IPTV and Asynchrony in the Consumer Era of Computing? The Apple/Microsoft/Sony War Kicks Off

Overview

Apple. Microsoft. Sony. “The Big Three.” Google. Netflix. BitTorrent. Tivo. Etc., etc., etc. Who doesn’t have a strategy for participating in the bright new world of IPTV? It’s real, it’s inevitable, and it’s happening, and it’s sure to be one of those technologies that disrupts industries where only the quick, savvy and visionary survive. This discussion is currently taking places across two key dimensions:

What is the potential impact of IPTV on traditional media and distribution? There are almost too many questions to answer when you think about the potential impact of IPTV on industries like cable, satellite, network TV, movies, sports and gaming.

Who is best positioned to win in an IPTV-enabled world? Do people want a single, easy-to-use platform for managing all things audio and video?  What about gaming? Is this a separate decision or an integrated decision when choosing an IPTV platform? Which players are best positioned to take advantage of their existing installed base? Is it Apple via iPod and iTunes? Microsoft via Xbox 360 and Windows Media Center? Or maybe Sony with the high-octane blu-ray PS3? Google doesn’t seem to think this IPTV business is a very big deal, and is focused on cutting deals with the cable companies and providing both text and video search.

All of this brings me back to two prior posts: one discussing the rise of the Consumer Era of Computing and the other concerning the move towards a time-shifted, on-demand Asynchronus world. I believe that the principles outlined in each of those pieces have bearing and relevance on how the IPTV debate plays out. I’d like to quickly revisit these concepts in order to ensure that we’re using the same terms.

The Consumer Era of Computing (written when discussing Apple vs. Microsoft): With the Internet, cheap storage and massive processing power, the
playing field has flattened measurably. One doesn’t need thousands of
developers, hundreds of man-years and tens of millions of dollars in
“big iron” to develop applications people want. People want to connect.
People want to be able to share. People want to discover. Pictures,
movies, music, email, web pages, files, spreadsheets, and more. This
means that people want programs and applications that are easy to use.
And fun. And open. People and companies became dependent upon Microsoft
because the lack of computing power and bandwidth called for a high
degree of desktop integration. However, this isn’t the case any more.
Big, heavy OS and related applications simply aren’t necessary. Google
threatens Microsoft in search and email. Apple is chipping away with
consumers.  And these are only two of many companies that are relentlessly challenging the Microsoft franchise.

The Synchronus vs. Asynchronus World (when discussing the SIRI/XMSR merger): I think there is little doubt of the financial motivation of the
SIRI/XMSR tie-up. It reminds me a lot of the in-market bank mergers I
looked at as an M&A associate in the late 1980s; it’s principally
about the cost savings, while some revenue accretion is possible due to
increased pricing power. But this entire line of thought needs to be
considered in light of the over-arching issue: is premium synchronous
(real-time) radio worth it (for news, sports and other real-time media)
in a world where the lion’s share of content can be consumed easily,
flexibly and cost-effectively in an asynchronous (time-shifted, on
demand) manner? I think this is THE question for the long-term
investor. Because if satellite radio is here to stay, economics at
scale could look pretty attractive. But if not…

I find this whole discussion of IPTV as a “new” concept pretty funny, since I remember back in 1991 when GTE was running pilots of video-on-demand  (VOD) over phone lines in Florida. At the end of the day, that, along with the Sony Walkman, were two early examples of the move towards asynchrony in how people consumed media. Sure, the Walkman was a huge hit, spawned imitators and eventually morphed (in both form and company) into the now ubiquitous iPod, while the  VOD pilot was plagued by bandwidth issues while its antecedents were eventually integrated into cable and satellite TV offerings. Further, this started the ball rolling on the capability and desire for an “a la carte” pricing plan, where one can choose both what one wants to consume and when one wants to consume it, and to avoid paying for unnecessary and undesired programming and services. While this creates massive new opportunities for some, it represents a profound threat to those who have built large, costly development and distribution models predicated on historical assumptions. Most of those assumptions are gone - so how does this impact tomorrow’s competitive landscape?

But the point remains: the trend towards an on-demand, take-it-with-me world was seeded over 20 years ago, and is just now being more fully played out. Is the catalyst available bandwidth and peer-to-peer streaming content distribution? Is it because of the rise of YouTube? Perhaps the ease with which people can publish and distribute podcasts and vodcasts on the Internet? Or maybe the ease-of-use with which a consumer can integrate these disparate capabilities? It is probably a combination of all these things. But one thing is certain: the current environment is both very confusing and wickedly complicated, and I’ll provide you with some of the latest online dialogue and thinking going on in this dynamic debate.

Setting the Stage

From the Mercury News 12/25/2006 - Takahashi: 10 Tech Trends of 2007

8. Couch potatoes celebrate

The dream of a world where anyone can watch just about any Hollywood
movie ever made in their living rooms at the touch of a button will
start to become reality in 2007. AT&T and Verizon are planning big
roll-outs of their IPTV (Internet protocol television) services, which
have the potential to offer hundreds of movies and other programming on
demand.

Meanwhile, Apple Computer will launch its iTV device, which will
connect consumers’ TVs with its iTunes music and movie service.
BitTorrent plans to launch an iTunes rival in February with thousands
of major studio movies. And with Intel offering Viiv-based
entertainment services on PCs and Microsoft already offering
downloadable movies to its Xbox 360 users, Sony is likely to follow
closely behind with a similar service for its rival PlayStation 3.

The Mercury News is not alone - MANY have been waiting for IPTV to hit the mainstream. And in 2007 it is becoming reality.

Apple TV - the “It” Girl

Without question, Apple TV has been one of them most hotly anticipated devices in recent memory (not including the iPhone, of course). It has generated far more buzz than any other offering, with critiques ranging from fawning to “What’s the big deal?” And let’s not forget our zealous and cheerleader-like sell-side analyst community for a little hyperbole early in the game.

From The Unofficial Apple Weblog 02/21/2007:

I don’t give predictions of market analysts too much serious thought,
mostly because the statistics don’t really mean much other than to hype
up a particular product. Or maybe these analysts just like to be able
to say ‘told ya so’ if their predictions become true. Anyway, one
Deutsche Bank analyst claims
that the Apple TV can potentially capture 20-30% of the CD and DVD
market within a few years after its launch this month. Not to be a
naysayer or anything, but that is a huge percentage that seems way too
optimistic to be taken seriously. There are a ton of factors at play
here. (Oh, and let’s not forget that only Disney, Paramount, and Lions
Gate are on board to sell films through iTunes… and as far as I know,
there are a couple more movie studios out there than just these three).

********************

Needless to say, even on an Apple fanboy blog like tuaw.com there is more than a healthy degree of cynicism about this analyst’s claims. Here is comment #6, for example:

6. I dont think this is
close at all, I see this as sort of a test for apple. They still really
need some development in bandwith capabilities, as does everyone. Also,
I don’t really understand why the appletv has hdmi, there is no high
def content for users. If I want to stream content at good quality, I
have to rip some pretty big files, but it can be done, I just don’t see
it to the point where it actually makes sense to do that rather than
pop it into my upscaler. So here is how I see it:

Hard DVDs will
actually become obselete, apple will get a fair amount of this
streaming/digital distribution market, which will be based on 2 things:
content, and ease of use. When apple integrates the store right into
apple tv, and doesnt compress content as much, appletv will kill the
dvd industry. But for this to really happen, bandwith improvements need
to be made in order to actually have reasonable times when downloading
a high def movie
*end analysis*

Posted at 6:28PM on Feb 21st 2007 by Brandon

Ok, Rob, chill out.  He is even more heated and expansive elsewhere in the post, but you get the drift. Bottom line - even if only a small part of what he says comes to pass, Apple TV will be the shot heard round the world, with potentially stunning effects for media distribution businesses everywhere. There is even discussion that Apple TV might, in fact, be a Tivo-killer.

The fascinating thing about the following post - and please click on the link to check it out - is that it provides side-by-side theoretical pricing of Apple TV on a per show, a la carte basis versus a conventional cable TV/Tivo package, i.e., paying for just want you want versus getting and paying for everything, with predictable results:

From Web 2.0 Explorer 01/24/2007

Yeah, I’m calling it. I think Apple (and others) are about to send
Cable TV and Tivo a clear message…your time is almost up. The Web 2.0
world is about to kick the door in and escort the old methodology to
pasture. And I think it is going to happen pretty quickly.

Don’t let the door hit you on the way out.

Now I’ve heard a lot of complaints about the Apple TV, and plenty of
skeptics who think the device doesn’t hit the right technical marks,
but I disagree. I think it hits a number of sweet spots that make it
one of the most compelling devices we’ve seen in some time. Other
companies are trying to get into the living room, but I think this one
may finally have the legs it needs to make a big impact in our lives.
Bigger…yes I’m saying it…bigger than Tivo!

********************

The Apple TV is a time-shifting media viewer that allows me to buy
only the media content I want to watch, when I want to watch it, with
pause/rewind/fast forward, at a reasonable price, with no monthly
subscription fee, small hardware footprint, works with Macs and PCs,
automatically downloads my season passes when available, doesn’t
require any BS to move it to my iPod or another computer, could very
well stream “live” television like news and sports (as it does movie
previews), supports HD, I only pay for content not service, doesn’t
force me to watch commercials, and gives me back 18 minutes of my life
for every hour I spend watching broadcast shows.

And why would I want Cable/Tivo?

So Apple…I am opening the door to my living room. Come on in.

Hmmm, so let’s see. Paying for only what I want, seeing it when I want to, and getting to take it with me and see it wherever I want via my iPod.  That sounds pretty good. Kind of like the integration of the Consumer Era of Computing and the Asynchronus, on-demand world, huh?

That said, even with all of its supporters, it is not as if Apple TV lacks critics. Many have valid, well-reasoned points for why Apple TV might not set the world on fire - at least not yet - and why an investor should view the hype with caution. Here is a representative selection:

From The Apple Core 02/19/2007 - Theories on Apple TV

From Shawn Oster’s Blog 01/10/2007 - Comparing Apple TV to the Xbox 360

From Ten Forward 01/09/2007 - An Xbox without the X

Ok, got it. But bottom line, the Internet dialogue about Apple TV is predominantly positive, with many cynics conceding that, over time, Apple will load more features and flexibility into Apple TV such that it will achieve broad adoption. Execution remains to be seen, but given their success with the Macbook, iPod and iTunes, it is hard to be against them. Steve and Co. are particularly good at bridging the gap between new technologies and the consumer experience, and Apple investors expect nothing less from Apple TV.

What of Microsoft, Sony and the Others?

Microsoft: Ballmer et al are getting geared up for Microsoft’s big Xbox 360/IPTV launch in London in early March.

From Kotaku 02/22/2007

********************

Microsoft will showcase IPTV on Xbox 360 for the first time in
Europe at The Connected Home show to be held in Olympia, London on 5-7
March, 2007 (www.the-connected-home.co.uk). Ed Graczyk, Worldwide
Director of Marketing and Communications for Microsoft TV, will
demonstrate IPTV on Xbox 360 during his keynote at the conference,
entitled “Future of Connected Entertainment”.

The demonstration will showcase what happens when next-generation
television is combined with next-generation gaming in a unique, new
service delivered by your broadband provider. Graczyk commented,
“Separately the Xbox 360 and Microsoft TV IPTV Edition deliver unique
and exciting entertainment experiences, but IPTV on Xbox 360 delivers a
real value proposition for consumers, service providers and content and
game developers alike. By integrating these industry-leading solutions,
we continue to drive innovation and enable new connected entertainment
experiences for consumers.”

********************

And earlier, from Microsoft’s annoucement at CES

From WebTVwire 01/11/2007 -  Xbox 360 Internet TV features I Video from CES

Sony: Phil Harrison of Sony recently announced the pending PS3 video download service. As usual, his language is oblique, his tone detached, and his effect not unlike that of a soggy blanket. Someone should break it to him that he should not be the front-person when discussing a new product release - kind of like Bill Gates. I think they need a little more media training and to sit on a few whoopie cushions.

From DailyTech 02/17/2007

********************

“Well we made a very conscious decision in putting a hard
drive in every machine and a minimum of 20GB, 60GB and who knows in the future,
maybe that will rise — you know, that tends to be a trend,” said Harrison,
adding that he sees the long term benefits of the hard drive. “The ten year
plan of allowing people to download all kinds of digital content to their
PlayStation 3 — not just games but movies, music, HD, standard definition TV,
you name it. And that was a significant investment, but it was absolutely the
right thing to do.”

In response to a question if the PlayStation Network could
soon see something comparable to Microsoft’s video service, Harrison said that
official announcements weren’t yet ready, but did offer, “We have a hard drive,
we have a commerce engine, it doesn’t take a rocket scientist to figure out we
will have that on the network very shortly.”

********************

Ok, Phil, thanks for sharing. Question is will anyone except hard-core gamers use PS3 as the vehicle for audio and video over the Internet? Not that hard-core gamers are necessarily a bad market - they’re not - but they are certainly not mass market in the same way as, say, the iPod is mass market. The same can be said of Xbox 360 Live. Will casual games (or non-gamers) choose the Xbox 360 platform as their method of accessing and organizing their audio and video on the Web? It is hard to imagine. Consider the success that Nintendo has had with both the DS and the Wii reaching the casual gamer. Big, big success. In gaming. But nothing remotely resembling Apple’s installed base of 90 million iPods dotting the landscape with iTunes in tow. Xbox 360 - perhaps 9-10 million? PS3? Well, a lot less than that. So if one gives a structural advantage to the company with the largest embedded base, Apple is miles ahead of the pack. And don’t look for them to let the others catch up.

BitTorrent: Their recent commercial (read: legal) offering was just released, and was met with a resounding thumbs-down.

From Gizmodo 02/25/2007

The BitTorrent Entertainment Network
we told you about a couple month ago launches tomorrow with “around
3,000 new and classic movies and thousands more television shows, as
well as a thousand PC games and music videos.”

Movie content is provided by Twentieth Century Fox, Paramount,
Warner Bros., and MGM, and will sit alongside free videos uploaded by
users. Exceedingly lame, however, is that all of the studio movies are
rentals only, imploding 30 days after you download one or a day after
you start watching it.

New flicks go for $3.99, older ones
for $2.99. TV show stuff is standard—$1.99 to buy (and keep). Since
they’re wrapped up in Windows Media Player DRM, you can guess where,
how and on what they’ll play (or not). Observation: Microsoft must be
making a killing licensing their DRM to people, since most of the big digital movie distributors other than iTunes use it.

While overall I find these services to be ill-conceived, limiting and wholly unsatisfactory, if you do decide  to buy crippled,  overpriced
content, a NYT test showed that thanks to BT’s p2p setup, it took less
time to download a movie than it did from Wal-Mart. Moreover, it seems
to solve the issues that the Xbox 360 download service ran into on the first day.

********************

From Om Malik on GigaOM 02/26/2007

BitTorrent is all set to launch a legal P2P
video download service, BitTorrent Entertainment Network, that will
offer television shows for sale and movies for rental from some of the
major Hollywood studios. The news has created quite a stir amongst the
technorati. Mathew Ingram, a man not known to mince words, is convinced
that the new service is destined to fail. It is hard to disagree with
his assessment, though our reasons are slightly different that his.
Here is a short list of challenges we see for BitTorrent’s new store:

1. Internet Service Providers dislike BitTorrent



2. BitTorrent’s not easy, especially for novices



3. Content on BitTorrent Store ain’t all that



4. Who uses the official BT client?



5. Why pay to play?

********************

If the user interface is poor, it is hard to use, “purchased” movies evaporate after 30 days, content selection is weak and the company has a history of facilitating illegal downloading, are they really a formidable long-term competitor to Apple? I don’t know, but they certainly lack many of the advantages and capabilities that Apple has secured over the past five years.

Netflix: The company recently launched their own online initiative, with an initial content base of over 1,000 movies and TV shows.

From Yahoo! 01/16/2007

Online DVD rental company
Netflix Inc is unveiling its long-awaited online movie delivery
service which allows subscribers to watch about 1,000 movies
and television shows on their personal computers at no
additional charge.

********************

Rental and retail sales revenues of DVDs and home videos
reached $24.5 billion in 2006. About 100 million U.S.
households have DVD players, and an estimated 41 million U.S.
households had access in 2006 to broadband Internet services
needed to download or stream video content.

Netflix’s goal is to sign up 20 million of them as
subscribers by 2012.

The instant viewing feature also puts Netflix squarely in
competition with several players already offering movies for
rent online, including Starz Entertainment’s Vongo and the
studio-owned MovieBeam, MovieLink and CinemaNow services.

Netflix’s limited slate of electronically available titles
mirrors its new rivals’ but its subscriber base of about 6
million dwarfs those of the other online rental services.

********************

Now I understand why Netflix is doing this - they kind of have to in the wake of the Blockbuster’s recently launched Total Access program, or risk being marginalized - but does this really represent a threat to Apple, much less Microsoft or Sony, in the IPTV arena? Further, Blockbuster also appears to be taking a swing at Netflix, with the recently disclosed discussions surrounding their potential acquisition of Movielink (from the WSJ 03/01/2007):

Movie-rental giant Blockbuster
Inc. is in advanced talks to acquire Movielink LLC, an online
movie-downloading company owned by the major Hollywood studios,
according to people familiar with the matter.

While the proposed deal is small — the price is said
to be less than $50 million in cash and stock — it has important
strategic implications. For Blockbuster, it represents a quick way into
the online download business. Movielink has quietly peddled films
online since 2002, with little success. In the past year or so, the
nascent field has begun to pick up momentum, with big players like Apple Inc.’s iTunes and Wal-Mart Stores
Inc. jumping into the fray. Blockbuster could bring much-needed
marketing muscle to Movielink’s efforts to increase market share.

********************

It also would help Blockbuster compete against its main competitor, Netflix
Inc., which unveiled its own movie-download service in January.
Blockbuster is still stinging from the strategic mistake it made in
initially ignoring the shift of consumers to Netflix’s DVD-by-mail
rental service.

Given the breadth of capabilities of the BIg Three, together with their installed bases and millions of devoted users, Netflix appears to be positioned as a niche player in a world that will likely be dominated by a handful of larger, more diverse, better funded competitors.

Google - IP What?

Google has come out and said it: IPTV might not be the wave of the future. Why not? One of the big reasons: inadequate web infrastructure.

From Macsimum News 02/09/2007

If you think that Internet TV is the wave of the future, you should
think again, according to Google. The company says that new Internet TV
services such as Joost and YouTube may bring the global network to its knees, according to a Reuters
report. In fact, Google, which acquired online video sharing site
YouTube last year, said the Internet was not designed for TV. But not
everyone agrees.

It’s even issued a warning to companies
that think they can start distributing mainstream TV shows and movies
on a global scale at broadcast quality over the public Internet, Reuters
says. “The Web infrastructure, and even Google’s (infrastructure)
doesn’t scale. It’s not going to offer the quality of service that
consumers expect,” Vincent Dureau, Google’s head of TV technology, said
at the Cable Europe Congress.

Google instead offered to work
together with cable operators to combine its technology for searching
for video and TV footage and its tailored advertising with the cable
networks’ high-quality delivery of shows. For now, broadband Internet
delivery to homes and small businesses is one of the most lucrative
segments for cable TV operators, but heavy investments in
infrastructure are needed to meet the rapid rise of Internet
file-swapping and video downloads.

********************

Research group Gartner estimates that 60 percent of the Internet
traffic that is uploaded from computers is peer-to-peer traffic, mostly
from consumers swapping films and TV shows through select user groups
and BitTorrent. Cable operators are set to return to capital
investments of a modest 10 to 12 percent of revenues, but they can be
forced to spend much more due to outside pressures from increased
Internet consumption and from rival telecoms operators that upgrade
their broadband Internet packages to fiber optic super speeds, Reuters notes.

********************

Most of the material I’ve run across touting the promising future of
Internet television is at least a year old, so Google may be onto
something. On the other hand, IPTV may flourish as a developing
technology that will allow consumers with a high speed internet
connection (DSL , Cable, etc.) to receive a television signal over the
Internet, not from Cable or Satellite. A set top box will decode the IP
video and convert it to a standard TV signal.

There are
doubtless substantial technological barriers to overcome. The question
is whether it’s worth the time and money involved.

Does Google really believe this? Are they simply stating this position in order to play up their natural strengths - search and advertising - while discounting the natural strengths of their competitors (Apple?). Without question the issue of technological challenges relating to IPTV have been raised in many quarters, so the issue is anything but a red herring. But does it really portend a weak future for the medium? It seems doubful.

A Word on Installed Bases

A few factoids on the current breadth of Apple’s reach. From Steve Jobs 02/07/2007 in a piece titled Thoughts on Music:

********************

Some have argued that once a consumer purchases a body of music from
one of the proprietary music stores, they are forever locked into only
using music players from that one company. Or, if they buy a specific
player, they are locked into buying music only from that company’s
music store. Is this true? Let’s look at the data for iPods and the
iTunes store – they are the industry’s most popular products and we
have accurate data for them. Through the end of 2006, customers
purchased a total of 90 million iPods and 2 billion songs from the
iTunes store. On average, that’s 22 songs purchased from the iTunes
store for each iPod ever sold.

Today’s most popular iPod holds 1000 songs, and research tells us
that the average iPod is nearly full.  This means that only 22 out of
1000 songs, or under 3% of the music on the average iPod, is purchased
from the iTunes store and protected with a DRM. The remaining 97% of
the music is unprotected and playable on any player that can play the
open formats.  It’s hard to believe that just 3% of the music on the
average iPod is enough to lock users into buying only iPods in the
future.  And since 97% of the music on the average iPod was not
purchased from the iTunes store, iPod users are clearly not locked into
the iTunes store to acquire their music.

********************

90 - million - iPods. 2 - billion - songs. Those are HUGE numbers.  There are currently 9.36 million Xbox 360s and 2 million PS3s  based upon the latest worldwide console sales numbers (from  VG Charts). Don’t you think Apple has got to have an advantage rolling out an IPTV product to its user base relative to either Microsoft or Sony? Even if one assumes that the demographics of the three user bases are similar, the sheer reach of Apple’s audience gives it a built-in head start relative to its top competitors. At least it seems that way to me.

Conclusion

IPTV is right at the intersection of two technology and user mega-trends - light, flexible, powerful and easy-to-use web-based applications (Consumer Era of Computing) and on-demand content that is exactly what I want, when I want it that can be consumed where I want it (Asynchronous World). The online conversation clearly sees IPTV as massively disruptive to legacy content creation and distribution platforms, forcing recognition of and adaption to these new mega-trends. Apple has been the recipient of most of the favorable discussion in this burgeoning arena, notwithstanding a spate of recent competitive offerings. That said, it appears that some technological hurdles need to be overcome - and performance proven - before the IPTV medium is accepted in the same way as, say, music downloads. But the handicapping is that these technical hurdles will be overcome and that IPTV will be massively disruptive, with Apple likely being the big winner. Surprise, surprise.

The author does not hold a position in this company’s securities.

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