Article from tomorrow's New York Times Sunday Magazine on TiVo, ReplayTV, and how the current tv marketing model is being gutted. Indirectly relevant to Gemstar, I think, although no mention of the company or of EPGs. Two parts cause it wouldn't fit in one post.
tekboy@aheadofthecurve.pov
Boom Box
The new technology from Tivo and replay provides the ultimate in television convenience. It will also spy on you, destroy prime time and shatter the power of the mass market.
By MICHAEL LEWIS
It is interesting how new technology arrives. On the one hand, there is something arbitrary about invention; on the other, every society seems to get the technology it deserves. Take ours, for example. The current phase of American capitalism began on Nov. 9, 1989, with the formal collapse of socialism. Suddenly, there was no need to flavor the free market with a dash of something else. The little pockets of socialism that had been tolerated when socialism posed a threat now, overnight, seemed horribly retrograde. Why have your capitalism diluted when you can have it straight? Since then, as if by some marvelous coincidence, a lot of new technology has arrived to enhance market forces. The Internet is one such technology. It creates new markets and new competition in old markets and helps to put a better price on everything. In a few short years, it has pretty much gutted the principles of corporate socialism -- jobs for life, employee and customer loyalty, all for one and one for all -- and replaced them with Lord knows what.
On any time line that describes this phase of American capitalism, you would have to include (in addition to Nov. 9, 1989) April 4, 1994 (birthday of Netscape), Nov. 10, 1994 (birthday of Amazon.com), May 5, 1996 (birthday of eBay) -- and Aug. 4, 1997. Aug. 4, 1997, was the beginning of the end of another socialistic force in American life: the mass market. Forty years from now when you have your grandson on your knee and he asks you, "Grandma, how did 50 million Americans ever let themselves be talked into buying the same mouthwash?" you will say, "Well, you have to know how things were before Aug. 4, 1997."
That was the day a pair of Silicon Valley engineers named Jim Barton and Mike Ramsay started their own technology company. They had no idea what that company might do. It didn't matter: all over Silicon Valley engineers were founding companies before they had any idea of what their companies might do; the urge to innovate preceded the innovation. The Internet had created a climate of entrepreneurship. It was assumed that even ordinarily smart engineers with the desire to create something new could do so with impunity, and Barton and Ramsay were more than ordinarily smart. They were so smart that a pair of venture capital firms -- New Enterprise Associates and Institutional Venture Partners -- advanced them several million dollars to get them started, few questions asked. "Three million dollars was pocket change," Ramsay explains.
Barton and Ramsay's first idea was to turn the American home into a network. Computer people have long imagined that the ordinary American home one day would be fully networked, leaving everyone else to wonder exactly what that means. Will the refrigerator order fresh milk directly from the grocery store? Will the furnace and the fish feeder and the vacuum cleaner respond to commands from the office desktop? Anything is possible. That was the good part about home networking as a business idea: the Internet had made it feasible. The bad part about the idea was that it was hard to see the point of it. Oh, it was easy enough to get worked up about it with a fellow geek, but Ramsay and Barton discovered they couldn't explain their dream to anyone else. Ramsay puts it this way: "When you build a company around a technology and someone says, 'Tell me again what this thing does?' you need to be able to say, 'It does this.' We found that we couldn't say what home networking did."
And so, after a few months, they abandoned home networking. They went back to their venture capitalists and told them that home networking was a bad idea because they couldn't explain it to anyone but other geeks. They had another idea, though. Instead of transforming the entire American home, they decided to focus on the one appliance that was the closest thing to the center of attention in the American home: the television.
Barton had become obsessed with the television a few years earlier, when he worked at what was then the hottest computer company in Silicon Valley, Silicon Graphics. In the early 1990's, Time Warner, AT&T, Microsoft, Silicon Graphics and other big technology and media companies fell in love with the same idea: that they could change the way Americans watched television. A new device -- variously known as the telecomputer, interactive television or the black box -- could be plonked down on top of the American television to offer the viewer an entirely new experience, one in which he would be able to e-mail, shop and access a virtual library of movies from his couch. There ensued a mad scramble, and Barton was a part of it. He helped to build the only interactive television that actually worked, installed in late 1994 by Time Warner in 4,000 homes in Orlando, Fla., and then watched in dismay as his beloved project was overrun by the Internet. The Internet did a fraction of what the new TV's promised, but at a fraction of the price.
Of the few people who dwelled on the way the Internet had swamped interactive television, Barton may have dwelled on it the most. Like a lot of really smart engineers, Barton has the air of a man used to figuring things out. Ask him a question, and a little smile and just a hint of self-satisfaction flickers beneath his light brown mustache and reminds you, gently, that he knows a lot more than the answer. But the TV gnawed at him precisely because he didn't have the answer. He had sunk the better part of three years into building Silicon Graphics' interactive television, and it had been a commercial disaster. The box worked. And yet no one cared. There were several lessons in this:
No. 1: Brilliant gadgets for a mass market do not go anywhere if the masses cannot afford them.
No. 2: A big company is not necessarily the best place to create a revolutionary technology.
No. 3: The whims of the American consumer are the eighth wonder of the world. They can wreak havoc with the most powerful establishments.
When Barton and Ramsay returned to the television, they had in mind another black box, at once more and less ambitious than the interactive television. They called it a personal television receiver, but never mind about that. It was a black box. The main thing about the black box was that it had a memory. It could record any program as it was watched, as well as anything its owner instructed it to record. This is, of course, what VCR's were designed to do but didn't, since no American, not even a geek, could figure out how to make them work. The new box would be simple to program. It was a VCR that did what it was supposed to do, even if you were a moron. But it was far more versatile than that. The viewer could record a great many hours of programming. Or he could simply tell the box to go out and find him the kind of programs he liked. If he liked indiscreet women, he could record and store every episode of "Sex and the City." If he liked intelligent blood and guts, he didn't need to wait until TNT's Clint Eastwood week -- he could just instruct his black box to fetch Clint Eastwood movies as they played. Once the box was up and running, the viewer's only constraint on choice was that the program had to be broadcast by someone, sometime.
The black box also enabled the viewer to treat all television -- even live television -- as television he had recorded for his own private use. All he would need to do is start watching a program a few minutes after it began. Then, by pressing a button, he could skip the credits, the huddles, the timeouts, the weather, the endless clicking of the "60 Minutes" stopwatch and all the other boring stretches of television designed by producers to lull the viewers into watching ads. He could also skip the ads.
Over time, the viewer would create, in essence, his own private television channel, stored on a hard drive in the black box, tailored with great precision to his interests. His ability to do this would depend on the amount of computer memory in this box. At the start, Barton reckoned, a black box that cost $1,499 would be able to store about 28 hours of programming; one that cost $699 would be good for six hours. But with the price of computer memory falling by half every 18 months, the price of the box would plummet: in less than a decade, a black box costing no more than $100 would be able to store the equivalent of an entire Blockbuster Video outlet.
There was one other cool thing that the black box did -- though Barton didn't dwell on it much at first. While the viewer watched the television, the box would watch the viewer. It would record the owner's viewing habits in a way that TV viewing habits had never been recorded. The viewer's every decision would be stored in a kind of private museum of whims. Over time, the box would come to know what the viewer liked maybe even better than the viewer himself. All by itself, it would go and record shows that it calculated the viewer might like to watch. The box was more than a box, it was a butler, and the more it learned about its master's whims, the more it would be able to fetch what its master wanted.
The box had certain advantages over every other attempt to transform the television -- and there had been many. One was its phenomenal simplicity. Unlike, say, the VCR, it required almost no technical aptitude. The black box would turn the television into a computer but without making any computerlike demands on the viewer: all the consumer would see was a slightly busier remote control. Another advantage was price. A revised final advantage was that you could explain it all to an ordinary human being. When someone asked Barton or Ramsay, "Tell me again what this gadget does?" they now had a simple answer: "It lets you watch anything you want to watch when you want to watch it."
Ramsay and Barton decided that in spite of appearances, TiVo, which is what they decided to call their new company, was not a maker of black boxes but a service for people who owned black boxes. TiVo would help each and every American to create his own private television channel. Of course, in the beginning, they would need to build the black box and sell it to the masses. But the black box was not where the money was -- the box was, in fact, a big money loser. To kick-start the market, Ramsay, 50, now C.E.O., and Barton, 42, the chief technology officer, would need to pay some consumer electronics company like Sony or Philips to manufacture the black boxes and to sell them below cost. The trick was to get as many black boxes into the American home as possible. Once the new boxes were proved to delight their audience, TiVo would then offer its services to the masses: the company's programming software would be in millions of new homes either in tandem with existing cable boxes or, in the future, embedded in new TV sets, cable boxes or satellite receivers made by companies like Sony or Philips. Thus, the long-term goal of the black box was to become unnecessary. "We'll know we've succeeded when the TiVo box vanishes," Barton says.
The ambition of the thing was breathtaking. The company intended to plop itself down between the 102 million homes with televisions and the $50 billion TV industry. Once the box was in place, TiVo would be the hub of the television industry. The company would come to know the subtle preferences of each and every television viewer. It would then be able to charge a fee to anyone who wanted to locate TV viewers or groups of viewers: networks, cable companies, advertisers. The trick was to get the box into those 102 million homes -- and that would cost money. Lots. Ramsay went back to the venture capitalists and told them that he and Barton needed to lose between $300 million and $400 million before they became profitable. Prior to the Internet boom, the capitalists were chary about sinking one-tenth of that sum into a small, risky venture; now they didn't think twice. "Instead of saying, 'No,"' says Ramsay, "they said, 'Great."'
What made the enthusiasm of TiVo's financial backers even more astonishing was that a rival company had already sprung up. Anthony Wood, a young entrepreneur, stumbled on the same idea as Barton and Ramsay at roughly the same time. Wood, who made a lot of money in computer games, had been frustrated by his inability to persuade his VCR to record episodes of his favorite show, "Star Trek." He saw the same big trends that had lighted a fire under Barton and Ramsay: the falling price of computer memory, the TV viewer's desire for choice, the continued inability of Americans to program their VCR's. In early 1998, not long after Barton and Ramsay got their first financing, Wood generously agreed to accept $8 million from the venture capitalists Kleiner Perkins Caufield & Byers and Paul Allen's Vulcan Ventures. He called his new company Replay Networks.
Another mad scramble to transform the television was under way, but this time it was more attuned to the spirit of the marketplace -- the approach came from the bottom up rather than from the top down. "This is the Trojan horse for the computer industry to gain control of the entertainment industry," says Marc Andreessen, a Netscape co-founder who invested his own money in Replay. "It is the first box built by Silicon Valley that is compelling enough that people want to hook it up to their TV sets."
The new companies were proposing to do politely to the television industry what Napster was about to do to the music industry: help consumers to help themselves to entertainment without "paying" the networks and advertisers. Naturally, this disturbed the television networks and advertisers. This winter, Stacy Jolna, TiVo's liaison with the networks, appeared on a panel before the National Association of Broadcasters. Jon Mandel, an ad executive with MediaCom, was also on the panel. "He started by calling me and everyone involved with this technology 'the devil incarnate,"' Jolna says. "And he went on from there. The basic attitude of TV executives was that we were somehow going to destroy a $50 billion business model."
By March 1999, the first TiVo and Replay boxes had already shipped. By the beginning of this summer, several hundred thousand more boxes had been rolled out. A Replay box with 30 hours of storage cost $499. A TiVo box with 30 hours of storage cost $399 -- but then the company generally charges a subscription fee of $9.95 a month. Until this June, the companies had sold about 100,000 boxes between them, and they had done so largely without advertising their products. Several market analysts estimate that TiVo and Replay will have sold five to seven million boxes by the end of 2002 -- and that within a decade they will be in 90 million U.S. homes. But that's just guessing. No one knows how quickly the companies can arm the entire American population, or even if they will do so. The black box is not, like the VCR, a winner-take-all market. There is room for a lot of different companies to sell the same seditious technology and to coexist happily with one another. They're seizing control of a $50 billion industry from its creators; there's more than enough booty to go around.
"The one question our investors did ask us," Ramsay says, "is 'How long will it take for the TV networks to hate you so much that they shut you down?"'
alk to enough people at TiVo and Replay and pester enough people at the networks and the big advertising firms, and you come to realize that they have two stories to tell: an official story and a true story. The official story is believed by practically no one, not even journalists. It's pure ritual, made necessary by the desire of everyone concerned not to dwell on the violence about to occur in a huge industry. The official story is that these new black boxes won't destroy the television industry as we know it; they'll merely enable its current rulers to make it an even better place.
Right from the start, TiVo set out to persuade the networks of this pleasant notion in the hope of avoiding lawsuits. To do this, they had to play down a lot of what made their box desirable to a consumer. Instead of a button that enables the viewer explicitly to skip commercials, for instance, Barton designed one fast-forward button with three speeds, which might be called fast forward, faster forward and faster-faster forward. The TiVo user is able to speed through the commercials but not skip them entirely: the ad still makes some sort of blurry impression on the viewer. "Network psychology is to have a line in the sand mentality," says Ramsay. "If you're on one side of the line, you're their friend. If you're on the other side of the line, you're their enemy. Advertising the ability to skip commercials is on the other side of the line. We designed the technology so that it doesn't infuriate the networks."
Eighty-eight percent -- 88 percent! -- of the advertisements in the TV programs seen by viewers on their black boxes went unwatched. If no one watches commercials, then there is no commercial television.
(cont.) |
