Taipanway’s Weblog

I can’t believe it is 2006 and I am writing my thoughts on DRM.  I have to say that the fact that this topic is STILL an issue is insane.  The only reason I am writing this is because over the last 2 weeks a bunch of people asked me my thoughts so here it goes.

To start – copyright holders should get paid for their work.  That is a working assumption we must begin with.  This is both a moral and a business issue.  If in doubt on this concept, stop reading and go pick up the book Atlas Shrugged by Ayn Rand.  As an owner of something I have a right to set my price and conditions. Xingtone sells software and as the CEO I have the right to protect my product and to set my price.  Capitalism 101.  What I will not do here is discuss the anarchy of the US copyright/patent issues – nor will I discuss in detail how long a copyright holder should be able to profit from their work.  Those issues, though of course important, are ultimately shades of gray and not the core aspect of the debate.

DRM is a tool not a strategy.  Technology in general is not a strategy it is a way to do something.  DRM allows a content owner to control access.  How, for how long, for what price, etc.. are rules around the technology to create an overall strategy – this point is very important because one must understand the overall strategy to decide on the technology implications of the given rules.

Artists ask me all the time – what about DRM for my ringtones?  Now keep in mind, most of our customers on a relative basis are unknowns.  They may be tremendous artists, but they are just starting, have not created audience, etc.. WHY SHOULD THEY BE WORRIED IF TOO MANY PEOPLE hear their music?  They are listening to the press, hearing the word DRM and do not want to be left out so they assume they need it.  But each situation requires a different decision process.  Business 101.

Let’s understand DRM as a way to stop people from ‘stealing’ music CAN NOT work.  It MAY deter – unlikely but possible.  Any music that can be heard can be recorded – it is that simple.  The best DRM can do is slow down the FIRST copy.  Once you have a clean copy – you can have a million clean copies.  So we now know that DRM will never stop someone who wants to steal/borrow, etc.. There is no technical way to stop this.

So who does DRM effect?  People who actually buy music.  DRM limits the usefulness of a given piece of music.  If I buy from iTunes I get X amount of authorized copies tied to Y amount of PCs.  If I stole music there is no DRM anyway.  A friend of mine has argued that digital music is the worst way to consume music.  For about the same price (though only works for albums) you can buy a CD with no DRM, own a back-up copy and your good to go.  If you buy an iTunes album you don’t get a CD and you have crippled functionality.

In the world of capitalism you would think that a crippled music file would be cheaper then a full use music file.  You are asking your users to take lesser audio quality, with more restrictions and pay more. It makes no sense.  Why consumers accept this I just do not understand.

In a previous blog I wrote about problems with a HP media center.  One of the issues that put me over the edge was when I tried to use the DVR to record/watch a show and it said it could not because of copyright issues.  Now there is a debate on flagging content across the board.  As a consumer I returned the HP media center and ultimately if technology limits usefulness, I won’t buy.  This will create significant further problems between CE companies and content companies.  Who absorbs the cost?  Crippling hardware to appease content owners while pissing off the consumer is bad for business.

I think the strategy of using DRM for protection is bad.  Notice I am not saying wrong – content owners can do whatever they want – it is their IP.  What I am saying is that it is a bad strategy – as can be seen by the SONY-BMG fiasco.

A couple things that can/should be done:

1) use DRM for access and not control.  Let anyone listen to your music if they give you an email address, sign up for a fan club, pass it to three friends…. Whatever the rule I don’t care, but use it as a tool for an overall strategy.  There are some bands that make most of their money from merchandise and concerts.  There may be business case to give away all music.  Never sell music again IF a fan buys a ticket, a t-shirt, signs up to the fan club, etc..

2) Price DRM tracks lower then non DRM tracks and give users the choice.  If iTunes made a $.49 DRM track available and a $.99 unprotected track available the public outcry would diminish greatly.  The labels can argue that you get what you pay for.  For the lesser price, they control and cripple the file but for the higher price you can use it as you see fit. 

DRM is not the solution to stealing, nor is it the cause.  DRM is a tool that is being used incorrectly – like a hammer to paint a room.  Technology NEVER solves business issues, EVER.

Xingtone is hiring:

Controller, All tech positions, account management, marketing - you name it, we want it.

You must be in local to LA (office in W. Hollywood) - if you or someone you know are interested, drop me a line.

This was going to be a part of my New Years look back/look forward blog BUT since I never had the time to right it, it never got done.  All of a sudden there is talk about Napster having problems, (though the CEO states that they are doing incredibly well) etc.. so I wanted to get my thoughts on ‘paper’ so I do not look like an also ran.

Let’s take a step backwards: the digital music business is owned by Apple but Apple does not really care about the digital music business – they of course sell hardware (better margins, more revenue).  This may change based on what is going on with Spitzer and the labels, but I digress.  So the dominant market leader Apple, wants to sell as much hardware as possible.  It will take them time to be de-throned – but the question is by who and who cares.

Right now there are tons of companies focused on this space: Real/Rhapsody, Yahoo, Virgin, Wal-mart, Music-net, Napster, Urge, etc. etc.. I maintain that ANY COMPANY focused on the selling of music will die.  Yahoo will live because it cares less about the revenue and more about the traffic and uniques.  I believe that Yahoo will offer a free service in some limited way (or maybe unlimited) to drive ad revenue.  In that case Yahoo does not care about selling music they are using music as a loss leader to sell ads.

It is why Napster can not survive.  Besides the pissing away the money, the over valuation of the brand equity, the poor strategy, there is a tremendous flaw in their business – it is a bad business.  Selling $.99 files or subscriptions is a tough business that has yet to hit stride. You need very deep pockets, a very strong stomach and more then anything you need another business model that actually makes sense.

Loudeye is another company in trouble, so is Virgin, etc.. etc.. I feel bad for some of the companies out there that are made up of good people, smart people but they believe too much in a business that a) does not exist and b) does not even believe in itself. 

My prediction is that the long term players in this space are the ones that can either merchandise (Yahoo/SBC – add the service to your bill), back-end infrastructure (like a music-net) or companies that use the service as a loss leader – (Yahoo or Apple).

So where does that leave Napster – MAYBE as an acquisition target by XM.  They are already integrated to some degree and it would make sense at a fire sale price but don’t expect XM to over pay. 

MTV/Urge – they might actually have a shot in that they will be closely integrated with WMP 11, and based on the above, MTV has been an expert at using music as a driver for their other businesses so they might be an expert in this space.

I have also heard Amazon is doing some cool things – but I am not yet a believer.

I just spent some time with a friend of mine at Hollywood Records.  I will leave his name out for no other reason then I am not asking permission to write about him.  Mr. X has always impressed me with how he sees the market and each time we hang out, I get a better picture.

Hollywood is doing well, on paper, better than EMI.  As my friend says where is all the money they make going?  Why aren’t the stock holders up in arms?  Hollywoodhas Hillary Duff, Jesse McCartney, Ali and AJ, etc..  They have a roster of about 25 artists – most of them YOU have never heard of. 

The reason I am writing about Hollywood is that they or at least Mr. X actually get it.  They understand the paradigm has changed they understand that selling millions of albums is unlikely.  They understand that this business will not survive churning out one hit wonders.  They understand that they are in the entertainment business and realize what the cheesy concept of integrated media actually means.

However, the reality is I am writing about Hollywood because I asked X what he thought about the new XM-Samsung (hard drive + satellite radio).  His answer was perfect, he sort of rolled his eyes and accepted it.  It was not a roll of the eyes in a bad way, more like I can either argue it or deal with it.  There is Tivo for TV why not for radio was the statement.  This sharply contrasts with an experience with another senior music guy from EMI that pretty much bashed the product and is angry at XM and Samsung for enabling, blah, blah, blah….

X understands, as does his Company that there is a real world that we play in and we can dislike things, fight against them, go on strike, etc.. Or we can accept the REALITY of the world!  Should the music industry embrace a satellite radio that allows you to make perfect copies of music to then be synced back to your computer?  That depends – do consumers want it?  If the consumers want it then yes – what is the alternative?  And if the consumers don’t (pocket books talk) then it is a useless argument.

Why does the music industry feel compelled to fight with its consumers?  I listen to more music now then I have ever in my life – by a huge multiple.  I probably pay less per listen, but spend far more money all in.  It just does not make any logical sense.  Why would an industry, relatively small by global standards, want to fight with so many enormous markets rather then work closely with them.

I have been saying this for some time – end of this year, beginning of next, the carriers and music companies will begin fighting.  Carriers ultimately offer access, music companies by their nature want to limit access – seems like a rock and a hard place.

Back to Hollywood – they move like an indie.  They understand that there is more then one revenue opportunity and they are keyed into them.  It is not about a disk it is about revenue.  To be certain I am not talking about music that will set the world on fire for the next 50 years, but that is the beauty of x, he knows that, he is fine with it.  He is not arrogant to the fact that Ali and AJ are artists (which they are) – he knows them to be a BRAND – entertainers and through concerts, and CDs, and digital sales, and ringtones, and merchandise and a new TV show – Hollywood will get paid.  In no small part due to Mr. X.

Nothing to do with anything - but just bought this awesome bean bag -  LOVE IT, also got the Ottoman - they are on-sale - check em out:

http://www.sumolounge.com/

I have a 2 ½ year old nephew who lives 40 minutes south of me.  I see him as often as I can, usually every Sunday.  My mom lives in Miami (he is her only grand child) and I needed away to ensure she was able to see how amazing he was so…

First I bought the new Casio Exilim 500 (or something like that) 5.0 mega pixel camera.  I bought it primarily for its size.  I heard mixed reviews on the camera in terms of quality but ultimately my only buying driver was size.  I needed something I could shove in my pocket and always have it.  So I bought the orange one and LOVE IT!  I am not a photographer so the limited features, the limited quality, are all good enough for me (which means they are excellent for me though maybe limited for others).

So now I have a camera that I take 400-500 MB of video and stills every week now I needed a way to distribute them.  I did not want to go the ofoto/Kodak route.  I wanted something as easy for me as it is for the people who I want to share with – so I decided on Orb.  Orb is FANTASTIC.  The set-up was easy and I can share my photos, video, music, etc.. I gave out some passwords and it just works.  It does not crash and people can log in and see what I want them to see (I could use more log-ins so I can segment my photos better – for example my brother and mother share a log-in but my mother should not be able to see my party pictures, my brother should be able to).  Through orb I can also ‘publish’ my pictures to friends – basically giving them short term, limited access to what I want them to see.  I have not found a limit to the amount of people who can log-in to this – very cool.

Now before I put Orb onto my ‘server’ I realized that my 4 year old eMachine I was using does not cut it.  So I bought a top of the line HP media Center that was built to be put in the living room.  The problem was it sucked.  Don’t get me wrong, it looked beautiful and installation was ‘easy’.  The problem was I had to reinstall the OS from the discs NOT PROVIDED twice just to get it where I needed it.  When I finally got it ‘working’ the  lag time between changing channels n the remote and the actual changing channels on the cable box was interminable.  Having a computer in the living room was cool but the fact that when you use component cables you can not adjust the picture so reading text was very difficult AND when I tried to record a movie channel on the DVR – it said for copyright reasons, it was not allowed.  ARGH!!! I decided then it was time to return the device (spent without exaggeration 40 hours trying to get this thing working). 

However, I was determined to get this thing working – so I bought a gateway dual processor to put in my closet (I have a big closet) where it would manage my media – except for TV/DVR.  This worked great – as advertised.  Set-up was easy – media center software is stable and user friendly.  My home system is purring.  I have my camera docked, my iPod docked and have utilized MSFT media Extender with my X-box which works MOST of the time.  I only have a Wireless G AP so the streams take a bit of time to get started, but through my X-Box and the included remote I now have access to my 30,000 music files, pictures and images in my living room with my killer stereo.

With Orb running I can log-in from anywhere to listen, see or watch anything on my server.

I am not a technologist, but I am technically savy.  Someone less so woul have given up – things are not easy enough, they take way too long, but so far, the system has been very stable and very effective.  The industry is getting closer – though I think my expectations have degraded so my patience has gone up.  An unfortunate side effect but one that consumers are getting used to.

So I finally bit the bullet and got the Video iPod.  I love it!  I got the Shure e3c headphones (which rock) and the www.iskin.com case which is fantastic and picked up a new hobby – which I am not sure I am all that happy about.  The iPod has so many options (from podcasts, video podcasts, peropherals, etc..) it is hard to keep up.  You constantly feel like you are missing something. I ride a motorcycle and I love it but never picked it up as a hobby, the iPod sucks you in.  Everytime you pass an Apple store you want to peek in – just to see if there is something new you need to get or learn about.

However, there are plenty of problems with the iPod.

1) iTunes on the PC is not great.

2) converting WMA music to MP3 (not willing to go AAC) is terrible.  It is time consuming and skipped (randomly) about 2000 songs in my library.

3) converting Video is a disaster!!!  There is no tools built into iTunes to accomplish this (you need quicktime).  There is no way to do it in bulk (with 3^rd party software that cost me $30).  I have found this process to be horrendous and it should be improved by Apple.  Last week, for no reason I can think of, my videos got deleted off my iPod (still available in iTunes) and I have yet to be able to get them back on my iPod (though I have not tried that often).

4) The device itself crashes WAY too much (my iRiver never did).  If I do not turn it on for more then a day or so I have to do a hard re-start.  Why?

I am still a huge fan of the device and the experience overall and would recommend it to pretty much anyone.  The one thing you can have faith in is that Apple seems to come out with the upgrades (like podcasting) before anyone else – which as an early adopter is critical.

I still have not bought ANYTHING from iTunes and I have no intention to do so.  No music, no video, NOTHING.  I have my Music, my pictures and my video.  I love having all my digital content with me at all times.

At this point I still prefer carrying two devices (MP3 player and phone) but we will see if something can change my mind this year…

I was a little disappointed at CES this year.  My major complaint has really nothing to do with the show and more to do with the reality of the world.

Growing up I was so excited about getting the sharper image, brookstone or the hamacher catalogue.  They always had the coolest toys and technology in there.  Things that I aspired to own, things I desperately wanted even though I couldn’t afford them.  When I started gong to CES (I have gone for the last 8-9 years) that was what CES was to me.  A place I could go and see all the new things.  Toys that I had not previously seen of, heard of, or imagined.  However with the world we live in now, that is simply not the case.  Rumor sites, blog sites, friends in the industry, ensure that I know what santa is putting under the tree before I have a chance to open the packages.  CES from a product standpoint is far less relevant to me then it used to be.  There is still the meeting factor that makes it valuable but from a knowledge perspective it is quickly declining in my mind. 

This is also true based on the short life cycles that now exist in the consumer electronics business. Apple refreshes the iPod line in 8 months instead of 18.  CES used to show off a product that in January that you are lucky to see at retail for Christmas.  Now most products you see at CES have either already launched or they are about to.  This shortened window has a greater effect on the market and I think there will be a tremendous backlash from the consumer market over time – My friend bought a mini 5 weeks before the nano debuted and is pissed.  Technology products can not be disposable at a $300+ prie point. A better HD TV is great if you have a standard rear projection TV but if you just bought an LCD 12 months previous.

For Chanukah I got fantastic Shure headphones – it is unlikely, unless I break them, that I will replace them for a LONG TIME.  No matter what comes out next.

My takeaway from CES is that this is the year of GPS.  There were dozens of GPS/media players from ODMs all over

Asia

.  Garmin has a movable GPS for $299.  Tom Tom had a big

Holiday

push (TV ads etc..).  GPS with traffic is very HOT and will be standard shortly.

Verizon music – nice offering – not sure it is ready for primetime. Price is still high, automatic conversion to MP3, iPod dominance, etc.. will limit growth.  And here I quote Lefsetz – How much are people going to SPEND to fill up the CE device? 

Sling Box is cool but it should be integrated into my router – I should not need to plug another device into my network – Cisco – BUY SLING!

Ultimately the wiz bang factor of CE has begun to lose its appeal – do I REALLY care about ANOTHER MP3 player?

Since the beginning of time, at least since any form of mass media has been in existence, the debate has raged over the relative value of content vs. distribution.  Media companies, at least the ones that do not own distribution, will say content is king. Distribution companies obviously believe distribution is king.  I believe they are both right – or just as accurately they are both wrong.

The debate is relatively useless in that the real answer is it depends on timing and other circumstances.  Let’s look at a couple of examples:

1) Major artist: If you are Eminem, Rolling Stones, U2, etc.. Content is king.  You can write your own terms, insist on revenue splits, value, etc.. In many cases distribution will utilize big names like this as a loss leader to gain traction.  Full music downloads on mobile or even iTunes typically don’t use content deals withartists you never heard of to build awareness.  Typically they pay a little more (through rev share or direct promotional dollars – or even in co-op) to get the best. 

2) Family Guy:  I have always been a huge fan and was disappointed when Fox took it off the air.  In this case it seems that distribution is king.  However, Family guy, through P2P mostly garnered a cult following and then the DVDs took off.  They did so well that Fox eventually brought the show back.  The internet and off-channel distribution allowed quality content (arguable I am sure) to get above the noise.

3) Good Content with no distribution:  I know of an artist, young and spectacular that few people have ever heard of.  She had a chance to do a distribution deal with Starbucks (yes they are now a distributor of CDs) but the label said no because Starbucks wanted some points on that and the next album.  I am not saying she should have done the deal (I do not know the specifics on the math) however, if she did, the world would already know her name, her music and be blown away.

4) Crappy content with distribution:  Time and time again we see mediocre TV, movies, music, etc.. with distribution (and marketing) fly to the top of the respective charts.  Distribution and marketing in this case are king.

The challenge in the world we live in currently is identifying when in a specific situation content is king and distribution needs it, or the reverse.  Let’s look at P2P:  If Eminem chooses not to use P2P as a distribution/marketing vehicle (this assumes a choice of course) I can understand that because at this point in his career it can be argued that he does not need it.  However, a band that no-one has ever heard of should use EVERY available medium.  Said differently, whoever brings the audience is ultimately King.

Why does ebay work?  Ebay created a sellers community but that created traffic for their sellers.  One without the other does not work.  eBay in this case is acting as ‘distribution’.  The terms moving forward become very difficult to fully utilize.  It used to be that TV, Radio, Cable was distribution.  Now can we say that DSL or Cable modems are distribution – well, technically speaking yes, but to the minds of the user, it is irrelevant.  Your ISP (unlike AOL of old) is not your source for content.  Aol.com, yahoo, are increasingly become that filter and ultimately that is what the key to this debate is.

Myspace.com has become a filter.  If a major wants to get traction they go to myspace. I have been told by friends in the business that if myspace died tomorrow they would have no significant online strategy for 12 months.  Myspace has only been around for 2 years or so. 

With wireless, proliferation of broadband internet, podcasting, blogging, satellite radio, etc.. there is more effective and just flat our MORE distribution.  As a general rule each type of distribution is less important relative to the whole.  An artist used to need MTV to be successful, now myspace can do it on its own.  Is the Wall St.Journal’s tech editor as relevant as he used to be (I still read him) but with engadget and other blogs, is he diminished?

The same is true for content.  It used to be that there were 5,000 CDs a year that would come out, now there are 50,000.  User generated content on site’s like myspace for music and flikr for photos and countless video sites.  There is so much content out there that there is far less likelihood that there is massive success (4.8 million was the top selling album this year – compared to 20 million in years past).

Consumers can not keep up, with the amount of content nor with the multiple ways of accessing it. I personally listen to more music now but watch far less TV.  I play less video games read less printed material but more blogs.  There is just not enough time in the day to do it all.

To be clear the point I am trying to make is that there is NO straight answer to this question anymore.  Every situation requires a different strategy and every situation has a different answer to this question.  Which is king? It depends!  Know your market, know your assets and know what your trying to accomplish.  Each situation is unique, treat it as such.

My apologies to all my loyal readers (all three of you).  Things have just been crazy.  With the holidays, launch of our latest service – http://www.xingtone.com/mstoresamples/creator/ - which I am very excited about and a little bit of end of year burn-out.

I have a number of topics that I want to write about that I will be posting over the next couple of days so I apologize in advance for inundating you.  I will try to be better at updating my blog and make it more journal like, less formal, etc.. That means more typos and more casual.  I am more comfortable in a more conversational approach anyway.  I will also be covering a wider range of topics and will branch out from wireless/media.

A couple of the postings that will be coming:

1) content Vs. distribution

2) my new Video ipod

3) new camera + Orb

4) media center disaster

5) X-box love

6) CES

7) yearly predictions

Thanks for reading.