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Please join me in my new home, www.ScottJBerry.com, where you can see my latest article "Blockbuster: Driving Off A Cliff?"

Hope you'll keep reading Digitalics. Thanks for listening.

Scott

Will The Madness Never End?

Am I the only one out there who's sick and tired of all the speculation about Yahoo and Microsoft?



Will Steve and Jerry tie the knot? Is Rupert going to swoop in and rescue the fair maiden? Or is Jerry destined for the arms of another, like say AOL, or Google?

Who cares, really? Yahoo shareholders ought to. Take the money and run, that is. No matter how much "synergy" there is, or how much sense this makes strategically (for either party), these things typically work out only one way--value gets destroyed, and some upstart comes in and disrupts the big guys.

Oh, they'll hang around for awhile, sheer weight will see to that. But in a couple of years the market for search and advertising will look completely different than it does today--and neither Yahoo or Microsoft will be at the top. So why bother?

Let's just get this over with one way or another, and go back to our regularly scheduled useless tug-of-war: Hillary and Barack.

Ride The Wave

Dan Rayburn has another nice article out this morning, this one detailing his recent visit to Akamai Technologies (NASDAQ: AKAM). It's generally very positive about the company, and given Dan's readership, I wouldn't be surprised to see a nice bump in the stock today, all other things being equal.

In past discussions with Akamai, management has hinted to me that most of the analysts covering the stock don't completely "get" its business model and in particular, its sustainable advantages. To do so requires a fair amount of technical acumen, and so I'm not surprised.

I do not see Akamai being disrupted in the short-term. Dan does a nice job in his piece of dispelling the myth of a CDN price war that has kept a lid on its stock price over the past couple of quarters. Certainly others such as Limelight Networks (NASDAQ: LLNW) and Level3 (NASDAQ: LVLT) can deliver content more cheaply, but not at the service levels many clients require. Really, it's in the [delivery x service] product where Akamai shines.

One day, transit bandwidth may be an order of magnitude cheaper, and everyone will have 100 Mb/s or more of sustained bandwidth entering their homes (I wish). But that time is far off in the future. As long as Shannon's Law holds, and people continue to ramp their media consumption via the internet, there will be a need for the kind of optimizing technology Akamai provides.

In the intermediate term there's nothing I see that would indicate severe headwinds for Akamai. They recently won an intellectual property suit against Limelight, and in general have a solid IP portfolio. They are the market leader, have very high profit margins, and continue to dominate the high end for CDN and application acceleration services, both of which are expected to enjoy double digit growth rates in the coming years.

My view is that they're currently undervalued (though not drastically) and should enjoy steady appreciation for some time.

Pando Bears

Dan Rayburn has a note out this morning about the lack of traction that P2P vendors such as Pando Networks and BitTorrent are experiencing with Content Delivery Networks. Dan's the most knowledgeable guy I've read about CDNs, and I agree with him here. P2P certainly has its commercial uses, but as Dan points out:

From what I can tell in the market, P2P is not as big of a story as it was at the end of last year. The topic has cooled off a bit except when its being discussed as it pertains to carriers blocking or filtering of P2P based traffic on their networks. Aside from that, customers are not asking me about P2P and 55.2% of those we surveyed about their content delivery needs said they did not plan to even look at P2P as a delivery solution for 2008.

Cost is usually touted as the primary reason to use P2P for content delivery, and as I've argued before, this won't scale--ISPs will eventually demand their pound of flesh, one way or another. Plus, as Dan says over and over, cost isn't even the most important factor for most content providers. My view is that P2P will eventually take its place as a valuable niche method for video delivery, and several of the larger players will gain traction (and/or be acquired). But it's likely to remain a total delivery solution only for file traders and small content owners.

Don't Bug Me

Michael Learmonth over at Silicon Alley comments on a NY Times article about how NBC is seeking to get advertisers to sponsor entire shows, as they did in the early days of television. It's an attempt to help bypass the impact of TiVo-like ad skipping.

While the expectation is that sponsors will have some input into the show, I think the ultimate model is a bit less.... participative.

Expect to see TV shows broadcast with corporate logo "bugs" included. You know, those little icons in the bottom corner of the screen that are somewhat intrusive but usually bad only when they cover something you want to see. One or more sponsors could purchase a certain amount of bug time during the show. It might not stop piracy, but it would mean TiVo viewers can't completely avoid the messaging.

What's more, with the advertisement now firmly attached to the video--sort of a cross between a product placement and an ad--the networks may be able to grab more coin from sponsors, as the ad would travel with the video wherever it was syndicated (cable, TV, web, even reruns).

MacroStar: Vision or Hallucination?

This morning Macrovision (MVSN) reported it has completed the divestiture of its software business, including the FLEXnet and InstallShield product lines, raising $200M. With the previously announced sale of its games unit to RealNetworks (RNWK), Macrovision is well on its way to completely transforming its business. What remains is to consummate the merger with Gemstar/TV Guide (GMST).

The company believes that with the cash raised from these recent sales, it has reduced the amount of debt needed to finance the Gemstar purchase by nearly 20%, to just $650M. Expect to see a good portion of this remaining debt retired early, as Macrovision spins off non-strategic portions of Gemstar once it's folded in--notably the TV Guide print business, which I believe is orthogonal to MVSN's core strategy. This could significantly shorten the loan payback on the purchase from the 2011 date CFO James Budge originally estimated.

That all assumes, of course, that the deal goes through. Many Gemstar shareholders were none too happy when the merger was first announced in December. Ditto many Macrovision investors, who either did not understand or did not believe the vision management articulated. I would argue Budge and CEO Fred Amoroso did a poor job of explaining it at the time, using lots of effusive, scripted prose but leaving behind what felt like a distinctive snake oil residue.

However, there is a method in the madness here, a bit more visible now that extraneous bits have been spun out. The key is to understand Macrovision's three key constituencies: Hollywood studios, consumer electronics manufacturers, and cable companies (MSOs). Traditionally, the studios paid for copy protection, manufacturers licensed the tech for VCRs and DVD players, and MSOs paid to ensure compatibility between studio copy protection and their headend gear. Great high-margin cash business. All good.

But a year or so ago, Macrovision acquired Mediabolic, which gives it technology to enable (copy-protected) video transfer between PCs and multiple devices within the home. Say, to cable set-top boxes. They have already signed Scientific Atlanta (CSCO) as a customer, and I believe either Motorola or NDS is also on board.

Next, they bought All Media Guide, which provides metadata for video and music. By acquiring Gemstar, Macrovision gains television guide info--again, metadata. MVSN can now license both algorithms and information to device manufacturers and cable companies, while helping Hollywood protect its content wherever it is transferred. In the bargain, consumers would get a seamless home video capability.

Your existing set-top box becomes a media hub. Can you say "AppleTV"? I knew you could.

Arguably, Macrovision has made some missteps with its strategy in the past. The software business had low margins relative to MVSN's licensing unit, and games was pretty much a bust. But unlike many firms, it has been fairly quick to recognize errors and dispose of losing businesses. And this vision, however poorly spelled out by management, feels right.

Based on April 1 closing prices, and assuming no change in the original terms, the Gemstar deal is now valued at about $2.22B, 21% below the original $2.8B figure but slightly above the current market cap. This compares to a 9% drop in the S&P500 over the same period, and largely reflects the poor reaction of traders to both sides of the deal. The SEC just declared the S-4 effective and proxies are being mailed out. As both boards are already signed up (including Rupert Murdoch, with 41% ownership), it looks like the merger will go through.

Given the margin expansion that will follow the spin out of the poorer performing Software and Games units, Macrovision may be somewhat undervalued, even allowing for the anticipated share dilution. But for Gemstar investors who believe this vision could become reality, there's substantial upside post-merger if the firm can execute properly.

Disclosure: Author holds no positions in either Macrovision or Gemstar.

Music "Fees" Sound Flat

Warner Music Group (WMG) has announced they've hired industry vet Jim Griffin to take a look at whether collecting fees from ISPs will rescue the music industry. The idea is that users would be assessed a fixed amount (included in their monthly internet bill) and would then have unlimited access to music. They hope to cover losses from illegal music sharing.

We already have numerous versions of this plan that are optional: Yahoo Music, Rhapsody, Napster, etc. We also already have many similar fees that are not optional. They're called taxes.

You don't have to be a libertarian to see this is not an "essential service" that ought to be subidized by all. Yes, we've all said the music industry's business model is dead, and it has to wake up and search for new, innovative methods to survive. But this ain't it.

Imagine you're a retail bank. You and your competitors, from time to time, lose money to thieves who hijack your armored trucks and drive them away down the interstate. In order to cover your losses, you lobby for a new highway toll that collects compensation from every driver using the interstate system.

Silly, isn't it?

The Broadband Salad Bar

The Wall Street Journal reports this morning (article, paid subscription required) on talks between Comcast (CMCSA) and BitTorrent, Inc. to make nice over Comcast's admitted blocking--excuse me, "delaying"--of bittorrent generated traffic.

At first glance it seems a rather ham-handed attempt to mollify Comcast critics. The WSJ and others are reporting it as a fairly straight up development, if something of a backpedal by Comcast. But these miss the point, I think, sidetracked by conspiratorial discussions of "net neutrality" and how the big bad telecablecos are angling to limit our choices, take over the world, and generally do evil.



Do I believe the big ISPs want to control content (or access to it) as well as the pipes? Absolutely. There's gold in them thar hills! None of them want to be limited to connectivity or bit delivery services. But will they succeed? Is the above fictional ad to be our broadband future? I doubt it. Anyway, it's beside the point.

There's another motive for ISPs to manage bandwidth on their networks--it's a finite resource. No, Virginia, there is no unlimited bandwidth. You can talk all you want about Moore's Law, etc. Bandwidth ought to be cheap. In a perfect world--or Asia--it is cheap. But not here, not without real competition.

The telecablecos have promised this always-on, flat-rate, high-speed internet access. It was a fiction created by the need for market share, and by consumer demand for a broadband salad bar. All-you-can-eat, with a fixed price. Sounds wonderful. But it could never have lasted since the infrastructure is largely shared and was built on the expectation that demand would be low (or at least intermittent).

Now the growth of video is stealing the condiments, and file sharers are sneezing in the salad.

There's no free lunch. So you do one of two things. Limit how many trips each patron can make for salad. Or charge them for each trip. Comcast has tried the former. My bet is on the latter.

You believe it's a fantasy? That no one will go for tiered or bit-based pricing? Think again--Time Warner (TWX) is already trialing it. And the more successful we are at regulating the ISPs to ensure net neutrality (in the absence of competition), the more likely it is we'll see pricing by the byte.

Joost Passin' Through

Hey, it's always nice to be right, even when it isn't for exactly the reason I predicted. Lots of fodder recently, here and there, about how P2P video startup Joost is becoming increasingly irrelevant in the land of VeohHuluTube.

In addition to its P2P strategy not scaling, Joost's software client ran slow on my machine, and apparently many folks resist having to download and install it. But going to a more mainstream web or browser-based presentation won't save the company either. It makes them no more compelling than any of the other portals (remember that word?) angling to become video "on ramps".

In fact, it seems to me that all of these sites--including the much lauded Hulu--are not where the money is. It's the content, dude. Content owners now spray their wares onto any website it'll stick to. Site owners have no leverage left, especially as the advertisements become more attached to the content and less to the site. How would ABC or CBS have ever differentiated themselves if you could have found the same shows on any channel you switched to?

Only the sites that provide something unique (social connectivity is the big one that springs to mind) have a chance. Joost seemed to have recognized that--with a built-in capability to chat with other viewers--but its technology and presentation prevented it from catching on. Now it's probably too late.

iPhone Doesn't Drive Mobile Usage. But AT&T Might.

According to a recent study by M:Metrics, summarized here, Apple's (AAPL) iPhone is having a dramatic effect on mobile web usage.

Per senior analyst Mark Donovan: "Beyond a doubt, this device is compelling consumers to interact with the mobile Web, delivering off-the-charts usage from everything to text messaging to mobile video."

Hmm.

Even more breathless praise for the iPhone: "This data indicates that the iPhone's widgets are an effective means to drive mobile content consumption," observed Donovan.

The numbers seem to back up the claims:

• 85% of iPhone users accessed news/info via browser, vs. 58% of smartphone users and 13% of all cellphone users
• [a "staggering"] 31% of iPhone owners watched mobile TV or video (vs. 4.6% market average)
• 59% used web search vs. 37% of smartphone users and 6% of the general mobile population

This would all be nice if it actually said anything about causality. It doesn't.

It is equally possible (more than likely, I'd guess), that iPhone users are self-selected for this usage pattern. Call them early adopters, technophiles, whatever. People who use--or would like to use--the web more often are among those most likely to buy an iPhone. There's no evidence whatsoever in this study that indicates the iPhone itself is driving greater usage. (It may be making it somewhat easier or more elegant for those who are so inclined, however.)

In fact, there's no data here that indicates mobile web usage has grown at all. For all we know it shrank last year. (Yeah, I know, I don't believe that one either.)

Sort of like a Dear Abby survey that shows women overwhelmingly believe something (e.g. breastfeeding is best) when all it really shows is that belief is held among people who write to Dear Abby.

Even if you assume the iPhone is a causative factor, consider this: Apple's U.S. market share is on the order of 1%. Given the size of the U.S. mobile market, there's no way that's having a significant impact on mobile internet usage. If we assume 200M U.S. mobile users, M:Metric's numbers imply 26M accessing the web via browser; iPhone users account for 1.7M of those. It's difficult to believe most of those 1.7M weren't using the internet on their old phone.

What would have been interesting is to show the deviation--if any--from the trend in growth that has occurred since the debut of the iPhone.

None of this is to say the iPhone isn't a great smartphone, or that its sales won't increase. I'm only throwing cold water on the claim that Apple is singlehandedly driving up mobile internet usage.

I did find one quote interesting, though: "... all iPhones on AT&T (T) are attached to an unlimited data plan. Our data shows that once the fear of surprise data charges is eliminated, mobile content consumption increases dramatically, regardless of device.”

Now that I'd believe.

When Down Becomes Up

Silicon Alley Insider has a short interview with BitTorrent CEO Doug Walker about plans to entice the media Big Boys to use BT's peer-to-peer delivery service. Walker claims he can undercut the likes of Akamai and Limelight Networks.

P2P does a great job of file transfer. Streaming? Not so much.

Streaming via P2P doesn't use any less bandwidth that streaming directly. It just uses somebody else's bandwidth. So yes, it can be "cheaper", but this is virtual savings, not real savings. Once P2P streaming delivery gets big enough--if it ever does--the ISPs will step in and demand their share. This is what the whole net neutrality thing is about. In fact it's already happening, with Comcast selectively blocking some P2P clients. Even if there's no direct royalty to the telcablecos, sooner or later their bandwidth gets chewed up, and then they raise prices to consumers.

This thing won't scale. It runs up against the fundamental problems of the Internet in the U.S.: lack of edge capacity and asymmetric bandwidth.

Most internet connections are designed to be timeshared. Your advertised 2 Mb/s (or 10 Mb/s) link only gets that kind of speed if no one else in your neighborhood is using theirs. Cable systems often have a 500:1 share ratio. Even DSL is shared in a way, limited by capacity at the DSLAM in the central office (and it's typically slower to start with). Which all works fine for web pages where it's a quick download between idle times. But video streaming of any kind runs into real problems with enough simultaneous users, because there's a minimum sustained rate that must be achieved to avoid jitter and/or buffering.

What makes the problem worse for P2P is that almost all internet connections are asymmetric; the upstream bandwidth is an order of magnitude slower than downstream. This is because the phone and cable companies--with their heads firmly in the sand--never envisioned the internet as anything other than a way to shove increasingly expensive media down consumer throats. That is, after all, the model they were founded on. But P2P and User Generated Content are turning that notion on its head.

So we have too little bandwidth, and it's increasingly pointed in the wrong direction anyway.

Streaming via P2P works fine on a small scale (Joost's beta wasn't half bad; but notice how the more users it gets the less you hear about it?) And P2P is great for file transfer since there are no latency/buffer issues. Just don't expect it to be the answer to video delivery for consumers. Conversations with executives at the likes of Akamai (who has their own P2P technology) have confirmed peer streaming will likely be limited to private networks where there's greater control over the protocols and the bandwidth.

Don't get me started on streaming vs. download, and why the latter is better because storage is cheaper than bandwidth. That's a subject for another post.

Whither--or Wither--Stage6?

I was one of many who were saddened and disappointed by last weeks shuttering of DivX's Stage6 site. It was surely among the best and most groundbreaking of UGC video sites--YouTube for adults. Moreover, I think they really got the community part of it right, and it served as a model for others wishing to combine social sites with video.

Many in the blogosphere, who didn't understand either Stage6 or DivX's business, dismissed it as just another video site destined to bite the dust because it "lacked scale". This always irked me.

Like DivX itself, the centrex of Stage6's popularity lay abroad, not in the U.S. So it's no wonder wags who look only at ComScore, Compete, etc. failed to notice its popularity (and why Jordan Greenhall, DivX's former CEO and Stage6 founder, always referred to Alexa statistics). For example, according to Compete, Stage6 only had about 1M monthly unique visitors, vs. 6M for Veoh and 60M for YouTube. But using Alexa's worldwide stats, Stage6 was among the 100 most popular sites in the world; dead-even with Veoh. Hell, it had 1/6 the traffic of Facebook, which regardless of your thoughts on exact valuation is worth beaucoup bucks.

As an interesting aside, deviantART, which is part owned by DivX, is ranked 60th worldwide per Alexa, which was a big surprise to me.

As someone who covered DivX as an analyst, I understood the drag it had on the company's financials. But still....it's unfortunate that the realities of business (and Street sentiment) did not allow them to hang on long enough to develop Stage6 into a standalone concern--or spin it off as planned.

Others have written either more eloquently, or more breathlessly, about the reasons DivX's Board chose to retain Stage6, and the circumstances surrounding the departure of Jordan Greenhall and the bulk of the DivX/Stage6 founding team. Personally, I think the rumored $90M post-money valuation sounds high, particularly in light of recent concerns about the difficulty of monetizing UGC video through advertising.

It seems much more likely to me that despite initial interest from potential buyers, the combination of an uncertain monetization and the threat of lawsuits (Universal) likely drove the value of Stage6 unacceptably low. That could explain the departure of the founders, particularly if they came to believe--rightly or wrongly--that DivX's board somehow botched the negotiations.

As to the fate of DivX itself, that's an interesting one. The company certainly has an impressive installed base, a compelling value proposition with electronics manufacturers for its licensed technology, and exciting potential to move into licensed content with its recent deal with Sony and its purchase of the leading MPEG-4 AVC vendor, MainConcept. The loss of Stage6 doesn't diminsh that user base as much as many fear. And based on my personal experience with a beta unit, DivX's Connected platform--which can turn any piece of electronics gear into a more open AppleTV--is a winner.

But despite a good 4th quarter, management whiffed on guidance for 2008 and the stock tanked. I suspect they are conservatively projecting a slowdown in electronics sales worldwide. I also believe the takeup of (DivX-certified) Blu-ray players will disappoint in 2008, as consumers delay HD player purchases in anticipation of cheaper prices down the road. Nor will any of DivX's other promising initiatives gain traction until 2009.

Still, the firm has plenty of value. Are they for sale? Sure. Everyone is at the right price. Management are big believers in the firm's potential, and won't let it go easily. But with the right buyer and a decent price, it'll go. My bet? Dolby Labs. They have the size, synergy in business model, a common customer base, and need for new growth platforms. And video is one they've already said they want to move into more strongly.

Any way you look at it, this is one company--and stock--that'll continue to generate excitement and speculation.

Beginnings (apologies to the Allman Bros.)

Well, here we go. After several years, and numerous suggestions by friends and colleagues, I'm taking the plunge. Guess I've got things to say, and need a rooftop to shout from. Wish me luck.