A Few Rules to Live By

I’m spending a typical Sunday night scanning the blogs that I missed during the week, and as usual, there are the seemingly never-ending lists of new Web 2.0 sites fortified with AJAX and Ruby on Rails, or whatever the latest programming paradigm is this week. Before my brain turns to mush trying to figure out just what market opportunity these people think they’re pursuing, I offer A Few Rules to Live By:

1. Technology is a means to an end, never an end in itself.
   
2. Just because you can do something doesn’t mean you should.
   
3. Just because you think there’s a market for your idea doesn’t mean that there is a market.
   
4. If you can’t explain your new product or service in one or two (reasonably short) sentences, you’ve probably got the wrong idea.
   
5. If you can’t convince someone who’s not a coworker, friend or relative that you’ve got a good idea, it might be time to rethink your idea.
   
6. If you don’t think you have any competitors, you’re wrong.
   
7. You can never know enough about your business, market or technical specialty.
   
8. The two most important resources for success in business are time and money. Like matter and energy, they’re interchangeable, but only under extreme circumstances.
   
9. At the end of the day, there will be a helluva lot more losers than winners. Never take success for granted, and never assume that it’ll last forever.

Me and the Internet: A Case Study

I moved from the relative civilization of Palo Alto, California to an apple farm in Sonoma County a few months ago. We have phone and cable service, but DSL is very problematic because of our distance from the nearest central office, and only the buildings nearest the road are wired for cable (one of which has a high-speed Internet connection.) I arrived here with a motley crew of wireless routers and other equipment, and I was committed to figure out a way to get a high-speed Internet connection back to my cottage using the equipment I already had, and without running a conduit and wires. Here’s what I did to get it to work:

First, I connected my Belkin Pre-N MIMO router to the existing cable modem. (Of all the equipment I have, the Belkin has by far the longest range.) The Belkin’s antennas can’t be removed, so I couldn’t connect an outdoor antenna to the router (which would have made the most sense.) Instead, I got the router as close to a window facing my cottage as possible. Next, I flashed my Linksys wireless router (which the Belkin replaced in my old home office) with DD-WRT firmware, and converted it to a wireless bridge, connected to the Belkin. I then wired a Buffalo wireless router/access point (the only new piece of active equipment I purchased) to the Linksys, and wired my print server, data server and Vonage phone adapter to the Buffalo (which is configured as an access point.) Finally, I connected my Buffalo wireless Ethernet converter to the Netgear USB-to-Ethernet adapter on my Series 2 TiVo. Both my TiVo and notebook computer connect wirelessly to the Buffalo access point, which sends packets by wire to the Linksys, from there wirelessly to the Belkin, and finally on to the cable modem.

So far, so good, but because of the distance between the main building and my cottage (and the fact that both the Belkin and Linksys are inside,) I was getting an average signal-to-noise ratio of 10dB on my wireless connection—marginal under the best of conditions. Thus, I added the last component: A 2.4GHz 15.5dBi directional planar array outdoor antenna from Sharper Concepts, and 25 feet of low-loss pre-terminated coaxial cable to connect the antenna to my Linksys bridge. With about a half-hour of work, we got the antenna mounted and aimed. The signal-to-noise ratio went from 10 to more than 40dB, more than enough to insure a reliable connection.

So there you have it. Rube Goldberg, eat your heart out!

“My Car Company is in Trouble. I Guarantee It!”

Every once in a while I write about cars, and seeing Dieter Zetsche starring in a new series of Chrysler commercials warrants a brief rant or two. Zetsche is the chairman and CEO of DaimlerChrysler, and the commercials play off his notoriously prickly personality. The ads have him demonstrate to a “reporter” how Mercedes’ technology has contributed to Chrysler’s products by taking the reporter on a scary test drive, show him storing away the Chrysler and Dodge minivans’ “Stow N’ Go” folding seats in record time, and even have him take the reporter along on a crash test. Unlike most of the commercials starring the head of a car company, these are actually funny.

But, to my point—does putting your CEO on camera actually make it more likely that people will buy your cars? It sure doesn’t seem to be working for Bill Ford, who, based on his ads, seems to believe that Volvo is an example of American ingenuity and that Ford cars are “bold.” (I’ve had Cream of Wheat that’s bolder than today’s Fords.) CEOs only seem to show up in car commercials when the company is in desperate straits—Lee Iacocca, after all, starred in Chrysler’s commercials to try to reassure customers that the company was going to bounce back from bankruptcy. My advice: The final sign of the Apocalypse for GM will be when Rick Wagoner starts showing up in its commercials.

When the Best of Intentions Isn’t Enough

The rumor mill is buzzing about Microsoft’s (unconfirmed) plans to launch its own portable audio and video player, probably in time for Christmas, along with an iTunes-like online store. The gist of the argument goes like this: Microsoft is unhappy that its hardware partners, including Creative Labs, iRiver and Samsung, have been unable to compete effectively against Apple’s iPods. So as not to let the portable digital media business slip away entirely, Microsoft’s solution is to launch its own portable audio/video media player to compete with the iPod, and its own digital media store to compete with iTunes.

The logic is that, like Apple, Microsoft can make a better product by tightly controlling the hardware, software and services. The problem, however, is that Microsoft already does that, and the results have been far from electric. Microsoft has launched many hardware platforms over the years, and they not only write the specifications for the hardware, they often actually provide a “reference design”—a working system—that is designed to be used as a model by hardware manufacturers. A few examples include the recent crop of tablet PCs, the Portable Media Center, and most recently, the Origami PC. The last two in particular were designed inside and out by Microsoft. None of them have made much of a dent on the market.

Having complete control of the platform is insufficient for taking on Apple, or for that matter, Sony in the Xbox/PlayStation 2 battle. The hardware, software and services not only have to work together, they have to be a step above the competition. So far, Microsoft is at best a parity player.

That doesn’t mean that I expect that Microsoft will fail if it goes ahead with its own player and store. Far from it. Apple’s strategy of locking down the iPod and iTunes with FairPlay, its proprietary DRM that it licenses to no one, is deeply frustrating. It prevents iPod users from seriously considering competitive products, and prevents users of competing players with large libraries of DRM-protected media from switching to Apple. I’d love to see Microsoft succeed with a platform that enables customers to choose players from a variety of manufacturers and media from a variety of stores. However, the intention to “out-Apple Apple” alone won’t cut it. To dislodge Apple, Microsoft will have to ship a product with a level of user-friendliness and refinement that’s an order of magnitude better than the company has ever done before.

Update: The rumors are correct, and Microsoft is readying its own media player/media store combination under the Zune brand name.

There Is No Power Without Interference

Broadband over power lines (BPL) has been touted as a viable alternative to DSL and cable, but suppliers have wrestled with the challenge of getting high-speed signals through power networks (called access BPL) and into homes and businesses (in-building BPL) reliably. The way they do it is by converting the binary data stream to a radio signal. The problem is that the frequencies used for BPL are some of the same frequencies used for amateur radio and other wireless services. In tests, BPL put out extremely high amounts of interference—so much so that the FCC forced BPL suppliers to go back to the drawing board.

In October 2005, the city of Manassas, Virginia and COMTek , a BPL-based ISP, announced that high-speed Internet services were available to the city’s 12,500 households. Apparently, the interference problems with amateur radio were solved. Apparently not. Today, the Amateur Radio Relay League (ARRL) released the text of two letters sent to Manassas’s city government and COMTek by the FCC, ordering them to either resolve the interference complaints of six amateur radio operators or prepare to shut down their BPL system.

This is far from a death sentence for either BPL in general or Manassas’s system in particular, but it does show that the industry still has a way to go in order to prove both the technical and business viability of BPL products. It may well be possible to implement an access BPL system that doesn’t cause unacceptable interference, but the BPL industry had better deploy one soon. BPL vendors have to demonstrate that they can actually deliver what they’ve been promising, or the utilities and their customers will soon lose interest.

Whose Choice Is It, Anyway?

The Net Neutrality battles are far from over, but it’s clear that the telcos and cable operators are going to get the right to offer different classes of service to different content and service providers, depending on:

1. How much they’re willing to pay, and
   
2. How much they compete with offerings from those same telcos and cable MSOs.
   

We saw a similar situation not too long ago, when the telcos convinced the FCC to stop forcing them to give competitive local exchange carriers (CLECs) equal access to their networks. Their argument then, as now, was that they needed to make huge investments in infrastructure in order to offer consumers broadband access, and that they couldn’t make those investments if they were forced to make their broadband networks available to competitors at wholesale prices. The telcos prevailed, and what do we have? Virtually the entire competitive DSL services industry is gone. Is your DSL service any better? Unless you live in a handful of AT&T or Verizon markets, the answer is no.

AT&T and Verizon argue that they should have the right to choose who they do business with, and under what terms. It’s hard to disagree with them, until you realize that their infrastructures were bought and paid for by their customers, who paid governmentally-mandated prices for telephone service to them as monopoly suppliers for decades. It’s not their infrastructure, it’s their customers’.

And what about their customers’ choices? The CLECs are gone, and cable is still a poor substitute for telephony services. Telephone companies’ customers have paid for decades for a network that could now give them a choice, but the FCC and Congress are systematically depriving them of the opportunity to choose their suppliers. And with recent research indicating that it may not even be worthwhile for cable operators or telcos to offer their customers a discount if they subscribe to more services, we’re headed back to where we were before the 1996 Telecommunications Act: For each market, we’ll have one company that offers telephony services, one that offers video services, a couple of satellite television providers, and that’s about it.

The best way to fight for customer choice is to do business with companies that support it. Tell your phone and cable suppliers that if they don’t give you equal access to competing telephony and video services, you’ll get it yourself. Find out which telcos and cable operators contributed to your state and U.S. Representatives and Senators, and get the word out—they can either represent you or the communications companies, but not both. As they become available, get your broadband services from a non-telco-affiliated wireless company, a satellite company, or a broadband-over-powerline provider. You’re just as entitled to be able to choose how you spend your money as the telecommunications companies.

Net Neutrality: The Subtext

Net neutrality is seriously on the ropes—the House of Representatives defeated amendments to the Communications Opportunity, Promotion, and Enhancement (COPE) Act that would preserve equal access to services on the Internet. However, the real issue isn’t whether the telcos and cable MSOs will exercise their power to discriminate against individual Internet content and service providers, but rather which content and service providers they’ll discriminate against. Somewhat surprisingly, I think that they’ll all discriminate against the same ones: VoIP and IPTV (video) providers.

It’s fairly obvious as to why the telcos want to make VoIP providers go away: Companies like Vonage and 8x8 offer comparable service to the telcos for half the price, and Skype and its ilk are largely free. Plain Old Telephone Service (POTS) has been on the decline for years, but it still represents a “cash cow” for AT&T and Verizon that neither company wants to see taken to slaughter any time soon. What’s more surprising is that the cable MSOs also want to kill VoIP competitors. The reason is that the cable operators are depending on revenues from local and long distance telephone service to help pay off their investments in two-way digital infrastructure. In my neck of the woods, Comcast is selling its VoIP service for $39.99/month, compared with Vonage at $24.95/month. All other things being equal, the quality of the two services should be just about the same, so why would anyone pay $15/month more for Comcast? How about if Comcast subscribers using Vonage get such a slow class of service that their phones are all but unusable?

The other field of potential carnage is IPTV. Again, it’s obvious why the MSOs would want to discriminate against video providers—they’re direct competitors for subscribers’ eyeballs. Cable subscribers who are watching third-party IPTV services aren’t watching cable television. Advertisers can’t reach them, so the cable operators will lose local advertising revenue. And, if cable subscribers watch enough third-party IPTV, they may not want to subscribe to premium cable channels. However, if the MSOs drop the available bandwidth for competitive IPTV services, their programs will look less like television and more like bad streaming video. For their part, the telcos have built their broadband business plans on IPTV services, so it’s counterproductive for them to allow competitors to have equal access to their subscribers.

The bottom line is that the loss of net neutrality isn’t going to hurt everyone--just those companies that compete with offerings from the MSOs and telcos. Text-based services such as search are probably pretty safe, but video and voice services from the likes of Google and MSN are definitely at risk. If this plays out as I think it might, the real issue will ultimately be revealed to be not net neutrality, but rather, restraint of trade. The telcos in particular have argued that they should be unregulated, but the protection they’ve had against most antitrust regulation for more than 100 years has been based on their willingness to accept government regulation in return for a monopoly on phone service in each market. When the regulation goes away, so should the protection. Of course, neither the telcos nor the MSOs have anything to fear from the Bush Administration’s Justice Department, but that could change fairly abruptly in 2008. In any event, I think that the true battlefield going forward will be antitrust, not net neutrality.

If It's Not a DVR, It Must Be a Lawsuit

Cablevision was sued last week by Fox, Viacom, Disney, NBC Universal and CBS. The previous week, it was sued by Time Warner's CNN and Cartoon Network. Why is Cablevision so unpopular all of a sudden? The reason is that it plans to roll out a Digital Video Recorder (DVR) service that stores the shows that subscribers record on servers on Cablevision's network, rather than on DVR-equipped set-top boxes in subscribers' homes. The services is called RS-DVR by Cablevision and Network DVR by everyone else.

What's the difference between network and set-top DVRs? To consumers, not much, but to Cablevision and the big media companies, a great deal. According to this article, by next year, Cablevision could deploy network DVRs for one-third the capital cost and 1/10th the monthly maintenance cost of in-home DVRs. Here's the breakdown:

Hardware: Set-top Box--$300 vs. Network Storage--$100 (for 80-200GB/storage per subscriber)

Maintenance: Set-top Box--$1/month vs Network DVR--$0.10/month (based on the fact that it's much less expensive to swap out a faulty hard disk from a server farm than it is to roll a truck and swap a set-top box.)

Cablevision's Network DVR system will work with any of its existing digital set-top boxes, so in Cablevision's case, 70% of its total subscribers could become DVR users the minute the company turns the system on. And, Cablevision is simply buying the software and hardware from Arroyo Video Solutions, so any other cable operator can use it. If it works for Cablevision, a lot of other cable operators will want it. So why don't big media companies want them to have it?

The debate is based on interpretation of Copyright law in general, and the Betamax decision in particular. (This is the point at which I have to remind you that I'm not a lawyer, I'm not giving legal advice, my interpretation of the relevant laws and legal decisions may be wrong, and your mileage may vary.) In 1984, the U.S. Supreme Court ruled that consumers have the right to record television programs for their own personal use, for the purpose of watching them at a later time or date ("time-shifting".) Cablevision argues that its Network DVR system does exactly what the Betamax ruling permits. The major media companies, however, counter that it's really Cablevision, not consumers, who are making the copies, and that the copies (from hundreds to potentially millions) reside on Cablevision's servers. They argue that a court ruling designed to allow one person to make one or two copies for their own use was never intended to extend to multi-billion dollar corporations making,storing and distributing millions of copies. The big media companies also argue that Network DVR is simply another name for on-demand programming, and the cable MSOs are already required to obtain licenses in order to distribute their content on demand.

Both sides have valid arguments. Network DVR is, in fact, nothing more than on-demand programming whose storage is triggered by individual viewers instead of MSOs, but the network storage really serves exactly the same purpose as the hard disk in a TiVo or other set-top DVR, or, for that matter, a VHS tape. This case is probably going to end up at the Supreme Court, which means that it'll be years before we know whether or not Network DVRs are legal. I'm rooting for the cable operators to prevail, but for the time being, thanks to the slow, grinding effect of the U.S. legal system, your next DVR is still likely to be in the form of a set-top box. At least it's legal to not have to put up with that blinking "12:00".

UPDATE: On June 8th, Cablevision agreed not to deploy network DVRs until the court can decide whether or not they are covered under the Supreme Court's Betamax decision. Both Cablevision and the studios agreed to an expedited schedule that will have the court hear arguments on October 30th or 31st.

AMD and ATI: Place Your Bets Now

Forbes.com has reported that Apjit Walia, an analyst with RBC Capital Markets, thinks that AMD might be considering a merger with ATI. There are a lot of qualifiers in the story, but it was a slow business news day, so it got a lot of play. Given that the source of the story is a single analyst who doesn’t cite any substantive evidence that a deal is seriously being considered, there’s not a whole lot of “there” there.

I don’t believe that this merger is going to happen any time soon, and the reason has nothing to do with graphics. NVIDIA is by far the largest third-party supplier of motherboard chipsets for AMD’s processors. I don’t know this for sure, but I suspect that they sell more chipsets for AMD processors than AMD does. NVIDIA’s chipsets have been instrumental in making AMD’s processors competitive with Intel’s, because raw processor speed is worthless if you can’t make it work in real-world PCs and servers. The two companies have been critically important to each other’s success: AMD’s processors made NVIDIA a serious player in the chipset business, and NVIDIA’s chipsets helped establish AMD’s processors as the best choice for hard-core gaming and graphics applications.

If AMD and ATI were to merge, NVIDIA would almost certainly pare back its commitment to AMD. That would be especially problematic for AMD now that Intel is ramping up to deliver its Conroe and Merom processors later this year, which will stack up very well against AMD’s models.

For this reason, as well as for the reason that acquiring ATI really doesn’t buy AMD anything, I don’t believe that an AMD-ATI merger is in the cards. But, I’ve been wrong before, so never say never. If a merger or acquisition should occur, however, the NVIDIA chipset problem won’t go away. In my opinion, an AMD-ATI deal makes less than no sense, but companies sometimes make emotional decisions and then rationalize them after the fact. Stay tuned.

Neutrality Net-Net

A topic that’s been getting a lot of play in Internet circles lately is “Net Neutrality.” Basically, net neutrality means that Internet service providers have to treat everyone who uses their networks equally, and not give either preferential or punitive treatment to any customer(s). But, while net neutrality has been the law for years, the big telecom companies want to get rid of it. Both Ed Whitacre of AT&T and Ivan Seidenberg of Verizon have been quoted on several occasions asking why they can’t charge more to big users of their bandwidth like Yahoo and Google.

On the surface, the argument has some merit: Everyone pays more as they use more electricity, so why shouldn’t the same thing go for Internet access—the more you use, the more you pay. The interesting thing is that Internet access works exactly this way already. Content providers such as Yahoo and Google don’t get Internet access for free. They have to pay for bandwidth, which they buy from Internet Service Providers. The two largest ISPs are…you guessed it, AT&T and Verizon. On the other end of the Internet, we’re paying for high-speed bandwidth and connectivity, and the companies that control consumer DSL access are…wait, let me guess…AT&T and Verizon.

In other words, AT&T and Verizon are already making money on both ends of the connection, from the content providers and consumers. Apparently, that’s not good enough. Of course, the telcos argue that they’re not going to turn off access to content providers that don’t pay, they’re simply going to give more bandwidth to those providers that do pay. Here’s a potential scenario:

Company “S,” which offers free or low-cost VoIP service (which it’s already paying the ISPs to offer,) is told by the telcos that it either has to pay more or lose some of its available bandwidth. If it loses the bandwidth, its quality of service will deteriorate, and customers will switch to competitors. If it pays more, it has to recoup those costs somehow, so it has to convert some of its free services to paid, raise the prices of its existing paid services, or both. Any of these outcomes will make its services less competitive with the local and long distance services offered by the telcos.

If the telcos came out and said that their intention is to put their competitors out of business, there would be a huge outcry, but by simply “charging more for using more,” they can obtain the same outcome. Also, by making the content providers, not consumers, responsible for footing the bill, they can deflect criticism that their actions are “anti-consumer.”

As with most things related to the telecom industries, the interests with the most money to contribute to politicians are the ones with the greatest probability of success, and the phone companies take a backseat to no one. Of course, if enough people write their Congresspeople and email the FCC, they could change the outcome. After all, if three people and a form letter can get the FCC to rule that a television show is indecent, surely thousands of emails and letters from outraged consumers will get action, right?

Don’t count on it.

PlayStation 3: DOA?

Earlier this week, prior to the start of E3 in Los Angeles, all three of the game console powerhouses—Microsoft, Nintendo and Sony—held press conferences to show off their upcoming products. Sony’s presentation was the most anticipated, and according to reports, most disappointing of the three.

Sony showed off the PlayStation 3…again. And, like previous demonstrations, almost everything they showed were prerecorded, canned demos of games. That was unimpressive, but the real shocker came at the end of the show, when Ken Kutaragi, President and CEO of Sony Computer Entertainment, announced the price. In the U.S., the PlayStation 3 will be sold in two versions: A stripped-down $499 model with a 20GB hard disk, no WiFi, no HDMI (meaning no digital HD capabilities) and no flash memory ports, and a fully-loaded $599 model with a 60GB hard drive, WiFi, HDMI and flash memory ports. Both models have Blu-Ray drives that can also read DVDs and CDs.

After Kutaragi announced the prices, the only sounds you could hear were crickets, with the occasional clunk of a jaw hitting the floor. By comparison, the stripped Xbox 360 sells for $299, and the fully loaded model costs $399. The new Nintendo Wii (snicker about the name among yourselves) wasn’t priced at the show, but the expectation is that it’ll certainly be no more than $299, and possibly as low as $199.

What’s fascinating is that Kutaragi was quoted post-conference as saying that he thinks the price of the PlayStation 3 may be too low. There seems to be a serious disconnect between Sony and reality, and I think that I’ve figured out what it is: Sony sees the PlayStation 3 as a home entertainment center, and the rest of the world sees it as a game console. When a company and its customers think differently about the same product, the customers always win, because they pay the bills.

Sony’s logic seems to go like this: Their first Blu-Ray player, which is now scheduled to ship in June, will sell for $1,000. The PlayStation 3 will sell for 50% to 60% of that price, but will be able to do much, much more. Thus, the PlayStation 3 is a bargain. On the other hand, most consumers will see the PlayStation as a game console that’s as much as 50% more expensive than the top-of-the-line Xbox 360.

Based on the demos that Sony’s given so far, the PlayStation 3’s games don’t seem to look all that much better than the 360’s. Sony’s clearly playing catch-up to Microsoft’s Xbox Live online service, and it threw a 3D motion sensor into its controller at the last minute to counter the buzz surrounding Nintendo’s Wii controller. Given all this, will consumers purchase a game console whose primary competitive differentiation appears to be its Blu-Ray player?

The answer to that question is critical, not only for the success of the PlayStation 3 but for the very survival of Sony. It’s been reported that the cost of the fully-loaded console and controllers is $900. Assuming that Sony manages to sell them to dealers for 30% off list, they gross $420 per machine, for a loss of $480 each. Normally, the statement “We lose money on every one, but we make it up on volume” indicates a serious lack of common sense, but it’s actually true in the video game business. In order to sell enough video games to recoup the loss on consoles that all the manufacturers incur, you have to sell lots of consoles. Somewhere down the road, if you sell enough consoles, your manufacturing costs drop, and you lose less money. The possible outcomes look like this:

• Don’t sell any consoles, and you lose your R&D, manufacturing and marketing costs.


• Sell tons of consoles, and the subsequent game sales more than offset the losses from the consoles, leaving a nice profit.


• Sell some, but not enough, consoles, and you cover neither your sunk costs nor your loss on each console. You also don’t get your manufacturing costs down enough to make money on sales of fewer games.

Sony’s risk is that PlayStation 3 sales could end up in the “Death Valley” of “okay, but not good enough.” Sony’s game operations have kept the company afloat for years, so if the PlayStation 3 isn’t a smash hit, it could take a big chunk of the company down with it. I’ve dumped on Sony a lot since I started this blog, in part because the company should be doing a hell of a lot better than it is. But, with the PlayStation 3 debacle, Sony is challenging GM for the coveted “Best Snatching-Defeat-from-the-Jaws-of-Victory” award.

Simpler is Better

The National Association of Broadcasters (NAB) convention ended a few weeks ago, and as usual, there were lots of announcements of new cameras, video recorders, editing systems, etc. The big buzz was about two new cameras: The RED One Digital Camera, a cinema-grade camcorder with 4K resolution priced at $17,500 without lens, and the Silicon Imaging SI-1920HDVR, a 1080P digital cinema camera priced under $20,000 that’s basically a computer with a lens and imager on one end and a hard disk on the other. The RED’s vaporware for now—there were no working samples at the show, while the Silicon Imaging camera was demonstrated in its full working glory. When (or if) they get to market, they’ll be exciting, wonderful tools for video production…but they’ll largely be irrelevant.

Media production is shifting to consumers faster than was dreamed possible even a few years ago. The action is in consumer-level hardware and software, especially the new consumer HD camcorders. Earlier today, Sony and Panasonic announced a new consumer HD camcorder format that uses conventional recordable DVD technology called AVCHD. It’ll use tiny 8cm read/write DVDs and record in 1080i or 720p, at 24 or 30 frames per second. Yes, it’s also vaporware right now, but AVCHD camcorders will be on the market no later than next spring, at 1/15th to 1/20th the price of the new camcorders shown at NAB.

But why limit yourself to HD camcorders? People are shooting movies with their cellphones. A lot of digital audio players can double as digital audio recorders for field recording. If you’ve got a PC, you’ve got everything you need to edit a movie or create a podcast. My point is that there are now absolutely no limits for individuals to make their own media. And that is inexorably making the expensive, “professional” tools of media production obsolete. For every RED One, there will be hundreds, if not thousands, of consumer camcorders sold, and the same number of content producers will be created.

The fact is that broadcast and film are mainly replacement markets. TV and cable producers are replacing their standard definition equipment with HD and analog equipment with digital. They’re buying the least expensive equipment that will do the job; $5,000 prosumer camcorders are replacing $25,000 professional models. Film producers are replacing their film cameras with digital ones. The number of television and film production companies and facilities isn’t growing; if anything, it’s shrinking. The consumer producer market, on the other hand, is exploding. For $100 million, you can get one Hollywood movie, or 100,000 people each empowered with $1,000 of media tools. Each of them can put their videos on YouTube, their podcasts on iTunes and their pictures on Flickr.

The media model has irreversibly changed. “Conventional” media is increasingly becoming irrelevant; the first, and best, example is the newspaper business. Knight Ridder, one of the biggest and most powerful newspaper publishers in the U.S., just disappeared, its individual papers being scattered among several buyers. Here in the San Francisco Bay area, the television stations seem to be promoting their websites and mobile video as much (if not more) than they’re promoting their newscasts. Movie studios are desperately trying to stimulate growth in a stagnant market. Drive-time radio is being replaced with drive-time iPods. Magazines are folding left and right, as their readers increasingly get more, and more current, information on the Internet.

Have we reached the tipping point, the inflection point, critical mass? We may have already passed them; you only see them in hindsight. But I’ll tell you one thing: If you want to know where the future of media production is, don’t go to NAB…go to Best Buy.

Back on the Blog

I’ve spent the last month or so getting up to speed in my new job, as well as moving from Silicon Valley to Sonoma County, California. Now, I’m finally settled in and will be making regular blog entries.

"Drop and Give Me OS X, Soldier!"

Apple’s announcement of Boot Camp earlier this week has stirred the kind of controversy usually reserved for, well, Apple’s announcements. For those of you living under a rock, Boot Camp is a new addition to OS X that enables Windows XP to be installed and run on any of the new Intel-based Macs. Boot Camp is currently in beta, and will be shipped as a standard component of Leopard, the next version of OS X.

Reviews to date have been very positive—Macs running Boot Camp perform at least as well as equivalent non-Apple computers when running Windows XP. The only major difference seems to be that video performance for some games on the Macs isn’t quite up-to-par with the native Windows machines.

The release of Boot Camp has unleashed a wave of punditry and Monday-morning quarterbacking, most of which claims that it’s:

• The end of Apple,
• The end of OS X, or
• A sign of the Apocalypse

I think that it’s an extremely shrewd move by Apple to dramatically increase the Mac’s market share. It’s taken from the same playbook that Apple used for iTunes.

You probably remember that when the iPod was first released, it only worked with Macs. Demand for the iPod from Windows users was so high that third-party developers came up with software to make them work together. Then, Apple released the iTunes software and music store, which like the iPod worked only with the Mac. However, in October 2003, Apple released a version of iTunes for Windows. The rest is history: The latest research shows that Apple has 93% of the U.S. market for digital audio players and more than 70% of the market for legal audio uploads.

With Boot Camp, Apple gets the chance to do it again. Apple’s share of the personal computer industry has been stuck at 3% to 5% for years. What’s been the biggest knock against the Mac? It couldn’t run Windows, and Windows had enormously more software and hardware support than OS X. That objection goes away with Boot Camp. With one move, just as with iTunes, Apple opened up the other 95% of the market for itself.

Some people say that the availability of Windows support will negate the need for OS X. In a lot of cases, that will be true. Once Windows Vista supports the Extensible Firmware Interface (EFI) that’s used in the Intel Macs instead of a BIOS, it’ll be possible to run Windows on a Mac without OS X at all. However, customers that buy a Mac will always get OS X thrown in for free. Even if they only sample what OS X can do, they’ll see that it’s just plain easier to use than Windows. They’ll also see that the user interface and standard media tools such as iMovie and iDVD are far ahead of their Windows counterparts in power and ease of use.

For media producers, Apple’s hard-core audience, I’m sure that applications such as Final Cut Pro, DVD Studio Pro and Motion will remain OS X-only indefinitely. However, producers wedded to Windows-only tools like Adobe Premiere Pro can now use them with the Apple applications on the same machine. Switching from OS X to Windows and vice versa will require a reboot, but it should be possible to mount one operating system’s disk partition from the other OS, so that files can be shared between applications.

Apple’s hardware designs are head and shoulders above virtually every Wintel manufacturer’s products. In my new job, I was assigned a Powerbook G4. I’ve used Macs since they first came out, but I’ve never used a Mac notebook. Although there are some quirks of the Powerbook that take some time getting used to, the overall design puts every Wintel notebook out there to shame. If I had the bucks, I wouldn’t hesitate to buy a MacBook Pro, even if I was planning to use it almost exclusively for Windows.

When Leopard ships, I expect to see Intel-based Macs running OS X and Windows XP side-by-side in Apple Stores, in order to demonstrate how well the new Macs run Windows. The demo will also seduce Windows buyers to plunk down more cash for a Mac: “Wow! I can get Windows plus all the Mac features? Where do I sign?”. It may be heretical, but I think that you’ll also start seeing copies of Windows XP on the software shelves in Apple Stores, in inconspicuous positions, “solely for the convenience of our customers.”

Apple’s competitors will no longer be able to sell against the company with the phrase “It doesn’t run Windows.” The easy sell is gone, and the personal computer industry is going to be shook up in ways that it hasn’t been for years.

The Death of Public Broadcasting

I just turned on Harry Shearer’s “Le Show” on my local public radio station, and learned that they were running a pledge break. (Pledge campaigns, for those of you from outside the U.S., are typically two-week periods during which regular radio and television programming are both interrupted and cut short by numerous requests for donations. Most public radio and TV stations run at least three pledge campaigns a year.) I immediately turned the radio off and made a note to avoid that station for the next two weeks.

Public radio stations, run for decades under the assumption that they had no real competition for their listening audiences, now find themselves competing on multiple fronts. For example, subscribers to XM and Sirius satellite radio have a wealth of public broadcasting shows to choose from; Sirius even has two channels dedicated to National Public Radio. Neither channel carries any pledges. In addition, most popular public radio shows are podcast on a national basis.

Most public radio stations try to get listeners to become members with a monthly payment of $10/month, or $120.00/year. Both XM and Sirius charge $12.95/month, or less if you prepay for at least a year. For $3 more a month than local public radio, you get over 150 channels of music, news, sports, talk, traffic and weather. You do have to buy a radio, but they’ve been discounted down to almost nothing, and most new cars either come with built-in satellite radio receivers or can be ordered with them. And, by the way, you can still get the public radio stations for nothing if you’re willing to put up with the pledges.

Some public radio stations counter by talking about all the great “bonus gifts” they provide. I learned not to even take the bonus gifts, because they decrease the tax deductibility of pledges. When I did get bonus gifts, they often took months to arrive, and I sometimes had no idea that they were attached to pledges: I started getting a subscription to Atlantic Monthly magazine that I didn’t order, and it took months to figure out that the subscription was a bonus gift for a pledge. Needless to say, I didn’t renew the subscription.

Doom and Gloom at the Movies

For the last sixty years, the movie industry has gone from crisis to crisis. In the 1950’s, it was the advent of television and the government-mandated divestment of movie theaters by the major studios. In the 60’s and 70’s, it was a cultural disconnect that both alienated the baby boomer audience and led to the birth of the independent film movement. In the 80’s, it was pay-TV and the threat of home video (which ultimately became the biggest money-maker for the movie industry,) and in the 90’s it was DVD, which pulled viewers from the theaters and put them on their couches.

Once again, the movie business is in crisis mode. Both ticket sales and revenues have either been flat or have fallen for the last three years. After years of double-digit growth, DVD sales (which have kept the studios afloat) have leveled off. HD DVD and Blu-Ray are an enormous question mark for both movie exhibitors and studios. Exhibitors are being pushed to make massive investments in digital projection equipment with no evidence whatsoever that it will either save money or increase attendance.

One of the industry’s dirty little secrets is that theater attendance has fallen steadily since the 1950’s. Increases in revenues from theatrical exhibition have come almost exclusively from higher ticket prices.

Privately, exhibitors blame the industry’s latest funk on lousy films. Studios blame exhibitors for too many ads before movies, an inability to control talking on cell phones and a lack of concern about picture and sound quality. They both have a point. Publicly, on the other hand, they blame their woes on piracy and technology, and they’re completely off-base.

I believe that the movie studios have fundamentally lost touch with their audience. As one studio after another attempts to up the ante with more and more sophisticated special effects, they seem to have forgotten that stories need to be compelling and characters need to be interesting. The major studios also seem to be in a race to make the most expensive movies, a race that’s been financed by the explosive growth of DVD sales. Now that the DVD market is cooling off, the industry’s cost fetish is no longer sustainable.

Consider a few recent examples: “King Kong” had great special effects and a couple of fine performances from Naomi Watts and Andy Serkis, but it simply shouldn’t have been made. Universal thought that it was a sure thing and put an estimated $300 million into producing and marketing it. Unfortunately, a large part of the potential audience had better things to do than watch a remake of a remake.

The second Star Wars trilogy: All three films were disappointments at the boxoffice, largely due to scripts and characters that never connected with the audience. Compare them with the Lord of the Rings trilogy: Both series of films had great special effects, but the Lord of the Rings trilogy also had a great script, compelling characters and great acting. The result was both tremendous artistic and financial success.

The major studios are trying to pull the coveted 12-to-24 year old male audience away from video games and the Internet, but they don’t have a clue about what that audience really wants. Think about it: Movies have been based on video games from Super Mario Bros. to Doom. None of them has been either artistically or financially successful.

As for the theater owners, they have only themselves to blame for customers fleeing in droves. Ticket prices are at an all-time high, but the audience has to cope with people talking on cell phones, screaming kids, lousy sound, mangled prints and out-of-focus projection. With more and more DVRs in use, television viewers can skip commercials, but the audience in many theaters is forced to watch an ever-increasing number of ads before the main attraction. Thanks to Wal-Mart and its ilk, DVDs don’t cost much more than a single nighttime movie ticket in large cities. It’s no wonder why more and more people are skipping the theaters and instead watching movies on demand and on DVD, at home.

The interesting thing is that all of these problems can be fixed by exhibitors today. In the old days, theaters had ushers who asked viewers who were disturbing other members of the audience to either quiet down or leave. Today, of course, the ushers clean the theaters between shows. Once upon a time, projectionists monitored films from beginning to end, and fixed problems when they happened. Now, one projectionist may be responsible for every projector in a theater with 24 screens, and much of the operations are automatic. If the film goes out of focus or the sound is too soft or loud, an audience member has to go find an usher or ticket taker to tell the projectionist to fix the problem. In the olden days, the only commercial you got was dancing popcorn, soda and candy singing “Let’s go out to the lobby and get ourselves a treat!”. Today, the audience is bombarded with ads dressed up to look like entertainment, but that are anything but entertaining.

The film industry is bleeding from self-inflicted wounds. They have no one to blame for their problems but themselves. Piracy and new technology are red herrings. Their problems will be solved with better movies and theaters run as if their owners actually cared about their audiences. Until then, they won’t see you at the movies.

Synergy: Good, Bad and Ugly

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


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


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

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

Open Source Creativity

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

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

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

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

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

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

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

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

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

When is HD QD?

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

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

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

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

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


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

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

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

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

Another Brick in the (Google) Wall

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

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

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

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

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

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

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

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