Wednesday, May 31, 2006

AMD and ATI: Place Your Bets Now 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.

Tuesday, May 16, 2006

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.

Friday, May 12, 2006

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.

Thursday, May 11, 2006

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.