Douglas Crockford

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January 2005

This month's report looks at the FCC, DRM, DVD, and America's biggest healthy problem, Obesity.

FCC

Chairman Michael Powell announced that he will be leaving the FCC in March. I saw him at CES a few weeks ago, and at that time he gave no indication that he was leaving. When he was asked what issues he would be driving this year, he said that he planned to deal with "whatever fell through the roof," meaning that he had no plan, that he would respond to problems from the outside (industry, government, the public). Powell is a smart man, but he is not a visionary. His approach was to try to find a compromise between the many interests. He found in some cases (like obscenity and Broadcast Flag) that he could please no one. People on both sides condemned him.

For the past 80 years, the FCC's principle activity has been the regulation of two monopolies: the Broadcasters and the switched telephone network. Both are now obsolete. Broadcasting is being replaced by cable, satellite, and IPTV. Switched telephony is being replaced by cellular and VoIP. The FCC needs to be radically restructured in order to deal the new monopolies that threaten the Public Interest. These include the DRM Conspiracy, the Patent Licensing Authorities, and Microsoft.

President Bush must appoint a new Chairman. It is unlikely that he will select the visionary that these times require. Since Bush owes his reelection to the Religious Right, it is likely that the new chairman's principle interest will be the suppression of obscenity. When the Right attacked President Clinton for lying about his sexual activity, the Media was given permission to talk in detail about sexual activity. The Religious Right is alarmed about the unintended consequences and wants to reimpose the old restrictions on the Media. This could result in expanded rules on the V-chip. The Religious Right is not concerned with helping foreign companies sell TV sets.

The new chairman must be approved by the Senate. That could possibly take a long time. I think that the FCC will not announce any important new rules or policies until the new Chairman is confirmed.

DRM

Since DRM will be a technological failure, the Content Industry is trying to use law to protect DRM, so that DRM can protect content. The most important event of this year will begin on March 29 when the United States Supreme Court begins hearing arguments in the final appeal of the Grokster case. The Content Industry lost in the previous trials, but is hoping for a win which will eliminate the Fair Use protections of the Betamax case. Such a decision could be extremely bad for the Consumer Electronics Industry.

Last summer Cory Doctorow gave a talk about DRM at Microsoft Research in Redmond. The notes from the talk are on-line here: http://www.craphound.com/msftdrm.txt. It is one of the best presentations on DRM that I have seen.

The founders (Sony, Philips, Samsung, Matsushita, and Intertrust) of the mysterious Coral Consortium (an interoperable DRM system) have announced that they have formed another organization called the Marlin Joint Development Association. Marlin will work somehow with Coral. It is not clear yet what either system does or why there need to be two of them. There will be a licensing program. It is not clear yet how they will force manufacturers to buy licenses.

LokiTorrent is a BitTorrent hub. MPAA is suing them in order to take them down. LokiTorrent is fighting back by asking for donations from people who use the site. They are using the money raised to mount a legal defense.

DVD

"Once people see HDTV, they never want to see anything else." I heard many people say this last year, but there is clear evidence that proves it is not true. While people like the great pictures, they value variety and control more.

Consider Voom, Cablevision's HDTV Satellite service. In a year of operation they were only able to attract 30 thousand subscribers at a time of expanding HDTV set sales. Voom is being sold to EchoStar at a huge loss for $200M. I think the reason for Voom's failure is simple. The vast majority of TV programming is not in HD (yet). Some primetime network shows are now in HD, but since they are designed to also play in SD, HD does not add much value. Also, it is not currently possible to record HD at home, so timeshifting is not possible. Variety and control are more important than image quality.

Most HDTV sets are not receiving HD programming. People buy them to watch DVDs. Currently in the market there are HDTV sets and EDTV sets. Most people do not understand what the difference is, but they do notice that the EDTV sets are much cheaper, and DVDs look just as good or better on EDTV sets than on HDTV sets. Sales of EDTV sets are slowing down the transition to HDTV.

People love the variety and control that they get with DVD. This is best seen in a category that was really big last year: TV on DVD.

In the lifecycle of a TV show, it is first shown on a network, and then rerun. Then it gets sold to syndication, where it be shown over and over again. Every time a program is shown, its value decreases. Over the years syndicated programs will migrate to poorer and poorer stations, until finally the program is so worn out that no one would want to buy it.

But now those tired old shows are finding a new life on DVD. People are buying box sets containing an entire year of old shows. They like being able to watch them without commercial interruptions, and they like being able to watch them whenever they like. They also enjoy better image quality than they saw on broadcast.

The Studios are excited to be getting new revenue from these worthless properties. The biggest problem they have in producing the DVDs is getting the rights to the music. The laws in the US on music licensing are horribly complex.

The Studios recently negotiated new contracts with the actors, directors and writers unions. All of the unions wanted to increase the residual payments from DVDs. Historically, 80% of VHS and DVD revenues are exempt from residuals. Studios have insisted that soaring costs of filmmaking have made it impossible to increase DVD payouts because they need the revenue from the disc to remain financially viable. When the Content industry is seeking to change the Copyright Law, they claim to be defending the interests of the Artists. But clearly, the Studios are not the friends of the Artists.

One concern for the Networks is that if people are watching TV on DVD, they will be watching less regular TV. When people can watch what they want, they stop watching the Networks.

DVD player manufacturers must obtain licenses from 3C (Philips, Sony, Pioneer) and 6C (Hitachi, Matsushita, Mitsubishi, Time Warner and I/O) and others. Royalties are $15-$20 per DVD player, which is exceeding the cost of hardware. Two Chinese manufacturers, Wuxi Multimedia and Orient Power (Wuxi) Digital Technology, have filed a class action lawsuit on behalf of other China-based DVD manufacturers with the US District Court in the Southern District of California in June 2004. The complaint states seven causes of action against the members of the 3C DVD Patent Group including: Price Fixing, Unlawful Tying, Group Boycott and Conspiracy to Monopolize in violation of Sections 1 and 2 of the Sherman Antitrust Act; a request for a judicial declaration that the patents in the 3C DVD Patent pool are invalid; and two claims for violations of the California Unfair Competition Law. If the Chinese companies win, this could have a huge impact on the Consumer Electronics Industry. It could liberate product designers and reduce costs for consumers.

A High Definition DVD format is much more important to the success of HDTV than the analog switchoff. The problem is that there are two formats, HD-DVD and Blu-Ray. The Industry (and Consumers) want to avoid a repeat of the VHS vs BETAMAX fight, so the Studios said that they would not release their content on any new format until a clear winner is determined. The specifications of the two systems are very similar, so a market battle would likely be long, unpleasant, and expensive.

Sony developed Blu-Ray. Sony is also buying MGM and its catalog of 4000 films, which it will publish in Blu-Ray along with the libraries of Columbia, Screen Gems, and TriStar. This put a panic into the other Studios. They think that if Sony is allowed to set the format, then Sony's products will be more profitable than theirs since Sony is not obligated to pay per-disc royalties to itself. So in November Warner, Paramount, Universal and New Line Cinema announced that they are going with HD-DVD. In December, Sony made a deal with Disney. Disney agreed to go with Blu-Ray. Fox belongs to both standards groups, but has not committed to either format.

So at this point, it is not possible to predict the winner. Some think that non-movie applications, such as games or pornography, will determine the winner. In any case, consumers will be warned to wait before buying a high definition DVD system until the format war is over. And until then, most people will be happy with EDTV.

Obesity

America has gotten really fat. We have developed a lifestyle wound around automobiles, televisions, and lots of fast food. The country is beginning to come to the understanding that our way of life is unhealthy and that we must change. It is similar to the country's recognition that tobacco is unhealthy, which led to no smoking areas, and then the banning of smoking in restaurants, airliners, and workplaces. Soon, it will become a national priority to get thin and healthy again.

A surprisingly popular series on NBC last year was The Biggest Loser. It was an imitation of Survivor, set in a fat farm instead of a tropical island. It was an elimination game in which large cash prizes were awarded to the players who lost the most weight. Millions of people tuned in to watch 12 people exercise and diet.

As we get more active, there will be less time for television watching. This will be bad news for the Networks and Studios as viewership continues to shrink. It is not necessarily a bad thing for the makers of TV sets if they can persuade consumers that Quality Viewing is better than Quantity Viewing. Television must find a new role as a small part of a healthy, active lifestyle. Television must distance itself from the unhealthy, sedentary lifestyle it helped create.

I think there will be opportunities for new products. Here are two examples:

The Digital Transition [2004 - 2005]