Sunday, January 29, 2006

Synergy: Good, Bad and Ugly

We’re witnessing the rise and fall of two strategies that have been around for years: Convergence and synergy. Convergence is rising and synergy is falling. The problem is that synergy doesn’t know it’s dead yet.

The textbook definition of synergy is the combination of two or more items that result in more than the sum of the items: The whole is greater than the sum of the parts. A hydrogen atom plus a hydrogen atom is ready for an oxygen atom to form water, but smash two hydrogen atoms together and you get both helium and an enormous release of energy. The same is supposed to be true for business: Put the right two or more businesses together, and you get a combination that’s more valuable than the sum of the individual, separate businesses. Put the wrong ones together, and you have a black hole.

Media and consumer electronics companies have a particular affinity for synergy. For example, Viacom started as the former television syndication division of CBS. Then, under Sumner Redstone, it acquired Paramount Pictures, Simon & Schuster, MTV Networks, CBS, Blockbuster Video, TDI outdoor advertising, Infinity Broadcasting and King World television syndication. They were all acquired in order to increase the parent company’s synergy.

Unfortunately, along the way, Viacom found out that synergy isn’t all that it’s cracked up to be. Blockbuster hit the wall when DVD sales gutted the video rental business, so Viacom spun it off. Infinity’s revenues tanked as advertisers shifted a portion of their expenditures to non-broadcast outlets such as the Internet. There really wasn’t much synergy between MTV and CBS because their audiences were quite different.

So, as of January 1st, Viacom split into two companies: Viacom and CBS. Viacom got Paramount and MTV, and CBS got the rest. (Sumner Redstone is the largest investor and still effectively runs both.) Viacom and CBS still have to wrestle with their own synergy problems, but at least the divisions of each of the two parent companies make more sense.

So, we come to the Good, the Bad and the Ugly. Let’s start with the Ugly: The AOL-Time Warner merger. The less said about that the better, except to note that it was probably the worst merger in U.S. history.

The Good and the Bad are more interesting. My examples are two companies that both sought to bring together content and consumer electronics: Sony (Bad) and Apple (Good.) In 1988, Sony acquired CBS Records, and the following year, it purchased Columbia Pictures from Coca-Cola. The reason for both acquisitions was synergy: Sony was, and still is, one of the world’s largest suppliers of audio and video consumer electronics. The company was still smarting from the years that the movie studios spent trying to get Betamax outlawed. By controlling its own supply of content, Sony could both give itself enormous influence in the media industry and provide itself with a secure supply of material for current and future generations of consumer electronics.

Instead of building synergies, however, Sony’s media acquisitions caused schisms. The consumer electronics divisions wanted to build products that would sell to the greatest possible number of customers. The media side of the company wanted the electronics divisions to put strong limitations on how consumers could copy and distribute their content, in order to battle piracy.

The results can best be seen in Sony’s portable digital audio players. In 2000, virtually all the players on the market supported MP3, which was shunned by the major recording companies because it could be freely copied. Sony’s players addressed the problem by implementing a proprietary compression and security system called ATRAC. The only audio format that Sony’s players supported was ATRAC, so all of a consumer’s MP3 audio files and CDs had to be converted to ATRAC before they could be played on Sony’s players. The conversion software that Sony provided was very hard to use.

In addition, three different divisions of Sony shipped three different lines of digital players. Each line’s features and user interfaces differed from those of the other two. Products changed dramatically from generation to generation, but they all kept the same dependence on the ATRAC format. The result was that Sony, whose Walkman trademark was once synonymous with portable audio, found itself an also-ran to Apple with a miniscule market share. It’s been only a year since Sony started shipping players with MP3 support, and even today they still don’t support Windows Media, Apple FairPlay or any copy-protected audio format other than ATRAC.

Now, Apple. In October 2001, Apple introduced the first iPod. It was considerably more expensive than other portable digital players, but it was much better designed. Apple completely skipped the flash memory generation of audio players and launched the iPod with 5GB of hard disk space for $399. The first model supported MP3, WAV and AIFF formats and had no digital rights management system. Consumers could purchase an iPod and start using it immediately without having to convert anything to a proprietary format.

Through subsequent generations of the iPod, Apple added bigger hard drives, smaller players, color displays and a wide range of prices, but it kept the user interfaces of all the players consistent. Once you know how to use one iPod (the Shuffle excepted,) you know how to use them all.

With the launch of the iTunes store, Apple implemented its own digital rights management system called FairPlay, which uses the AAC audio format. Like ATRAC, FairPlay was proprietary, but FairPlay’s licensing terms were by far the most liberal of any commercial DRM: The same track could be copied to any number of iPods and up to five personal computers simultaneously, and could be recorded to standard audio CDs any number of times.

There were two additional advantages that Apple had over Sony: First, Apple’s iTunes software was dramatically easier to use than Sony’s software, and second, Apple’s Steve Jobs convinced all of the major record companies to sell their songs through iTunes for 99 cents each. For the first time, consumers could legally acquire digital music from all the major labels in high quality at a very reasonable price. The combination of iTunes and iPods was explosive. As of November 2005, iTunes was the seventh largest music retailer in the U.S., ahead of Tower Records but behind Circuit City. And, in the fourth quarter of 2005 alone, Apple sold over 14 million iPods.

Like Sony, Apple adopted its own proprietary DRM format and launched its own music store that only supports that format. So what makes Apple’s synergy good and Sony’s bad? Here are some reasons:

  • In designing the iPod, Apple focused on the needs and wants of consumers, while Sony focused on placating its record labels.

  • Apple didn’t own a record company, so it had no record company’s profits to protect, while Sony’s goal became maximizing record division revenues at the expense of player sales.

  • Apple’s players had a consistent look, feel and user interface, while often the only way to tell that a player had been made by Sony was to look at the label.

  • In launching the iTunes store, Apple was able to convince all the major labels to let it sell their recordings, while Sony’s competitors were always suspicious that Connect was somehow giving Sony Music an unfair advantage.

The lessons of success and failure at achieving positive synergies will continue to be learned. In the latest round of convergence, everyone (wireline and mobile phone companies, cable operators, satellite operators, content providers, consumer electronics companies, infrastructure suppliers, etc.) will be looking for synergies with everyone else. If history is any guide, they won’t find them.

Monday, January 23, 2006

Open Source Creativity

Lately it seems that every mass media company is moving into Internet and mobile video. In general, the big guys are doing what they tried to do in the dot-com “bubble”: Repurpose existing content for the Internet, along with “monetizing” said content. Unfortunately for them, the ideas got ahead of the available technology, and “big media” dalliances in new media largely disappeared after the bubble burst.

Now they’re back at it. CBS is selling episodes of selected series through the Google Video Store. ABC and NBC are selling episodes in the iTunes store. Fox is creating short “mobisodes” of “24” for viewing on mobile phones. Verizon’s Vcast service offers both video downloads and live television from CBS, ABC, MTV, ESPN and more. Sprint’s Power Vision service offers similar content.

All of these companies and services are repackaging existing content. The only thing that they’re doing that’s different is distributing the content through new (for them) channels. However, the media landscape that these companies are in is very different from what it was in the dot-com era. Today, there are blogs, photos, podcasts and vodcasts, almost all of which are free.

Even the best of this self-produced content can’t hold a candle to big media production values, yet listeners and viewers are flocking to them. What’s going on? First, there’s clearly a difference in the form of what’s being produced. Big media is focusing on conventional 30- and 60-minute episodes of television shows and similar productions, while “grassroots” producers are offering everything from three-minute to more than hour-long shows. Brief content works much better for both mobile video and “short attention span” viewers. Rocketboom and Tiki Bar TV are two of the most popular vodcasts on the net, and they’re both less than six minutes long.

However, there’s something more interesting afoot. Grassroots producers use their shows for personal expression, not monetization. In the not-so-distant past, blogs were called diaries. Photo sharing sites like Flickr were called slide shows. Podcasts were what went over the air from college radio stations, and vodcasts were called student films. Originally, all of these things were personal productions that only a handful of people saw. Today, they can reach an audiences of thousands, if not millions.

In general, grassroots producers don’t ask readers or viewers to pay. Many of them get income from Google advertising (in fact, it’s been argued that Google is almost single-handedly financing the blogger community,) but monetization isn’t the primary goal, or even a goal at all. The real goal is personal expression, and almost by definition, that expression is 180 degrees away from what the big media companies have to offer. (Yes, there are exceptions such as “The Daily Show,” but they’re few and far between.)

The grassroots media movement has a lot in common with open source software. Like grassroots media producers, open source software writers generally aren’t interested in making money from their creations. Their software is a personal expression, whether they’re solving a problem or simply creating an application for fun. The quality of open source software varies widely, but the quantity and variety dwarf anything coming out of the commercial software world. Much of it is very good indeed: Linux sparked a revolution that has Microsoft rocking back on its heels in the server business, Apache is far and away the most-used web server, mySQL and PostgreSQL are quickly becoming as powerful and sophisticated as the leading commercial databases, and the Firefox browser is grabbing market share from Microsoft’s Internet Explorer.

Both the grassroots media and open source software movements are driven by the same thing: Personal creativity. And, just as open source software keeps getting better and better, so is grassroots media. A host of blogs are at least as well-written as the best print media, yet offer news and commentary in a fraction of the time of print, broadcasting or cable. Photo sharing sites offer an enormous variety of images that are several orders of magnitude easier to find than slides or prints. Production values of the best podcasts can go toe-to-toe with anything that radio broadcasters and syndicators can do. Vodcasts still need some work, but they’re getting better all the time, and some of them are comparable to commercial cable shows.

My point is this: Just as the commercial software business has been turned upside-down by open source software, so the commercial media business is being turned upside-down by grassroots media. (Ask any newspaper executive what the effect of craigslist has been on their advertising revenues.) The rules of media are changing fundamentally, and the big guys still don’t get it. Repurposing has to be supplanted by original, highly creative programming that’s anathema to big media companies. Solving this conundrum is the greatest challenge that mass media faces, and perhaps the greatest challenge in its history.

Friday, January 20, 2006

When is HD QD?

According to Video Business magazine, the companies in the Advanced Access Content System (AACS) consortium, the group defining the digital rights management system for Blu-Ray and HD DVD players, decided this week to make consumers with analog HD monitors and receivers watch HD movies in “quarter-def.”

Here’s the story: Blue-laser players are capable of outputting 1920x1080 images to television monitors equipped to display them. However, most HD monitors built before the end of 2004 don’t have digital inputs, so they use analog component video connections. Video signals that are encrypted for copy protection have to be decrypted in order to be displayed through component video connections. The decrypted video can then be recorded in analog form, reconverted to digital and distributed freely. This is the “analog hole” that the film and television industries are concerned about.

Earlier this week, the AACS consortium came up with a way to make the analog hole smaller, without plugging it entirely. Each publisher will set a flag on each disc. If the flag is turned off, the disc can be viewed over an analog connection at the full resolution that the monitor is capable of. However, if the flag is turned on, any video sent to a monitor or other device through an analog connection must be down-converted from 1920x1080 to 960x540—exactly one-quarter the resolution of the original HD signal.

Supporters of this scheme (called “Image Constraint”) say that:

  1. It’ll only affect owners of “first-generation” HD devices, and

  2. Most viewers can’t tell the difference between HD and quarter-D anyway.

Concerning point number 1, there are a lot of people who have HD monitors and televisions without digital inputs. I have three HD monitors purchased in 2002 and 2004, none of which have digital inputs. All of my receivers are subject to “Image Constraint.” As for point number 2, if the argument is true (viewer’s can’t tell the difference,) WHY ARE WE BOTHERING WITH HD IN THE FIRST PLACE? 960 x 540 isn’t much better than the 720 x 480 resolution used in today’s DVD players.

Let me make this clear: AACS will be broken. It most likely will be broken outside the U.S. and outside the jurisdiction of U.S. laws. Once it is broken, it will take approximately 30 milliseconds for bootleggers in Eastern Europe and Asia to start circumventing it. Making U.S. consumers settle for HD that’s actually QD will do nothing to stop piracy. All it will do is add to the confusion surrounding the idiotic release of two incompatible HD formats. Why would anyone buy either HD DVD or Blu-Ray if what they’re going to get is no better than what they already have?

We have an entrenched media industry that believes that all its customers are potential thieves, and a consumer electronics industry that is desperate for products that will bolster its profit margins against the phalanx of Chinese manufacturers. Neither side seems to care whatsoever about its customers. However, at the end of the day, it’s those customers who will decide whether or not to buy in. The entire motion picture industry is now living on revenues from home video sales, and if they jeopardize those revenues in the HD transition, the effect on their businesses will be immediate and devastating. For consumers, the message is clear: Do nothing.

Monday, January 09, 2006

Another Brick in the (Google) Wall

Here’s a story that passed under the radar screen (or at least under mine.) In last week’s Multichannel News (subscription required,) a story ran about Current Communications Group, a company planning to offer video, high-speed data and VoIP services over powerlines. That in itself isn’t big news—lots of companies are investing in broadband-over-powerline technology. What is news is that Current’s two largest investors are Liberty Media and Google. Liberty Media is the company founded and run by John Malone, who also founded and ran TCI, the largest cable operator in the U.S. at the time, for many years. Google is, of course, Google. They’re rumored to have invested $100 million in Current.

$100 million is a comparative drop in the bucket to Google, but it’s a big investment. Current vice president Jim Dondero was quoted as saying: “We certainly intend to leverage the Google brand in our offering, and it will certainly be a part of our offer.” He sidestepped the question of whether or not the broadband service will itself be branded with the Google name, but that’s an obvious option.

This deal inserts another piece of the puzzle that I discussed here. Executives at the two largest telephone companies, AT&T and Verizon, have both gone on the record saying that they want to force companies such as Yahoo!, Google and MSN to pay for access to their customers. If the telcos get paid, the cable operators are certainly going to demand the same fees.

Google has been buying thousands of miles of “dark fiber,” fiber optic networks built during the dot-com boom that are unused. They’re also in the WiFi service provider business in Mountain View, CA, and they’re bidding for the rights to build and run a citywide service in San Francisco. With broadband-over-powerline, a “bypass” scenario begins to take shape.

Google could use its fiber network to make itself a peer to the telcos (AT&T and Verizon control the vast majority of the internet backbone.) In peering arrangements, no money usually changes hands, so Google would get access to the backbone without paying the telcos. Google’s fiber probably goes all the way into many cities. From that point, Google could connect directly to customers through either or both WiFi (and perhaps WiMAX) and broadband-over-powerlines. In short, Google could almost completely bypass the local telephone and cable systems, and thus not be subject to the customer access charges currently proposed. In addition, the network would generate revenue for Google from subscriptions. It would take years to pay off the capital costs of the network, but it may very well be worth it.

One other thing: Google won’t have to bear all the costs itself. John Malone has been looking for ways to get back into the cable business ever since AT&T acquired TCI in 1998. Both personally and with Liberty Media, he’s been acquiring cable systems in Europe. With broadband-over-powerline, Malone could build a communications powerhouse (no pun intended) to rival Comcast. With Google’s brand, he’d have instant credibility, and both Google and Liberty Media have the financial strength to take on a lot of debt in order to build out the network.

And, by the way, there’s almost nothing to build out. Powerlines are strung to virtually every home and business. WiFi and WiMAX networks are very cost-efficient to deploy and maintain. Google’s fiber network can handle backhaul of the local connections to the Internet backbone. In short, this network would be very fast to deploy and extremely cost-efficient.

Both Google’s WiFi experiments and broadband-over-powerline investments are probably trial balloons at this point, but they could represent the first steps of a major push into communications.  For companies like AT&T and Verizon, which are both investing billions of dollars to upgrade their local networks with fiber, a Google/Liberty Media market entry could be very bad news indeed.    

Saturday, January 07, 2006

Yahoo! and Google: Two Peas in an iPod?

Yesterday (Friday), Yahoo! and Google announced new products and services at their respective CES keynote presentations. Yahoo brought in Tom Cruise, while Google countered with Robin Williams. Yahoo’s announcements got much less coverage than Google’s, but what I find so interesting is that both companies essentially introduced the same things.

Yahoo announced:

  • Yahoo Go Mobile, which will enable mobile phones to access Yahoo’s most important services without using a web browser. (Yahoo’s first major hardware partner is Nokia.)

  • Yahoo Go TV,  which will extend the reach of Yahoo’s services to televisions connected to PC-based media centers (such as Windows Media Center and Intel Viiv-based PCs.)

  • Yahoo Go Desktop, which will enable consumers to access all their information through a suite of applications that run on their computers’ desktops. The first two components will be the Yahoo Widget Engine (formerly Konfabulator) and the Yahoo Go Desktop Dashboard, a “central control center” for accessing Yahoo applications without a browser.

Google announced:

  • Mobile Google,” where Motorola will install in selected new phones a Google icon that, when clicked, takes the user directly to Google for searches and other services.

  • Google Video on Viiv-Based PCs, which will enable users of computers built on Intel’s Viiv media platform to access Google services on their televisions and portable devices in the home.

  • Google Video Store, an online marketplace where content providers can sell, rent or give away their videos. Anyone can upload videos to the store. When customers buy or rent the videos, the content provider gets the revenue, less a transaction fee taken by Google.

  • Google Pack, a free downloadable suite of PC applications from Google and third-party developers, including all of Google’s desktop software applications and browser toolbars, Adobe’s Acrobat Reader 6, antivirus and antispyware software, RealNetworks’ media player and the Trillian instant messaging client.

In fact, about the only significant difference between the two sets of announcements is the Google Video Store, which is similar to Yahoo’s existing video search service.

So, are the two companies growing into clones of each other? Not really. Google’s strength is technology, an outgrowth of the experience and philosophy of Sergei Brin and Larry Page, the company’s two founders. Yahoo’s strength is media, exemplified by Chairman and CEO Terry Semel, who spent most of his career working for (and running) Warner Brothers’ motion picture business.

Google drew first blood with its automated Internet indexing system that enabled the company to provide search results from many times more websites and documents than Yahoo. When Terry Semel was hired by Yahoo, he quickly diversified his company’s services to put far more emphasis on (and resources into) aggregating media, as well as producing its own original media. To date, that’s been a very successful strategy, but now Google wants to do to Yahoo Media what it did to Yahoo Search.

I don’t think that Google is going to have much success in unseating Yahoo as the dominant media portal on the Internet. The reason is mindset rather than technology. Terry Semel and much of the management team he’s recruited (including Lloyd Braun, formerly President of ABC Television) come from the entertainment business. They know how the business works, the power players and the rules of success. Google, on the other hand, comes from technology. The company’s philosophy is to use technology to solve almost any problem.

Technology companies usually compete on the basis of who has the best technology (patent battles not withstanding,) while the entertainment business tends to adopt new technologies very slowly unless acted upon by an outside force (i.e., Sony, Toshiba, Napster, Apple, etc.). Encroach on its space too quickly, and you’re likely to get sued or legislated out of business.

Entertainment is one of the most intensely personal relationship-dependent businesses around. Yahoo moved its entire media operation to Santa Monica in order to be closer to the industry’s producers and distributors. I’d never count Google out, but the way that the entertainment business works will likely be anathema to Google’s management, as it already has been to Microsoft.

Google is likely to make a very nice business out of its new media ventures, but it’s unlikely to lead the pack. I’d put my bet on Yahoo for this one.

Google Video: The Rest of the Story

Yesterday, Google announced its Google Video online store, with a host of content suppliers including CBS and the NBA. Lost in much of the excitement was an announcement and a non-announcement, both of which could be very significant.

The announcement was a partnership with DivX to use its format as Google’s standard for downloading video files to consumers. The choice of DivX is surprising to some, but it shouldn’t be. Apple (Quicktime) and RealNetworks (RealVideo) are both competitors, and Microsoft (Windows Media) is an enemy. In addition, DivX, based on MPEG-4’s H.264/AVC codec, has very efficient compression and display quality at various bitrates that can go head-to-head with any of the “big three” formats. Adobe/Macromedia’s Flash Video could have been an alternate choice, but it doesn’t have an integral Digital Rights Management (DRM) system for protecting content.

However, an important capability of DivX wasn’t discussed. The current version of DivX offers a set of features very close to those of DVDs. For example, DivX file authors can add interactivity to their videos, enabling them to create menu structures much like DVDs. DivX also supports multi-language subtitles, multiple audio tracks, chapter marks and  metadata, just like DVDs. However, instead of requiring the overhead of PC DVD players, these functions can be used in lightweight DivX players. They will also be supported by the free Google Video Player.

By taking advantage of the DivX advanced features, content creators can add enormous functionality to their videos. An excellent demo can be downloaded here (you’ll need the DivX 6 player, which is free, to play it and use the interactive features.) One potential problem is that the authoring tools for DivX are in beta and are very rudimentary, but I suspect that’s a problem that DivX and Google could solve fairly quickly.

The non-announcement concerns the DRM system that Google’s implementing. Google’s executives dodged questions about how their DRM system will work, except to say that it won’t permit DRM-protected files to be played by portable players unless the content provider gives permission. DivX has its own DRM system, and Google may be using that “as is,” licensing the code from DivX to make its own proprietary system, or writing its own system from scratch.

In any case, Google will be introducing one more DRM to the world that’s likely to be incompatible with other DRM schemes. Yet another DRM system means yet another headache for content providers and third-party developers.

Clearly, the big winner in this deal is DivX. It’ll gain enormous credibility from its partnership with Google. Also, It’ll be very interesting to see if and/or when Google plays the interactivity card, which will raise the stakes vs. Yahoo! and Microsoft. I expect Google to release the details of its DRM when the Google Video store opens. Until then, all we can do is speculate.

Friday, January 06, 2006

The Open Set-Top Box is (Slowly) Coming

Several announcements were made at CES this week that suggest that third-party cable set-top boxes (STBs) will start shipping, albeit in very small quantities, this year. Yesterday (Thursday,) CableLabs, the central R&D organization for the cable industry, held a press conference featuring some very heavy hitters, including Brian Roberts, the Chairman and CEO of Comcast, Glenn Britt, who holds the same title as Roberts at Time Warner Cable, Thomas Rutledge, the COO of Cablevision, Neil Smit, President and CEO of Charter, and Robert Miron, the Chairman and CEO of Advance/Newhouse Communications. Including Cox, which made a separate announcement, these companies have more than 53 million subscribers (as of March 2005.) Also participating were the Presidents of CableLabs, the NCTA (National Cable & Telecommunications Association—the cable industry’s largest trade group,) and LG Electronics.

All of these companies announced support for OCAP, the OpenCable Application Platform. OCAP is the specification for middleware connecting the applications running on an intelligent STB with the services provided by cable operations. OCAP provides a uniform API (application programming interface) that application programmers and OS developers can write their code to in order to connect to the applications and services provided by the cable operator.

For example, STB manufacturers or third-party developers could provide their own interactive program guides that show program names, times, descriptions and channels. DVRs can use this same information to automatically record programs for later programs, or even to automatically record selected shows whenever they’re broadcast, without user intervention (like TiVo’s Season Pass feature.) OCAP also supports third-party applications that may combine cable programs and data with Internet-based content, including interactive television, e-commerce and games.

Less widely reported, but very important, was a key announcement about DCAS (downloadable conditional access system,) a cable system-independent security system that downloads the cable operator’s specific security scheme to a STB. DCAS will supersede CableCARD, which is the current security solution for third-party STBs and television receivers. Every cable operator must supply consumers with CableCARDs that are compatible with their specific security scheme, and a CableCARD for one cable operator may not work on another operator’s network.

LG Electronics is the second third-party STB manufacturer to commit to DCAS (Samsung adopted it late last year.) However, as I discussed earlier, it makes little sense for future STBs to implement CableCARD if that technology starts to go away late next year. We may get DCAS-ready boxes with CableCARD slots as first-generation products, with CableCARD deleted to save manufacturing costs as soon as DCAS is released in its final form.

Prior to the CableLabs press conference, Comcast announced that it would purchase 250,000 OCAP-compatible set-top DVRs from Panasonic and 200,000 STBs without DVR capabilities from Samsung. Even if all those boxes are deployed, they represent a drop in the bucket compared to Comcast’s approximately 24 million subscribers. In fact, they really represent a test (both technology and market) before Comcast commits to a wide-scale rollout.

Comcast will initially deploy its OCAP boxes in Philadelphia (Comcast’s home,) Boston and Union, N.J. (very close to Philly,) and Denver (home of CableLabs.) Time Warner will upgrade its plant & equipment to support OCAP in five markets, the largest of which (by far) is New York City. Advance/Newhouse will “enable” OCAP devices in Indianapolis (upgrading plant & equipment while not committing to deployment,) and Charter said only that it would deploy OCAP in “selected” markets in 2006.

Now, these announcements could, and probably are intended to, put pressure on the FCC to extend or abandon its timetable for requiring the largest cable systems to replace their existing STBs with CableCARD-compatible ones. Cable operators want to move to a new generation of STBs on their timetable, not the FCC’s, and they don’t want to discard hundreds of million of dollars worth of perfectly good equipment.

Not to “bury the lead,” but TiVo also announced its forthcoming Series 3 high-definition DVR, which will support HD with two Version 1.0 or one Version 2.0 CableCARDs. TiVo vociferously criticized the cable operators’ slow implementation and development of CableCARDs in a letter to the FCC dated January 16, 2005. As currently planned, the Series 3 DVR will use its own middleware, not OCAP, and won’t support DCAS either, leaving consumers with a hard choice: Buy a Series 3 that may be obsolete in 18 months, or wait a bit for OCAP- (and, potentially, DCAS-) compatible DVRs from a variety of manufacturers. TiVo is probably going to have to redesign the Series 3 to support these standards or risk losing whatever share of the retail market it currently has.

Very few cable subscribers are going to get their hands on OCAP-compatible STBs this year, but that could change in a big way in 2007, especially once DCAS is officially released. The message to all the consumer electronics companies thinking about connecting their products to cable networks is: Adapt or die.