August, 2009

Choosing up sides over e-books

Quite an interesting battle is taking shape in the suddenly hot world of e-books.

For many, of course, “e-books” are synonymous with Amazon and its Kindle device. But over the past few months, several would-be challengers to Amazon’s Kindle kingdom have emerged to do battle. In July, No. 1 brick-and-mortar bookseller Barnes & Noble unveiled a revamped online e-bookstore and announced a partnership with e-book reading device maker Plastic Logic, which plans to introduce a thinner, touch-screen version of an e-reader early next year.

kindle-newsweekA few weeks ago, Sony entered the fray with a pair of new e-book readers and its own revamped e-bookstore. (Technically speaking, Sony has been in the e-book business longer than Amazon has, but for reason known only to Sony it seemed to be trying to keep its involvement a secret until this month.) Last week, Sony announced a third e-reader, this one with wireless connectivity to allow Kindle-like direct-to-device downloads (no need to stop at the PC first for transfer to the handheld device).

The big news in Sony’s announcement, however, was its embrace of EPUB, a series of open technical standards for the file structure, packaging and publishing of e-books over digital networks developed by the International Digital Publishing Forum, an industry group, and supported by a number of major publishers. Last week, Sony’s embrace of EPUB was seconded by Google, which announced it would use the standards to distribute (at no cost) the nearly 1 million public domain works it has compiled in digital form as part of its Library of the Future project (many of the works were originally digitized by the non-profit Project Gutenberg).

As an open platform, EPUB poses a significant challenge to Amazon, which has followed an iTunes-like strategy of enclosing the Kindle and Kindle e-books within the walled-garden of a proprietary format and DRM–the better to set prices and control margins. Should the rest of the industry adopt EPUB–which Amazon has so-far shunned–Amazon’s current status as the 800-pound gorilla of the e-book market would be threatened. (Shameless plug: For more on Amazon’s strategy and the implications of the EPUB initiative, see my report, The Evolution of the E-book Marketat GigaOm Pro [subscription required].) Read More »

Redbox, RealDVD and Hollywood’s long struggle with consumer demand, Part II

In my last post, I discussed the Hollywood studios’ long history of being willing to frustrate consumer demand in order to maximize their own profit, or at least to do what they believed would maximize their profit. For decades, in fact, it defined their basic business model: starve demand in one window or market to boost it in another.

In ordinary businesses, continuously frustrating consumer demand would not be a very effective business plan. But under the artificial conditions of the copyright monopoly it has generally worked for the studios over the years. When some innovator came along and found support in the Copyright Act for a model to meet consumer demand without giving primacy to studio profits, such as video rental stores, the studios’ first instinct has been to suppress it, often by litigation or seeking new legislation, or failing that through monopoly pricing.

It’s a deeply ingrained habit.

From the bunker of their copyright monopoly, however, the studios have often misidentified their own self-interest, at least at first. The video rental market, after all, went on to become hugely profitable for them, despite their unease with it. Yet the old habit is stubborn.

DVD, for instance, was the most successful format for distributing movies to the home ever devised. And it achieved that success largely by overcoming the studios’ historical ambivalence and meeting consumer demand head on. It didn’t eradicate the rental market but by meeting consumers’ reasonable expectations for purchasing a movie–in terms of price, convenience and quality–DVDs fundamentally changed consumer behavior to the benefit of the studios.

It wasn’t enough to change studio behavior, however. As later technological innovation caused consumer expectations and behavior to change again, the studios effectively did nothing to respond. DVD prices that once seemed reasonable, for instance, came to seem less reasonable over time as consumers’ expectations of value changed. Yet prices largely stayed where they were. Read More »

Redbox, RealDVD and Hollywood’s long stuggle with consumer demand, Part I

There’s something about the video rental market, to borrow a phrase from Barack Obama, that causes the studios to get all wee-weed up.

Back in 1983, not long after the Hollywood studios began, ever-so tentatively, to release movies on the newly introduced half-inch videocassette for watching at home, they were horrified to discover that some enterprising video shop owners had begun renting the cassettes for a few bucks a night, sparing their customers the need to shell out $30 or $40 for a movie they might watch only once. Worse for the studios, the video shops had not licensed the right to rent movies and were not sharing any of their rental earnings with the studios.

Hollywood huffed and it puffed but, in fact, the video shops had the law on their side, specifically Section 109 of the U.S. Copyright Act of 1976, which provides that:

[T]he owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.

In other words, the rental shops didn’t need a license, and the studios couldn’t stop them from renting. So Hollywood did what copyright owners had done at least since the introduction of radio: they went to Congress to get the law changed more to their liking.

Never mind consumers’ manifest interest in renting movies.

In the sausage factory of Capitol Hill, the repeal of Section 109, known colloquially as the First Sale Doctrine, became twinned with a separate studio initiative to outlaw the use of VCRs to record TV programs, or, short of that, to impose a royalty levy on VCRs and blank tapes to “compensate” copyright owners for such copying.

In 1984, however, with the legislative battle still raging, the U.S. Supreme Court threw a wrench into the works by handing down its decision in the famous Betamax case, which held that recording TV shows off the air with a VCR for private use was perfectly legal and that no royalty payment was required. With that, the studios’ effort to ban or tax recording equipment died in Congress, and with it its legislative twin, repeal of the First Sale Doctrine.

The studios were not ready to make their peace with rentals, however. Their next move was to implement a series of ever-more baroque “rental plans,” which involved various schemes to try to distinguish between “rental” cassettes and “sale” cassettes, including the use of different color plastics for the cassette shells. Thus, “rental” cassettes were red, while “sale” cassettes were blue.  The idea was that “rental” cassettes would not actually be sold to rental stores but licensed, thereby pulling an end-run around the First Sale Doctrine. Since the stores would never legally own the cassettes, they could not unilaterally exercise their right to rent them under Section 109 of the copyright statute. Instead, they were compelled to pay a “royalty” to the studio on each rental transaction. Read More »

The studios just say 'no'

The studios and the DVD Copy Control Assn. (DVD-CCA) are on a legal roll. On successive days last week they won a preliminary injunction against RealDVD and a reversal on appeal in the Kaleidescape case (The Media Wonk has been on another assignment so I’m only just getting aroundto blogging this now). The two courts found, inter alia:

  • The CSS license and technical specifications “unambiguously rule out” (RealDVD) the making of permanent digital copies of DVDs and prohibit the playback of the DVD’s content without the original disc in the tray.
  • The technical specifications in the CSS license are indeed part of the CSS license agreement and it was the “unambiguous intent” of the parties that those specifications barred the creation of permanent digital copies  (Kaleidescape).
  • The anti-circuvention provisions of the DMCA clearly and plainly tipped the balance of copyright law in favor of copyright owners and trumped any fair use analysis (RealDVD).

The studios really couldn’t have asked for more.

Kaleidescape-collection-to-systemSo, now what? Now that the studios have won most of the key legal points and preserved the integrity of the CSS license  (at least for now), what will they do with them?

Alas, probably nothing very useful.

As long-time readers of The Media Wonk know, the DVD-CCA has been attempting to devise a comprehensive system for allowing “managed copying” of DVDs for the better part of four years–a process that has thus far produced little apart from the Kaleidescape and RealDVD litigation. Based on the most recent discussions, in fact, Media Wonk’s sources suggest, negotiators seem farther than ever from a comprehensive solution. Read More »

Toshiba now officially Blu

Toshiba on Monday officially confirmed last month’s rumor that it’s preparing to join the Blu-ray Disc ranks, issuing a one-paragraph statement saying it will roll out Blu-ray products, including set-top players and notebook drives “in the course of this year.”

“In light of recent growth in digital devices supporting the Blu-ray format, combined with market demand from consumers and retailers alike, Toshiba has decided to join the BDA (Blu-ray Disc Association),” the statement said.

blu-ray_disc_logoThat immediately led to speculationthat Apple will be next to join the Blu-ray camp, completing the format’s sweep of the field among electronics makers.

I can’t speak to Apple, but as I noted in a previous post, I think Toshiba’s new-found support for the format has more to do with Toshiba’s business than with Blu-ray.

Why? Because the electronics maker just wrapped up the worst fiscal year in its history, posting a record et loss of $3.5 billion for the year ended in March and things haven’t gotten better since then. The Consumer Electronics Assn. is forecasting total industry sales to be off nearly 8% this year and to turn around only gradually in 2010. About the only bright spot in the CEA forecast was Blu-ray players, which are expected to grow by 112% this year, to 6 million units.

Today’s announcement also comes on the eve of the CEDIA Expo custom installers’ show, which is scheduled to get under way in Atlanta on Sept. 9 and is an important event for CE makers. Installers these days generally like to include a Blu-ray player and their set ups and right now there’s a hole in Toshiba’s product line-up. That means it can’t sell installers complete home-theater packages and is likely losing high-end market share to manufacturers that do offer Blu-ray players. Though Toshiba said it has not decided whether to display its new Blu-ray players at CEDIA, it has at least alerted an important constituency that it is plugging the glaring hole in its product line.

The biggest reason to suspect today’s news is more about Toshiba’s business than about Blu-ray, though, is that Toshiba is still selling HD DVD players in China, under the China Blue High Definition (CBHD) banner.

Desperate times, desperate measures.

Scared hens in the Fox house

Somewhere, Tom Freston is laughing.

murdochRemember when News Corp. was supposed to have figured out this New Media thing way better than the other media empires, and Sumner Redstone was firing Freston for letting Rupert Murdoch snare MySpace? These days, not so much. New Corp., in fact, appears to be getting a bit panicky over the whole New Media thing.

Yesterday, the company announced pretty ugly second-quarter earnings (fiscal Q4), low-lighted by a $403 million impairment charge against Fox Interactive Media, which consists primarily of MySpace, as well as a $228 million “restructuring” charge due mostly to layoffs as MySpace. That’s $631 million in charges for the same “prize” News Corp. snatched away from Viacom for $580 million in 2006.

In the earnings call, Murdoch declared that he intends to start charging people to read all News Corp. newspaper content online, from the Wall Street Journal  to the Page Three girls in the Sun, a sure sign that the company really doesn’t know what it’s doing online. Unless there’s some other strategy for leveraging the network economics of the Internet Murdoch hasn’t told us about yet, simply throwing up paywalls around everything isn’t a business plan. It’s taking your marbles and going home.page3girls

On the same call, newly appointed vice-chair and COO Chase Carey took a whack at Redbox, the $1 a night DVD rental kiosk outfit owned by Coinstar. “I think making our content available for $1 grossly undervalues it,” Carey said.

According to the Journal (sub. required, natch), Fox has told DVD wholesalers like Ingram Entertainment and VPD not to sell its movies to Redbox until 30 days after their initial release, the same anti-competitive-ish stunt Universal pulled earlier this year.

The fact that News Corp.’s No. 2 is spending his time worrying about dollar-a-night rentals tells you all you need to know about how far the studio is from figuring out to respond strategically to precipitously declining DVD sales.

If I were Carey (or Fox video head Mike Dunn) I’d be worrying about why Blu-ray, which Fox championed, hasn’t arrested the massive outflow of consumer dollars from the packaged media business. And I’d be focusing on how to structure my deal with Netflix before it finishes the job of remaking the online video-on-demand business into a non-transactional subscription business and Reed Hastings ends up with all the leverage, rather than risking litigation over my deal with Redbox. The DVD business is term-limited. Getting digital distribution right now will do a lot more for earnings in the long run than bashing a few kiosks to make yourself feel good.

Petulance is not a strategy.

Sony's long-shot e-book strategy (and a shameless plug)

Sony formally unveiled two new e-book readers today, slightly ahead of schedule because details of the announcement began to leak on the web. The big news: one of the two models is priced at $199, a hundred bucks cheaper than the least-expensive Kindle (the fancier Sony device goes for $299). Clearly, Sony’s strategy is to position its Reader as a more mass-market friendly device by getting under the Kindle in price.

“They are not trying to beat Amazon at its own game—they are trying to redefine the terms of the game,” Forrester Research analyst Sarah Rotman Epps told the Wall Street Journal. “Where Amazon went bigger with the Kindle DX, they’re going smaller.”

sony readerFair enough, but trying to compete on price in the e-reader market is likely to prove a tough nut. First, Sony isn’t the only one trying to work the low-end side of the street. UK-based Interead introduced its Cool-er e-reader earlier this year is also playing the price game.

The bigger problem for Sony, though, is the cost of manufacturing e-book readers. It ain’t cheap.

As I detailed in a new report on the e-book market that was released yesterday byGigaOm Pro (subscription required), the essential technology in e-book readers is the electrophoretic electronic-paper display (EPD), which uses reflective electronic ink on a static background to produce the image, rather than electronic pixel elements on a backlit screen. That makes the experience of reading more like ordinary ink on paper and yields a huge savings in power consumption.

According to a tear-down analysis by iSuppli Corp., the EPD is by far the most expensive item in Amazon’s $177 bill-of-materials for its $299 Kindle (Amazon claims the BOM is much higher than $177), at $60, followed by the wireless broadband module at $40. Read More »

Feels like old times

Some news out of China last week laid a nostalgia trip on those of us who covered the long saga of the Blu-ray vs. HD DVD format war. According to a report in the Timesof London, a recently introduced high-def DVD format developed in China, called China Blue High Definition (CBHD), is already outselling Blu-ray in the Peoples’ Republic by a margin of three-to-one.

bluray-vs-hddvdThe Times called the development a “new format war” but it’s really a continuation of the same format war that had simply gone underground after Toshiba pulled the plug on HD DVD  in the West back in February 2008.

The roots of CBHD go back to 2005, when the Chinese government set out to “break the monopoly” of Western and Japanese companies on the technology underlying the DVD format by creating new intellectual property controlled by China to be used in a next-generation format.

In 2007, the DVD Forum fomally approved specificationsfor a “China-only” version of the HD DVD standard, which was to be based on the HD DVD physical specs developed by Toshiba and Chinese-developed audio and video codecs. Instead of MPEG 2, VC-1 and H.264, for instance, the Chinese format would support only the Advanced Video System (AVS) developed in China, saving Chinese manufacturers boat-loads in royalty payments to foreign technology owners. Read More »