Tuesday, May 10, 2011

How to value Skype (hint: it's not worth $8.5bn)

Maybe it's because I've been looking at Greece's sovereign debt nightmare so much in the past few days that the $8.5 billion that Microsoft agreed to pay for Skype didn't seem like such a big number at first, but it is. Not only is it 32 times EBITDA for a company that has yet to make a profit, it's more than three times the $2.75 billion that it was valued when eBay sold the majority of its shares in 2009 to a group of private investors who are currently laughing all the way to the bank. Remember that eBay had paid $3.1 billion to buy Skype from its founders in 2005. Ouch.

So what happened in the last two years to take Skype from a $2.75 billion valuation to a $8.5 billion valuation? OK, Skype has 145 million active users but most of these people don't actually pay for anything nor do they view any ads. On the other hand, they don't cost much either. Comparisons with Facebook and its half-a-billion-plus users are tempting but Facebook needs some really beefy server infrastructure to serve up its rich interconnected data set. Skype calls need none of this; Skype just gets you and the person you're calling together, after which you just communicate with each other and provide little to no additional load on Skype's infrastructure.

Then there's the 10 million paying customers who pay Skype to make calls from their client to traditional phone numbers or to rent a phone number that is reachable from those traditional phone numbers. This looks like a business model at first, but there are huge problems with this approach: First, it puts Skype in direct competition with both traditional telcos and cheap VoIP calling-card peddlers that are scrambling to offer and market the cheapest calls per minute to anyone who's interested. Second, it rather awkwardly diminishes its revenue stream as Skype's user base grows. The more people who are on Skype, the fewer calls they will make to traditional phones and the less they will pay. Granted, this is a very long-term thinking, but if you're paying eight and a half billion dollars you'd better be thinking long-term.

The fact that we can't make free calls to anyone anywhere from any device connected to a network these days (free as long as you've paid for the network, of course, but that's usually a flat monthly fee) is down to some technological inertia but mostly due to the way telecoms companies are protecting their current business model by charging termination fees to anyone who wants to call their users. If your phone company decided to offer all its users unlimited calling for a flat monthly fee, every time they called a number in a different network that network would demand payment by the minute which could be just about anything. It's a perfectly viable business model for the industry, but nobody wants to move first, so we're still stuck paying something like 50 cents for a 140-byte text message between two phones in different countries when a 5,000,000-byte email with photos, sent between those same two phones, is free. The problem with Skype in this brave new world that is going to roll around sooner or later is that Skype already uses other people's networks for its calls. When you Skype your friends the call goes over your ISP's network. If the phone service is free then Skype adds no value.

The reason we don't have a good, open, standard way to do voice, text messaging and video chat over the Internet is because everyone's trying to own this somehow. In the long run it's as futile as trying to own e-mail. E-mail wouldn't be e-mail if one company owned the service, or the client software, or the network infrastructure. Similarly, VoIP and IM won't be ubiquitous unless they're open services. Microsoft has lost that game once already with Hotmail versus G-Mail: Even if you manage to have such a huge user base that you're the de facto owner of VoIP, someone's just going to offer a better, cheaper alternative because the barriers to entry are so low.

In the end, Microsoft is buying 145 million active accounts: People who have a username, a password, a public Skype address and use them regularly. Can they turn them into Live accounts and merge them their other online services? Probably, though many of these people will already have Live accounts and many more won't bother. Can they convince them to turn into profitable paying users or advertising eyeballs? Probably that too.

Will this stop tomorrow's unspecified free-or-thereabouts, open, commoditised VoIP behemoth? Not a chance in hell.

And in the end, what's $8.5 billion divided by 145 million?

$58.62 per user.

And that, dear readers, is over the odds.

Wednesday, November 17, 2010

All your base are belong to Zuck

So Facebook announced that it's launching a new messaging platform that will combine e-mail, IM and social network messaging. Where have I heard this before?

Damn, I loved Google Wave. Well, maybe not; I loved what Wave could have become. The potential Wave. The Wave That Could Have Been. The platonic ideal of Wave. I did not for a second have any love for the buggy, poorly-designed pile of dog poo that Google released to the masses to universal cries of "Huh?"

Last year I wrote a quick wish list for a Wave-like replacement for e-mail and IM. The things I longed for:
  1. It has to seamlessly support multiple public identities
  2. It has to support conversations in a native way
  3. Users should be able to slip into and out of live chat seamlessly, without advertising their presence
  4. It should require encryption and cryptographic signing
The wave federation protocol had some amazing stuff to handle wish #1, but all of it was missing in the Wave web client that Google released. You got one address and that was it. It did #2, and did it very well. As for seamlessly switching between a messaging and chat paradigm, Wave did it this too but you still got annoying privacy-invading "who's online" crap. Finally, cryptography was added late in the game to the Wave protocol, and since the Google service was the only implementation, it was a bit of a moot point.

In hindsight, I'd like to add:
  1. It should integrate with existing protocols.
  2. It should be relatively easy to implement, especially on mobile devices.
These were by far Wave's biggest failings. There's no point in making an e-mail replacement if you can't use it to e-mail anybody. And Google's insistence on the anti-feature of character-by-character updates (which put off most users who actually quite enjoy the ability to review what they just typed before casting it off into the void) and complex extensions not only made implementation horrendously complicated - in most cases, especially on mobile devices, impossible.

Imagine a Google Wave that could send and receive e-mails and IMs, manage multiple identities and got rid of the character-by-character updates. Never mind extensions that add interactive maps or games or bots that check your spelling and all the other geekery that was being worked on - you shouldn't be doing any of that until you tackle the basics. And you can't do any of it unless you encourage an ecosystem of clients and servers that just couldn't flourish when it had to support a complex JavaScript engine just to show what to most people was a simple message. I'd buy that for a dollar.

So Wave died and was hardly mourned by anyone who used it, and now Facebook has come to fill the void.

How does the new Facebook Messaging compare with my wishlist?

It miserably fails #1, multiple identities. With Facebook, you only have one identity which is almost always labelled with your real name. It seems to be able to manage #2, native conversations and #3, the message/chat duality - the extent of this remains to be seen. #4, strong crypto, is nowhere to be found. It does hit #5, legacy protocol support, pretty sweetly, but #6 doesn't even apply - the only ones who can implement this are Facebook themselves.

Of course, not all items on this wish list are meant to be necessary ingredients for success. But I can't see anyone who doesn't already use Facebook messaging extensively being tempted to use this platform for anything. All it will do is allow these people to almost completely drop traditional e-mail and just use their new Facebook e-mail address instead. For anyone who is not already an Facebook user, I just can't see the appeal - you'll have to get inundated in all the Facebook stuff that refuseniks actively despise, and despite the half-billion with a Facebook profile (most of them never log in anyway) there's a hell of a lot more people without one.

In any case, no technology has ever become established without the ability to use it as a platform. Aside from their half-hearted attempts at a federated identity service and the two or three apps that actually were successful (Farmville, Farmville and another one that begins with "Farm" and ends with "Ville") instead of just devaluing their brand by messing up the clean design that prevented them from being yet another MySpace clone, Facebook doesn't really want to open up to an ecosystem of developers and partners, or at least hasn't figured out how to yet.

One of the more successful aspects of Facebook as a social network is its ability to encourage people to use their real identities on their profiles. Sure, some people use a nickname or abbreviate their last name to an initial but for the most part you're not pretending to be someone else on Facebook. Granted, almost everybody's pretending they're a prettier, sexier, more interesting, sociable and fun version of themselves, but they're still themselves. Very few cases actually invent a completely distinct persona.

While this works wonders for a social network that aims to mirror real life social connections to as close a degree as possible, it will fail as a communication medium where anonymity and especially multiple personas (friend-me, family-me, work-me, professional-me) are part and parcel of how we communicate with others.

So, once again, ignore all this talk of Facebook Messaging being a GMail killer. It'll just allow a small subset of Facebook-obsessed teens (a dying breed as most people learn to see Facebook for what it is and nothing more) to stop logging on to their e-mail accounts since their grandparents can now just email them at their @facebook.com address. Let's not get carried away here.

The next e-mail and IM killer app is still coming. It has to come. It wasn't Wave, and it's not going to be Facebook either. Don't you just love the suspense?

Thursday, February 11, 2010

A wave of buzzing: Has Google finally lost the plot?

The phrase "Google is the new Microsoft" has been bandied about by the tech media so much lately that it has become a cliché in its own right. With the latest addition to their stable of online services, Google Buzz, it seems to me to be increasingly true.

Now, before I explain why, I'd like to ask my readers a question: What is Google's primary business? If you're like 90% of the people out there, you immediately answered "Oooh, I know this one! It's the search engine!" You probably have a smug, satisfied look on your face too.

Of course, you'd be completely wrong.

Google is an advertising broker. Advertising revenue remains its biggest and only significant revenue stream. I'm not just talking about the ads that appear on their sites, I'm talking about AdWords and AdSense.

In case you haven't heard of these before (don't worry, most people haven't), Google AdSense is a service that allows website owners (and increasingly, mobile application providers, video distributors, and in fact anybody who offers any kind of content in which ads can appear) to let Google manage the ads that appear next to their content. Its sister service, AdWords, allows anyone who wants to advertise to get their ads on AdSense.

People pay to display their ads via AdWords and Google pays people to display those ads via AdSense. Minus the vig, of course. This is how Google makes money. About 57% of the ads on the Internet, at the latest count, are provided by AdSense.

That's Google's primary business. For all intents and purposes, it's Google's only business. Google, as a company, has one simple strategy to maximise revenue:

1. Get as many ads as possible bought through AdWords
2. Get as many ads as possible displayed through AdSense (including on its own sites)
3. Increase the perceived relevance of the ads displayed so that more people click on them.

Point 3 is important, and it's what Google is really good at. The more relevant the ads, the more likely people are to click on them. The more they click on them, the more advertisers pay for AdWords. The more people pay for AdWords, the more people get paid for AdSense, and so on. Yes, you may never click on 99.9% of the ads you see on the Internet, but if Google manages to get that down to 99.8% it just doubled its revenue, and since it also increased ad revenue for its AdSense partners, it's likely to get more of them, and hence more people advertising via AdWords, and hence even more revenue.

How does it do that, and why does it offer all these services like Google Search, GMail and YouTube for free? The answer to both questions is the same.

Because of these services, Google knows what you search for. It knows what's in your email. It knows what you chat about. It knows what you watch on YouTube. It definitely knows what ads you've clicked on in the past. It's got a veritable army of very, very smart and very, very well paid people working night and day to find ways to translate that information into increased click-through rates for ads, and another army of equally smart and well-paid people coming up with new services that it gives you for free in exchange for more information that it can use to target ads to you.

Most people positively freak out when they realise this, because they think there's this guy in an office in Mountain View, CA that goes to work every morning and pulls up people's personal information. "Ah, Joe Bloggs of Liverpool in the UK was searching for DIY plumbing instructions yesterday, and here he is emailing his father about a leaky tap. Perhaps this ad from Merseyside Plumbing would appeal to him."

Fortunately, there's nothing of the sort going on. There's so much information in Google's servers that getting an actual person to look at it would cost way, way, way more than any money they'd ever make from ads. It's also important to realise that this information isn't as clean and tidy as you imagine. Most of the time, it's not personally identifiable. They don't really care what you're called, except in the context that people named Joe are more likely to buy Brand X, if that's even the case. They don't really care that there's a record of you from the time you spent browsing from your mother's PC mixed up with her data and missing from yours; Google plays the numbers game, trying to get that 99.8% to 99.79%. The data is noisy, it's disjointed, it's incomplete, and most importantly there's so much of it that the only way to process it is to use the type of large, distributed computer systems that Google is so good at designing. There's no clear cause and effect here, and no direct human intervention.

People who search for term A aren't necessarily going to click on an ad for product B, but as long as they're slightly more likely to, it's good enough for Google to feed into their algorithms. The type of information you really consider private and personal - your name, your address, your bank account number - is actually a lot less valuable to Google than how many times you mentioned the word "iPhone" in your emails, blog posts and tweets in the past six months.

So, Google is an advertising broker, and everything else it does - purportedly out of the goodness and generosity of its own heart - serves to increase its ad revenue. With this established, let's go back to the whole "Google is the new Microsoft" thing.

If you know anything about the IT world, you can immediately see the similarity. Windows and Office are to Microsoft what AdWords and AdSense are to Google. Just like Google loses money on YouTube so it can make more on AdWords, Microsoft loses money on Internet Explorer or SQL Server so it can make more on Windows.

They're not the only ones either. Every major IT behemoth has a similar business model: Build a solid revenue stream out of a monopoly and then spend gazillions on R&D to give away free stuff that loses you money but makes people more likely to spend even more money on your main business. With Google it's ads. With Microsoft it's operating systems and office suites. With Apple it's shiny gadgets - from iPods to Mac Pros. With IBM it used to be (and to a certain extent still is) mainframes.

The problem with this approach is that it makes these companies rather single-minded. Everything that might affect their primary business model is a threat that must be eliminated. Like Microsoft before it, Google has been on an acquisition rampage for years. Any company that comes up with something that competes with any part of Google's advertising business - or any service that drives the data collection that makes the ad business profitable - is either bought up, has its top employees poached, or, if all else fails, finds itself competing with a free service from Google that benefits from an R&D budget ten times its turnover. Look out - you just got Netscaped.

Mind you, when I say that's a problem, I don't mean it's a problem for Google, just like Microsoft's utter dominance of the IT industry in the 90s wasn't a problem for them either. But like Microsoft, if you build this huge organisation with an excess of cash hell-bent on maintaining your primary revenue stream by launching loss leaders in any field that's even remotely related to it, cracks will start to appear. There's a certain amount of organisational schizophrenia kicking in because the people making all the cool stuff you lose money on either don't realise they're only doing it to secure your main revenue stream or would rather not think about it - and in the end, most of them would rather work for a company that wants their project to be a commercial success, not just a way to put competitors out of business.

Add in the fact that you'll often pour large amounts of time and money into initiatives that you think will drive more money to your revenue stream, or prevent money from flowing away from it, but actually do nothing of the sort, and you get into the kind of mess Microsoft has been in for the last decade or so. Massively delayed projects (Vista, anyone?) entire loss-making divisions of questionable value (XBox, anyone?), product initiatives that turn into complete failures (Zune, anyone?) and a high staff turnover mean that sooner or later, you start bleeding serious amounts of cash. Yes, Microsoft is still profitable and dominant, but nowhere near where it used to be. Take a look at MSFT's stock price for the last ten years and you'll see that overall, it's been pretty flat.

It happened to IBM in the nineties, it happened to Microsoft in the naughties, is it Google's turn in whatever we're calling the coming decade? There are signs. Google has branched out to just about everything. Smartphones. Operating systems. A full-blown DNS service. And now this Google Buzz thing. On its surface, it makes sense: Google wants the data that now sits on Facebook and Twitter's servers to drive its ad matching algorithms. And yet, just a few months ago it was all about Google Wave, which seemed to be more or less the same thing. Who made Buzz? Did they talk to the Wave people? How come Buzz integrates with email, Facebook and Twitter while we're still waiting for proper Wave extensions that do the same?

As for Chrome OS, I've already covered it in a previous post. The whole Andriod / Nexus One thing? Partner up with Motorola and their ilk to compete with the iPhone, and then release your own (sort of - the hardware is built and designed by HTC) competing phone that keeps the more advanced features for itself?

For most people, the fear is that Google is going to turn evil and abuse the vast amounts of data they have on everyone. I find that scenario highly unlikely. What I'm increasingly worried about is how Google has lost its focus and is beginning to thrash around the IT industry with questionable initiatives - albeit ones that are backed by billions of dollars of cash and aimed squarely at anyone who threatens their dominance of the online advertising business.

Just like Microsoft. And just like Microsoft killed innovation in the 90s and fought the tide of the Internet revolution, I'm afraid Google is doing the same, and fighting the revolution that's about to happen in the coming decade: That of people paying real money for content and services online. Just like Microsoft knew that if everyone did all their computing in a browser they wouldn't need to buy Windows any more, Google knows that if people can sell their content and services online they won't need to buy ads from them any more. Both were right, but both were also wrong. People still need Windows. People will still need ads. But when corporate schizophrenia is coupled with corporate paranoia, bad things happen - and the prognosis for Google is not at all good.

Friday, January 29, 2010

iPad Launch: It's the business model, stupid!

In 2001, when Steve Jobs went up on stage to introduce the original iPod, he left his audience struggling to see the point. The iPod wasn't the first personal music player on the market. It wasn't the smallest, or the lightest, or the one with the biggest storage capacity. It only worked with Macs. Almost everyone thought it was doomed to failure.

When Jobs took the stage again on Wednesday, before performing an equally unconvincing presentation of Apple's new iPad, he dropped an interesting little factoid on the audience: Since that underwhelming launch in 2001, Apple has sold 250,000,000 iPods. By now, the music industry is wondering how Apple is making more money out of music than they are - it's hard to find good numbers, but worldwide music sales in 2008, online and off, were about $10 billion. Going on its latest quarterly figures, announced just a day before the iPad, Apple is a $60 billion/year company, and at least a quarter of that can be linked to music.

Compared to some of Apple's more phantasmagorical product launches - especially the original iPhone launch - it was a bit of a snooze. Barely five minutes into it, everyone was trying to understand why we were watching Jobs browse through the New York Times and National Geographic websites - this was nothing new, nothing unexpected - but it was fast-paced action compared to watching Phil Schiller edit a spreadsheet on the iPad. Much like the iPod launch all those years ago, somebody forgot to bring the wow. It's a big iPod Touch. So what? The iPad has that distinct feeling (so uncharacteristic of Apple products in the Jobs 2.0 era) of being a solution in search of a problem.

As did the iPod all those years ago.

Much like the iPod, the significance of the iPad is not immediately apparent. Much like the iPod, it's not first to market, nor does it offer any single feature we haven't seen before. Much like the iPod, there will be a bunch of knock-offs within a few months that will beat it on price and headline features. The device itself is not the issue. The issue - and it's a huge issue - is how content is going to be distributed, consumed and most importantly how it's going to be paid for in the years to come. To paraphrase Bill Clinton, it's the business model, stupid!

Now, I don't think Apple will sell a quarter of a billion iPads any time soon, if ever. In fact, I predict rather lukewarm sales figures for the first year. It'll take a while for a few of the more glaring limitations - such as running third-party apps in the background - to be fixed with a software update, and I'm pretty confident the second generation of the device will add things like a built-in camera, microphone and speakers [Update: thanks to fufurasu for pointing out that the iPad already has a mic and speakers] to the mix and bring the price down even further. I don't think Apple cares. It'll make good money from the fanboys and the early adopters.

But that's not the point. The point is that Apple has already changed the way we buy and play music with the iPod; but the revolution was slow, it was stuttering, it's far from over, and it's far from perfect. The main reason is that Apple had to strike deals with the music labels to make the iTunes store possible in the first place. For me, the true revolution came with the App Store. Here, Apple was unfettered by the problems of agreeing licensing deals with existing rights holders, and it managed to completely re-invent the way we buy and consume software.

As a software engineer by trade, I cannot stress enough what effect this has had on the industry. The idea that a small group of people, or even an individual, could write a simple but useful piece of software and make money off of it - not by showing annoying ads all over it or partnering with an affiliate program, hoping their users will buy stuff from others of which they get a tiny cut - but real, hard cash from retail sales; this idea was unheard of a couple of years ago. But when the right model appeared, with the right end-to-end experience, on the right device, suddenly this entire ecosystem of small mobile app developers sprung out of nowhere and a profusion of innovative software has suddenly come into existence. Most importantly, this is no bubble. These app vendors aren't the next Twitter, leveraged to the hilt by VC capital in the vain hope that their immense popularity will somehow be translated into profits. These companies are making cold, hard cash and turning real profits from a business model that is entirely sustainable.

Go back and read that again if you missed its immense significance. If you're still missing it, try and follow this reasoning: What if the App Store wasn't confined to the iPhone? What if we could get these apps on larger devices - tablets, laptops, set-top boxes. What if people dropped their $0.99 on apps that could run on all of these? Now, what if Facebook, or Twitter, weren't websites, but apps that sold for $0.99 (I still don't understand why Facebook's iPhone app is free - or crap). Would we still be making a big deal about Facebook being "cashflow positive" (code for "not really profitable, but getting there, honest") or have every tech pundit waxing lyrical about the wonders of Twitter, all the while ignoring that it's a huge black hole into which investor capital disappears, never to be seen again?

The Web is great at getting information out, but the only way people have figured out how to run a business by doing that is advertising. Advertising is OK, but it won't support content that has a high production cost (music; TV shows; movies; scientific research; high-quality journalism; the list goes on) and it just doesn't scale to profitability unless you're Google, or at least Facebook.

If you still don't get it, go back to the presentation and pay particular attention to the New York Times app. All these years and newspapers have been trying to find a way to sell their stuff online, and here it is. An app running on the iPad - all the high-quality content, with all the goodness of the electronic format (search, copying, embedding of video, multiple views, the works) in a form factor that you can actually read on the train to work or on your breakfast table. And the best bit? It's got a revenue model built right in. As Jobs pointed out, Apple has twenty-odd million people with their credit cards on file at the iTunes store, ready and willing to buy music, movies, TV shows, apps - and now books and periodicals too.

The iPad won't take over the world, it's not going to sell anywhere near the numbers that the iPod and the iPhone have, but in the next couple of years we're going to see entire industries wake up to the fact that they now have a way to make money in the digital world. The model will be copied, and it will appear in other platforms, but Apple will have been first, will make a tidy profit and will continue to dominate the high end of the market while Taiwanese and Korean manufacturers fight over the leftovers. And if Jobs and his amazing team are still in charge, in a decade's time he'll be up there presenting the next thing that people just don't get, but ends up changing everything forever.

Monday, January 18, 2010

The Great Firewall of the West

At some point in the past, a network engineer decided to call a system he was working on a "firewall". I'm sure he was a very competent network engineer, but really he should have been in marketing. The term has caught like wildfire, if you'll excuse the horrible pun. There's even a Harrison Ford movie of the same name; in fact these days it's hard to find a popular culture reference to computers that doesn't mention a "firewall" of some sort, usually in completely the wrong context. It's one of those things; people just love saying "firewall". It sounds cool.

Thus the conglomeration of systems that allows the inhabitants of the People's Republic of China to only access those parts of the Internet deemed suitable for them by the Party has been dubbed "The Great Firewall of China". Search for "Tiananmen Square" on images.google.cn and you'll get pictures of happy tourists taking snaps against the beautiful backdrop of the historic square. Search for the same on images.google.com and you'll get the usual lines of tanks running students over during the 1989 student protests; the difference being, if you're actually in China, you can't get to images.google.com, or any of millions of other sites banned for reasons big or small. All you get is the sanitised version.

This state of affairs has caused much consternation in the liberal West by people who like to point their finger at China and tut with disapproval. These people are fond of pointing out that the Internet doesn't work that way; to get the benefit of the Internet you need to allow unrestricted access to information. They also point out that it's a rather futile effort that mostly causes frustration; anyone determined enough (e.g. most American and European expats I know living in China, who want to check their email now and again) can get around the filters rather easily, and anyway the rate at which "objectionable" content appears is much, much higher than the rate at which the government censors can identify and block it. I happen to completely agree with these objections, but come on, this is China, are you really surprised?

The People's Republic has a very different concept of human rights than most developed nations; their censorship of the Internet is merely a side-effect of this. Over here in the West we pride ourselves on being much more liberal. Short of child pornography, you can basically send and receive anything on the Internet without any barriers, legal or technical.

Well, anything that isn't copyrighted. At least, not without the copyright owner's permission, and on the copyright owners terms, however ridiculous they might be. As it so happens, the vast majority of material produced over the last century is copyrighted (repeated extensions of the term length of copyright have ensured this) and the vast majority of the copyright holders don't want it on the Internet. Those that do, however, are doing more harm to the Internet than China ever could.

You see, copyright owners are beginning to wake up to the fact that putting their stuff on the Internet might be a good idea. Of course, other people have woken up to this fact a long, long time ago, but I digress: Sites like Hulu in the U.S.A. and BBC iPlayer in the U.K. allow people to access video content - the same content they see on TV - via the Internet.

Good job, that. I can testify that the iPlayer is a very useful site. Unfortunately, I have no opinion about Hulu, because I can't access it. In fact, whenever I'm outside the UK, I can't access iPlayer either. You see, neither of these sites are available outside the countries they operate in.

This might seem normal to most people who are used to pre-Internet media distribution. Hollywood movies always opened in the U.S. first. When I was a teenage music fan growing up in Athens, I had to take a 90 minute bus ride to the city centre to visit record shops that had a rather pitiful selection of vinyl, so the first time I visited an HMV in London I felt like a kid in a candy store. The reasons are well understood; it costs money to ship vinyl, CDs, books and all the other media all the way out to Greece where the market is tiny. In fact, I'd wager my experience wouldn't have been much different to that of an American living in rural Montana as opposed to one in Manhattan. Economies of scale: The big cities get all the new stuff.

With the Internet, however, this is not the case. By its very design, anyone on the Internet can access anything on the Internet. To actually limit this access - either by geography, as the US and UK do, or by content, as China does - actually requires extra effort. For a website like Hulu to identify which country an incoming Internet connection is coming from is quite a difficult thing to do, and easily spoofed.

I find it hypocritical that the West criticizes China for crippling the Internet by trying (in futility) to enforce their laws with insufficient technical means when the US, the UK and several others are doing exactly the same; or perhaps, exactly the opposite; ironically, mirroring their respective political views, the West is on a futile quest to keep content in while China is on futile quest to keep content out. In either case, the same criticism applies: "You're missing the point, people!"

Why can't I get Hulu here in the UK? Why can't I get iPlayer when I'm in Greece? Why can the farmer in rural Montana now download any music he wants via iTunes or Amazon MP3, but the farmer in rural Patagonia can't? Why does the iTunes store have a different selection of content depending on which country you're in?

Does this make sense, even from a business point of view? There's no point in doing a cost-benefit analysis here. As I mentioned before, it actually costs more to limit access than it does to allow it. If some guy in Trinidad & Tobago fancies spending $0.99 on an iTunes track, is his money not as good as anyone else's? Wouldn't this actually allow the copyright holders to make more money?

The real reason for this is, of course, that copyright holders are very closely tied to their existing, pre-Internet distributors. Cable channels, radio stations, record stores, they're all so closely intertwined that the copyright holders dare not compete with them. Hence every effort to get copyrighted content online has had ridiculous restrictions placed upon it in order to placate the distributors that are (rightly) afraid that they can't compete.

Perhaps this all seems wistful when taking about pop music and sitcoms, but digital bookstores have similar restrictions; the value of the BBC's video news and reporting cannot be underestimated for so many people with no access to any news source of a similar standard. The fact is that the Internet has the potential - already being realised in so many places - to level the playing field and allow people in far-flung or impoverished parts of the world to access the same information - if not the same goods and services - as those in the richest, most cosmopolitan corners of this planet. Placing geographical restrictions on content solely to appease distributors is not just bad business - it's just bad.

Update: Google has announced that, after detecting a concerted attack against its infrastructure apparently by the Chinese government in order to spy on human rights activists in China and abroad, it will start negotiations with the aim of either offering fully uncensored Internet search or pulling back from China. Good for them. If only iTunes and Amazon MP3 could stand up to the Big Content lobby as easily as Google is standing up to the Chinese government. I mean, come on, they don't even have nuclear weapons.

Thursday, December 3, 2009

Say goodbye to your privacy - and perhaps good riddance?

The Greek media is awash with news of an appointee of the newly elected government that was fired only a week after his appointment due to posts he made on Facebook on election night criticizing the party. People are wondering - is it fair and just to fire someone for expressing a personal opinion on a public, but restricted, social networking site when he is otherwise perfectly qualified for the job?

This is far from being a Greek phenomenon. Stories abound of people getting fired or refused work due to Facebook updates or blog posts. Even 5 years ago, most people never published anything. These days everybody's a prolific published author of one sort or another. Photos, status updates, tweets, blog posts, comments - most of us provide a constant stream of information to the world at large.

George Orwell got it wrong. When he saw television he thought, what if you could transmit as easily as you could receive? But his thinking was still trapped in the centralised model of old media. The Internet does allow anyone to be published, but it doesn't go via any central choke point - in fact, it's exactly because it doesn't suffer from centralised control that it allows this. Orwell saw a totalitarian regime forcing people to share their private lives with a central authority - ironically, today regimes are scrambling to find ways to stop people from sharing their stuff, and finding it increasingly difficult, even impossible to do so.

Remember, this technology is still in its infancy. It's not going to be long before we have the storage capacity and network bandwidth to record - and transmit - full, 3D, high-definition video and audio of every moment of our lives. Will we have a choice? Probably. But which choice will we make? In the end, nobody took our privacy away, we gave it away willingly because we yearn to communicate and share.

Sceptical? 10 years ago I still knew a lot of people who swore they'd never get a mobile phone. Just look at them now.

Our kids will probably not even understand the concept of privacy, and the irony is that it won't be Big Brother that will take it from them by force, it will be themselves that give it up. Us old codgers will whine and express outrage at what we perceive as the loss of our God-given privacy, but I doubt a generation raised in a world of ubiquitous networking will even know what the hell we're talking about. The question is not if, but how this will change our society.

The pessimist view is not hard to come by, nor is it hard to understand. We're all obsessed with our public image, and the more public our lives are - politicians, athletes, entertainers, what have you - the more we try to hide behind a veneer of respectability.

And yet... maybe I'm just a glass-half-full kind of guy, and believe me when I say I share most people's fear of living my life on public record as much as the next guy, but maybe it's not such a bad thing after all. Maybe, just maybe, putting yourself out there will help people understand you more, and help you understand - and accept - others more. We pride ourselves in living in a society where someone can be openly gay, openly secular, openly communist, openly critical of the government and just generally open and honest about their preferences, actions, opinions and beliefs, but we're far from being truly tolerant. Yes, you're not going to be thrown in jail for being any of these things, but as we well know you might well lose your job, your friends, and you sure as hell aren't going to hold public office. Why? Because most people are still - for well understood, if not justifiable reasons - afraid of, even hostile to those who don't conform to their idea of normality.

Perhaps the pessimists are right. Perhaps our increasingly public lives will lead to more fear and oppression as we struggle to conform to this idea of normality in a world where we have little to no chance to be ourselves in private. But maybe, just maybe, if we can't be ourselves in private, we'll start being more comfortable being ourselves in public. Maybe when everyone - not just celebrities - lives in the spotlight, we'll learn to stop criticising and poking at every little detail of each other's lives and learn to accept each other for who we truly are.

Privacy? It's a notion on its way out. The question we have to ask ourselves is not how we can stop this - it's what good we can make of it.

Friday, November 20, 2009

An open letter to Kyle McSlarrow

Ars Technica featured an article by Kyle McSlarrow, head of the National Cable & Telecommunications Association, stating the case for Selectable Output Control. Here's my response.

Mr. McSlarrow,

iTunes, Amazon MP3 and many other services are making a brisk trade selling "unprotected" content. People flock to these services even though there are "free", illegal alternatives because of the convenience and high quality of the offering. I still hold that these services are overpriced and that lowering prices would give you increased revenues through more sales, but even today they are popular and profitable.

It's a false claim to say that anyone can "easily" use a BitTorrent tracker to download a new film and watch it. It's a tedious, inefficient, bandwidth-hungry process that would pale in comparison to the experience offered by services like iTunes or Netflix if they were stripped of DRM. I can clog my upstream broadband connection and download dodgy, mislabeled, low-quality, malware-infested files from a P2P site for "free" or I can download high-quality, easy-to-find, instant-play content from a legal source for a reasonable fee. People value their time, and they will pay for saving it, if only you'd allow them to.

In addition to DRM, geographical restrictions to online distribution are just as ridiculous. There are 1.9 billion people on the Internet today, but all your legal services are available to only a tiny fraction of these people for no sensible reason whatsoever. To make things worse, the people in countries without legal download services tend to also be the people without access to good cinemas, cable channels and other means of content distribution - i.e. the most likely to flock to an online service for content they can't get elsewhere.

Here are some undisputed facts:

1. DRM doesn't stop the determined copyright infringer. This is a simple fact of life. From a technical point of view, playing a media file and copying it are one and the same thing. If you can play it, you can copy it. End of story.

2. What DRM does do is inconvenience the casual, paying user. It makes time-shifting, format-shifting, backing up etc. very hard for them.

3. More importantly, it makes the things we haven't thought of yet very hard. People will come up with innovative ways to use your content in the future, just like portable music players were an innovative way to use your CD library. If music CDs had DRM, the PMP would never have taken off. I'm sure the music industry would have loved that, but nobody can claim that it would have been good for the consumer. DRM kills innovation by limiting content to currently existing uses.

You need to offer unprotected content at a reasonable price. The P2P networks can never match you on convenience and quality, their need to evade detection and offer things for zero cost guarantees that, and you can use legal channels to go after the biggest infringers. Some people will not pay to see your movies. That's OK. People buy second-hand DVDs or borrow them from friends, or just go over to their house and watch, all the time, you don't see a cent from that. That's fine, it's all baked into the price of the DVD, and you still turn a profit. Stop worrying about catching every last person that watches your movie without paying full price - that's futile. Concentrate on making it so simple, cheap and flexible for your paying users to get your content that they won't bother.

I don't want to "rent" your movie for 30-days-or-48-hours-after-start. I don't want to "stream" your movie to my browser. I don't want to download a file that won't play on half the hardware I own today and most of the hardware I buy tomorrow. I just want the bloody file with your movie in it.

There is nothing stopping you from doing this. You don't need laws, restrictions or DRM schemes to "enable" you to do this. You can do it today. You're already enabled. So please, just do it.