How fear of change is paralyzing political action

I very rarely write about politics, but political movements in the U.S. have a huge effect on the economy, and that's something that I cover. In my opinion, both the right and left wings of U.S. politics espouse very different philosophies but are being driven by the same thing: Fear of change.

The right wing, especially the Tea Party, wants to go back to a pre-New Deal period where the Federal Government's role is dramatically reduced and focuses primarily on national defense. The left wing wants to increase the social safety net. The problem for both wings is that they don't want to face, let alone deal with, the dramatic changes in the U.S. and the world over the last two decades. Here are a few examples:

• In the Reagan years, the "glory days" of the right wing, the U.S. still had a robust manufacturing base. Today, the U.S. manufacturing base is thoroughly hollowed out, and our country is dependent on manufacturing in China, Taiwan, Mexico and other countries. The manufacturing jobs that we once had have largely been replaced with lower-wage service jobs or are gone entirely. High tech industries haven't come up with replacements for steel, cars, etc., and most high tech manufacturing has gone overseas.
• Our primary and secondary public schools are falling further and further behind schools in other countries, but the left wing sees only one solution: Reform the existing schools. The problem is that neither administrators nor teachers are willing to make changes that jeopardize their jobs or work rules. The solution is robust competition from outside the existing school systems, in the same way that effective competition weeds out ineptly managed companies and makes the survivors better.
• Our financial institutions are no longer trustworthy. The financial meltdown demonstrated that the management of most of the top consumer, commercial and investment banks was (and still is) incompetent. Our securities exchanges are dominated by programmed traders that buy and hold securities for milliseconds. Humans are no longer in control of the process, as last year's "flash crash" illustrated.
• The Internet has made talent and capital global. High-quality talent in the U.S. has to compete with talent from around the world, most of which is willing to work for less money. Similarly, capital flows around the world to where it can get the best return; it's no longer limited to a single country or continent. While the U.S. is still seen as the "go-to" place for entrepreneurs, scientists and engineers around the world, it's losing its appeal as other countries grow.
• Our infrastructure (roads, bridges, sewers, water and gas lines) is deteriorating at a dramatic rate. We're nearing the point where we can no longer maintain much of our existing infrastructure--it will have to be replaced.

The U.S. doesn't have the money to maintain its existing social safety net. Nor does it have the money to maintain its military at its current level. It certainly can't do both while fixing its educational system and infrastructure, and it can't rebuild its financial system on a foundation of quicksand. If unemployment levels out at 8% rather than 5%, where does the money that the formerly employed had been paying in taxes come from? If property values level off at 20% to 30% below where they were before the Great Recession, how will our schools and local governments compensate for decreased property tax revenues?

We're going to have to radically change our spending priorities. This is a daunting challenge, and it brings me back to my original point: Rather than face the real challenges, the right wing wants to go back to a time before the challenges existed, and the left wing wants to keep spending money in the hope that a miracle will occur. Both sides are afraid of dealing with where change has taken us today, and will take us in the future. Until both sides get over their fear and start dealing with the real issues, the U.S. political system will be a perfect example of "sound and fury, signifying nothing."

Cloning Silicon Valley is a lot harder than it looks

For decades, cities and countries around the world have tried to duplicate Silicon Valley. With very few exceptions, these Silicon Valley "clones" have failed. The most common reasons given for the failures include lack of venture capital and lack of university support, but there are a number of other reasons why good intentions so often go awry:

• Technology and business centers usually grow organically, as an outgrowth of existing universities or businesses. "Artificial Trees" are "Silicon Valley" clones that are built in areas with no natural growth factors. They're a lot like farms that are built in the middle of the desert: Everything they need has to be imported. As soon as the supply of any essential ingredients (talent, technology or money) tapers off, these "Artificial Trees" die off.
• In some areas, startups get funded on the basis of political clout and power, not merit. Entrepreneurs without connections don't get funded, and if they can't make the necessary connections, they go under. It becomes clear fairly quickly that the startups that got funding did so for the wrong reasons, and the available investment capital dries up.
• Some Silicon Valley "clones" get started with verbal commitments from government or private investors to make funding available. As time goes on, however, those "investors" don't actually make any investments, or the few that they do make are small and ineffectual.
• In some areas, a handful of people have designated themselves as the "go-to" people for creating and supporting the startup community. If other investors or organizers that haven't agreed to work with the "go-to" people try to offer support to the community, the established order works to push them out or minimize their influence. In addition, the startup community defines itself by the mindset of its "go-to" people and rejects ideas and participants that don't fit.
• Sometimes, the "go-to" people are well-meaning but ineffective. The head of a startup development organization I interviewed late last year in Chicago said that his group had spent seven years trying to get the city's largest investors (family foundations and investors affiliated with the Chicago Merchantile Exchange) to get involved with venture investment, especially A and B rounds, with very little success. If you try doing something for seven years and keep failing, you're doing something wrong.
• Startups struggle in areas where there's a great deal of competition for talent from established companies. For example, New York City startups have found it very difficult to compete for technical talent with investment banks and other financial companies that pay enormous salaries and bonuses.
• If entrepreneurs focus on the wrong reasons for doing startups, they're likely to fail. For example, if an entreprenur wants to start a business in order to get rich, without recognizing the high risk of failure and tremendous effort involved in building their business, they're likely to give up as soon as running their business becomes too difficult or expensive.
• If the community puts a high price on failure, either social or financial, startups aren't likely to flourish. In the U.S., 90% of all small businesses fail, and 70% of startups funded by professional venture capitalists fail, so it's essential that entrepreneurs have the ability to fail and try again without stigma or crippling personal penalties.

There are so many ways that a venture community can fail that it's amazing when one succeeds.  There's no single key to success--there are many.

TWiT, Revision 3 and...Keith Olbermann? Television networks on the cheap

Update, February 8, 2011: In a teleconference this morning, Keith Olbermann and Current TV announced that Olbermann will do a nightly news and commentary show on Current beginning in Spring 2011, become the company's Chief News Officer and have an equity stake in Current Media.

Update, February 2, 2011: I fixed all of the capitalization errors for Leo Laporte's name (it's Laporte, not LaPorte, although he's known as "The Door" to his friends). In addition, NewTeeVee reported today that Revision3 reached profitability in the last quarter of 2010 and claims that it's the number one "over the top" television network in terms of viewers.

Last week, TWiT Network owner Leo Laporte signed a lease to move his operations from his farmhouse in Petaluma, CA to a 9,400 square foot building formerly occupied by the audio software company Bias. TWiT will turn it into multiple television studios, a radio studio and business offices. The TWiT Network is entirely Internet-based, although Laporte also does conventional radio and television shows for other outlets.

TWiT didn't arise out of a vacuum. Laporte was one of the central figures in the creation of ZDTV, which originally started by producing programming for MSNBC and became a 24-hour cable network focused on technology news and information in 1998. ZDTV immediately ran into problems getting (and paying for) cable carriage, as well as advertising, and in 2000, it sold out to Paul Allen's Vulcan Ventures and changed its name to TechTV.

Allen and the programming team he put in place at TechTV tried a variety of programming approaches, but nothing worked to make the business profitable (and no one approach stayed in place long enough to build and sustain an audience). In 2004, Allen sold TechTV to Comcast, which merged the channel with its G4 games-oriented cable network and renamed or eliminated most of TechTV's programs. Today, only two of TechTV's on-air hosts remains at G4.

Laporte didn't make the move to G4; he stayed in Northern California and started the "This Week in Tech" podcast, from which TWiT gets its name. Laporte added more podcasts, then began simulcasting some of the podcasts with video, and eventually added some video-only shows. Last August, the Los Angeles Times reported that TWiT's revenues were $2.25 million in 2009 and were on track to reach $3 million in 2010, with 10 full-time employees and 30 to 40 contractors. Not a huge business, but profitable, according to LaPorte.

One key to TWiT's success is that Laporte has scaled its growth to fit its revenues. He still runs it out of his Petaluma farmhouse, and he's kept the operation "bare-bones". Even with the move to a larger facility and Laporte's intention to eventually offer programming 24/7, it's still operating on a much smaller scale than ZDTV or TechTV ever did, and that's essential to its success.

Another ZDTV veteran, Jim Louderback, runs Revision3, a spin-off of Digg (which was co-founded by yet another TechTV survivor, Kevin Rose). Revision3 is also an Internet-based news and entertainment video network, and in addition to his duties there, Louderback is a columnist for Advertising Age. He recently wrote about cable network WealthTV's decision to create a channel for the Roku set-top box, and in a follow-up article, suggested that cable networks that have been unable to get much carriage from U.S. cable, IPTV and satellite operators could follow WealthTV and create their own over-the-top Internet video channels.

The problem for these cable networks (Louderback calls them "zombies") is that the can't simply move their operations to the Internet and hope for a better outcome. Instead, they have to scale their operations to the revenues that they can generate from the Internet. They don't have to pay for carriage, but they're going to have an uphill climb to earn any significant subscription revenue. (TWiT gets the vast majority of its revenue from advertising.) That means that they're going to have to dramatically lower both their costs and their expectations.

That brings us to Keith Olbermann. Keith Olbermann? U.S. readers probably know that Olbermann anchored the most popular program on MSNBC, "Countdown with Keith Olbermann", until last Friday. Initially, it was thought that NBC, the owner of MSNBC, fired Olbermann, or that Comcast, the soon-to-be owner of NBC Universal, had played a role in the decision. However, it now appears that Olbermann wanted to leave the network and NBC wanted to get rid of him, so they worked out a mutually-convenient settlement.

Olbermann spent eight years at MSNBC, but he's bounced around among many networks for years, including CNN, ESPN, Fox Sports and a short previous stint at MSNBC. The only option he's had over the years has been to go to work for a different network, but the Internet offers him another option. The Huffington Post and The Daily Beast have both built large, profitable audiences on the Internet from nothing in just a few years (The Huffington Post, in less than six years, and a little over two years for The Daily Beast). Olbermann could create his own Internet video network, operating at low cost (like TWiT) while providing a forum for a variety of outside contributors (like the Huffington Post). Whether it would make enough money to keep Olbermann interested is a separate issue, but it would enable him to work as he wants without answering to a phalanx of corporate management.

The wheels keep turning: Dan Rather went to HDNet and Conan went to TBS. Could Olbermann go to the Internet?

Vid.ly: Universal video for the masses

Earlier today, Encoding.com announced a new service, Vid.ly, that dramatically simplifies the distribution of video content to just about any device. To use Vid.ly (currently in invitation-only beta), you simply submit a video file on an FTP server or in the cloud, or upload a file from your local system. Vid.ly converts the file into a variety of different formats and codecs, assigns a single universal URL to the file, and then serves the appropriate version based on the device and browser that you use. For example, if you're using an iOS device, Vid.ly will send an H.264 file with resolution appropriate to the device. If you're viewing the video in Google's Chrome, it will send a WebM file. Using a Nokia phone? No problem--Vid.ly will send a video file that's compatible with the device. What about Internet Explorer? It'll send a Flash file.

This is an incredibly powerful offering. You no longer have to detect the kind of device, browser, and codecs installed on a target device, nor do you have to come up with an "if...then" scheme that chooses among various formats, codecs and resolutions. Vid.ly does all the work for you.

I uploaded a video that Barnes & Noble produced to introduce the Nook Color (I used portions of it in one of my Feldman File videoblogs last year.) I originally downloaded the video from YouTube as a 720P H.264 file, and then uploaded it to Vid.ly. If you want to see it for yourself, go to http://vid.ly/9d4t6p.

Update, January 25, 2011: In addition to the link above, I embedded some code supplied by Vid.ly that was supposed to do "universal" browser detection. The code worked fine in Firefox, my usual browser, but caused major layout changes in Chrome and completely broke in Internet Explorer 8, so I've removed it. They've clearly still got some bugs to work out.

Is there too much emphasis on scalable startups?

Enterpreneurs, especially technology-based ones, are encouraged to "think big" and build startups that have the potential to grow to an enormous size. Steve Blank, the father of the Customer Development process, calls these types of business "scalable startups". As he puts it, "A 'scalable startup' takes an innovative idea and searches for a scalable and repeatable business model that will turn it into a high growth, profitable company. Not just big but huge. It does that by entering a large market and taking share away from incumbents or by creating a new market and growing it rapidly."

By definition (and as Steve says in the very next paragraph), "A scalable startup typically requires external 'risk' capital to create market demand and scale." This is the very definition of the role of conventional venture capital: Invest a large amount of money in a startup, with the hope that the business will grow big enough to exit, either through an acquisition and IPO, and pay the investors a huge multiple on their original investment.

Steve calls the alternative to a scalable startup a "small business", while venture capitalists have a more derogatory name: "Lifestyle business". These businesses don't have the potential to become huge (with equally huge valuations), and are therefore bad. Or are they?

Somewhere between a "mom & pop" business like a local hardware store or restaurant and, say, Facebook, there are a lot of businesses that have the potential to grow into valuable companies that can be sold at a good multiple, but don't have the potential to be "huge". In software, there are development tools, utilities, and vertical applications that can be significant businesses. On the Internet, there are countless online services that could grow into significant businesses and be acquired by larger companies. These opportunities are right in the wheelhouse of angel investors.

Consider a startup that an angel invests $100,000 in and ends up being acquired at a 20-to-1 multiple. The angel walks away with $2 million. To a venture capital firm, that's not even worth wasting time on, but it's a good return for an angel. Compare that to a VC that puts in $1 million to get a $20 million return. The VC's financial exposure is ten times as much, and the probability of getting back $20 million is lower than that of the angel getting back $2 million.

Obviously, any angel would give their right arm to get the return that Peter Thiel got from Facebook ($500,000 invested for a $1.7 billion valuation of his share of the company as of last November, and undoubtedly, more now.) However, the odds of that kind of return are incredibly long, even for the best VCs. The new model is smaller investments in more companies at earlier stages. The larger number of investments, and their small size relative to historical VC investments, compensates for the higher risk of seed investments, as well as lower absolute rewards if and when the companies exit.

To be clear, a startup that has no hope of an exit with a 10X to 20X return to investors won't get funded by angels, let alone VCs. Those businesses have to bootstrap and/or call on "friends & family" for financing. However, there are a lot of "non-huge" startups that can still exit with a good return on investment, and dismissing them as "lifestyle businesses" means closing off a lot of good opportunities to make money.

Amazon's confusing self-publishing options

Tim O'Reilly just tweeted about Amazon's new Kindle Direct Publishing (KDP) program. This program enables authors to self-publish and have their eBook titles sold by Amazon. Authors are likely to be confused by Amazon's self-publishing options, for these reasons:

First, there are two royalty rates in the KDP program: 35% and 70% of the list price. To get the 70% rate, you have to give Amazon an exclusive on the eBook versions of your titles (you're allowed to sell the eBooks on your own website, but priced no lower than Amazon's price.) You also have to price the eBooks at least 20% less than the least-expensive print version of the same titles. In addition, you must support all the features that Amazon enables with the Kindle (text-to-speech, book sharing, etc.). If you fail to do any of these things (or don't meet other qualifications), Amazon will pay you on the 35% royalty schedule. Even with the 35% royalty, you still have to give Amazon "most favored nation" status on pricing--you can't sell eBook or print versions of your titles anywhere at a price lower than Amazon's price.

In other words, unless you give Amazon an exclusive and monitor all of your resellers daily in order to keep Amazon's list price the lowest, you could find yourself getting a 35% royalty with no recourse. Not such a great deal if you had expected to get 70%.

Another area of confusion is that Amazon has operated a self-publishing business, CreateSpace, for years. What if you want to distribute your title both in print and as an eBook? You have to work with and enter into separate agreements with both Kindle Direct Publishing and CreateSpace. What if you'd like to take advantage of the promotional packages and design services available from CreateSpace for your eBook? Too bad--CreateSpace only works with print versions, and Kindle Direct Publishing doesn't offer those services. Why aren't both programs unified in a single self-publishing program for eBooks and print? Ask Amazon, because it certainly doesn't make any sense to an outside observer.

I suspect that as more word gets out about the "gotchas" and limitations of Kindle Direct Publishing, publishers like Tim will have less and less to worry about.

ivi TV could be "off the air" soon

Yesterday, a Federal judge in Seattle dismissed a suit filed by ivi TV, the company that sent programming from broadcast stations in New York, Seattle, Los Angeles, Chicago and other markets over the Internet without permission. The court ruled that ivi improperly filed the case in Seattle to avoid being sued by broadcasters and networks in New York.

FilmOn, which followed ivi into the U.S. market, was enjoined from retransmitting most U.S. broadcast networks last year. The Seattle lawsuit was the only thing preventing the broadcast stations and networks from demanding the same relief from ivi. Now that the way is clear for a trial in New York, ivi could be enjoined from broadcasting most of its stations and networks in as little as a week.

Ivi can still argue that the U.S. Copyright Office gives it the right to retransmit broadcast signals, but most of its subscribers will drop the service while the arguments go on. It's unlikely that ivi has the financial resources to fight a drawn-out court battle, so the Seattle court's decision is likely to be the beginning of the end for ivi.

Does Comcast-NBC Universal matter?

Now that both the U.S. Federal Communications Commission and Justice Department have approved Comcast's acquisition of 51% of NBC Universal, observers of the deal have broken into two camps:

1. The deal will benefit consumers (this camp is very small)
2. The deal will concentrate power and harm consumers (most observers fall into this camp)

The FCC and Justice Department have imposed some conditions on Comcast--for example, it can keep its ownership share of Hulu but can't exercise any management control, it has to make NBC Universal's cable channels and movie content available on an equal basis to all "bona fide" competitors (the courts may have to define what a "bona fide" competitor is), and it has to unbundle its high-speed Internet service so that consumers can purchase it without buying Comcast's cable or telephone service. These conditions go nowhere as far as some of the opponents of the deal wanted, but let's take them as a given.

Now that the deal is done, I find myself in a third camp--the "It doesn't matter" camp. At the end of the day, I think that this deal is going to harm Comcast more than anyone else. Here's why:

• Comcast is getting control of the NBC television network after years of mismanagement that have driven it into fourth place out of four major commercial broadcast networks in the U.S. The broadcast networks' share of the television audience has been shrinking for years, so even if Comcast manages to dramatically improve NBC's programming, it's still an asset with a declining value over time.
• If Comcast tries to move NBC's premier sports programming (primarily the Olympics and NFL football) to cable, NBC's affiliates will go to the U.S. Congress and FCC to force Comcast to prevent the move.
• Universal Pictures has been floundering without direction for years. Comcast will be the studio's sixth owner in 20 years (MCA, Panasonic, Seagram's, Vivendi and General Electric). The studio has been in the "second tier" of the Big 6 U.S. movie studios since its game of ownership "hot potato" started in 1990. It's unlikely that Comcast is going to bring anything to Universal that will change the situation.
• Comcast is acquiring a strong set of cable channels, but it can't deny them to its IPTV or satellite competitors.
• Comcast can't shut down Hulu or turn it into a "TV Everywhere" service.
• Comcast faces the same problem that the last four owners of Universal didn't deal with: What should it do with its theme parks? Panasonic, Seagram's, Vivendi and GE didn't want to be in the theme park business, but they didn't do anything about it. Now, Comcast has to decide whether to invest in the parks or sell them off.

In short, with the exception of the cable networks, which Comcast will effectively no longer have to pay to carry, the company has acquired control of a bunch of problems with questionable solutions. NBC Universal's problems are going to further divert the focus of Comcast's management, which is dealing with a loss of subscribers to IPTV and satellite service providers, and the rise of over-the-top Internet video as a viable competitor to its cable services. (To date, Comcast's primary reaction has been closing its eyes and hoping that the problems go away, but that response won't work for much longer.)

I'd be willing to lay odds that within five years, Comcast will either divest itself of everything but NBC Universal's cable channels, or failing that, will divest the entire company to another acquirer who's foolhardy enough to think that it can turn things around.

U.S. video rentals from kiosks now exceed rentals from retail stores

According to the NPD Group, in Q3 2010, rentals of DVDs and Blu-Ray discs from kiosks (primarily Redbox) exceeded those from retail stores (including Blockbuster) for the first time. Netflix and other subscription services accounted for 41% of all video rentals, while kiosks accounted for 31%, and in-store rentals accounted for 27%. Year-to-year, kiosk rentals increased 10%, subscription services increased 2%, and in-store rentals declined 13%.

Keep in mind that the numbers reported by NPD Group only cover rental of physical media; if streaming video and digital downloads were included in the figures, retail's share of video rentals would be even lower.

This news comes at the same time that Blockbuster received a two-week extension from the U.S. Bankruptcy Court to file a reorganization plan and hire a new CEO. The Dallas Morning News reports that Blockbuster is looking for as much as $250 million in additional financing in order to exit from bankruptcy. Bloomberg Television is reporting that some Blockbuster creditors are balking at putting more money into the company and are suggesting that the company liquidate.

In any event, Blockbuster's retail locations are an endangered species. For the company to survive, it has to increase its presence in the kiosk segment and build a viable online business.

Will 2011 be the "tipping point" for over-the-top video?

Ty Braswell wrote a thought-provoking post for VentureBeat, calling on his past experience as a music industry executive to suggest that the same dynamics that overturned the conventional order in the music business are happening in video:

• Viewers now have easy access over the Internet to much the same content that was previously only available from cable, satellite and IPTV service providers
• Convenience (for example, the ability to start watching a movie on your iPad, leave your house and pick up where you left off on your iPhone, and then come home and finish watching the movie on your HDTV) is driving consumer decisions
• Service providers are raising prices, even while they're facing unprecedented competition from over-the-top video services

There is one big difference between the music industry's situation and that of the video industry: The music industry was decimated by completely free services such as Napster and P2P networks before Apple launched iTunes, while video content producers are still (relatively) healthy. The same formula that Apple came up with for iTunes in the music business is being applied to video successfully by Netflix, Amazon, and, to a lesser extent, Apple itself. There's money to be made, but who makes the money is shifting from the service providers to the over-the-top distributors and content providers.

Braswell gives the example of ESPN, which typically charges $4 per month per cable subscriber. What if millions of consumers were willing to pay $12/month to ESPN if they could get it wherever they want, without a cable subscription? ESPN would be way ahead, even if 30% or 40% of the gross revenues went to Netflix, Amazon or Apple, and those companies handled distribution and billing.

I'm not a big sports fan, but I'd gladly spend $10/month for the Discovery and National Geographic networks, and go back to basic cable for everything else. Could Time Warner sell a bundle of its cable channels directly? I think that it could. Would Fox News viewers pay for anywhere, anytime access to the Fox cable networks? I believe they would. Even better, unlike the music business where there's Apple and everybody else, no one company dominates over-the-top video distribution. Netflix is the biggest player, but by no means is it the only player. That gives the movie studios and cable networks more negotiating power and pricing leverage.

Content providers can see the new over-the-top landscape as "the sky falling", or they can see it as an opportunity to gain more control over their pricing and distribution.

Google's many positions on video codecs

Earlier this week, Google announced that it would drop support for the H.264 video codec from the HTML5 video tag in the Chrome browser, and replace it with support for its own WebM (VP8) codec. It also announced its intention to release WebM plug-ins for Apple's Safari and Microsoft's Internet Explorer browsers, which support H.264. Chrome joins Firefox and Opera in supporting WebM with the video tag.

Google suggests that Chrome users who want to access H.264 content use Adobe's Flash or Microsoft's Silverlight plug-ins. What's confusing about this is that the Chrome, Android and Google TV teams all have different views on the codec issue. Android's browser supports H.264, and there's no word from the Android team that they plan to drop it. Google TV doesn't support WebM, and in an interview last year, an executive from Intel was very noncommittal about future WebM support. Similarly, YouTube, which supports both H.264 and WebM, has said nothing about dropping support for H.264.

So, the message from Google seems to be "Use WebM for Chrome, H.264 for Android and Google TV, and either one for YouTube." It would be hard for them to be more confusing, or more confused. If you create or distribute Internet video to the desktop, set-top and mobile devices, you now have more to keep track of, and more transcoding to do.

It would be nice if Google would speak with a single voice, but its management doesn't seem capable of coordinating the actions of multiple product teams.

The "Connected Store" and the future of retailing

Intel and a number of partners, including Adidas, Procter & Gamble, Best Buy, Kraft Foods and the MIT Media Lab, are showcasing a two-story, 2,400 square foot "Connected Store" at this week's National Retail Federation Convention in New York. Intel is using large flat-panel, touch-sensitive displays to showcase how its processors can be used to improve the retail "experience".

The Adidas demonstration uses three displays to showcase Adidas' entire shoe line. Shoes that aren't in stock can be delivered to the store for pickup or directly to the customer's home within 48 hours. The Best Buy demo, built in conjunction with MIT's Media Lab, enables customers to get a demonstration of any product on any vertical surface in the store.

These demonstrations go far beyond the digital signage systems found in many retail stores, in that consumers can interact with them instead of simply passively watching them. These systems could help drive a trend to downsize retail locations. For decades in the U.S., there's been a proliferation of "big box" stores, led by Walmart, Target, Costco and Best Buy. The problem is that real estate is leased based on square feet, and bigger stores means higher real estate costs, as well as higher costs for utilities and more employees needed to staff the physical space.

The "big box" cost problem is very clear at Borders and Barnes & Noble. They've built bigger and bigger bookstores, even as print book sales have declined. Many consumers still like to look at physical books in bookstores, but they then go home and purchase them online as eBooks. Bookstores can recreate the "books on bookshelves" experience using much less floor space with big-screen touch-sensitive displays. Consumers can open "books", page through them, and make a purchase decision right there. eBooks can be sent to their portable devices for immediate download, and the sale is made by the retailer, not by Amazon or another competitor.

These systems will also enable consumer electronics retailers to shrink their stores. They can keep the most popular products in stock in the stores for immediate delivery, yet let consumers interact with and order the same assortment of products that they already carry on their websites. One might argue that consumers can do that already from home on their personal computers and tablets, but closing the sale in the store means that those customers won't compare prices with other online merchants and buy at the lowest price.

In short, the era of the "big box" store isn't over, but "little box" stores enhanced with interactive digital technologies will take their place in many markets and segments.

D-Link "plays the field" with a Yahoo Connected TV set-top box

Last week, D-Link announced a deal with Yahoo to implement that company's Connected TV in a set-top box. The D-Link/Yahoo set-top box will sell for less than $200 (U.S.) and will ship in Q2 2011. This is in addition to the D-Link Boxee Box that was released in time for last year's holiday season.

One of the major features of the latest version of Yahoo's Connected TV is its ability to integrate and interact with content coming from broadcast and cable networks. For example, at CES, Yahoo demonstrated the ability to overlay polls on live content from CBS and Showtime. For that to work, the video from a user's cable, satellite or IPTV box will have to go through the D-Link/Yahoo box. It's the same approach that Google TV uses.

Rafe Needleman of Cnet suggests that the Yahoo box shouldn't be priced much more than $49, because it doesn't offer much in the way of new content. As for D-Link, it's clearly hedging its bets on who will be the set-top box winner, but it's also adding to consumer confusion: When a customer goes into, say, Best Buy, will they be able to figure out whether to go with the D-Link Boxee or Yahoo boxes? My suspicion is that this isn't the last Internet TV system that D-Link will support.

Off topic: How to respond to the Arizona massacre?

Like many people, I was stunned by the massacre in Tucson, Arizona last Saturday. Since then, many people have tried to understand why it happened, and how to prevent future massacres from happening. I claim no expertise in the subject whatsoever; these are simply my thoughts about how we can move forward.

• Jared Lee Loughner is clearly mentally deranged, and there was ample evidence that he was a threat to others from his behavior at Pima Community College, as well as from his YouTube videos. Frankly, the students and faculty at Pima were very lucky that he didn't stage his massacre there, rather than at the shopping center.
  
  Over the years, many, if not most of the massacres and assassinations in the U.S. have been staged by clearly deranged individuals (and in the case of Columbine High School, two deranged students.) Most of these tragedies end with the shooter committing suicide, unless they're prevented from doing so by others. The Discovery Communications hostage incident last September, which luckily resulted in the death of only the gunman, was staged by James J. Lee, who was clearly disturbed and had staged protest events at Discovery's headquarters before the hostage-taking incident.
  
  We have poor methods of identifying people who are potential threats to themselves or others, and equally poor ways of getting them into treatment. At least in the cases of people who have demonstrated that they represent a threat, we need better ways to compel them to undergo qualified psychiatric evaluation. We also need to both increase and improve the treatment options for such people. In many area of the country, mental health facilities are so overcrowded and have such long waiting lists that people who represent a threat can't get into treatment for days or weeks.
• Even if Loughner had been identified as a threat to himself or others, and even if he had been involuntarily committed to a mental health facility, he still would have been able to purchase the Glock 19 and ammunition that he used in the massacre. Under Arizona law, the only background check that gun stores can use is the Federal "instant" database, and Arizona isn't keeping the Federal database updated. Participation in the Federal database is voluntary by states; gun stores must use it, but each state can decide whether or not to participate, and how often to update its information in the database.
  
  Participation in the database by states should be made mandatory in order to receive Federal funding, and states should also be required to keep the database updated in a timely manner. This is especially true if the state doesn't require any additional checks beyond the Federal database.
• We may have to go back to some form of the assault weapons ban that was in place from 1995 to 2005. Loughner used an extended 30-round magazine that was illegal during the assault weapons ban. He was stopped only when he ran out of ammunition in his first magazine and had to reload. Had he been forced to reload after 12 or 15 shots, the carnage could have been stopped sooner.
• There's a tremendous firestorm of charges and counter-charges as to whether heated political rhetoric, including direct and indirect references to guns and gun-related symbols, contributed to Loughner's actions. There's little evidence that he was influenced by mainstream political movements on either the right or left. There's no mention of conventional political rhetoric in any of the videos that he left behind, or in his statements in class at Pima Community College.
  
  Nevertheless, this is an excellent time to tone down the references to violence in our political rhetoric. Politicians and commentators who advocate or demonstrate violence need to recognize that their authority and celebrity can help unstable individuals to rationalize violent actions. We can disagree with each other without demonizing each other.
  

Internet TV will turn your next HDTV into a set-top box

Ryan Lawler of NewTeeVee has written an excellent post about how the just-concluded Consumer Electronics Show demonstrated that HDTV manufacturers have become the new consumer gatekeepers, and cable (as well as satellite and IPTV) operators are just another content option. This is thanks to the Internet TV functions built into almost all of the major-brand HDTVs introduced at the conference. Some manufacturers, such as Samsung, Vizio and Sony, have licensed Internet TV technology from Yahoo, Google and/or Boxee. Others, such as Panasonic, have developed their own Internet TV systems.

Lawler's argument is somewhat premature, in that only a small minority of installed HDTVs have Internet TV capabilities, and sales growth in the U.S. market has slowed to only 1% per year. Nevertheless, it points out a "blind spot" in many industry observers' thinking (including my own). The focus to date has been on set-top boxes from Apple, Boxee, Google, Roku, etc. The argument has been made that most consumers won't add another set-top box to the one they already have from their cable, satellite or IPTV provider.

Last year, the U.S. Federal Communications Commission proposed a new set-top box design called AllVid that would combine the functionality of service provider and over-the-top set-top boxes in a single device. However, Internet TVs don't require a separate set-top box for over-the-top Internet video, and as Lawler points out, consumers' incumbent multichannel video services show up as one of many content choices, including Netflix, Amazon on Demand, Twitter, Pandora and other services. These Internet TVs accomplish most of the goals of AllVid without requiring any changes to existing set-top boxes.

On the other hand, just as there's currently a lot of consumer confusion about how to choose among Apple TV, Boxee, Google TV, Roku, Vudu and other over-the-top set-top boxes, there will be confusion about the Internet TV services built into the new HDTVs. That's in addition to the existing confusion over HDTV resolutions, refresh rates, backlight technologies and 3D technologies/formats, all of which may be enough to stall consumer adoption. I don't think that there's a chance that we'll see any real standards, either de facto or imposed by the consumer electronics industry, to lessen the confusion. It will take several years for technologies and formats to shake out.

Sooner or later, however, most HDTVs will be Internet-enabled, and at that point, the third-party set-top box argument will be moot. The real challenge for the current set-top box vendors will be to get their systems integrated into HDTVs. Yahoo is in the lead today, but with strong competition from Google and Boxee, it's not likely to keep it over the long run.

Borders closes its Chicago Michigan Avenue store

Yesterday was the end of an era, as Borders closed its huge Michigan Avenue bookstore located across from the Water Tower in downtown Chicago. The closing wasn't related to Borders most recent financial problems; the company originally planned to close the store a year ago, but negotiated a one-year lease extension. However, it is indicative of the larger changes in the overall U.S. retail book business. Borders was in its just-closed location for 16 years, and for the first time in decades, there will be no bookstores on Michigan Avenue, one of the premier shopping locations in the U.S.

Borders will be replaced by Topshop, a British-based clothing chain. There are many clothing stores on Michigan Avenue, and while I wish Topshop well, I also wish that there had been room there for at least one bookstore. There may still be, but in an era of eBooks, bookstores in the U.S. are going to have to get used to much smaller locations. As I've written previously, the new model is likely to look like an oversized Starbucks with a modest selection of print titles, rather than a book superstore with a Starbucks inside it.

3D at CES: Better solutions, but more confusion?

Consumers interested in buying 3D HDTVs have had to contend with the limitations of existing sets: They require expensive (typically $100 (U.S.) or more), powered, "active-shutter" glasses that are incompatible from vendor to vendor--for example, Sony's 3D glasses won't work with Samsung's 3D HDTVs, and vice versa. (One company, Xpand, has developed "universal" 3D glasses that work with a variety of manufacturers' sets.) At this week's CES, a number of companies have announced new approaches that might make active-shutter glasses obsolete.

The first innovation is passive 3D glasses. They require no power, and depending on the vendor, will cost between $10 and $20 each. Vizio was the first out of the gate with passive glasses. The company claims that it will work with virtually any modern passive 3D glasses, including the ones given out at movie theaters. The biggest limitation of the Vizio approach is that it results in "half-resolution" 3D images, because the images for both eyes are displayed simultaneously in the same frame. That means that a 1920 x 1080 image becomes 960 x 540.

Next, LG Electronics announced its Cinema 3D technology, which it claims has been certified to be flicker-free by two commercial standards organizations, Intertek and TUV. There's no word yet on whether the LG technology provides a full- or half-resolution image.

Samsung has teamed with RealD, the largest supplier of 3D technology to movie theaters, to offer a 3D system that uses the same passive glasses as theaters. The active switching layer is in the LCD display, not the glasses, and changes the polarization of the light coming through the LCD from the backlight. This enables the system to display a full-resolution image. In 2D mode, the polarization switching system is disabled. Although Samsung is displaying the system at CES, it hasn't announced any ship dates, while both the Vizio and LG Electronics systems should begin shipping in Q1 2011.

Finally, Toshiba is displaying 3D HDTVs that require no glasses whatsoever. The Toshiba system uses passive filters to split the image for each eye, and results in a half-resolution image. In addition, viewing position and angle are critical in order to get the maximum 3D effect. Toshiba plans to ship 3D HDTVs of 40 inches and larger, and is showing 56 and 65 inch prototypes at CES. Bloomberg Business Week reports that the company plans to start shipping sets in April.

This new collection of 3D technologies opens up a number of questions:

• We know the cost of the passive 3D glasses, but how much will the 3D HDTVs cost? So far, the price of only one of the new sets has been released. How will the prices compare with existing sets that use active 3D glasses?
• Will the performance of the sets vary depending on the type of passive glasses used? Vizio, for one, claims that its new sets can use passive glasses from just about anyone, including the ones given away at the movies. Samsung and RealD, on the other hand, claim that their system will only work with glasses from RealD.
• Will consumers be satisfied with "half-resolution" systems? In a crowded Best Buy, Walmart or Costco, where they're most likely to see the sets, will they even be able to tell the difference?
• How will consumers choose between all these different approaches, or will they wait until manufacturers settle on a standard approach?

Canon's new XA10 prosumer camcorder

Canon has announced the XA10, a new prosumer camcorder priced at $1,999 (U.S.) that brings many of the features of the XF100 to an even smaller camcorder. The XA10 has the same 1920 x 1080 1/3" CMOS imager as the XF100, and it uses the same 10x zoom lens (30.4 to 304 mm focal range). The advantage of a 1920 x 1080 imager is that it should be able to operate in lower light, and it shouldn't have the rolling shutter and moire effects found when using sensors with higher resolution that have to be decimated in order to get HD video.

Perhaps the biggest difference from a performance standpoint is that the XA10 uses a 24Mbps 4:2:0 AVCHD codec instead of the XF100's 50Mbps 4:2:2 codec. That means that the XA10's output will have the same color space, grading, keying and editing limitations as other prosumer AVCHD camcorders. The XA10 has dual XLR audio inputs, built into a removable handlebar. It has 64GB of flash memory built in and two slots for additional memory, but unlike the XF100, which uses Compact Flash cards, the XA10 uses SD/SDHC/SDXC cards.

In short, the XA10 is essentially an under-$2,000 version of the XF100 that uses AVCHD. Canon expects to ship the XA10 in March 2011.

Could a Borders bankruptcy bring Indigo Books to the U.S.?

Borders' financial struggles are well-known; I wrote about the company's decision to delay payments to some of its publisher vendors, and its notice that if it can't raise additional capital, it will be in default on its existing financing by the end of Q1 2011. The most obvious scenario is that if Borders is unable to raise more capital, it will go bankrupt and its stores will close. However, there's an alternative scenario that's intriguing (it's also entirely speculative at this point).

Rather than develop its own eBook reader as Amazon and Barnes & Noble did, Borders decided to partner with a Canadian company, Indigo Books, for its Kobo reader. Indigo has 70% of the retail market for books in Canada under the Chapters and Indigo brands. If Borders goes bankrupt, it could become an appealing acquisition for Indigo. Under U.S. law, all of Borders' leases would be cancelled, and Indigo could pick and choose the stores that it wants to keep open. Borders' debt, pension and benefits obligations would also be wiped out. Indigo could bring its successful merchandising approach to the U.S. Together with its operations in Canada, it would have the purchasing power to compete with Barnes & Noble, albeit on a smaller, more economical scale.

Indigo could also dump the non-Kobo eReaders (Sony, Aluratek, Velocity, etc.) sold at Borders and focus exclusively on its own devices. This would decrease consumer confusion and increase Kobo's market share.

Rather than Borders buying Barnes & Noble (unlikely), Barnes & Noble buying Borders (unwise) or Borders going out of business (unfortunate), an acquisition of Borders out of bankruptcy by Indigo could make a lot of sense for Indigo, publishers and consumers.

Google and the limits of tweaking

Late last year, several observers wrote about what they believe is deterioration in the quality of Google's search results:

• Jeff Atwood of Stack Overflow wrote that sites that have simply copied Stack Overflow's articles and surrounded them with advertisements are showing up higher in Google's search results than the original Stack Overflow content. According to Google's own rules, that's not supposed to happen.
• Vivek Wadhwa wrote in TechCrunch: "Google has become a jungle: a tropical paradise for spammers and marketers. Almost every search takes you to websites that want you to click on links that make them money, or to sponsored sites that make Google money. There’s no way to do a meaningful chronological search."
• The "wheels fell off" of Google Search for Paul Kedrosky when he tried to decide which new dishwaher to buy. Thanks to keyword-driven content generated by content mills such as Demand Media and the Yahoo Contributor Network (formerly Associated Content), "Pages and pages of Google results...are just, for practical purposes, advertisements in the loose guise of articles, original or re-purposed. It hearkens back to the dark days of 1999, before Google arrived, when search had become largely useless, with results completely overwhelmed by spam and info-clutter."

Content providers have been trying to "game" Google's results ever since Google became a serious search engine player, but Google has always been able to adapt its algorithms to keep the best results coming up at the top. Now, however, it looks like the gamers are winning, and that's opening the door for other search engines.

This may not be a perfect, or even a relevant, analogy, but it may help explain what Google is facing. 25 years ago, Kurzweil was the only company that could read and convert virtually any typeface to ASCII (OCR, or optical character recognition). They did it by having the machine operator scan in examples of the material to be converted, and then individually identify each character ("this is an "L"...this is an "I"...this is a lower-case "i") until the reader could understand the test set. Then, the operator could scan in the complete set of documents, and the Kurzweil device would read and convert them. However, there were always characters that it still couldn't read, and the operator would have to stop and correct the mistakes. These corrections would further train the system.

The Kurzweil system could only recognize a limited number of typefaces at a time, because it would get confused. Over time, more training and corrections actually led to lower accuracy, as the system could no longer distinguish between similar characters such as "e", "o" and "q", "E" and "F", "D" and "O", or "I", "i", "L", "l" and "1". Early systems relied on character shapes alone and didn't use dictionaries or context checks. As a result, at some point the operator had to discard the training set and train the device all over again.

True algorithmic recognition systems from Palantir/Calera eventually solved the problem and were able to read the vast majority of typefaces without any training. Eventually, through acquisitions and mergers, the technologies of Kurzweil and Palantir/Calera fell under one roof at ScanSoft, and are currently sold as OmniPage 17 by Nuance.

My point is that the training technology of Kurzweil eventually reached its limit. Even after adding the best fixes the company could think of, its technology was eventually supplanted by algorithimically-based shape recognition, augmented with dictionaries and context analysis. Google could now face the same challenge. Having tweaked and augmented its search algorithms for years, it may no longer be able to keep up with attempts to game its system. In order to truly fix the problem, Google may have to either switch to a fundamentally different search and filtering technology, or bolt on a radically different approach, such as social searching.

As the Kurzweil case suggests, technologies have limits, and once those limits are reached, it may take radical, not just incremental, changes to the technologies in order to either get further improvements or to avoid going backward.

Comcast out, AT&T's U-Verse in

Yesterday, after years of getting video and high-speed Internet service from Comcast in California and Illinois, I switched to AT&T's U-verse IPTV service. There were two big reasons for making the switch:

• Cost: Even with HD service to only a single television, no premium channels (HBO, Showtime, etc), moderate Internet speeds and domestic phone service, I was paying almost $200/month with my most recent price increase. This is the same service that I paid around $120/month for two years ago with "teaser" rates. The U-verse service is around $150/month, with more channels (including premium channels) and faster Internet speeds. I could have gotten an even better rate had I been willing to commit to 12 months of service.
• Quality: Some channels (for example, the local CBS station) were so compressed and filled with errors that audio would frequently drop out and video would freeze. I initially thought that the problem was with the television station itself, but watching the same station on U-Verse was a revelation: Not a single audio dropout or video freeze in hours.

AT&T gives the same three-hour "window" for installers to arrive as the cable operators, but it also advises customers to allow four hours for the installation. In my case, AT&T sent two installers, who called me 35 minutes before they arrived and showed up 5 minutes into the window. It took them just two hours to complete the installation (I needed a few hours more to get everything working on my network).

A few observations from very early use of U-verse:

• Even though I was supposed to be getting around 12mbps down from my Comcast service, I measured the speed before AT&T started its installation and only got around 8mbps down. The U-verse service measures a true 12mbps down.
• AT&T really, really wants you to use their 2Wire gateway for everything related to the Internet, but even though I got the very latest 2Wire model, it still only had 802.11 b/g wireless, not 802.11n.
• I received what appear to be Cisco's latest set-top boxes. Compared to the elderly behemoth Motorola box that Comcast used, they're much smaller and more modern, with a far more attractive user interface and electronic program guide.
• One thing I miss from the Comcast system is that the AT&T remotes lack a "Favorite" button to take me immediately to my list of favorite channels. Instead, I have to navigate the set-top box's menu tree to reach the favorite list.
• I don't at all miss the never-ending parade of commercials that Comcast runs on its own systems disparaging its competitors. If Comcast could sell that commercial inventory, they'd have enough money to buy NBC Universal twice over.

In hindsight, I should have dropped Comcast at least six months ago.

Pay more, get less

Two stories broke late last year that were seemingly unrelated, but in fact are closely related once you think about them. Last November, industry research company SNL Kagan announced that in Q3 2010, U.S. cable subscribers declined by their greatest amount, 741,000, since Kagan first started tracking the industry in 1980. Even with subscriber increases for IPTV and satellite television providers, the multichannel video provider industry as a whole lost 119,000 subscribers.

Cable prices have been going up for years, and IPTV prices, which had been kept lower than cable to provide an incentive for cable subscribers to switch, have also begun to rise. Plans by Time Warner Cable to increase its rates in 2011 first leaked in late November, and after a 2010 rate increase in most markets, Comcast announced late last year that it will raise rates again in 2011, by an average of 4.6%. On December 29th, AT&T announced that it would increase rates in 2011 for its U-Verse IPTV service from 2.4% to 10.2%, effective February 1, 2011.

Now, let's turn to another business--motion pictures. On December 29th, Hollywood.com projected that total theatrical ticket sales revenues would be slightly lower than last year, but that the number of tickets sold would be down by 5.36%, the second-biggest drop in the decade. The only reason that revenues were as good as they were was the inflated price of 3-D tickets. According to the Los Angeles Times, 8% of ticket revenues in 2010, or $850 million, came from the $3 to $4 premium charged for 3D tickets. Without that premium, revenues would also have been down more than 8% year-over-year. Like the cable industry, ticket prices have been going up for years, and attendance has been in a long-term decline.

So, in both the cable and theatrical motion picture businesses, we have prices going up and the number of actual customers going down. No one is arguing that subscribers or moviegoers are getting more for their money--they're simply being forced to pay more for the same content and service. Time Warner, Comcast and AT&T have all essentially said that they're fine with that, and they'll raise prices even more. The LA Times quotes Jeff Blake, vice chairman of Sony Pictures, as saying: "Focusing purely on headcount is nice if you don't want to accept money. But if money goes up while bodies go down, I'm not sure it's necessarily a bad thing." (Can you show me ONE Sony division that knows what it's doing?)

So, Mr. Blake and the executives at the cable and IPTV operators, here's the problem: Price elasticity of demand. There's now a significant body of evidence that demand for both multichannel video services and theatrical motion picture tickets has become elastic, which means that price changes have a disproportionate effect on demand. So, as prices go up, an even higher percentage of cable subscribers will switch to alternatives, and an even greater number of consumers will wait to see movies via Redbox, Netflix, Amazon, Apple, cable, satellite, IPTV, etc. HDTVs bring the big-screen experience into the living room, and 3D HDTVs will eventually eliminate 3D as a big reason to go to the theater.

One other thing that Mr. Blake doesn't seem to understand: Theaters make most of their money not from tickets, but from sales of food and drinks at their concession stands. If 5.36% fewer people go to the theaters, that's 5.36% fewer people buying food. If ticket prices are inflated, that's less money that consumers will be willing to spend on food. Mr. Blake might not care if he's making the same money from fewer people, but theaters care greatly, and if price increases cause further concentration of the theater business, it will give the remaining theaters much more negotiating power against the movie studios.

Both the cable operators and the movie studios seem to think of their services and products as essential goods without reasonable substitutes; in other words, consumers have to purchase them, no matter what the price. Even before the Great Recession, evidence was mounting that the "essential goods" designation was wrong. Consumers do have substitutes: They can replace cable with satellite or IPTV, or even with over-the-air broadcasts that are, in many cases, of significantly higher quality than the signals provided by the multichannel video operators. They can replace a $10 movie ticket with a $1 DVD rental at Redbox. They can replace both cable and movie theaters with streamed movies and television shows from Netflix, Amazon and Apple.

It's clear that both the cable and motion picture industries will stay on their present courses. They'll continue to raise prices and lose customers, until they reach the point where they're no longer profitable, and even then, they'll stay on course while they expect things to "go back to normal." The problem is that there's no more "normal" to go back to. The "new normal" may very well turn into the worst nightmare of the cable and motion picture industries.