Why the AT&T/T-Mobile deal may mean less than it seems

Earlier today, AT&T announced an agreement with Deutsche Telekom to acquire its U.S. T-Mobile operation for $39 billion in cash and stock. The timing of the announcement was very interesting: AT&T and T-Mobile chose to announce the deal on a Sunday, while Western forces are attacking Libya, the Japanese disaster continues and the U.S. college basketball championships are underway--in other words, when very few people are likely to pay attention to it.

Part of the companies' caution is due to the fact that the deal will undergo intensive investigation by the Federal Communications Commission, Federal Trade Commission and U.S. Department of Justice. There's an excellent chance that the deal will be challenged in court; it will add T-Mobile's 33.7 million subscribers to AT&T's 95.5 million, making the merged company the largest mobile operator in the U.S.

On the other hand, there's also a good chance that the deal will go through, at least in some form. T-Mobile is the Number 4 mobile operator in the U.S., the smallest of the four nationwide operators. It's struggling to come up with the capital to upgrade its network to the worldwide LTE standard, and despite its ads portraying its existing network as 4G, most consumers realize that it's not true. Both AT&T and T-Mobile use the same GSM transmission system (albeit at different frequencies), so integration of the two companies' networks will be much easier than if the rumored Sprint/T-Mobile merger had occurred.

AT&T is likely to argue that it's the most natural partner for T-Mobile, and that T-Mobile is unlikely to survive as a national operator in the long term if it stays independent, is acquired by a company with an incompatible infrastructure, or is acquired by a private equity investor that doesn't have extensive telecom experience.

The obvious concern is that an AT&T/T-Mobile merger will result in higher prices and poorer service for consumers, and given AT&T's prior track record with acquisitions, that's likely to be the case. Regulators may require the two brands to maintain separate identities, even if the infrastructure of the two companies is merged. My belief is that AT&T will continue to use T-Mobile as a "value" brand to compete with prepaid and lower-priced postpaid services from operators such as MetroPCS and Leap Wireless, but will migrate T-Mobile's most profitable customers to AT&T.

T-Mobile may not have much of a future in the U.S., whether or not the AT&T acquisition goes through. It's up to AT&T can convince regulators that the most likely outcome for an independent T-Mobile is, at best, to become a regional carrier without the scale to compete with AT&T, Verizon and Sprint.

U.S. cable subscribers continue to decline

SNL Kagan has released its Q4 2010 report on U.S. video service subscribers. The number of cable subscribers declined by 526,000 for the quarter, the third quarter in a row that cable's subscriber count has declined. Satellite operators added 133,000 subscribers, and IPTV service providers (primarily Verizon and AT&T) added 458,000 subscribers. Overall, the net number of multichannel video subscribers (cable, satellite and IPTV together) increased by 65,000.

The numbers don't add much evidence one way or the other for "cord-cutting", but they clearly suggest that the cable industry's subscriber losses are becoming a long-term trend. However, cable's competitors aren't doing themselves any favors. In particular, AT&T raised its rates considerably this year, and two days ago, the company announced that it will begin capping its DSL bandwidth starting May 2nd. Conventional DSL customers will be capped at 150GB, and U-Verse customers will be limited to 250GB. (The limits will not be imposed until a customer has exceeded their limits three times during the life of their AT&T account.)

The primary reason for customers to shift from cable operators to satellite and IPTV (as well as the primary motivator for cord-cutting) is saving money. If cable competitors raise rates and put limits on their services, they'll end up giving cable subscribers a reason not to switch. SNL Kagan reports that cable operators have almost 60% of the market, so it's their market to lose.

Amazon and YouTube are trying to manufacture hits

Earlier today, YouTube announced its Creator Institute, a training program intended to teach "camerawork, storytelling, promotion, and new media skills" to a small, selected group of artists. USC in Los Angeles and Columbia College in Chicago have partnered with YouTube to provide facilities, educators and equipment. 20 writers and directors, selected in a competition by YouTube, the partner colleges and the YouTube community, will participate in all-expense-paid programs this summer at one of the two schools.

Late last year, Amazon introduced Amazon Studios, a competition that awards cash prizes to screenwriters and directors who submit scripts and "test movies" for review by Amazon and its customers. Amazon's program encourages participants to "improve" submitted scripts by adding to or rewriting them, effectively making anyone who contributes to or changes a script a credited co-writer.

Both Amazon's and YouTube's programs are intended to produce original content that they can distribute, and either sell to viewers or advertisers. The problem is that neither program is likely to accomplish what its sponsors intend. Pick up any copy of MovieMaker Magazine, for example, and you'll see that it's loaded cover to cover with ads for schools and seminars that teach movie and television production techniques. There's no lack of places that students can learn how to make movies, and there's scant evidence that participating in a two-month program is going to turn a novice into a hit-making director or writer.

In Amazon's case, companies have run movie and script contests for years, and they very rarely find scripts or directors of much note. You may remember Project Greenlight from a few years ago, which was sponsored by LivePlanet (Matt Damon, Ben Affleck and two other partners) and Miramax. The most interesting things that came out of the project were the television episodes chronicling the production of the three movies, which ran on HBO for two seasons and Bravo in the U.S. for the final season. The films that came out of Project Greenlight, on the other hand, were considerably less interesting: The first film grossed less than $140,000 at the boxoffice, the second less than $280,000, and Miramax refused to distribute the third one, so after one night in a single theater, it went directly to video.

If anything, Project Greenlight should have been much more successful than Amazon's project: It was backed by the most successful independent film distributor in the U.S. at the time, had active participation from Academy Award-winning filmmakers, and was publicized weekly on heavily-watched cable networks. Yet, all three films were financial busts.

The problem is that making a popular film or television show requires a combination of talent, timing and luck that can't be taught or identified in a contest. It's the basis of writer William Goldman's famous quote, "Nobody knows anything." It's why movie studios are much more likely to make sequels of a successful movie than they are to make a movie about an original topic, with an unknown screenwriter or director. It's also why U.S. television viewers get to watch "C.S.I.", "C.S.I. Miami" and "C.S.I. New York".

I applaud both Amazon and YouTube for encouraging and training talent, but their programs aren't likely to create the popular content that the companies want. The problem is that there is no systematic way to create hits, or even identify them before they're produced.

Apple's control advantage, and what Google needs to do with Android

Earlier this week, Apple announced the iPad 2, a solid, if incremental, next step for the iPad design. When the iPad 2 goes on sale on March 11th, nine days after it was announced, it will be launched with two important media creation apps, iMovie and GarageBand, and a new version of iOS, 4.3. For its part, iOS 4.3 will be deployed at no cost onto all iPads and most iPhones and iPod touches starting the same day. (Update, March 10, 2011: Apple made iOS 4.3 available for download starting yesterday.)

Apple controls its own hardware, software and distribution infrastructure. That level of control causes a lot of consternation on the part of consumers and developers who'd like the freedom to run what they want, when they want, on Apple's devices. However, Apple's control gives it a significant ongoing advantage over Android.

The existing and forthcoming collection of Android tablets demonstrates the disadvantages of Google's approach. Last fall, Samsung introduced its Galaxy Tab tablet, which launched with Android 2.2. It was officially endorsed by Google, meaning that it got access to the Android Market and could run Google's own Android apps, although Google's own executives cautioned that Android 2.2 was designed for smartphones, not tablets. Galaxy Tab purchasers reported that the product functioned more like a big smartphone than a tablet, and as reported by a number of sources, sales have been disappointing.

Google's hardware and mobile carrier partners are under no obligation to upgrade smartphones and tablets in the field to the most recent version of Android. They're not even obligated to release new devices with the latest version of Android. Google itself released Google TV with an earlier version of Android. Google keeps track of the versions of Android in use by monitoring Android Market app downloads, and according to its own statistics, more than 10% of Android devices actively in use are still using Android 1.5 or 1.6. (Google's statistics don't track the "unauthorized" Android devices that don't have access to the Android Market.)

Update, March 6, 2011: Here's an excellent example of Google's dilemma: According to Engadget, Olivetti in Italy just announced its OliPad Android tablet. It has all the hardware features it needs to support Android 3.0: Tegra 2 processor, 10" 1024 x 600 display, WiFi and 3G, yet it's being released with Android 2.2 rather than Android 3 as its operating system.

Many developers have complained about the variety of Android versions in use, but Google's management says that it's a "non-issue". Nevertheless, buyers of Android devices have no guarantee that their smartphone or tablet will ever be upgraded to a newer version of Android. Apple developers can largely target the newest version of iOS, with assurance that it will quickly spread to most iOS devices, but Android developers have no such assurances.

That brings us to the current wave of tablets running on Android 3.0, also known as Honeycomb. First out was Motorola's Xoom, which launched with less than 20 tablet-aware apps, a price very near Apple's top-of-the-line iPad, and future compatibility with LTE that will require the tablets to be sent back to Motorola for free upgrades. Early reports indicate that the Xoom is selling much more slowly than Motorola or Verizon, its sole carrier partner in the U.S., expected. Next up will most likely be LG's G-Slate, with similar specifications and a carrier partnership with T-Mobile, followed by Samsung's Galaxy Tab 10.1.

Google could have taken control of the process and required hardware vendors and mobile operators to agree to upgrade their devices to the latest version of Android within a reasonable period of time after they're released, but it chose not to do so. It could also have compelled vendors to hold back their tablets until a critical mass of tablet-aware apps was available, but again, it chose not to do so. If you buy a Motorola Xoom today or a G-Slate or Galaxy Tab 10.1 tomorrow, do you have any assurance that it will run Android 3.1, or 3.5, or 4.0, or that the manufacturer or carrier will allow you to upgrade? The answer is no.

Google could have orchestrated a huge day-long event in April or May to introduce the Xoom, G-Slate and Galaxy Tab 10.1 together, each with its carriers, along with perhaps 1,000 tablet-aware apps. Each vendor could separately announce their products, along with ship dates, prices and carrier partnerships, at the event. A separate Developer Showcase at the event could have shown off the best of the new apps. But, none of that is going to happen. All three tablets, along with their apps, will trickle out over the next few months.

Google needs to start exercising more control over its hardware partners, carrier partners, and the Android Market (see this week's malware breakout). Android is now important enough to its partners that Google has the power to coordinate product launches and updates, if it chooses to do so. Google can still have open source and an open development process, but it needs to act a bit more like Microsoft used to when it coordinated hardware partner launches with new versions of Windows.

NAB 2011: Free exhibit pass and discount on sessions

It's getting close to NAB 2011, the premier U.S. technology and business conference for broadcasters, videographers and Internet media producers, which will be held in Las Vegas from April 9th through the 14th. Conference sessions will run from April 9th to 14th, and exhibits will be open from April 11th to 14th. NAB is offering some special deals for "Feldman File" readers:

• You can attend the exhibits for free by clicking this link, or go to the main registration page and use code SM01.
• You can also save $100 on an all-access SMART Pass, a Conference Flex Pass, which gives you access to all Conferences except Post|Production world, or Post|Production world itself, by clicking this link or going to the main registration page and using the code SM08.

There are still hotel rooms and flights available for the event, but you should book soon to insure getting a hotel that's convenient to the Convention Center and Las Vegas Strip. Also, you'll save a lot of time and money if you stay at a hotel that's near one of the Las Vegas Monorail stations.

If you're visiting the exhibits only, give yourself at least one full day to get through all three exhibit halls (if you're well-organized and are willing to do some running). If you want to take your time, two or three days are best.

Why you shouldn't announce products without delivery dates and prices

Yesterday, Apple announced the iPad 2 in San Francisco. I won't go over the details, since it seems like every news outlet in the U.S. has already covered them. However, I want to point out one thing that Apple does consistently that its competitors still do all too rarely: Apple announced hard retail availability dates and prices for the iPad 2, iMovie and GarageBand for iOS, as well as the availability date for iOS 4.3. When the event was over, everyone knew when the products would be available and how much they'll cost. Apple regularly does this; in fact, it's rare when Apple announces a product without giving hard prices and availability dates.

Compare that to what its competitors have done. When Samsung announced the original Galaxy Tab Android tablet, it didn't release any prices or availability dates. The information leaked out over the next several weeks. Motorola and Verizon didn't announce prices or availability dates when the Xoom tablet was shown at Mobile World Congress; that information leaked out of Best Buy weeks later. LG's G-Slate came out with German pricing but no U.S. pricing or availability date. Samsung's new Galaxy Tab 10.1 doesn't have either availbility dates or prices.

It's not just the Android tablet vendors who can't get their numbers straight. RIM has been showing the BlackBerry PlayBook for months, still without hard prices or a release date, although a date of April 11th has been leaked. HP held a big event in San Francisco to launch its new WebOS-based smartphones and TouchPad tablet, but gave no prices. As for the ship dates, HP was unwilling to get more specific than "Spring" or "Summer".

It's difficult to take a product announcement seriously if the manufacturer isn't willing to say how much it will cost or when it will be available. I understand the problem when products are sold through mobile carriers, who have their own release schedules and pricing plans. However, Apple works with carriers around the world and has managed to be able to announce consistent release dates and prices.

In hindsight, given the difficulties that Samsung had with the original Galaxy Tab and that Motorola is having with the Xoom, it wouldn't have hurt to delay the announcements until price and availability dates were set. In the Xoom's case, it probably wouldn't have hurt to wait until it ships with LTE built-in and until there's a decent population of tablet-optimized Android apps. Rushing product announcements out in order to "freeze" the market and prevent consumers from buying competitive products may have worked once, but today, when new products are released continuously, consumers won't wait. For example, they're going to compare the second-generation iPad 2 and its 65,000 tablet-optimized apps with a version 0.9 Xoom--not quite ready to ship and with less than 100 tablet-optimized apps--and in the vast majority of cases, the iPad 2 will win.

Google and its partners went through this with Google TV, which should have been announced as a product concept to encourage app developers, but instead was rushed to market at too high a price, with inadequate content partnerships and insufficient user experience testing. RED preannounced its Scarlet camcorder years before it was ready, and ended up educating its competitors, frustrating its customers and frittering away its market credibility.

If you can't announce a hard price and release date, you shouldn't announce a product. It's as simple as that.

Blockbuster: Pass reorganization, head directly to liquidation?

In court filings yesterday and today, several parties to Blockbuster's bankruptcy plan filed objections. According to the Los Angeles Times, the objectors include "Walt Disney Studios, Universal Studios, landlords, unsecured creditors, other parties and the office of the U.S. Trustee, a Justice Department unit that oversees bankruptcy proceedings." The problem is that the plan filed on February 21st for the sale of the company to four major secured creditors for $290 million would give the buyers the right to determine who receives the proceeds of the sale. Unsecured creditors, such as the movie studios and landlords that own Blockbuster's stores, would get little or nothing.

It's not a surprise that the unsecured creditors objected to the sale, but when the U.S. Trustee also objected, it made it much more likely that the court will take the matter very seriously. According to the Wall Street Journal, the unsecured creditors would prefer that the court convert the proceedings to a Chapter 7 liquidation, rather than allow the sale to go ahead as proposed. As a practical matter, it's very difficult to see how Blockbuster could survive without the support of the movie studios and distributors. It's their movies and television shows that Blockbuster rents, and if they refuse to supply product to the reorganized Blockbuster, it would cease to be a viable business.

Blockbuster could still modify the sale proposal to satisfy its unsecured creditors and the U.S. Trustee, but it's looking increasingly likely that Blockbuster will end up in liquidation.

HarperCollins puts limits on library eBook lending

According to Library Journal, last Thursday, OverDrive, the leading supplier of eBooks to libraries in the U.S., sent a letter to its customers that stated, in part:

[W]e have been required to accept and accommodate new terms for eBook lending as established by certain publishers. Next week, OverDrive will communicate a licensing change from a publisher that, while still operating under the one-copy/one-user model, will include a checkout limit for each eBook licensed. Under this publisher's requirement, for every new eBook licensed, the library (and the OverDrive platform) will make the eBook available to one customer at a time until the total number of permitted checkouts is reached.

OverDrive didn't state which "certain publisher" had ordered the new licensing terms, but Library Journal learned that it was HarperCollins. Under its new terms, its eBooks can be checked out a maximum of 26 times before they have to be repurchased or discarded. According to the article, HarperCollins based the 26 times number on how many two-week checkout periods fit into a year.

Print books in libraries eventually wear out due to usage, and have to be discarded or replaced. Publishers get to resell the same titles to libraries for replacement, until the libraries decide to take them out of their collection. On the other hand, eBooks never wear out, so an eBook sold to library would never need to be replaced. To protect its stream of replacement revenue, HarperCollins is implementing eBooks that wear out, at least contractually.

There are many problems with HarperCollins' policy:

• This licensing change reinforces the fact that customers don't purchase eBooks, they purchase a license to use them.
• Print books wear out at different rates, depending on how they were bound. Some companies that sell to the library market offer bindings with lifetime guarantees--so long as the title remains in print, if a copy wears out, it will be replaced at no charge. HarperCollins' new model ignores all that and says that an eBook should last a year.
• The 26-loan limit is bad enough for public libraries that have two-week lending periods, but it's far worse for school libraries that typically have lending periods from three to seven days. A popular new title could "wear out" and have to be repurchased in less than three months.

If this new policy doesn't spread beyond HarperCollins, I suspect that libraries will boycott their titles and the damage will end there. However, if other major publishers implement the 26-time rule, it could greatly impact the adoption of eBooks by libraries. Even worse, if other publishers implement their own variations of the rule (for example, one requires repurchases after 15 loans, while another limits the number of loans to 50), it will be virtually impossible for libraries and eBook suppliers to keep track of all the rules.

HarperCollins and OverDrive will roll out the new licensing terms next week, and I expect public and school libraries to react very negatively. Their reactions may dictate how widely, and even whether, other publishers adopt HarperCollins' rules.

Why I didn't buy a Xoom

Motorola's Xoom Android tablet went on sale today, and I decided to buy one for Android development. Unfortunately, the buying experience was so bad that I ended up walking away. If you've shopped for or purchased an iPad, you know that buying one is an incredibly easy experience. You can purchase it online, in Apple's own stores, at Best Buy, AT&T and Verizon's own stores, and many other places. Verizon, however, has chosen to make the Xoom available only in stores, not online. So far as I know, it's only carried by Best Buy and Verizon's own stores. So, I visited a local Verizon store, and that's where the problems began.

You can buy a Xoom for $799 without a data plan, purchase a month-to-month data plan, or pay $599 with a two-year data plan. I simply wanted to pay the $799 price, but the salesperson kept trying to get me to buy a data plan. She finally had to call over her supervisor, who agreed to allow me to purchase the tablet without a data plan. Then, as the salesperson started to ring up the sale, she tried to sell me Verizon's home phone service (I live in AT&T's territory). Next, when she learned that I use an iPhone 4 and AT&T for my mobile service, she tried to get me to switch to Verizon. She offered to "buy back" my AT&T phone--but then, I'd have to pay AT&T's early cancellation fee, plus buy a new iPhone 4 phone from Verizon. By this time, I felt as though I was dealing with a pushy car salesperson.

I ended up leaving without purchasing the Xoom. It's very clear that Verizon doesn't want any Xooms to be sold without a data plan, or without selling some other ongoing phone service. If that's the case, they should simply sell it at the subsidized price and require the two-year data plan. It would be simpler for customers and easier for Verizon's salespeople. As much as I'd like a Honeycomb tablet, I'll upgrade to an iPad 2 first, and eventually add an Android tablet, with (I hope) much less hassle.

Apple launches new MacBook Pros with faster processors and Thunderbolt high-speed interface

Last September, I wrote a post forecasting that Apple would announce a new generation of MacBook Pro notebook computers in Q1 2011 using Intel's Sandy Bridge-generation processors and Light Peak high-speed interface. Today, Apple did release its new generation of MacBook Pros, which use Sandy Bridge Core i5 and i7 dual- and quad-core processors. They're also the first products to implement Light Peak, which is now called Thunderbolt.

The new MacBook Pros range from $1,199 (U.S.) for the 13-inch model with a 2.3GHz Core i5 dual-core processor, to $2,499 for the 17-inch model with a 2.2GHz Core i7 quad-core processor. For the 15" and 17" models, Apple has shifted from the NVIDIA GPUs that it previously used to AMD's Radeon GPUs. The 13" model uses the improved GPU built into the latest generation of Intel's Core processors. All models are shipping as of today.

In addition, all of the new MacBook Pros implement the Thunderbolt interface, which shares the Mini DisplayPort connector for connecting external displays. As many as six devices can be daisy-chained on the Thunderbolt interface, which has a maximum throughput of 10 Gbps--twice that of USB 3.0, and more than 12 times more than FireWire 800. The Thunderbolt interface explains why Apple didn't implement USB 3.0 in last year's models and Intel didn't incorporate USB 3.0 in its chipsets for Sandy Bridge--both companies knew that a faster interface was coming.

The lack of a high-speed interface to external storage and video capture devices has been the biggest limitation when using MacBook Pros and iMacs for data-intensive applications such as video editing. Thunderbolt eliminates that problem, although it will take some time for peripheral vendors to ship Thunderbolt-compatible devices.

Update: Intel has made its own Thunderbolt announcement, with more technical details. Media creators will be excited by the list of companies that have already signed on to support the new interface:

• External hard drives and storage arrays: LaCie, Promise Technology and Western Digital
• Audio interfaces: Apogee, Avid
• External audio processors: Universal Audio
• Video interfaces: AJA, Avid and Blackmagic Design

ivi TV is shut down by U.S. Federal Court

TV Technology reported that earlier today, Judge Naomi Reice Buchwald of the U.S. District Court for the Southern District of New York issued a temporary injunction ordering ivi TV, which retransmitted the signals of broadcast TV stations in several cities, to immediately shut down its service. The text of the ruling can be downloaded here (PDF link).

Judge Buchwald ruled that it is "...extraordinarily unlikely that ivi will ultimately be deemed a cable system under Section 111" of the U.S. Copyright Act, and that the broadcasters and content providers that requested the injunction "...have demonstrated irreparable harm, that the balance of hardships tip in their favor, and that the public interest will not be disserved by an injunction."

Ivi still has the right to appeal the judge's injunction, and will still be able to argue in court that it is a cable system under Section 111 of the Copyright Act to avoid a permanent injunction that would put the company out of business.

Kno more? Kno in talks to sell off its tablet business

All Things Digital is reporting that Kno, the Silicon Valley-based educational eBook reseller startup, is in negotiations to sell off its hardware tablet business and focus solely on renting eBooks. The company had announced plans to start selling its tablets in several configurations, both single- and dual-screen, between $599 and $999, at the end of last year. Kno apparently did deliver several hundred tablets before halting shipments.

Kno's original dual-screen tablet was conceptualized before Apple released its iPad. Kno's idea was to develop a tablet that could display 99% of college textbooks at full size, so its tablet was purpose-built for that application. The problem was that the resulting tablet was much too big and heavy--equal to two full-size college textbooks. After the iPad was released and defined consumer expectations about tablets, Kno responded with a single-screen version of its tablet, but it was still too big and heavy.

Now, according to All Things Digital, Kno wants to support tablets like the iPad and Motorola's Xoom, and get out of the hardware business. That, however, will impact Kno's "99%" strategy. There's no standard size for tablets, and they generally range from 7" to 10.1". None of them are big enough to support Kno's page size requirements, so users will have to pan and zoom documents, which Kno originally wanted to avoid.

Kno is apparently attempting to get some financial return on the time and money that it spent developing its own tablet, but it's unlikely that any hardware manufacturer will acquire its tablet designs. The Kno reader runs on Linux, not Android, so it will require significant additional software development. Whoever buys the hardware design will be coming into the market well behind Apple, Motorola, LG, RIM and HP. They'd be better off going with an ODM design from a Taiwanese or Chinese manufacturer.

Kno's tablet was the centerpiece of its business strategy; without it, it has no particular advantage over CourseSmart, Follett, Barnes & Noble, Chegg or any number of other, better-funded college eTextbook vendors.

Is there a hidden reason for Apple's in-app payment policy changes?

Apple's announcements about its in-app purchasing policies have ignited a firestorm of criticism from booksellers, publishers and app developers. First, a little more than two weeks ago, Apple announced that apps for eBooks and similar products had to have in-app purchasing. They could continue to link to an external website and price products on those sites however they wished, but they had to enable and pay Apple 30% of in-app transactions. Also, they couldn't disable all purchasing capabilities in the app in order to avoid the 30% fee. These rules were to go into effect on March 31st.

Yesterday, Apple announced its subscription processing system, and announced a new, more restrictive set of rules. There cannot be any links within an app for purchasing subscription content from outside the app--only in-app purchases are allowed, for which Apple gets 30% of each transaction. Further, the price charged inside the app must be as low or lower than the price charged for the same subscriptions sold anywhere else (for example, a publisher's own website.) The subscription rules go into effect June 30th.

There's considerable confusion as to whether the new subscription rules supersede Apple's earlier statements about eBooks, or if there will be separate policies for content sold one time, such as eBooks, and content sold on a subscription basis. If the former is true, Apple has closed the loopholes and made it impossible to sell content on an iOS device without paying Apple 30%.

Apple had to know that these policies would result in charges of price-fixing and anti-competitive behavior. The company is very profitable and is sitting on one of the biggest cash reserves in U.S. business, so it doesn't need the money from transactions. So, why is it pursuing policies that are guaranteed to cause friction?

One possibility is that Apple is trying to get Amazon to stop its "most favored nation" pricing policy, which requires that any publisher or author who sells through Amazon insure that Amazon's prices are as low or lower than any other reseller. Apple's argument could be that if its pricing policy is anti-competitive, so is Amazon's, and conversely, if Amazon's policy is legal, so is Apple's.

Another possibility is that Apple is planning to make some pricing changes that will lower the profit margins on its iPads and iPhones. There have been a flurry of rumors recently about an "iPhone nano" that would sell at a significantly lower price than the existing iPhone 4. This new, less-expensive iPhone will make less money per unit and could cannibalize some sales of the iPhone 4 and forthcoming next-generation iPhone. In addition, Apple may be planning to bring out the iPad 2 at a lower price, with commensurately lower margins. By increasing its transaction revenues, Apple can subsidize these lower prices and maintain its overall margins.

It makes sense for Apple to announce its new in-app sale pricing policy before the next wave of iPads and iPhones is launched, and to give vendors (and the market) more than four months of notice. If Apple doesn't need to launch its new products with lower margins (which is looking increasingly likely on the tablet side), it can rescind or modify the in-app pricing policies. Or, if antitrust litigation pressure from the U.S. or E.U. gets too great, Apple can change its policies before announcing prices for its new products.

In any case, I wouldn't be surprised if Apple modifies its new policies before they go into effect, but neither would I assume that Apple will change its mind.

Could 3D be the Blu-Ray of HDTVs?

Dealerscope has written about a CEA (Consumer Electronics Association) report that U.S. HDTV sales declined on both a units and dollars basis for the first time in 2011. The decline wasn't completely unexpected, because there was a huge increase in sales when digital television broadcasting replaced analog service, which made tens of millions of television receivers obsolete.

In 2006, consumer electronics companies and motion pictures studios hoped to make DVDs obsolete with Blu-Ray discs. At the time, DVDs were still breaking sales records, but motion picture studios were concerned about DVD piracy, and consumer electronics companies saw their profit margins on DVD players being eroded by Chinese manufacturers. Blu-Ray was supposed to be the solution to both groups' problems: It had enhanced anti-piracy systems for the studios (and could encourage consumers to replace their standard definition DVDs with high-definition Blu-Ray discs). In addition, Blu-Ray players required new licenses and were significantly more difficult to manufacture than DVD players, which kept the Chinese manufacturers on the sidelines (at least initially).

What both groups failed to foresee was the Great Recession, which forced consumers to go back to renting movies rather than buying them. That gave a huge boost to Netflix and Redbox, but it caused the overall market for DVDs to decline. Most consumers were also unwilling to pay the premium demanded for Blu-Ray players, so player and disc sales failed to compensate for DVD's decline. In response, consumer electronics manufacturers have had to drop the price of entry-level Blu-Ray players under $100. Now, digital streaming and downloads are depressing sales of physical media even further. Since most Blu-Ray players are compatible with one or more Internet movie services, they're encouraging expansion of streaming video without a commensurate increase in demand for Blu-Ray discs.

The CEA's sales results suggest that a similar scenario is playing out for 3D. Both consumer electronics companies and movie studios hope that 3D will spur a new round of TV purchases, and will stimulate sales of 3D-capable Blu-Ray players. However, the first generation of 3D HDTVs was expensive and required active glasses, which typically cost around $100 each. Glasses from one HDTV manufacturer generally don't work with televisions from other manufacturers. The increased cost, multiple formats and discomfort of wearing active glasses discouraged consumers from adopting 3D.

This year, at the Consumer Electronics Show, several manufacturers showed 3D systems that use less-expensive passive glasses or no glasses at all. However, early reviews state that the loss in resolution that some of these systems require in 3D mode (they can only display 25% of 1080P resolution) is noticeable and distracting. Some systems also use filters that distort conventional 2D video. The glasses-free systems require viewers to sit in specific places in order to see the 3D effect. The proliferation of 3D formats (active, passive, glasses-free, and variations of each approach) is likely to confuse consumers even more than last year. What's worse is that the problems with various 3D formats may not be clear in retail showrooms, but will become obvious once consumers get the TVs into their homes. That will lead to product returns and negative word of mouth, which will taint all the 3D products, even the best ones.

At the same time, millions of consumers are using HDTVs as the primary screen in their living rooms and tablets as a second screen that can augment the first screen in some cases and replace it in others. Consumers are buying tablets, which don't do 3D well but are portable, rather than 3D HDTVs. It's much too early to say that 3D in the home is dead, but the probability is increasing that 3D will be a niche format, in much the way that Blu-Ray is a niche.

What's going on with Android 3.0 tablet pricing?

The annual Mobile World Congress opened this morning in Barcelona, and as expected, there were many smartphone and tablet introductions. One of the most important was LG's Optimus Pad, which will be sold in the U.S. by T-Mobile as the G-Slate. The Optimus Pad runs Android 3.0, has a dual-core processor and an 8.9" display--fairly standard so far as Android Honeycomb-based tablets go. The big shocker, however, was the price: According to Engadget, the Optimus Pad will be priced at 999 Euros, or the equivalent of $1,395 in the U.S. Even after you subtract the 19% VAT, its equivalent U.S. price is $1,075. That's almost $250 more than the most expensive iPad.

Motorola's Xoom Android 3.0 tablet, which has a 10.1" screen but otherwise is almost identical to the Optimus Pad, will be priced at $799 (U.S.) when Best Buy makes it available for pre-sale later this week. That's $30 less than Apple's price for its top-of-the-line iPad. However, Verizon is rumored to be requiring Xoom buyers to purchase at least one month of broadband data service in order to enable the tablet's WiFi interface. The least expensive data plan is $20/month, so that makes the price difference between the Xoom and the iPad only $10.

Last fall, the expectation was that WiFi Android tablets would sell for between $300 and $400, and their lower prices would give them an advantage over the iPad. Now, however, two of the three major Android 3.0 tablets announced so far are priced as high or higher than the most expensive iPad. (The third tablet, Samsung's Galaxy Tab 10.1, hasn't yet been priced.)

The iPad 2 is widely expected to be released in the next couple of months, and the big differences are likely to be dual cameras and a faster processor--the key features that differentiate the new Honeycomb tablets from the current iPad. The iPad 2 is almost certainly going to be priced no higher than the current model, so where is the market opportunity for Android 3.0 tablets?

We may eventually see Android 3.0 tablets from second- and third-tier manufacturers that are priced in the $300-$400 range, but Android tablets need to compete with the iPad now, not at some unspecified time in the future. The pricing policies of the first-tier manufacturers may end up giving the tablet market to Apple--or they may open the door for RIM's PlayBook (which the company's CEO said today would sell in a basic WiFi-only configuration for under $500) or HP's TouchPad, if HP prices it aggressively.

Are cracks starting to show at Groupon?

Last week wasn't a good one for Groupon. On February 6th, the company launched a series of television ads (its first) on the Super Bowl broadcast in the U.S. The ads started by describing some major problem (the situation in Tibet, deforestation in the Amazon, or threats to whales) and then turned into a pitch for a great deal at a restaurant, a salon or a boat trip. They were intended to be funny, but they ended up offending many viewers. Company CEO Andrew Mason defended the ads on a company blog, but said that their endings would be changed to put more emphasis on the problems that the ads were supposed to be about. However, rather than pulling the original ads until the revised versions were ready, Groupon continued to run the original ads, and the complaints continued. Last Thursday, Mason announced that the ads would be discontinued entirely.

The same day that Groupon called it quits on its television ads, it ran a deal with FTD, a flower distribution service in the U.S., offering $40 worth of flowers for $20. According to CNNMoney.com, almost 3,330 people took the deal, which required them to purchase the flowers through a special Groupon/FTD website. The problem was that some customers compared the prices found on the Groupon/FTD site with FTD's own website, and learned that the prices for the Groupon promotion were marked up anywhere from $10 to $20 more than they were on Groupon's own site, meaning that the Groupon deal offered little or no discount from the true prices.

In addition, some buyers found that the flowers wouldn't be delivered until February 15th, the day after Valentine's Day. Groupon and FTD were forced to rescind the deal, agreed to refund money to any customers who wanted it, and offered the discounts on the prices of flowers on the FTD.com site, not the Groupon/FTD site, for those customers who still wanted the deal.

Groupon's portrays itself as a fun company, but the "fun" might be disguising a level of immaturity on the part of the company's top managers. This is certainly not the first time that a startup has made highly public mistakes. Facebook is a prime example of repeatedly making gaffes (intentional or otherwise) when it comes to its users' privacy. A few years ago, Amazon was caught offering different prices on the same products to different customers, and was forced to both change its pricing policies and refund the difference to customers who purchased at higher prices.

However, while Amazon's Jeff Bezos was decisive in taking responsibility for the company's pricing gaffe, Groupon's Mason looks wishy-washy. Take the ads: First he denied that there was a problem, then said that the company would change the ads (without actually doing so), and then he withdrew the ads. Or consider the FTD situation: Did no one within Groupon take the time to compare the prices listed on the Groupon/FTD site with FTD's own site to make sure that customers would get the deal they were buying? Or did Groupon know that the prices on the Groupon/FTD site were marked up and figured that customers wouldn't know the difference?

Looking at Groupon's rapid growth, it's beginning to look like an engine that's revved up so high that parts are flying off. Problems like the ones that Groupon had last week are "red flags". The company should learn some lessons from its gaffes, and consider bringing in more experienced managers to prevent them from happening again.

The iPad gets a vote of confidence at the Chicago Auto Show

I spent a few hours at the Chicago Auto Show this afternoon, and I was surprised by the number of iPads on the show floor--not those brought by visitors, but those being used by the auto companies. Several car companies were using iPads for portable data collection, where company representatives were gathering visitors' information for mailing lists and contests.

What I found more interesting, however, is that some companies, including Hyundai, had turned iPads into fixed kiosks that visitors could use to enter their own information. Retail kiosks tend to be expensive computer displays that are built to take severe usage, but here were iPads being used for the same purpose. (You could tell they were iPads by their user interfaces, and in Hyundai's case, because they thoughtfully cut out holes in the backs of the kiosks to show the Apple logo.) I looked at many of the kiosks in a number of exhibits and didn't see a single one that had failed.

Now, this was the first weekend day that the show was open to the public, so it's likely that some of the iPads will fail by the time the show ends on February 20th. However, if an iPad fails, the cost to replace it is probably $500. (Who needs 3G or a lot of memory in order to collect names and addresses for a single app?) Compare that to the cost of a custom kiosk or even a portable data collection computer from someone like Motorola. The iPad is making waves in an application that I hadn't considered, and this year's crop of new tablets will get in on the action as soon as customers can judge their reliability.

Is MPEG LA's "Call for Patents" for Google's VP8 a sign of weakness?

Yesterday, MPEG LA, the agency that licenses patents related to MPEG-4/H.264, issued a "Call for Patents" for Google's VP8 video codec. VP8 is the video codec incorporated in Google's WebM format, which Google is licensing at no charge. MPEG LA wasn't asked to round up potentially applicable patents by Google. Instead, MPEG LA sees an opportunity to make money, in much the same way that attorneys around the U.S. advertise on late-night television to find users of various medications or workers in particular industries who might have been harmed.

Update, March 3, 2011: PaidContent reports that the U.S. Justice Department has begun an investigation of MPEG LA's actions related to VP8 to determine if they violate antitrust laws. The article suggests that MPEG LA itself may not be the real target of the investigation, but rather, one or more members of MPEG LA who might have reason to sabotage Google's open video efforts. 

The interesting thing is that executives from MPEG LA have been claiming that VP8 infringes its MPEG-4/H.264 patents since last summer, when VP8 was first made available for free by Google. If that's the case, why do they now have to go out and find patents that cover VP8? Didn't they already know which patents were being infringed when they charged that VP8 was "undoubtedly" infringing their existing patents? And, if they examined their existing patent pool and decided that nothing they've got covers VP8, what are the chances that they're going to find anything now?

This move, which is being seen by some observers as a threat to WebM, looks to me more like a statement of weakness by MPEG LA. To this observer, it looks as though they don't think that they can prevail with their current patent pool, and they're desperately looking for a "submarine" patent somewhere that will stand up against court challenges.

I would have taken MPEG LA's threats much more seriously if they had filed suit for patent infringement against Google using the patents they already represent. At this point, Google is in a much stronger position than I thought they were.

Mobile's impact on Microsoft: HP's out, Nokia's in

Two announcements--one yesterday, one tomorrow--mark a major realignment of industry support for Microsoft, and also underline the transition from PCs to smartphones and mobile devices. Yesterday, HP announced two new WebOS-based smartphones and its new TouchPad, but perhaps the biggest bombshell was held for the very end of the presentation: HP will make WebOS run on its personal computers.

As I wrote yesterday, WebOS isn't a true replacement for Microsoft's Windows 7, and it relies extensively on a touch interface, so it's likely that WebOS support will be confined to HP's touchscreen all-in-one PCs and tablets, at least initially. However, HP's move is very bad news for Microsoft, because HP is Microsoft's largest software reseller. Microsoft won't get any smartphone or TouchPad operating system revenue from HP, and its revenues from Windows on HP's desktops and notebooks are now at risk. In addition, HP's decision to port WebOS to its PCs may increase the market credibility of Google's Chrome OS as a Windows alternative (although I still believe that Google should drop Chrome OS and put all its efforts behind Android.)

Bloomberg reports and other sources have confirmed that Nokia will announce a partnership with Microsoft to use its Windows Phone 7 operating system tomorrow. Nokia has been struggling in the smartphone market, and a blunt memo from Nokia's new CEO suggests that the company's existing smartphone operating systems, MeeGo and Symbian, won't turn things around. Windows Phone 7, which has been floundering in fourth place among smartphone operating systems, could get a big boost from Nokia, especially outside North America. Microsoft is addressing the big structural holes in Windows Phone 7--copy and paste are likely to be added in March, and multitasking will most likely be implemented before the end of the year.

HP's and Nokia's decisions make it very clear that Microsoft's future, as well as the future of information technology, is mobile. The problem for Microsoft is that it's moving from a position of strength (the desktop) to a position of weakness (mobile). However, Microsoft can't hold back the future, no matter how hard it tries.

HP's WebOS announcements: You mean there's no beef in this taco?

As I write this, HP's WebOS announcement in San Francisco just ended. The actual product announcements--the Veer and Pre3 smartphones, and the TouchPad tablet, are being well-covered by Engadget, CNET and others. However, what HP left out is at least as interesting as what it disclosed:

• HP didn't announce a single carrier relationship, domestically or internationally, for its smartphones or tablet, except for Verizon, which will sell a now-obsolete Pre model.
• Not a single reseller came out to commit to sell any of the products.
• HP didn't give any hard delivery dates or prices, so it's impossible to say how any of the products will stack up against their iOS and Android counterparts.
• The TouchPad will ship initially without 3G/4G support, and no carrier will bother with it until it has broadband support.
• There was no mention whatsoever of battery life for the TouchPad, which is a bad sign--if it had great life, HP would have talked about it.
• There will undoubtedly be more details tonight at HP's developer event in San Francisco, but most developers that haven't already committed to the WebOS platform are going to wait until prices and distribution deals are announced.

Near the end of the presentation, HP dropped a bombshell: It will port WebOS to its personal computers. This is clearly meant to "sweeten the pie" for software developers, but it doesn't mean anything until it's actually demonstrated. WebOS is designed to use a touch interface extensively, so porting it to a conventional PC is far from a "slam dunk". This announcement, however, has to have Microsoft shaking, since HP is its largest OEM customer for Windows. WebOS isn't going to be a complete substitute for Windows 7, but Microsoft has take the WebOS threat a lot more seriously than Google's Chrome OS.

In short, the bottom line from today's event is that HP's new devices might be really good, but we'll have to wait to see when we can get them and how much they'll cost.

Micro Four Thirds gets more support, Sony jumps in with its E-mount

In the course of less than a week, two major lens manufacturers have announced that they've joined the Micro Four Thirds System Standard Group founded by Panasonic and Olympus. Last week, Schneider-Kreuznach announced that it has joined the group and is working on compatible lenses, and this week, Carl Zeiss announced that it has also joined the group and will release compatible Zeiss HD Video lenses.

This is big news, especially for users (current and potential) of Panasonic's GH1 and GH2 mirrorless digital cameras, and its AG-AF100/101 camcorder. There have been adapters available for some time that enable a variety of third-party lenses to be used with Micro Four Thirds cameras and camcorders, but they don't support autofocusing and rarely support aperture control. In addition, these lenses usually operate at longer focal lengths than specified on the lenses because they're built for bigger sensors than Micro Four Thirds. The forthcoming lenses from Schneider-Kreuznach and Carl Zeiss will most likely support automation and will be designed specifically for the Micro Four Thirds sensor format.

These announcements may explain why Sony announced yesterday that it's making the specifications for its E mount, used in its NEX-family digital camcorders and camcorders, available for license. Today, Carl Zeiss, Tamron, Cosina and Sigma all announced that they would support Sony's E-mount. The population of third-party lenses for the two most popular mirrorless formats is about to get a lot bigger.

And now, we get to the speculative part: What will Canon and Nikon do? Both companies are widely expected to launch their own EVIL-style digital cameras soon. Will they use one of their existing mount designs, create their own new mounts, or license the Micro Four Thirds format or Sony's E-mount? We'll know in the next few months.

More thoughts on the AOL-Huffington Post deal

The acquisition of The Huffington Post has been getting a lot of coverage and analysis since the deal was announced at midnight Monday morning U.S. Eastern time. The two big questions center around "Why?" and "Is The Huffington Post worth $315 million?". The answers to both questions are tightly related.

Consider the following:

• AOL's revenues and profits have been declining for years. As revenues from dial-up data service have declined, advertising revenues haven't increased enough to compensate.
• AOL has a mix of content and services, some of which accumulated from AOL's years as a data service powerhouse, some of which was developed internally, and some (like the former Weblogs, Inc. blogs and TechCrunch) were acquired specifically to increase traffic.
• Patch and Seed, AOL's internally-developed hyperlocal news service and content farm respectively, aren't generating the traffic or revenues that AOL needs to turn its financial results around.

Last week, Business Insider published a copy of the "cookbook" that AOL implemented to run its content businesses. And, it's literally a cookbook--the roles and actions of just about every employee are mapped out on a day-by-day and hour-by-hour basis, with the goals of increasing traffic and advertising revenues while bringing down the costs of content acquisition and production.

Consider that you're AOL CEO Tim Armstrong and the opportunity to acquire The Huffington Post comes along. It's going to be expensive. Is it worth it? Here's what he could have been thinking:

• The Huffington Post would add almost 30 million unique visitors a month to AOL, increasing AOL's traffic by almost a third.
• The HuffPo claims that it generated $31 million dollars in revenues in 2010, and its 2011 revenues and profits would be immediately accretive to AOL.
• The HuffPo has a small advertising salesforce, led by a former AOL sales executive. If AOL's much larger salesforce took over The Huffington Post's sales, it could generate more revenue from the same traffic.
• The quality of The Huffington Post's writing is much better than that coming out of AOL's own Patch and Seed. Further, unlike AOL's services, much of The HuffPo's content is comes from two low-cost sources: 1) Rewrites of articles and blog posts from other sites, and 2) Articles and blog posts submitted by often well-known writers and celebrities, for which The HuffPo pays little or nothing.
• AOL could get The HuffPo for $315 million, a price at the low end of what industry analysts said the property is worth (Bloomberg News quoted Shahid Khan of MediaMorph, Inc. last December when he said that The HuffPo was worth $300 to $450 million at that time.)
• AOL has $750 million in cash, more than enough to make the acquisition.

Put all of that together, and the decision to acquire The Huffington Post was easy. However, it's not without risks:

• There's no guarantee that Arianna Huffington is going to be able to be any more successful with AOL's existing media properties than AOL has been in the past. Those properties that have never gotten off the ground or are "circling the drain" may continue to stagnate.
• Writers who have contributed articles and blog posts to The HuffPo at no charge may begin demanding payment. The HuffPo is no longer a feisty startup with a left-of-center orientation--it's the central media property for a multi-billion-dollar business, run by an executive who one source to Business Insider said is "one of the most conservative people around." Why would anyone contribute their work to AOL for free, when they would at least get paid by AOL's Seed content farm? That will increase The HuffPo's cost of content.
• If many of the popular writers for The HuffPo leave, the quality of the site's writing is likely to decline, taking site traffic with it.
• There's no word on how long Arianna Huffington or her key managers are obligated to stay with AOL. Historically, AOL has had very little success with retaining key managers and engineers from companies that it acquired, and The Huffington Post isn't likely to be an exception. If Arianna Huffington leaves, will AOL be able to continue to attract the same number and quality of contributors?

In short, the acquisition makes sense for AOL, and it was a smart move on Tim Armstrong's part. However, it's not at all clear that The Huffington Post won't deteriorate under AOL in the same way that many of AOL's other media properties have. Armstrong purchased a short-term "shot in the arm" for AOL's revenues and profits, but it's now up to him and Arianna Huffington to grow the business over time.

Canon T3i/600D Announced

Earlier today, Canon announced its new T3i/600D DSLR. It will fit into Canon's product line between the T2i/550D, which will remain in production (at least for now) and the 60D. Engadget reports that the T3i will ship in the U.S. at the beginning of March at a list price of $799.99 or $899.99 with a new cost-reduced 18-55mm f/3.5-5.6 zoom lens.

According to Digital Photography Review, which has had a chance to preview the new camera, the primary difference between the T3i and T2i is that the T3i has an articulated LCD, which means that some of the controls on the back of the camera had to be repositioned, and the camera is slightly deeper and heavier than the T2i.

The T3i uses the same sensor and processor as the T2i, so its ISO range and video performance are identical to the T2i. However, EOSHD.com reports that the T3i has a 3X and 10X crop mode; the 3X mode is the most interesting, because it crops the image to 1920x1080, which should decrease the imager's rolling shutter problems. (Update: Commenters to EOSHD.com are suggesting that the 3X and 10X modes are actually digital zooms, not crop modes, which would result in a much lower-quality image.) The other primary functional changes to the T3i are "beginner-friendly" new features, including:

• Basic+, which simplifies adjustments to exposure and scene mode parameters.
• Scene Intelligent Auto mode, which automatically selects exposure and scene mode, and adjusts color balance, based on whatever the camera is pointed at.
• Video Snapshot mode, which allows a sequence of 2, 4 or 8 second long video clips to be strong together without requiring video editing.

For videographers, the most compelling advantage of the T3i is its articulated LCD, at a price very similar to that of the T2i when it was originally launched.

AOL acquires The Huffington Post: Buying its way to relevance?

About an hour ago, AOL announced that it's acquiring the Huffington Post for $315 Million. According to Advertising Age, $300 million of the $315 million purchase price will be in paid in cash. TechCrunch has published the email sent by AOL CEO Tim Armstrong announcing the deal to his employees. All of AOL's media properties, including Patch, Seed, Engadget (and the other Weblogs, Inc. properties that AOL acquired in 2005) and the recently-acquired TechCrunch, will be folded into a new Huffington Post Media Group, to be run by Arianna Huffington.

Last week, Business Insider published a very detailed presentation on AOL's media operations--essentially, the rule book for how the company's media properties are to be run. Whether or not Arianna Huffington is going to be made to adopt the rules, which leave virtually no room for individual interpretation, hasn't been addressed. It seems very unlikely that she's going to be willing to be straitjacketed into an operating plan that effectively dictates what every member of her team will do, every hour of the day.

It's clear that internally-developed projects such as Patch and Seed aren't enough to drive the traffic that AOL is looking for. Tim Armstrong is willing to buy content and traffic, even at high prices. However, it's not clear as to how all these different properties can be organized coherently. The operation plan published by Business Insider emphasized increasing advertising CPMs via video and increasing traffic through search engine optimization while continually decreasing the cost of acquiring or creating content. On its surface, the plan was to build AOL into a tightly cross-linked content farm. How that plan will fare now that the HuffPo is essentially in control of the entire operation remains to be seen.