the art and observations of Ranjit S. Mathoda

In my prior post (http://www.mathoda.com/archives/160), I stated that the most impressive web company today is Facebook. They have created a clean, elegant interface, populated it with an ecosystem of other companies, and have an incredible core value proposition they call the social graph, which lets you easily see what your friends and acquaintances are up to in their lives.

Rupert Murdoch is a very savvy businessman, and he’s often credited for moving fast to snap up MySpace at what seemed like a foolhardy price, until it wasn’t. However, one reason he is a good businessman is because he doesn’t fool himself when it comes to business matters.

In an interview with the Wall Street Journal (a company he’s trying to buy) (http://online.wsj.com/public/article/SB118115049815626635.html), here’s what he said about Facebook:

WSJ: The Tribune company was shopped around for quite a while.

Mr. Murdoch: Yeah, but there weren’t any buyers.

WSJ: There was one in the end.

Mr. Murdoch: For $90 million. Risk. That’s in the figures …

WSJ: Why didn’t you do it?

Mr. Murdoch: Don’t want to spend the rest of my life going through that, getting rid of people, ugly. I think they’re in decline, they can fire a few hundred people everywhere, save a couple of hundred million dollars … I guess they will have a billion a year to pay down the debt, that’s what it sounds like. No, a bit less. I would have thought that, although the decline in readership will probably go on.

WSJ: They’re all going to MySpace.

Mr. Murdoch: I wish they were. They’re all going to Facebook at the moment.

And here’s what he said about Google and Microsoft:

WSJ: Then what’s the opportunity for you? Digital?

Mr. Murdoch: I think it’s in the digital area, digital and TV. And I think we’ve got to pour some money into digital. We’ve got to do a lot of things there… There’s so much going on on the Internet. We’ve got to find new ways and new business models to get revenues. Or else the world is going to be owned by Google. I was asked at this investment thing I had to go to, what competitors I see I would have in five years time. Globally. I said I’m sure they’ll be a lot of them. I know one is Google. It’s just getting so strong, so powerful. And I know the guys, and like them. They’re friends of mine. But it is a big fact of life. They sort of just hit the mother lode of search advertising and they’re just destroying Microsoft search, hurting Yahoo’s and making others irrelevant. I don’t understand the technologies but whatever their technology is, it seems to be producing a much higher margin of profit. What are they going to do next? I saw in the New York Times today they’re devising certain, a lot of computer applications which would directly challenge Microsoft, which they’ll give away. So it’s going to be very interesting. Four or five years ago we were all convinced Microsoft was going to take over the world. Now we’re all convinced it’s Google. But that’s another subject.

We live in interesting times, where mega-billion dollar market cap companies arise in very short time frames and fall from relevance even before their cash flow drops. I wonder how long it will take people to catch on to how fleeting competitive advantage can be on the Internet, even for what seem today to be the titans. It’s something to think about the next time someone bemoans corporate power or monopoly status of a company in the software industry.

Update, June 25, 2007: My friend Danah (danah.org) points out that MySpace and Facebook have different levels of popularity in different social classes: http://www.danah.org/papers/essays/ClassDivisions.html

My friend Jon points out in critiquing my post about Vudu (see http://www.mathoda.com/archives/146) that physical box distribution business is not only very tough, and potentially a commodity business, but also that secure content systems like Joost and iTunes are maturing on the PC side, which may be where the real energy for video distribution lies. Om Malik similarly points out that the cable companies are potentially even better situated than Vudu to provide such a service (see http://gigaom.com/2007/04/29/vudu/).

I agree that distributing boxes as a business is tough. Vudu has to convince people to shell out $300 when it initially starts selling boxes. Historically the cable companies and satellite companies (and now the telecom titans) have been able to eventually/slowly copy the features and are in a better position to promote it to their customers before the mass market really catches on. That’s what happened to Replay & Tivo. The only area in which being a box provider has been a huge
success is (a) with the Slingbox where you just pay for a box that lets you stream your TV content to your PC, not the service, and (b) the major videogame console manufacturers, where the box is subsidized by the closed environment for game software sales.

However, while box distribution is a challenge, I think Vudu has a shot, particularly if their patents on this type of instantaneous p2p caching holds up to scrutiny. The growth of video of all kinds on the PC through systems like youtube.com, iTunes, and Joost is an important story, but the mass market has avoided tying their PC to their large
screen televisions, and the mass market isn’t particularly happy with having to wait for a movie to download. While it’s great having all kinds of video on a PC, and movies are okay to watch on a PC (yay for Netflix), movies definitely also should be on the large screen, and they should be available instantly.

The customer ease of use (not having to configure with their wireless network and iTunes account, ala Apple TV or deal with the terrible menu systems to watch the movie they want as is the case with cable co and satellite channel lineup menus), the secure environment for copyright holders (with a Vudu box being an even more closed system for copyright than Joost or iTunes, as you can see from all the major studios and even alot of the minor ones signing up with them, the
holders of the highest popularity content agree: according to NY Times article, Vudu has 5,000 titles licensed, 10 times more than the 500 films Apple offers), and the instant start for a movie download, are all advantages that I think counterweigh the cost of box distribution.

However, even if Vudu itself fails, the basic idea of having a dedicated hard drive hooked directly to your TV and broadband which can instantly serve you movies due to clever p2p caching is an important idea, particularly if coupled with a closed environment in which the content holders feel secure.

One interesting point is that historically the cable cos have held tight control of their infrastructure. however, if you look closely at what they’re doing now, they and the telecom titans are trying to create more open APIs so that startups can come to them with ideas for which they can get more revenue. So maybe, as the NY Times profile of Vudu mentions, Vudu chips would be added to existing HD digital vide recorders by the cable and telecom titan companies.

Of course alot depends on (a) how Vudu’s patents on their p2p caching technology holds up to scrutiny, and (b) how much the mass market becomes comfortable with attaching their PCs to their TVs directly. Eventually I presume the community feel of youtube and Joost will come to the living room TV, and that may require a full PC hookup.

It’s quite possible that by the end of the summer of 2007 you will be able to instantly watch on your television almost any movie you want to see, without resorting to DVDs. How?

The startup that will bring this to you is called Vudu (vuduinc.com). It has built a $300 box (the price should drop rapidly) that hooks directly to your TV and to your broadband connection. Through some technological magic, as soon as you click on a movie it starts playing the movie, rather than making you wait for a download. Vudu has already signed deals with all the major studios except Sony for movie content. Unlike the Apple TV, this box doesn’t require you to have a personal computer, a wireless network, or be on iTunes.

Here’s a NY Times profile: http://www.nytimes.com/2007/04/29/business/yourmoney/29vudu.html?pagewanted=1&ei=5088&en=1605d6e7e6acc068&ex=1335499200&partner=rssnyt&emc=rss

The type of service Vudu Inc. provides is to my mind the next evolution of the entertainment industry. Does it challenge Netflix and Joost? Let’s compare:

Netflix is distribution of DVDs in the mail, where you are sharing them with other customers. With Netflix, the content creator gets paid for the DVD. Movie studios are happy to provide their content on DVD, because DVDs are an encrypted, closed system (there is software to easily hack DVD encryption but it’s too much bother for many people to use). Netflix cleverly shares the same DVD with multiple customers. It has relatively low content costs (the studios can’t jack up the price of DVDs easily), medium content and service distribution costs (better than a video store but requires a warehouse and mailing costs), but one big disadvantage: it takes time for the movie to get to you.

Joost is streaming video, using freely downloaded software on personal computers to display and store the content. Each Joost user’s personal computer stores some of the content other people will watch (a peer to peer system). With Joost, the content creator gets paid for their content, through a share of advertising. Studios are happy to provide their content on Joost, because the Joost player is an encrypted, mostly closed system (it’s possible to copy the video feed, but it’s too much bother for most people to try). Joost has relatively low content costs (the studios could jack up the price of their content but they are competing with each other on the Joost system and are getting a share of advertising), very low content distribution costs (download the Joost software, use their customer’s PCs to store much of the content, and free ride their customer’s broadband), low service distribution costs (viral growth of the Joost download by word of mouth), and instantaneous gratification with a video stream, but it usually isn’t connected to your TV.

Vudu is downloadable video, using a Vudu device you buy that’s hooked up to your tv. Each Vudu user’s Vudu box stores some of the content other people will watch (a peer to peer system). With Vudu, the content creator gets paid because Vudu can bill customers of their system or potentially sell advertising. The content is encrypted, on a closed, very secure system. Its content costs depend entirely on what the studios want to charge, low content distribution costs (buy the box, use their customer’s Vudu boxes to store much of the content, and free ride their customer’s broadband), moderate service distribution costs (get people to buy a $300 box), and give you instantaneous gratification.

I think Vudu will do well. It’s a new approach to creating distribution for people who want to be paid for their content, but it also is easy for the ordinary customer to use. It may be a threat to Netflix’s business model or its growth rate, although how it all shakes out will depend partly on how much customers want instant gratification and how much the studios require Vudu to charge for it.

A company called Red One started by Jim Jannard, the founder of Oakley (the sunglass company), has created a digital video camera (http://gizmodo.com/gadgets/gadgets/red-one-camera-169222.php) that has a massive 24.4 x 13.7mm sensor. With a sensor that big it basically duplicates the depth of field and selective focus characteristics of film cameras. Steve Jackson, director of the Lord of the Rings, recently demonstrated the camera’s power by filming a short film using it.

Red One is bringing the camera to market at a price point ($17,500) that should make digital filming at a super duper high definition (better than current HDTV’s are capable of) very common. Instead of renting a $250,000 film camera, now you can buy a digital camera with equivalent capabilities for less then the cost of most cars.

This tracks a natural evolution of technology in film production that is removing many of the hurdles of creating a tremendously professional work yourself. With youtube, Joost, Netflix, the Xbox360, and iTunes transforming distribution, the entertainment industry is in for a set of significant changes.

Having access to or being the talent that can put together a compelling story, direct, and act remains a significant barrier to entry, of course. But even more people should now have a shot.