First, i have nothing against youtube. I hope they do just fine. Whether they survive or not doesnt affect me one tiny bit.

As someone who worked hard AGAINST the DMCA and provided financial support for legal efforts against the movie industry’s effort to overturn the BetaMax ruling. Anyone who has read anything I have written, knows I think copy protection schemes are a waste of money and far too much money is wasted trying to police and implement copyright laws. This coming from someone who has a lot of money invested in content.

I wrote the first blog entry simply because I thought the discussion of how and why Youtube had achieved its level of traffic where others had not was interesting. As many different copyright discussions as I have had since 1995, the one constant was that big copyright owners want control. It was never a matter of if they would try to assert themselves to gain control of their content, it was always just a question of how and when.

GIven Youtube’s meteoric rise, I thought it was an interesting question to ask, “Is there anything really unique about Youtube?”. The answer was yes. They were the first site I had seen that had any traffic at all that was going to risk it all by saying that since users did the uploading and all they were doing is hosting the files, they fell within safe harbor rulings of the DMCA. All of this sounds really really nice when its a couple people discussing it on their blogs or in the comments or at a conference. In reality, the user implications are damn scary.

This is from the DMCA

The safe harbor provisions permit a copyright owner to subpoena the identity of the individual allegedly responsible for the infringing activities. [512(h)] Such a subpoena is granted on the condition that the information about the individual’s identity will only be used in relation to the protection of the intellectual property rights of the copyright owner. [512(h)(2)(C)]

Another section goes on say

The safe harbor provisions require the service provider to include in its copyright infringement policies a termination policy that results in individuals who repeatedly infringe copyrighted material being removed from the service provider networks. [512(i)(1)(A)] This termination policy must be made public in the terms of use that the service provider includes in its contracts or on its web site.

Thats right sports fans. If they know who you are, and you post something that doesnt belong to you, they might have to give you up.

And if you are are the guy/girl that posts the NFL, Daily Show, Letterman highlights every night, and any of the owners of those items decide they dont want to be on youtube, then there is a good chance that your days on youtube are numbered.

Now I realize you can add any number of profiles, today. But thats the thing about having all these content owners come after youtube, at some point users get sick of getting kicked off, and of all the hassles that could be associated with dealing with youtube. One identity gets revealed and its front page news.

To some this might not be a big deal, but one of the great things of youtube is how easy it is. If it stops being easy, and the hassles go up. The value and breadth of content declines as do the number of users.

Now all this so far presumes that Youtube qualifies for the safe harbor act. Personally, and Im not a lawyer, I dont think they do. To qualify, as I read it. They arent allowed to change the original file they host in any way. Well Youtube re encodes the video into the FLV format. On top of that, it progressive DOWNLOADS the content to your hard drive (thereby saving a ton on bandwidth for replays). So these issues may be moot, but if they are Youtube is going to be in a heap of hurt.

But for the sake of example, lets go with Youtube being able to qualify for the DMCA Safe Harbor. Lets presume that there isnt going to be a rush to turn over user names and information or kick off anyone who has repetively uploaded any copyrighted materials that has received takedown notices.

The two things I dont think will ever change is that big media companies want to control where there is content is seen, and how their content is monetized. They have absolutely no problem suing to gain that control or sicking the MPAA or RIAA or both on anyone or thing that threatens that control

So rather than guess about Youtubes future, lets think about the implications if Youtube can go about doing their business as is. That anyone can upload anything they want and the worst that could happen is that the copyright owner sends a notice to Youtube that they own the copyright of a video and they want it removed, and then Youtube removes it.

So then what ? Does anyone really think that the big media companies will say “oh its ok, we like youtube..Lets just move on. ” ?

Of course not. There wont just be one Youtube, there will be millions. Youtube limits the size of the uploaded video. But thats their choice, probably for cost and performance reasons. Youtube2 wont necessarily do that. So if its legal to upload 100mb of copyrighted materials, then it will be legal to upload 100gb of copyrighted material. Which means any movie, any anything. Convince everyone you know to upload every movie or video they ever bought to Youtube2 and then just offer the video from your blog. Or better yet, tell all your friends to upload those movies and videos on Youtube2, then go to your website and just use the html code to present all those movies. It will be a buffet of all the movies you can watch , and Youtube2 pays the cost of bandwidth and deals with all the takedown notices.

Now that will be a great business.

Now some might say that it wont work that way because YoutubeX will do a licensing deal for the video/movies. Dream on. Ask Cablevision what happened when they simply tried to move the DVR from the home to their central servers. Ask anyone who has tried to license a wide range of products how hard it is just to find all the people that own the rights to certain materials.

But wait, there is more. For the last 8 years the battle has been between copyright owners, the people who want to download that content for free. and the services that enable that function. What Youtube could go down in history for is extending the battle to the world of uploading to hosting services. Little Johnny can get sued by the RIAA or potentially the MPAA for making music or movies available from his hard drive. But if Johnny uploads that to a hosting service that is claiming the DMCA safe harbor, Johnny is in the clear.

Forget Youtube, a site could come along EverythingTube.com. Make it primarily for sharing independent artists music videos and user generated video content, a “bigger, better Youtube” if you will. Just offer an encoder that mixes mp3 audio with any video or any series of pictures Then create profiles like Beatleswhitealbum and upload the white album, etc, etc. If Youtube can do what its doing, why not EverythingTube ?

Move the risk from everybody’s hard drive on to the copyright owners who would have to sort through tens of millions of profiles and videos to find out what belongs to them. It would be impossible to police. THink someone might get mad and try to change the DMCA ?

Bottom line is that ri
ght now everything seems really nice. One site with tons of traffic, tons of videos, tons of infringing and non infringing videos. A really cool library where you can find tons of stuff. All the excitement of discovery that we all felt when we first started using Napster.

The problem is that the web is a cockroach farm. There is never just one cockroach and there is never just one site that will compete in a certain area . THere are many video hosting sites now and to come that will look at what youtube is doing and try to oneup them. In a copyright world where lawsuits are more prevalent than even Dwayne Wade free throws in the finals, the lawsuits will come.If the lawsuits dont work, then they will give the politicians in DC lots and lots of money to get the DMCA changed, again.

And one last time I will touch on the economics of streaming. Youtube streams to their user and allows the user to retain the file. But they are still streaming huge quantities of bandwidth. The thing about streamed media is that it doesnt get less expensive the more you stream. When you get into doing terabytes of streams per day, your cost per bit tends to go up as volume increases because of all the incremental overhead associated with delivery of that video. From servers to routers to people to software licenses to maintenance to backup and redundancy etc, etc. the costs ad up in a big way, Delivering video is a whole lot more expensive than delivery of text, but the CPMs for any advertising have to compete with people selling text based ads. Its going to be interesting to see how it all turns out.

I made a prediction, but that doesnt mean I dont like ‘em

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Blow a call in a college football game, get suspended right ?

Believe or not, wrong. its the wrong thing to do, but its not a suprise. Not at all.

There is a reason why there is so much secrecy around officiating in college football and basketball; to protect the people doing the hiring. If you dont have to worry about scrutiny, why not throw the people you hired under the bus ? Or if you can, just lie about the entire situation and tell everyone it was the right call, or say nothing at all so all the suspicion falls on the game’s officials.

In the Oklahoma game, the officials got it wrong according to statements from their bosses, and of course the many Tivo replays. Of course the bosses conveniently left out that the replay official wasnt provided all the angles that TV viewers saw, or that the equipment dosnt provide for freeze frame. Freeze frame is what, a $99 dollar software upgrade ?.

Conveniently leaving out key information that would change the public’s expectation of the person actually doing the job is one quick and easy way for management to throw their employees under the bus. Which is exactly what happened here.The result was the suspended replay official being harassed and threatened and suffering physical repurcussions.

His boss should be suspended or fired for not having the balls to take the blame and redirect the public outcry to him/herself.

Thats a huge business lesson to anyone who manages professionals who have to deal with public scrutiny.

Oklahoma fans suggested it was a conspiracy by the Pac 10. The Pac 10 said nothing. When you hear such inflammatory comments without response, its never the work force with the problem, its management. Just ask any PR firm that specializes in crisis management.

When you see problems on a repetitive basis in any profession, the first place to look isnt the people on the job, its the people managing the people on the job.

Should it really matter which conference an official comes from when he/she is selected for a game ? Of course not. Most officials will call a game fairly. But how exactly is “fair” defined ?

From what i can see “fair” in all sports is a little bit different from manager to manager or conference to conference. The only certainty is that officials will do what all employees do, they will strive to make their bosses happy. They will do what it takes to keep their jobs and train to get promoted.

There are a lot of judgement calls in every game, in every sport, in any business. How any given judgement call is evaluated is purely a function of how the employee is managed. Call it mechanics, and those mechanics differ from conference to conference in every college sport. Getting assignments comes down to making the guy/girl in charge happy. As in any business, that always comes first, even at the expense of what fans may consider “fair” or even accurate. You may not believe it. But it happens. All the time.

Who hasnt been in a position where the boss wants to prove who is in charge, facts be damned ? Talk to officials at any level about different calls. You will here the same phrase repeated all the time. “this is the way they want me to call it “, or “they dont want us to call that”

What a great management lesson.

The job of management is to hire the best possible people for a position and put them in a position to succeed. Which means that the hiring process has to be strong. It means the recruiting and training process has to be strong. A workforce of professionals has to have bench strength. There have to be well trained individuals ready to take the place of those who quit, retire, or cant meet the standards of the organization.

It means communication has to be strong so that employees and management can have give and take and work to improve the organiztion and profession. It means the evaluation process has to be strong. Its not simply a matter of tracking statistics as a Pac 10 official said would happen going forward. Statistics are worthless if management doesnt understand how to use them as part of a bigger goal. Managers need to be able to communicate with each employee about their individual needs and design programs to help them improve, or make a change if they cant meet those expecations. And finally, management needs to be open to communications with the outside world as a means of developing strong relationships with its customers and garnering ideas and suggestions that independent eyes and ears offer that might improve the quality of performance.

Thats good business.

Its not what we have seen from the conferences that have been involved with controversies. Of if its there, they certainly havent communicated it to their customers and to their employees that i have communicated with.

In an industry as big and public as collegiate sports, thats a huge mistake. It also leads to some basic qustions.

Why are officials hired and assigned by conference rather than a national organization ? Isnt the current system a formula for lack of consistency and public mistrust ? is resistance by conferences to a single entity for officials just a confirmation of management over quality of work ?

Why are hiring practices and programs not publicized ? Dont they want to attract the best and the brightest officials ? Shouldnt the same professional interviewing , work analysis and hiring techniques applied to other professions be applied by the NCAA to their officials ?

Hey Im just a college football and basketball fan, but sometimes the lack of business 101 principles that any of their business schools teach is worse than glaring and there is no better time than now to make changes.

Or they can wait till the next official who makes a mistake is thrown under the bus and suffers the personal consequences. They wouldnt do that to other professionals under their hire, why do that do that to officials ?

What type of training do the officials receive during the summer and season ? Is it a fulltime focus during the offseason and off days, or is it a camp for a couple days ? I realize that for some this is a weekend occupation while they work other jobs, but given that some with a full schedule, particularly in basketball can make more than 150k per season, I think its a reasonable question for fans to ask if the officials their teams count on are fully trained.

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Some were right, some were wrong, some were early. But its fun to look back and see which is which from 1999.

Despite what some people think after my Youtube thoughts, I’ve been a big proponent of User Generated Cotent for a long, long time. In fact, Broadcast.com bought a company, Simplenet.com, specifically to enable hosting for user generated audio and video. One of the biggest projects we had going on was software to enable individuals to upload their own videos (Remember that project Justin M ?). It wasnt a big stretch for us since we already had it in place for corporations to do the same thing. (contrary to what most people think, Broadcast.com made almost all its money from hosting corporate events)

BAck to the presentations I did, I way overstated the impact of the net on TV and the connectivity between TV and the net in the home. The key reason was that I expected broadband speeds to continue to grow linearly (is that a word , and to be well past 25mbs actual throughput to the home by 2006. I was so off, i was telling people to expect 5mbs to 10mbs by 2001.. Oops.

The net stock market bubble bursting put a big clamp on capital investment and created disincentives for companies to spend on last mile infrastructure. Those disincentives continue to exist today as speed increases to the home are more from bandwidth recapture than laying of optics to the home (Verizon excluded)

Im holding to my prediction on Youtube. The complexity of rights issues. Their lack of DRM. And that doesnt even account for the stupidity of subsidizing Myspace and hosting how many videos on myspace pages, millions ?? The minute they try to monetize those videos, you can bet Fox will have their own solution waiting to release. No Youtube on Myspace ? No Youtube on how many other pages once they start to try to incorporate ads (Yeah I know they said they wouldnt). What happens to their traffic ? All of the sudden rather than being the darling, the articles will be talking about the dramatic decline in traffic.

If they dont incorporate ads, then thats even worse. Again, that means they are hosting the video of the net for free. Thats an ugly, no win business.

A word of wisdom to the Youtube folks, sell if you can. A word of wisdom to a potential buyer, the minute the labels see even the hint of deep pockets they are going to come after you for all your worth. It will be a Lawyers Employment Act. Just ask Bertlesman about being the deep pockets behind Napster. Its not different this time.

So how good are my previous predictions ?

Here are some goodies to laugh at:

This is a speech i gave at a UCLA Symposium in 1999

Notice the discussion point of User Generated Content..

This is a presentation I gave to ETV, also in 1999, with the focus on what I thought a Set Top Box would have in it .

And finally, this is a review of a speech I gave to SXSW music conference in 1999 where I predicted the end of MP3s as a commercial file format. I said you wouldnt be able to buy MP3s because they would be superceded by file formats with better encoding performance and DRM enhancements. I think Fairplay/Itunes and WMA from MicroSoft have pretty much proved me right on this one. Now as far as how songs will be sold and a few other things. I couldnt have been any more wrong. But notice the reference to “communities of interest”. I was right on there, I just was too lazy to do anything about it

MP3 Will Die, Executive Predicts

MP3 Will Die, Executive Predicts
By Loring Wirbel,

SAN JOSE, Calif. — Streaming media wars will characterize the turn of the century, and MP3 audio formats will be an early casualty, according to Mark Cuban, president and chairman of Broadcast.com, in Dallas.

MP3 will not fall victim to the Recording Industry Association of America’s attempts at censorship, but will fail because it will not scale as much as streaming media systems from RealNetworks or Microsoft, Cuban said in a keynote address at the MultimediaCom conference here in San Jose, Calif., Wednesday.

Although MP3 is an open format that does not carry the economic incentive of a proprietary streaming media system, it will not be doomed by its openness or lack of an owner, Cuban said. Rather, its lack of a compression advantage over RealMedia or Microsoft ASF files, plus the fact that it cannot be extended by new developers as software like the Linux operating system can, means developers will not find it attractive.

But recording-industry executives should not be smug or complacent about the death of MP3, Cuban warned. Not only is the Secure Digital Music Initiative likely to fail, Cuban said, but also the structure of music and film distribution networks will dissolve in less than five years in the face of Web-based distribution. Cuban said he predicted the six companies that control film rights distribution, and the five that control CD music distribution, will be either dead or changed beyond recognition by early in the 21st century.

Among streaming media specialists, Cuban predicted RealNetworks will be acquired within a year, not by a software giant like Microsoft or a traditional media giant, but by a telephone company or specialized carrier that wants to add streaming media capabilities to bandwidth-access schemes.

Cuban presented a unique vision of how bandwidth will be metered. He said downstream high-bandwidth channels such as cable-modem QAM or copper xDSL likely will retain their all-you-can-eat, unmetered status, even as customers exceed megabit-per-second rates. However, carriers will turn to usage-based pricing for return-path services, for customers who wish to reserve videoconferencing or upload significant files to the Internet, for example.

And Cuban saw an even more unusual replacement for film and CD distribution. He said charging customers by downloads of individual songs or movie titles probably will not work, in part because the search space of possible audio and video clips is so huge. Instead, he said, smart record companies will turn to a subscription-based service for a particular artist, in which a monthly fee will allow a select community to receive all new works by an artist for that month.

In this model, he predicted, the current “MP3 rebels” who post bootleg live performances to websites will be encouraged to join “communities of interest,” similar to fan clubs, where they will be given incentives to post semi-legitimate recordings of an artist to a fan group and become part of the more informal licensing structure of the future.

The biggest challenge companies like Broadcast.com will face in the future, Cuban concluded, comes not from media traditionalists or other streaming media specialists, but from “the little kid effect,” stemming from the 10-year-old who invents the next killer application for the Web to avoid doing the day’s homework.

THe more things change, the more they stay the same. Even on the net.

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What is it about youtube.com that has made it so successful so quickly ? Is it the amazing quality of user generated content ? Is it a broadband fueled obsession with watching short videos ?

No & No.

Youtube’s rapid ascension to the top of the traffic ranks can be attributed to two and only two reasons:

1. Free Hosting from any 3rd Party site
Hey, why pay for bandwidth for a video if you dont have to ? A blog, a myspace page, an email, any website. Just throw in some html in Youtube.com foots the bill for bandwidth. Sure you are limited by size of file, but so what. Just chop it up into parts 1 through N. Its fast, easy and free.

Come to our website and use our video hosting services, we can party like its 1999 all over again !

2. Copyrighted music and video.
I dont have a count, but i bet Daniel Powters’ Bad Day is attached to some video snippet of every sporting event ever played , with links sent to fans of every losing team. PIrates season, You had a Bad Day. Spurs vs Mavs. Mavs vs Suns, Mavs vs Heat , Yankees vs Red Sox, etc, etc, etc. Bad Day, Bad Day , Bad Day. If Daniel had a nickel for every time his song was used in a YouTube sports video, he would be a much richer man.

This so reminds me of the early days of Napster. They were the first to tell you it wasnt illegal. They didnt host anything but an index to link to all the illegal downloaders. Youtube doesnt upload anything illegal and will take down whatever you ask them to. Sounds legit right ?

No, but thats not the thing. The thing is the shock that until Universal Music Group apparently started to put the pressure on them, no one had sued them. Considering the RIAA will sue your grandma or a 12 year old at the drop of a hat, the fact that Youtube is building a traffic juggernaut around copyrighted audio and video without being sued is like…. well Napster at the beginning as the labels were trying to figure out what it meant to them. With the MGM vs Grokster ruling, its just a question of when Youtube will be hit with a charge of inducing millions of people to break copyright laws , not if.

And its not just people putting copyrighted music to copyrighted video to create a new work of user generated content thats going on here. ITs also become a cheap and easy way to get music. Find a new hot song, and some kid is doing a goofy dance to it and uploading it to Youtube. Some have decent audio quality. So just search for the songs, create a playlist, minimize the window and play all your favorite songs as often as you want. For free. And of course if you have no fear for the copyright police, you can use tuberaider and keep a copy.

And its not just copyright lawsuits that will end up severely impacting Youtube’s business, its that their business is too easy for the people who own the copyrights to copy.

If Daniel Powter wants to encourage everyone and anyone to put Bad Day music behind user created videos, its certainly easy for him or his label to do. Its just a question of who will pay for all the bandwidth involved. If the NBA wants lots of versions of Bad Day or any other song backing videos of their games, they would be smart to do a deal with his label and have their own little hosting section on nba.com . As would any copyright owner. Maybe TNT will offer up the ability to host user generated voice overs of Charles and Kenny. Now that is using technology for a good purpose.

Whats worse for Youtube is that there might finally be an economic model for the copyright owners to host their own videos. Advertisers are chomping at the bit to buy rich media advertising and copyright owners are chomping at the bit to provide them broadband content for their ads. (Of course we are just a year away from there being far more video available than advertisers, but thats a future blog entry)

So you can pretty well bet that every and any copyright owner is going to be jumping up and down telling Youtube to remove every bit of content with any copyrighted material. The double worse news for Youtube is that wont be easy. How are you going to tell Barry that he has to take down the video of Aunt Sally getting her groove on to Long Tall Sally, and Uncle Willie doing the Hand Jive at his Bar Mitvah ? That those are both copyrighted songs that Cousin Brucie, the DJ played, and we encouraged you to break the law when we made it so easy to post them and send links to your entire family ?

How are they even going to find every instance of copyrighted music behind some personal videos ? They will have to. And it wont be easy.

Take away all the copyrighted material and you take away most of Youtube’s traffic. Youtube turns into a hosting company with a limited video portal. Like any number of competitors out there that decided to follow copyright law

Youtube, we hardly knew you.

UPDATE: This morning the WSJ wrote that Warner Music and Youtube announced a revenue sharing deal.
Obviously the devil is in the details of the deal, which we dont know. Obviously the devil is in the details. We dont know what the percentages are. We dont know how capable a salesforce Youtube has. We dont know what percentage of revenue their streaming costs take up (remember, streaming costs per bit dont go down as volume goes up, they go up at very high volume levels) and we dont know just how diligent they are going to have to be for Warner MG to recognize WMG copyrights.

Think about it. In order for them to recognize a copyright violation in the bar mitvah tape, they first have to identify any and all songs, then they have apply that to a list of WMG songs. That aint going to be cheap to do.

Does this make a difference in my thinking ? Not at all. In fact its reminds me of when Bertelsman cut a deal with Napster. It sure sounded nice, but didnt amount to much of anything. Kudos to WMG for giving them a chance and probably leveraging the hell out of Youtubes traffic, but this is just one copyright owner out of the thousands, if not tens of thousands owning copyrights that are most likely being illegally used on Youtube.

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Obviously quite a bit is going to be written about Apple’s new releases today. Hopefully I can cover new ground.

First, i thought it was smart of Apple to announce their ITV product. Streaming from a PC to a device connected to your TV with multiple connectivity options , HDMI, Component, Digital Audio is certainly nothing new. IO Data has a box that can wirelessly read from a PC, as do others. I use15 an IO data box as a DVD player as well as for playing back directly from a portable hard drive to an HDTV. That said, I dont think there is any question that Apples implementation will be cleaner and more popular.

There are a couple things that are special about Apple’s announcement today as it pertains to Movies and TV shows.

1. The 80gbs hard drive.
The opportunity to download movies to a hard drive and KEEP THEM THERE and replay them AS OFTEN AS THE USER LIKES. Is critical. Its a great first step towards carrying around your video library as easily as you carry around your music. As hard drives grow, so will the number of titles you can store, and of course the door will open for high def. Its clear that the Ipod is not only a playback device, but is a personal or family digital content host.

I personally have digitized almost every picture and home movie i have ever taken or had given to me . I currently only have room on my IPod for the pics, my music and a few videos. As storage expands, so will my storage of personal content. I also have found transferring baby pics and videos to a new Ipod and giving it as a gift to relatives is easy and more humane than making everyone sit through the pics and videos at our house.

2. THe 1.5mbs encoding speed for self proclaimed “near DVD quality” is important. First of all it sets a quality floor using H.264 and they didnt lie and call it DVD quality. Others that want to call their offerings DVD quality will at least have to match. It also means that HD quality, when it comes, will really be HD quality at 8mbs or more encoding levels.

3. The first two items are nice , but its No 3 that is tthe key to the future of digital content.

The most important element of Apple’s announcement today is that the IPod interface is now viewable on your HDTV. Cable and Satellite companies are working hard, spending tens of millions of dollars to optimize their Programming Guides to incorporate Video On Demand, DVR ability, Internet Content, Purchase of content and TV Programming Guides. Of course this is a matter of my opinion, but I think that the Apple interface, because it already has tens of millions of consumers trained to buy content on impulse has to have the edge. Adding a Programming Guide of TV shows and controlling a tuner (in your TV using OCAP possibly) or a tuner built into a future ITV box would put it square in the crosshairs of the cable and satellite companies as a direct competitor.

Its going to be very interesting to see how not only cable and satellite respond, but also how TV manufacturers respond.

I just ordered my HP MediaSmart TV . It’s 37″, and does technically everything that the ITV appears to do. Except run the IPod interface and enable buying from the ITMS (itunes music store). If HP makes it as easy to buy, AND TO SAVE TO A HARD DRIVE with as slick a user interface as the Ipod and ITMS, then why wouldnt i just plug my 80gbs PDA into my TV and use it to store and playback all my digital content and read from a networked computer for anything else ? And of course it could easily have a direct broadband connection for any internet connectivity.

And the cable and satellite companies can, and in some cases have already enabled the same technical features in a set top box.

The big problem for all the above is that it will be a battle.

So what does this mean to video on the net for everyone else ? For movies, nothing. Nada. Downloading wont get any faster. DRM is still a nightmare. High Definition video from the net is still a nightmare. In fact, the best way to beat Apple in this game is for cable and satellite companies to push as much content as possible to HD. The greater the expectation for HD content from consumers, the less value to consumers for downloading movies.

For TV shows, its still a great idea. Selling TV shows is found money for Apple and producer.

And of course retailers continue to be big losers in this. Apple gets a movie store with unlimited inventory, for no inventory cost (that we know of), at a price that appears to be lower than what retailers currently sell many DVDs for. (unless of course Disney withholds certain DVDs from Apple in the future and only makes less popular titles avialable day and date with their DVD release. Retailers are asked to stock their shelves and warehouses, deal with carrying and marketing costs and sell their products at what looks like premium pricing.

Which means it wouldnt be a surprise if retailers sent a loud and clear message to non Disney related studios about the direction their stocking orders will go if they cooperate with Apple.

Apple did a great job making their UI available to HDTV users. Thats a good thing and will certainly speed the competitive landscape. But one thing it will not do, is speed up downloads. I dont know where Apple is getting 5mbs throughput for an entire 2 hour movie, but i want some where i live in Dallas.

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Rich Greenfield of Palicapital had another great research note about the economics of video downloads , in particular how they apply to Unbox, Amazon.coms new video download program.

Here is his email summary of his research note, below it are my comments explaining why the studios and anyone who sells to retail is in no rush for video downloads, particularly of movies, to succeed.

Maybe the Studios Do Not Want Legal Internet Downloading to be Successful Right Now?

Richard Greenfield rgreenfield@palicapital.com

Mark D. Smaldon msmaldon@palicapital.com

Yesterday evening, Amazon launched its new movie and television download to own/rent service called Unbox (www.amazon.com/unbox).

The rules and pricing scheme of Unbox, make us believe that movie studios do not want legal movie downloading to be terribly successful in the near-intermediate term.

Exhibit A illustrates the Unbox download-to-own pricing ($19.64) for a recently released movie, Family Stone.

· $4.65 premium (31%) to the cost of the same physical DVD available on Amazon as shown in Exhibit B (albeit you do have to buy at least two DVDs to qualify for free shipping from Amazon, with no sales tax on the download or physical DVD).

· Unbox Internet download-to-own allows you to playback the movie on two computers and two portable devices, but you cannot burn the DVD for playback on a standard DVD player. Consumers need to connect their computer to their TV.

o What makes no sense to us about the inability to burn a DVD, as well as limiting to two PCs/devices, is that the studios are competing against increasingly easy to obtain, albeit illegal, ripped DVD versions that have no restrictions on PCs/devices that can be burned for playback on any DVD player.

o Exhibit C illustrates an illegally ripped version of Family Stone. The “torrent” file was found by simply entering the words “family.stone torrent” into a Google search window (bittorent client application must also be installed once). The illegal version has no cost, no restrictions on use/playback, and can be downloaded far faster than the Amazon version as it utilizes BitTorrent peering technology to accelerate the download (relative to the 1 hour 50 minute download time stated by Amazon for a 2-hour movie file on a 3 Mbps connection).

§ The fact that Amazon is not using P2P technology to accelerate downloads also means that they are bearing all the bandwidth costs to transmit the files, versus leveraging their users’ bandwidth to offload a significant portion of those costs.

· Unbox Download-to-Rent – why bother? Amazon’s unbox rental service is constrained by the studio’s pre-existing subscription deals with HBO, Showtime and Starz Encore. The reason why Unbox rentals expire 24 hours after you begin watching (although you do have 30 days to start your 24 hour viewing period), is that anything over a 24 hour rental is a violation of the pay cable subscription window output deals. This has been the underlying problem affecting previous online rental services such as Movielink and Cinemanow. >

o Given that pay TV output deals are critical to movie industry economic health, not to mention that the majority of these pay TV output deals last until 2010-2012, it is unlikely that online download-to-rent terms of service will improve in the near-future.

o The $3.99 rental price (see Exhibit D), is the same as renting a physical DVD from a video store (such as Blockbuster), and again you cannot burn the file to a DVD to watch on an existing in-home DVD player, users must watch on their PC, a portable device or connect their PC to a television screen.

Restrictions on use should drive a cheaper price to the consumer, not the same or higher pricing, especially because the studios’ cost to produce and distribute is lower in an online world. In turn, the rules/pricing of online downloads-to-own/rent appears to be intended to ensure that they have no meaningful impact on the movie/television studios existing (and highly profitable and important) physical DVD business. While this will surely change in the future, the goal today appears to be to protect incumbent physical DVD distributors such as Wal-Mart.

· At a premium price point we also question who is the target market? Illegal movie downloaders are unlikely to be attracted at these prices and physical DVD purchases are unlikely to be interested in dealing with primarily PC-based nature of the downloadable files (with heavy movie renters far better off with Netflix or Blockbuster than Amazon Unbox).

We are quite interested to see how Apple’s new movie store changes the game next week (September 12^th launch). Speculation is building that the service will go beyond simply allowing full-length movie downloads to an improved video iPod; with some form of hardware/software solution to enable (ease the process for) viewing of downloaded movies on home televisions (home theatres).

· We hope the Apple service is significantly more innovative than the Amazon service, as the studios need to accelerate the attractiveness of digital delivery to prevent illegal P2P from capturing too much market share (particularly as cable system/RBOCs are continuing to increase bandwidth provided to consumers as competition to control the broadband IP-pipe into the home continues to heat up).

First of all, i dont agree that the illegal P2P market will capture any more market share than it has now. As I have said many times, its too much hassle for anyone other than those who have lots of time on their hands, and those people will borrow DVDs from their friends before they would buy the movie.

However, his google search for a movie torrent does raise the question of why the studios and MPAA dont go right to Google and ask them to use all that amazing search technology they have to block illegal torrent sites the MPAA provides them. Its not like the MPAA cant put in the same search terms and then provide a list of sites.

But lets get back to why Studios are smart in not pushing Internet Downloads of ANY products they sell in packaged goods to retail. The simple answer is that download sites pay a license per download while retailers buy inventory.

The complete uncertainty of how many licenses/downloads may occur vs the far greater certainty of product that has been shipped selling one way or another with an expected return percentage makes downloads not very desirable to big media companies.

Its one thing to allow downloads of yesterdays TV show and create a market and revenue that didnt exist last year. Its another thing to mess with your biggest revenue stream.

What makes downloading even less desirable is that the sites offering the downloads don’t believe in their ability to sell enough to pre buy a given number of licenses. IN other words, I can’t go (so far anyway) to CinemaNow or MovieLink and say “we need you to place an order for at least 10k licenses in order to get the same price as 10k DVDs shipped to a retailer”. They won’t do it.

I will give you the gist of an exchange i had with a torrent site that promotes that it reaches 70mm unique users and growing. They wanted us to offer our content for sale through their site. I told them I would be happy to if they placed an order for a number of units that made it worth our while to encode the content, deal with the management of the content and working with their systems. All that is overhead to me, and I was absorbing the risk. So if they placed an order like a retailer or rental outlet would, i would be happy to work with them. They wouldnt put up a nickel. They wanted us to absorb all the risk . Which in turn tells me they dont trust their platform.

Compare this to Netflix. This is one of the reasons Netflix has been so successful compared to any and all download sites. They believe enough in their product and systems to know and trust what they will rent and how many turns it will generate. Which in turn allows them to offer guarantees and minimums on products they want to offer.

So the choice for studios comes down to simple economics. Make a real sale, and get the revenue minus a historical rate of product returns or hand over an encoded file and hope it sells with no assurances of ever making a nickel or covering your administrative and management costs.

And as far as the perspective of giving users what they want and they want downloads. If we dont offer them downloads, they will find downloads on their own , jus
t as we saw in the music business… Nope. This aint the music business. This aint 3 minute songs that download in under a minute and allow users the option of getting the 1 song they like instead of a package of 10. IF movies were sold in prepackaged albums of 10 movies. Maybe. If movies were 3 minutes in length. Maybe. If watching on a computer or on an Ipod was as good an experience and often better than watching on the smallest TV in the house, maybe. But its not.

Watching video on a computer or on a PDA/Ipod is a 2nd class experience. It works amazingly well as a time killer on a bus, plane, lunchroom. It works good enough in a dorm room or your apartment bedroom, but its not going to replace watching on a real tv. It will always be a niche market in every manner.

and for all you “but i can and do download everything ” types. Good for you. Get up and away from your computer and go see how the rest of the country lives. And when you hit 27, get a real job or move out of your parents house, whichever comes first, tell me if you are still downloading 10 movies and burning them for your friends and creating 10 playlists for Itunes every week like you did in college or when you first graduated. At some point you realize the time you spend downloading and burning to a DVD is worth more than the 10 bucks to go to a movie or 20 bucks or less to buy the movie. When that happens you will have figured out that all that time you spend burning DVDs and trying to manage space on your hard drive wasnt worth it

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If you were ever curious, as I have been about the training officials go through to prepare for the season, someone sent me an MSNBC video link (click on the obstacle course challenge ) that tells it all.

Its nice to see the guys getting some excercise and having fun.

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I did an interview with Mike Freeman of Sportsline that he posted today.

I’ve taken the liberty of repeating it here, and adding some additional thoughts below it. Thanks MIke.

I also wanted to add a quick thought that is in response to some of the comments.

The ultimate test, whether of American or foriegn players of their committment to playing for their national teams is whether they would waive their guarantees for any injuries suffered during international competitions. If its country before money. Great. Go for it.

The next point is that if we want NBA players to be better international as well as NBA players, then why do we restrict our ability to work with them over the summer ? Even if a player wants to come to Dallas and train and work with our coaches, we arent allowed to make it happen. Commissioner Stern said it best (although im paraphrasing, i couldnt find a directlink) when he said that it didnt make sense that student athletes had more access to shoe companies than their coachs. Well the same thing applies to NBA players. Our players can play in Pro Am Leagues. THey can do whatever they want with their shoe company and the promotions and games they put together, but we cant work with them on their skillsets. Skills that would improve our ability to compete internationally, and would make the NBA better. Hopefully the commish can work with the NBA Players union, or better yet, the Players Union will encourage their membership to allow skills based training over the summer.

And finally, let me go back to the business side of the equation. I personally dont think the NBA gains returns equal to a money market fund from the money we spend internationally.

Do we sell product. Absolutely. Do we sell TV rights. Absolutely. Do we gain an international profile ? Absolutely. That said, my business bias is to win the battles we are in first, then take on new battles.
HOw about we focus on doing a better job in the battle for eyeballs in the US first ? How about we create so much demand fo
r our game that over the air TV perceives it as a must have TIVO buster product like the NFL ? Or Iceskating in the Olympics ?

All that money we spend to promote ourselves internationally can be far better spent to promote our game domestically. Lets make the NBA a close, not distant second to the NFL. The USA is the most prolific TV market in the world. Increasing our ratings and attendance here from better marketing will pay us far , far more returns than anything we could ever possibly do internationally.

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I’ve writting about this mutiple times before, but its been several years.

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