order to sell higher margin video games is an old trick in the console industry, it’s worth noting that the loss that Sony is taking, is three times what it cost Microsoft to subsidize the Xbox 360 and they even sold the 360 at a lower price.

In looking at the breakdown of where the expenses are coming from, I couldn’t help but notice that the bulk of this cost comes from the $125 charge that they are paying for their Blu-Ray optical lasers. The PS3 has been Sony’s biggest reason for convincing the studios to extend the current HDTV DVD format war and with a shortage on the Blu-Ray diodes, I doubt that the studios will be very happy when they see that there will only be 150,000 – 200,000 PS3′s released at the launch, according to some estimates.

“Are you kidding me? Are blue ray diodes grown on a remote mountaintop in the Himalayas retrievable only by tiny faeries on unicorns? It must be because 400,000 PS3s is now 150,000 – 200,000 PS3s. Lazard Capital Market’s analyst, Colin Sebastian, surmises as much based on retail numbers.”

Whether Blu-Ray is being made by magic unicorns or Sony engineers, incorporating Blu-Ray technology into the console was a huge and unnecessary risk for Sony to take. In their attempt to monopolize control over the future of the DVD, they’ve alienated home theater enthusiasts and have frozen the development of the only thing that might extend the dominance of the DVD by another 10 years. By making every customer purchase a Blu-Ray drive with their console, it will not only cost Sony millions of dollars from delays, but as iSuppli demonstrates, there is a very real hardware cost involved as well.

The irony of all this, is that many of the hardcore gamers who are already waiting in line, hoping beyond hope to get a console, will lack the necessary HDTV equipment to even utilize this feature in the console. With the European launch delayed until March, I can’t help but wonder how much more time the studios will give Blu-Ray, before they realize that Blu-Ray won’t be the money maker that they had hoped.

There is no reason why Sony couldn’t have licensed their films to Blu-Ray and HD-DVD and let consumers decide which was the superior format. Had they done this, they would have had enough PS3′s to satisfy this year’s holiday demand and they could have still included an add on Blu-Ray drive for consumers who would prefer their technology.

While the thought of watching high resolution DVDs on my big screen TV holds tremendous appeal, you can bet that I won’t be investing in any technology that has the potential to be obsolete within a year. It’s still possible that the PS3 could pay off big time for Sony and that their Blu-Ray support could be the straw the breaks the HD-DVD back, but considering that their insistence on including the technology is going to put them a year and a half behind the Xbox 360 in market penetration and that it’s significantly added to the cost, I think it’s a gamble that will end up costing them even more their Betamax fiasco.

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HD-DVD – Now With Even More Ads http://davisfreeberg.com/2006/11/07/hd-dvd-now-with-even-more-ads/ http://davisfreeberg.com/2006/11/07/hd-dvd-now-with-even-more-ads/#comments Tue, 07 Nov 2006 15:03:35 +0000 Davis http://davisfreeberg.com/2006/11/07/hd-dvd-now-with-even-more-ads/ Studio executives would like you to believe that HD-DVD and Blu-ray represent the future of the DVD, but according to Ad-Jab it also represents the future of advertising. In a move sure to infuriate fans everywhere, HD-DVD is going to start including enhanced advertising content on the extra space that HD-DVD discs allow for.

The only thing more controversial then the ads that the studios make you watch when you buy a DVD are the ads that movie theaters force on you when you go see a film. The advertisments that you can opt out of, or skip past don’t bother me quite as much, but I can’t tell you how many times I’ve rented a movie and have then been forced to sit through some lousy spot that I have no interest in.

It would be one thing if the DVD was free, but when I’m paying hard earned cash for premium content, it’s just not right double dip into adverstising as well.

The HD-DVD and Blu-ray has been celebrated for their higher disc capacity, but if the studios plan on filling up that capacity with a bunch of spammy ads, it’s going to give consumers one more reason to take a pass on the technology. The strategy for HDTV DVDs has been a failure from the start and if the HD-DVD and Blu-ray camps can’t figure a way out of their stalemate, they risk being made largely irrelvent by video on demand. With the Xbox 360 now offering HDTV downloads, it is only a matter of time before we see VOD technology more broadly adopted.

It’s already a tough sell to get someone to pay up the big bucks for access to HDTV DVD technology, but if they are now going to including ads, after early adopters have shelled out $1,000 for what could possibly be obsolete technology, you can bet that there will be a backlash. Hopefully, the studios will realize that they need to do something fast because everyday that delays the implementation of HDTV DVD technology is one less day that the studios will be able to justify charging $15 – $20 for a movie.

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Starship Netflix You Are Cleared For Liftoff http://davisfreeberg.com/2006/10/24/starship-netflix-you-are-cleared-for-liftoff/ http://davisfreeberg.com/2006/10/24/starship-netflix-you-are-cleared-for-liftoff/#comments Tue, 24 Oct 2006 02:05:57 +0000 Davis http://davisfreeberg.com/2006/10/24/starship-netflix-you-are-cleared-for-liftoff/ Starship NetflixStarship Netflix Hosted on Zooomr

Recently, I was looking at some of the online data that is available on GameFly and I remarked to Motley Fool contributor Daniel Rubin, that I was surprised to see that internet video game rentals hasn’t turned out to be more popular option for consumers. Online video games have been something investors and customers have been very vocal about wanting, yet Netflix CEO, Reed Hastings has stood steadfast in his commitment to stick with just DVD rentals. Rubin’s response to my comment was a true testament to how much Reed Hastings has shown an uncanny ability to understand the DVD market better then anyone in the industry.

“Isn’t this yet another spectacular display of strategic leadership by Reed Hastings? The guy’s like a Starship captain flying this sucker through an asteroid storm and outmaneuvering every one and every thing.

The man has thrashed Blockbuster (one of the biggest brands in busines history), beat off Wal-Mart, scared off Amazon, and now may have dodged a huge bullet by having NOT wasted time on a failed venture at this critical juncture when time is of the essence. I’ll take Red Envelope Entertainment and the value that will come from proprietary content over video games any day.”

While no one doubts the importance of having a good management team, this aspect of investing, is remarkably hard to quantify, but for investors who have just witnessed Netflix report another blow out quarter, it’s clear that Captain Hastings has put Netflix Starship into orbital launch mode. A quick glance at their 3rd quarter 2006 earnings report, reveals that during the quarter Netflix achieved 493,000 net new subscriber additions, bringing their total subscriber base to almost 5.7 million customers, an increase of 58% over the last 12 months. With this stronger customer base, Netflix also reported record revenues of $258 million for the quarter and handily beat their earnings guidance by recording another $12.8 million in net income. This increase in net income was an 84% year over year improvement from their third quarter results in 2005. The company also raised guidance for the 4th quarter and for all of 2007.

These impressive results were accomplished during a quarter where Netflix spent a record $45.32 for each gross subscriber added. During the company’s conference call following the earnings announcement, Hastings not only reaffirmed their outlook on the video rental market, but also discussed how they see the video store market unfolding over the next year.

“The larger online gets the more difficult store based rental becomes economically and we think the major chains will close 5 – 10% of their stores next year. As more stores close the online market is further strengthened. Our view is the trend of online rental growth and the store rental decline will continue for many years.”

This outlook on the growth potential of the online market is shaped, in part, by the company’s experience in the San Francisco Bay Area. Not only have they seen a lower subscriber acquisition cost from Bay Area subscribers, but they’ve also see lower churn as well. In fact over the last quarter, Netflix saw their penetration in the Bay Area increase from 14.1% last quarter, to 14.9% this quarter. They also saw that in Seattle, Austin and Washington DC, their market penetration now exceeds 10%. The reason why 10% is an important number for Netflix is because this is traditionally the net margin that video stores have realized. Because of their high fixed cost structure, if 10% of a video store’s revenue disappears, it quickly pushes stores into unprofitability.

In looking ahead, Netflix put off many of the questions surrounding their upcoming download plans for another quarter, when they’ve agreed to discuss these plans in greater detail. They did however leak two important pieces of information about their downloading ambitions. The first is that the company is expecting to spend somewhere in the neighborhood of $40 million in 2007 for internet downloading services. The second piece of downloading news is that “as with all internet movie services, [Netflix] will initially have significant content availability constraints imposed by the TV network windowing system for movies.”

In other words, for those of us who are still waiting to get access to 65,000 movies and TV shows on demand, don’t hold your breath. While this won’t come as a surprise to those who have seen the studios take a cautious and skeptical approach to downloading, it is disappointing nonetheless and means that we could see the life of the DVD last much longer then what many “experts” are hoping for.

In talking about the various aspects of their business, Netflix pointed out that the only “dark cloud” that they have seen has been the stalemate over high definition DVDs. The battle for high definition DVDs has essentially come down to a battle between the Playstation 3 and the Xbox 360. With Sony having bet heavily on Blu-Ray, as a proprietary format and with Microsoft determined to not allow the PS3 to achieve that market dominance that the PS2 saw, Hastings sees little hope of a solution during the fourth quarter. He did call on the studios once again to embrace a format agnostic approach to high definition, but admited that if any progress were to be made, it certainly wouldn’t happen until the first quarter of 07′, at the minimum.

During the question and answer session of the call, Hastings was asked if the introduction of dual layer technology had played an impact in convincing studios to release their films on both formats and sadly his reply was “We haven’t seen any move towards both technologies, the market you know is reasonably frozen pending Playstation’s arrival, so if I had to guess it would be Q1 before we start seeing some movement.”

Why the studios have been so reluctant to embrace technology will never make sense to me, but between forcing consumers to wait for the climate to thaw on movie downloads and their being frozen in regards to the HDTV format war, I am begining to become convinced that Hollywood is looking a lot more like the artic tundra then the palm beach paradise portrayed in the movies.

With Netflix reporting, yet another impressive quarter of growth and profitability, it’s becoming increasingly harder for the Netflix skeptics to deny that Netflix has not only made their mark in an impressive growth market, but that they can also make profits at the same time. Even the most pessimistic analyst on Netflix’s future, Michael Pacther, had to admit that “the results showed the company could be profitable even at the current level of marketing spending.”

In fact the irony of Netflix’s blow out quarter is that they were able to realize both profit and growth, despite spending record levels marketing the very $5.99 plan that Blockbuster has recently abandoned. While many in the industry may end up scratching their heads as to how Netflix has accomplished this task, Hastings has once again proven to be an impressive pilot in the asteroid field that makes up the current universe of DVD rentals.

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No PS3 For You – Hollywood Considers Grounding Sony Over Blu-Ray Debacle http://davisfreeberg.com/2006/10/19/no-ps3-for-you-hollywood-considers-grounding-sony-over-blu-ray-debacle/ http://davisfreeberg.com/2006/10/19/no-ps3-for-you-hollywood-considers-grounding-sony-over-blu-ray-debacle/#comments Thu, 19 Oct 2006 23:35:20 +0000 Davis http://davisfreeberg.com/2006/10/19/no-ps3-for-you-hollywood-considers-grounding-sony-over-blu-ray-debacle/ With Hollywood fat cats beginning to realize that 2006 may see the DVD reaching it’s peak in popularity, they are starting to get nervous and have started to show signs of turning on each other. In the latest sign that not all is right in Hollyweird, Variety is reporting that movie executives are upset about being misled by Sony over the PS3/Blu-Ray timeline and are actually beginning to consider alternatives to the Blu-ray / HD-DVD stalemate.

Over the last few years, Sony has continually used the PS3 as a way to convince Hollywood studios to embrace a senseless format war and to get them to refuse to license their movies to the HD-DVD format. There is no doubt that the PS2 has been the most successful video game system ever. With a full year headstart on the Xbox, a slate of exclusive video game titles and a strong international presence, Sony was able to dominate Microsoft and Nintendo in the 2nd generation console wars. Having built this lead with their PS2, Sony has been so aggressive in negotiations over the format war, that it has sparked an anti-trust investigation within the EU.

After sucessfully convincing several studios to boycott the HD-DVD format, industry executives are finally beginning to show cracks in their resolve after Sony has experienced delay after delay after delay in deploying their upcoming third generation console.

“”The more problems the PS3 has had, the more chips Sony has pushed in,” says one senior videogame industry exec. “At this point, it’s a huge gamble.”

The fate of the PS3 will not only determine the future of the videogame industry, but the battle over hi def DVD formats as well. Because every PS3 is a Blu-ray player, its success could help drive the success of the Sony-backed format over Toshiba’s HD DVD. If it’s a flop, studios aligned with Blu-ray will undoubtedly start switching sides.

In other words, a lot more players in Hollywood will be watching the launch of the PS3 than typically pay attention to a new videogame console.”

I’ve said this before, but I’ll say it again, until the Blu-Ray and HD-DVD studios can figure out a way to end this format war, I will boycott any HDTV DVD system out there. If that means that I won’t be getting a PS3 as a result, then I’m absolutely fine with that. Why the studios can’t license films on both formats is beyond me, but when companies engage in this sort of monopolistic chicanery, they will never receive any of my hard earned entertainment dollars.

The good news for consumers though is that with all of these delays, the studios may take a second look at this issue and see the benefits of either agreeing upon an open standard or agreeing to supporting both formats. Interestingly enough, in a post analyzing many of the issues brought up in the Variety article, The Home Theater Blog mentions that his contacts have indicated that we could see at least one studio agree to dual distribution by the end of this year.

“The A2 and XA2 along with the Xbox add-on will put HD DVD into insert-number-here additional homes and from there who knows where this will go. One thing’s for certain however HD DVD has established a “beachhead” new window regardless of what Mike Dunn has to say on the subject. The net result of this may surprise even the most ardent Blu-ray supporters; I’m told to expect at least one Blu-ray exclusive studio to announce neutrality, before the end of the year.”

Reading this makes me hopeful that we could see an end to this stalemate sooner or later, but until we see the PS3 deployed on a large scale, I think many studios will take a wait and see approach when it comes to the issue of whether they should be format agnostic. While I’d like to see this technology begin to gain widespread adoption, until we see a solution where consumers aren’t put at risk of buying obsolete equipment so that studios can profit, I will also take a wait and see approach.

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HDTV 101 – What You Need To Know Before Buying Your Next TV http://davisfreeberg.com/2006/10/11/hdtv-101-what-you-need-to-know-before-buying-your-next-tv/ http://davisfreeberg.com/2006/10/11/hdtv-101-what-you-need-to-know-before-buying-your-next-tv/#comments Wed, 11 Oct 2006 02:46:55 +0000 Davis http://davisfreeberg.com/2006/10/11/hdtv-101-what-you-need-to-know-before-buying-your-next-tv/ About two and half years ago, I made the jump to HDTV. In fact, not only did I make the jump, but I actually moved apartments after learning that my landlord had refused to let Comcast install the underground cables necessary to deliver that rich HDTV experience. After reading so much about the technology and having an opportunity to see the clarity of the picture, I knew I needed to upgrade. At the time, I felt pretty tech saavy, but when it came to making a purchase, in reality I had no idea what I was doing. It’s confusing enough trying to understand the resolution differences between 720p or 1080p, let alone issues like HDMI support or whether 1080i is really a better format. In fact sometimes, I think that the consumer electronic industry almost wants to intentionally confuse consumers. With so much confusion over HDTV technology, it’s no suprise that 25% of HDTV owners haven’t hooked up their televisions properly.

Well for those of you who are in the market for a slick new HDTV set, have no fear because TechDigs has put together an excellent HDTV overview on the differences in the various HD televisions. Can’t figure out if you should be going plasma or LCD? Need to know if that extra $1,000 is really worth spending on a new set? Well TechDigs has the answer. Like any overview, it won’t answer every question that you might have about HD technology, but it’s a good resource for helping to demystify some of the confusion surrounding HD television and is a good starting point for anyone who is still trying to figure out how to stop their VCR from blinking 12 o’clock.

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All Buzz No Bite – Why Davis Won’t Be Buying A Zune Or PS3 http://davisfreeberg.com/2006/10/05/all-buzz-no-bite-why-davis-wont-be-buying-a-zune-or-ps3/ http://davisfreeberg.com/2006/10/05/all-buzz-no-bite-why-davis-wont-be-buying-a-zune-or-ps3/#comments Thu, 05 Oct 2006 23:46:47 +0000 Davis http://davisfreeberg.com/2006/10/05/all-buzz-no-bite-why-davis-wont-be-buying-a-zune-or-ps3/ Over the last year, Microsoft and Sony have been in full hype mode for their upcoming slate of gadgets. While last year’s Xbox 360 was the buzz du jour, this year it’s all about Zune and it’s all about the PS3. I never understood what was so appealing about the Zune to begin with, but I will admit to eyeing that PS3 and being at least a little curious as to the quality of gameplay. The problem with both of these products though, is that Microsoft and Sony are so uptight about controlling every single aspect of the device that they’ve turned interesting products into lame consumer electronic devices that don’t give any freedom to the end user.

In a great post, A1E1 goes after both Microsoft and Sony with both guns loaded and does a good job of identifying the weaknesses in both brands. On Sony’s side, it’s their insistence on incorporating the Blu-Ray technology into their PS3 boxes rather then letting consumers decide whether or not this is something they even need. Because of this there have been delays in getting the product to the market and it’s added to the already high cost of the PS3.

On Microsoft’s side of the business, they’ve created a product that supports wifi, but then they strip out all of the functionality that wifi could bring. Instead of ending up with an iPod killer, Microsoft has instead ended up with a music player that won’t even play their own music files. This is such a joke, that I can’t believe the company is hyping this as much as they have been.

Until Sony agrees to cross license their films to HD-DVD I will refuse to buy any product that uses Blu-Ray technology. There is no reason why consumers shouldn’t be able to get access to the same movies on HD-DVD as they can on Blu-Ray except the media companies are trying to create a monopoly around HDTV-DVDs. If either Blu-Ray or HD-DVD is successful in becoming the only format, I will guarantee that consumers will pay dearly for this mistake. Sony knows the stakes are big and so they’ve forced PS3 fans to adopt this technology if they want access to their video game platform because they know that consumers simply won’t buy stand alone Beta Blu-Ray players.

As for Microsoft, WiFi on an mp3 player is a great idea. Being able to share that music with your friends is a great idea, but bending to the pressures of the studios and implementing bad DRM is a terrible idea and despite the fact that they will let you play mp3s, their insistence on adding strings to the wifi capabilities makes absolutely no sense. Had Zune been a laptop instead of an mp3 player, there is no way that Microsoft would have put these restrictions in place. I understand the need to work with content owners, but when you abandon consumers so that you can cozy up to the studio fat cats, you are setting yourself up for failure.

A few years ago, Tom convinced me to buy an Audiovox SMT 5600 and while it does allow me to merge my music collection with my cell phone, only being allowed to play .wma files still makes me bitter. Microsoft may have opened up Zune in regards to mp3′s, but by building bad technology into the product, they’ve taken a potentially good idea and turned it into a terrible one.

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Partner or Compete? How TV Monopolies Benefit From Competition In The DVR Industry http://davisfreeberg.com/2006/09/28/partner-or-compete-how-tv-monopolies-benefit-from-competition-in-the-dvr-industry/ http://davisfreeberg.com/2006/09/28/partner-or-compete-how-tv-monopolies-benefit-from-competition-in-the-dvr-industry/#comments Thu, 28 Sep 2006 17:50:32 +0000 Davis http://davisfreeberg.com/2006/09/28/partner-or-compete-how-tv-monopolies-benefit-from-competition-in-the-dvr-industry/ TiVo may be the brand name in the DVR space, but it’s no secret that they’ve faced a lot of competition from cable and satellite providers. Despite all of the doom and gloom that we’ve heard though, over the past few years, instead of fighting the cable and satellite operators head on, we’ve instead seen TiVo partner with these competitors and they now have licensing agreements with DirecTV, Comcast, Cox & the National Cable Television Cooperative (NCTC). Collectively, these relationships represent over 65 million potential homes that TiVo could find themselves in and with the DVR marketplace exploding in the growth, TiVo is well positioned to leverage these relationships to help accellerate their own expansion plans.

As cool as TiVo is though, they aren’t the only game in town. Some have argued that the cable and satellite providers are a threat to TiVo’s business model, but over the last few years we’ve seen a much different trend begining to develop in the television industry. While the MSOs are the most visible providers of set top boxes, they’ve actually had quite a bit of trouble building their own reliable DVRs and have turned to a number of different companies to meet their set top box needs.

On the surface a DVR seems like something that would be pretty simple to build. You would think that all you really need is a small computer and a large hard drive and you should be good to go, but in reality these machines take complex middleware, finicky hardware arrangements and important patent rights in order for consumers to enjoy the luxury of being able to time shift their television. As the MSOs have moved forward with their own expansion plans in this area, one thing they are figuring out is that it’s not an easy process.

Earlier this year, DirecTV was supposed to drop their relationship with TiVo after signing an agreement with NDS Group to provide their own high definition box, but after experiencing countless delays on their HDTV Frankenstein box and after seeing their competitor Dish absorb a devasting body shot in their patent loss to TiVo, DirecTV rethought their strategy and extended their relationship with TiVo for another 3 years. While industry watchers have attributed the move as a defensive play on DirecTV’s part, I believe that this move was part of a larger trend in the set top box industry. As the cable and satellite companies are finding out how unwieldy the DVR can really be, they’ve abandoned the go it alone strategy and are now turning to multiple solutions for their customers.

This does two things for the DVR industry. First, it offers more choices to consumers. Rather then forcing consumers to live in a world where they have to accept the terrible Gemstar TV Guide menu, consumers may one day be able to pick which software they want to run and decide how much it’s worth paying for. Whether it’s Microsoft’s foundation software, OpenTV’s participation TV or TiVo’s upcoming operating system download that is rumored to be in beta testing right now, despite all of the talk about cable and satellite doing it alone, it’s interesting to note that there are already four different software solutions for the Motorola set top boxes that have been unveiled over the last two years.

The second effect that these partnerships are having in the DVR industry though is that by partnering with so many firms, the cable and satellite companies have been able to better negotiate contracts then had they choose just one vendor to give exclusivity to.

To date we have largely seen this trend contained to the software part of the set top box business, but recently there have been signs that the MSOs are trying to bulk up their offerings on the hardware side as well. So far Motorola and Scientific Altlanta (who was later bought by Cisco) have been the largest hardware beneciaries from the growth of the DVR industry, but Pace Micro Technologies has recently been making a splash of their own.

Less then a month after signing an agreement with DirecTV to provide next generation HDTV boxes to their subscribers, Pace Micro Technologies has now begun shipping their standard definition set top boxes to Comcast as well. This marks the first time that Comcast has moved beyond Motorola for their hardware needs and is an important trend to keep an eye on. Thus far the Motorola set top boxes have received pretty lackluster reviews and they’ve been plauged with hardware and software issues, but by bringing Pace Micro on board, Comcast will not only have a new solution to offer consumers, but will also be able to leverage this relationship to force Motorola to improve the quality of their hardware and to think more critically about their pricing negotiations. While analysts may point to the threat that the cable and satellite industry poses to the DVR industry, I believe that as the MSO’s open up, the real competition will come from the various DVR players all fighting for the same cable and satellite subscribers.

While you can’t call up Comcast today and customize your DVR, I believe that in the future consumers will choose who the real winners in this industry will be and will be given the option of not only choosing whether they want Microsoft’s Foundation technology or TiVo’s Home networking solution, but will also be able to customize their hardware choices by adding on things like DVD players, burners and HDTV DVD support. The industry still has a long ways to go, but as the DVR becomes an integral part of the digital home, I believe that the cable and satellite industry will abandon the monopolistic practices of the past and will end up benefiting more from the intense competition in this consumer electronics space.

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