O'Reilly Digital Media

Jack Valenti recently sent in a rebuttal to Lawrence Lessig’s editorial, “Who’s Holding Back Broadband?. Valenti claims that Hollywood is being made into a scapegoat, while Lessig is making the claim that broadband is being delayed because of the entertaiment industries lack of support for the technology. I took a good look at both editorials, and would like to share a few thoughts on Mr. Valenti’s claims (reader be warned, I’m a strong advocate for widespread broadband deployment and P2P technologies such as Napster)

Mr. Valenti introduces a thought in the first sentence that shows how off the radar the rest of the world is to the entertainment industry with the following statement, “The movie industry is under siege from a small community of professors.” It’s not a small community of professors that is attacking the entertainment industry, it is a large number of people, including professors, web professionals, and businesses. Professors such as Lessig and Edward Felten are our voices, and luckily enough, they’ve spoken loudly enough for you to pay attention.

Valenti also points to a survey that says 68 percent of all home computer users say they’re satisfied with their normal 56k connection. I’m calling shenanigans on this one, and I’d like to see this survey that he’s getting his information from. Nobody likes their 56k connection (56k if they’re lucky, most modems get around 32kbps), that’s one of the reasons for the collapse we saw in 2001; not enough people were interested enough to spend large amounts of time online to buy a dog toy for Sparky. My parents go online once every week to check email. If you gave them another reason to go online, say, to rent a movie online instead of driving 30 minutes to rent a movie, I guarantee they’d want a broadband connection. Chances are they would do more economy boosting things such as online shopping, research their next automobile purchase, etc.

He then starts to play the sad fiddle with the following: “Because making movies is so expensive, only two in 10 films ever retrieve their production and marketing investment from domestic theatrical exhibition. Distributors have to use other venues — delivery systems such as cable, satellite, TV stations, videocassettes, DVDs, international markets.” He of course fails to say how many movies make money after all of these different areas of distribution are added into the domestic release total. Something tells me the percentage of movies that turn a profit is higher than 20%, this is quite a misleading comment.

In Lessig’s editorial, he says the movie industry is holding back the exhibition of movies on the Net because the Net threatens the entertainment industries comfortable way of doing business. Mr. Valenti calls this “palpable nonsense”. He then contradicts himself by saying that the reason films aren’t made available on the net is because “valuable creative works can’t be adequately protected from theft.” What he’s really saying is that the industry hasn’t come up with a way to distribute movies that they feel comfortable with, and right now if we made a movie available online, it would be pirated very easily. He knows that movies are already being sent around the globe very easily, and broadband will only make that much easier. What Hollywood needs to do is create a service that (say it with me) makes it easier to purchase your product than it would be to steal it.

The last big statement he makes is almost laughable. “As for the third charge — that copyrighted movies are destroying digital innovation — what the critics mean by ‘innovation’ is legalizing the breaking of protection codes, without which there is no protection.” Give us some credit Jack, not everybody in the world is trying to innovate some new way to work around your security. If you read Lessig’s editorial, you’d realize that we think of innovation as pushing the envelope of an existing architecture. Lessig uses MP3.com as an example. Lessig also points out that the music industry has sued (and won every case to date) everybody that has stepped up to the plate to challenge their old, comfortable way of doing business, including such innovators as MP3.com. The ability to send much larger packets of data will spur even greater innovation in all fields of study then we saw during the last decade. Until cease and desist letters stop coming out of your offices and you release the killer app (such as television or movie broadcasts online) that is needed for broadband to take off, you are in fact stifling innovation.

Lessig says it better than I ever could hope to: “Copyright laws should of course give artists and creators an adequate return for their creativity; but they should not become a tool for dinosaurs to protect themselves against evolution. Broadband will come when content can roam more freely.” I’ll put this into a movie quote so Jack can understand it…. if you build it, they will come.

Do you think Hollywood is the key cog in holding back broadband technology?

I have been developing a theory of the current economic downturn as it relates to non-internet companies.

.communism is my term for the phenomena of centralized institutional control and distribution of the money resources needed for startups by venture capitalists. Like communism, this made it possible for a while for companies to operate without putting in sufficient exchange for the money they were recieving, and also like communism, it tended to collapse upon itself over time

.communism is a philosphy of operating in the red.

The in-vogue comment about busineses created and operated under this regime is that they “had no business plan.” But this belies the truth.

For any tech companies that have been swept away or failed to close their necessary rounds of financing in the last year (including a number of P2P companies that made it to O’Reilly P2P SF but not to DC), the reasons seem obvious: they did not have a business plan that made them self sufficient within the first year.

Note that this does not mean they didn’t have a business plan; many companies were pursuing TRIED AND TRUE internet business plans, such as:

• field of dreams business plan (build it and they will come)
• big bag of users business plan (acquire market share and get acquired by a media company
• mindshare business plan (be the first, not even the best, to a market, get acquired or IPO)
• research lab business plan (build cool tech with no particular business plan, get acquired)
• verticalportal business plan (insert vertical into portal, get acquired or IPO)

There’s a bit of overlap on this list, but the point is, getting acquired was a respectable exit for tech-oriented or consumer-centric plays, and IPO was also an available exit for the more business-oriented plays with a good MBA team on board.

Any sensible venture capitalist in the computer industry would have been foolish to not to pursue the ‘new economy’ rules in 1997, 1998, 1999. My own experiences with venture capitalists showed that in 1999, they were still talking about “IPO in 18 months.” Having run a company on angel and cash investment for 3 years prior to this, the concept of doing a public offering on a brand new business seemed absurd. Hiring people and spending the money as fast as possible to expand as fast as possible… This story has been told before.

But this was not an unreasonable phenomenon. It was simply a game, and a new way to play the game had been pioneered, and our VC was simply trying to get us to play.

During the Internet boom, I often remarked how much space technology would have advanced if it had been as heavily financed recently as the Internet was. Areas of intense attention and funding advance very quickly. For a while, all the research for the Internet was being done in industry instead of acadamia, helmed by college dropouts and/or MBA’s instead of professors. This increased the heterogeneity of the exploration and resulted in prolific and unprecidented growth

But what effect did this have on non Internet or tech sector companies? How could this affect power companies, airlines, or small businesses?

Believe it or not, not all venture capital funding goes to technology companies. Some goes to good, old fashioned enterprises like supermarkets or utilities. And those companies began to envy what was happening over in the Internet hemisphere.

Here’s my theory: Several years of .communism took its toll on seasoned capitalists in the venture world for other industries. The stable Yahoos, Ciscos, and Amazons were making fools of these companies. AOL’s acquision proved that monopoly money could be exchanged for dollars. And the philosophies of pull out all the stops gain mindshare at all cost the first one there wins (and charge it on your VC credit card) became so demonstrably successful that they began to creep into the thinking of offline enterprises.

Although .communism may not have created a direct financial impact on non-e-companies that were totally disrelated to the internet, it’s infectuous philosophical stance on finance certainly altered the thinking of businesspeople industry- and world-wide.

As a result, other industries began operating on similar principles:

• expand as fast as possible
• create value through market share, not sales
• ‘mindshare’ or brand identity as a substitute for stable income
• high risk = high reward

etc.

(I suppose a more accurate equation would be: high risk <= high reward)

.communism also had it’s censorial dark side. Just like in Animal Farm when the rules seem to change over time, .communism endorsed a Stalinistic approach to marketing and finance alike. Fallen founders and under-credentialed staffers could vanish from the photo-retouched company bio page, and erased from company history. Name changes and new business models could effectivly bury old mistakes with new marketing propaganda. And darkest of all, each new regime could practically rewrite the capitalization table by simply closing a new round. “The new investors understand that we have to incentivize the people who are still here…

note on business theories:

There is an interesting phenomenon that goes on with business theories. Not to belittle something by calling it a “management fad”, it is nonetheless true that certain “one size fits all” management techniques are taught and applied in the world.

Here’s an example: a developer I know said (precociously) that MBA’s, in his opinion, “just cut a company in half and prepare it for an acquisition”. I found this statement rather astute; it is certainly a sensible pattern to come into a company, cut all the dead weight, focus on ‘low hanging fruit’ business opportunities, and steer the company to success.

Note that you could create several scenarios for which this somewhat cookie-cutter strategy would not work: companies that needed ALL their on-board talent to create a product would not survive after 50% layoffs. Companies with no dead weight would be arbitrarily throwing away value (human capital, acquisition cost of new developers, etc.)… the point is, one size does NOT always fit all. Certainly, it’s a good strategy, just not always applicible.

Sometimes it is correct to ‘pull out all the stops’ and expand as fast as possible. Sometimes it is correct to slowly and stably grow an enterpise. And it always depends on a combination of market conditions, the condition of the enterprise, and the financial patterns that are in operation at that time

So, in summary, my theory is that the financial philosophies of .communism, well documented in magazines such as Business 2.0 (alpha; guess we had to roll back), and financial leftist rags like the Red Herring, found sympathizers in offline markets and businesses. Certainly, I have heard election years, cyclical economic patterns, Republican presidents, etc, etc. presented as more sophisticated ways of explaining the financial downturn. Yet I think it was just manic financial optimism and balance sheet bullshit (a logical extension of capitalization table “creativity”) that has seeped over from the .communes to red scare our economy.

I was reminded of this when I recently was in Germany giving a keynote for a business-oriented P2P symposium. A student peer of mine, the chair of the conference, hearing me describe my six-year-old company, asked “so, your what happened to your IPO?”

I had not even heard this kind of talk for years, but then I remembered that I have observed that the cultural lag in Europe makes it take a while to adopt crazy American trends like “profitless companies”.

The new fad is back to good old, capitalistic, profits-or-else. And now we go back to ’stifling innovation’, ‘preventing new risky ideas’, etc.

Perhaps .communism it is a threat to our way of life, but the space race mentality it fostered and the “market gap” we sought to defeat made it an exciting time.

Have I hyperextended my metaphor?

I’m off to the CodeCon conference going on today, Saturday and Sunday at the DNA Lounge in San Francisco.

I’ve just added a new batch of entries to the
O’Reilly P2P Directory to convince those of you who may be able to make it this weekend that it might be in your best interest to do so and let those of you who can’t make it read up on the cool stuff being presented.

Peek-A-Booty

Invisible IRC Project

Reptile

Alpine

Eikon

See you there!

In the “I thought I’d seen it all” department comes DieCorp, who has come out with a product dubbed “Musit” that will apparently download music for free from a satellite. The product is about the size of a mini-disk player, and looks like it wants to take the place of your MP3 player when you go to the gym.

They claim that your downloads will be 1Mbps (gadzooks) and all you have to do is enter in an artist, song, or album title and you’ll have it to your ears almost instantaneously.

So has DieCorp come to an agreement with the RIAA about licensing the music? Well of course not, that would make too much sense. What is even more laughable about the situation is that DieCorp plans to rid the world of major music labels and finance the production of future music through it’s own royalty plan.

There is also something on the site about their stock being made public soon. This sounded fishy before I read this, and now something tells me that this is just vaporware, and the people behind Musit are just hoping to make some quick stock dollars before the RIAA comes a-knocking. Either that or they haven’t been paying attention to how the RIAA deals with it’s competition.

Related link: http://www.eff.org/sc/felten

EFF won’t appeal a recent loss in the case brought by Professor Edward Felten against the Digital Millenium Copyright Act. The government promised in court documents that “scientists attempting to study access
control technologies” are not subject to the DMCA. Felten and EFF decided to take them at their word.

Related link: http://www.inc.com/search/23854-print.html

Recently, he’s looked at the process from the point of view of the disrupters themselves. He has come up with a series of tests to help entrepreneurs judge whether their ideas are likely to succeed in the marketplace.