Hollywood Hates Netflix, Hollywood Loves Netflix

One of the things I love about Silicon Valley is how connected it is. In the past two weeks I casually met with a former Hollywood studio senior manager, and a Netflix insider. It was an opportunity to find out what they know that I don't -- and it's usually a lot! Since I'm a recent Netflix Instant Streaming convert, I asked them both about it, and what I found out was interesting. According to the former studio guy, "the studios hate Netflix." According to the Netflix insider, "the studios love Netflix." And, according to both of them, it's all about money. So what gives?

When I asked my ex-studio friend about Netflix, his reaction was nearly instantaneous and visceral -- "Do you know how much the studios hate Netflix?" According to him, the issue is that Netflix "hides behind" the "first sale doctrine" resulting in lower revenue to the studios. The "first sale doctrine" refers to US law that allows copyrighted material to be transferred after it's been purchased so long as no additional copies are created. What that means is that Netflix can legally send me a DVD disc in the mail, then get it returned and keep circulating it as long as they want without paying the studios any more money. That's different from say a pay-per-view movie, where every time someone watches it, the studios get a cut of the revenue. OK, I can see why the studios wouldn't like that, but then it's not like Netflix made the rules -- they just built a system to capitalize on them.

So how is it my Netflix contact can claim that the studios love them? Well, to start with, according to him, it's not about how much money the studios make on each viewing, it's about how many viewers Netflix brings to more obscure content. He claims Netflix is so good at learning what you like, that they can sell you the "long-tail," or lesser-known content, and you'll love it. So, the upside for the studios is that they can make money with movies and TV shows that would never sell on an end cap at Walmart or Circuit City, because Netflix has to tools to find just the right people to watch them. Not only does this grow the market, but it also helps up-and-coming artists find an audience. You might be great at making shows that appeal to 1% of the viewing audience, but no one will ever know if you have to get approved by a Walmart buyer first.

The one thing they both agreed on is that it's all business, and it's all about money. If Netflix (or anyone else) builds a service that has lots of viewers, paying lots of money, with enough allocated to send to Hollywood, the studios will find a way to provide their content. Today, Netflix Instant Streaming content library selection consists mostly of older TV shows and movies, and in some cases, it's clear that it's "teaser" content. For example, you might get episodes 1 to 4 out of a series via Instant Streaming, but then have to watch concluding episode 5 on DVD. From a studio perspective, that ensures that Netflix still buys the DVD, but it definitely compromises the consumer experience. So what would it take to have a richer library, or one without these kinds of compromises? The answer is simple -- money.

Today, Netflix Instant Streaming is bundled with a DVD rental service, so you could argue that the end-customer isn't really paying anything for it. In contrast, the other "all-you-can-eat" video-on-demand services are either ad-funded (e.g. Hulu) or come with fairly large monthly bills (e.g. Cable and Satellite TV). What will be interesting to see is how this evolves over time. In the past, cable and satellite justified their rates by arguing that it was expensive to build and maintain their distribution networks. Now that standard definition TV can be readily delivered over broadband cable, and HDTV will be in the near future, the line between traditional video services, and Internet streaming services has begun to blur. So regardless of any love-hate relationships, I'd place my bets on the most efficient delivery systems -- after all, it's all about the money.

AT&T U-Verse Catching Up

Today, AT&T announced that their U-verse video service would be adding whole-home video watching from a single PVR to up to 8 televisions. Hooray! As a consumer, it's always great to have a choice, and until now, Dish was pretty much the only service-provider game in town when it came to whole-home PVR. Now, if they'd only add the ability to expand the hard-drive capacity via USB, and compatibility with portable viewers like the Archos players, we'd have a real horse race.

As a long-time user of the Dish Network VIP-622 PVR, this has been one of the features missing for me in the AT&T offering. Being able to program only one PVR and have it available on both of our TV's has been a great convenience. Dish network took a rather simple, but effective approach to multi-room PVR viewing. They have an output on their PVR that essentially broadcasts a second viewing experience including user interface, audio and video on a cable TV channel. By connecting that output to a coax cable running to a second TV, you can access all of the PVR's recorded shows on that other TV. This approach has some advantages and disadvantages. On the plus side, there's no set-top box required at the second TV. On the minus side, it only works for standard definition viewing, because the channel it sends is a standard-definition analog TV signal. The control from the second TV is via an RF wireless remote control. In principle, that should work fine, but in practice, we find that it doesn't go through stucco walls very well, and we're often contorting our bodies to achieve the right positioning of the remote to get the key clicks heard by the PVR. Still, it's been fantastic to only have one PVR to record, and have the whole collection of video available in two rooms at once.

The new AT&T approach is different. They require a simple IP set top box for each of the TV's that will be accessing the PVR, but those were necessary to view the U-verse service anyway. Because the remote controls are communicating with those set top boxes, there's not likely to be any problem with remote control range like there is with the Dish Network PVR. The AT&T U-verse solution also covers up to 8 TV's which will probably matter to some folks, though we're a bit backward having only two. I'm still on the fence about trying the service because I'm always running out of hard-drive space, and the Dish solution allows an extra hard drive to be installed via USB while the AT&T solution does not. I've also used the Archos PocketDish players with the Dish network, and liked them. Again, I don't think AT&T U-verse has anything to match this. Still, if they were able to add multi-room, maybe it's just a matter of time. In their press release, Jeff Weber, AT&T VP of video products says "With our 100 percent IP network, we are able to constantly evolve features and services to match the needs of viewers." So, I guess we'll have to watch to see if they deliver on that promise.

Mythbusters, NVIDIA and Growth

For the grand finale at NVISION 08, NVIDIA brought in the Mythbusters. They were looking to demonstrate how a GPU (graphics processing unit) differs from a CPU (central processing unit) in a way that the average person-on-the-street could understand. This is important to NVIDIA because they've come to dominate the stand-alone GPU business, and still need to grow. To do that, they'll need to have both the industry, and end-users come to appreciate how the GPU can do more than just graphics.

First the Mythbusters demo (you can see all of my pictures on my photo-sharing website pqphotography by clicking here). They started with a small remote control robot that represented the CPU because it did one-thing at a time -- namely, shot paint balls at a piece of paper to paint a smiley face. The crowd of industry analysts, gamers and developers loved it, and welcomed Jaime and Adam to the stage like heroes. It was kind of cool and generated applause. Then, it was time for the GPU demo, which involved pulling the curtain back and unveiling a suitably more impressive machine. Naturally, it does more in parallel -- Using 1,100 paint-ball guns to paint the Mona Lisa in a fraction of a second. It was very impressive. If you want to see a youtube video (hopefully still posted), click here.

So, other than having pulled off and entertaining, engaging, trade-show with clear messages, what did this all say about the evolving graphics market, and NVIDIA in particular? As for graphics, I think it's clear that the industry is following an "if you build it, they will come" strategy, and the developers and artists are coming. It's hard to imagine all of the things that will be done with graphics in the next 5 to 10 years, but it's easy to imagine that many of them will be compelling and easily appreciated by large segments of the population.

As for NVIDIA, they're at an interesting point in their development as a company. Many a company experiences success in one domain, only to struggle extending that success beyond their initial niche. They've had an amazing run when you think that they are the only sizable dedicated PC graphics company still standing, and they're doing very well against the likes of Intel and AMD who each develop and offer their own graphics engines. But continuing to grow at a rate that will satisfy investors will require much more than maintaining share of the PC graphics business, so the bets they are placing are on mobile, embedded, and compute applications of GPUs. I like these bets because they are all adjacencies and logical extensions of their core capabilities. For mobile, it seems reasonable that we will want richer interfaces on our iPhones and Smartphones. For embedded, why not have richer interfaces and displays for our cars -- after all, a 3D representation of the map would be a lot closer to what I see out the window of the car. Probably the toughest challenge is in compute. Sure, there are interesting difficult problems that will quickly appreciate the value of NVIDIA's CUDA that turns their GPUs into massively parallel compute engines, but it's hard to imagine that this won't be fiercely fought for by existing CPU companies when the market broadens. That's not to say that NVIDIA will fail, just that this is less of an adjacency, and will be a harder win. On the whole though, yes, NVIDIA came off looking like a company making good calculated bets on the future, while continuing to lead in their core business. I look forward to seeing where they are at NVISION 09.