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

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

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

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

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

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

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

“Hi Davis Freeberg,

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

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

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

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

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

The key to unlocking most filings, isn’t so much what they tell you, but what’s missing. If you look at the numbers that they do give you from different perspectives, you can often get a rough outline of the ones that aren’t there.

With this in mind, I decided to dig deeper into Research in Motion’s latest 6K filing, to see if I could find clues to some of the questions that RIM left unanswered when they acquired Dash Navigation. Rim’s purchase of Dash has always been shrouded in a cloud of mystery. Normally, acquisitions make front page news (or at least the front of Techmeme), but Dash and Rim both kept quiet for nearly two weeks, until Boy Genius saw details leaked in an industry publication. Even in their most recent 6k filing, Rim doesn’t mention Dash by name once.

What Rim does mention though, are some hard numbers that can help to fill in the blanks.

In the filing they tell us the following

-During the 1st quarter they purchased two companies. A company named Certicom and “a company, whose proprietary software will be incorporated into the Company’s software.”
-The two businesses cost RIM $124.4 million
-Out of the $124.4 million, $111 million was spent on Certicom
-They also spent $4 million in financing costs as part of the transactions
-Even though they only spent $124.4 million, they actually had to redeem short term investments of $136.4 million in order to complete the transactions.
-Part of the cost of the Certicom transaction was reduced by the $10.9 million in cash that they picked up as part of the transaction.

Since RIM admits to only making 2 acquisitions during the quarter, it is relatively easy to determine the purchase price of the company.

$124.4 million - $111 = $13.4 million
$13.4 million - $4 million = $9.4 million

In order to make sure that we take into account any cash that Dash may have had, you have to look at the difference between what RIM actually paid for both companies and what it actually cost them.

$136.4 - $124.4 = $12 million

Since Certicom had $10.9 million, it would suggest that Dash was left with a mere $1.1 million when they were acquired.

$9.4 - $1.1 = a purchase price of $8.3 million

When you consider that Dash raised $71 million in three rounds of financings, it’s easy to understand why they wanted to keep quiet about an 88% loss for their VC investors.

What is a little surprising though, is how good of a deal RIM seems to have gotten out of the transaction. One of the more interesting figures that caught my eye was an entry for a $26 million dollar tax credit picked up in “one” of their acquisitions. That’s right folks, by buying Dash for $8.3 million, Rim will get a $26 million haircut on their taxes. They actually had to book over $8 million in revenue during the quarter to reflect the immediate gain on their investment. The tax loss alone represents a 300% (overnight) return on the acquisition. No wonder RIM doesn’t want to talk about it, Dash seems to be more of an accounting adjustment then an actual play at their technology.

While I can understand why Dash and Rim wouldn’t necessarily celebrate this transaction, lets hope that they are being honest with us about implementing Dash’s technology into their products. Allowing consumers to share information, in order to better understanding real time traffic could really help to push GPS technology ahead. It would be a shame to see Dash’s legacy relegated to an unnamed footnote in a business filing.

If you’ve ever wondered what my opinion on something might be, here is your chance. Contact me through the tip line and I’ll consider your question for a future column.

Since then, I’ve spent more time researching the pill and realize that I made a terrible mistake. Not only is there an antidote, but Dish may already have it.

Over the years, I’ve spent a lot of time thinking about this pill, but could never figure a way around it. It wasn’t until I asked myself a simple question, that the solution became so obvious. What would Charlie do?

Love him or hate him Dish CEO Charlie Ergen has a special kind of brilliance. His reputation as a fearsome litigator is legendary and more than once he has demonstrated his mastery for the fine art of negotiation. Over the years, his decisions have created huge growth for Dish (albeit at great risks.) Unfortunately, his penchant for the legal system may have finally caught up with him and now he finds himself struggling in quicksand with the prospect of having to buy rope from TiVo.

To get a better picture of his frame of mind, I turned to his own testimony from last February. (Via Mainer’s Law Library)

Q: Is the following an accurate statement, that Echostar would lose $90 million per month if it had to comply full with the terms of the injunction, assuming it’s properlty interpreted as requiring you to disable DVR functionality in the specified product lines?
Ergen: There would have been a time fame that, that would have been an accurate statement. Today that,
Q: Ninety –-
Ergen: Today it would be more than that. Today would be more than $90 million dollars
Q: And how much would it be a month today?
Ergen: Would be probably several hundred — It would be over several hundred million dollars, I don’t know exactly, I don’t have the figures in front of me, but it would be more today.
Q: Several hundred million dollars a month?
Ergen: It may be as much as several hundred million dollars a month.

I don’t know about you, but if I spent the last 30 years of my life building a business and all of a sudden was faced with the prospect of losing several hundred million dollars a month, it’s a good bet that I’d be willing to do whatever it takes to make sure that this doesn’t happen. I don’t care how big you are, after a few months, hundreds of millions turns into billions and after billions in losses vultures have a tendency to sweep in and pick off your carcass.

Even before we see how this plays out, S&P is already circling. From their June 10th assessment of Dish’s credit rating.

“With nearly $1.2 billion in cash and marketable securities and very moderate leverage for the current ‘BB-’ rating, Dish could easily fund the $103 million of new judgments and penalties without a ratings impact, it said. However, the longer term effect on the company’s credit profile would depend on the strategic path Dish takes to resolve the DVR issues, S&P said. If Dish were to enter into a licensing arrangement with TiVo, which S&P said was the most likely scenario, there would be no effect on Dish’s BB- corporate credit rating” [Note: Bold added by me]

If Mr. Ergen believes his own testimony, then his only frame of mind has to be one of desperation. He is left with only two solutions.

He can try and negotiate a settlement with an empty gun or he can go for an all-in bluff and try to buy TiVo in a dangerous gamble.

Now I don’t know whether or not TiVo has actually refused to settle with Dish, but if they really are serious about enforcing their right to NOT license their technology, then Charlie really only has one option. In my opinion, I see TiVo digging further into the trenches. Take a look at Tom Roger’s comments from the Q3 2009 conference call as a good example,

“We will pursue with great aggressiveness the resolution of these issues in a way that hopefully will lead to the imposition of the injunction but I just wanted to make clear that the right to appeal is not one without the ability of the court to handle this situation and bring it to ultimate resolution.”

Or if you want to get a closer glimpse into how TiVo feels about the injunction, take a look at TiVo’s most recent argument for why Dish doesn’t deserve a stay of execution,

“The right to exclude conferred by TiVo’s patent is empty if it can never be enforced. Since this Court entered its previous stay, TiVo has lost 25% of its DVR subscribers, while EchoStar’s have nearly doubled. Ex. 1 (Brunelle Decl. Ex. A). That harm can never be fully redressed through damages. Entry of yet another stay will undermine respect for district court process and severely prejudice TiVo.”

further in their response,

“EchoStar is a large, aggressive competitor, more than willing to pay damages (and face contempt charges) so long as it can continue to do as it likes Granting a stay here will distort the patent system by encouraging other infringers to make minor changes to their adjudicated products and then seek further stays in order to keep operating even after they are held in contempt. With deep-pocketed infringers, endless cycles of purported change and ensuing litigation will reduce the right to exclude to little more than a compulsory license—and one enforceable only through rounds of litigation that not only drain a patentee’s resources but allow rapidly-evolving modern markets to be shaped by infringing competition in ways that go far beyond monetary harm.” [Note: Bold added by me]

The more that I look at things from Charlie’s perspective, the more it becomes clear that he doesn’t have a choice in this scenario. He must buy TiVo. The future of his business would depend upon it.

This leaves just two questions, how much can he spend and how does he do it? If Dish currently has $1.2 billion in cash and short term securities, it would give them enough firepower to easily get 50% at recent market prices, but it wouldn’t be enough to pay for the poison pill.

Dish could probably raise another $2.5 billion before their debt would start to get too expensive, so for the sake of argument, let’s say that their budget is around $3.5 billion. When you consider TiVo’s tax losses, their cash on hand, and what Dish actually owes them in licensing fees (plus punitive damages ), they’d probably really only end up paying $2.5 billion to make this acquisition happen.

So if Charlie came to me and said, Davis here’s a pile of money I want you to engineer a hostile takeover, here’s how I’d do it

Since making a tender offer would trigger the pill, my only option would be to try and acquire more than 50% of TiVo’s stock on the open market before anyone found out about it. One problem I would face with this strategy is that as soon as I purchased more than 5%, I’d have a mere ten days to complete my acquisition before I’d be forced to tell the world about it (11 or 12 days if the deadline falls on a weekend).

Since this would make this strategy very dangerous, I’d want to wait as long as I could before trying to pounce. Once the judgment was final though, I’d move as quickly as I could to mask the accumulation with publicity from the verdict.

On day 2, I’d continue to buy heavy shares to try and simulate the appearance of quick profit taking. By the time day 3 rolled around, I’d slow things down so the market wouldn’t catch on to the significance of what was happening. Days 4 - 9, I’d continue to add, but in a very controlled and deliberate manner. It wouldn’t be until day 10 that I’d go bonkers and buy anything on the market because at that point every share I purchased would be one that I didn’t have to pay an extra $60 for.

Where my math was flawed when I was originally calculated the cost of TiVo’s poison, was that I didn’t consider the shares Dish wouldn’t have to pay a $60 dividend on (their own.) If they could accumulate 50% of the company for $1 billion, then they’d owe $3.5 billion to the remaining TiVo shareholders. If they grabbed 60% for a billion, they’d only be on the hook for another $3 billion in poison. If they could actually buy 70% of TiVo’s shares, they’d get away with a $3.2 billion total acquisition (the equivalent of $28 per share even after paying $71 to the shareholders who hold out.)

A price that seems reasonable given the gravity of their situation.

The danger in using this strategy is that just like a snake, Echostar would be most vulnerable when it was feeding. If the market (or TiVo) somehow got wind of this it could very well threaten Charlie’s ownership stake in Dish.

You see, TiVo has a provision in their pill that says if someone triggers the pill, but then can’t pay for it, they have to pay in stock worth .50 cents on the dollar. Based on Dish Network and TiVo’s current market caps, this would mean that if TiVo managed to choke Dish on an acquisition, they’d end up owning roughly 65% of Dish’s stock.

While there is no way for me to know whether or not Echostar really is in the process of a hostile takeover, there is evidence to suggest that this scenario is possible.

I don’t want to read too much into technical indicators, but if you look at TiVo’s money flow index, you’ll see that it spiked from a score of 50 to 90 following TiVo’s latest win. In 2006, TiVo’s money index hit 80 following the initial verdict, but it was already at 80 going into it. The money flow index measures the eagerness of buyers for a particular security. It looks at the high mid and low points that a stock trades at and takes into account the volume that buyers and sellers are trading at. Anything over 80 is usually considered over bought, but it would be impossible for anyone to achieve a hostile takeover without tripping this index off the charts. To put the significance of this score in perspective, you have to go back to the wild days of 2001 to find a time where TiVo’s money index was at a higher level.

The day after TiVo’s most recent court victory, their stock traded a record 38 million shares. They very next day TiVo saw 12.5 million shares change hands. To the man on the street, this may not mean anything, but for a stock that normally sees 1.5 million shares of action, this is extremely significant. Two days alone represented nearly 50% of TiVo’s total shares outstanding. The mainstream media never picked up on this story, but Bloomberg’s reporters knew enough to be incredulous when they found out how much volume TiVo was seeing post judgement.

Some will dismiss this spike in volume as speculators and day trading following a well publicized judgment, but I’m concerned that something much more sinister is happening. While TiVo did see 30 million shares trade hands following their 2006 verdict, the situation leading up to that spike in volume was very different. In the week prior to their 2006 verdict, they averaged 6 million shares per day as speculators clearly bet on the result of the trial. After the victory, there was heavy volume, but there was also heavy volatility as people cashed in their winning tickets. Over the course of two days, TiVo shareholders watched their shares jump from $8.05 to $9.80 and back down to $8.20 a share. Over the course of 8 days, investors traded an average of 6.6 million shares a day.

This time around has been very different. TiVo’s stock has been steadily increasing and continues to set higher highs and higher lows in most of their trading sessions. In the five days prior to their latest court win, TiVo averaged 2 million shares per day, but in the 8 trading days that have followed, they’ve averaged almost 10 million shares a day. To get a sense of the difference in volume between now and 2006, see the following graph.

We don’t know whether or not it was Dish or market forces that caused 50% of TiVo’s stock to trade on June 3rd and 4th, but we do know that these transactions took place. If Dish was in fact the buyer, I would guess that over the last 8 trading days, Dish probably has picked up a 45% stake in TiVo for about a half a billion. If this is the case, it would mean that they are still on the hook for another $4 billion.

Even if they were to pay $20 per share for the remaining 25%, they could easily hit a 70% target, assuming that they were willing to spend the half a billion that would be left in their bank account.

How could TiVo defend against this? They would need to poison the snake with more venom. Currently, they are authorized to conduct a secondary offering for up to 170 million additional shares. I wouldn’t recommend trying to go to market with all of those, but for every dollar TiVo raises, it would cost Dish $7 to make an acquisition.

If TiVo was to do a 10 - 30 million share offering in a secondary, it would add $700 million to $2.1 billion more to the cost of an acquisition. If they actually managed to catch Charlie while he’s feeding, they’d seize control over Dish Networks.

While this conspiracy theory is based on speculation and is admitedly a long shot, it’s possible that this could be going on. If TiVo sees the type of crazy volume it would take for Dish to get to the final 70%, I would hope that TiVo management would be cunning enough to contact their bankers and get those extra shares out into the market.

Either way though, it won’t take long to find out whether I’m looking like a goat or a genius on this one. If Echostar really is in the midst of a hostile takeover, we’ll find out today (June 15th), after the market closes. If we don’t see a 13-D filing, you can chalk this one up to crazy Uncle Freeberg chasing aliens again, but if by some wild chance I’m actually right, then David will have figured out a way to slay Goliath with little more than their wits and a pebble aimed squarely at Dish’s forehead.

Update - A hostile takeover may have been possible when I published my post this morning, but as of today’s filing deadline, Dish hasn’t disclosed a position in TiVo. This would make a takeover at this point highly unlikely unless we see volume spike again. I’d still like to see TiVo issue a few more shares to beef up the pill, but for now they should be out of the woods. Sorry for getting everybody excited, but it looks like I’m going to end up looking like a goat on this one. At least it was fun to think about the what if’s of trying to break the pill. Since I was wrong about the filing, I probably should go back and reconsider the health benefits of the tin-foil suit . . .

It’s been over 5 years since TiVo filed their patent lawsuit against Dish, but we’re finally reaching the endgame of what has been an epic chess match between the two companies. Between the he said/she said arguments that have played out in the press to the endless legal maneuvers by both camps, it has been a long and brutal battle for both. As a TiVo shareholder, I know that I’ve found the long delays especially frustrating.

In the latest development in this high stakes game though, TiVo has managed to pin Dish into a dangerous checkmate situation. With appeals quickly running out, Dish’s options are becoming increasingly limited. While things look pretty dire for Dish, I believe that they may try to play one more dangerous gambit before this game is up.

I think they might try to buy TiVo.

While looking through my traffic logs, I came across a very interesting visitor In 2006, I wrote an article referencing a poison pill TiVo implemented in 2001. Since Google loves bloggers so much, my story somehow ended up near the top of the page for the search term TiVo poison pill. Given recent analyst chatter that TiVo could be an M&A target, I’m not surprised that people would be interested in taking a closer look at the nuts and bolts behind the agreement, but I was surprised at where my visitor was coming from.

While there is no way for me to know who it was, someone at Echostar’s corporate HQ’s spent 25 minutes researching an article that I wrote on the topic. Their outclick took them to the legal document that contains all of the nitty gritty details on how the pill actually works.

Now, there could be any number of explanations for why someone at Echostar would be interested in TiVo’s anti-takeover provisions, but the most likely one is that they’re interested in making some kind of play at TiVo.

On June 4th, the Eastern District of Texas District Court announced that they were holding Dish in contempt for continuing to infringe on TiVo’s timewarp patent. (via Mainers’ Law Library) Dish may have been able to get a temporary stay on the injunction, but the eventual impact of the ruling could end up being devastating.

The order against them contains two crucial components, the first is a requirement to disable all infringing DVRs. For Dish to comply with this portion of the injunction, it will probably cost somewhere in the neighborhood of $300 - $400 million. This type of expense would hurt, but it wouldn’t necessarily put them behind the 8-ball.

The far more damaging portion of Folsom’s order is the infringement provision. This prevents Echostar from replacing these DVRs with other DVR set top boxes.

“The DVR functionality, storage to and playback from a hard disk drive, shall not be enabled in any new placements of the Infringing Products.” (bold added by me)

The inability to offer a DVR to their customers would put Dish at a severe competitive disadvantage. Furthermore, because Dish has now been caught trying to sneak a “replacement” DVR in through a redesigned back door, they now must seek court approval prior to deploying any new DVR solutions.

Now I realize that there are still a lot of people who haven’t adopted DVR technology yet, but for those who have, you know that once you get a sweet taste for time shifted entertainment, there’s no going back.

Survey after survey after survey has confirmed that people LOVE their DVRs and while I can’t speak for others, I know that if my television provider disabled my ability to record television, it would take less than a week before I found a replacement.

Dish doesn’t breakdown their current number of DVR subscribers, but during their most recent earnings call, Dish CEO Charlie Ergen acknowledged that the “majority” of their customers buy advanced DVRs and/or HD services. This would suggest that that as many as 8 million Dish subscribers could potentially lose access to DVR technology.

While the cost of replacing the set top boxes could hurt Dish’s earnings, the loss of even 10% of their subscriber base would do terrible things to their stock price. Customer defections and the inability to remain competitive could easily cost Dish shareholders, $3 - 4 billion in lost market cap.

Given the strength of TiVo’s position, several analysts have suggested that Dish may finally be ready to enter into a settlement agreement with TiVo and while forfeiting the game at this late stage would help to prevent an unmitigated disaster for Dish, I don’t believe that TiVo is willing to accept such a forfeit.

Instead I think TiVo is planning a North Korea strategy. For years, they’ve been unable to command respect in their industry and as more and more generic DVRs have hit the market, TiVo has seen their market share eaten away by larger competitors. Now that TiVo possesses a nuclear DVR patent, it opens up new avenues for “conversations” between them and their competitors.

A fat royalty check from Dish would be good for TiVo shareholders, but having the ability to strike fear into the heart of the MSO industry is worth considerably more in increased pricing power. Some may believe that a settlement is inevitable, but I believe that TiVo would have already entered into an agreement long ago, if they weren’t crazy enough to actually push the red button.

Even before TiVo’s latest legal victory, this bargaining power has enabled them to forge agreements with Cox, Comcast and DirecTV. Once companies like Time Warner and AT&T realize that TiVo is both ready and willing to put this kind of hurt on a business, it makes it a lot more palpable to swallow the carrot that TiVo offers through DVR partnerships.

If you assume that TiVo will eventually win this case and that they have no intention of settling with Dish, the only logical move left for Dish to try and make is an expensive acquisition.

After five years of litigation, I would hate to see Dish win this by seizing control of a company that they’ve done everything to squash. Fortunately for TiVo they should have a lot of leverage to negotiate. Their pill wouldn’t prevent an outright acquisition, but it would make it extremely expensive for someone to buy TiVo without the board of Director’s approval.

Based on my understanding of the complex agreement, in the event that Dish (or another acquirer) were to accumulate more than 15% of TiVo’s shares (or even announce the intention to acquire more than 15% of the shares), it would trip a provision that would entitle the other TiVo shareholders to a special $60 per share dividend This means that if Dish were to forcibly acquire TiVo, it would cost them $71 per share or close to $7.5 billion (more than Dish’s entire market cap.) If Dish tried to pay for the transaction in stock, TiVo shareholders would be entitled to $13.5 billion ($131 per share) in the buyout.

With TiVo’s stock currently trading at $1.15 billion ($11 per share), this type of premium would be too bitter of a pill for Dish to swallow.

While it’s possible that we could see Dish challenge the poison pill legally (I hear that they have an attorney or two working for them), the only other option that I can see around this restriction would be for Dish to somehow convince TiVo shareholders to get rid of the pill at next month’s annual shareholder meeting.

This would be a long shot in and of itself (and one that I’m not even sure would be allowed per TiVo’s bylaws), but this feat is made even more difficult when you consider the fact that you would have had to have been a TiVo shareholder prior to the most recent judgment, in order to be eligible to vote on this kind of initiative.

While I’m doubtful that Echostar would succeed in an attempt to acquire TiVo, at the very least it’s interesting to see them thinking about it.

“I need not fear my enemies because the most they can do is attack me. I need not fear my friends because the most they can do is betray me. But I have much to fear from people who are indifferent.” - Russian Proverb

Now I know that most people don’t really care about the mechanics behind playing video files and I can’t say that I blame you for caring more about your content than the technology behind it, but while this post will get into some of the more mundane mechanics of the codec industry, I ask that you stick with me because behind the scenes a war is being fought for control of your very television.

This particular battle has been going on for over 10 years now and centers around something called a codec.

When J.D. Rockefeller set out to monopolize the oil industry, there were several crucial areas where he attacked. He knew that he couldn’t control all of the oil fields because it was literally bubbling out of the ground, but what he could control was the distribution method for getting oil to the end customer.

In building his monopoly he seized assets used to transport oil from raw material to the end consumer. Whether it was owning all of the oil pipelines, so that he could control what oil cost him, owning the railroads so he could dictate how far his competitors could reach or owning the distribution points where consumers bought kerosene to light their homes, he made sure that he had control over every aspect of it. This was good for Standard Oil investors, but wasn’t very good for competitors or consumers.

Online video may not seem like it has a lot to do with the oil industry, but if you look at it’s early development, there are many similarities. So much content is bubbling up that the real challenge isn’t finding video oil, it’s getting it to consumers. Instead of pipes, now we have internet access, instead of railroads there are CDN networks, instead of gas stations, there are operating systems ready to serve us 24 hours a day.

In all of these industries, competition has been limited to a handful of big companies, but the industry that I’m most interested is much smaller than any of these. In the grand scheme of things, codecs (and the filters that go along with them) are the refineries of the video world. They take digital signals and convert them into the flickering magic that appears on our screens. Consumers may not understand the technical details behind it, but they are a crucial chokepoint in your digital video experience.

This battle has been fought on many fronts, but in the end it always comes down to one issue. Those who think consumers should have a choice and those who think they know better. It’s about control over your entertainment experience. Who, What, Where, When, and How you are allowed to consume YOUR media. On one side, well funded corporations with huge financial stakes, on the other, an unorganized patchwork of misfit companies and an army of guerrilla volunteers desperately fighting for a better entertainment experience for all of us.

The war over how video is transmitted may not make it to the front pages, but how it turns out will be important for the success of digital video. In order to better understand how this battle is going, I reached out to interview one of the Colonels in this digital revolution.

Dan Marlin is the CEO and Co-Founder of CoreCodec. His company has built many of the tools necessary to play video files. Before starting his company, he worked for DivX and over the years has contributed extensively to the open source codec movement. He also sits on the board of the Matroska Foundation, an organization dedicated to enabling high definition digital video support for as many consumers as they can.

In our interview, we discussed the growing momentum behind the MKV format, his thoughts on DivX and the competitive landscape of the codec industry and had a passionate discussion around a controversial decision by Microsoft to prevent outside developers from using alternative filters in Window’s Media Player.

In regards to MKV, Marlin had many positives things to say about the momentum that they are seeing. When I asked him about interest in the format, he said that over the last 8 months, they’ve seen a “20 fold increase in the inquiries in regards to more details, about usage about enhancing the current feature set.”

This interest should mean good news for consumers. As more and more customers ask “where’s the MKV?“, hardware companies are starting to respond. When I asked Marlin about how long it would take before we see MKV reach critical mass he said,

“If you look at the adoption scale, you’d probably have to say that we’re at the Ubber Geek stage right now. It will probably take 2 - 3 years. We’re just starting to see the penetration now and it’s been three years since our last release. I would probably have to say two years. Not this Christmas, but the following Christmas you’ll probably start to see more devices.”

One of the more interesting things that came up during our conversations was some of the trends that Marlin is seeing in the MKV adoption curve. It’s no surprise that the anime community was one of the first ones to start using the technology, but I was surprised to learn that countries in Asia and Europe have been more enthusiastic in adopting MKV then in North America. In fact, the trends for MKV adoption mirror the original DivX adoption curve exactly. It’s almost as if the people who’ve been long time DivX users are the first ones to upgrade to an HD experience.

“Absolutely, as a matter of fact it’s mirrored exactly. You could look at DivX in the early days when I was there going back to 2001 and you can actually see the same adoption happening, the anime, the ripped releases from the AV heads, it’s mirroring it, but you have to ask why they are doing it? They are doing it because of the flexibility that it brings to what they’re doing. They can add, especially when it comes to some of the guys that rip DVD and the like and Blu-Ray, they kind of make it their own. They can add menus, there are menus out there that even though they are text, they do very basic things, but there can also be a ton of files inside the container itself, there are info files and pictures you can group.”

While Matroska was technically created by CoreCodec, Marlin told me that he has plans to spin it off into a foundation similar to Mozilla. They plan to offer sponsorships to companies that want to tap into their early adopter customer base. One of the things that I found fascinating throughout the interview was the openness behind such a transformative piece of technology. Instead of monetizing their creation, CoreCodec is building a business around the open source eco-system. Big media companies that believe you can’t build a business around “free”, would be well served in looking at how Core Codec has been able to position themselves by giving a good portion of their technology away.

“we looked at it not looking to make money and that wasn’t really the intention, but even what has been proven now and maybe not so much back then, open source and the ecosystem around open source, there can be profit. Even in a non-profit foundation or a not for profit foundation I should say, which the Matroska Foundation will eventually become, you know is pretty much the same thing. You still can be profitable and make money to support what you developed.”

When I ask Marlin about his thoughts on DivX and how they are positioned in the codec industry, his thoughts were bittersweet, “it’s a love-hate thing.” On one hand, having DivX adopt the MKV container does a lot towards making it a standard. It also helps to speed up the amount of time it will take to get into hardware devices. On the other hand, not a lot has changed since DivX and XviD split paths and now that the open source movement has taken the upper hand, he doesn’t like to see confusion between X.264/MKV and DivXHD.

“Obviously they’ve rethought what they had to do with H.264 which is a migration, but they’re not providing anything of value to what’s already out there. As a matter of fact, it brings more confusion than anything else and that’s the frustrating part because they have their own eco-system with certification and us as a solution provider like with CorePlayer or the CorePlayer platform itself is working with third party OEMs and they are asking questions in regards to DivX and DivXHD and we say the same thing we’ve been saying all along. DivX is Mpeg video and DivXHD is AVC video.”

Of all the topics that we discussed though, the most controversial was the decision by Microsoft to restrict how third party filters work within Windows media player.

To fully understand the issue, you need to know how your computer reads media files. When you click on your file, filters take a look at that data and tries to figure out what to do with it. If it’s audio, they’ll send the data to an audio decoder so your soundboard can play it. If it’s video, then it gets sent to a splitter where the audio stream and video stream are separated. From there a decoder looks at the video data, decodes it and sends it to a renderer for display on your screen.

The controversy revolves around how Microsoft prioritizes filters when you play back content. Currently, if you have several filters installed that can all handle the same job, WMP will look at the merit value of each filter and give preference to the highest one. Since you have the ability to prioritize which filters you want your computer to use, it allows you to create the ideal settings based on your hardware.

This comes in handy if you’re trying to play H.264 video in WMP and it happens to conflict with your video card. Since the user has control over the priorities, you’re able to create a better (more credible) configuration.

With the Windows 7 RC, Microsoft has taken away your ability to prioritize which filter you can use. From their perspective, they get a ton of complaints about filter problems and by making it a closed system it improves the experience for their customers. For the codec industry though, it will reduce the incentive for engineers to continue to work on filters because Microsoft has just essentially seized the entire filter market.

Microsoft will argue that because they allow people to install whatever filters they want on their own media players, that this restriction is somehow reasonable. After all, they’re not preventing customers from downloading another media player and configuring the settings anyway you like, they’re controlling their own product.

The problem with this argument though, is that while consumers have shown that they’re willing to download a codec, by and large, they’ve been very reluctant to download an entire media player. It’s a big commitment to mess with the default settings on Windows and because Microsoft bundles a copy of Window’s media player into every operating system they sell, it drastically minimizes the potential market that companies like CoreCodec, DivX and Nero can serve. This ultimately leads to less investment in codec technology and lower quality video for consumers in the long run.

Take a look for yourself at a real life comparison between video played using Media Foundation’s preferred filters and an open source combination. While the differences may be subtle, there is clearly better focus and definition in the open source solution. It might not be much, but it makes a huge difference when you put it on a 60″ screen. Today, you’d have the option of recreating the ideal settings in WMP, but with Windows 7 Microsoft is now in control.

While Marlin wouldn’t go as far as to accuse Microsoft of using their dominance over the operating system as a way of stifle third party codec competition, he did agree with me when I suggested that this may have more to do with preventing competition then securing their media player for consumers.

“You said it I didn’t, but essentially when it comes down to it, that’s what it is. It’s just frustrating that we all have to go through what we have to do and they could have provided an integrated solution without having to lock out third parties. Period.”

Now we can argue over whether or not Microsoft had an evil intent when they choose to shut down part of the codec industry, but regardless of the motives, competition is hurt by their decision to close media player to third party vendors. When I asked Marlin whether this would hurt his company or whether it was a dam in the river that would fork around the issue, he had conflicting thoughts.

““I think it’s going to be both. Microsoft will probably tell you that there is no problem and then the Core people will fork around it, but you’ve got to question the value of it though. You could still have embedded DirectShow filters, why have them under media foundation?”

Later on in the interview he extrapolates,

“I would say that as long as the default decoders are not set as the default and can be overwritten, I think we’re OK. The question is what steps will you have to go through and will Microsoft allow those steps. Right now you can edit it, they posted the solution online, but Microsoft could bypass that solution with the next RC. So that’s kind of like a wait and see thing. It does affect our business though, it does affect DivX’s business, it affects everyone’s business. “

Now Microsoft is free to run their business in anyway that they see fit and while the issue over filter compatibility within WMP may be an inch in the grand scheme of things, with each inch consumers lose a little bit more control. What’s so surprising to me about Microsoft’s behavior though, is how bold their actions are given the current regulatory climate.

Someone should nominate them for Alpha Dog of the Week because it takes giant brass balls to use your ability to bundle software, in order to shut down an entire industry, while you’re being accused accused of abusing your monopoly by bundling software within the operating system. If the EU understands even a little bit about codecs, I would expect them to be up in arms over this issue because it essentially proves the argument that they’ve been trying to make. Microsoft’s dominance in the operating system is having a detrimental effect on competition in other areas of the software industry.

It could very well be that Microsoft has good intentions here, but given their long history of doing whatever it takes to gain control of the codec industry, I can’t believe that this is by happy accident. This is a company that just spent a ton of money to exclusively webcast the Olympics in their Silverlight codec. The lack of MKV support in Windows 7 prompted the Hack 7 MC blog to write that “Microsoft’s support of the format is borderline neglectful.”

The decision to interfere with the priority filter settings is so Machiavellian I still don’t know what to make of it. My cold banker heart says yes! yes! yes!, but the consumer in me says dear God no. While I understand that these issues are hard to figure out and that there are many ways to look at them, I hope, for the sake of the entire codec community, that Microsoft will rethink their decision to exclude third parties from Windows media player.

For a complete transcript of my interview with Dan Marlin, please click here.

What exactly is CoreCodec and how does it relate to what you are doing with Matroska?

“Matroska is a container that our engineers developed some years ago. It is part of CoreCodec, I mean CoreCodec technically owns the rights to the trademarks and the like for Matroska. We have begun to form a separate Matroska foundation which will pretty much takeover from what we’ve begun to more of an independent, something along the lines of the Mozilla foundation, where they independently control the source code, but for right now CoreCodec is maintaining and helping to startup the Matroska foundation itself.”

CoreCodec also does for-profit work as well is that right?

“Absolutely”

Why did you go with such a radical open source license for Matroska then? Was that the only way you saw it coming together and competing or is it a reflection of your core fundamentals?

“Really it goes back to what our roots were. If you go back to even from when I started with multimedia when I was originally with DivX, I was one of the original people in DivX and we had what was called the OpenDivX decore, that was pretty much under an open source type of derivative license that I think was called the DivX open license or something along those lines.

It didn’t come out, it didn’t really pan out very well for them because I thought that the eco-system that they were trying, which they eventually came to realize, that the eco-system they were trying to go for just wouldn’t work with that license.

so in a lot of ways at Matroska we saw, well we saw a lot of opportunities in that AVI itself was an outdated technology. At the time, MP4 the container wasn’t very well defined. You’re going back again to about six or seven years ago now, so we looked at it not looking to make money and that wasn’t really the intention, but even what has been proven now and maybe not so much back then, open source and the ecosystem around open source, there can be profit. Even in a non-profit foundation or a not for profit foundation I should say, which the Matroska Foundation will eventually become, you know is pretty much the same thing. You still can be profitable and make money to support what you developed. It’s no different than Redhat, though they are more at the corporate level trying to support their customers or their derivative works of the Red Hat OS on Linux.

With the CoreCodec side of the business how are you helping other companies? Who would be an ideal customer for you and how are you helping them?

“With regards to Matroska, it would have to be implementation. While Matroska is open source, we also have a free BSD style license version of our library for playback. What that means is that you can still playback the content even though you may have a closed eco-system. We still allow you to integrate the technology into your closed eco-system, so that’s the difference there. We help third party solution providers integrate Matroska into their solutions. Some examples that are currently out there implementing would be LG, Panasonic, Toshiba and the like, more recently Western Digital with their hardware that they just released for multi-media playback.”

Over the last 12 months it seems like we’ve seen awareness of MKV really start to take off. Even some of the more mainstream technology writers are starting to make it a check list feature, has that surprised you? What are you seeing in terms of the interest around the container? Has there been a ramp up over the last 12 months?

“Oh absolutely, as a matter of fact we’ve probably seen a 20 fold increase in the inquiries in regards to more details, about usage about enhancing the current feature set. It was really designed from the very beginning and if I can go back to the conversation that some of us had here in the early days, it was designed for the next 25 years, in that no matter what the MPEG consortium came up with in regards to the spec for whatever might be the next gen including Mp4 as a container, it was really designed to go beyond that, it was designed to let the spec grow as the technology kind of grew at the same time and again that’s the whole point of it.

Part of the early days, going back to DivX, one of the biggest things that held DivX back was the AVI container. It’s really why DivX right now is adopting Matroska in what their efforts are, and we’re all for that, even though, I’m no longer with DivX, I wish any third party that wishes to adopt a technology like Matroska the best of luck.

I really think it’s only going to enhance what has been in the past, a frustrating experience for end users. In that Matroska, once adoption has come and the tools are there, people start to understand more about the difference between a codec and a container, the experience will be much smoother because there won’t be hacked flavors of AVI or this or that, they’ll just be standards. No difference than what MP4 is, but the difference I think is about control.

People feel that they have no input whereas we listen to all third parties. We adjust and adapt as needed, but the core code itself has not needed to change itself in three and a half years, so we have not needed to touch the container itself in well over three years now and again that’s a testament to the flexibility of what is in place. Now in the future, that’s going to grow obviously with 2.0, but we’re actually going to slow our development for 2.0 because of the adoption curve of 1.0 right now. Which will allow us to be a little more meticulous and listen to the customers, listen to the consumers, the OEMs and the integration providers and see what their needs are and then we’ll kind of adapt to it, so we’ve kind of slowed down a little bit in what will be the future version of Matroska just so that people can start to enjoy what’s already out there.”

With Matroska, because it’s a container it allows you to put various codecs in it. Does that create problems when you go to try and certify MKV with a CES company, where maybe it could play some MKV files, but not all of them?

It’s setup so that the structure within it is the codebase with the exception of only one or two formats which are only recent formats and I think one of them wouldn’t actually be seen at all. It’s pretty much setup, I don’t think you’re really going to see problems.

Now certification, that’s something that we’re just getting into now. We’ve put out there I think in our specs, we actually put out levels of certification what a mobile and desktop platform are going to need. We put that out there for comment and later on we will have some form of certification, but it’s more so for sponsors and things down that line where we’ll certify their hardware against a certain profile and allow them to use logos and the like for distribution on the device itself or on the box and things like that, so it’s more so the flexibility and the updates hasn’t needed it for awhile and I don’t think any existing formats, even the ones I briefly mentioned, their not pressing. I think one is E-AC3, but I think even the guys that discuss their current code will still support it.”

Given the momentum that you’ve been gathering, what do you feel the next step is? What needs to happen for the next stage of MKV’s growth?

“Well probably, more hardware. That’s where we see it. The growth in the past 8 months, I won’t even say 6 months, prior to Christmas 2008, we saw big growth and we see this year that the growth even will be much more explosive going into this year’s holiday season. So I think that would probably be the biggest thing that we would want and we’re also expanding out from the services we’re providing within CoreCodec. People are starting to look more closely at what we have with our other technologies with CoreAVC, CorePlayer and even next year with CoreMVC which is based on H.264 and CoreAVC. So we’re excited about doing that, helping others as an alternative to what is currently out there right now. Again, no different from what we’ve done in the past.

How do Core services work within an open source eco-system? You’re working on creating these filters for private customers right?

Yes, it depends, both You’ve got to take it two different ways or at least we look at it two different ways. One as a consumer and one more from the OEM/consumer electronics side. Each one is supported in different facets. On the consumer side you have our codecs themselves outside of the container, the Matroska container, we have all of our decoders CoreAVC, CoreAAC, we support Mpeg2, Mp3, etc. We pretty much have our own codecs very similar to Ffmpeg, except it’s closed source.

Now later on at some point, we do plan to open source pretty much our entire eco-system, if the business warrants it and right now it looks like does and that is because of the popularity of the CoreAVC as it is. We can still open source it and monetize it and also release our encoder as well, but at the same time we’re very cautious about what we do. We take steps appropriately. We do, again going back to the core of what we’ve always done, we open source a lot of our technology. Like Matroska, the Haali media splitter may not be open source, but it is free and we put it out there for everybody to use. Most of our other directional filters from CoreVorbis to our original CoreAAC is all open source and available on our website.”

Help me understand some of the terms out there that can be a bit confusing, for me at least. What’s the difference between a codec, a splitter and a filter?

“You can throw renderer in there as well. Each one plays a certain role in playback. Consider a container like Matroska a ball. Inside of that ball you can put anything. You can put pictures, you can put video, you can put audio, you can put text files, you can put pretty much, even executibles in there if you support it with your parser. It gives you unlimited possibilities to put stuff in that ball. Then you have the codec which allows playback. They are the physical means for playing back the audio or video. Now in between the playback and the file itself, you’re going to have to have a player that supports it and to be able to do so, you need a splitter and a renderer and that’s where the Haali media splitter comes in.

Technically what it does, it puts pin outputs to the audio and video and connects the playback to the physical software itself within the operating system and that’s on Windows, Linux is something different and CorePlayer is something different as well. CorePlayer has it’s own built in filters. It’s not DirectShow, it’s pretty much has it’s own internal decoder, renderer and splitter.

Each playback means is going to have it’s own and Mplayer does it by mimicing DirectShow where you physically take the Windows .dll and you’re able to take it over to Linux and kind of emulate DirectShow within Linux. It’s hard to understand, but once you start to use it a little bit more and you start hearing the terminology you become much more familiar with it, but just know that each part plays a very key role in processing the playback of audio and video.”

Looking at the step forward to Window’s 7 that is coming out, there’s been a lot of positive press in terms of native codec support and the h.264 and AAC support. A lot of people would say this is a good thing, that this is going to make the codec experience more seemless for consumers. Why should anyone care about Windows locking down their filters and is Window’s 7 really bad for the codec industry or is this something where the good outweighs the bad?

“It really depends on how you look at it. If you’re a consumer, absolutely. It’s a controlled eco-system, it’s no different than what Apple does with the iPod or even the iPhone where they’re trying to control the experience for the end consumer. For technology companies, however that has a very large investment in what they’re doing as a service provider for their individual solutions, it’s bad.

Going back to our case with CoreAVC, our H.264 filter, we have people that have purchased it, consumers, OEMs that have purchased it and to have to shut out what is something that people have come to expect, ie. the flexibility of being able to add filters or add playback filters on their own, I think is bad.

You should always give them the choice.

I understand the point of trying to control the environment. I’m sure that one of the largest problems that Microsoft deals with when it comes to Window’s media player is people complaining that their multimedia doesn’t play. They’re trying to integrate that, it does make sense from a business case, but to have to shut out, under the guise, maybe of saying that it is a matter of controlling it, I think we can pretty much say that, or guess here, I don’t want to overstep myself, that it may be a guise and that may be in lieu of control.

It has to do with DRM and if you think about the formats that have been shut out, it’s AVC or H.264 and it has to do with AC3, this is what’s in Media Foundation itself. Now Media Foundation is a higher class replacement for DirectShow, in all honesty, it’s DirectShow, that’s all it is.

So they basically used their own filter and are now saying that we’re going to control the codec at the filter level and anybody who wants to use a different filter, you can do that, but you can’t do it on our player, you have to build your own application?”

“Right and there are some work arounds where people are hacking the registry and are trying to come up with bypasses where it overwrites the priorities for media foundation so when somebody clicks an h.264 file, that it actually will open up with a third party filter, DirectShow. The point is, there’s no documentation, or very limited documentation and there’s not even clarification.

Even Microsoft is confused in this case.

If you take Silverlight for example, Ok lets do a comparison with Adobe. Adobe has the Adobe media player and the like. They all share the same architecture essentially. Whether it’s Adobe Air, they all interangle amongst each other, whereas Microsoft’s Silverlight has it’s own collection of decoders within it and does not share the embedded ones that are on the OS. It’s kind of confusing and goes against what they should be doing.

If they’re truly trying to control it, meaning yeah that’s OK that Silverlight is a stand alone product, but if they’re going for the largest control then why aren’t they sharing the Media Foundation codec within Windows 7, within Silverlight? Maybe I could see stuff like XP, Vista making sense, but it doesn’t in Window’s 7, they should be sharing the same architecture and again, I don’t know I would probably say that the argument is going to come for control for their users experience, but I would probably have to lean towards it being more in line with DRM.

It’s about control for secured content.

Do you think DRM is the reason why Silverlight hasn’t been made portable? I mean isn’t the solution that Matroska is solving partly because there isn’t a high def portable format out there?

“You know, I’ve heard people talk about that, but I don’t really know about that. I just think that it’s almost about staying the course, but trying to migrate to something new at the same time and I just don’t know if the flexibility of being able to get things like Matroska into what they have, would work. How would you even get Matroska into Silverlight?

I don’t know

“I don’t know either and we have some of the top guys over at some of the forums like Doom9 and you have some of the engineers from Microsoft kind of chatting about it and as long as we’re putting the thought in their head, I’m hoping that it’s going to play a role in their future decisions. Not just for Matroska, but even for third party decoders like CoreAVC or DivX or PowerDVD or Nero or any of those other third parties.”

Looking at that piece of the eco-system, it seems like there are a lot of MKV files out there and now that we’re beginning to see more hardware devices support it, how far away are we from software solutions where you can start editing files or is that not even related to your goals with MKV?

No, it absolutely is, in fact that was one of the keys of what we’ve always done. You have AVIMux or MKVtoolnix which, is probably one of the most advanced tools, it is THE authority when it comes to mixing and creating Matroska files. That was a very key part of Matroska from the very beginning. We wanted to unify, or mirror some of the stuff that we’re doing with CorePlayer. Even CoreAVC is a single unified core for every operating system and Mosu with what’s he’s done and even Steve or some of our lead engineers, what they designed from the very beginning, is to be able to do that for adoption purposes. That way there were no restrictions, Linux OSS, Windows Pocket PC, Windows Mobile, even though it doesn’t really matter, it will create outputted formats supported on all operating systems and the tools for creating Matroska and editing Matroska is no different.

They’ve evolved over the last five years as much as the format has not evolved. The tools are the complete opposite I should say. They’ve evolved with at least a dozen versions every single year whereas the container hasn’t really needed to change. That’s a key to our success. Again, all under the same type BSD license where they can take the source code and integrate into the product, whatever that product might be.

They’re not required to pay royalties or licensing, all we want is for people to adopt the format itself, that’s the key to the success of it.

It seems like there are going to be three standards for downloadable media. The Silverlight solution, The Apple solution and the open solution that people can go towards. Recently, it seems like a lot of the hardware providers are partnering with studios to do streaming deals and the hardware is more about incorporating YouTube and Netflix into the devices then full portability for consumers. How long do you think it will take for mass adoption of MKV and having a serious penetration level where most of the devices out there have to support to?

If you look at the adoption scale, you’d probably have to say that we’re at the Ubber Geek stage right now. It will probably take 2 - 3 years. We’re just starting to see the penetration now and it’s been three years since our last release. I would probably have to say two years. Not this Christmas, but the following Christmas you’ll probably start to see more devices.

Even with companies like DivX putting DivXHD and the like, but we’re not convinced that DivXHD is going to succeed at all. It really is just a rehack of H.264. It’s no longer DivX. DivX was a file format and they’ve done nothing different with this, they just have the eco-system with their hardware partners for when they upgrade. I don’t know, I’d probably have to say within the next year and a half, we’ll be at a more critical mass.”

DivX adoption of MKV helped to solidify support in creating it as a standard, but as far as what DivX is trying to do with it, do you see a solution there or do you think that they have to reinvent their business as DivX SD becomes less popular? Where do you feel that they are positioned in the codec space?

“Well they have. Obviously they’ve rethought what they had to do with H.264 which is a migration, but they’re not providing anything of value to what’s already out there. As a matter of fact, it brings more confusion than anything else and that’s the frustrating part because they have their own eco-system with certification and us as a solution provider like with CorePlayer or the CorePlayer platform itself is working with third party OEMs and they are asking questions in regards to DivX and DivXHD and we say the same thing we’ve been saying all along.

DivX is Mpeg video and DivXHD is AVC video.

You can still say DivX name, just put a disclaimer saying blah blah blah, there’s no difference. Now DivX would probably argue with that and say they have file specific format stuff, and they do if you talk about the DMX menus, which they do have or they have Sub-X, which is their subtitle format and yeah that’s proprietary to their decoder and for them to be able to playback those file formats, but do they really bring anything of value to the table? No.

We support sub-titles in Matroska in .KF, so any kind of SSA or other sub-title formats we already support and the menu system is already out there for the 1.0 menus. You can create menu overlays right now within Matroska.

In a lot of ways, it almost seems like they’re back at the Xvid/DivX split where you have something where there is now this open source solution and correct me if I’m wrong, but if you’re Toshiba and want to support MKV in your products does that cost them anything at all?

“With DivX sure”

No, no, no, recently JVC had an MKV box without DivX, did it cost them anything at all to include Matroska support?

“Zero.”

So that’s very disruptive when you look at the eco-system and it goes back to the question of you’ve got these closed sourced solutions where you’re building a business and making money, but then you’ve created this open source solution. Is that because the only way to take on Microsoft and Apple is to keep it open and you need that help or is it more that you wanted to future proof your own container?”

“It wasn’t so much container it was more or less a need. The limitations on AVI as a container were very frustrating for engineers to be able to do things that they wanted very easily, you could not. Lets say you wanted to add or remove elements from within the container, for example an audio track where you wanted to be able to add an additional audio track. You couldn’t do that with AVI easily, you could hack it, but there weren’t tools to be able to extract.

With our tools you can extract or remove or replace very easily, so it wasn’t a move against Microsoft by any means, it was more of a necessity of what we wanted and then once we found out what we wanted, we tried to look at the future and see what we can do to extend the adoption for that 20 - 25 year period and we feel right now considering the feedback that everybody’s provided over the past few years and the fact that we haven’t changed for the past few years that we’ve kind of accomplished that.

Now to monetize it? The whole point wasn’t really to monetize it. We will with some of the stuff we’re doing, we have contractors that go out and help out and integrate within CoreCodec by helping third parties and that’s great and with the Foundation that will change a little bit because of the sponsors, but it’ll be no different than XMPP or Mozilla where you have sponsorship levels.

It gives you funding to do marketing, so that you can get people interested

Yeah, you want to be able to advertise. We also want to be able to further our eco-system, not only with Matroska, but also with CoreCodec and some of the stuff around other technology that we’re doing and we want to be able to provide that so having that will help us continue to stay in business and continue to further evolve the technology.

Providing the logos and the certification for those levels will definitely help to that point and cause less confusion in the marketplace, which again I feel that DivX is and will continue to cause. Again we’re not sold, they’re going against everything that we have tried to put out there, but again I understand it.

What’s to differentiate an MKV file that was created with DivX tools vs. Us? The only thing we can do is warn the user. We can detect it in the header of the file that was created and we can say you’re trying to play back a DivXHD file and this file may not be supported. We’ll continue to play it back in our eco-system with CorePlayer. With the filter we can do the same thing, we can warn the user that it was created with the DivX tools and it may not be supported because it may not be and DivX will try to tell you that everything is compliant with Matroska and I’m sure that it is, but that’s just what they’re saying. We’ve already identified stuff that’s not compliant and we’re reporting back to them and it’s good to have a type of relationship with them.

There’s a bit of a dichotomy there. It sounds like one hand you’re competitors, but on the other hand they’re ability to get this out into their ecosystem could really benefit the container as well?

Yeah, it’s a love-hate thing, same thing with Microsoft really. I wish them luck. I think that what they’re doing is great for the container. It shows that we were right all along. Hacking AVI was not good and Matroska was built for the future and I’m glad for that, but at the same time I don’t want them to ruin something for the consumers or confuse consumers anymore.

That’s my only concern. I wish them luck. When I left DivX, I left them wishing that they could have done better and I’m glad to see that they made something of a good move, but the question is how will it hurt in the long run.”

They made a splash, but where they’re going is what everyone is trying to figure out right now?

“What they have going for them is the current partnerships with the companies that they have and that’s a great great thing and again I just feel that under the guise of saying that it’s DivX and DivX only is what the third parties need to realize. Most of them aren’t stupid please, the third parties whatever companies you mention, they all know.

They have to see some value in the certification in order to spend the money so if it’s not there it won’t shake out that way.

“Absolutely and again you have to question the true certification and the cost for that certification. I’m not going to sit here and spit out numbers that they charge to certify, but the value is about control. They’re looking to control the experience for the customer, for that third party. That’s going to become less and less of an issue over time, especially with faster hardware coming into play and even TVs and the like, I’m not sure if you saw the latest TV reviews from Google?”

I saw that you have an LG TV coming out, but that’s thru USB stick right, not thru an ethernet connection?

“Yeah, but the speed of the menu system is horrible, it’s bad.”

So there is this trade off where you need the chips to be a certain speed in order to support your format?

“Yeah, but like with anything that will become less of an issue. In the mobile market CorePlayer excels because of the speed of the player and that’s because it’s written for 386, we write at a very low level, so when you start taking bloated code and start applying that to something that doesn’t have a lot of CPUs or dedicated CPU cycles, that’s when you start to realize the same performance. Going in it’s favor though, you do have hardware catching up especially when they have to upgrade to H.264. With TVs, it’s no different from some of the stuff they’re doing. Even with CorePlayer it’s already integrated with some third parties for TV usage, so that’s great for us and what we’re doing, but all we’re doing is providing the multimedia framework for playback on the TV itself and the user interface with CoreUI.

Going back to the Window’s 7 issue real quickly, do you think the decision to freeze out the outside filters, is that going to hurt the codec industry, is that going to result in less competition or will this be another case where there’s a dam in the river and the river forks around it?

“I think it’s going to be both. Microsoft will probably tell you that there is no problem and then the Core people will fork around it, but you got to question the value of it though. You could still have embedded DirectShow filters, why have them under media foundation?

Because you can lock competition out, people won’t download other media players they will download codecs.

“You said it I didn’t, but essentially when it comes down to it, that’s what it is. It’s just frustrating that we all have to go through what we have to do and they could have provided an integrated solution without having to lock out third parties. Period.

That’s the most frustrating thing. Then to not provide the information needed in order to overwrite, obviously we can now the hacks are out there, guys have already posted the registry key that we can kind of use, but what we’re doing here is we’re waiting. They’re not providing us with any of the information that we need now, so we’re in a wait and see mode. We’re in RC-1 right now with Windows 7 we’ll have to see with RC. Maybe they’ll post more information.

It sounds like this isn’t so much a threat to your ability to do business, but rather a lot more man hours, a lot more work to get this worked out?

“Yeah, I would say that as long as the default decoders are not set as the default and can be overwritten, I think we’re OK. The question is what steps will you have to go through and will Microsoft allow those steps. Right now you can edit it, they posted the solution online, but Microsoft could bypass that solution with the next RC. So that’s kind of like a wait and see thing.

It does affect our business though, it does affect DivX’s business, it affects everyone’s business.

When you can’t have filters within your application work properly . . . whether anybody realizes it or not, there’s mass adoption going for Windows 7. I can tell you that the demographics from our website, the ubbergeeks that are early adopters, I can tell you right now that the people running XP and Vista jumped to Windows 7. A huge percentage of them, probably 75% of them are all on Windows 7 and this is just since the RC came out.

It’s going to become an issue very fast, much more so than anybody thought. We need some kind of answers and I guess you’re not really going to get them right now from Microsoft. They are on our forums talking a little bit chatting back and forth with Haali, Steve and myself, so it’s good to see some dialog, but we’re still not getting any answers and I don’t expect that to change.

It seems like it’s an issue that affects your industry quite a bit, but it’s hard for people to see past that just because it’s not as visible.

“It’s definitely not as visible, but when people start screaming . . . . we’ll probably see that, if they are planning on releasing Windows 7 by Christmas . . . It’s going to be ‘great’ fall.”

I know that when DivX first came out, it was released in Europe and there was big adoption in France and to a certain extent spread geographically from there. Have you seen similar trends with MKV?

“Absolutely, as a matter of fact it’s mirrored exactly. You could look at DivX in the early days when I was there going back to 2001 and you can actually see the same adoption happening, the anime, the ripped releases from the AV heads, it’s mirroring it, but you have to ask why they are doing it?

They are doing it because of the flexibility that it brings to what they’re doing. They can add, especially when it comes to some of the guys that rip DVD and the like and Blu-Ray, they kind of make it their own. They can add menus, there are menus out there that even though they are text, they do very basic things, but there can also be a ton of files inside the container itself, there are info files and pictures you can group.

It’s creates a more interactive experience for consumers?

“Yeah and is that different than .divx? it is, but again, it is what it is. They’re looking for something that has a hacker edge to it and not that Matroska was really created for that, but we’re glad to see adoption no matter where it occurs and that kind of pushes hardware companies to do the same. They’re getting their customers asking why isn’t MKV support in there? Look at Sony, why isn’t there MKV support in the PS3? It’s free, they should add it, same thing with the Xbox 360.

Why do you think that the hacker community choose MKV for the Blu-Ray rips?

“Probably because of rips support, we started to see it right off the bat really. A huge Japanese following with Matroska back in probably 2004, somewhere right around there. We saw that right off the bat, the anime people jumped right on it.”

Do you have any sense as to why anime seems to be so far ahead of the curve when it comes to online video?

“We’ve actually had this discussion internally. I wish I could answer that, you could say it’s geographic and that the Asian market is faster to adopt cutting edge technologies, but at the same time why is China still using Real video? It could be argued both ways.

I would tend to think that they just look for something that’s flexible to their needs and I think that’s what Matroska is providing just like DivX did back in the early days with quality video. It was night and day vs. anything that was prior to that. I think Matroska brings the same thing to the table, but we do it with a little bit more flexibility than what they can do with the files themselves, being able to attach multiple files within the container.

What do Matroska fans have to look forward to next? In the next 3 - 6 months, are we going to see more hardware coming out?

“Oh Yeah!”

Is 2.0 going to be rolling out or is that further down the road?

2.0 like I said, we’ve definitely pushed it out for awhile because were going to hang back and let 1.0 get the adoption. You’ll probably see things finalized with MKS/MKV/MKA so there’s support within the web browser itself by default. Within all web browsers, Safari and the like. The application type will be set. That will be coming in setting us up for maybe tweaking it for some more menus.

We’re also talking about adding a bit more menu work into 1.0 and we’ve already done some work prior to 2.0 which is a major part of Matroska technology called EBML. We’ve already completed EBML 2.0, as a matter of fact EBML 2.0 is a complete rewrite of 1.0 which is in Matroska 1.0. It really provides us greater flexibility for what we will be doing for Matroska 2.0. At the same time, it uses the technologies that we created here at CoreCodec and utilizes those technologies within EBML which is CoreC which is our AVC library language. Going along those lines is what we’re planning for 2.0.

It’s exciting, you guys are at the heart of something pretty big here I think and to be part of that is neat. Since this is your 2nd go around is there anything that you think you’ll do differently from when you were at DivX?

“Yeah, it has to do with playback. While Matroska for us is great, we’re obsessed with fluid playback no matter what it is, including Matroska, so right now our main goals are to extend the eco-system, the CorePlayer eco-system even further and then be cutting edge with Matroska as we roll out our 1.x version and also 2.0 and that’s pretty much it. We’re excited to be able to provide that for the consumers and our OEM customers.”

I was on DivX’s website earlier today and saw a link to an online survey. Since I don’t tend to be very shy about sharing my opinions, these sorts of things are the perfect click bait for me. Most of the questions were about how and where I watch online video, but after answering a dozen or so, one of them caught my eye.

“5. Would you be interested in a free service that lets you bookmark online videos to queue and play back in media center software or on a device?”

I’ve never really been a heavy user of bookmarking services, but being able to bookmark TV would be much more appealing. One of the biggest problems with bridging the computer to TV gap, is the process of finding the content that you want to watch and then getting it to the television set. For downloadable media this is easier to accomplish, but for streaming media you’ll need some kind of a PC or internet connected gadgetry. Once you are juiced up to the net, trying to navigate the vast sea of digital content with a remote is like trying to paddle upstream as you go over Niagra Falls backwards.

So far, Netflix seems to have come up with the best solution, but there is still room for others to build a better mousetrap. Instead of letting consumers use a remote to browse all of their programing, Netflix makes you bookmark your watch now movies via the old fashioned computer. This hybrid tv/computer approach may lack a bit of elegance, but it does create a more satisfying experience to the end user. Sometimes having too many choices can create a paralyzing effect when it comes to finding content.

If DivX were to launch their own bookmarking service, here’s what I think it would look like. Instead of limiting their “queues” to Netflix content exclusively, they would allow consumers to bookmark content from all over the web. While there would be a few notable exceptions, I bet that they could build support for 90% of the sites on OVGuide.com. Using some kind of greasemonkey script or a toolbar button, consumers would be able to click a button and create a playlist of streaming content that they can watch later. As you begin to bookmark more and more videos, the service would get to know you and could make video recommendations to you. Once consumers are at the television, they’d be able to connect to their data stream and shuffle through their own personalized VOD channels. The killer feature would be the public streams that allow you browse through your friends’ queues too.

Throw in some nifty social networking features, support for sites like Twitter, Facebook and Friendfeed to help make it go social and a partnership with StumbleUpon video or Reddit’s bookmarking service to help get others to adopt it and DivX could have a very useful application for their Connected solution. If they’re able to build enough of a critical mass around these types of enhanced video services, it would help differentiate DivX’s features from generic codecs.

This question alone doesn’t necessarily mean that DivX will actually try to launch another social network, but it does suggest that they are at least thinking about it. What do you think, something only a geek could love or would you be interested in bookmarking online videos for playback on your TV?

Last night, I decided to do a little bit of spring cleaning with my TiVo and stumbled onto a treasure trove of memories. With the TV season starting to wind down, I needed to make some tough choices on what I wanted to continue to follow and what shows it was time to give up on. While I have a few core shows that I love, one of my favorite parts of the television experience is checking out new TV programs, so there were a lot of programs to go through. I’ll usually decide within 2 or 3 episodes whether or not to keep a season pass, but this season I’ve given a couple of shows way too much patience.

When I was browsing through my Season Pass manager, I realized that I must have terrible taste in programs because a healthy chunk of the shows listed had already been canceled. My TiVo was littered with tombstones of promising shows and pilots that had ended. Neil Young sang that “it’s better to burn out than to fade away” and when it comes to TV, I couldn’t agree more. While there have been some heavy publicized cancellations, most of the dead shows disappeared with nary a whimper. In fact, it wasn’t until I started to write this blog post that I found out that some of my more recent picks had ended

After flipping through the current batch of killed pilots, I decided go back even further and list every show that’s ended, while I’ve owned and subscribed to it on TiVo. The following is my TiVo graveyard (listed in order of priority of course.)

Surface
X-Files
Jericho
Wonderfalls
Alias
The 4400
The Jamie Kennedy Experiment
Dirty Sexy Money
New Amsterdam
My Own Worst Enemy
Welcome To The Captain
Survivorman
Greed
The Lone Gunman
Drawn Together
La Femme Nikita
Journeyman
Cane
Dark Angel
1 Vs. 100
Carpoolers
Two Guys, a Girl and a Pizza Place
Strangers With Candy
The XFL
Friends
Ally McBeal
Veronica Mars
Party of Five
The Ex-List
Prison Break
Malcom In The Middle
Just Shoot Me
Moonlight
Kid Nation
Dharma & Greg
Eli Stone
Stacked
Andy Barker P.I.
Kidnapped
Jeremiah
Spin City
Freaks & Geeks
Last Comic Standing
Blade
Cavemen
Titus
Becker
Buffy The Vampire Slayer
Andy Richter Controls The Universe
Pirate Master
Treasure Hunters
The Con
Joey
Shark
Angel
Dog Bites Man
Roswell
Dead Like Me
Las Vegas
Tripping The Rift
Pushing Daises
Aliens In America
Pasadena
Conspiracy Zone
Crank Yankers
The Weakest Link
Battlebots
Heist
The Bionic Woman
Celebrity Deathmatch
Ed
Conviction
The Mole
Crusoe
I’m With Busey

*As an added bonus, if you’re interested in checking out the new premiers that haven’t aired yet, I highly recommend an RSS subscription to GeekTonic’s coverage.

Steve Fox at PC World has the skinny on the new program.

“As we’ve come to expect from TiVo, basic recording and timeshifting functionality is effortless, and the interface remains unchanged from previous models. More important, the SuperAdvance feature is easy to find and activate: A red “SA mode” icon appears in the bottom righthand corner of the screen whenever the feature is available; you simply click the icon once, and presto–you jump 58 seconds forward.”

While Fox sounded impressed by the technology, it did have a few snafus. Because of limitations to the overclocking of the DVR, you’ll need multiple TiVo’s in order to get more then a 1 minute jump on live TV. In my own beta tests, I’ve also noticed that when overclocking the DVR unit, it has a tendency to catch fire while watching reality TV programming. I haven’t figured out why only reality TV seems impacted, but it especially doesn’t seem to care for Jerry Springer.

Another complaint Fox has is the cost of daisy chaining multiple DVRs together. While it’s true that it’s expensive to buy a dozen TiVo units just so that you can fast forward into the future, the power of the technology pays for itself. I like to use mine to watch CNBC and will short stocks before they recommend them. Given CNBC’s reputation for stellar financial reporting, this is essentially like printing money.

When I inquired with TiVo about the rumor that this feature would only be available on April 1st of each year, they had no comment.

One final restriction to the super fast forward functionality is that TiVo apparently needs copyright approval ahead of time before they can unlock a program. Some channels seem Ok with this, but other programs are much more secretive. When I contacted Hell’s Kitchen star Gordon Ramsey for a comment on why he choose to not include his show in the beta trials, he told me that it was because “no #$%&(* chef worth a lick of salt can bake a decent lasagna in less than an hour.”

Hard to tell whether or not this functionality will be a hit with consumers, but it’s good to see TiVo fast forwarding into the future. While in the past, I’ve been critical of people spoiling TV shows I was saving on my TiVo, it’s nice to finally be able to turn the tables on them by using TiVo super fast foward to spoil their live TV experience.

Over the last few years, Redbox has been able to build an impressive DVD rental network by being innovative and flexible while their competitors were still laughing at the concept of kiosk rentals. Over time they’ve added features to the Redbox website that allow customers to browse and reserve titles online. They’ve linked their kiosks together so that unlike competitors (ahem: Blockbuster), you can actually rent a movie from one location and return it at another. Redbox’s core business may ultimately be, plain old boring DVD rentals, but there’s no denying that they’ve been an innovator in their industry. This is why I am so perplexed by their most recent decision to go hostile against iPhone owners.

Given the company’s reputation for thinking progressively, I was disappointed to learn that they’ve decided to take a technological step backwards by putting pressure on the Inside Redbox blog, to kill their Inside Redbox iPhone application.

I haven’t jumped on the iPhone bandwagon myself yet, but I can understand why some people think of their phones as an extra appendage. The apps store was a brilliant move by Apple and has created all kinds of interesting software programs that wouldn’t have existed if people had to rely on big companies to build them.

By taking advantage of the GPS features inside the phone, Inside Redbox was able to give iPhone customers the ability to look up which Redbox was closest to them at any given moment. It also allowed customers to find out whether a specific title was available before wasting time visiting the kiosk in person.

The best part about the application though, was it’s ability to reserve movies directly from the iPhone. This means that if you’re standing in line at a Redbox and the person ahead of you is taking too much time selecting a movie, you could theoretically use your iPhone to digitally cut in line and reserve the last copy of Harold and Kumar instead of having to wait impatiently.

When you consider that one of the biggest customer service complaints about Redbox are the long lines when customers try to return DVDs, it blows my mind that Redbox would discourage consumers from using their own mobile device by having them monopolize a kiosk instead.

Whether a customer prefers to order their movies from the internet, a kiosk or the middle of the store while shopping for groceries shouldn’t make a difference to Redbox. No matter what, they are still making a sale, even if they don’t have 100% control over the purchase.

Inside Redbox is mum on details and calls to Redbox’s PR agency didn’t shed any light on the situation, but the two most “controversial” features included in the app is a list of codes for free Redbox movies and the fact that the app relies on Redbox’s website for most of the content.

One theory for why Redbox doesn’t seem to care about iPhone customers is that while they’ve been able to get a lot of buzz using their free movie offers online, consumers haven’t been all that aggressive about redeeming the promotions. Since iPhone customers have access to the most recent free offers while they are actually standing in front of the Redbox kiosk, it makes it easier for customers to take advantage of their specials.

If this is the reason why Redbox killed the application, my response would be that Redbox hasn’t solved their problem, they’ve just made it more difficult to work out a reasonable compromise with their customers. It won’t take consumers very long to figure out that they can bookmark Inside Redbox’s list of free codes or RedboxCodes.com on their iPhones and still have access to the same information.

Rather then fighting progress, Redbox should be using the relationships formed through the application to streamline their movie promotions. They already restrict some of their offers to new customers only, so why can’t they work out a deal for iPhone promotions? Wouldn’t it be better for Inside Redbox iPhone users to have a 10% chance at “winning” a free movie instead of killing the app and forcing these customers underground? By trying to lower the wham hammer on this neat little application, they’ll only end up upsetting customers instead of addressing a weakness in how they’ve choosen to promote their service. Just because the iPhone app doesn’t fit into their mold of what marketing should be, doesn’t mean that killing it is the best solution.

A second theory for why Redbox may have requested that the app be pulled is that Inside Redbox uses Redbox.com’s website for a healthy chunk of their content. Some businesses may object to this and want to have 100% control over how their customers are “allowed” to use their product, but smart companies see the benefits of being open. In fact open API’s are becoming increasingly common in the tech industry. By allowing third parties to mashup and repurpose your data, entirely new creations are possible. This is why some of the most successful companies have business models that encourage outsiders to partner with them. The Inside Redbox app may repackage content from Redbox’s website, but when push comes to shove, it’s really no different than an internet browser. Is it really better for Redbox to force their customers to have a subpar experience using the Redbox.com website on the iPhone instead of an app that is specifically designed to be viewed on the small screen? I don’t think so.

Asking Inside Redbox to pull their program is a bit like asking Microsoft to not allow Redbox’s website to be shown on Internet Explorer. If Redbox really objects to how their content is being used, they have the power to change it. Instead of trying to kill the third party programs that tap into what they’ve already created, they should be encouraging their fans to mix, mash and experiment to create new experiences for their customers.

To date, Redbox has managed to stay ahead of the competition by being nimble and by nurturing a passionate and dedicated fan base. Their decision to now turn on the very fans who cared about them long before their mainstream momentum, says a lot about how fickle their business decisions really are. Instead of acting like the innovator that I know they are, they are acting like a big media company. Hopefully, Redbox comes to their senses and “authorizes” the use of an app that only makes their service more valuable to their customers.

If you ask the big content owners, they’ll argue that the only content on YouTube has either been stolen from them or is some kind of a lame cat video uploaded by your crazy neighbor. Unfortunately, in my seemingly endless quest to collect and document the best cat videos on YouTube, I keep getting distracted by some pretty amazing independent content producers. Here are ten of the artists who’ve impressed me the most, over the past few months.

Wicked Awesome Films - Kevin & Bobby create movie trailers of pop culture events. Whether they are remaking the latest films, riffing on popular internet memes or teaching underaged kids how to get alcohol, their quick 2 minute clips will keep you entertained and laughing. They tend to be a little over the top and crude at times, but that’s a big part of their charm. They are usually NSFW so be forewarned, but if you enjoy listening to shock jocks on the radio, you’ll love their videos.

Jack the Danger Bunny - Filmed in a style that is part documentary, part sitcom, and pure genius, Cait and Dan share moments of their dysfunctional relationship with the rest of the YouTube community. If their relationship in real life is anything like the show, I’m not sure how long the series will be around, but take advantage why you can because their silly antics make for some of the best videos on Youtube.

The Big Time Show - Gabe and Dave moved to Hollywood with a dream to make it big. Along the way, they’ve been documenting their progress towards trying to break into the world of show business. They’ve got the looks, are willing to work hard, sell themselves out and have no shortage of motivation. The only problem is that they seem to be lacking talent. Filmed as a reality TV show, their videos take a satirical look at the movie business and features a wacky cast of characters including their sleeze ball agent, a clueless photographer and a student director who isn’t even willing to cast these guys in a student project unless they’re willing to pay him. If you’ve ever wondered how bad b-movies end up making it to the big screen, this mockumentary provides all of the answers. Spinal Tap fans will especially love this series.

Scenic Videos - I tend to prefer watching Youtube online vs. taking advantage of it on my TiVo, but the Scenic Video channel was made to be displayed on a big screen television. They film relaxing nature scenes and let viewers play them in the background. If you play their clips while you sleep, you’ll have fantastic dreams. Most channels get attention by flashing lights or using loud buzzer sounds, but the low key nature of their videos is what makes this channel really stand out.

Rejected Jokes - This sketch comedy channel is produced by Ben Schwartz, a writer who has worked for Letterman, SNL and Robot Chicken. While not every one of his jokes ends up on television, his unique blend of dark humor fused with pop culture leaves you laughing even if his YouTube jokes are the leftovers. Sometimes Schwartz will do a stand up routine, while other times the skits are a little bit more complex, but either way they’ll make you smile.

Daneboe - Whether your watching his award winning expose on the Kool Aid serial killer or his LegoMan job inquiry, Daneboe’s Gagfilms will keep you entertained with his seemingly random videos. He doesn’t produce a ton of content, but when he does it tends to be very high quality. It’s one of my favorite channels for when I need to quick bite of comedy.

Visible Mode - Watching the Visible Mode channel is kind of like watching a car accident in motion. You know it’s terrible, but you just can’t stop your self from watching the destruction. Visible Mode has some pretty crazy ideas, but his demented sense of humor is a good fit on YouTube. After watching his experiments at bringing the combover back in style, I feel much more comfortable about my own receding hairline.

Timbotantrum - This channel is producing the excellent LA I.C.E. web series. It’s about a couple of immigration agents trying to clean up the streets of LA. In addition to the series, Timbotantrum also produces some very funny clips that tend to mock the pop culture we live in.

Sloncekandrej - Sloncek is a legend in the P2P community, but is relatively unknown on YouTube. At one point, his website SuprNova was the most popular torrent site on the net. Sadly, it all had to end after he started to receive a little too much attention in the local Slovenian press. After shutting down the site, he gave the domain to the Pirate Bay and started focusing on making videos instead. Recently, he’s been working on an excellent P2P news vidcast with Torrent Freak. The program is very professional and is a bit like watching the local news for people who care about P2P.

Beet.tv - Beet.tv is a good example of what modern TV studios must do if they want to succeed amidst the fragmentation of the internet. Most of their videos are interviews with influential people in the tech community, but they’ve also begun to cover other industries like healthcare. After filming and editing unique niche content, they then hyperblast it through a distribution system that includes sites ranging from MySpace to the New York Times. The combination of high quality unique content and fragmented mass distribution has worked out pretty well for them so far and I’m optimistic that the model will prove to be successful. Viral stories don’t always have the same immediate punch that you get from live TV, but if they end up being seen by just as many people, it can be even more powerful than traditional television.

The last couple of years may have felt like a bad dream to most investors, but for DivX shareholders it’s been nothing short of a nightmare. They don’t hand out Oscars for businesses, but if they did DivX would have won hands down for best horror flick.

When the company first went public, expectations were high. YouTube had just been sold for $1.6 billion, DivX was demonstrating 75% gains in their high margin core licensing business, and their unique business model looked like it offered a very strong moat from competitors like Apple and Microsoft.

At one point DivX’s market cap exceeded $750 million, today it barely closed above $150 million. Over $600 million dollars in capitalization wiped out by one misstep after another. Admitedly, the tough economic environment can be partially blamed for DivX collapse, but the sad truth is that much of the value destruction could have been avoided.

Suicide Kings

Shortly after DivX went public, Jeran Wittenstein wrote “DivX was founded just before the dotcom bust in February 2000 after Greenhall managed to convince Jerome Rota — a French software engineer who created DivX’s founding technology — to join him in building a company. Including Greenhall and Rota, eventually there would be five co-founders, all of whom are younger than Greenhall and still with the company.” (Note: bold print added by me)

They may have been able to survive the dot com collapse, but DivX’s founders weren’t able to survive the success of going public. In December 2007, Jordan Greenhall, Darius Thompson, & Tay Nguyen all left the company after DivX’s board of Directors made the inexplicable decision to cancel their spin off of Stage6. Joe Bezdek officially left the company 10 months later and now I hear that Jerome Rota, DivX’s original creator, resigned from the company on February 6th of this year.

While Rota remains on the DivX board of Directors, the loss of his day to day influence can’t be understated. I only had the opportunity to meet him once, but was impressed by his remarkable vision. These five individuals may not have had the spit and polish that Wall St. expects from traditional executives, but they weren’t afraid to take risks and knew how to motivate the troops beneath them. The impact from the loss of these employees goes well beyond their individual contributions and investors have already seen shockwaves from these loses ripple through DivX’s employee base.

Two and a half years later, investors have voted with their feet, all five of the founders have now left the company, cracks are beginning to form in their moat and their franchise is very much in danger. The company has gone from being an innovative risk taker to a zombie of her former self. DivX now stands at a crucial crossroad. Are they willing to risk potential annihilation to save consumers from their zombie masters or do investors have Dawn of the DivX in store for a sequel?

“Affliction comes to us all, not to make us sad, but sober; not to make us sorry, but to make us wise; not to make us despondent, but by its darkness to refresh us as the night refreshes the day; not to impoverish, but to enrich us.” - Henry Ward Beecher

There are many instances where management has stumbled, but the end result all comes down to a loss of confidence. They’ve lost the confidence of their shareholders, the analysts, their employees and most importantly, the consumers who drive demand for their products.

Without a dramatic turnaround, I fear that this lack of confidence will spread to their manufacturing partners and we’ll see DivX lose their digital video franchise. While there is still plenty of cash flow left to milk from the DVD market, without aggressively expanding their market position, DivX’s influence will be over before they have a chance to finish the revolution they started.

Barbarians at the gate

When DivX went public, investors were willing to pay a premium to get exposure to the stock. At one point investors were paying more then 10 times sales, a P/E over 30 and over five times DivX’s book value. Based on the midpoint of DivX’s 2008 guidance, DivX is now valued at 1.15 times book, 1.66 times sales and a p/e ratio of 9.5. When you consider that DivX is holding $120 million in cash and short term investments, investors are pricing them more like a blank check IPO, then a strong growing company. You can argue that this is a result of the poor financial markets, but I think it speaks volumes about the lack of confidence that shareholders seem to have in management.

DivX’s response to their problems has been to try and slash and burn their way out of it. When they closed Stage6, they also layed off approximately, 10% of their staff. After Yahoo! backed out of their toolbar arrangement, DivX fired another 10% of their staff. If DivX was struggling to get by, I could accept these types of sacrifices, but the reality is that these cuts are only designed to boost earnings for the company.

I believe that DivX’s management is under the impression, that if they can increase earnings enough, investors will reward them by returning to their stock. The problem with this strategy is that it may be easy for DivX to position themselves to feed off of years of hard work, but without continuing to invest in the business, they have little chance of realizing meaningful growth. When DivX presents their 2008 earnings in early March, I believe that their focus will be on strong earnings results. This may look impressive from a distance, but don’t be distracted unless it’s accompanied by strong revenue growth. Earnings are certainly nice for investors, but if DivX has stopped growing, then investors won’t pay a very high multiple.

When DivX presented at the Thomas Weisel technology conference earlier this month, they used the following graph to illustrate their past growth. On the surface, it’s hard to criticize the progress they’ve made.

While there’s no doubt that DivX has accomplished a lot in a very short time, where they are going is more important then where they’ve been. Sadly, over the last year they’ve seen their progress come to a screeching halt. Another way to illustrate, the same information that DivX used in their Thomas Weisel presentation, is to graph the percentage that revenue has grown each year. Even if we exclude things like the Yahoo! toolbar fiasco, the trend for DivX’s core business doesn’t offer a lot to get excited by.

In 2003, DivX grew their core licensing business over 700%, in 04′ they saw 184% growth, in 05′ they saw 84% gains, in 06′ they almost experienced a 76% increase in growth. In 07′ signs of danger started to appear, but they still realized 40% growth from their core business. If we use the midpoint of their guidance for 08′ revenue, DivX should see a 13% increase in core revenue for 08′.

As DivX’s business has grown, there is an expectation that the law of large numbers will start to kick in, but if current trends continue, it would appear that DivX’s core licensing revenue will hit near term maturation sometime this year.

Jordan Greenhall said that 2007 would be a building year for DivX, Kevin Hell said the same thing about 08′. With the company in self destruct mode, how optimistic should investors be for 2009?

Trouble In Never Never Land

Some investors may cheer the savings in earnings, but make no mistake, it has had a tremendous cost. The coup to get rid of Greenhall, the divisive nature of current management and the layoffs have all had a tremendous impact on employee morale. DivX may claim that their employee relations are normal in their SEC filings, but there is too much evidence to suggest that DivX now suffers from Yahooitis! These creative individuals are the soul of the company. If DivX continues in their zombie state, more and more employees will leave, feelings will become even more bitter and the company’s progress will be stalled.

If you want to see proof of how bad employee relations have become, take a look at DivX’s reviews on Glassdoor.com. Kevin Hell’s current approval rating is 15%. That’s worse then GW’s numbers, when he left office. To put this into perspective, Hell’s ranking gives him the dubious distinction of being the 18th worst CEO of the 7,185 companies that Glassdoor is tracking.

If you read the comments on the site, it’s very revealing about what’s going on behind the glass curtain.

“It’s party time…if you are a VP or above…”
Pros
It’s a fun atmosphere and very social if you are of the right mindset. Lot’s of cool people and talent…
Cons
Watch your back…I didn’t trust any of the management at all after seeing my boss’ team cut without her knowing beforehand. Very closed, “open environment”… If you are looking to complete a project to add to your portfolio…think again…my projects changed scope every 3 weeks. The strategic direction changes everytime the wind blows.
Advice to Senior Management
Hire new management that cares more about the company’s success than their cushy compensation packages… Layoffs in 2008 were taking place while senior management was cashing in on millions of $$ in stock…even at very low strike prices….Something very fishy is happening here…”

or this one from a current employee who goes by the name anonymous

Anonymous in San Diego, CA: (Current Employee)
“Great company, TERRIBLE management.”
Pros
You get a chance to work with a lot of cool, talented people.
Cons
All the cool, talented people are getting laid off/fired/quitting.
Advice to Senior Management
DivX had so much energy and drive but the management seems to have succeeded in beating that out of the company almost completely.

Here’s one that calls out DivX CFO Dan Halvorson

Developer in San Diego, CA: (Past Employee - 2008)
“DivX was a fun place to work…. at one time”
Pros
DivX has a wonderful group of bright engineers. The camaraderie in my team was superb and we made the best of the otherwise dismal situation. The HR department is better than most in that they truly seem to care about the needs of the employees. There is an opportunity to do something big, and that can be exciting as well.
Cons
I’m not sure where to start! The CFO Dan Halvorson has a reputation for layoffs and cash-outs. He was rumored to have said, “I love it when people quit”. It’s gotten to the point where Halvorson avoids the office and never sticks around at company events. I suppose he knows he isn’t welcome. The constant layoffs and lack of openness to employees gives people an sense of uneasiness and all you can really do is speculate what they’re upto. At least with Jordan, he would be straight with you. The Hell regime seems pretty secretive and sometimes dishonest most times. The Stage 6 debacle was a train wreck. So much of the company’s resources were thrown at this pig and look what came of it? Nothing. A number of long time employees left around this time? Coincidence? Maybe, but not likely. I am guessing the founders got tired of the games and politics.
Advice to Senior Management
Get rid of Halvorson, he is dragging morale down all on his own. No one likes him or wants him there. Be more honest and forthcoming with employees.

The most accurate of them all though, is the bittersweet summary of DivX’s short history.

Anonymous in San Diego, CA: (Past Employee - 2007)
“Good While It Lasted”
Pros
The culture, when it first started was remarkable. There was a great vibe in the office and you constantly felt that you were being challenged and motivated.
Cons
After they went public, and Stage 6 launched, there was a massive series of mistakes that killed morale.
Advice to Senior Management
Listen to your employees.

It may be tempting to write off comments like these as disgruntled employees, but there’s obviously friction between labor and management. Shareholders may not want to acknowledge it, but they would be foolish to ignore it.

If DivX’s reign of Hell is allowed to continue, labor problems will only get worse. Lower payroll may be good for the bottom line, but it does nothing to boost their revenue, long term potential or the health of the underlying business. Going into zombie mode may be the safest way for management to keep their jobs, but zombies move slow and now is the time for action, not caution.

DivX’s digital eco-system is shifting like quicksand beneath them

Like the DVD, DivX’s codec is being made obsolete by high definition. To DivX’s credit, they saw this trend earlier than most and had the foresight to buy MainConcept to help manage this shift, but even there we’ve seen talented defections.

Support for H.264 doesn’t automatically mean that their codec won’t be skipped over in lieu of generic HD certification. The biggest threat to DivX’s business model is that CE makers will use the DivX to HD transition as a way to build support for generic certification. If consumers aren’t demanding DivX support, it will make it easy for them to cut DivX out of the equation. Managing this change to their eco-system, should be the company’s top priority. If DivX can’t convince device makers, that consumers really want their product, more and more manufacturers will leave DivX for cheaper alternatives, creating a downward spiral on their licensing business.

Winbox COO, Niklas Samios shares his rationale for choosing to skip DivX certification

Since Hell took the helm of the company, DivX has been focused on licensing premium content from the major studios. They have scored agreements with Sony and Time Warner, but between their P2P reputation and their Stage6 experiment, one can understand why some of the studios would be reluctant to dance with them.

Last August, they announced a partnership with Cinema Now for showcasing DivX content. While it’s unclear as to when their collaboration will start, it sounds like they are working on creating some kind of new entertainment destination.

According to CEO Kevin Hell DivX is “actively working with retailers to launch sites that can sell content leveraging our DRM in the marketplace. We announced Cinema Now last year and we are actively working to launch a retail offering with Cinema Now and other parties that are out there. The whole idea being that we want to bring content and allow that content to move to all the different devices out there that have our DRM inside.” (Note: Bold added by me)

While I’m of the belief that there can never be too many internet video sites, I did find it curious that Hell used the word “launch” to describe their initiative. When you consider how difficult it’s been for businesses to gain traction in the online video space, it’s a little surprising that DivX wouldn’t be using Cinema Now’s own flagship website as their distribution system.

What the need for a brand new site reveals about DivX content initiatives is a fatal flaw in their Hollywood ambitions. Even with a third tier internet video provider, they can’t convince Cinema Now to incorporate DivX into their main site, because they’ll never be able to get a license from all of the content providers.

Even if they could get a couple more studios on board, their lawsuit with UMG will effectively torpedo any hope of them ever being able to offer a comprehensive catalog to consumers. If you think UMG has any intention of backing down on this one, take another look. Read through DivX’s latest dust up over whether or not UMG should be allowed to use Audible Magic on Stage6’s 60 terrabyte database and form your own conclusions as to how far UMG seems willing to take this.

In the past, DivX management has argued that access to premium content was a key component to their growth, but at the Thomas Weisel investor conference, Hell backed away from previous comments.

“this space does I think take some time to play out, I think that there’s a lot of interesting opportunities out there right now in the premium space, but they’re taking time to really play out, so we’re making sure to pace ourselves in this space and not get ahead of the market”

Going after the studio content is a mistake in my opinion, it’s like ditching the girl you took to the prom for the cheerleader that all the jocks are already trying to make a move on. If DivX had a clean record and was bulging with cash, they might have a shot at some of that hot mainstream content, but when their P2P ex-girlfriend is more horrifying then Carrie to the content providers, it seems foolish not to stick with the girl you took to the dance.

DivX doesn’t need Hollywood content, they need consumers to DEMAND support for DivX in their consumer electronics. Supporting the dark side of the content business wouldn’t earn them any friends in Hollywood, but it would win them the hearts of consumers and would rebuild their moat in high definition.

One of the biggest challenges that Blu-Ray players have faced, isn’t so much the high cost of the hardware device, but the extra money that studios are insisting for Blu-Ray content. DivX could turn themselves into a recession play if they’d be more vocal about advertising the “free” content that people can use on their devices. As Paul Sweeting so aptly put it earlier this year, “hardware makers are adding all sorts of other gimmicks to their Blu-ray players, too, from wireless connectivity, to portability, to, wait for it…VHS playback. Yep, anything to try to avoid slashing the price of players. And anything to try to give consumers options beyond paying $30 for Blu-ray movies.”

Instead of promoting their latest licensing scheme as an H.264 solution, DivX should be pointing out that DivX Plus certification offers “Blu-Ray quality” high definition without this $30 cost. Again, it wouldn’t help their content negotiations, but it would help drive consumer demand back to DivX Plus devices, which is what ultimately drives CE interest and powers DivX’s business.

Content deals make sense as a way to extend their eco-system, but only if it’s on DivX terms. Instead of begging studios for access, DivX should be developing their consumer pipeline and rewarding the content companies who recognize the benefit of being able to access millions of consumers at their television sets. DivX greatest opportunity is the caos caused by Hollywood’s licensing terms. If they go through official channels, it will be years before they can reach their core fans, but if they fight against the system, they will be the only international solution for a very long time.

How much buzz could DivX get, if they actually spoke out about their lawsuit against UMG or if they ran some kind of “pirate” friendly promotion like giving free ISOhunt toolbar installations, while trying to find a replacement for Yahoo! These moves wouldn’t make them any money, but it would be a clear signal about who their end customer really is. DivX does almost zero marketing because their consumers have built their brand. By going hostile against Hollywood, DivX would magnify the strength of their signal. When consumers show passsion for the DivX brand, CE companies will quickly fill the void.

Fat Tube and little DivX

DivX other big “growth” initiative has also turned out to be a flop. Despite two years of pitching the concept, DivX has yet to see Connected integrated into other consumer electronics. The sad part is, that I believe Connected could radically transform DivX’s value proposition.

Currently, if you want to play a DivX movie on a DVD player, consumers must find the content, transfer it to a portable storage device (i.e. burn a DVD or move the file onto a memory stick) and then physically transport the media to their DVD player. If you’re a hard core fan, it’s worth going through all this trouble to get access to your media, but I’d be shocked if more than 5% of users were taking advantage of this feature.

The beauty of the Connected business model is that it dramatically simplifies the process. If consumers buy a TV that is powered by DivX Connected, they’ll get curious as to how to take advantage of the functionality. Not everyone will adopt DivX, but if even 25% of those customers plug their television into the internet, it would drive mass adoption for DivX content.

Compared to their DVD licensing, DivX Connected could have an atomic impact on the content industry. Make no mistake about it, if Connected takes off, it will be a weapon of mass piracy from the studio perspective. Because Connected makes it so easy to access your content, it has the potential to turn mainstream customers into rabid file sharing animals. Why it hasn’t already taken off remains a mystery to me, but it could have a serious impact on the demand for DivX, if they can ever get it released into the wild.

Last fall, I had the opportunity to meet Hell in person and I asked him whether or not he felt that the premium they were asking for Connected had anything to do with manufacturer resistance.

His response was “I wouldn’t attribute it to the pricing, I think it’s more an issue of implementation and the fact that a lot of these guys are still trying to figure out what they’re doing there. They either have their own initiatives or they’re confused about it, they want to try X, they want to try Y, anything that’s out there to figure out what it’s all about and in my mind it’s a lack of coherent focus and understanding by the CE partners.”

Since then, CES has come and gone, but it looked pretty clear to me that the CE industry isn’t all that confused about their connected television plans. The fact that DivX hasn’t been able to get their product in the door may or may not have something to do with their pricing, but deep discounting may be their best option for jump starting the program again.

In 2002, DivX was struggling to convert their company into a licensing business. Manufacturers were skeptical that consumers would pay extra for the support. To prove the value of DivX certification, DivX signed a licensing agreement with a little know third tier DVD maker known as KISS. It was officially certified in August 2003. The product, immediately began to pick up buzz and less than six months later, Phillips signed on to have DivX included in their own DVD players as well. After Phillips made their move, other CE companies were forced to follow and by mid 2004, DivX DVD players were pretty much available anywhere on the globe. To this day, the Phillip’s DVP642 remains one of the most reviewed DVD players on Amazon.

A couple years after DivX helped to put Kiss on the map, Cisco bought them out for over $60 million. I would argue that there are many similarities between Divx’s initial efforts to convince DVD player manufacturers to licensing their technology and their current struggles in the Connected market. Rather then continuing to hold out for a premier deal, DivX would be well served in signing a teaser deal with a small television provider. When large CE companies see proof that DivX Connected can move TV sets, they’ll quickly begin signing contracts to ensure that they remain competitive. While heavy discounting is less than desirable from Divx’s perspective, getting more Connected devices in the wild, would at least give them an opportunity to prove that there’s still value in the DivX brand.

Death of a Salesman

While I support discounting when it helps to secure DivX’s moat, it’s hard to be encouraged by the cracks that we’re seeing in their value proposition.

To help take a closer look at DivX’s pricing erosion, I reached out to Jack Wetherill from Futuresource Consulting for data on global DVD player sales. According to Mr. Wetherill, “DVD players in their broadest sense (ie set-top players, recorders, integrated home theatres, DVD/VHS combos and portable DVD players) totaled 122m in 2006 and 127m in 2007. We expect the market to level off at 127m in 2008, although year end numbers are still being finalised.”

When DivX first went public, the company said that they had a 25% penetration rate in the DVD player market. This translated into approximately $47 million in core licensing revenue for 2006 or approximately $1.54 per DivX certified device.

In 2007, DivX grew their global DVD player market share to 37%, which translated into approximately $66 million in core licensing revenue or $1.40 per unit.

At the Thomas Weisel Technology conference, DivX said that they’ve now captured 50% of the DVD player market, but according to their own projections they are only expected to grow their core licensing business by 13% in 2008. With core revenues around $75 million, this would suggest that DivX is now earning a unit licensing fee of $1.18 per certified device. A decline of approximately 23% in pricing power since the company went public.

When you consider that consumer trends have been much kinder to upscaling DVD players (where you almost always find DivX) vs. traditional DVD players and when you consider that DivX’s core revenue numbers include other electronic categories and Main Concept revenue, one could argue that these calculations are much more conservative then the actual results.

DivX has always said that they provide volume discounts to partners, but with over half the market now captured, it would appear that DivX’s DVD upside is somewhat limited.

Saving Private DivX

Along the way, DivX has made their fair share of mistakes, but they’ve also achieved tremendous wins as a result of the risks that they’ve taken. Compared to the mainstream studios they may only be a tiny mouse, but when you look at affect that their technology has had on the media landscape, it’s clear that they’ve been able to frighten the Hollywood elephants.

The good news is that it’s not too late to turn DivX around, but without some kind of action, I fear that DivX will remain in cruise control while their franchise continues to lose value. What does DivX need to do in order to return to their glory days of growth? It all comes to restoring confidence in the company.

First and foremost, DivX must put a stop to the bleeding from employees leaving the company. Given their labor issues, I don’t believe that this can be accomplished without replacing their management team, so I believe that new leadership needs to be a top priority.

Once a new team is in place, I would take .25 cents worth of earnings and commit to investing it in DivX’s growth. DivX’s employees are more accustomed to the culture of a start up then a publicly traded company. DivX should be playing to these strengths. Spend $500k per month building out new businesses. Adopt a Google model where employees are encouraged to spend 15% of their time thinking outside the box. Become a technology incubator with the long term goal of spinning off divisions when the markets recover. Start funding a profit sharing contribution to the company’s retirement plan, so that DivX’s success is shared by everyone instead of those lucky enough to get options. Take the time to listen to your employees and address their concerns.

Secondly, DivX must restore faith to their investor base. New leadership could help to accomplish this, but it will likely take more than promises of growth, to soothe the rattled nerves of their investors. Reinforce DivX’s long term commitment to shareholders by paying a .25 cent dividend as a way to reward investors while they wait for evidence of a turnaround. Taxes on a dividend would be better avoided through a buyback, but further buybacks would only reward short term shareholders and would increase volatility by reducing an already low share count. With a 5% yield, a dividend should help to establish a floor on DivX’s share price until earnings multiples expand back to growth levels.

Finally, restore confidence in your consumer base by speaking out for consumer rights. Use the UMG trial as a way to create passion in your fans and to drum up support for digital rights. Squeezing marketing leverage from the lawsuit would at least help to justify the costs involved with going to trial. Focus on Divx Plus’ quality advantage for HDTV consumers. Instead of throwing good money after bad, abandon your content plans until you have better leverage. Use small independent content providers to show how powerful DivX user base can be to progressive studios. Sign a sweetheart deal with a small CE television manufacturer to put pressure on the rest of the market.

If investors do nothing, DivX won’t necessarily go bankrupt, but it will torpedo their brand and market position. DivX CFO Dan Halverson said that their #1 goal in 09′ is to protect the balance sheet. This may seem prudent during such difficult economic times, but sleepwalking through a format change won’t position DivX for the long term. There will be a time for Divx to cash in on all of their hard work, but to try and do so at such a crucial point in the digital transition seems foolish and short sighted.

While the panic may have subsided, the pain that people continue to feel is very real. Businesses continue to fail and the very health of some of the largest financial institutions still remains in doubt. There have been a lot of solutions proposed for getting ourselves out of this debt ridden mess, but most agree that it’s going to take some kind of investment to break the vicious downward spiral. Some argue that this investment should come from the government through stimulus spending, while others have argued that we need tax breaks and incentives for the market to properly function. Some say we should do nothing and let the market figure it out. There are even those who argue that the tax revenue from legalizing marijuana could be the solution to our problems.

While every argument has it’s pros and cons, even at $3 trillion dollars, I can’t help but wonder if these solutions aren’t radical enough. Now bear with me, because I’m still trying to flesh out the impact that this kind of idea would have on the financial markets, but here is my own proposal for an economic recovery plan.

Eliminate the creation of any new derivative investment.

When you look at the cause of the financial crisis, it’s easy to blame real estate, but the reality is that it was over leverage that created the tsunami after the quake. Because of the lax regulation surrounding CDOs and other leveraged investments, banks and institutional investors were able to create a side market where they could bet on the success or failure of the marketplace.

From 02′ - 07′ the derivative market grew from $100 trillion to $516 trillion in size. When the bubble burst, this side market took the real market down with it. Considering that it was leverage that led us into this, forgive me if I can’t help but wonder how beneficial this stuff really is.

While derivatives do allow for businesses to hedge risks that they’ve taken, they are also used to speculate on everything from the price of gold to the weather in New York city. The problem is, that I don’t think they actually create jobs, at least not directly.

If a company wants to raise money so that they can hire staff, expand their business or just stay alive, they’ll typically either borrow the money (debt) or will sell off ownership in their company (equity). While there are many other ways to raise money, the important point is that the debt or equity that is created goes towards helping the business succeed.

When a big bank writes an option contract or an interest rate swap and links it to the price of something else, none of the money goes to the business or underying asset that investors are betting on (or against for that matter.) Instead the money raised is passed between investors and financiers depending upon the final result.

So what would happen, if the captains of industry weren’t allowed to underwrite derivatives any longer? This $500 trillion market would be forced to find other investments. Instead of being able to borrow money and make 10 - 1 long shots, they’d have to invest in the real assets or buy that debt and equity off of the open market. Instead of a $3 trillion injection, we would see $500 trillion redistributed to businesses as more and more contracts expired.

Now I’ll be the first to admit that there are some serious risks to my proposal and that such a drastic action could potentially cause an even greater collapse. I’ll also concede that any possible attempts at banning derivatives would have so many loopholes that it wouldn’t be effective. I won’t even pretend to know how the financial behemoths would react if they lost access to these types of investments. Certainly a few of them would likely go under. I’m also not sure what type of contraction effect something like this could have on the money supply. The last thing we’d want is for people to have to pay back $500,000 mortgages earning 1980’s level wages. Yet despite all these misgivings, I can’t help but wonder how important this extra layer of investment really is. By not allowing derivative investments, it would remove a middleman from the finance system and allow private money to go directly to job creation.

The cure may end up being worse then the disease, but if we end up finding ourselves in the great depression 2.0, I think that the nuclear option should be left on the table.

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

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

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

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

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

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

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

For those of you who are still not satisfied with the current crop of movie recommendation services, you’ll soon have a new choice available to you. Last week, I signed up for the private beta of Jinni and have been pretty impressed so far. Jinni is a new interactive movie rating website that is trying to do for movies, what Pandora has done for music.

While the site doesn’t stream any of the films that they recommend, they do offer convenient links to places where you can find the films online (Netflix, Blockbuster, Hulu, etc.) Apparently, the company has been live for a few months now, but I only just found out about them last week after seeing a review of the service on Read Write Web.

The site includes reviews, photos and even trailers for each film in their database, but their movie filtering software is the real bread and butter. Most of the content you’ll find on their movie description pages is pretty much available on any of the other movie sites, but their “movie genome” information is exclusive to them.

Through a process of human and computer intervention, they’ve categorized every film in their library using information from the movie’s plot, mood, genre, time period, critic reviews, story type, and attitudes. Viewers are then able to filter their search results by using these definitions.

For example, a search for the term bank brings up 134 movies, but if I filter this list by looking only at the “witty” films that include a heist in their plot and are set in the 21st century, I’m able to narrow my search down to just three films, Criminal, Inside Man and High Heel’s and Low Lifes. Since I haven’t seen any of these movies, it’s hard for me to tell how effective this really is, but by narrowing down broad based searches, it does enable me to discover movies that would have gotten lost in the volume of other search results.

On Jinni’s website you can find more information on the actual genome mapping process.

“The starting point of the Movie Genome is manual tagging by our team of film professionals. Each title has around fifty genes, among thousands of possibilities. Then, using advanced machine-learning technology, Jinni’s system learns from the manual tagging to begin automated tagging. This creates a level of consistency that creative human taggers can’t reach - especially important for similarity matches and recommendations, which won’t work unless you compare apples to apples and battles to battles as often as possible. Users who vote on genes, as well as the Jinni team, constantly check and improve the machine tagging.”

After playing around with the site, I was really impressed with the user experience, but I’m still on the fence about whether or not Jinni’s approach is the right way to go. On one hand, by creating “genome” fields around each film’s “DNA”, they’re able to accomplish a lot more with the data, but on the other hand, by restricting rating population to just their staff, it also limits the number of films that they are able to catalog. As an example, if I do a search for the plot Psycho, I get 270 results, but the same search on the user driven site Spout, gives me 509 movies. Now I’d be willing to bet that Jinni’s quality is better then Spout, but by not allowing their users to tag films, they may be giving up quantity through their process. Some people prefer quality over quantity, but I can’t help feeling like they are missing out on the wisdom of the crowds by excluding users from participating in the genome mapping process.

In addition to their movie filtering technology, Jinni also allows you to share more information about your own movie tastes and they provide personalized recommendations. While I haven’t tested the quality of their movie recommendation service yet, I do plan on putting them through my own blind taste test to find out how accurate their ratings really are. In the meantime, if you’re interested in trying the service, feel free to apply to their private beta or you can leave me a comment and I’ll be happy to share one of my invites with the first 10 readers to respond.

For my first Ask Davis question of the year, I turned to an anonymous Google surfer from Fort Wayne Indiana who asks Can Netflix tell if a movie has been copied?

Dear anonymous Google surfer from Fort Wayne Indiana. Thank you for choosing the Digital Connection for all of your movie ripping needs. I suppose a better question to ask may be whether or not it’s legal or ethical to copy movies from Netflix, but I’m not here to judge, so here is the answer that you are looking for: it depends.

Netflix has two different movie delivery mechanisms. The first is the traditional DVD by mail. Pretty much all DVDs use a copy protection known as CSS. It was designed by the fat cat studios to limit access to your media, but was cracked several years ago by an underground hero known as DVD Jon. Since then, there have been a number of rouge software companies who have built dvd decryption programs, but their legality lies somewhere in the grey area. Last year, Real Networks tried to launch a program that would legally allow you to make back up copies of DVDs that you owned, but a judge granted a temporary injunction against them, after the big wig studios argued that people might use the program to make copies of discs that they didn’t own, but had rented through Netflix

Now I know that you wouldn’t do anything like that, but to get back to your theoretical question of whether or not Netflix would be able to tell if you did use one of these programs, the answer is no. Because the DVD decryption programs don’t write anything to the disc, there would be no way for Netflix to know that you had sneaked a copy. Netflix does monitor usage behavior so its possible that they might suspend or slow down your account if you abused their service, but by and large they depend on people playing by the rules.

When it comes to the movies that you find on their watch instantly feature, technically there is a way that you can copy them, but it’s a bit more tricky. If you stream rip the watch instantly files, you’ll be able to download a copy of the film to your hard drive, but you need a back ground in tech in order to figure it all out. Perhaps even more importantly when it comes to your question, Netflix can tell when you’ve downloaded a movie instead of streaming it. I don’t think that they lower the hammer on people who do this periodically, but there have been reports of them taking action against heavy users of this hack.

At the end of the day, you may be able to copy a movie from Netflix without getting caught, but my own question is why would anyone want to? The great thing about Netflix is that you can always request to see a movie again without any extra cost. Trying to save money by ripping a bunch of titles in a month may sound like a good idea, but if you’re going to walk that close to the line, you may as well go Bit Torrent. There may have been a time in my life where this sounded like a more appealing idea, but I don’t mind paying $18 a month for all you can eat, virus free film bonanza. I hope that this helps to answer your question and look forward to finding out what else my readers are interested in.

Regards,

Davis

Yet, despite all of the advances in technology, the rollout of fiber access has been painfully slow. AT&T likes to brag that they now offer Uverse to over 17 million households, but after two years, they’ve still only managed to sign up 1 million subscribers. While 17 million households sounds like a pretty significant footprint, if you’re not in one of the higher tax brackets, you are probably still waiting for super fast internet access.

A Tale of Two Cities

A little over a year ago, I left my swanky downtown loft in San Francisco for a much more humble apartment in the heart of Oakland. A big part of the move was because I wanted to save money for a new business that I was starting. At first I was ashamed to tell people that I was living in the 510, but after spending a year in Oakland, I’ve grown quite fond of the neighborhood. We certainly have more then our fair share of violent crime, but if you take the time to get involved in the community, you’ll meet a lot of amazing people. Leaving San Francisco for Oakland meant that I had to give up my fiber connection, but at the time, I was hopeful that it wouldn’t take long before AT&T finished their rollout of Uverse in the Bay Area. Sadly, after researching Uverse’s availability, I don’t expect this to happen anytime soon.

According to ZipSkinny.com residents who live in my zip code make a median salary of $32,273 per year. 23.7% of the population lives below the poverty line and there are nearly 18,000 people per square mile living in my neighborhood.

While Oakland can be a rough place, smack dab in the center of Oakland is a small town named Piedmont. Piedmont may be less then 2 miles from my home, but their community is night and day compared to my own. Despite being surrounded by Oakland, Piedmont was able to create a separate town for their residents and as a result they have their own school district, police department and fire services. While people in Oakland are struggling to survive, the median salary in Piedmont comes in at $77,952 (over twice what my neighbors are making.) The percentage of people living below the poverty line is a more reasonable 4.9%, and the average density per square mile is a measly 5,700 people.

Now I can’t fault Piedmont residents for wanting to live in a good neighborhood, but when you compare both cities, the difference between them is pretty startling. While one city is known for it’s high drop out rate among teenagers, the other is known for their high SAT scores. One city has an extraordinarily large population of single mothers, the other has an extraordinarily large population of personal nannies. One city has limited internet options, the other has access to Uverse.

We can argue over whether or not it’s fundamentally fair that Piedmont has so many advantages, but it’s their access to Uverse that I take exception with. As someone who has first hand experience with the benefits of a super fast internet connection, I’ve been harassing trying to get AT&T to expand Uverse into my neighborhood since I first moved. So far they’ve been pretty unresponsive and downright uncooperative to work with, yet 2 miles away in Piedmont, they are going door to door signing up residents for their service.

If you ask AT&T (either their phone reps or their PR dept.) for a list of neighborhoods where they provide service, they’ll refuse to break down the data citing competitive threats. Since I knew that Piedmont was juiced up for Uverse, but that Oakland had been largely denied service, I wanted to take a closer look at the numbers, to determine whether or not this was part of a larger pattern by AT&T.

In order to test my theory that AT&T is discriminating against the poor by only choosing high net worth areas to rollout Uverse service, I painstakingly researched bay area availability by looking up individual addresses one at a time. To help track this data, I created a public spreadsheet showing all of the bay area zip codes where you’ll find (and not find) Uverse service. While my spreadsheet does not prove that AT&T is using demographic data to discriminate over who gets access to Uverse company wide, it does suggest that their selection criteria in the Bay Area could be favoring the rich neighborhoods over the poor. When asked for more data on their company wide rollout, AT&T’s public relations department more or less told me to kick rocks and refused to comment on their selection criteria for Uverse availability. While they are well within their rights to withhold this data from the public, when you consider all of the government assistance that they receive, it seems only fair that they be required to provide some transparency over how they are choosing who gets Uverse and who gets denied.

According to my research, the average median salary of Bay Area Uverse neighborhoods comes in at $75,486 vs the average median salary of $67,405 for neighborhoods without access. In neighborhoods where AT&T offers Uverse, 6.65% of the citizens live beneath the poverty line compared to 11.04% in non-Uverse neighborhoods. While you would think that it would be in AT&T’s best interest to offer service in some of the densest areas first, a quick glance at the data shows that the average Uverse neighborhood represents approximately 3,500 people per square mile compared to density of over 7,000 people in Non Uverse neighborhoods.

Encyclopedia Davis and the Case of the Missing Uverse

Perhaps even more perplexing then the discrepancy between the haves and the have nots, was the fact that I could not find a single address in San Francisco which has access to Uverse. While my phone calls to AT&T reps and their public relations department generated plenty of assurances that they were offering service in the city of San Francisco, after more then 200 address searches, I still could not identify a single San Francisco residence that had access to Uverse. Despite AT&T’s claims that Uverse is currently available in the city of San Francisco, their representatives were also unable/unwilling to provide me with a single address that is currently using Uverse. As a result, I’ve excluded demographic data from the city of San Francisco when running the calculations listed above.

What makes this issue such a controversial topic is that if you are one of the traditional cable providers and want to expand service to a local neighborhood, there are typically very strict guidelines on which neighborhoods you have to serve. Because cable agreements have been traditionally negotiated community by community, local city governments have been able to negotiate equal access for all citizens. There are plenty of examples where cable companies have tried to only service high net worth neighborhoods, but because of the local franchise agreements, local politicians have had the muscle to pressure the cable companies to treat all of their citizens fairly.

When it comes to the telephone companies, the rules are a little different. Two years ago, California approved statewide franchise agreements that allow the phone companies to pick and choose which neighborhoods they want to offer service. The result is a broadband system that rewards the rich while discriminating against the poor.

Normally, I’m content to let businesses operate in the best way that they see fit, but when it comes to the internet, I’m a strong proponent of open access for all. The net is a great equalizer for society. It doesn’t matter whether you are black or white, rich or poor, male or female, gay or straight, young or old. When push comes to shove, it’s the power of your ideas that matter online. Yet, when it comes to the speed of your connection, it would appear that the tax returns of your neighbor, play a large role in deciding whether or not you have access to the highest tiered speeds on the net.

Internet providers have a unique business model that tends to encourage natural monopolies. Because the barriers to entry are so high, incumbent providers have a big advantage over new companies trying to get into the game. When you consider that President Elect Obama has proposed some pretty large checks to the phone companies, it becomes even more important to ensure that AT&T’s rollout policy treats everyone the same.

While I recognize the need for AT&T to turn a profit on their investment, I fear that by discriminating against the poor, it will only increase the digital divide. If AT&T isn’t using demographic information in their decision making process, then they should be more open about the criteria they are using to decide who does and does not get access to fiber internet. If my data is correct and they are only rolling out Uverse to the wealthy neighborhoods, then this is an issue that should be addressed before giving them access to more public funds.

While I believe that the statewide franchise agreements were a positive step for consumers and the telecommunications industry, if we’re not careful we run the risk of creating a system that makes it even more difficult for the poor to succeed online. While there may not be the same adoption rates in Oakland as there are in Piedmont, it doesn’t mean that their citizens should have less opportunities. Instead of continuing to discriminate against the poor, I’d like to see AT&T provide more balanced access to all.