Amazon demonstrates Kindle for the iPad

Earlier today, Amazon took the wraps off of its Kindle Reader for the iPad. Details are still sketchy, and Amazon has only released three screen shots. Also, so far as I can tell, it hasn't yet been approved by Apple. However, what Amazon's shown looks good, and it brings full color, full page displays to the Kindle.

I've long believed that Amazon's end game is to get out of the eBook reader hardware business. Hardware is a very difficult and expensive business, and it doesn't play to Amazon's strengths. Amazon needed the Kindle hardware in order to build a large base of eBook customers and thus drive eBook adoption and sales. Now that tablets are becoming available in a range of sizes and prices, the need for Amazon to have its own readers is declining.

Focus.

I visited a startup in Silicon Valley a couple of months ago; for purposes of confidentiality I won't name them. They're executing a business plan that calls for them to develop an online eCommerce service, client software and a new hardware platform. They started from scratch on all of it, and their goal is to get to market about a year after the company was first conceived. They're well funded, but they're obviously not generating any ongoing revenue, and they're still in stealth mode.

The single most important thing that a startup has to do is to focus. There's never enough money, time or resources. The three things that this startup is trying to do--Internet services, client software and hardware--would be big challenges for three startups, but they're trying to do it all themselves.

The irony is that they don't have to do everything they're trying to do. There are plenty of software clients out there that do what they need, or they could contract out for the client's development. The hardware segment they're focusing on is one of the most active and rapidly evolving areas in consumer electronics. There are (or certainly will be by the time they launch) tons of platforms that they could support, but they've deliberately chosen to build their own hardware platform. They could focus on their eCommerce service, which is going to be a big enough challenge in itself.

By trying to do everything themselves, they're scattering their resources and dramatically increasing the risk of failure. Also, by staying in stealth mode for so long, they're running the risk of coming to market with a poor product/market fit. They think that staying in stealth mode will protect them from competitors, but competitors don't need them to understand what the market needs.

The single most important thing that a startup must do is focus. Focusing helps you to conserve resources, pivot more adroitly, and leverage external partners and technologies. It decreases the potential points of failure. The company I just described is one of those "fat startups"; being fat has enabled it to unnecessarily scatter its efforts.

Jack Sprat and the semantics of startups

"Jack Sprat could eat no fat.
His wife could eat no lean.
And between the both of them, you see
They licked the platter clean."

It looks like we've got yet another semantic dustup going on in Startup City. A couple of weeks ago it was about ridding the world of the term "fail fast", and last week, a battle broke out between Lean and "fat" startups. The breaker-outer was Ben Horowitz of Andreessen Horowitz, who wrote an op-ed piece for the Wall Street Journal's All Things Digital website titled  "The Case For the Fat Startup." In his article, Horowitz reviewed the history of Loudcloud and Opsware, the companies that he and Marc Andreessen co-founded, and argued, in his words, 'The best companies can raise money even in this market. If you are one of those, you should consider raising enough to wipe out your competition."

Fred Wilson, a well-known New York-based VC, argued in his blog post titled "Being Fat Is Not Healthy" that "I have never been involved in a successful software-based web service that raised and spent boatloads of money before it found it's (sic) sweet spot." He points out that Loudcloud and Opsware raised $350MM in four rounds of financing, including an IPO, in the space of 15 months. The only reason that they were able to do that was because the companies had been co-founded by Marc Andreessen, and Netscape made a bunch of people rich.

If Loudcloud and Opsware had been founded by two different people, even if their resulting services and products were exactly the same, they would have had a dramatically different outcome, because they would have only been able to raise a fraction of the capital. In statistics, we call something that is so far outside the realm of normal occurence an "outlier". Loudcloud and Opsware were outliers, and using an outlier as proof of the validity of a concept is like saying "I won $10 million in the lottery, so anyone can do it." Technically, yes, "anyone" can do it, but the odds against it are astronomical.

Wilson argues that once you've got your product/market fit right and you're sure that you're pursuing a real market and not a mirage, then go ahead and raise all the money that you can. Loudcloud didn't do that. It raised and spent an enormous amount of money only to learn that it didn't have a good product/market fit. (Horowitz claims that Loudcloud had, in fact, found a viable product/market fit, but then why did he decide to sell it off and focus on software?) It could have learned that it had an insufficiently appealing product/market fit by spending only a fraction as much as it did, and then put its resources into the real market opportunity that it finally identified. And it's true that reaching a product/market fit isn't a binary decision; it takes time. However, I'd argue that you want to floor the accelerator when you've found the right fit, not the first fit.

I worked with Ben at Netscape, and I consider him a friend, but the approach he advocates smacks of both "Ready, Fire, Aim" thinking and the now-discredited "get big fast" philosophy of the dot-com boom. I'd argue that Loudcloud spent the money because it had access to the money. If it hadn't had access to so much money, it would have been run very differently.

When you know that what you're doing is right, by all means raise the money you need to "crush your competition." There are also businesses where the capital investment required to even figure out if you're going in the right direction is so high that there's no alternative to being a fat startup. But for most software companies, being fat won't be a winning strategy for either entrepreneurs or investors.

Here comes your $99 eBook reader/tablet

Earlier this week, Marvell displayed engineering prototypes of "Moby", a tablet powered by its Armada processor that will run either Android or Windows Mobile. Moby will come will built-in WiFi, Bluetooth and GPS, the ability to encode and decode 1080p HD video in real time and 3D graphics support. The tablet will support Flash, and Marvell claims that end-user devices based on its reference design will be able to be sold for $99. As Technologizer pointed out, the tablets shown at this week's Future of Publishing Summit were rough engineering prototypes, so Marvell's claim that production versions ready for customer delivery will be ready by the end of the year is probably correct.

One interesting aspect is that Marvell is targeting the education eBook market with Moby; the company's press release is full of references to the educational market, and Marvell even plans to give Mobys away to every student at an at-risk school once the device goes into production. There have been companies targeting the low end of the eBook reader market, but $99 is an awfully low price point to beat. The advantages of full color, video and Flash will outweigh any disadvantages of using an LCD display instead of e-Ink for educational applications.

In any event, the tablet market is getting very crowded, very quickly, and Marvell is positioning itself to be one of the arms merchants.

Palm: Dying by self-inflicted wounds

Today, Engadget ran a long post about what Palm needs to do in order to survive. The article reads more like a list of things not to do when you launch a product. Most people agree that when the Palm Pre was first shown at CES in January 2009, it had an innovative operating system and a decent, if not great, hardware platform. However, from CES forward, Palm made one major mistake after another. Here's the summarized list from the Engadget article:

1. Palm waited six months to ship the Pre after it showed it at CES; by that time, much of the initial interest had cooled.
2. Palm shipped the Pre only days before Apple announced the iPhone 3GS, which immediately stole most of the Pre's thunder.
3. Palm's exclusive partner for the Pre launch was Sprint, probably the weakest of the major US wireless carriers. Palm should have done whatever it had to do to get the Pre into AT&T, Verizon or both.
4. There was no Software Development Kit available for the Palm Pre when it shipped. It took a long time for Palm to ship the SDK, so only a handful of applications were available while the iPhone and Android were gaining apps tens or hundreds of times faster. Also, Palm has only recently gotten around to shipping a PDK that enables access to the low-level functions of the Pre and Pixi.
5. Palm had awful marketing at launch, especially an incomprehensible advertising campaign that told buyers nothing about what made the Pre special or why they should buy it.
6. When Verizon finally got the Pre Plus and Pixi Plus, it advertised the phone as suitable only for housewives from the 70s. Palm should have done everything it could to nix Verizon's campaign, but whatever it did wasn't enough.
7. Rather than develop its own content management application or license something from a third party, Palm deliberately broke USB compatibility rules in order to make the Pre look like an iPhone to iTunes. Apple promptly retaliated, closed off iTunes and got the USB Implementers Forum to order Palm to stop masquerading as Apple.
8. The Palm Pixi makes no sense--it can't compete with other phones at its price point, and it was deliberately underpowered by Palm so as not to compete with the Pre.
9. The Pre had lots of hardware problems, most of which Palm refused to acknowledge or take responsibility for.

I'm going to stop there. My point isn't that Palm shouldn't fix these problems, but rather that it never should have had these problems in the first place. Everyone makes mistakes when they launch new products; we're all human. Palm, however, made so many disastrous mistakes that the company is now probably too far gone for any survival guide. Writing a survival guide for Palm is like telling the deceased at a funeral home to stop smoking. It's already too late.

Reed Hundt did something "naughty" with the HDTV Transition

You may remember Reed Hundt. He was the Chairman of the FCC under Bill Clinton, at the time that agency was planning for the transition to HDTV. The original plan was to implement HDTV in the same way as Japan had done it--one resolution, one refresh rate, one single standard. The FCC instead mandated a convoluted standard that required some 17 combinations of resolutions and refresh rates to be supported; even what we now consider Standard Definition was included in the HD standard, in order to support data applications over broadcast bandwidth. Chairman Hundt invited Microsoft into the process, and Microsoft demanded a series of changes to the standard in order to support its plans. What was originally a clean, straightforward and reasonably inexpensive upgrade became complex and expensive for everyone--broadcasters, cable and satellite operators, and consumers.

Earlier this month, at the Columbia Business School, Mr. Hundt gave a speech where he admitted that he and his associates deliberately logjammed the HDTV transition with the intention of killing it entirely. Here's a direct quote: "This is a little naughty...we delayed the transition to HDTV, and fought a big battle against the whole idea but we lost." If Mr. Hundt and his associates were so dead-set against HDTV, why didn't they fight it out in the open instead of waging a passive-aggressive war of changing the specifications and moving the goalposts? If he and his associates had been honest, we wouldn't need this National Broadband Plan--there would be plenty of bandwidth for broadcasters and for broadband wireless services. Instead, we've got the world's most expensive and convoluted HDTV system, many consumers still aren't getting true HD, and tons of bandwidth is lying fallow in subchannels mandated by the FCC.

We have to dramatically increase the availability of broadband access at prices that U.S. consumers can afford. As I've written previously, the National Broadband Plan says precious little about how it's going to lower costs to consumers, and puts few demands on the incumbent telephone and cable providers. It's biased to take its "pound of flesh" from broadcasters. Is what we're seeing a real attempt to make broadband available to everyone at an affordable price, or is it merely the continuation of Mr. Hundt's now almost 20-year-long war against broadcasters?

You're only as good as your partners

According to the New York Times, Google has partnered with Intel, Sony and Logitech to port Android and a set of Internet-oriented applications to set-top boxes, HDTVs and other devices. Google is also said to be working with Dish Network to implement Android and similar applications in Dish's satellite receivers.

In any kind of industry consortium, you're only as good as your partners. Logitech, which is being called on to provide peripherals including a remote control, is an excellent choice, although their inclusion in the consortium seems like overkill, given that many companies can do remote controls well. The quality of the partners goes down from there:

• Intel has a terrible track record with consumer electronics; it repeatedly announces industry initiatives and partnerships, but very little comes from them, because Intel's chips are both overkill and overpriced for most consumer electronics applications.
• Sony has lost its market leadership in consumer electronics. The company's engineers strive to lock customers into Sony technologies, and that has made the company an also-ran in many markets. The company's fierce unwillingness to compromise on Blu-Ray delayed the entire consumer electronics industry from launching the technology for more than a year, and its arrogant overpricing and over-complication of the Playstation 3 allowed Nintendo and Microsoft to dominate the console market until very recently.
• Dish is a weak #2 in the U.S. satellite television market, and its repeated court losses against TiVo mean that the company may not remain a viable satellite receiver or set-top box manufacturer.

I would feel a lot more comfortable about this effort if Google had managed to attract a couple of ARM licensees and additional consumer electronics manufacturers such as Samsung and Panasonic. (Signing up Samsung would have gotten them both the ARM processors and additional consumer electronics clout.) Google may be planning to add more companies to the consortium, but if this is all they get, I don't see Google TV gaining much market traction.

Google can't call the Nexus One "Nexus One"

On top of the slow sales for Google's Nexus One smartphone comes a bombshell from the U.S. Patent and Trademark Office (USPTO): Google's application for Nexus One as a trademark was refused because it's too similar to the Nexus trademark held by Integra Telecom. It's hard to believe that Google's trademark counsel didn't find and report this conflict.

Google can fight the ruling with the USPTO, which will take months, it can license the trademark from Integra Telecom, or it can find a new name for its smartphone. I'm betting that Integra Telecom is going to get a nice payday, whether Google does a friendly deal to license the Nexus trademark or Integra takes them to court for trademark infringement. Even with its slow sales, Google now has too much equity invested in the Nexus One trademark to drop it without a fight.

The Department of Unfortunate Names Department

The new issue of Videography magazine went out today, and in the back, there's an interview with NBC Universal's Vice-President of Digital Content, Cameron Death. I can only imagine what he went through when he was growing up. To indicate his answers to the writer's questions, the magazine said that the answers were given by Death.

He should have considered a career in Human Relations: "Mr. Death wants to see you in his office." "Next week's seminar on life insurance benefits will be given by Mr. Death." "I heard you were just fired! 'Yes, I was terminated by Mr. Death.'" And so on.

The 2010 Census: Are we missing something?

Regular readers of this blog (both of you) know that I've spent a lot of my career doing market research. In the United States, the decennial (every ten years) Census is the single most important source of governmental and consumer research. Every household in the U.S. is required to participate in the Census, and it represents the "ground truth" dataset used to calibrate governmental, commercial and academic market research databases. Every ten years, the Census allows us to reset, recalibrate and build a strong base for forecasts.

I received the Census form yesterday and filled it out as instructed. In previous years, there were two forms: A short form, roughly equivalent to the 10-question form I filled out, and a long form which asked far more questions and got far more detailed responses. Most people received the short form, while the long form was sent to a statistically-selected sample of the population. In 2000, I received and filled out the long form.

For 2010, the long form is gone, and everyone fills out the short form. The 2010 form asks questions about age, race, ethnicity and housing. There are no questions about employment, income, or the more detailed ethnic, relational and housing questions that we've come to expect from the Census. Instead, a small sample of households, college residence halls, nursing homes, etc. will get the American Community Survey (ACS), which the Census Bureau sends every three years (2007 was the first year). Households who receive both the 2010 Census form and the ACS will have to complete and return both forms.

The information collected in the 2010 Census, while important, will no longer be as useful or insightful for governmental and commercial purposes as previous surveys. A lot of extremely useful information on employment, income, housing and more will be lost, and the ACS will only provide a statistical approximation. The whole reason for doing the Census is to completely measure the population, not a sample of the population. We may be losing too much for the little bit of money that we're saving.

Is Microsoft protecting the wrong thing?

For decades, Microsoft's strategy has been to protect sales of Windows and Office at all costs. Those are the company's revenue and profit centers, and Microsoft's inability to make money online or with its consumer electronic business has made protecting Windows and Office a self-fulfilling prophecy--they need to protect their cash cows because they can't build new ones.

I'm one of those people who's still running Windows XP, because Microsoft is basically requiring XP users to "forklift upgrade" if they want to go to Windows 7. I run Windows 7 on my netbook and it works fine, because I was able to start with a bare machine. I've used my current XP system for four years and shudder to think about buying a new system and reinstalling software from scratch.

There are a lot of people in the same boat, but Microsoft is showing all of us the friendly middle finger. The trend started with experimental products like Pivot--sorry, but they only work on Vista or 7. Yesterday, Microsoft made the Windows Phone 7 Series SDK available for free download, but even though the instructions say that it'll work on Windows XP, it doesn't. The installer demands Vista or better. Then, Microsoft released the preview version of IE 9, and again, it requires Vista or 7.

If I was so motivated to get a new system and reinstall all my software in order to use these new Microsoft products, I'd do it, but I'm not, and I don't see anything there that would justify spending either the money or the time. I'll happily continue working on Android on XP and the iPhone on my Mac. The Microsoft Office team was able to figure out how to get Office 2010 to work perfectly fine on XP. Microsoft should be looking forward to build new user bases and new businesses, not backward to protect Windows revenues at all costs.

Update: I've come up with a personal solution, which is to install Windows 7 under Parallels Desktop on my iMac. It seems ridiculous that my most economical solution to Microsoft's "push Windows 7" strategy is to run it on a Mac.

The most important thing left out of the National Broadband Plan

The Executive Summary of the National Broadband Plan was released today by the FCC (PDF link), and what's been proposed is largely in line with what was leaked in the last few weeks. The FCC wants to get affordable broadband service with 100 Mbps download and 50 Mbps upload speeds into at least 100 million homes by the end of this decade. The Plan proposes lots of ways to get there, from subsidizing expansion of wired Internet connections in rural communities to reallocating 500MHz of wireless bandwidth to broadband service. However, for all the platitudes in the plan about lowering costs and making broadband service more affordable, there's precious little (at least in the executive summary) proposed to actually back up that intent.

A few years ago, when I was an industry analyst covering the IPTV market, I regularly traveled to Europe. My visits to France were particularly enlightening. There were multiple service providers offering IPTV, high-speed Internet and local & long distance phone service at the equivalent of around $30 a month; less than one-third the price of the $99 triple-play deals offered in the U.S., with similar or better channel selections and Internet speeds. As you can imagine, the French services were wildly popular.

So why was triple-play service so much less expensive in France (and so much better)? The French Government required France Telecom to make its lines available to competitors at wholesale prices. Far from slowing down the growth of broadband access, the French Government's decision caused usage of broadband services to explode for everyone, including France Telecom.

Telephone companies in the U.S. were once required to provide their lines available to competitors on a wholesale basis, and the U.S. had a healthy competitive market for DSL services. Cable operators, on the other hand, were never required to make their networks available to competitors. In the Clinton Administration, the same team that drafted the National Broadband Plan allowed telephone companies to stop making their networks available to competitors as part of the Telecommunications Act of 1996, ostensibly to encourage phone companies to make bigger investments in their networks and further the growth of broadband.

We saw what happened: Most of the phone companies that were originally part of AT&T got consolidated back into AT&T. As a practical matter, most U.S. households have a choice of broadband service from two suppliers--the incumbent telephone company and cable operator. There's no meaningful price competition. U.S. households pay much more for much slower Internet service than do households in many other countries.

I'm not saying that the National Broadband Plan doesn't have merit, or that it shouldn't be taken seriously. What I am saying is that the thing that's most likely to increase competition, lower costs and make more broadband access available is to open up the existing cable and telecom networks for wholesale availability. That idea is nowhere to be found in the National Broadband Plan, and there's no surprise why.

Update, March 22, 2010: The Berkman Center for Internet & Society at Harvard University did an extensive study of broadband in the U.S. and the rest of the world for the FCC, and released the report, "Next Generation Connectivity" in February, 2010. The report speaks to the points that I made in this blog post, plus much more. Click here to access the entire study, or visit this article at the New York Times for a summary of the relevant points.

Coming Wednesday: Open-Source Set-Top Boxes?

The FCC is going to release its long-awaited National Broadband Plan this coming Wednesday. Details of the plan are leaking out, and broadcasters are the group that stands to lose the most--see Harry Jessell's column on TVNewsCheck for an analysis of and link to a speech by Reed Hundt, a former Chairman of the FCC and one of the architects of the new Plan.

One element of the plan that's been leaked will also have dramatic impact on cable operators...at least if I understand its intent. The FCC will propose a new type of set-top box that will provide equal access to cable and Internet programming. The FCC tried to open up the set-top box business several years ago when it required cable operators to provide customers with CableCARDs (conditional access/tuner devices) that could be inserted into set-top boxes and HDTVs from consumer electronics companies. The cable industry fought implementation of CableCARD tooth and nail, and even today, most CableCARDs don'y allow subscribers to access pay-per-view and other two-way services. As a result, the entire CableCARD program was stillborn, and cable operators continue to equip their customers with tens of millions of proprietary set-top boxes.

On Wednesday, the FCC is likely going to propose that CableCARD be swept aside and replaced with software-based set-top boxes, HDTVs, home theater PCs and other devices that can provide customer authentication, decryption and tuning for digital cable systems without proprietary hardware. These devices will also have Internet connectivity, and will be able to provide access to Internet video in the same device and using the same user interface (interactive program guide) as cable channels. In essence, these new devices would elevate Internet video to the same level as cable channels.

I'm now diving into wild speculation, but here's what I think the FCC will also propose: These new set-top boxes and compatible devices could be purchased by consumers and used on any digital cable system. That means that consumers could move from area to area and use the same set-top box. They would no longer have to pay any monthly equipment leasing charges to cable operators, since the boxes would be configured and made compatible with different cable systems via software and firmware changes.

I know that all of this was supposed to happen with CableCARD and didn't, so why would it happen with this new scheme? It might not--the cable industry will fight it ferociously, especially the part where they have to give equal access to Internet video programming suppliers. The advocates for an open approach have nowhere near the political clout as the cable operators and broadcasters who are going to fight the Broadband Plan. However, the time has come for "soft" cable set-top boxes; the capability to do just about everything they need to do in software has long been there, and the cost of the processing power and memory they need is very low, especially compared to when CableCARD was first proposed.

Set-top boxes that don't require a truck roll in order to install, can be provisioned by consumers and can be upgraded and reconfigured in software would save an enormous amount of money for cable operators. Companies like TiVo and Arris could make a real business out of selling consumer set-top boxes. Any Blu-Ray player with an Internet interface and the horsepower to support Internet video applications could readily be adapted to become one of these new set-top boxes. In the long run, a software-based open design makes more sense for everyone.

First-day iPad sales estimated at 120K units

According to FORTUNE Magazine and the AAPL Sanity Board at Investor Village, Apple sold 120,000 iPads through the online Apple Store yesterday. This is obviously an estimate (since Apple hasn't released numbers) and doesn't count orders placed by shoppers in person at Apple's physical locations. It also doesn't count corporate and institutional sales (which, given Apple's aggressive educational pricing, rumored to be $230 for the 16GB WiFi iPad, are likely to be substantial.) Given that somewhere between 300,000 and one million iPads are expected to be ready for shipment by the end of the month, it's likely that there will be a sell-out, at least for the month of April.

First-day sales (especially pre-sales) should never be used as an estimate of long-term sales potential, especially with a company like Apple that has a big community of dedicated users. However, what surprises me is the number of people who have written articles and blog posts questioning the iPad that are turning around and buying them. I thought that there would be more price resistance, and I'll be very interested to see the distribution of sales for the three memory capacities and WiFi vs. 3G. The survey that the AAPL Sanity Board did on the distribution of orders by model covered only 99 orders for 110 units and is too small to be representative.

In any event, there are a lot of people at Apple who are very happy right now.

Why the term "Exit Strategy" should be kicked to the curb

Mark Suster, a respected Los Angeles-based VC, has been taking a lot of flak for a blog post he wrote suggesting that the saying "fail fast" should be discarded. Many people took Suster's comments as a rebuke of Lean Startup principles, but they were in fact highly supportive of Agile and Lean concepts. Suster was targeting entrepreneurs who use "fail fast" as an excuse to fail using someone else's money: "If at first you don't succeed, quit and make someone else pay for it."

Recognizing that misery loves company, I want to take on another popular phrase that should be kicked to the curb: "Exit strategy", specifically when it's used in the following sentence: "What's your exit strategy?"

If a company is successful, there are lots of possible exit strategies:

• Sell the company to a bigger acquirer for a lot of money
• Merge with another company
• Go IPO

You can also continue to run the company successfully and grow from internal growth, or acquire other companies.  A successful company doesn't have to worry about exit strategies.

An unsuccessful company, on the other hand, needs to worry about exit strategies a lot. The options for an unsuccessful company include:

• Selling the company, usually for a fraction of the amount put in by investors
• Liquidating the assets of the company in the hope that something (a product, patents, etc) will fetch a good price
• Using available cash reserves to pay off creditors and shut the company down
• Going bankrupt

None of those are appealing options.

Moreover, the startups that are asked about their exit strategies are usually the ones at an early enough stage of their development that it's impossible to say what an appropriate exit strategy should be. So, the founders or managers make up an exit strategy that they think VCs will want to hear. If the IPO market is vibrant, that will be the first choice; in a period like today where few IPOs are launched, they'll emphasize acquisition or merger.

The appropriate question isn't "What's your exit strategy?", it's "What's your business model?" and "How will you make this into a successful business?". The answer to those questions will determine whether the startup will even get to the point where a positive exit strategy is possible.

The Chicago startup scene is starting to take off

I attended an event in downtown Chicago tonight called MidVentures25, a presentation and competition for 25 startups from Chicago and other parts of the Midwest. One company that participated came all the way from Athens, GA. The event was very well-organized and equally well-attended. The organizers took over 22,000 square feet of "see-through" space in an office building across from the Willis (Sears) Tower for the night.

Each of the startups had a separate display area, much like a trade show.  The judges (drawn from companies such as Groupon and Google, as well as VCs and local entrepreneurs) visited all 25 tables, got demonstrations and then chose their five favorite startups to present in the final round. The winner got $16,000 in cash, goods and services. UPDATE: One thing that I forgot to mention when I wrote this post last night is that the startups didn't have to pay a dime to enter the competition or for exhibit space at the event. The event organizers and sponsors picked up all the costs. The TechCrunch50 was the first major startup competition that chose not to charge the selected startups. MidVentures25 has picked up on that trend, and I hope that it becomes the rule, not the exception, in startup competitions in the future.

What's so exciting about this is that Chicago is starting to feel like a viable place to base a startup. There still isn't much of a VC community in Chicago; I'd like to see a "Sand Hill Road East" spring up somewhere in the city, even if it's only remote offices for a handful of VCs from Silicon Valley, New York and Boston. As I've written before, just about everything needed for a vital venture community is here, and the costs of operation are very low compared to Silicon Valley, New York and even Boston.

Tonight's turnout indicates that there's a lot of interest in startups, even though the local culture hasn't exactly been supportive of the startup mindset. Three new incubators recently opened in Chicago, so there will be more opportunities for entrepreneurs to pursue their dreams.

A la carte and the law of unintended consequences

If you live in the New York metropolitan area, you were a pawn in a high-stakes game of "chicken" between Cablevision and Disney, with the Academy Awards telecast as the prize. The issue was how much Cablevision would pay Disney to retransmit ABC's broadcast stations. After the Academy Awards had been going on for 15 minutes, Cablevision and Disney finally came to an agreement.

Now, the cable and satellite companies want the FCC to outlaw broadcasters from withholding their programming and force both parties to accept arbitration. Broadcasters, who have no small amount of political clout and influence at the FCC, argue that consumers have multiple ways of getting their programming, including over-the-air at no cost. If they can't withhold their programming, they'll have almost no bargaining power with service providers.

The service providers are using these retransmission fees as a reason for raising their rates to consumers, which is causing a customer backlash. Even worse, viewers are once again viewing service providers as unreliable. The cable industry has worked for more than a decade to overcome its reputation for unreliability and poor customer service. Now that most of the major service providers seem to have their acts together, program suppliers are pulling channels at a moment's notice. Planning to watch the Academy Awards tonight? Better get that antenna out. Want to make sure you see the Super Bowl? Good luck if the network that carries it is in negotiations with your service provider.

One likely outcome, and one that neither the service providers nor the program suppliers want, is to force the service providers to make channels available a la carte. In an a la carte world, the service providers would pay the program suppliers only for the channels that its customers subscribe to, and in direct proportion to how many subscribe to each channel. Presumably, the program suppliers would set a wholesale price per subscriber, and service providers could mark that price up or down.

Service providers hate a la carte because it will almost certainly decrease their revenues. Customers will be able to trade off fixed packages and a la carte selections, and go with the cheapest option. Tiered pricing plans will be wrecked, since customers will be able to build their own packages.

Program suppliers are scared to death of a la carte for several reasons: First, they'll no long be able to charge service providers for all of their subscribers; they'll only be able to charge for the customers who actually subscribe to their channels. That will result in dramatic revenue drops for many, if not most, channels. Second, advertising-supported channels will no longer be able to represent all the subscribers to a service provider as "potential" viewers; they will only be able to list the actual number of subscribers in a given period. Which would you rather tell advertisers: We've got coverage in 60 million households in the U.S., or 2.5 million households have actually subscribed to watch our channel?

The final, and perhaps scariest, outcome of a la carte for program suppliers is that the service providers may cut back on their channel lineups to just the most popular and profitable channels. Unpopular channels that have been carried so that service providers can support a wide variety of interests may be dropped.

As brinksmanship between service providers and program suppliers becomes a way of life, consumers will increasingly look for alternative sources of programming. If they can't control how much service providers are willing to pay for channels, and are thus constantly at risk of missing shows they want to watch, they'll demand the right to select and pay for channels themselves. If the service providers and program suppliers don't agree, they'll find other ways to get the programs or other things to do with their time. This game-playing has to stop.

AMC takes on IMAX with its own big-screen system

AMC Entertainment has deployed an in-house-developed IMAX competitor called ETX (Enhanced Theater Experience) in theaters in Toronto, Ontario, Canada amd Orlando, Florida, and is planning to install it in more of its theaters. ETX features a 20% larger screen, digital projection, 3D-compatibility and 12-channel sound.

The problem with IMAX in conventional movie theaters is that it in no way provides the floor to ceiling enveloping experience of true, purpose-built IMAX theaters. Frankly, it's not much better than conventional, high-quality digital projection in a well-maintained theater.

Motion picture exhibitors have been able to charge considerably more for tickets in their IMAX-converted theaters. However, they have significant upfront costs for the IMAX equipment, and then they're required to pay royalties to IMAX for use of its system. AMC believes that it can offer a comparable moviegoing experience without purchasing or licensing the IMAX equipment and (one hopes) without infringing on IMAX's patents. In fact, Cinemark is deploying its own big-screen system, but it and IMAX have already sued each other. Lower costs will put more money into the pockets of the exhibitors (but don't expect ticket prices to go down.)

Most of IMAX's growth has come from retrofitting of conventional movie theaters, and a move by its customers to in-house systems could slow that growth or even bring it to a halt.

A big thank you to a little cat

Please forgive a personal note in a blog that usually focuses on technology and business. I was fired by my now former employer last Friday. I'm 53 years old, and this is the first time in my life that I've ever been fired. As you might expect, I've been depressed, but I have a little bundle of love and support in my corner. Her name is KayTee. I adopted her from a no-kill shelter in Huntley, IL in January of last year (and thank God for no-kill shelters.)

KayTee is incredibly affectionate, playful and smart. She's with me wherever I go in my apartment; last year, when the weather was good, she insisted that I walk her around the neighborhood. Now that I'm spending a lot more time at home, she seems to understand that something's wrong, and she's giving me even more support.

If you're able, please adopt a shelter pet. They'll love you for life, and you'll have a true friend who'll be there for you. If you're not able to adopt, please consider finding a no-kill shelter where you live and making a small contribution. These shelters save the lives of countless pets that would otherwise be euthanized. That would undoubtedly have been KayTee's fate if the Animal House Shelter hadn't been there for her.

The independent filmmaker's paradox

Several years ago, I ran a DVD distribution business. I didn't do a very good job, but sometimes you learn more from your failures than your successes. We were looking to license the home video distribution rights for a number of feature films, and worked with a company in Los Angeles that keeps track of all the independent films that are in production or completed and are looking for distribution. This was a few years ago, but there were more than 4,000 independent films produced each year without committed distribution deals. That's an enormous number by any measure. According to the Motion Picture Association of America, there were 610 movies released in the U.S in 2008. That's about the capacity of the U.S. theatrical exhibition system; they could of course show more films, but it probably wouldn't be profitable for either the exhibitors or the distributors.

Home video used to be a good outlet for a lot of titles that couldn't find theatrical distribution, but independent movie rental stores are all but dead, Blockbuster is "circling the drain", and the other leading rental chains are nearing, in or just existing bankruptcy. Home video is being driven by Netflix and Redbox; Netflix with a huge selection, and Redbox with a very small selection but low rental prices. DVD sales have dropped off due to the economy, and Blu-Ray is nowhere near picking up the slack. The big-box retailers like Wal-Mart and Best Buy no longer discount the new releases as heavily as they once did, slowing sales even further.

For an independent movie producer, the "conventional" outlets are becoming less and less viable. When shelf space is determined by how many discs can fit into a vending machine, the chances for small feature films to get distribution, let alone get noticed, drop to almost zero.

The Internet is seen by many as the savior of independent film, but that's where the filmmaker's paradox kicks in. You can produce and edit a movie today for less money than ever before. Distribution via the Internet is less expensive and more democratic than any method ever available to filmmakers. However, there's very little chance of making enough money from the Internet to cover the production costs of even a small independent film. So, even though it costs less to independently produce and distribute a movie than it ever did, it's no easier to turn a profit.

For decades, independent film financing has relied on an ever-changing assortment of starstruck investors, government agencies offering tax breaks and the families of filmmakers who want to help them make their dreams come true. Every year, there's a new set of players: One year there's money from South Korea, and the next year Germany becomes the big player. Canada and Louisiana compete to see which one can offer the most tax subsidies and the lowest overall production costs. Nothing, however, changes the fact that independent film funding is a sucker's game for the vast majority of investors. Subsidies allow you to save money, but you usually have to make some in order to get the benefits.

So what's the solution? It's attitudinal rather than structural. The Internet is not going to change into a profitable distribution channel any time soon. If you're making an independent film with the intention of making money, you're very likely to be disappointed. In you invest in an independent film with any expectation of making a return on your investment, you're also likely to be disappointed. The trick is to make and invest in independent films with no expectation of getting your money back. Make them because you want to tell a story, because you deeply believe in a subject, or you just want to pal around with actors and directors you admire. Take advantage of the lower costs of production and distribution to make films that otherwise would never have been made.

Barnes & Noble partners with Samsung, but what about the nook?

Earlier today, Samsung announced that Barnes & Noble's eBookstore will be available on its new $299 E6 eBook reader. There was no word as to whether or not B&N will sell the E6 in its stores.

B&N's nook eBook reader has been plagued with delivery delays, software problems, poor performance, an unwieldy user interface and promised features that still haven't been implemented. After an initial burst, the appearance is that consumer interest has died down considerably. Nooks are available for immediate delivery at B&N stores across the country, including many stores that weren't initially scheduled to stock the device.

B&N, like many other vendors, is learning that the eBook reader market is evolving at light speed. It seems like every Chinese and Taiwanese manufacturer with an assembly line is building one. At the same time, Apple is changing the rules of the game with the iPad. B&N is a bookseller, not a consumer electronics manufacturer or even a strong user of technology. Rather than try to continuously update the nook and introduce new devices in order to stay competitive, it might be better off by reselling products from companies like Samsung and Plastic Logic that are devoting major resources to hardware. Let the hardware companies shoulder the technology risk; B&N can be the "arms merchant" supplying them content to battle Amazon and Apple.

I wouldn't be writing this if the initial launch of the nook had gone well, but just about everything that could have gone wrong for B&N did. They blew the Christmas season and disappointed many buyers once they received their readers. If I were making the decisions at B&N, I'd continue development work on the existing nook to implement all the functionality that the company promised its buyers, but turn to other partners for future eBook readers.

What's the right tablet operating system?

Yesterday, everyone who watched the Academy Awards in the U.S. saw the first TV commercial for the iPad. Today, Adobe and HP released a video showing Adobe Flash and Air running on HP's Windows 7-based tablet. Tablets haven't been this popular since Moses, but I have a sense that we may be going in the wrong direction.

This is turning into a "Goldilocks" situation: Scaling up the iPhone operating system for the iPad is too little, but scaling down Windows 7 for the HP Slate is too much. Both approaches have a big benefit, in that the hundreds of thousands of applications that work on the two respective operating systems will run on their respective tablets--just not well. In the case of the iPad, scaling up iPhone applications for the bigger screen will lead to some clumsy user interface compromises. As for Windows 7, it's going to be very tempting for software developers to add a flimsy tablet layer to their existing applications and call them tablet applications, again with severely compromised user interfaces.

So, what's my crazy tablet OS suggestion? A few weeks ago, I bought a Zune HD. (Let the snickering commence.) The Zune HD user interface is the basis for Windows Phone 7 Series, and it actually works very well with touch input. (The keyboard sucks, but I think that cramming an onscreen keyboard into the Zune HD took things a little too far.) The visual and kinesthetic metaphors in the Zune HD are worlds better than layering a touch interface onto Windows 7.

Microsoft's Courier concept may tie into this as well, but Courier is very heavily dependent on its two-screen design; many of its user interface metaphors wouldn't map well into a single-screen tablet. I'd be very excited to see a Zune HD-like user interface on a tablet, and I think that it would give Apple a serious run for its money.

Will the Dish/TiVo case kill Sling Media?

Last week, the U.S. Court of Appeals for the Federal Circuit upheld a previous ruling of contempt of court against Dish Networks in the patent infringement lawsuit brought against it by TiVo. According to this article from Multichannel News, Dish could not only be required to shut down as many as eight million of its DVRs within a month, it may also be prohibited from offering its own DVR in the future. That would mean that Dish would have to license technology from or farm out DVR manufacturing to TiVo or another company whose DVR technology doesn't infringe TiVo's patents.

In late 2007, Echostar, Dish Network's parent, split into two separate companies, with Dish Network providing satellite television services and Echostar maintaining the satellites and building the receivers, DVRs and other equipment. When the split took place, Sling Media was moved into Echostar.

Echostar has been trying to expand its set-top box and DVR customer base beyond Dish Network, but to date the company has had limited success. One of the reasons has undoubtedly been the Dish/TiVo litigation, since anyone using the infringing Echostar DVRs would be subject to the same threat of litigation as Dish. If you're in the set-top box business and you can't offer DVRs, you're stuck in the bargain-basement pricing arena that Chinese manufacturers are dominating.

Sling Media is stuck in the middle. Echostar is no longer focusing on direct-to-consumer sales and instead has retargeted the Sling products for the cable, satellite and IPTV service provider market. If service providers don't want Echostar's set-top boxes, they're unlikely to buy the Sling products either. Given the TV Anywhere initiative and similar services being offered outside North America, the need for Slingboxes and similar devices will inevitably diminish. Sling may be a good idea whose time has come and gone.

How aggressive is Apple getting with its educational iPad pricing?

I learned from a source last week that Apple is offering the entry-level 16GB iPad to schools, school districts, colleges and universities for $230. That's about the same price as a Kindle 2, and reinforces earlier reports that the manufacturing cost of the iPad is far below the sales price. It also indicates that Apple is very serious about getting the iPad into the hands of as many students as possible. They've turned the iPad into almost an impulse purchase, especially for college students.

At Apple's introduction of the iPad, there was no mention of any textbook publishers or titles, but that content will have to be there in order to justify iPad sales into the academic market. I expect a flood of textbook and educational publisher announcements next month, to coincide with the first shipments of the iPad and to try to snag sales for the school year starting in September. It's going to be a long spring and summer for educational eBook vendors.

I'm now available full-time for work...

I suspected that my employer was going to let me go in a few months, but they showed the motivation, forward-thinking and determination that's a hallmark of the company, and let me go last Friday. As a result, I'm free to pursue full-time work and consulting projects in any area, including eBooks. If you've followed my blog for any time, you know about my experience and interest in eBooks, new media, consumer electronics, cable/IPTV, Internet services and building successful startups in general.

In both my blog and my business, I'll be able to speak more freely about the eBook business, and a lot of other things as well. If I can help you, or if you want more information, please email me at lfeldman257 (at) gmail (dot) com.

Burn the boats, and don't use the iPad as a life raft

An interview that Marc Andreessen gave to Erick Schonfeld of TechCrunch on Friday is causing much discomfort in the "old media" ranks. In essence, Marc said that the only way for newspapers and magazines to save their businesses is to fully commit to digital media, instead of taking halfway measures designed to protect their print businesses. It's the cannibalization argument--it's much better to cannibalize yourself than to allow competitors to do it for you.

Those thoughts were interpreted by some to mean that he was suggesting that publishers should get out of the print business, but what I believe he meant is that they should be prepared to give up their print businesses, once it becomes clear that those businesses are no longer sustainable. However, what Marc said about the iPad is even more interesting. Rather than paraphrase, I'll quote the article precisely (with my apologies to Mr. Schonfeld and TechCrunch for the length of the quote):

"With all the recent excitement in media quarters recently over Apple’s upcoming iPad and other tablet computers, and their potential to create a market for paid digital versions and subscriptions of newspapers and magazines, I wondered if Andreessen still felt the same way. Does he think the iPad will change anything?"

"Andreessen asked me if TechCrunch is working on an iPad app or planning on putting up a paywall. I gave him a blank stare. He laughed and noted that none of the newer Web publications (he’s an investor in the Business Insider) are either. 'All the new companies are not spending a nanosecond on the iPad or thinking of ways to charge for content. The older companies, that is all they are thinking about.'"

"But people pay for apps. Wouldn’t he pay for a beautiful touchscreen version of a magazine? Maybe, if it were something genuinely new that blew him away. It would have to be more than an article with video and graphics though. (I agree, otherwise it’s no better than a CD-ROM)."

"Oh, and he points out, that the iPad will have a 'fantastic browser.' No matter how many iPads the Apple sells, the Web will always be the bigger market. “There are 2 billion people on the Web,” he says.' The iPad will be a huge success if it sells 5 million units.'"

Last week, Penguin showed a number of iPad applications based on its books; only one of them looked like a conventional eBook. However, all but one of them could easily be written in Flash and run in any modern browser, and the one that required use of the compass and accelerometer could probably be customized to use those features without having to be a completely native app. The problem, of course, is that Flash doesn't run on the iPad and won't run in the future, not for any serious technical reason, but because Steve Jobs hates Flash.

Writing applications for the web allows them to be used just about anywhere, on any device; writing them for the iPhone/iPod touch/iPad means that they can only be used on those devices, in the Apple environment. Time will tell if Marc's prediction about iPad sales will pan out, but why would a publisher lock itself into a single platform from a company that has a history of dictating terms to its content partners?

If you talk to executives from the record companies, they would probably say that they turned Apple into an 800 pound gorilla in the media business by ceding pricing control. The book publishers have apparently just done the same thing, in part to attack Amazon's pricing model, but at the price of giving Apple pricing control at slightly higher levels.

My opinion is that the iPad is going to be successful, more for its applications and user interface than simply for media consumption. Nevertheless, Marc's comments are on target. Publishers should build their digital businesses sustainably rather than defensively, and they shouldn't depend on the iPad to save them.

Reaching critical mass for encouraging startups

An article in today's New York Times talks about the revival of New York's startup community, which is focusing primarily on consumer Internet services. The article points out that New York is number three behind Silicon Valley and Boston in VC investments, but is growing rapidly.

Most people forget that before there was Silicon Valley, there was Route 128, named for the freeway that circles the Boston area. Route 128 was where the venture capital business was born, funding companies like Digital Equipment, Data General and Lotus. Polaroid was also a huge part of the tech community. The mantle of startup hotbed moved to Northern California in the late 1970s, and has stayed there ever since. New York blossomed for a time in the dot-com boom, and then collapsed as a startup center until its rebirth in the last few years.

There is absolutely no reason why startups have to concentrate in one area. Silicon Valley has Stanford and UC Berkeley, two of the top universities in the U.S. if not the world, and it also has the biggest concentration of venture capitalists anywhere in the world. However, Boston has Harvard and MIT. New York has Columbia and NYU. Chicago has Northwestern, the University of Chicago and IIT. Pittsburgh has Carnegie Mellon and Pitt. Los Angeles has UCLA and USC.

You can see where I'm going here. The educational resources needed to spawn successful startups can be found across the U.S., not to mention in cities around the world. Venture capital is far more concentrated, but there are large communities of VCs in Boston and New York as well as Silicon Valley. Chicago, Pittsburgh and Los Angeles are no more than a two-hour plane ride from one of the three VC centers.

Geographic location is no longer as important as culture. Boston and Silicon Valley have strong entrepreneurial cultures developed over decades. In those areas, people challenge the existing order, question how things are done, look for their own opportunities and seize them.

By comparison, finance has been so lucrative in New York that there wasn't much motivation for people graduating from college to start their own businesses. That all changed with the Great Recession and the collapse of the financial sector. Very little hiring is going on, so entrepreneurship now looks much more attractive to new graduates.

The other cities, Chicago, Pittsburgh and Los Angeles, have largely served as talent feeders to Silicon Valley. There hasn't been a strong startup culture in any of those cities for some time, and new graduates interested in startups either moved somewhere else right away or had their locally-based startups acquired and then moved. However, all three cities are showing signs of nearing critical mass: Chicago has Groupon, 37signals and Threadless. Google has a very large presence in Pittsburgh (and for that matter, Carnegie Mellon has opened a branch campus next to the Googleplex in Mountain View). Los Angeles (and San Diego) have Hulu, Divx, Buy.com and a large Yahoo contingent, among others.

As Caterina Fake says in the New York Times article, what New York (and, by extension these other cities) needs is a PayPal--a big, successful startup that spins off a lot of other startups. PayPal has spun off startups including YouTube, Tesla, Slide, LinkedIn and Yelp, and the founders of those companies are investing in a new generation of startups. (Fairchild Semiconductor and HP performed the same roles for previous generations in Silicon Valley.)

Perhaps that's the "secret ingredient" to creating a sustainable startup culture--you need a successful startup that spawns off others and educates the community that you can not only survive but thrive on your own. Groupon is the most likely candidate to perform that function in Chicago, while Google is the prime suspect in Pittsburgh, and there are a number of candidates in Southern California.

Thus, two final points:

1. No startup center lives forever: Route 128 around Boston lost its lead to Silicon Valley, and now Silicon Valley is declining in strength as other centers around the world are gaining.
2. Culture and the presence of a large, successful startup are as important to establishing a strong startup community as the proximity of top universities and venture capitalists.