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December 13, 2010
Volume XXXIII, Issue 4

Register Now for CITC at CES and Save

Now's the time to sign-up for the 2011 International CES - the world's largest consumer technology trade show - and start picking the products you want to see firsthand, learning about what exhibitors to see on the show floor and selecting from hundreds of educational sessions.

Register by December 31st and save $100 or more.

Attend the first-ever CONTENT IN THE CLOUD Conference within CES to start the new decade with a valuable and stimulating gift to yourself. CONTENT IN THE CLOUD, focused on the many ways that cloud computing will dramatically impact the entertainment sector, will take place on January 7th at the Las Vegas Convention Center.

For more details about CONTENT IN THE CLOUD, please scroll down to this week's Report from the CEO.

Please click here to register.

Amazon Developing Cloud-Based Video Service

Excerpted from Digital Media Wire Report by Mark Hefflinger

Amazon is developing a TV episode and movie streaming subscription service to compete with Netflix's similar offering, The Wall Street Journal reported, citing people familiar with the matter. 

The service is expected to be included as a bundle with Amazon Prime, the company's premium shopping service, which currently costs $79 annually. 

Along with Amazon, The Journal reports that media companies have spoken with both Microsoft and Sony about their respective plans to offer video subscription services.

Can Black Eyed Peas Make Cloud Computing Cool? 

Excerpted from Network World Report by Robert Mullins

Tech CEOs often incorporate pop or rock music into their keynotes and so it was with Marc Benioff, CEO of Salesforce.com, that he strode onstage at San Francisco's Moscone Center Tuesday at the Dreamforce 2010 conference to the Black Eyed Peas' "Own It" from their new CD. Then Benioff pointed to the group's front man, will.i.am, in the front row of the audience and asked "What do you think of the cloud?"

Cloud computing is the current "it" technology in the industry and, like the music business, employs its share of hype. But as Salesforce tries to position itself as the leader in software-as-a-service (SaaS) and platform-as-a-service (PaaS), against such companies as Microsoft, Benioff is employing a bit of showmanship to make his point. So will.i.am, wearing both his musician and tech industry consultant hats, answered that "The cloud for me is the now and the future."

"I can have thousands of people collaborating with me in the cloud, people anywhere who will be able to hear my songs in real time and influence that," he said.

However, it's somewhat ironic that Benioff chose "Own It" as his keynote's theme song because its lyrics, "wanna own it, wanna wanna own it," are the exact opposite of the concept of cloud computing, which is that you don't own the software Salesforce delivers to you, you rent it.

Benioff also linked Salesforce to the other hot trend in tech, social media, unveiling a suite of six products that together deliver what the company calls Cloud 2 to the enterprise. Its sales force automation, customer relationship management (CRM) and support, and a new database-in-the-cloud offering all incorporate social media features mimicking those of Facebook.

Sales Cloud 2, for instance, incorporates Salesforce's Chatter platform for real time collaboration with a user interface similar to Facebook's where a user can pose a question to their community in the hopes of getting an answer that will help close the deal with a sales prospect. Likewise, Service Cloud 2 uses the social network to answer customer support questions.

Of course, Salesforce cloud apps have to integrate with legacy applications on premise, said Kraig Swensrud, Senior Vice President of Marketing at Salesforce, who described Sales Cloud 2's integration with Microsoft Outlook. Salesforce also introduced Database.com, its first delivery of database access as a cloud offering, which will need to integrate with such on-premise systems as Microsoft SQL Server, as well as database systems from Oracle and IBM.

But Salesforce will also have to not just integrate, but compete with Microsoft's cloud offerings, including Dynamics CRM Online, Office 365, Windows Azure, SQL Azure, and Lync. For predominantly Microsoft shops, the temptation for customers to stick with a brand they know would be compelling.

Still, with 87,200 customers and recently reported third quarter revenue up 30% to $429 million, Salesforce, like the Black Eyed Peas, has a hit on its hands.

Report from CEO Marty Lafferty

Photo of CEO Marty LaffertyThe Distributed Computing Industry Association (DCIA) this week announced the agenda and principal speakers for its first ever CONTENT IN THE CLOUD Conference at CES.

This fourth annual DCIA "Conference within CES" is scheduled for Friday January 7th in Las Vegas, NV in conjunction with the 2011 CES International trade show. The DCIA is an allied association of the Consumer Electronics Association (CEA).

For more information or to register before December 31st and save $100 or more, please click here.

Explore this cutting-edge technology that promises to revolutionize entertainment delivery. If the cloud touches your business, you won't want to miss these eight keynotes and three panel discussions focused on cloud-managed content and its impact on consumers, the media, telecom industries, and consumer electronics (CE) manufacturers.

The Opening Keynote - Vision for Content in the Cloud - will be presented by Geng Lin, Chief Technology Officer, IBM - Cisco Systems Alliance. Cloud computing can dramatically impact many aspects of entertainment delivery from transcoding to storage to distribution to payment collection to performance measurement. Step into the dynamic world of the cloud.

The second CITC Keynote - Cloud Vision vs. Technical Reality - will be presented by David Rips, President, Verizon Digital Media Services. Is the cloud up to the challenge of consumer content demand that is stretching the bounds of today's infrastructure? Hear a different perspective, focusing on massively scalable network capacity, advanced technology capability, and significant capital investment - the building blocks of the digital media future.

Panel Discussion 1 - The Impact on Consumers of Implementing Cloud Computing for Media Storage - will feature Todd Weaver, CEO, ivi TV; Mike Lewis, Founder, Kapost; Christopher Allen, General Manager, Napster; Guillermo Chialvo, Gerente de Tecnologia, Radio Mitre; Ian Donahue, Co-Founder, RedThorne Media; Jonathan Sasse, SVP of Sales & Marketing, Slacker; and Louisa Shipnuck, Director, Marketing & Strategy, Verizon Digital Media Services. Discover how cloud storage affects users' ability to access entertainment content and to own copies of music, games, movies, and other media.

The third CITC Keynote - Benefits of Cloud-Delivered Content for Consumers: Ubiquity, Cost, Portability Improvements - will be presented by Rob Shambro, Chairman & CEO, GenosTV. Cloud-based solutions offer consumers a number of clear advantages over older methods of online content distribution. Hear them all in this important address.

The fourth CITC Keynote - Drawbacks of Cloud-Delivered Content for Consumers: Privacy, Reliability, Security Issues - will be presented by Jim Burger, Member, Dow Lohnes. What have various industries experienced with inadvertent leaks or intentional hacking of confidential data? When users go offline, how can they mitigate inaccessibility to their applications or losing data accidentally? And what happens if a cloud provider goes out of business?

Panel Discussion 2 - The Impact of Cloud Computing on the Entertainment and Telecommunications Industries - will feature Stephen Condon, Director of Market Development, AT&T; Alex Limberis, VP Business Development, Next Issue Media; Doug Heise, VP of Marketing & Strategy, Panvidea; Guy de Beer, CEO, Playcast; Mark Friedlander, National Director, New Media, Screen Actors Guild (SAG); Mark Vrieling, CEO, ScreenPlay; Kurt Smith, VP, Sales, Verizon Digital Media Services; and Anne-Carole Nourisson, VP Licensing, Vivendi Mobile Entertainment.. Content rights holders and broadband network operators are concerned that cloud storage could affect the way they manage their intellectual property (IP) and utilize network resources. Gain valuable insights on this critical issue for both industries.

The fifth CITC Keynote - Benefits of Cloud-Delivered Content to the Entertainment and Telecommunications Industries: Efficiency, Control, Flexibility Improvements - will be presented by Barry Tishgart, VP, Internet Services, Comcast. Cloud-based solutions provide a number of clear advantages for content rights-holders and broadband network operators over older methods of online content distribution. Explore these benefits in this strategic overview.

The sixth CITC Keynote - Drawbacks of Cloud-Delivered Content for the Entertainment and Telecommunications Industries: Infrastructure, Disruption, Accountability Issues - will be Claude Tolbert, VP, Business Development, BitTorrent. What problems do rights-holders face in adopting their internal content management processes to cloud-based media storage? What does the on-demand always-accessible nature of cloud-based entertainment delivery mean to conventional distribution systems? What new kinds of liabilities does the cloud present to participants in the distribution chain?

Panel Discussion 3 - The Impact on Consumer Electronics Manufacturers of Cloud Computing Deployment - will feature Mick Bass, VP, Strategic Alliances, Ascent Media; Sean Barger, CEO, Equilibrium; Les Ottolenghi, CEO & Founder, Fuzebox; Alexander Marquez, Director, Intel Capital; Mark Taylor, SVP, Content & Media, Level 3 Communications; Michael Papish, Product Development Director, Rovi Corporation; AJ McGowan, CTO, Unicorn Media; and Stuart Elby, CTO, Verizon Digital Media Services. Our expert panel examines the implications of remotely accessing applications and data that must be integrated into networked end-user devices. A look at servers and other edge storage hardware products rounds out the discussion.

The seventh CITC Keynote - Benefits of Cloud-Delivered Content to Consumer Electronics Manufacturers: Advanced Capabilities, New Features, Cost Advantages - will be Charles Perkins, Founder & Chief Scientist, Virtual Rendezvous. Cloud-based solutions open up many possibilities for CE manufacturers. Learn more about how cloud computing is being adopted now.

The Closing Keynote - The Years Ahead for Cloud Computing - will be presented by Mark Teitell, Executive Director, Digital Entertainment Content Ecosystem (DECE). End the day with a comprehensive overview of the benefits and drawbacks of cloud-delivered content for CE manufacturers: expanded opportunities for new products and features at various price points; challenges for interoperability and data security; and advantages of cloud-based solutions for popular entertainment.

Registration can be done online at here or by calling 410-476-7965. Share wisely, and take care.

Skype Is Joining Cloud Computing Bandwagon

Excerpted from Laptopet Report

Cloud computing today perhaps is getting a new supporter - Skype. You know that Skype is popular IP-based software that allows you to voice- and video-chat over the Internet.

Most of the users prefer the free version while some people pay money to call in different countries. According to TechCrunch, there is a strong possibility that within the next few months, Skype will start some new services based on cloud computing.

As a result, Skype will get new corporate customers and business users.

TechCrunch did not specify that what kind of technology based on cloud computing will be created by Skype. It talked about a possible partnership with Microsoft in this field but it is purely a hypothetical assumption.

TechCrunch also stated that another area of partnership may be is Facebook, but again this is also a hypothetical assumption. What is perhaps clear is that there is a strong demand for VoIP-related services that Skype is offering.

For big companies, this approach will not only save money but also help to ensure better and smoother communication.

Skype informed TechCrunch that the company was going to hire nearly 350 workers, and most of them will be in the engineering field. 80% of these new workers are supposed to come from Silicon Valley. So, it is also sure that Skype is coming out with a big new product most probably in the field of cloud computing.

The popularity of Skype can come under threat in next year from Google Voice. Google Voice has been gaining users by offering free calls within the US and Canada. This is an attractive offer for most people living in these countries, and Google also claimed that its rate for other countries is cheaper than Skype.

Cerelink Tries Luring Hollywood to Cloud Computing 

Excerpted from San Francisco Chronicle Report by Michael White

Making a special-effects-laden blockbuster like "Harry Potter and the Deathly Hallows" or an animated hit such as Disney's "Tangled" involves complex computing. Sophisticated algorithms govern the way sunlight plays on moving water or how hair moves; transferring that math into an image takes an average of six hours of computing time per frame.

And the processing requirements are growing: The original "Shrek," released by DreamWorks Animation in 2001, required 10 million to 15 million computing hours to complete. This year's "Shrek Forever After" needed 55 million hours.

Cerelink has a pitch for digital studios and special-effects companies: Rather than build, power, and maintain expensive server farms to do all that computing, outsource it. Companies in other data- or computing-intensive fields already rely on off-site servers and connect to that raw horsepower via the Internet via cloud computing.

"The visual effects industry is, at its core, a technology-centered industry," says James Ellington, Cerelink's Chief Executive Officer (CEO). The company allows studios to "expand the production line quickly and flexibly without having to take the time to build more infrastructure," Ellington adds.

In July, DreamWorks Animation became the first studio to sign up with Cerelink. The studio is using its processors in New Mexico to handle some of the computing on the "Shrek" spin-off "Puss in Boots" and a sequel to "Kung Fu Panda." The deal followed a yearlong trial during which DreamWorks put Cerelink's servers to work on hits including "Shrek Forever After."

"Films are requiring more and more technology to enable the visuals," says Ed Leonard, chief technology officer at DreamWorks. "The advantage of the cloud is that I don't have to build out big data centers on my campus."

While Cerelink, which is based in Corrales, N.M., is far from the power-lunch hot spots of Southern California, its location has advantages. One is cheap energy. Leonard says DreamWorks spends more than $100,000 a month powering each of its data centers in San Francisco, Marin County, and Singapore. Cerelink says it pays 9 cents per kilowatt-hour, compared with 14 cents in Los Angeles.

For clients that need ultrafast computing, Cerelink also can access New Mexico's Encanto supercomputer, which can perform 172 trillion calculations a second. Because of the nearby University of New Mexico and research centers, such as Los Alamos National Laboratory and the Santa Fe Institute, Cerelink can tap a highly educated labor pool to keep its servers humming.

Cerelink started as a consultancy in 2005. One of its four founders, all former Intel executives, had worked in public relations and had extensive government contacts, which helped Cerelink win contracts advising economic development projects in places including Vietnam and Uganda.

DreamWorks will outsource about half of its computing power next year, says Leonard. A Hewlett-Packard data center in Las Vegas will get some of the business.

Not everyone in Hollywood is as comfortable with the cloud. Richard Kerris, chief technology officer at Lucasfilm, which includes Bay Area digital-effects powerhouse Industrial Light & Magic, says his clients - mainly big studios such as Warner Bros. and Disney - worry about security.

"Whenever a client's content is not in our data center, there can be concerns," he says.

Cerelink says its service is secure: It uses dedicated broadband lines to connect with DreamWorks animators, and it isolates the servers running DreamWorks tasks from others in its data center. And the connection is fast enough that an animator in Los Angeles can tweak the shading of a panda's fur, send the command to New Mexico for processing, and have the results register on his screen in less than 20 milliseconds - so speedy that there's no perceptible lag.

Leonard says other Hollywood players will inevitably follow DreamWorks' lead.

"The guys in the very high end of the business, the Disneys, the Pixars, Weta Digital, all of these guys are keenly interested in using the cloud."

Will Online Streaming Work Out for Netflix?

Excerpted from Knowledge@Wharton Report

Once defined by the red envelopes used to deliver DVDs for its mail order service, Netflix has turned its focus toward allowing subscribers to stream movies and other programming directly to their computers and television sets. The move has reaped rewards including an increasing customer base, but created friction with the entertainment and technology companies Netflix competes with - and, in many cases, relies on for gaining access to content.

Wharton marketing professors Peter Fader and Raghuram Iyengar and operations and information management professor Kartik Hosanagar recently sat down to talk with Knowledge@Wharton about what the future may hold for Netflix. An edited transcript of the conversation follows.

Knowledge@Wharton: We're here with Wharton professors Kartik Hosanagar, Raghuram Iyengar, and Peter Fader, to talk about Netflix's evolving business model. The first question I'd like to ask is, as Netflix expands from primarily being a mail-order DVD rental service to being a service that focuses on online streaming of movies and television programs, what are the potential positives and negatives for the company? Peter, why don't you start?

Peter Fader: I think it's a move that Netflix has been preparing for, for a long, long time. Even though they started with mail order, their name is Netflix. So, they have been thinking about it. They have been developing the infrastructure. Their brand isn't necessarily tied to any one channel of distribution. They are in a really good position, as shown by their current performance. I don't see anything on the horizon that suggests it's going to be any different. Whether they will go on to dominate the sector, as some people are starting to fear - I'm not sure about that. But I think it's a really good outlook for them.

Knowledge@Wharton: Would either of you like to add anything?

Kartik Hosanagar: I think online streaming is a huge opportunity for Netflix. Netflix spends, I think it's somewhere close to half a billion dollars on the actual physical distribution business, which is the postage, mailing the DVDs out, and so on. Just getting rid of that over time, with more and more of the distribution happening online, changes the cost structure for Netflix dramatically, and it allows them to offer the service at a price point that would be more attractive to consumers. I think this will also allow Netflix to grow because the lower cost structure results in lower prices, and in turn brings in new customers. So, I think there are a lot of positives.

If you were to pick one negative, I think there is the potential for cannibalizing Netflix's high-end service. I can imagine why some of the subscribers to Netflix's premium service might actually shift to the online only, or the streaming service. And that might cannibalize some revenues. But I'd say, all in all, I see more positives from Netflix from this.

Knowledge@Wharton: Raghu, do you have anything to add?

Raghuram Iyengar: I agree with both Pete and Kartik. I think there are positives right now, but I think there are also some challenges that have come about. I think particularly if you start looking at the portfolio that they have - the portfolio of options that they have for streaming versus DVD - currently they have lots of DVD rental options, and the inventory itself is huge because they have lots of alliances with different studios. I think they have to start rethinking about what kinds of agreements they would come to with the studios. For example, they have been spending a lot more money getting the streaming content, but they still have a long way to go. So, if you look at the inventory that they have for streaming, it's much older movies and much older television programs. That's something they clearly have to think about.

Knowledge@Wharton: How does the emergence of Netflix, particularly the increased emphasis on its streaming service, impact other content distribution models, such as sales of DVDs and cable television? Kartik, why don't you start?

Hosanagar: A lot of the content deals still need to be negotiated, as Netflix moves from the DVD model to the streaming model. The way it structures these deals with the content owners is not yet very clear. It really depends on what Netflix is willing to offer for the content, and how early it's able to get the content. To the extent that Netflix's big plan works out - that it's able to get the content early and at the right price point - there's no doubt this will hurt DVD sales. But I would say that the content owners have several reasons to be wary about this service because of the likelihood that it could cannibalize other revenue streams for them.

Fader: I would say that the fate for the content owners and creators is in their own hands. To the extent that they just continue to produce basically commoditized content that could work equally well on any of these distribution platforms, then they're doomed. But if they can come up with ways of adding value, to make it a different experience for someone to stream, such as getting the "blooper version" of a program only if you're a registered member on the website and giving people reasons to buy the boxed DVD set because it is going to have extra value in it - I think there's an incredible opportunity to be using each one of these platforms to promote the content consumption and purchase through these other platforms.

There aren't a lot of good indications yet that they have the business savvy to do that. There are a few happy stories here and there, but there are an equal number of bad stories, where they are just basically creating cannibalization instead of avoiding it.

Iyengar: I think there is a lot of tension right now. Netflix is in the middle of lots of different kinds of industries. One is, of course, the content industry that we talked about. The other is, in some sense, the cable industry, with Comcast being the leader there. And the third one, in fact, is ... the content delivery network (CDN) industry. Netflix, by being part of all of these different industries and especially moving towards the streaming set-up, is making ripples across all three sectors. Think about some of the deals that Netflix has recently done, for example, the deals that it did with Starz to stream the cable network's movies, which include Disney and Sony films, for example. Disney is now putting pressure on Starz such that it will charge Netflix more once the current deal expires. And Netflix is apparently trying to get new TV episodes, at almost $100,000 per episode. I think all of these things completely change the way these content developers have to think about how to add value in their own ways of getting to the consumer, as opposed to getting to them through Netflix.

Hosanagar: If I may react to what Peter and Ragu said, I completely agree with you guys that there is a big opportunity here, and that one needs to look at the full value chain, all these other companies, and the opportunities for content owners to package the content differently for different media. But I think the other issue is that there are all these players that have over several decades established a position in this industry. History doesn't suggest that these companies are vertically innovative and willing to change their business models overnight. I think that many of them, the Comcasts of the world and the Time Warners, will try to hold onto the old models. And I think that's why I said it's not clear. But I agree with you, that if they see that the future really is in this, that the future really is about interactive media and video on demand, and so on, then they could perhaps make significant strides.

Fader: I'll just respond by saying, it's true that the well-established players have more to lose. But they've been a little bit more progressive than their counterparts in, say, the music industry by introducing initiatives like Hulu and TV Everywhere. There are a lot of different kinds of experiments going on, and in many ways, it's just different business models around the existing old-fashioned content. But at least they're thinking about it, at least they're trying it. The winners will be based on who has the best business models, as opposed to who has the best lawyers.

Hosanagar: Yes, I'll give them credit over the music companies any day.

Knowledge@Wharton: We've seen one example of how the traditional content distributors are responding to the whole Netflix-Comcast battle of recent weeks, in which Comcast has been demanding that a company that's been acting as a middleman pay exorbitant fees to deliver Netflix content to Comcast subscribers. What do you make of that? Is that the way cable companies should be reacting? And if not, what would be a more productive way to deal with this? Raghu, why don't you start?

Iyengar: If you look at some of the numbers - Netflix streaming accounts for about 20% of Internet traffic from 8 p.m. to 10 p.m. at night. That is a huge chunk of data that's being transferred. The jury is still out on whether Comcast versus Level 3, which is the intermediary company - whether Comcast is in fact acting according to the agreements that they had, or do they really have to rethink the agreement. One thing that is immediately clear is that they should resolve this agreement really soon, because the end consumers are the ones who will be hurt. This in turn has a ripple effect on how Netflix will change its prices, if there is some disagreement there.

Knowledge@Wharton: Kartik?

Hosanagar: I think that the Level 3 - Comcast issue is a particularly complicated one, because Level 3 has this dual role as a backbone provider and as a content delivery network. On the one hand, Level 3 is justified in saying that Comcast is asking for more money because Level 3 carries Netflix traffic, and this is anti-competitive. But on the other hand, it's fairly standard that in peering arrangements, if you are exchanging an equal amount of traffic in both directions, there are no payments. But if it is disproportionately in one direction, then payments are indeed made. And so, that's not unusual. Comcast's response is that we are not charging specifically for the Netflix traffic, and therefore this is not a violation of net neutrality - we're just saying that there's disparity in the traffic going in different directions, and we're asking for money for that.

As far as the legal side of it goes, it's somewhat complicated because of Level 3s dual role. But setting the legal side aside, I personally feel that, independent of what Comcast says, this ultimately is about Netflix, and about the fact that Netflix poses a threat to Comcast's video-on-demand initiatives.

Knowledge@Wharton: Peter, do you have anything to add?

Fader: This is just one of many ways that Comcast is going to get itself in trouble. Their sheer size, the number of different businesses they're in - talk about cannibalization. They're a company that's going to be cannibalizing itself in so many different ways. It's not clear that they have thought through all of these potential conflicts. We're going to be seeing these kinds of issues coming up time and time again and this time it involves Netflix. It's going to involve many other entities. And it's going to be very important for Comcast to have a coherent strategy to deal with all these things before they start flashing up.

Knowledge@Wharton: There have been a lot of questions about how long Netflix can sustain an all-you-can-eat pricing model, in which subscribers pay a flat fee to access any of the available content. Can you talk a little bit about how sustainable that pricing model is, first of all to those who provide Netflix with content, and then also to those who receive the content, i.e., the subscribers? Peter?

Fader: I'd love to celebrate what Netflix has done on the pricing side. Many people refer to it as "the Netflix pricing model" - the fact that they own it, that it is so singularly associated with their brand, is a great credit to them for going against the grain 10 years ago and staying with it. Another big part of that is that they're constantly changing their prices, sometimes up, sometimes down. People don't seem to notice. People don't seem to care. They're into the content. They're into the wonderful delivery mechanism and the association with the brand. People like to be seen with the red envelope. In many ways, they've downplayed the role of price, per se. That's what every company aspires to do, so it doesn't matter about price: It matters about just having the value and the association. I don't think price matters that much and I think Netflix has a great deal of flexibility to get away with things.

Knowledge@Wharton: Raghu, do you have anything to add?

Iyengar: I have a little bit more of a skeptical attitude toward the pricing itself. For example, if you think about - and I've done some calculations - if you think about how much Netflix is typically charged for the royalty for streaming, as opposed to just sending by mail, it's about 40 cents a movie. If you take that number and now take in the streaming costs, which are about five to six cents per movie - about a 1 gig transfer - you're thinking about 50 cents per movie. If a customer has an $8 per month plan, anybody who streams more than 16 movies a month is already a non-profitable customer. I'm not exactly sure how long Netflix can sustain all-you-can-eat plans. My prediction is, I think you will end up seeing plans which may be differentiated in terms of the quality of movies that you are able to stream - for example, being able to stream movies in digital versus the standard format. Or Netflix could differentiate subscription levels in terms of what kind of inventory customers have access to; for example, some people might have access to newer movies versus older ones, and so on.

Knowledge@Wharton: Kartik, we'll turn to you for some final thoughts on that.

Hosanagar: When I look at Netflix's pricing strategy, there are two or three different aspects to note, at least from my perspective. The first one is the kinds of content that Netflix makes available. And as Ragu was mentioning, there's the royalty that Netflix pays. And the question is, what kind of content would you have access to? What if Netflix expands its library, goes more aggressive in acquiring content early, and getting movies soon after they're out of the theater, and so on?

The question is, if the library that Netflix has changes, then the royalty structure and the cost structure also changes. And then the question is whether Netflix can give [customers] access to everything at $7.99, or is Netflix giving you access to some portion of its library at $7.99, and then there's some other [inventory] that is blocked? I think one question is, what is the content library that is made available? And the current content library might be very different from the content library they would like to have, say, five years from now.

The other thing is that lowering the price brings in a whole new set of customers to Netflix. I would expect Netflix's customer base to grow quite dramatically with this lower price point. I think the content they have and the opportunity to go after new customers are two really important issues.

Net Neutrality: Will Netflix Destroy the Internet?

Excerpted from ZDNet Report by John Carroll

A recent article in Bloomberg Businessweek got me thinking about the subject of "net neutrality." The issue boils down to whether providers of Internet access (fixed-line phone networks, cable networks, mobile phone networks) should have the right to prioritize - or even block - traffic for certain services on their network.

The fear is that carriers will have a strong incentive to hinder competitors to services they provide themselves, thus leveraging their control over the pipes into consumers' homes to drive usages levels of those services. Phone companies might try to block VoIP traffic, or else hinder video traffic from Netflix, in order to protect revenues for their own Pay TV offering.

Of course, there are less overt ways to favor one's own offerings over that of a competitor. Comcast recently increased what Level 3 pays to send additional data over its network. Level 3, as it turns out, is now Netflix's chosen content delivery network. Comcast has also expressed a desire to institute bandwidth caps at some point, though has backed off near-term plans due to the negative publicity the declarations generated.

The problem for Comcast is one of vested interest. They have strong incentives to raise prices and institute caps that limit competition to their own fixed-line video services. This is what raises the hackles of net neutrality advocates, as it enables carriers to favor their own services without anything so obvious as slowing down packets from Netflix.

Preventing gatekeepers from using their power to lock-out competitors is certainly a noble goal. Even Ronald Reagan, a man touted by many on the right as a paragon of free market virtue, opted to turn oil pipeline companies - which are, in essence, the gatekeeper to oil consumers all across the United States - into "common carriers." This created an open market for oil over privately owned, but highly regulated, transmission pipes.

On the other hand, carriers have to generate a return on investment (ROI) in order to continue to upgrade their networks. This may become a problem quite soon, if a Juniper Networks report is a fair approximation of reality.

Quoting "Will Video Kill the Internet, Too," from the December 6th issue of Bloomberg Businessweek:

"The report predicts that carriers such as AT&T and Comcast will see Internet revenues grow by 5% a year through 2020. Meanwhile, traffic will surge by 27% annually, and carriers will need to increase their investments by 20% a year to keep up with demand. By this math, the carrier's business models break down in 2014, when the total investment needed exceeds revenue growth."

By 2014, video will account for more than 90% of Internet traffic. As Michael Hatfield, founder of Cyan Optics, noted in the article, "this is the most dramatic change in the network that has ever occurred."

By way of context, Juniper Networks is a vendor of networking equipment, and thus would stand to gain a lot from carriers convinced they had to buy large stacks of equipment to keep up with galloping bandwidth demand. On the other hand, the fact that Juniper Networks has an interest in painting the issue in the darkest colors doesn't mean they aren't identifying a real problem. An explosion in bandwidth demand is still very real, whether or not the economic tipping point happens in 2014, 2017, or 2020.

This has obvious ramifications to Netflix, a company whose future growth is linked to its fast-growing video streaming service. It also has ramifications for companies like Google (with Google TV) or Microsoft, which is currently in negotiations to roll out an Internet TV service for its XBox Live and Media Center products. It also would affect me, personally, as I am one of those "cord cutters" who gave up subscription cable services in favor of video streamed over the Internet to my television (in my case, by way of my XBox 360).

I still on occasion watch some of the over-the-air HD channels in Los Angeles, though I use Netflix's on-demand video streaming service much more frequently. When Hulu finally comes to the XBox, I am likely to pay the subscription fee, as it has the advantage of offering a number of shows the day after they are broadcast. On demand TV works perfectly for a guy who spends all day programming, most of the evening chasing his 17-month old daughter, and then has only an hour or two later in the evening to do other things.

In the past, I have vacillated somewhat in my stance on net neutrality. My instincts run in favor of the principles espoused by net neutrality advocates, because it is a valid economic objective to avoid media oligopolies (which is really a duopoly in many places in the US, split as it is between cable operators and, increasingly, phone networks). Just as it's good that oil pipelines are prevented from playing the role of highly-profitable gatekeeper to the transmission of oil, it would be spectacular if I could pick and choose my source of media "a la carte" from thousands of providers around the world. Net neutrality would help to ensure that future materializes.

On the other hand, my economics side is very aware of the incentives principle, and network providers need profits to incentivize them to grow the network to support a video streaming future. Net neutrality advocate Google seems to concede that point, at least in part. The overload point has already been reached for mobile networks, which is the reason they proposed to exempt mobile networks from net neutrality mandates. Knowing where their "bread is buttered," however, they insisted in full-on net neutrality for fixed-line providers, an argument that furthers their goal of developing into an Internet video service based around YouTube, and is easier to make now while carrier economics are still sound.

Net neutrality advocates often speak of the right of consumers to access any Internet service they want without interference by carriers. Those on the other side speak of property rights, and the incentives needed to build the network to support more data.

I hate the language of rights, favoring a more goal-oriented approach. The goal should be to maximize choice AND maintain incentives, something that is only possible if the people making the decisions aren't trapped by the black-and-white language of "rights."

It is good to have lots of choice in terms of media services. It is also good to maintain the profits necessary to incentivize carriers to build out their network.

We are heading towards a world of bandwidth caps on even fixed-line networks, barring the development of some amazing new technology that will make streamed video take up less bandwidth, or widen the pipe faster and at less cost. If we want to ensure that competitors to carrier-offered video services are on an even playing field, then the only option is through oversight and regulation.

Regulation is a dirty word to many, but so very fundamental to the proper functioning of capitalism. That, to my mind, is the biggest problem I have with some libertarians (to say "all" is unfair, as in a continuum, I can be said to share many of their views). They are like people who fixate on the engine in a car, ignoring completely that an engine on blocks doesn't do a whole heck of a lot.

Government provides the structure within which economic activity takes place. Part of that structure is rules that will attempt to maximize service choice given the constraints of a market that doesn't lend itself to hundreds of competitors naturally.

The FCC is set to vote on net neutrality rules on December 21st. Given the looming bandwidth crunch, it is likely to be one of their more important decisions in quite awhile.

Aydin Caginalp - Legal Eagle

Excerpted from Daily Variety Report by Bruce Shutan

Aydin Caginalp is currently a Partner at Manatt, Phelps & Phillips.

Working within the firm's corporate and entertainment group, Caginalp handles transactional legal services for business enterprises with an ear toward popular music. He co-authored a chapter in "Inside the Minds: The Music Business" (Aspatore Books) and made the Best Lawyers in America list each year from 2006 to 2011.

Key deals include those on behalf of BMG Rights Management, which is owned by KKR and Bertelsmann and "doesn't have the historic trappings of a music publishing company" in an industry that has fallen victim to digital exploitation, he says.

Caginalp facilitated about $300 million worth of music acquisitions in the past year, including songs from Britney Spears, Ricky Martin, Will.i.am, the Eagles, and Jim Morrison. He gets jazzed about artists like Elvis or John Denver, noting how "it's fun to listen to these and then relate to the agreement that you're reading."

In his spare time, Aydin likes sailing and antique sports cars.

His top cause is medical research.

Infringement Solution: Bundle Music with Internet Access 

Excerpted from San Francisco Chronicle Report by Matt Rosoff

Streaming music services are plagued by a basic economic problem: it costs more to license music than they can earn from advertising, and not enough people are yet willing to pay for a subscription.

European P2P streaming music sensation Spotify has managed to use the freemium model to gather 750,000 paying subscribers and is on track to triple its revenues this year, but it's bleeding losses from licensing fees. Rhapsody, which has been in the business for almost a decade, has close to the same number of subscribers in the US but has never turned a profit.

One big reason customers won't pay for music? There's too much content available for free.

Irish ISP Eircom, working with the record industry, is trying to turn this equation on its head. Instead of asking customers to pay yet another subscription fee for music, Eircom is offering it for free to all broadband subscribers. The company has more than 1.5 million broadband customers according to its most recent quarterly report.

Customers will be able to sample any of four million tracks, then purchase monthly bundles of downloads for prices that are about 75% cheaper than what iTunes offers - 6 euros for 15 tracks per month, 13 euros for 40 tracks.

The company is combining the new offering with a tougher "four strikes and you're out" policy for customers whom the Irish equivalent of the RIAA accuse of infringing content. The ISP was sued by the four major labels in 2008 because it was advertising on The Pirate Bay (TPB), and eventually settled out of court.

Other ISPs outside the US have experimented with bundling streaming music services, but still expected customers to pay. Unsurprisingly, those experiments have not ended well: most recently, British ISP BSkyB (part of the Murdoch News Corp empire) announced it would end its Sky Songs service in February after little more than a year.

Eircom's approach makes sense for the music industry, which is struggling to find a replacement for plunging CD sales. If customers are already getting music for free (with the charges really hidden in their ISP bill), they have less incentive to infringe. And bundling it with a service that customers are already willing to pay for - Internet access - gets the service to scale immediately.

So how long until Comcast or another big ISP in the US follows suit?

Coming Events of Interest

LA Mobile Entertainment Summit - December 7th-8th in Los Angeles, CA. This event is brought to you by the producers of the widely acclaimed 3D Entertainment Summit, this high level strategy and networking event will explore all facets of the mobile entertainment industry.

International CES - January 6th-9th in Las Vegas, NV. With more than four decades of success, the International CES reaches across global markets, connects the industry, and enables consumer electronics (CE) innovations to grow and thrive. The International CES is the world's largest consumer technology tradeshow featuring 2,700 exhibitors.

CONTENT IN THE CLOUD - January 7th in Las Vegas, NV. The DCIA's Conference within CES explores this cutting-edge technology that promises to revolutionize entertainment delivery. Six keynotes and three panel discussions focus on cloud-delivered content and its impact on consumers, the media, telecom industries, and consumer electronics (CE) manufacturers.

Gamification Summit 2011 - January 20th-21st in San Francisco, CA. The Gamification Summit brings together top thought leaders in game mechanics and engagement science for the first time. Hear what works and what doesn't in this dynamic and fast-moving field through case studies, workshops, keynotes and panels delivered by experts such as Gabe Zichermann, Amy Jo Kim, and Jane McGonigal.

Global Services Conference 2011 - January 27th in New York, NY. Cloud computing has implications not only for IT services but also for business processing; cloud-based delivery models present a discontinuous and disruptive shift that will redefine how IT and BPO services are delivered. The conference will present actionable propositions to leverage cloud-based models.

Cloud Connect Conference - March 8th-10th in Santa Clara. CA. Learn about all the latest cloud computing innovations in the Cloud Connect Conference -- designed to serve the needs of cloud customers and operators - where you will see the latest cloud technologies and platforms and identify opportunities in the cloud.

Media Summit New York- March 9th-10th in New York, NY. This event is the premier international conference on media, broadband, advertising, television, publishing, cable, mobile, radio, magazines, news & print media, and marketing.

1st International Conference on Cloud Computing - May 7th-9th in Noordwijkerhout, Netherlands. This first-ever event focuses on the emerging area of cloud computing, inspired by some latest advances that concern the infrastructure, operations, and available services through the global network.

Copyright 2008 Distributed Computing Industry Association
This page last updated December 19, 2010
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