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My last column generated a lively debate on the prospects for various business and technical options for the delivery of Internet TV so it makes sense to continue this topic and build it into a more full-featured model.  I used to write quite a bit about this back when I was trying to get NerdTV going.  The core of what I’ll write here can be found in a couple dozen columns from back then — columns that would seem to have been for the most part forgotten given the direction last week’s discussion took.  You see the future of television IS Internet television.  There is no other in sight.

No business or technology exists in a vacuum.  They all have customers, users, competitors, and make use of resources in an environment that is not one of total abundance.  This means that if there is going to be something like television in the future it is going to adapt to the distribution model that offers the highest price/performance, which is to say the highest performance for the lowest cost.  That is not how one would traditionally describe the Internet, but then times are changing.

Whatever country you live in there are generally four models for live entertainment video distribution — broadcast, cable, satellite, and Internet.

Broadcast is a limited local resource and therefore more highly regulated than the others but it has traditionally featured the lowest cost per marginal user.  That means it costs a lot to build and maintain a TV station but additional viewers within the service area can be added pretty much for free.

Cable offers more channel capacity than does broadcast but requires building a distribution network that’s fairly expensive.  While one could imagine a cable TV “station,” the way the industry has grown is through cable operators becoming content aggregators offering many services over their expensive networks.  That’s the most efficient way for cable companies to serve the broadest audience and the only way that enables them to sell extra-cost services like pay-per-view, premium movie channels or, indeed, Internet service.  Remember, though, that cable operators pay for nearly all of the content they carry, which is different from broadcast, where a lot of content is free to the broadcaster and some content even comes with money attached.

Satellite operators pay for their content, too.  Satellite initially used wireless technology to offer cable content in rural areas where it was too expensive to build a wired network.  Having gained economies of scale in the rural markets cable couldn’t compete for, satellite has come to town competing generally on price.  But satellite offers no practical Internet service.  I know there are some and I tried one years ago (Starband) but they don’t work well.

Internet TV is different from all these others.  It began as a parasite on telephone and cable networks so the cost of building the network generally wasn’t there, having already been covered for the most part by those earlier services.  Internet TV is less of a network than a conduit; at present the Internet Service Providers don’t pay for video content but then neither do they get paid for it.  Yet this common carrier attribute also makes Internet service often more profitable for telcos and cable companies than the core services those companies were established to provide.  Whatever you pay for Internet service, it is mainly profit for your ISP.

The important lesson to learn when it comes to these competitive services is that the first three — broadcast, cable, and satellite — are all going up in cost to their providers while the cost of providing Internet service is going down.  In the USA, broadcast viewership is dropping, which means the cost per viewer is rising.  Same for cable where viewers are stagnant, viewership is declining (number of hours of viewing) and the cost of content is rising.  Satellite has been growing marginally but that could end at any moment and it shares the same content cost increases as cable.  Meanwhile Internet service just gets faster and cheaper thanks to a Moore’s Law double whammy.

Remember Moore’s Law works in two ways.  It makes digital products ever cheaper AND ever more powerful.  This has profound meaning for Internet TV because it continually increases the bandwidth we can get for the same dollar while giving our devices the capability to do even more with the same bandwidth.

Here’s an example.  My primary Internet connection is an 8 megabit-per-second business cable line with a service level agreement and static IP addresses.  I pay more than you do but then I get more, too, though even my service is crap compared to what you can get in Japan, Korea, and much of Europe.  My primary computer WAS a Mac Pro G5/1.6 circa 2004.  I should have replaced the G5 a couple years ago, I know, but my kids are in private schools and I keep buying airplane parts. I finally replaced the G5 last week, though, with a dual-core Mac Mini 2.0.  Both the old and new computers had four gigs of RAM.  Though my Internet connection can easily carry one or more 1080p H.264 video streams, there is no way that old G5 (which cost me $1999 in 2004 dollars) could play it.  It didn’t do much better with 720p for that matter.  But the $750 Mini (small drive but lots of RAM) can easily decode 1080p.

This is the trend, then: our available bandwidth will go up while our devices will become more powerful, making better use of the bandwidth.  The result, as always with Moore’s Law, is either better services or lower total cost or maybe a little of both.

What this means for the future of television is that we’re approaching a point where Internet service will equal and then be lower than the marginal per-viewer cost of the broadcast TV model.  This crossover will inevitably happen with the only question being when. That’s a function of bandwidth costs decreasing at 50 percent per year and processing power increasing at 50 percent per year.  My calculations suggest the crossover will happen around 2015, which used to seem like a long time away but no longer does.

When Internet TV becomes dramatically, unequivocally, and inexorably cheaper than the other three distribution models, those other models will quickly go away.  That’s why I argued in PBS meetings to forget about spending $1.8 billion to upgrade local stations for digital TV and instead sell or lease that spectrum for commercial data use and throw the resulting $3 billion (lease revenue plus the $1.8 billion savings) into rebuilding the network solely as an Internet service.

Nobody listened.

So there is a cliff rapidly approaching for television.  Five years from now local TV stations will have the same complaints that local newspapers have today as many of them go out of business.  Cable TV operators will become ISPs, period.  Phone companies will be ISPs, too, and analog voice service will be gone completely.  The regulatory implications of these changes should be interesting.

Who, then, will be the players in this future TV?  For the most part they will be the content providers, which probably doesn’t mean traditional networks.  And the networks know this, by the way. Hulu.com isn’t called NBCFoxABC.com and TV.com isn’t called cbs.com for a reason. Networks will go away.

But content will endure, bringing new value to I Love Lucy episodes and almost anything else people like to watch.

The TV networks are throwing their lot together.  CBS chairman Sumner Redstone will come to his senses one day and merge tv.com into Hulu, I am sure.  Their big competitors will be Google, Apple, and a player yet to be even founded (definitely NOT Yahoo OR Microsoft).

Google will differentiate itself as always through technology.  Those shipping container data centers I first wrote about in 2005 exist not just because they are easy to stack inside big Google plants.  Why botehr with weatherproof containers if they are to be used exclusive indoors? Because they are even easier to put in the parking lot at the telephone company central office or at the cable company head-end, both of which will by then be strictly ISPs.  Google will proxy content at every major ISP in America.  And they’ll do this because Google has no idea what people want to watch on TV, nor do they particularly care.

Apple, on the other hand, cares.  Following the content development scheme I laid out last time Apple will attempt to become the dominant content provider to the 20 percent of the market that spends 80 percent of the money, with margins high enough to use Google distribution and still come out ahead, leaving to Page and Brin the 80 percent of content that generates 20 percent of revenue.

But wait, isn’t Apple just a maker of hardware?  Don’t they do iTunes just to sell iPods?

No.

Apple is a software company that has traditionally packaged its software in attractive hardware boxes.  The fact that any new Mac is essentially a Windows computer proves that.  But price points have been eroding in every hardware category and will continue to do so.  Microsoft right now makes more profit from every Windows PC than does the maker of that PC.  Apple is not immune to this trend.  So the company needs to find ways to sell more and more software.

Content is software.  TV is software.  And the great thing about entertainment is that it is software we can be induced under some circumstances to buy over and over again like those teenage girls who paid to see Titanic dozens of times.

What does that leave, then, for that player to be named later?  I’ll get to that next time.

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My last column was all about the culture of Microsoft and how it makes real change difficult for the company.  It’s not just at Microsoft that these things happen, by the way: nearly all mature organizations get into similar ruts.  And if, like Microsoft, they are spectacularly profitable ruts, well then it isn’t surprising that things stay more or less permanently dysfunctional.

I said last time that a second column would follow with my specific suggestions for restructuring Microsoft, but now that I am really into it I think we might be looking at a total of three columns, not two.  But then I’ll be finished with Microsoft for a few months.

Setting out to rebuild Microsoft for the next 30 years it is tempting simply to throw away the parts of the company that don’t make money, which is to say almost everything except Windows, Office, and MAYBE the xBox.  Most parts of Microsoft lose money. But those parts that are profitable are SO profitable that they more than make up for all the losers, as I have explained ad nauseum before.

The part of Microsoft that it would initially make sense to dump is easy — everything related to MSN, including MSNBC, the MSN home page, and the many MSN websites. Even though some MSN sites are relatively successful, such as MSN Money, Microsoft should never have gone into the content business and stayed there so long. It’s not Microsoft’s core business, and MSN has cost the company billions of dollars over the years.

But I said it would INITIALLY make sense to dump MSN, not that I still believe that completely.  After all, wasn’t it MSN that Microsoft intended to augment by attempting to buy Yahoo for $44 billion?  How could Microsoft be so stupid to throw another $44 billion into a toilet that already contained close to $10 billion in cumulative MSN losses over the years?  Yet CEO Steve Ballmer seemed very intent on doing just that.

The arguments for dumping MSN are that it never made money and never felt like the rest of Microsoft.  The arguments for keeping MSN are that in many ways it is the future of PC technology and Yahoo has shown it is possible to make a pretty good living in the content business.  Just because MSN hasn’t made money doesn’t mean MSN COULDN’T have made money if that was an important goal.

One could argue, in fact, that someday the Windows and Office franchises will start to fade so Microsoft needs to learn how to build new and successful lines of business.  Yes MSN, so far, has been a failure.  It is a management failure and to be successful well into the future, Microsoft needs to fix this problem.

Yet there is big money still to be made online as Google and Yahoo have shown and it is something Microsoft should somehow do.  Microsoft needs several new lines of business that can each generate billions in profits.  “Online” has the potential to do that.  There are big bucks to be made there and Microsoft needs to be in the game.

The problem, though, is that the folks in Redmond don’t know how to build an online business, which is a big reason why they wanted to buy Yahoo.  Ballmer suggested, remember, that Yahoo’s DNA, not MSN’s would be perpetuated in the combined online business.  This is a nice argument, but who can believe that Microsoft would spend $44 billion and then not take an active and probably destructive role in managing that business?  I can’t. Worse still, it can be argued Yahoo has forgotten how to manage an online business, too, for reasons I have written about in the past.  But Microsoft was willing to take that risk, or so they said.  There was a good foundation for an online business at Yahoo and it could be obtained at a bargain basement price.

Only it wouldn’t work.  Microsoft would meddle and screw it up while Yahoo might just as easily self-destruct.

The only answer to optimizing the online operations of both companies, then, would be for YAHOO TO BUY MSN.

This actually makes some sense in a weird way.  The only way to keep Microsoft from screwing-up Yahoo is by making Microsoft a minority partner in the operation.  The only way to push Yahoo management into being less boneheaded in its own way is by having a demanding minority owner.  And you can be sure Ballmer would be demanding.

Let’s put a value of MSN at $10 billion giving the combined companies a worth of $29 billion and Microsoft a 34 percent ownership of Yahoo, perhaps with warrants to buy the rest at some later date under certain conditions.

Yahoo, for all its problems, knows how to make money on the Internet.  It could use Hotmail and other parts of MSN to increase economies of scale and become even more successful.  Yahoo still wouldn’t defeat Google but it would be a much stronger number two and even number one in certain areas.  Because Microsoft couldn’t control Yahoo it couldn’t impose Microsoft culture on it.  Because Microsoft was a big enough minority owner, it COULD push Yahoo into being more logical, less emotional, and probably more profitable – something Microsoft could never force MSN to do itself.

And Microsoft, suddenly unburdened by MSN losses would look better to Wall Street, which would appreciate, too, any option to recapture Yahoo at a later date, but only if it made sense then to do so.

Unlike Microsoft buying Yahoo or even Yahoo remaining completely independent as it is now, this plan actually makes some sense, at least to me.  But then you know me…

Next column we’ll deal with the rest of Microsoft, chopping those 20,000 to 50,000 heads.

New Kindle?

A few hours from when I’m writing this Amazon will reportedly introduce the second-generation Kindle ebook reader.  A lot of money has been lost on ebooks over the years and I have my doubts that the Kindle is yet profitable.  Still, if any company can make a go of eBooks it is probably Amazon.  As for what’s in the new Kindle I’ll take a chance and guess right here.

It will be thinner, have a better user interface and probably a touch screen of sorts.  Also I shot some interviews last year at E-Ink near Boston and got some idea of where that technology, which is used in the Kindle, is headed.  Last spring I saw full color video running on an E-Ink display, so I’m guessing that will be a part of the next Kindle, too.  But that’s as far as my guessing goes.

Update –The Kindle 2 has now been announced.  As predicted it is lighter, thinner, and faster, but it doesn’t have a color screen — 16-level grayscale instead.  That color model must be the Kindle 3. –Bob

All Bob All the Time!

Now some news about me.  Sometime this spring I will start a weekly online video show in cooperation with the Computer History Museum in Mountain View, California.  Think of this as a follow on and an improvement to NerdTV.  It will be 52 weeks per year and unlike anything you’ve seen to date on the Internet, even from me.

This spring I will also start writing a blog about the global financial crisis with my friend of 25 years Adam Smith, author of The Money Game, Super Money, Paper Money, etc. and for 14 years the managing editor of Adam Smith’s Money World on PBS.  I’m definitely the junior partner in this operation, which will be done as a co-production with a major New York publisher.

My reasons for mentioning these two projects are entirely self-serving: we need sponsors.  If we can bring in a launch advertiser for the blog, especially, we can grandfather that arrangement at a lower CPM before the New York guys get a chance to mess with it.  So give me a call if you or your company are seriously interested.

Microsoft

Microsoft may or may not make a deal for Yahoo’s search service.  What neither firm realizes yet is there is a better way to do searches with value advertising.  It will be easier than what Google is doing and can produce more tangible results.  Right now both firms are in the mind set of “competing with Google” instead of being creative and innovative.  When they start thinking independently and start tuning into what the customer needs, Google will have some competition.

Apple

If Apple would port its Mac software (iWork, iLife, Final Cut, etc) to Windows it could quickly OWN the software market.  Microsoft’s competitive advantage is not Windows — it is Office.  Apple could take them out if it chose to.  They won’t in 2009.  But if the economic crisis really hurts Apple’s 2009 business, taking business away from Microsoft in 2010 could become a real consideration.

Google

Android, Google’s phone software will suddenly become much better and will become the preferred software platform for the cell phone industry.  Competitors of the iPhone will jump on the Android bandwagon and rush many new products to market in 2009.  This will force AT&T and Apple into some uncomfortable decisions.  Should AT&T be open to iPhone competitive products?  Should Apple open up to other telco providers?

IBM

Thanks to the economic crisis, the IT industry will take a beating.  To survive many IT providers will cut costs and services to the point of driving away customers.  IBM is more diversified and has deeper financial reserves.  In time customers will begin to return to IBM, but with some new expectations.  They’ll be willing to pay more for help desk workers who speak understandably.  They will want to see more people on site, more face-to-face support.  This won’t stop the rush to offshore IT jobs.  It will however signal a change in the direction of the pendulum and will force IT providers to rethink their business model.

So far IBM and most IT providers have cut support costs by shipping work offshore to lower paid workers.  Someone in the industry will finally realize there is another way to cut — by using quality improvement techniques to reduce the occurrence of problems.  This will become a game changer in the industry.  Sadly IBM is too big, too bureaucratic, too set in its ways to catch this wave.  What will happen instead is firms will start in-sourcing their IT again.  Watch for this in the next 5 years.

Yahoo

Someone will buy a controlling interest in Yahoo.  There will finally be a big house cleaning of Yahoo’s board and senior management.  Then either of two things will happen.  The new leadership will unlock Yahoo’s value and creativity — and Yahoo will soar again.  Or, Yahoo will flounder and continue to become less relevant over time.

DTV

There will be problems with conversion to DTV.  It will take months, perhaps a couple years for the problems to become apparent.  The original NTSC system was basically an “open” system.  All stations, satellite, and cable providers used it and it worked on every television made.  With DTV content providers will attempt to introduce proprietary technology in an attempt to “lock in customers.”  Only open-air transmissions will use DTV.  Cable and satellite will use different and proprietary digital communications.  Cable and satellite will start increasing their prices to the point where consumers start spending less.  To make matters worse, the Internet will become a big provider of DTV content and it will also use “different” technology.  At the same time ISP’s will implement bandwidth restrictions to thwart DTV content that is not their own.  It won’t take long for the S consumer to get very upset with things.

Internet Centric devices

Theft of smart phones and Internet centric devices will become a big problem.  Thieves will figure out how to steal identity information, raid bank accounts and investments, and so on.  This will become a big problem.

Intel/AMD

Intel will launch an 8-core processor for the PC market.  It’s price point will be too high for the consumer market and the product will languish — forcing Intel to lower the prices of its product line.  Worse, Microsoft will limit its support of this chip to Vista.  While we can expect Vista to continue to get better and better, the extra cost and hassle of Microsoft’s software, Office upgrades, etc will limit sales.  Apple will swoop in and take more market share.

Obama

As a result of all the economic problems and scandals on Wall Street, I predict the Obama administration will propose a comprehensive financial monitoring system for the banking and investment community.  It will be proposed in 2009 and will take a few years to implement.  With it government agencies will have the means to thoroughly monitor and regulate the industry.

The Obama administration will move forward, as promised with a national program to computerize medical records.  They will however, miss one of the greatest values of such an effort.  Because of privacy concern, government ignorance of technology, etc the system will not have the ability for the medical industry to do data mining.  With computerized records we will finally have the ability to spot drug interaction problems and perform research on the effectiveness of treatments.  With data mining with patient privacy protection, our health care system can be greatly improved.  We will miss that opportunity.

The Obama administration and/or Google will create a new Google Gov service.  Like its news service, Google Gov will start tracking everything going on in Congress.  Committee hearings, votes, discussion of bills and amendments will be captured by Google and made public within days.  We will finally be able to see in real time what our elected leaders are really doing, who is influencing them, etc.  This will be a game changer.