Antitrust won't help Google's codec fight

Nowadays, Google is normally considered the next monopolist on the losing end of antitrust scrutiny. This month, Google is getting help from antitrust authorities in its uphill efforts to get VP8 video codec (and its WebM project) established against the dominant H.264 codec.

In January, Google announced plans to drop support for H.264 in its Chrome browser, nominally because of the H.264 patent royalties. Meanwhile, Google licenses VP8 and its associated patents with the claim that it’s royalty free:

Please explain how WebM is "royalty-free."

Some video codecs require content distributors and manufacturers to pay patent royalties to use the intellectual property within the codec. WebM and the codecs it supports (VP8 video and Vorbis audio) require no royalty payments of any kind. You can do whatever you want with the WebM code without owing money to anybody. For more information, see the License page.

However, all Google can promise is that it won’t charge royalties on VP8. It can’t promise that its source codec doesn’t infringe the patents of others: that’s up to the patent holders to allege and (ultimately) for a court to decide. (Its policy is that people can’t use WebM without licensing their own patents to WebM users.) The only way around third party patents would be for Google to indemnify users against these claims.

Since MPEG LA is in the business of managing and licensing patent pools, including a pool of some 800 patents that read on H.264 (including 273 US patents and 469 Japanese patents) it has long expected that many of these patents could also be essential for implementation of VP8. So last month it asked all parties (both current and other licensors) to submit their patents for review. Needless to say, this brought squawking by Google and the usual anti-software patent crowd.

Now, the Wall Street Journal reported that the US Justice Department is looking to help Google in its efforts to resist MPEG LA patents:

Antitrust enforcers are investigating whether MPEG LA, or its members, are trying to cripple an alternative format called VP8 that Google released last year--by creating legal uncertainty over whether users might violate patents by employing that technology, these people added.

The Justice Department and Federal Trade Commission start many more antitrust investigations than they bring to court. There is no per se legal problem if patent holders want to charge royalties to VP8 users, as long as they are on comparable terms to those charged to H.264 users. As the FTC antitrust website states:

Restraints in the supply chain are tested for their reasonableness, by analyzing the market in detail and balancing any harmful competitive effects against offsetting benefits. In general, the law views most vertical arrangements as beneficial overall because they reduce costs and promote efficient distribution of products. A vertical arrangement may violate the antitrust laws, however, if it reduces competition among firms at the same level (say among retailers or among wholesalers) or prevents new firms from entering the market.

So the only problem is that MPEG LA wants to run the licensing business for both H.264 and VP8. Normally in competing standards (think Blu-ray vs. HD DVD) competing organizations run the patent pools. So while the DoJ will not find anything wrong with charging patent royalties for VP8, it might force MPEG LA to exercise greater transparency in royalties or even to spin off the VP8 pool efforts.

The research has clearly shown that patent pools increase the efficiency of patent collection for both licensors and licensees. (The only downside is that licensees might hope that without pools that would-be licensors might not bother to enforce royalties.)

If MPEG LA comes under pressure, I think it could easily solve the transparency problem by separating royalties into three piles: patents that apply both H.264 and VP8 (or WebM), those that apply to H.264 and those specific to VP8. If the terms for the first pile are the same for either standard, VP8 supporters would be hard-pressed to show any anti-competitive effects of the patent policy — other than their fantasy of releasing a patent-free codec.

All this kerfuffle over MPEG LA royalties ignores three other factors:

• the effect of the annual royalty cap (as with H.264) in making MPEG LA royalties negligible for large firms like Apple, Google or Microsoft
• as with any other standard, the existence of other patents that are not “essential” to the standard but may be commercially necessary
• Google’s ability to use its own patent leverage (including those it acquired when it bought the WebM developer) to force a cross-license or non-assertion agreement by key patent holders

Commoditization is hell

In an AP dispatch† from the distant reaches of San Francisco, the San Jose Mercury News today reported that the life of a videogame developer ain’t what it used to be:

Nintendo President Satoru Iwata said in the conference's keynote speech Wednesday morning that "game development is drowning" because of the rise of cheaply made and priced mobile and social games. He expressed concern that those platforms have "no motivation to maintain the value of gaming" and that they lower gamemakers' ability to make a living.

In other words, 99¢ iPhone games have killed the market for $60 console games.

Hmmmm...let’s see. Consumers would rather have a cheap portable way to pass the time rather than an expensive immersive experience that requires they sit in front of a TV all day.

Actually, the concerns of developers are exaggerated. The industry is cyclical, chronically depending on the latest hit console — at a time when the major console developers are stretching out platform life cycles, trying to milk their cash cows for all they’re worth.

The problem seems to be that the industry believed its own hype that it would soon surpass the movie industry in revenues and societal impacts.

There’s no reason to suspect that videogames would be immune from the commoditization pressures facing any other industry.

As with any technology-based industry, the growth of performance eventually slows downs — or efforts to add features no longer increase the value perceived by customers. As Clay Christensen noted, the threat in these cases is that a cheaper technology soon becomes good enough.

Time to face reality: commoditization is not going away. The 99¢ games will become more compelling as the mobile devices become more powerful, siphoning off business from the high end formerly mainstream product.


† Apparently the Merc had to close their San Francisco bureau due to budget cuts, or perhaps they decided to stop covering videogames since ace reporter (and author) Dean Takahashi jumped ship.

Barns & Noble: searching for an answer

The year 2011 should be a good one for Barnes & Noble. As Best Buy was with Circuit City, B&N should be the primary beneficiary of the Borders bankruptcy and closure of another 200 Borders stores.

It also has a promising tablet computer in the nookColor, which is being developed by a team of Silicon Valley veterans in its Palo Alto R&D facility. It is distributing and supporting the devices in its 700 physical stores, including free Wi-Fi and free book browsing for nook owners.

It’s also leveraging Amazon’s sales tax disputes with the states to attract potential marketing partners. States can’t legally tax out-of-state sales under Quill v. North Dakota unless there’s a physical presence. If the states want to argue that website affiliates are a physical preference that makes it liable for tax — a point Amazon disputes — then Amazon will shed those affiliates. Since it’s already stuck paying California taxes, B&N is now soliciting those soon-to-be-former Amazon affiliates to promote its own site.

For many years, B&N was a successful fast follower in its rivalry with Amazon. When I taught my first MBA course in 1998, I wrote a BN.com caselet to show how Barnes & Noble moved aggressively to respond to the Amazon threat with a “clicks and mortar” (aka “bricks & clicks”) strategy. That strategy held up pretty well for a decade, except that it found its physical stores made it futile to fight state sales tax levies, leaving it at a cost disadvantage in high tax states..

When it comes to e-books, Barnes & Noble seems to have tried its best to match Amazon’s Kindle AZW content with its own supply of (proprietary DRM) epub files. In a spot check, both had Michael Porter’s two most popular strategy books at the same price, while neither store had anything by J.K. Rowling — a search for “Harry Potter” instead produced books about Rowling and her billion-dollar manchild (68 on the B&N site).

However, the search algorithms for finding the B&N content seem primitive, particularly when on B&N’s own tablet — where navigation is inherently slower and more frustrating than on a keyboard-equipped laptop. I noticed the problems Thursday after I took my nookColor to my local B&N store.

Nook owners can browse books inside the shopping app, or use a web browser like everyone else. When you go to the BN.com website on a nook, it has the same tiny text hyperlinks that work great on a PC and terribly on a 7" tablet. One would presume that the website would know that a nook version of the WebKit browser suggests interest in nook content.

But the worst thing is the search algorithm. In some ways, it’s a prisoner of a literalism stuck in the 1990s. Unlike on Amazon, at the BN website and the nook shopping app when I searched for “Don Rumsfeld,” it found nothing. If I put “Donald Rumsfeld” into either one, it found the New York Times bestseller. (Amazon and of course Google will even suggest the correct option if I type “Donalf Rumsfeld”).

Conversely, the search options within the nook shopping application are nearly useless for popular topics. Like Amazon, BN.com has an “advanced” search option for specific fields, but on the nook app there’s just one free-form text search field, and no “advanced” option. So if I’m only interested in books with “Harry Potter” in the title and “Rowling” in the author field, the nook shopping app won’t let you do that.

Let’s take a more ambiguous case: the word “Bible” brings up 259,000 entries under “books” at Amazon.com, 79,000 books at BN.com and 10,000 in the nook shopping app. Entering "Bible" and “New International Version” produces 2,000 hits on BN.com and 118 in the nook app. In the former case, all of the first 100 hits are NIV Bibles, but only one of the top 10 hits in the nook store is correct — the other 9 have nothing to do with the NIV.

It’s hard to imagine a more strategic priority for B&N than making it easy for customers to find and buy books. Thus, it’s long past time for B&N to update its search and discovery algorithms. Ask.com, Bing, Excite, Google, Yahoo and even Baidu know who Don Rumsfeld is, evne if BN.com does not. Perhaps if it searches hard enough, Barnes & Noble can find a way to leverage external technology (we call it “open innovation”) to catch up to its #1 rival.

iPad: price is no object

Steve Jobs returned to work briefly on Wednesday to introduce the iPad 2. Clearly launching new platforms and changing the industry is his passion.

The introduction was and was not what everyone expected. It’s still a 10" tablet, but adds two cameras, a new operating system and much faster processor into a smaller and lighter box.

What didn’t change (despite various predictions) was the price. For example in March 2010 ZDNet flatly predicted “You know Apple will drop prices with the second generation iPad.” The price cut predictions continued up until Steve Jobs walked on stage — but the only price cuts were the clearance prices on last year’s model.

Instead, Apple is counting on superior execution to hold continued loyalty of the press and the customers. It’s also available next week in the US and two weeks later in major overseas markets, closing the window rivals had hoped to exploit: Apple will ship its second tablet before HP (and especially RIM) can ship their first.

The analysts who underestimated the iPad in 2010 are outdoing themselves to be bullish in 2011. Forbes quoted one prediction of 26 million units in 2011 — nearly double the 14.8 million sold in 2010. Again this year, Apple will remain the leader of the tablet market, with the #1 product, the #1 company market share and the #1 platform market share. Keeping 2/3 of the market in 2011 might be an underestimate.

In contrast, this year’s round of iPhones are rumored to include a lower cost model. Of course, this is year 5 for the iPhone and year 2 for its iOS cousin. Apple has both more serious competition and a more saturated high-end market in phones than in tablets.

However, indications are also that by setting the bar so high, Apple is making it difficult for competitors to undercut it on price. Its $500 iPad 2 competes with a $800 Motorola Xoom, which despite Motorola’s decades of high-volume mobile device experience, has a bill of materials cost higher than the original iPad. Steve Jobs showed a slide Wednesday noting the higher prices of its Motorola rival.

Apple also spent $3.9b of its excess cash to invest in its display suppliers, both enabling capacity expansion and locking up scarce inputs that are now unavailable to rivals. For now, most of its rivals (vertically integrated Samsung excepted) will have difficulty matching its volumes and prices of screens.

As Matt Asay noted last month, Apple’s rivals have no hope in the near term of taking away customers from Apple at the high end, among discerning early adopters:

No one beats Apple at being Apple. The best bet for the iPad also-rans, then, is to run a different race, aiming for mass market appeal….with much lower price tags.

For now, the only opening for its rivals is in the 7" tablet, which for now Apple has lambasted as a losing form factor. I disagree, and if I were a company like HP/Palm, I’d put all my resources in 2011 into becoming the #1 vendor of 7" tablets, and hope Barnes & Noble doesn’t get their act together quickly enough to own that market.

Now above $350, Apple shares were trading at $150 a year ago and $85 two years ago. Boy I wish I’d bought some: my 401(k) might actually be something I could use for retiring.

Update 3:30pm: Goldman Sachs reiterated a “buy” rating and set an AAPL target price of $450 — reiterating the pre-announcement prediction.

Good month for Mark Zuckerberg

February was a memorable month for Mark Zuckerberg. The hype for “The Social Network” is over without further embarrassment. With the movie out on video, three minor Oscars and Zuckerberg’s uneventful appearance on Saturday Night Live, that story is over.

Meanwhile, earlier this month the 26-year-old Facebook CEO gained positive recognition as the only Silicon Valley mogul under 40 invited for a private dinner with the President — as immortalized by the official White House picture.

This follows a January where Facebook’s bankers cleverly raised $1.5 billion in an oversubscribed private placement (boosting its valuation to $76b) by ignoring SEC concerns and going to overseas investors (and Goldman’s internal funds.)

Yes, the movie didn’t put Zuckerberg in the best light, but as Salon notes, the most sophisticated viewers can separate fact from fiction:

Moreover, we don't go to movies to learn about history, or at least we shouldn't, since the history taught in the movies is even more ludicrous and shot through with present-tense ideology than the history taught in schools. … I probably know more about Facebook and the Early Middle Internet Age than I did before I saw "The Social Network," but that stuff isn't the source of the film's appeal. It's an energetic and straightforward work of American pop storytelling, a soapy, gossipy tale of young people behaving badly and class-based infighting at America's most elite university.

It’s obviously not news that Harvard boys (or young men more generally) want sex. Decades ago, one would not expect that Jerry Brown’s trips with Linda Ronstadt (or Steve Jobs’ evenings with Joan Baez) were limited to talking politics.

Merc columnist Chris O’Brien feigned outrage at the treatment of Zuckerberg, Facebook, and Web 2.0 at the hands of Hollywood in a “hatchet job”:

Technology, it argues, is giving rise to a generation of people who are lost and shallow, in danger of losing touch with their humanity. As you might imagine, I couldn't disagree more: Technologies like social networking are expanding people's relationships and actually helping us better connect with the rest of humanity.

This is a silly argument: the generation (particularly Zuckerberg’s male contemporaries) was already shallow and self-centered before Web 2.0 technology came along.

O’Brien quotes two outraged so-called social media experts:

"What they did was make a movie that completely marginalizes social media," said … an assistant professor. …

"It reflects what film critics think about social media," [a professor] wrote in an e-mail. "They should own those attitudes rather than project them onto this generation. "

(Of course, these academics make their careers selling the idea that social media is a transformational technology that renders obsolete any previous technology or societal movement — just as I did for my research on open source software or mobile phones.)

It’s pretty clear the movie isn’t going to change people’s view of entrepreneurship one way or the other. Yes, it’s a bigger soapbox than usual: Zuckerberg got a Hollywood Oscar contender at the peak of his fame — as opposed to Steve Jobs and Bill Gates who had to settle for a TV movie made for TNT two decades after their respective debuts. But unlike a multiyear TV series like Perry Mason or ER, it’s a onetime impression about a career or profession that will fade over time.

If Silicon Valley wants a more favorable impression of its business, perhaps it can commission a weekly series. Although “Social Network” screenwriter Aaron Sorkin did such a good job fictionalizing Washington DC political wonks, his extreme technophobia suggests that he’s unable to understand or empathize with hardworking technologists on the left coast. But certainly California has enough underemployed scriptwriters who would jump at the opportunity.