Digital Media

There has been a lot of commentary following last week's New York Times op-ed by Dick Brass, a former Microsoft executive who claims that the company is bogged down by process and infighting, and has hence lost its ability to innovate.

Apple CEO Steve Jobs announces iTunes for Windows in 2003.

(Credit: CNET)

One of the most interesting follow-ups comes from Groklaw, which dug up some e-mails placed into the public record a few years ago during an antitrust case against Microsoft. (These materials have been a treasure trove of interesting and sometimes-embarrassing internal communications, including then-Windows chief Jim Allchin's 2004 admission that he would have bought a Mac over a Windows PC at that time.)

Almost immediately after Apple launched the iTunes Music Store in April 2003, Microsoft Chairman Bill Gates sent an e-mail to a bunch of folks in the Windows Media and MSN groups praising Steve Jobs' ability to get "a better licensing deal than anybody else has gotten for music." He continued, "We need some plan to prove that even though Jobs has us a bit flat-footed again, we move quick, and both match and do stuff better."

Allchin added his opinion in a follow-up e-mail: "We were smoked."

A bit of history
At the time, the major record labels had built a couple of music stores, as well as online-delivery platforms Pressplay and MusicNet, which were almost universally panned for their lack of usability. Initially, songs purchased through the services couldn't be burned to CD or transferred to any portable device. Other online music stores were similarly hampered.

By the time Jobs struck his iTunes Music Store deal, the labels had loosened these restrictions only slightly, and they still required users to pay a subscription fee for a limited number of downloads or streams. Jobs was able to get consistent (99 cent) single-song download pricing, unlimited CD burning, and--critically--unlimited transfers to the iPod.

As Allchin asks, "How did they [Apple] get the music companies to go along?" Jobs' personal magnetism, as well as status as a Hollywood insider through his founding of Pixar Animation Studios, probably had some effect. But more importantly, the iTunes Music Store was originally Mac-only.

The Mac had less than 5 percent market share at the time, so content owners probably figured that allowing single-song downloads into such a small market would provide a good test bed for Apple's FairPlay DRM system and pricing model.

By the time Apple was ready to launch the Windows version of iTunes in October 2003, Apple had sold 13 million songs through the service, outpacing all other music stores, despite the Mac's small market share. In other words, FairPlay and the consistently priced single-song downloads worked.

Almost seven years later, the iTunes Store is the largest music retailer in the United States, online or offline, and most of the stores based on the Windows Media Platform (including MSN Music) are out of business or have moved to selling unrestricted MP3 files.

Getting back to Dick Brass's criticism of Microsoft, I find it fascinating that top Microsoft executives were aware almost immediately of the threat the iTunes Music Store posed to the whole Windows Media ecosystem, but Microsoft was still unable to stop it. This matches what I've seen time and time again in my last 10 years following the company.

Microsoft has some smart executives who can quickly and correctly assess market changes and opportunities. Often, they come up with a good strategy to capitalize on those changes. But somewhere between strategy and execution, the thread is lost. Windows Media and Zune are most relevant to this blog, but you can see it elsewhere: online advertising, search, and mobile phones, to name three obvious examples.

RealNetworks and Viacom plan to spin off the Rhapsody subscription music service, the companies announced Tuesday.

Rhapsody, which has struggled for years to grow its subscriber base, was operated by a joint venture formed by Real and Viacom, parent company of MTV Networks.

At the same time, Real has decided to give up a controlling interest in the music service. The company will no longer own a majority stake in the company and will hold slightly less than 49 percent of the company's shares. Viacom owns a similar amount.

Real agreed to contribute $18 million to the new company. Under Real's control, Rhapsody has never really caught on with music fans. Rhapsody has suffered from what has dragged on most subscription services. Music fans generally prefer to own their songs; they don't want to risk losing their music libraries, should they fail to keep up their monthly fees.

The move comes after a major leadership shakeup at Real. Rob Glaser, Real's founder and former CEO, was pushed out last month, according to reports. The spinning off of Rhapsody appears to be the first significant move made by Robert Kimball, who is interim CEO and is being considered for the position permanently.

Google co-founder Sergey Brin (shown at a previous event)

(Credit: Stephen Shankland/CNET)

Google co-founder Sergey Brin said the team behind Buzz, Google's service that aims to organize your online social life, started out small. But as they tested the system within Google, they "found it so useful for internal communications that we became really motivated to bring this to the world," he said in an interview recorded immediately following Google's announcement Tuesday. (Scroll down to listen to the interview.)

For him, one of the most useful features is the ability "to start typing a thought right off the bat without having to worry about disrupting other people...I can throw something out there and the people who are most interested and most relevant tend to pay attention and reply."

Signal to noise
Brin said that Google's "recommendation systems will tend to surface (posts) to the most relevant people so that I'm no longer acting as a human router of sorts but the back end does that heavy lifting." He added, "Extracting signal from noise is one of our key competencies."

Safety and privacy
In response to a question, he said that the company is concerned about privacy and security because their mobile service "gives you the ability to share where you are." But, he said, it's up to individuals to decide whether to share your location and your posts," adding "people need to be thoughtful with whom they share and with what purpose."

On the other hand, Brin said that "it can really enhance safety and security," suggesting that parents could give a phone to one of their kids "and if something happens to them you can know where they are at the time." In response to a question on whether Google will provide advice on how to use this service safely, he responded, "so far it's clear that the benefits outweigh the cost and as we see people use it more broadly I'm sure we can come up with a set of guidelines."

Disclosure: Google is one of several companies that provide support for ConnectSafely.org, a nonprofit Internet safety organization I help operate.

Blockbuster was once one of the cornerstones of weekends and movie viewing, nearly as much a part of home entertainment as the TV set.

As Blockbuster yet again rethinks its move-rental business, the beleaguered company continues to lose ground to Netflix and Redbox.

No more.

Amazingly, Blockbuster's stock is trading at 40 cents a share following the company's announcement that it had undergone another round of layoffs and corporate restructuring. Last month the once dominate video-rental chain informed investors that it would miss revenue expectations for the fourth quarter due to lagging holiday sales. Blockbuster said it expects to report a loss of up to $193 million for 2009.

Jeanine Poggi at theStreet.com last week interviewed Blockbuster CEO James Keyes, who acknowledged that Netflix and Redbox continue to snatch away market share from his company. Last month Keyes said at a conference that Netflix was taking "demand out of the market."

Blockbuster, which in May of 2002 was trading at over $29, said previously that it planned to close 20 percent of its stores by next year. The company is now betting on a multiplatform strategy and plans to replace stores with kiosks and compete online with Blockbuster digital.

There was a time when many on Wall Street argued that Netflix would never threaten Blockbuster or video stores because ordering online was too complicated and nobody would ever want to wait days for the mailman to deliver a film. Nothing meant immediate satisfaction like the local video store, or so they said.

Netflix proved otherwise. At the same time that Blockbuster's stock trades for less than the price of a postage stamp, Netflix's stock and revenue are soaring. Netflix shares were trading at over $61 on Tuesday and last month the company reported that profits rose 36 percent to $30.9 million while revenue grew 24 percent to $445 million.

As for the future, it's hard to see how Blockbuster will ever catch Netflix. After striking partnerships with dozens of set-top box makers, Netflix enables subscribers to stream movies from the Web to TV sets at no additional cost to their monthly fees.

And with Redbox boosting the number of its automated video-rental kiosks, the traditional video-store business model appears doomed. At this point, Blockbuster appears headed for the same fate as Movie Gallery. At one time, Movie Gallery was one of Blockbuster's biggest brick-and-mortar competitors, but last week it filed for bankruptcy protection for the second time since 2007.

Despite job layoffs and other cost cuts, Electronic Arts is still struggling to dig out of its current financial hole.

The game maker reported Monday that its fiscal third-quarter net loss narrowed to $82 million, down from a loss of $641 million in the year-ago quarter. Its quarter ended December 31.

EA was on a tear last year to slash expenses--laying off staff, closing down studios, and trimming its product line. But sluggish game sales, especially in Europe, took their toll on fiscal third-quarter revenue, which fell 25 percent to $1.24 billion from $1.65 billion in the year-ago quarter.

Revenue was also affected by a smaller number of titles released for the 2009 holiday-shopping season compared with 2008, the company said. Sales were driven mostly by a few new games, such as Dragon Age: Origins, Left 4 Dead 2, and NBA Live. But older standbys FIFA 10, Madden NFL 10, and The Sims 3 helped too.

The poor results didn't surprise analysts as Electronic Arts had already announced in January that its fiscal-third quarter would be weaker than expected. But the company also warned Monday that the current quarter's revenue will likely be lower--between $925 million and $1 billion--than had been anticipated. The news sent its stock down around 9 percent in Tuesday morning trading.

Despite the weak outlook, EA is pinning some hope on less-traditional business markets and a couple of new game titles.

"EA is growing share in our packaged goods business, and our digital businesses continue to grow rapidly," Chief Executive Officer John Riccitiello said in a statement. "Mass Effect 2 is the first blockbuster of 2010 and we are looking forward to the launch of Dante's Inferno and Battlefield Bad Company 2."

In particular, the company is eyeing the online game market as a potential source of more revenue. In its third quarter, EA's online game subscribers reached 1.9 million. As players buy fewer CDs in stores and increasingly hop onto the Internet for their game fix, Electronic Arts is trying to capitalize on that trend.

The company noted that its Playfish social gaming unit, which it bought in November, scored two of the top 10 Facebook games for the quarter. Reports have also surfaced that EA will launch a Facebook version of its popular Madden NFL franchise.

Still, many analysts remain pessimistic about Electronic Arts' near-term future, noting that the cost cuts aren't doing enough to turn the company around.

Put yourself in their shoes.

They are twins. It's the morning of their 20th birthday. So they log on to Facebook, expecting to find messages from well-wishers.

Instead Angela and Maryanne Vourlis discover posts that read "RIP Chris Naylor" and "RIP Bobby." It took more than a few seconds for them to realize that their 17-year-old brother was the "Bobby" to which the posts referred.

According to the Sydney Daily Telegraph, the twins saw the RIP posts and tried to call their brother.

They then called their mother.

(Credit: CC Benstein/Flickr)

"I rang Mum and said: 'Chris Naylor must have died--I just read it on Facebook. But where's Bobby? People are writing 'RIP Bobby' too," Angela Vourlis told the Telegraph.

But Mrs. Vourlis knew that Bobby had been out with Chris Naylor. The family then called the police in order to discover the truth.

Bobby was one of three teens who died when their car smashed into a pole in heavy rain on the Great Western Highway at Colyton, near St. Marys in Sydney, Australia.

Bobby's uncle Peter Matelis told the Telegraph: "It's every parent's worst nightmare to lose a child in a car accident, but to have to hear it on Facebook, then have to chase up the police yourself, is just horrifying."

The police claim they had trouble identifying the victim. But the family saw the Facebook posts six hours after his death around 3 a.m. Sunday.

While everyone has now come to expect that social networks have become the most immediate and regular ways in which many people communicate, there are some experiences that no-one ever imagined would play out through sites like Facebook.

If you thought the Recording Industry Association of America was hard on illegal file sharing, consider Dorin Dehelean.

Dehelean, an Internet security analyst, was in charge of tracking illegal file sharing at the University of Georgia until he tried to shake down the student downloaders he caught.

Last week, police arrested the 37-year-old Dehelean on a felony extortion charge, according to a report published by the Web site of the Athens Banner-Herald. Police allege that Dehelean contacted a female student two weeks ago to tell her that he'd caught her violating school policy by illegally downloading copyright materials.

He also told her he could make the "situation go away in exchange for money," Jimmy Williamson, chief of campus police at the university, told the Banner-Herald. "All he was doing was (offering) to keep the information from going to Judicial Programs."

The student, who apparently could have faced disciplinary action for the downloading, told Dehelean that she didn't have the money and then informed a school official about the conversation. The police were contacted and they sent a plainclothes officer to meet with Dehelean posing as the student. After Dehelean accepted a payment of an undisclosed amount, he was arrested and the school immediately fired him.

Police believe Dehelean tried to extort other students and may have been paid off by at least one student. No word yet on whether the female student was disciplined for the downloading.

Editors' note, 4:30 p.m. PST: Netflix now claims that it incorrectly acknowledged 1080p streaming in the company's 2010 development road map. A Netflix representative has clarified that the company plans to bring 5.1 surround and closed captioning to its streaming HD videos later this year, though 1080p Watch Instantly is not on the books for this year. The text below is the original story, based on earlier conversations and e-mails with this Netflix representative.

Netflix subscribers with HDTVs and streaming boxes have something big to look forward to in the coming months. CNET has learned that the company plans to roll out 1080p streaming with 5.1 surround sound later this year.

No details are known on the timing of release, how much content will be available in 1080p, or how much--if any--extra bandwidth will be required.

Netflix's current (though unofficial) requirements for streaming 720p HD content on an HD-compatible box such as the Xbox 360, PlayStation 3, and Roku box are 5Mbps or higher. Presumably 1080p, which is a little over twice the resolution of 720p, will require more speed.

Netflix uses Microsoft's Silverlight technology for its video-streaming service. Microsoft rolled out 1080p smooth streaming support to Silverlight in March of last year. One of its first, big commercial uses was in Microsoft's own Zune Marketplace video store on the Xbox 360. It's also being utilized extensively later this week to stream the 2010 Winter Olympics on NBC's Web site.

Correction, Monday at 3:10 p.m. PST: This article incorrectly listed the Internet connection speed required to stream 720p HD content. According to Netflix, that number is "typically" 5 megabits per second.

Netflix, the Web's hottest video rental service, is worried that bandwidth providers could abuse their position as the gatekeepers of Internet access to hamstring competing Web-video distributors.

As the Federal Communications Commission continues to consider proposals for Net neutrality regulations, Netflix recently asked the agency (PDF) to adopt rules that protect Web video fans from anti-competitive practices.

(Credit: Netflix)

"Network operators control the delivery pipes and generate significant revenue from content that travels over those pipes," Netflix wrote to the FCC. These operators "provide both the means and motive for discriminating against new ventures that might threaten revenue sources of the network operators."

Netflix's comments to the FCC, first reported by The Washington Post on Monday, is a signal that the company sees a showdown coming with Comcast, Time Warner, and other broadband providers over the distribution of online video.

While seemingly everyone predicts the Web will one day be the preferred means of distribution for on-demand film and TV shows, Netflix has aggressively prepared for that day by building up its Web-streaming service and partnering with set-top box makers that enable users to watch Internet-video on TV sets. But in the future, cable and satellite companies may have the upper hand when it comes to acquiring Internet rights to films and TV shows.

The bigger network operators possess huge numbers of subscribers (for example, Comcast boasts 25 million cable TV subscribers and 15 million Internet customers), and can afford to pay big bucks for content. The cable guys have also established strong ties to the studios after decades of heavy spending in Hollywood.

Netflix has 12 million subscribers--many of whom pay only $10 a month for the service--and has at times clashed with the studios over acquiring access to content. Typically, Hollywood sees far better returns from cable and satellite providers than Web services, such as Netflix and Apple.

In comments to the FCC, Netflix wrote: "There is substantial discrimination and consumer harm if a network operator uses its ownership affiliation with a (studio or TV network) or even its bulk buying leverage with a video content provider, to deny attractive programming to a competing online video service."

The "ownership affiliation" that Netflix is obviously referring to is Comcast's proposed merger with NBC Universal. The deal would give Comcast, the nation's largest cable company, a huge say in where NBC's content goes. /p>

Comcast has said that it has no intention of hurting NBC by limiting how the company distributes shows. Another concern for Netflix is that ISPs could use the so-called TV Everywhere initiative as another means to control distribution. TV Everywhere calls for cable and satellite companies to offer subscribers Web access the same content they can watch on their TVs--just as long as they keep paying that subscription fee.

In a statement last summer about TV Everywhere, Comcast said that it intends to roll out the service in a "manner that is consumer-friendly, pro-competitive and non-exclusive."

This is what Netflix would like to see the FCC do nonetheless.

First, Netflix supports a proposed rule known as a "transparency principle" that calls for network operators to disclose "practices that affect the consumers' ability to access content, use devices or services, and run applications," Netflix wrote.

"The Commission and consumer and other watchdog groups can monitor these disclosures," Netflix added, "to ensure that the associated practices do not violate the other open Internet rules."

Netflix wants the FCC to create a group assigned to determine what kind of information network operators must disclose.

Finally, Netflix doesn't want the proposed "managed services" exception to be able to circumvent the FCC's open Internet policies.

In the FCC's Notice of Proposed Rulemaking (NPRM), the group ponders the idea of "managed services." The FCC asks whether some services should be exempt from some or all of the Net neutrality rules. Netflix is very wary of this one.

The company wrote in its comments that a task group "would help assure that the 'managed services' exception does not become so extensive as to in effect create a 'fast lane' for service offerings from network operators and their affiliates while relegating all unaffiliated entities to the 'slow lane' of the open public Internet.