Grossman family west

san francisco


Archive for November, 2005

The Data behind why DRM sucks

Tuesday, November 29th, 2005

Oliver posted to his blog recently that his friend Damian (from OKGO) had written a guest blog post on why DRM sucks. I thought that Damian’s points were well taken, and it certainly carries additional weight coming from an artist, but is it just another emotional rant?

Last semester I had Professor Oberholzer-Gee, a veritable Strategy ninja, as far as I’m concerned. I had the pleasure of talking with him one afternoon about the Grokster Supreme Court case (before they had issued a ruling). It turned out to be a very enlightening conversation: Professor Oberholzer-Gee (along with a colleague at UNC) had published the first academic paper on the effect of P2P File Sharing on the Music Industry that had used actual download data, a paper which was later filed as a Friend of the Court Brief for Grokster Supreme Court case.

I want to emphasize that they use actual data in their analysis: they “match 0.01% of the worldís downloads to U.S. sales data for a large number of albums. To establish causality, [they] instrumented for downloads using data on international school holidays and technical features related to file sharing.”

The result? “Downloads have an effect on sales which is statistically indistinguishable from zero. Moreover, [the] estimates are of moderate economic significance and are inconsistent with claims that file sharing can explain the decline in music sales during our study period.”

The actual study is interesting, but long and dense. Fortunately, the Friend of the Court Brief is short and readable.

So Damian’s gut instinct, that “before a million people can buy our record, a million people have to hear our music and like it enough to go looking for it. That ainít gonna happen without a lot of people playing us for their friends, which, in turn, ainít gonna happen without a fair amount of file sharing” is 100% correct and backed up by real quantifiable evidence.

Smart Rock Star.

joel

Will TiVo survive?

Thursday, November 10th, 2005

Earlier this week, Tom Rogers, the new TiVo CEO (4 months old, I think) came to my Strategy and Technology class. (We’ve had a ton of fascinating visitors and i’ve totally dropped the ball not blogging about them)

Mr. Rogers is much quieter, much more reserved than Mike Ramsey (the creative and energetic Founder and CEO until this past summer), whom I saw speak last year. While Mr. Ramsey was more “fun” to listen to, I left his talk last year thinking that TiVo had no hope: that they had no sustainable advantage, that DVRs would become commoditized, and that Mr. Ramsey was all over the map in terms of great ideas, but lacked some focus.

Let me first back up and say that I LOVE TiVo. Really, I do. I had TiVo/DirecTV until this fall. I moved and went with Comcast, who offered me a huge incentive to leave the ditch. I’ve been using the Comcast DVR for a few months and it’s crap. Total, complete, and utter crap. When you turn the cable box off, it stops recording. Need I say more?

Back to TiVo. Here’s where they stand today: DirecTV’s parent (News Corp) recently sold its 4% stake in TiVo and is a significant shareholder in a TiVo competitor called NDS. Why? My bet is that they feared TiVo becoming too powerful: it turns out that there is high churn in satellite and cable customers (upwards of 20%) but very low churn in TiVo customers (like me, most TiVo customers love the service). DirecTV saw this: the only customers who didn’t churn were the combo DirecTV/TiVo customers. Furthermore, the DirecTV contract was huge for TiVo: responsible for over half of their customer base (1.86M out of 3M total, as of 1/31/05). There couldn’t really have been a short term monetary reason for this move: TiVo’s current situation allowed DirecTV to negotiate very steep price discounts (paying TiVo slightly more than $1 per customer per month). Interestingly, DirecTV still advertises TiVo (only promising to push customers to NDS in the future). Further, it seems very unlikely that News Corp will incur the cost of going into the houses of all 1.86M DirecTV/TiVo subscribers and replace the box. I think it’s a safe bet to assume, at least, that those 1.86M folks will stay TiVo subscribers for the near future.

Once this happened, Comcast signed a deal with TiVo–hoping, I assume to lower their churn (and maybe snag some of the DirecTV/TiVo devotees). Again, the “deal” is a good one for Comcast (about $1 per sub per month). For Comcast subscribers (like me) eagerly awaiting the arrival of such a box–I think that they’re saying 2007 (though I’m not sure about that, so don’t quote me). It will be interesting to see if this lasts or if Comcast starts to fear the same thing that DirecTV did: that TiVo would become the valuable service and relegate them to a “dumb pipe” (therefore allowing TiVo to command a larger revenue share).

So what’s to become of TiVo? What’s their strategy?

First, let’s look at how TiVo makes money. Currently, the lion share of revenues come from hardware sales of boxes (fairly low margin) and service revenue (ARPU has been falling thanks to DirecTV and Comcast deals). It earns some revenue selling data (the information that they collect is incredibly rich, and therefore more valuable than Nielson, but currently only collects for a skewed population–TiVo owners). TiVo has been experimenting with an advertising platform that allows richer, more targeted, possibly opt-in, advertisements (mini infomercials or richer, in-program advertising). Finally, TiVo could offer content distribution (see recent talks about a deal with Netflix). Currently, these are all small businesses.

If you look at the players in the industry, you quickly realize that TiVo has the possibility to make an enemy of them all–which, as a startup, is a bad move (since the giants will take steps to protect their revenue streams). At the same time, though, the industry has recently realized that DVR penetration is inevitable–Forrester is predicting some sort of DVRs in 50M US households by 2009 (current penetration is about 10M households). This means that, with or without TiVo, the advertising industry is about to change radically (since the primary function of a DVR is skipping the spam-like 30 second commercials).

My bet, therefore, is that the future cash cow for TiVo is an advertising platform. There will likely be supply-side network effects in this industry: advertisers will want to write sophisticated, targeted ads for one platform, not many. The way to win here, therefore, is own significant market share, fast. (Additionally, the cash-strapped company needs to grow the user base, badly).

Hence, the recent moves to discount the box. You can get a 40GB TiVo series 2 for $50 these days. Additional moves are designed to distinguish TiVo from the generic DVRs that are now ubiquitous: the recently announced deal with Yahoo! means that you will be able to program your TiVo from the Yahoo website and even view pictures from the Yahoo website on your TV.

The game is surely not won. Customers generally can’t distinguish between TiVo and generic DVRs, which is bad for TiVo (since it’s generally more expensive). The better technology does not always win: BetaMax lost to VHS, Mac OS and OS/2 to Windows. TiVo is so much better that I’m rooting for them. I feel like TiVo is a sick relative in the hospital. I’m hoping they’ll pull through…

In the meantime, I need to go make sure I didn’t accidentally turn my Comcast box off again. There’s a West Wing episode on tonight that I don’t want to miss.

Disclaimer: I believe that all information herein is public. Most of it comes from the HBS case and Mr. Rogers (like all guests) was very careful about what he says due to SEC regulations (and good business sense). You can buy the HBS case online (it’s N9-706-421, a recently updated version of a 2003 case, so it’s not yet available).

I can’t believe MicroCenter is still in business

Thursday, November 3rd, 2005

I seem to have made some traction by blogging about bad experiences in the past, so here’s another:

Don’t buy anything at MicroCenter. They sell two types of computer products: those from brand-name manufacturers that you can get online for much less money, and generic white-label items that are total junk.

Last month, I made the mistake of heading to MicroCenter to buy the latter. In spite of the fact that major manufacturers sell PCs for $500 or so (I didn’t need a monitor or any fancy specs), I headed to MicroCenter in search of a deal. Sure enough, I found a “PowerSpec” (MicroCenter brand) tower for about $420, with “good enough” specs (2 GHz Athelon, 500 MR Ram, 150 GB HD).

I was content with my purchase until, 5 weeks later, the system clock started acting up. Whenever I turned the computer back on, the clock would be wrong (usually, the date as well as the time was totally off). Sure that the PC was still under warranty, I brought it into the Cambridge MicroCenter, where I purchased it five weeks earlier.

The service was absolutely horrific:

  1. Although they knew that they couldn’t even look at my computer for 3 days, they would not schedule me for a service appointment then. They insisted that I drop my computer off NOW so it could sit on their bench for 3 days until they got around to it. Mind you, my computer was mostly fine, so I’d be losing it for NO reason–they just didn’t have their act together to draw up a service schedule. When pressed, the woman on the phone explained that “it just couldn’t work that way.” Apparently, MicroCenter doesn’t hire employees with enough competence to use a calendar. Good thing that Dr offices, automotive service repair shops, and restaurants have managed to crack this very complicated problem.
  2. Even though I had purchased THEIR brand of computer from THEIR store a mere 5 weeks earlier, they charged me $85 JUST TO LOOK AT IT! I was horrified.
  3. They somehow managed to break my computer and “fix it”, thereby keeping the $85. That is, they called me and told me that they couldn’t get it to boot (the ONLY problem I had was the clock when I had brought it in). Magically, though, when they tried to boot it, they claimed that they couldn’t–that they had to “safe boot” it and reinstall a video driver.

These are just the facts. I leave out the fact that the actual customer service was frustratingly slow, that the salespeople were pushy (like used car salesmen) when I was considering a purchase, and that the service reps were disinterested with me, their jobs, or the quality of their service.

There is absolutely no reason for you to go to MicroCenter. Just skip it. The stuff that they sale is junk (and they know it because they don’t offer free repair for even 35 days) and the name-brand products are cheaper elsewhere. Do yourself a favor and stay away.

Cheers,
joel