Devices, Media, And The Future Of Everything

Why YouTube Might Not Go Down

[Ted] Okay, time for me to weigh in here. While I trust and respect Josh's experience with content piracy -- after all, who else wrote a piece called "Music Lessons" that used the Kubler-Ross model of grieving to analyze the music industry?

But, I can see a way out for YouTube, and it goes something like this:

• Do lots of deals quickly to make YouTube a legitimate video destination. The deal with Warner Music Group is a good start, but hardly enough. What about sports bloopers from CNN or Sopranos outtakes from HBO? Share that traffic, split that ad revenue, love those guys to death.
• Listen carefully to the jungle drums of Universal to see if there's a way out.
• Lobby hard for copyright protection, publicly and visibly in the site experience.

With those steps, YouTube will likely survive, even if battered, an onslaught of the video industry legal attacks. But if YouTube fails on all three accounts, I have to agree with Josh.

Disagree? Lemme know.

[signed] Ted

Real Networks' "Rhapsody-Inside" Strategy: Brilliant

[Ted] Real Networks finally has a business model that works. Look what the company's done in the past year:

• Built out its technology stack: DRM support, Web services, recommendations. I first became re-interested in Real when I heard they had ported Windows DRM to Linux. And then they announced Web 2.0 access to their music catalog. At that point, I knew that this company was driven by technology. The close partnership with Microsoft means Real can take protected content out onto every digital platform -- MP3 players, mobile phones, set-top boxes, you name it.
• Beefed up its content: music, games, video. More music, more games, more video, more ringtones is what makes Real so compelling to a hardware manufacturer. Real's acquisition of WiderThan for $350 million gives it a bigger portfolio and a real share of the mobile entertainment back office.
• Brought in a massive capital infusion. Real's settlement and deal with Microsoft put $761 million in the treasury. Why go public to raise capital when Microsoft is willing to pay? This is cheap money that Real is using to finance its expansion.
• Developed into new distribution channels: MSN, Microsoft Messenger, Sonos, SanDisk, SK Telecom, Verizon, T-Mobile. With every deal, Real is acquiring customers and a paths to market. Sonos, for example, invented whole house audio and is now found in Best Buy, Circuit City, and Tweeter. And now Sonos comes bundled with all of Real's music. Bose should be wondering why it didn't invent this market. And now the SanDisk deal makes Real

When the company does finally decide to go public, it will be in a powerful market position with significant annuity revenues.

So what does the success of Real's strategy mean for digital entertainment?

• What it means #1: Business deals, not licensing deals, drive digital entertainment. Microsoft has tried and failed to create a meaningful business on a software API. Unlike with Windows, digital media needs a "business API," not a software API. PlaysForSure? Not. Future deals will come bundled with content, DRM, and technology. In that world, Microsoft is an ingredient, not a brand.
• What it means #2: Technology is critical -- but must be hidden from view. Real gets that digital media requires digital technology. (Others do, too, which is why all those Web 1.0 entrepreneurs are building new startups.) But only a few companies have figured out that the technology must be hidden from view. Apple is one, of course. And now it's clear that a few others -- Sonos, Logitech, Sling Media, and even Microsoft's Zune group -- are getting it.
• What it means #3: Back-office providers must willingly hide their brand from view. You heard it hear first, folks: ingredient suppliers don't have consumer brands. Note to all startups in the ingredient business: give up thinking that you're creating a consumer brand and start focusing on your real customers -- Yahoo!, AOL, Motorola, Cisco, Microsoft, Samsung.

Disagree? Lemme know.

[signed] Ted

Technorati Tags: Forrester, SanDisk, Sonos, Zune, Real, iPod

SanDisk -- A Smart Memory Giant In The Making

[Ted] It's impressive to see what SanDisk is doing to the non-iPod music player business. The company's strengths -- low-cost memory products, tremendous retail reach, and an increasing sophistication in CE and IT applications and products -- give it a very strong operating platform. The recent MP3 player announcement only highlights the company's opportunity.

So, will SanDisk displace Apple? Well, no time soon. Apple's tremendous market development is leading it to create a world class ecosystem for Apple products. If you buy a Mini Cooper with an iPod connector, it's a safe bet that your next MP3 player will be an iPod.

So what's SanDisk's future? In a phrase, it's smart memory. Everybody gets dumb memory. It's a memory card. But smart memory is a whole different animal. When compared with dumb memory:

• Smart memory is a platform for media. I think we can all imagine a future where consumers stop by an airport kiosk, broadband connection, or subway station vending machine to download movie bits onto a smart memory key fob. Come to think of it, with UWB in place, it might be a matter of passing the fob over the video bit bucket.
• Smart memory is beholden to a more complex ecosystem. It's much harder to get value out of smart memory than dumb memory. For example, in music, we need a music store. And that will reward a bigger company with a focus on business and application development (and not just technology development).
• Oh yeah, smart memory carries a price premium. And that's why SanDisk is going after it.

So why is SanDisk poised to become a giant here? Well, it's already an $2+ billion dollar company that grew more than 28% last year. It has pioneered memory formats as a memory pure play. It recently acquired MSystems, a partner in developing the U3 application framework. It is focused on new memory-based applications. It's practiced as a supplier to other device makers.

Disagree? Lemme know.

[signed] Ted

Technorati Tags: Forrester, SanDisk, iPod

Dell Needs To Explain Why It Will Never Happen Again

[Ted] If you ask me, Dell has done a great job in handling the burning battery problem. Just as Johnson & Johnson did with Tylenol, Dell chose to step up and accept responsibility. Sure, we could argue whether they should have done it sooner or how it could have gone on for so long, but the fact that they did it all -- AT THIS SCALE -- is responsible behavior. The payoff for Dell's mea culpa will be stronger brand trust (which is already among the highest of any tech brand -- Dell's trust score of 4.3 falls behind only Bose, Apple, and ironically, Sony's).

HOWEVER . . .

Dell has not yet completed its responsibility to consumers and enterprises. It has not yet asked a senior executive like Michael Dell or Kevin Rollins to stand up and explain why this happened and what steps Dell is taking to ensure that IT WILL NEVER HAPPEN AGAIN. Consumers and CIOs alike must be able to answer the question: Will I trust Dell for my next PC? And without a clear communication of what caused the problem and what concrete actions Dell is taking to prevent it happening in the future, potential buyers will be left to decide for themselves whether Dell products are too risky to bet on.

If I were Michael Dell, here is what I would do:

1. Explain how -- exactly how -- this happened. Was it poor engineering? A lack of understanding of the typical notebook operating environment? Poor communication with Sony?
2. Bring in Sony CEO Howard Stringer to explain Sony's role -- and remediation -- in this fiasco.
3. Explain what -- exactly what -- Dell will do differently to ensure that this doesn't happen in the future: process changes, quality control changes, supplier management changes, testing changes, etc.
4. Provide regular updates to customers on the progress towards those changes.

Disagree? Lemme know.

[signed] Ted

Technorati Tags: Forrester, Dell, Sony

Apple’s Deal With Detroit Locks Up Yet More Earshare

[Ted] It’s convenient to say that a great product and a seamless end-to-end music and video experience alone is enough to sell 60 million iPods. But that would be wrong. To sell 60 million iPods in three years, create a legitimate market for digital media, displace the king of portable audio, and reinvent the business model for consumer electronics takes more than a pretty product. It takes brilliant market execution. And that, folks, is what Apple continues to do.

The deal with Ford, GM, and Mazda to put iPod docking stations in “70 percent of 2007-model

US

automobiles” makes iPod the slam dunk winner in the car market. And with 56% of consumers saying that they listen to music most frequently in their cars, it also gives Apple even more consumer earshare.

What does this deal mean?

• To accessory makers, it means that they had better be working on car components to supply

  Detroit

  with iPod docking stations. Belkin, et.al, who are making hay with iPod FM transmitter accessories, can’t be happy . . . unless they’ve got a deal with Mazda in the works.
• To Microsoft Zune, it means that they’ve lost the car channel before they even launch. The longer Microsoft stays out of the market, the more entrenched Apple will become. Unless Zune is 10 times better than iPod (or competes in a completely different market), consumers will stick with the player that they’ve fully accessorized and loaded with at least some Apple-protected content.
• To Ford, GM, Mazda, BMW, and other car manufacturers, it means they should be thinking about video integration next. Streaming video from an iPod to the backseat is a cheap and easy way to amuse the kids on the drive to grandma’s.
• To Apple, it means that they now need to focus on the next big lockup opportunity -- making iPod a platform for independent applications. Though it is not in Apple’s DNA to open up the software to independent developers, it should be doing exactly that. As iPod adoption begins to flatten out (as Forrester expect it will in 2007), Apple will need to entice consumers to need more iPods to run specialty applications. They should pause and create a stable and open set of APIs for developers to match the standard 30-pin docking connector that they haven’t changed since 2003.
• To XM and SIRIUS, it means that they’ve got a new competitor to worry about in their best market. A consumer could get a Sirius experience -- and more given the rise of celebrity podcasts -- with their iPod and a broadband connection. It’s competition like this that will help limit satellite radio adoption to 30 million

  US

  households by 2010.

Disagree? Lemme know.

[signed] Ted

Technorati Tags: Forrester, Apple, Microsoft

Microsoft's Zune Is A Risk Worth Taking

[Ted] Okay, it's time to weigh in on Zune. In a word, Zune is risky. But the bigger risk is losing a place at the table when digital media decisions are made. So it's a risk worth taking.

Three things make Zune extremely risky for Microsoft because its Zune strategy will:

1. Cast Microsoft's DRM in a proprietary shadow. Today, Apple's FairPlay DRM technology is proprietary -- no other hardware manufacturer or media retailer can use it. That protects the tight link between iPod and iTunes and makes Apple the only mass market online outlet for protected music, movies, and TV shows. Microsoft has been the "open" alternative -- its WMA DRM technology is easily and cheaply licensed and available to anybody. But Zune, which will use WMA, will need to compete against Creative, Samsung, Sony, and SanDisk, as well Apple. And that means Microsoft will be tempted to introduce proprietary features that favor Zune over those other players. Adding proprietary features is a risk that Microsoft is takes at its own peril -- as the recent ruling in the EU over Windows Media Player shows.
2. Create a group of disgruntled MP3 player partners. Michael Garternburg's post on Zune's impact is worth reading.
3. Raise concerns about where Microsoft might go next. When your software component supplier starts competing with you or your buddy, you look at them with a jaundiced eye. Microsoft has entered market after market to the discomfort of long-established partners. Might Microsoft next build a Zune phone to compete with the Q? If you're Motorola, you've got start wondering . . .

However, for Microsoft, these risks are worth taking because every day Apple is locking in more control over the future of portable digital media. And if Microsoft can't make its DRM the dominant technology in digital media, then it will miss out on a great software-driven market. And Zune could be one vehicle to displacing Apple's dominance.

So, what should Microsoft do to make Zune a success? I wrote about the future of digital devices in a report called "Sell Digital Experiences, Not Products" (which costs $$ at Forrester.com). The report introduced a "connected devices" architecture that describes the relationship between a service such as a media portal, a control devices like a PC or set-top box, and portable device like an MP3 or portable game player. The advantage of this three-part architecture is that it reveals where the value-creating opportunities -- and the failure points -- are. For example, to beat Apple, Zune must:

• Significantly improve on music discovery. Apple's music discovery consists of hits and serendipity. Suppliers like Last.fm, ChoiceStream, and the emerging ZING offer an intriguing alternative -- replace the local record store guru with online expertise.
• Go way beyond music to video, gaming, voice, etc. This one's been written about.
• Put community and eBay-style entreprenurialism at the center. Xbox Live is proving that a marketplace can be built around gaming. Zune should build on that to give media programmers a place to establish and sell their expertise. Want a daily bebop recommendation? Sgn up for the Bebop-a-loo-bop RSS feed. Want a great soundtrack for Halo 3? It's yours for a fee.

Disagree? Lemme know.

Technorati Tags: Forrester, Apple, Microsoft

Apple-Nike -- A Lesson In Network Externalities

[Ted] Okay, somebody stop me before I turn this into an Apple blog. C'mon, guys, do something way cool interesting so I can write about it.

What's cool about the Apple-Nike announcement? Three things:

1. The iPod is now an application platform for personal information. Okay, it could always store contacts and photos. But now it can log your miles, calories, and exercise time. This is just the latest in a long line of iPod as application platform," following in the footsteps of Duke University syllabus, radiologist medical image viewing, and museum tours.
2. Apple locks up another huge brand. It began with BMW putting iPods in cars. Now Nike, the biggest brand in sports apparel is in Apple's marketing team. Talk about getting leverage out of your marketing dollar!
3. More companies will now "get it" -- Apple's a good partner for commercial ventures. What's perfect about this deal is that any CMO can take the concept to their CEO and they'll get the benefit: Apple+BrandX = Good Stuff. The result will be more CMOs knocking on Apple's door.

All of these things showcase the power of network externalities -- unreasonable returns accruing to the company with the biggest reach and most partners. It's the rich get richer and the poor get poorer all over again.

Now here's the punchline. Nextwork externalities in application and developer support used to be Microsoft's biggest asset -- but now Google and Apple have taken on the mantle of most connected or biggest center of the universe.

Disagree? Let me know.

Technorati Tags: Forrester, Apple, Microsoft

How Did Apple Move To Intel So Quickly? (hint: it wasn’t magic)

Apple has engineered a complete overhaul of its consumer PC business to use Intel chips (from announcement to overhaul) in under a year -- an unbelievably short time. With the introduction today of the MacBook, Apple has now moved its entire notebook line as well as the Mac Mini and iMac to use Intel’s Core Duo processor. No other computer manufacturer has made a transition this comprehensive this quickly. How did Apple do it?

I spoke this morning with Phil Schiller, Apple’s SVP of worldwide product marketing, to find out. Based on this conversation and conversations I’ve had in the past with Apple VP of software technology, Bud Tribble, here’s my take:

• Intel and Apple engineers found that they liked working together. It probably shouldn’t have surprised anybody, but Apple’s hardware engineers and Intel’s hardware engineers speak the same language. The teams co-located when necessary and opened fat pipes of communication to make sure that problems were identified and solved quickly. Thus, Principle #1: When motivated and allowed to work together, engineers from different teams can move mountains.
  
• Apple’s use of quality open source components (like the Mach microkernel and Kerberos security) and commitment to a component software stack made it easy to isolate and replace just the components that talk to the hardware. This transition would have taken years on OS 9. But Apple’s move to the component-based OS X operating system eliminated the hassles that accompanied Apple’s last hardware transition. Thus, Principle #2: component software architectures are moveable, extensible, and future-proofed.
  
• Because Apple owns both the hardware and software, it was able to connect the hardware and software engineering teams to solve common problems. This is very different from Microsoft’s Windows ecosystem approach, where Microsoft must support the needs of 100s of PC manufacturers. Apple’s problem is simpler --everybody reports to the CEO. This could be an example of principle #1, but it’s actually Principle #3: The consumer PC industry is now mature enough that it’s easier to control the product end-to-end than to outsource the software. Walt Mossberg wrote about this recently and you can also purchase a report that I wrote on the topic of "digital experiences" in December.

What it means #1: Apple has stepped onto Intel’s processor roadmap, which will pay off big in computers that are increasingly portable, connected, and consumer-friendly.

What it means #2: Dell, HP, Gateway, Sony, Toshiba, et.al., have a formidable new competitor in consumer PCs. Apple will continue to set the design benchmark, and with proper execution, will win an increasing share of the consumer PC market.

What it means #3: Intel is on notice: Apple could just as easily move to AMD chips if Intel disappoints in any way.

Disagree? Please let me know.

Technorati Tags: Forrester, Apple, Microsoft, Intel, Bose, HP, Dell

iPod <> Apple, Now I Get Why

[Ted] I was reading the blurb (on the excellent Digital Music News Daily Snapshot) about where things stand in the Apple USA v. Apple UK case. According to their analysis, the worst case for Apple USA is that they would have to take the one bite Apple logo off the iTunes application and site.

But the logo is only barely there, anyway. Yeah, there's a shadowy one-bite Apple logo on iTunes and iPod bootup. But what people remember about the TV ads is iPod+iTunes (okay, and hip, wanna-be street smart youth), not Apple.

Okay, stay with me now. We published a brand scorecard report recently (Note: this report costs $$, but see my post on it) that reveals among other things that the number of people that think they use the "Apple Computer" brand regularly (5.2 million households) can't possibly be right. I think it's because iPod owners don't necessarily know that they are Apple customers. Here comes the lightbulb part:

iPod owners don't necessarily know that they are Apple Computer customers because Apple USA had to suppress "Apple" in the iPod+iTunes story so as not to violate a previous agreement with Apple UK not to sell music.

In other words, Apple USA couldn't promote the Apple brand heavily in their iPod marketing materials without violating their previous agreement with Apple UK. Ouch. That had to hurt.

What does all this mean?

• What it means #1: Apple USA did what they had to do to keep the Apple name out of their music business. That's just plain bad luck. After all, nobody thinks "Apple" when they think about the Beatles. They think John, Paul, George, and Ringo. Oh well, such is life.
• What it means #2: The good Justice Edward Mann should use his good judgement and let Apple USA use the one-bite Apple in all its offerings. And if he's a music lover, he should also suggest to Apple UK that it's time to get the Beatles repertoire onto iTunes. Apple UK should wake up and realize that keeping the Beatles off of iTunes is to promote file sharing, theft, and zero digital Beatles revenue. Apple UK: Don't let vinyl nostalgia keep you from making money off of digital Yellow Submarine downloads.
• What it means #3: Apple USA will have extra work to do to convince mainstream consumers that it's a computer company as well as a music company. But that's nothing $200 million in advertising won't fix.

Disagree? Lemme know.

Technorati Tags: Forrester, Apple, iPod

Apple Runs Windows, Pigs Fly

[Ted] It's official. The crew in Cupertino is smarter than your average bear. The second leg of the Intel strategy has dropped: Intel-based Macintoshes can run Windows using software that Apple created. Here's what it means:

What it means #1: The bar just got a lot higher for Dell, HP, Sony, Toshiba, and Gateway. Now these computers will be judged by how good they are compared with Apple products. So much for competing on PC style. They now have to complete on Apple style.

What it means #2: Consumers will find it easier to buy Apple computers. At least for the technology optimists, Apple has made it possible to run Windows, which eliminates a barrier for consumers that want to run PC games, Internet Explorer (which their bank probably requires), and Office.

What it means #3: Apple's in the game. It must have been frustrating for Apple  to watch a lone developer do the work to enable Windows to run on Macintoshes, then lose control over that experience. At least now Apple has some control over how the Windows-on-Mac experience goes. And if they choose to support Windows or even cut a licensing deal to sell Windows, they will have earned the right to do that. Apple does Windows deal with Microsoft? Sure, and I just saw a pig fly down Park Avenue (where I am right now).

What it means #4: Enterprises will have to take a harder look at Apple PCs. As happened with PCs originally and with cell phones and PDAs, consumers will bring their Windows-on-Mac PCs into the business to run corporate applications. And that means enterprises that have long been the protected market of Apple, Dell, and IBM will have to pay attention to Apple computers.

Disagree? Please let me know.

Technorati Tags: Forrester, Apple, Microsoft, Dell, Bose, HP, HP