Hidden Dimensions -- An Exercise in Disruption

by John Martellaro
March 23rd, 2006

One of the ways to get ahead in the world of high technology is to have a good understanding of all the key components that make up a technical ecosystem, understand the customer, understand the weaknesses of the competition, question easy and familiar assumptions that may not really hold, have a coherent plan, and then execute it well.

That's all.

Oh, and one more thing. Throw in a bit of technological disruption.

One of the disruptions brewing these days is Apple versus the cable and satellite TV companies. I've thought about it, done a little math, and put some pieces of the puzzle together in a way that allows us to better understand current events. Here's my perspective.

Apple has the connection to your computer. The cable and satellite companies have the connection to your TV. By all accounts, Apple would like to sell you video content -- movies -- on the Internet and steal your business from the satellite and cable providers. Can they do it? Apple has the key hardware components in place. But they need a key concession from the movie studios.

The first step is to look at key delivery technologies, how they're structured, where they are going, and anticipate how customers might want to use these video technologies.

Let's start with some assumptions.

1. The regional phone companies remain in a war with the cable providers. Here in Denver, every time Qwest increases the speed of their DSL service, Comcast raises its throughput to counter. Right now, Qwest is moving slowly from 1.5 Mbps towards 6 Mbps, and Comcast will likely move from 6 or 8 to 10 or 12 Mbps. This war isn't going away.

2. The FCC has approved broadband Internet access over power lines. It's reasonable to assume that even rural locations will have, in the next few years, broadband Internet.

3. Customers, especially Apple's, have discovered the delights of downloading video on demand and watching the video at a time, place, and on a display of their choosing. Meanwhile, the cable and satellite companies are struggling to build an individually addressable system, called IPTV, where each TV in the country has an IP address. Most TV shows and movies are still constrained to be downloaded at specific times of they day, and once they're on the PVR they supply, you can only watch the show in one place -- the TV in your living room.*

4. A two hour high definition movie requires, very roughly, 15 GB of storage.

With these assumptions in hand, let's do some simple math. 15 GB is 120 gigabits. At 12 Mbps, it'll take 10,000 sec or 2.8 hours to download a two hour HD movie. If you pay $50/month for that 12 Mbps pipe, 2.8 hours of download costs you about 19 cents. That's negligible.

Right away, we see that downloading a movie on the Internet is just as cost and time effective as your cable or satellite TV service. While we knew that, there are implications.

Pay-per-view movies are going for about $4 on cable or satellite services. Let's assume that Apple wants to argue that a movie should cost no more if downloaded on the Internet and DRM'd on your hard disk than if you do a pay-per-view on, say, cable. After all, a precedent has been set: a one hour TV show for $1.99 from iTMS.

In parallel, we've also heard that the movie studios don't want you to own individual movies downloaded to your computer. That's due to the economics: if you can download a movie to your MacBook for $4, watch it there or put it on your iPod, or worst of all for the movie studios, transmit it to your TV with something like the rumored AirPort video Express, then the ~$25 to $30 price of a movie on a Blu-Ray disc doesn't look very attractive. Customers might just bypass these new optical technologies altogether.

However, if the movie studios, by agreement with Apple, can make the manipulation of that movie just inconvenient enough, you may be tempted to spring for the HD-DVD or Blu-Ray disc. You'll be squeezed into a financial trap between price and convenience. Apple, it appears, wants to disrupt that model.

Meanwhile, Apple knows it's in a race. Apple has to exploit the current popularity of downloaded TV shows to maneuver the movie studios into acquiescing. Then Apple can undermine the traditional cable and satellite providers before they, in turn, can implement IPTV. Of course, satellite and cable is a big source of revenue that the movie studios don't want to give up, so the movie studios are naturally skeptical of Apple's moves that threaten those providers.

One strategy to combat that, an end run, is to convince Disney that they can make more money delivering content on the Internet, where far more people have computers and hard disks than high definition PVRs, and then panic the other movie studios into jumping on this bigger bandwagon. Or at the very least, convince them that it is incremental revenue.

To achieve this, Apple will point out that they have Intel hardware, a secure OS, the delivery and accounting mechanism (iTMS), the DRM that customers like, 70% market share in portable video players, and the best customer interface to the content (Front Row). Apple will argue that traditional providers show no signs of understanding, let alone duplicating, this integrated set of 21st century technologies that can only be produced by a computer company.

And that's where the negotiations seem to be right now.

From my perspective, I can see how Apple needs to have a relationship with a content provider like Disney to instigate others and lead the way in this new delivery mechanism. To get there, Apple needs you to have ownership of your movies on your computer (just like your songs) in order to disrupt the current economic model of movie distribution that backs customers into a corner, annoys them, and slows down early adoption. Moreover, a possible fallout from Apple's strategy would be to make the war between Blu-Ray and HD-DVD moot.

All in all, that's some serious disruption. It'll be very interesting to watch the negotiations, the agreements, and the technologies unfold as each camp tries to outmaneuver the other to optimize their revenue. Soon, however, it may become clear to some that short term optimization is the road to irrelevance and bankruptcy.

* One satellite provider, Dish Network, has seen the light and is promoting the "Pocket Dish", a small portable video player that can download content from their PVR and travel with you. But since this Pocket Dish "isn't an iPod" and volume will be small, it's hard to see how Dish Network can make it a success.

John Martellaro is a senior scientist and author. A former U.S. Air Force officer,he has worked for NASA, White Sands Missile Range, Lockheed Martin Astronautics, the Oak Ridge National Laboratory and Apple Computer. During his five years at Apple, he worked as a Senior Marketing Manager for science and technology, Federal Account Executive, and High Performance Computing Manager. His interests include alpine skiing, SciFi, astronomy, and Perl. John lives in Denver, Colorado.

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