I’m a big fan of Reed Hastings. Not just of his vision, but his honesty as well.   Reed posted his strategy deck on Slideshare.com . While we agree and disagree on a few items here and there, he does a great job identifying the risks created by Cable/satellite/telco (CST) .  The key quote on this slide ( page 26) –  ”almost no customers leave cable for netflix”

Reed is one of the smartest guys in the space. This is a must read for anyone interested in the future of the entertainment business.

Google TV is going to be very interesting. It is far  from a certainty that it will be more than Apple TV in terms of consumer sales.   From a first glance the Marketplace is the most important and interesting element of the announcement.  As a development platform, Android creates the potential for untold  unique and interesting applications that could capture users imagination.  Early on, I don’t think TV oriented apps will have the most impact. If  I understood the announcement, in the beginning of 2011, there will be an Android Marketplace. The money and the opportunity won’t be in TV apps. It will be in gaming and social apps. The low hanging fruit will be in taking apps that work on facebook and Iphone/Pad and moving them (if they haven’t already) to the Android platform and upsizing them to take advantage of working on a big screen.

The Google TV box could be a very cool and hopefully inexpensive gaming console. That is where the money will be.

What about TV ?

The success of Google TV will come down to one thing….PageRank.  Can you imagine the white hat and black hat SEO battles that will take place as video content providers try to get to the top of the TV Search Listings on Google TV ?  Like Google said, there are 4 billion TVs and growing and the US TV Ad market is $70 BILLION. There is a lot at stake if Google TV takes off. How Google does its PageRank for this product  will have a bigger impact on the success of the product in the TV market than anything else it does.

If you search for “House” on your Google TV and it returns a Youtube Video of some kid doing a parody of the Fox tv show House, you can bet the shit is going to hit the fan. Not that Fox or any big media company will sue Google. I don’t think they will. What will happen is that they will “turn off” the Google TV Chrome Browser, just as they did to Boxee.  They will fight and possibly sue over what meta data is used to determine search results. It will be a mess.  That would kill the product because if it doesn’t work with the TV shows you want to watch, why buy it ?

On the flipside if the best Google offers users is what they showed in today’s demo,  returning 5 or fewer results from a search with content from the cable/sat provider showing first and possibly consuming all 5 results, every internet content creator is going to scream loud and long at Google for putting them at a disadvantage.  No one is going to be able to find your video if you show traditional TV shows first and  dont show more than 5 results. They aren’t going to be satisfied with referrals or Google Suggestions as their only access to Google TV users. They are going to claim that this is all  just a ruse to get them to advertise and that Google sold out to big media.

Even if Google lets the user decide how to rank results, it creates too much risk for TV content providers and their distributors. More mess.

On the other other side, if traditional TV makes it to the top, Google TV is the best thing to ever happen to Cable , Satellite and Telco TV providers. Why ? Google just solved their biggest problems, their user interface and programming guide. Not only that, if Google TV is what big content providers and distributors consider to be a good partner, they just off loaded much of the future R&D for the set top box to Google and its partners and developers. Should cable and companies adopt Android on their set top boxes ? They will watch and decide. Even better for the TV Providers, maximum utility from the  Google TV comes from having a TV subscription. They may actually gain subscribers as a result of this product. Which is exactly why Charlie Ergen had Dish Network participate. Its win win win for Dish Network

Google TV isn’t the answer. It’s the question.  I’m sure Apple, Microsoft and even Facebook have an opinion on the announcement. Their response will be even more interesting.

The Future of TV is….. TV. But Google sure sped up the timeline today.

if you are in the media enough, you recognize that the media lives for the next headline. Facebook Privacy ? What a great headline.  We all care about privacy, right ?

Wrong.  Privacy is a boogie man for the media to play with. Unless you are in the internet business in some manner, where discussing privacy issues with other internet people makes everyone feel like they are part of the “smart people”. Facebook privacy is a media issue (which in turn of course makes it a politicians wet dream), nothing more.

If you join Facebook, by definition you want to give up some of your privacy. You want to share pictures, updates and statuses with friends. You want friends you haven’t seen in a long time to find you.   Items and information that would never see the light of day pre social networks, are now regularly uploaded from our phones. No DRM on those pictures. No requests for DRM on those pictures. No copyright on our status updates. No requests for copyrights on our status updates. Facebook is a social network.  The operative word being social.

Let me put this another way. In every FB profile there is a question called “Interested In”.  You know you answered the question in your profile.  When you tell 500mm people that you are interested in finding  something, friends, business, whatever,  did you really think that only applied to your immediate circle of friends ?  And what about the interests you shared ? Why would you need to share that information to your immediate friends ? They should already know that stuff shouldn’t they ?  When you published your political or music views and interests, you didn’t do that for the benefit of your immediate friends did you ?  Of course not. You did it to expand your circle of friends. If you want to expand your social circle, you need to share information  to people you don’t know.  You can’t share information with strangers in hopes of possibly adding them to your social network and then bitch about the lack of privacy.

The privacy advocates among us would tell us that sharing with friends and even potential friends  is one thing, making it available to everyone  is another.  Well guess what, while FB doesn’t have the equivalent of a Retweet function, it doesn’t have a Muzzle function either.  Facebook can’t control downstream discussions today any better than you could when you told stories to your buddies at the bar the other night.  Whether you like it or not, posting on FB is a publishing function. You are publishing to your “friends” and whether you like it or not, they have every right, opportunity and possibly inclination to share what you say, do and show.

Facebook privacy is very simple at its core. You joined because you wanted to give up some of your privacy in exchange for the benefits that FB offers.  If you think its a problem, de-activate your account.  If you think its a problem, but really want to be on FB, RTFM (Read the Frickin Manual).  The functionality is there. Since when did it become law that software can’t have some level of depth in order to provide the breadth of features and services that all levels of users require ?

The complaints about FB privacy are pretty much a joke.  It’s a social network, not your voting record.

My last two posts were designed to stimulate discussion.  But lets talk the real problem that regulators, public companies, investor/shareholders and traders face.  The problem is that Wall Street doesn’t know what business it is in. Regulators don’t know what the business of Wall Street is. Investor/shareholders don’t know what business Wall Street is in.

The only people who know what business Wall Street is in are the traders. They know what business Wall Street is in better than everyone else.  To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.

The best analogy for traders  ? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing.  A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it.  A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.

I recognize that one is illegal, the other is not. That isn’t the important issue.

The important issue is recognizing that Wall Street is no longer what it was designed to be.  Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings.  What percentage of the market is driven by investors these days ?

I started actively trading stocks in 1992. I traded a lot. Over the years I’ve written quite a bit about the market. I have always thought I had a good handle on the market. Until recently.

Over just the past 3 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF.  Combine that with the leverage of derivatives tracking companies,  indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less  comfortable playing. It is a game fraught with ever increasing risk.

The Pimco (who I think are the smartest guys on the Street) guys talk about a new normal as it applies to today’s state of  the world economy. I think just as important is the new normal as it applies to Wall Street.  Wall Street is now a huge mathematical game of chess where individual companies are just pawns.  This is money in the bank for the big players like Goldman, Morgan, etc. Why ? Because the game of chess is far too complicated for 99pct of the institutions out there investing money. So to keep up, they turn to Goldman, Morgan and the like to invent products for them. “You don’t know how to play the housing boom, let us show you”. “You think the housing boom is about to crash, let us show you how to play that”. “You think that PIIGS are in trouble because they can’t print money to pay debt holders, let us create a product to allow you to play that game”  The big houses have the best hackers in the business and they put together the games and sell them to the many, many institutions managing Billions and Billions of dollars.  They are the ultimate Hackers selling their attacks to the highest bidder, regardless of which side they are on. That is a new normal.

Again, I’m not passing judgement one or the other.  I’m just recognizing what is going on in the financial world today.

It’s rare for companies to go public these days. Just as rare for secondary offerings.  The only thing that keeps me in the market is that most of the stocks (not all) pay dividends or some other sort of cash payout. For the first time in my life, I bought outside the United States.  I bought Australia in a big way because it is becoming increasingly hard to find new domestic investments that are not influenced by the “hackers” and the games being played on a macro level. It’s hard to believe, but evaluating countries as an investment is now easier than evaluating companies . Even with all the unrest in Europe. Or maybe because of it.

So back to the original question. What business is Wall Street in ?

Its primary business is no longer creating capital for business. Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period. (I would be curious if anyone out there knows what percentage of transactions actually return money to a company for any reason). It wouldn’t shock me that even in this environment that more money flows from companies to the market in the form of buybacks (which i think are always a mistake), then flows into companies in the form of equity.

My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business.  Whether its through a use of taxes on trades, or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years.  However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy.  It won’t come from traders trying to hack the financial system for a few pennies per trade.

And solutions won’t come from bureaucrats trying to prevent the traders from hacking the system. The only certainty when bureaucrats step in is that the law of unintended consequences will smack us all in the head and the trader/hackers will find new ways to exploit the system that makes them big money and even more money for the big institutions that develop products for the other institutions that are desperate to play the game.

Regulators have got to start to recognize that traders are not investors and vice versa and treat them differently. Different regulations. Different tax structure.  Different oversight. Individual investors and the funds that just invest in stocks and bonds are not going to crash the market.  Big traders who are always leveraging up and maximizing the number of trades/hacks they make will always put the system at risk.  We need to recognize that they do not serve much of a purpose other than to add substantial risk to the global economy.  That their stated value add of liquidity does not compensate the US and World Economy nearly enough for the risk of collapse they introduce into the system.

Wall Street as a whole needs to be in the business of creating capital for companies and selling shares to investors who believe they are shareholders.  The Government needs to create incentives for this business and extract compensation from the traders/hackers for the systemic failure level of risk they introduce.

There will be another crash, because there are too many players looking for the trillion dollar score. They can’t all win, yet how many do you think wouldn’t risk everything, even what is not theirs, for that remote chance to score big ? Put another way, there is zero moral hazard attached to any trade. So why wouldn’t traders take the biggest risk possible ?

Update at 10pm 5.9.10

One more consideration. If there are traders of any kind that are unregulated or unmonitored, and trade for their own account, how do we know how big they are and how much of a threat they pose to the system, individually and in aggregate ?. For any High Frequency or big leverage derivative folks out there- is it possible there could be firms that have billions at risk with questionable ability to make a margin call or fulfill their side of the trade  if things went against them ?  Could there be hidden AIGs that few people know about  or a bunch of AIG like situations ,which in aggregate fail and put the system at risk ? I have no idea. Just asking the question.

Net Neutrality. At it’s most basic, its the principle that all internet content sources and applications have equal access to the internet, and to all internet subscribers, including you.  And that no internet provider can price access to the internet to give one source or application over another. The internet has been a free for all, and as far as the Net Neutrality supporters are concerned (and Im not arguing one way or the other here), that is the way it should always be.

But what about in your house or apartment ?  Do you want all applications running on your XBox/PS3/WII gaming devices to be treated equally with the applications running on your Roku/Tivo Premiere/Media Server to be treated equally with the applications running on your PC/Laptop to be treated equally with your new HDTV that has wireless internet access ? Or would you want to give priority to one application over another ?  Do want the content you just paid for to be interrupted by the email being downloaded with the huge attachment some idiot just sent you ?

Do want the streams from Netflix coming to the TV in your bedroom through your PS3 to be treated equally with the bandwidth needed for your 7 year old little sister/ daughter playing on Barbie.com to be treated equally with the streams of Mom/Dad/Husband/Wife/Significant Other watching Totally Rad on Revision 3 ?

If you don’t, how are you going to fix this problem ?

If you think fighting over the remote control, or which show gets DVRd at 8pm on Sundays is bad, you ain’t seen nothing yet.

I got news for everyone, the bandwidth in your home is more limited and more variable and harder to manage  than the bandwidth coming into your house from the internet.

How many of you are up to speed on network management for the wireless router you have in your house ?  What about those of you with more than one router and no idea how they connect ?  How many of you want to know what network management is ?

Are we going to see an Iphone/Ipad app for managing network resources or will families just post who gets access to bandwidth on a note on the fridge ?

6pm Joanie gets to play Barbie.com while johnny downloads and uploads your homework (yes Johnny, it means you have to be done by 7pm sharp young man !)

7pm Mom gets to look up her real estate listings and download and upload whatever pictures she needs. She also has those videos she took on the Flip she got for Xmas that she wants to upload to Filesanywhere.com and to Picassa.    EVERYONE PROMISES not to be on the network from 7pm to8pm. These are movies and pictures from the pageant that are going to end up in those stupid books she gives all of us on our birthdays.  You know how annoyed and flustered mom gets if something times out. Johnny, I’m talking to you. I’m not going to show her how to restart  those stupid uploads any more.. Unless she pays me 5 bucks like last time, right  mom

8pm Game Time. Kids get to play whatever games, or watch whatever they want to watch  ON THEIR OWN BOXES. Joanie, that means no XBox. You wanted a WII and we got you one. You can use the family PC to watch videos on Youtube if you want, but ONLY on the playlist that dad and I put together for you. Clear ???

9pm Dad gets to watch those old movies from Netflix.  When he is done, he is going to do the backup

11pm Backup all the PCs time.  Remember, if you want everything backed up, you have to stay off the network. You know how dad gets if all his new stuff doesn’t get backed up every night.

You can watch regular tv on the tv in the living room or your own room anytime you want.

Any requests for changes to the schedule have to be in before Johnny leaves for school in the morning.

You get the idea.

Like they said in Seinfeld, you will have to be  ”The master of your own domain “.  Being a network manager is not an easy job. Just ask your cable or telco internet provider. Yet that is the exact job you are looking to undertake .

Anyone out there think provisioning bandwidth at home is easy ???

Before I get into the topic at hand, I want to first commend Google and Youtube. Just read the article “Are Live Sports the Next Frontier for Youtube?”  Dang, why didn’t I think of that 15 years ago ??. Oh well.  And one more thing. You may be reading today about the problems streaming Youtube and other videos over the AT&T network to an IPad with 3G.

That wouldn’t be a surprise if you read my blog back in January:
“Whats also big is the exclusion of flash.  The reason is obvious. No flash.  Far less streaming over 3G. Less streaming over 3G means less bandwidth consumed. Less bandwidth consumed means ATT can  offer a GREAT price on the 3G data service. I personally have never had problems with the ATT Network.  The limits on 3G streaming probably means I wont going forward either. Thats a good thing.”

Sorry, couldn’t resist.

There is an old saying that tends to work today and I expect will work for years to come: ” Follow the money”.  In particular, follow where consumers spend their money on new products. It is the ultimate definition of consumer choice.  In the word of consumer electronics, consumers have been, and continue to spend their money on brand spanking new HDTVs.

Consumers are adding TVs to their households. According to Nielsen the number of TVs in homes INCREASED in 2009 over the previous year, to 2.93.  In addition the percentage of homes with DVRs increased to 34pct. Now what do you want to do when you buy a new big, flat screen TV ? YOU WANT TO WATCH STUFF ON IT !  No one buys an HDTV in order to ignore it.

But wait there is more. Another 35pct and quickly growing have and use VOD from their TV provider.

You know what is AMAZING about VOD  ? It gives you thousands of choices and its already connected to your TV. It just works.

You don’t have to buy another box. You don’t have to figure out how to connect it to your TV. You don’t have to stream from another device over your WIFI netork and get all confused about how to pull video from the internet. It just works.  That’s what you want when you unbox that great big flat screen TV. You want it to work…. like a TV. Easily. Quickly.

Which is why I don’t understand why so many people think that consumer choice is about having millions of videos available online to watch any time is some big deal.  Consumer choice is about having the brand new device on which  you just spent hundreds of dollars or more work immediately and just as you expected.  It’s about getting the most out of your investment in your new big screen that looks beautiful on your wall.

When you buy a car, you don’t want to have to figure out how to make it work. You don’t want to have to bring someone in to make sure the engine starts, or have to buy some 3rd party device so that you can go full speed or blast the stereo.  When you buy that car, you want to jump in the drivers seat, smell that new car smell, be excited when you turn it on, and crank that stereo and roll down the road in your brand new car. You made your choice as a consumer. You spent your money. You want IMMEDIATE GRATIFICATION.

The same applies to big ticket consumer electronics. When you buy that new TV and get it installed on your wall or wherever in your apartment or house, you want to turn that baby on and watch your favorite show, the big fight or concert or put on your favorite video. You want it to look and sound good. It doesn’t matter if you are 20 and living in a dorm or an apartment, or 65 and watching Oprah. It’s a proud moment.  You don’t want to have to figure out which 3rd party box or streaming service you can hook up via the internet and then stream to your TV and then find out the video you are streaming looks nothing like the video they had on in the store.  You don’t want to tell your buddies not to bump the mouse so it stays full screen. You don’t want to piss off  everyone because your screen saver of your dog  just came on or have to stop everything and turn your facebook alerts back off because they keep interrupting everything. You dont’ want to scream to your girlfriend/roomie/wife/kids in the other room  to stop downloading stuff so you can watch your show without it buffering. You just want it to work.

The beauty of that TV is that you unplugged your set top box from that old piece of shit you used to have and you plugged in your new , beautiful, ready to roll HDTV and it worked great. It worked so great, that you want as much content as you can possibly get , with the best possible picture. So you started saving stuff on your DVR, or if you didn’t have a DVR , you called your TV provider to pay the extra 5 bucks a month. And when you got that new set top box with the DVR, which worked when you plugged it in, you started checking out all the programs and movies they have in the VOD section.

You can save any show you want on to your DVR. You can watch any of thousands of shows , anytime day or night on your BRAND SPANKING NEW HDTV.

I just don’t understand why media pundits think that people are going to want to turn those BRAND SPANKING NEW HDTVs into PC monitors watching internet quality video. It’s a hassle. There is nothing that works out of the box. You have to be your own personal systems integrator and get the right box, figure out how to get content to that box over your in home internet, and then eat up your internet bandwidth in order to watch video that is dumbed down because it takes so much bandwidth. Why ?

That is not consumer choice. That is consumer hassle.

What about the future ?

The number of DVRs, HDTVs and VODs users will continue to expand every year.  Every year for the next 10 years we will be discussing the future of  internet video and all the great things that could possibly happen.

Remember this. The potential for video over the internet is huge….. and always will be.

The future of TV is TV. That is what consumers want. Consumers have made their choice to spend money on new HDTVs. Why ? Because  they want to watch TV.