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Pi is a small number with a lot of decimal points after it: 3.14159265 etc., which apparently goes on forever. Google’s new issuance of shares, 14,159,265, is a large number with no decimal points after it, which apparently goes on to be worth about $4 billion in cash. (See how the number of shares they are selling is the same as the first eight decimal points of Pi? Get my clever/stupid blog title now?)

When I think Google, I think “search.” I don’t think community applications, social networking, VoIP, software, email or digital music. “Googling” is “searching.” For this reason, I think there is one piece in a Google Pi and it is Search. But what does search look like in the future?

Let’s assume that the reason for Google’s new issuance isn’t that they consider their stock overvalued and therefore just took some money off the table. Let’s further assume they raised the cash to make some acquisitions. What would they buy?

Google sure is a great company. With sales of $4.5 billion and trading at more than a 17x multiple, they have an impressive market cap of roughly $80 billion and with a ~32% operating margin they are generating well in excess of a billion and a half EBITDA annually. So figure they’ve got around $3 billion in the bank. Add another $4 billion to get $7 billion and you start wondering why that is the right amount to execute on their apparent plan to grow through acquisition. You can buy a lot of small companies with $7 billion, but the integration cost is too high if you buy too many, so you do it sparingly. A company like Google buys a small company when they are building a new value chain and have some links missing and their build/buy analysis points to buy. You cannot buy a big company because they are simply unaffordable. MSFT: $291B. EBAY: $52B. YHOO: $47B. (BTW, I personally think YHOO compared to GOOG is undervalued, and if you look at the fundamentals of each, you will likely agree. Same revenue, better profit margin, lower multiple. Is a search company really valued on “search” or is it valued on how many ads it can sell against its inventory? I just convinced myself to buy more Yahoo.)

So that means Google is most likely going to buy some medium-sized companies in areas that move the revenue needle measurably and some small companies where there is a strategic fit to build new value.

This post is divided into the three major strategies I see that Google could execute to fuel growth through acquisition:
1) Buy more inventory
2) Focus on International
3) Focus on Local Search
…plus a fourth area that I think ties them all together that I just know a major player is going to figure out sooner or later and it might as well be them. That is:
4) Be the largest LMNO.

1) Buy inventory in different forms
Medium-sized acquisition top pick: Skype. (Yes, me and everyone else, but this only really makes sense to me if Google also buys my small company acquisition top pick, TellMe.)
There is some speculation about Google buying Skype.

What would it give them? Skype kicks much ass, and is a truly disruptive technology. Owning Skype is like owning all phone calls in the future. Many more people make a call every day than search for something on the web. Think about the Skype interface. Could you monetize that? I could. And so could Google. Plus it is sticky in a way that Google isn’t if you believe it is possible for a better search engine to challenge them.

What would it cost? Several billion. Math: Let’s say MySpace has around 15 million active users. At $580 million, News Corp. is paying around $38 per user. Skype’s website boasts in excess of 51 million users. If the going rate for user acquisition is $38, then around $2 billion should be about right. But Skype is rumored to have turned down multi-billion dollar offers. So then they are simply not for sale or they believe there is sufficiently massive upside to their business in the future combined with a low enough threat of competition that they can realize larger gains going it alone. In any case, on its own this doesn’t make sense to me unless there is an interface to tie the Google ad-based world to the Skype transaction-based world. For this, I like TellMe.

Small company acquisition top pick: TellMe. I absolutely love this company. It’s the kind of company entrepreneurs wish they had started. Call ANY big company and the annoying but cost-effective “natural language” voice-recognition menu system is probably powered by TellMe. (“Hi, this is Julie. I thought I heard you say, ‘I want to talk to a real %$#@! person.’ Did I get that right?”) TellMe is internet-powered telecommunications, and it is the link that is missing between Google and Skype (or Google Talk.)

What would it give them? A telephony-based front end for search. This acquisition makes so much sense to me that I can hardly believe it hasn’t happened yet. If you believe that phones will replace computers and Google with voice recognition would be the ultimate killer app for the phone, then combine this acquisition with Skype and Google can close the loop, essentially owning the whole telephony search value chain in two simple acquisitions. They would have the user relationship, the interface, the network and the inventory.

What would it cost? With revenue around $100 million for the year, a 10x multiple, while generous, would not be out of line, and it might be more than the public markets would represent when the company finally executes on its long-anticipated IPO plans.

2) International expansion = good
Medium-sized acquisition top pick: Baidu. (Yes, more bandwagoning here, but look at the major emerging international markets and you’ll see India is unattractive and that leaves China.) Google makes money by selling ads. The more inventory you have, the more ads you can sell. All the hype around Baidu lately whipped up speculation that Google may have to buy them or else miss the gigantic opportunity that is China.
Impossible? A similar thing happened to Ebay, which got its ass handed to them by Yahoo Japan.

The price is looking more attractive now that they have lost 35% of their value since their meteoric IPO.

What would it give them? In the case of international expansion, I would rather see Google spend the money internally on a massive organic growth strategy. Put (a lot of) people on the ground in international markets that matter and grow battle ground by battle ground the way Ebay did. Sometimes you lose, but if you stick to what you do best, most of the time you win. That said, this post is about acquisitions, so I’ll jump on the bandwagon and say Baidu looks pretty good, particularly because as far as international markets go, China looks very promising, despite its highly censored version of the internet.

What would it cost? Google already has a stake in Baidu, so this acquisition makes sense if you think at ~$3 billion, it is worth it to get in on the ground floor (current total online revenue in China: $1.1 billion) of a market that is going to dwarf the U.S. at some point in the future.

3) Focus on local search
Nobody does local search very well, least of all the biggest internet search engines. Because the internet is placeless, relevance ranking is based on how many people link to a site or the traffic it gets or the keywords they buy. Stand on a street corner in New York City and search for “Steakhouse” in “new york” and observe the results. Use Google web and you get Outback Steakhouse, which ignores your location. Use Google local and you get Smith and Wollensky, which ignores your proximity. Try to drill down on Google Local to “Manhattan” and it doesn’t know where that is. I am serious. Google Local doesn’t know where Manhattan is. Try it yourself.

Yes, I am sure there is a Manhattan in the UK, but now we’re back to the need for a relevance ranking engine that is entirely different if Google is going to do local search.

In fairness, it knows Manhattan zip codes, but people don’t know zip codes other than where they live and work. I don’t have to search for a steakhouse around where I live because I have tribal knowledge of where I live. This is a major UI problem, and a nontrivial issue that means they are going to build some cool new stuff or they are going to buy someone who puts them seriously into local search.

Medium-sized acquisition top pick: InfoSpace. Recently, investors have proven they apparently don’t see the upside of this great company, but maybe they are simply the piece of a larger company that has been missing. FYI, I objectively believe in this company. I have no financial interest in INSP and sold all of my stock long ago. (At 55 :-P)

What would it get them? A mobile, local bolt-on strategy. InfoSpace has smart people, great assets and a search engine optimized to make their local data relevant. Plug it in to Google Local and slap on a mobile phone-based interface and they instantly become the most relevant search conglomerate in the free world. If you believe local search is the holy grail because owning that “last mile” to enable people to find everything around them gives you the power to become a sort of personal portal to all services that anyone could ever want, then you will see the logic of this acquisition.

What would it cost? With a nice premium, INSP could be had for a little less than $1 billion, which is way less than this company is worth, in my opinion. Plus, with $400 million in the bank, you get a nice rebate on your purchase.

4) Connect the dots to be a huge LMNO
Google could spend the money to be the largest LMNO. They have the technical skill to build a Skype competitor, and the reach to distribute it. Google Talk could beat Skype eventually, if they come at it from a different angle, like voice communication is about Phone Call 2.0, not Skype’s Phone Call 1.0.

Here is the GOOGLMNO value chain:
Google Search +
Blogger (distributed network of people plugged into Search) +
Google Talk, Gmail, and [missing: IM and social networking, but they just bought Meetroduction] (most familiar communication protocols to connect people) +
Google Local [missing: Better local POI like InfoSpace] +
Dodgeball (Proximity-based local overlay for aforementioned media networking construct) +
[missing: Mobile thick-client footprint] (distributable addictive mobile communication client that rolls up blogging, social networking, IM, messaging and possibly a Skype-like client all as a front end for their core product, Search.)

Simply put, GOOGLMNO would be the interface that enables users to find anything from any source through a network of other users via every communication protocol available. Interestingly, it isn’t that hard to put together and doesn’t require a paradigm shift in user behavior. More interestingly, Yahoo and MSN may actually be better positioned for this. Most interestingly, IAC, AOL/Time Warner or News Corp. may be best positioned because their media assets add particular value to the future of communication which is really personal networking through media creation, attachment and redistribution.

I am thinking about UI lately, and because of this, I am noticing all of the things with really bad user interfaces that could be greatly improved with a new approach. Particularly, I am noticing things that probably work well in the test environment, but fail miserably in real-world deployment.

My next company
I you want to be a kajillionaire, make an automatic sensor for restrooms that actually works. I travel a lot, and the thing that most detracts from the enjoyability of my trips is inferior bathroom technology. Automatic sensors are used to flush the toilets, operate the faucets and dispense the paper towels. NONE of them work well. You enter the stall and put the little paper gasket thing on the toilet seat, then when you stand up to undo your belt, the damn thing flushes and takes the little paper thing away. You might figure out how to fake out the sensor, but probably not and then it won’t flush when you actually want it to so you end up pushing the manual override button. Then you want to wash your hands. You put your hands under the faucet, and…nothing. You wave your hands a bit, then something! Then nothing. More hand waving. A small ration of water vomits onto your hands. Then you see everyone else, down a line of twenty sinks, doing the same thing with looks of mild frustration on their faces. After that maddening experience, you have to wave your hand in front of the paper towel dispenser and it dispenses ONE piece of paper, which is insufficient, but when you wave your hand again, nothing. Wait five seconds, wave your hand again, then one more piece of paper. A queue of people builds up behind you. Out of the corner of your eye you see a guy quickly walk out with wet hands, wiping them on his suit pants.

To me, airports are for rushing through, and the bathroom technology not only slows me down, but it adds indignity and frustration to the process. This is because it doesn’t quite work the way it might work in another environment like, say, the manufacturer’s showroom where they are using the product in a very different way. I don’t think any salespeople are actually demonstrating the auto-flushing toilets.

The mobile environment is like an airport bathroom – it requires a specific technology approach to accommodate a specific use case that is very different from your bathroom at home. The current technology meant to enable us, while nifty, actually slows us down.

Mobile applications are different
Mobile application development is constrained in ways that web development is not. The browser environment is relatively stabilized and robust now, whereas the mobile phone only recently could do anything but ring. There is no real “platform” - every handset is unique in its own beautiful way, often requiring reverse engineering to find workarounds. Last week, we discovered and reported manufacturer defects on five handsets and had to engineer creative ways to work around them. (How is it that we are the first to discover these things? Happens all the time.) For Rabble, we essentially maintain a different client codebase for each handset class ID, and often for each handset within a class ID.

Not only is it difficult to do, requiring technical domain expertise that not every hacker possesses, but the environment itself is different, requiring a fundamentally different approach to technology, architecture, presentation and most importantly, User Interface. Rabble has been in development for a year. Sounds like a long time for a blogging and social networking app, doesn’t it? How about cramming that app into a 200k payload, working around caching limitations which are all different across hundreds of supported handsets, overcoming network latency issues unheard of on the web and doing it all in a presentation environment that requires creative solutions to the problems that are among the easiest to solve on the web? Now do it with 1.5 inches or less of screen real estate in a way that is logical and useful for the consumer. The coding was done in a few months. It’s everything else that goes into bringing a product to market that takes time. This is the kind of time I wish the automatic bathroom flushing people would have spent.

Be careful if you think that your website is going to be relevant in the mobile space because you may be asking for disappointment. Your functionality might be very relevant, but your success will depend much on how you present that functionality to the consumer. You cannot effectively render a web page on a mobile device. The 18 inches of landscape point-and-click multi-purpose real estate you have on the web simply does not translate to the 1.5 inches of scroll-and-select single-purpose real estate you have on mobile devices. Oh, and session lengths are measured in seconds, not minutes or hours. Thinking that a user is going to fire up the browser on their mobile phone and get any real utility out of an application developed for the web is like providing inferior bathroom technology – you will slow them down and frustrate them to the point of losing a customer. Imagine viewing this site on a 1-inch screen.

I counted 158 things to click on. You cannot do “portal” in the mobile space.

Rules for mobile app development
I want to see more companies provide mobile applications, but I want to avoid the lameness of the internet bubble when you could go public with a “dog food service provider.” Just because you can make a mobile app doesn’t mean you should. Behold my contribution in this regard: Shawn Conahan’s Rules For Mobile Application Development…

Start with UI and work backwards. This is the era of single-purpose applications. They must be extremely well thought out, provide vertical functionality with minimal navigation options or requirements and still be visually compelling. Do not try to replicate an experience from somewhere else. If you can’t make it work with very small storyboard mocks, (we do ours at actual size to pass the “squint test”) then you may simply have an idea that won’t work in the mobile environment.

Consider the input device. DigitWireless’ Fastap is going to help text input-based applications. The HipTop is even better, and possibly the coolest device in the mobile space. While you shouldn’t underestimate the amount of free time a teenage girl has to spend with her mobile phone, there is no reason to make life more difficult for her. The best mobile apps are built with the hardware in mind. (Rabble on the HipTop will be a great user experience.) Like bathroom technology engineers, many handset manufacturers aren’t thinking about the total use case of their handsets. Many manufacturers still don’t ship their devices with things like multiple keypress. This has implications if you are building a game which requires you to be able to move your spaceship and shoot at the same time. The Motorola T-720 was a big seller, but the soft keys don’t map to anything in BREW, making it a difficult handset to develop for. Keep these sorts of things in mind across the hundreds of handsets you will need to support.

Get mobile domain expertise. There are many web-based businesses that could be very successful in the mobile space if presented correctly. The most important presentation element to keep in mind is how mobility augments your functionality. Internet dating is cool, mobile dating with an LBS-based social networking proximity overlay (a cornerstone of the LMNO) is very cool, but it also changes your service from the web-based long session length “I want to meet Miss Right” to the mobile-based short session length “I want to meet Miss Right Now.” Not that there’s anything wrong with that. I am just pointing out that mobility changes things and may change what you think you have, so just be aware of it and think creatively.

Start with the basics. If you do these things and don’t consider whether your application is relevant or useful to the mobile consumer, you might fail anyway. Here are my five criteria for useful mobile applications. (All of our planned mobile applications must have at least four, but maybe you don’t think they are all that important for what you are doing. Time will tell.)
Successful mobile applications:
1) Are not just mobile relevant, but mobility relevant
2) Are personal or offer some form of personalization
3) Leverage the network effect of mobile connected devices
4) Originate in the mobile space
5) Utilize and extend the upstream capabilities of the mobile device (this could be as simple as texting and passive location or as involved as massively multi-user networked games.)

All of this boils down to a holistic approach to UI, which I believe is the cornerstone of mobile application development. I like short lists, but feel free to add more if you think I missed something important.

Part 1: Brands in the mobile space are affected by unique issues
I looked around at other industries for interesting fodder on the concept of branding. Part 1 is really all I have to say about it at the moment, but if you have a few extra minutes to spare, feel free to read Part 2. I found it so totally unrelated that I edited it out but since I had already written it (I had a long flight yesterday and rambled on more than usual) I figured I’d leave it in for people who like cars.

We all know what cars are and what they are for, so there is no need to make it explicit in their names. It’s the Porsche Boxster, not the Porsche Boxster Automobile. In the car space, brands only differentiate from one another in a homogenous industry on select attributes. (The explicit purpose of an automobile is to get you from point A to point B. The value proposition of a Porsche is to get you there very very fast and in style.) Furthermore, rarely does a new car category emerge that requires a huge amount of consumer education. The last new category was the SUV, which was really just a refresh of an existing category. (Yes, you SUV owners are driving repackaged stationwagons with bling bling rims. How cool of you.)

The mobile space is different. The mobile application space is new. That means that native mobile applications are all new brands. So what should we call them? And what is the best way to present them to consumers to make those brands meaningful?

Look at the big brands on the internets that immediately command consumer recognition. They didn’t exist before the internet, and they are some of the largest companies in the world today. They all started from scratch and grew within the context for which they were intended, which means we can do the same thing in the mobile space.

“Yahoo” stands for “Yet Another Hierarchical Officious Oracle,” representing what they do as a search and directory company. I think that’s cool. “Google” is a trademarkable version of Googol, which is a very large number. Again, very indicative of what they do – searching through a very large number of sites to find you a needle in a haystack. I like these brands because they communicate something about the value proposition to consumers.

EBay is a big brand, but it doesn’t mean anything. Pierre wanted “EchoBay.com” since his company at the time was called Echo Bay Technology Group, but that domain name was taken so he went with ebay.com. I like this brand, too, but it doesn’t communicate anything to consumers. Rather, they have done a good job of imbuing a non-word with consumer value, and in the process have owned the majority of mindshare for “auction site” in many countries in which they compete.

Napster was a great brand, wasn’t it? It just embodied coolness. Also, it did an important thing: It defined a category. Before Napster, the notion of P2P hadn’t really entered the collective consciousness, and a really interesting thing happened when it did. Other companies co-opted “…ster” to mean “P2P” in a variety of other segments. There is now a Friendster, Grokster, Eurekester, Feedster, Blubster, Hamsterster, but interestingly no Sterster.

Anyway, it occurs to me that branding in the mobile space is driven by its own set of issues that I don’t see in many other industries.

Issue #1: Handset UI makes data entry difficult
The numerical keypad has to evolve. It wasn’t designed for what we are asking it to do. Data entry limitations on handsets have apparently already shaped one brand. What does JAMDAT mean? Nothing, but it is the first letter on your keypad of 526328. I think the thought there was that when you are entering an address into a WAP browser, it is easier to enter the first letters mapped to the keypad because it avoids the need to multitap. If you like this approach, admad.com is not available, but gadmat.com is. I think it is smart how they use their brand: It’s “JAMDAT Bowling.” You see the publisher’s brand along with a subtitle that tells you exactly what you are getting. Very smart for deck marketing, and easy to trademark. Additionally, JAMDAT owns a lot of “mobile gaming” mindshare. Will we see some kind of repeat of the “…ster” phenomenon? (Just in case, I am starting a competing mobile gaming company and just registered JAMDIS.com, so there. “No no, don’t jam dat bowling, jam dis bowling.” Brilliant, I know. Consumers will flock to it.)

Issue #2: Off-portal marketing means more numbers for people to remember
I can no longer remember numbers because all of my communication starts either with a click on an IM screen name or a scroll to someone’s name in my mobile phone’s PIM. But the big thing now is short codes, so marketers are challenged with making their consumers remember more numbers. Premium short codes sell for more than generic short codes. It’s like the new domain name. Have you heard of a company named GLOO? I don’t think it was intentional, but that is a great brand for short code marketing. For one thing, it is 4-5-6-6 right across the center of the keypad, which is easy muscle memory to develop. If they ever got into the business of interactive media, they could make 4566 their universal short code and make that the nucleus of their marketing strategy. Anyway, I think we can look forward to many more 4- and 5-letter brands in the mobile space over the next year.

Issue #3: Differentiation is difficult
Bango, Handango and Ztango. Quick - which of these mobile media companies does what? There aren’t many single-product companies in the mobile space, so I guess company name doesn’t really matter much if it isn’t intended to be a consumer-recognized brand. More importantly though, if what you do is not specific enough, you run the risk of not capturing any mindspace at all. The term “mobile media company” is not very descriptive, yet that’s what everyone calls themselves because the opportunities are evolving so rapidly and there are so many potential customers to sell to that mobile media companies are presenting themselves very broadly lest they leave some money on the table somewhere. This is probably good because it points to a rapidly growing opportunity space, but it also generates a lot of noise. Hence the very memorable names.

Issue #4: Existing categories don’t reflect the choices available to consumers
This is the era of deck marketing, where consumers are scrolling through a list of names sometimes categorized in ill-defined buckets. I know where games go in a wireless carrier’s storefront – it’s called “games.” Well, where do I find productivity applications? And what does “productivity” really mean anyway? Does a mobile email client belong in “productivity apps” or is it in “messaging and chat”? Does it matter if it is targeted at a youth segment or an enterprise segment? Are there enough categories on any carrier’s deck to reflect the number and variety of mobile applications available to consumers? What about an application that enables you to point your cameraphone at a barcode and receive information or execute a transaction of some sort? What exactly is that and how do you communicate it to consumers? I am looking at my phone right now and I cannot find the category for it.

This reminds me of the early days of usenet when there were seven categories: comp, news, rec, misc, sci, soc, talk. Many more have been added over time but possibly the most important one is alt, which was not an original category and is now the receptacle for the lion’s share of usenet groups. I wonder if this is going to happen in the mobile space.

Proliferation of content in the mobile space will create the same problem we saw on the internet. There is an immediate need for a mobile search engine that only looks for mobile-relevant content and applications. Somebody please beat us to this opportunity.

Totally unrelated but interesting to me Part 2: Consumers define brands as much as companies do
Brands are a way for consumers to assign meaning and differentiate products and services among competitors. There are many reasons to invest in a brand. One is to communicate market positioning in a crowded or highly segmented category. I know branding works in this way because the average consumer can rank order automobile brands off the top of their heads: Most people would agree that Mercedes is ranked somewhere above Toyota and Toyota is ranked somewhere above Buick. This consumer “gut feel” is a reflection of brand investment. Those companies have invested in their brands to fight for their rank on the mindshare ladder and it works. Now ask an objective* party to rank order those brands according to some measurable criteria like initial quality, and the order reverses: Buick, Mercedes, Toyota. Buick above Toyota? Really? I never would have guessed that. Does their brand reflect that?

* I am referring to JD Powers and Associates Initial Quality Survey in which cars are ranked by problems reported per 100 vehicles shipped. Just FYI, I personally find it dubious that JD Powers can be truly objective when it sells customer survey services to the very same manufacturers and dealers that it rates on behalf of consumers.

Lexus is at the top of the list. Jaguar is ranked second. Would you have thought that, given the years of negativity associated with the Jaguar brand? Wasn’t it a common understanding that they broke all the time? When did that change? Doesn’t matter – it apparently did change at some point. Perhaps more importantly, their brand didn’t – at least, not in my mind. Until I saw that press release just now, I assumed they still had the same negative service track record that their brand has been associated with for so long. Well, good for them. I wonder if it is helping sales at all?

I find it interesting that Porsche is very close to last place in initial quality. Here is the real test of branding in the automotive space: If I said I was going to give you a free car and you could choose between a Porsche and a Jaguar, which would you choose? Everyone I asked chose the Porsche. This isn’t about price, either – the convertible Jaguar is more expensive than the convertible Porsche.

There is nothing wrong with Ford products, but the Jaguar looks to me like the Taurus design team got reassigned to the Jaguar product after Ford acquired the nameplate. I don’t want to drive a convertible Taurus. What used to be a symbol of status and luxury (i.e., if you drove one, you could afford to have it break all the time) is now a symbol of cost-cutting and repurposing of Ford parts across multiple brands. Despite its high quality ranking, no number of quirky radio ads wherein they pronounce Jaguar “Jag-you-are” with a British accent is going to imbue this brand with the luxury it once stood for.

So, do brands necessarily map to quality? Do brands necessarily map to reality?

I don’t think so, and that is the point of branding – to capture the hearts and minds of consumers. But there is a difference between what you would like your brand to mean, and what your brand really means to people. I will remember not to ignore this.

Change Is In The Air
When I say “in the air” I mean literally atomized, and as difficult to see or contain as air. The most interesting fallout from the Grokster case is that it may have provided the blueprint for the development of a P2P community that cannot be killed. I understand why the incumbent media companies have to play whack-a-mole on the technologies that threaten their business models, but the danger of using the courts to do it is that every time a ruling is handed down it has to specify what is illegal. Creative technologists need only create a paradigm that doesn’t include any of the explicitly illegal items specified to force the media incumbents to continue spending their profits trying to lock down their distribution models.

A Blueprint in Four Sentences
Below are two excerpts from the Grokster ruling. To me, they explain the other 55 pages of the decision:

“We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.”

“Despite offsetting considerations, the argument for imposing indirect liability here is powerful, given the number of infringing downloads that occur daily using respondents software [Grokster and Morpheus]. When a widely shared product is used to commit infringement, it may be impossible to enforce rights in the protected work effectively against all direct infringers, so that the only practical alternative is to go against the device’s distributor for secondary liability on a theory of contributory or vicarious infringement. One infringes contributorily by intentionally inducing or encouraging direct infringement, and infringes vicariously by profiting from direct infringement while declining to exercise the right to stop or limit it.”

So, build a P2P network and don’t promote copyright infringement, and don’t profit from it.

Richard Cotton, executive vice-president and general counsel at NBC Universal said in this article, “Many of the services that were the direct focus of legal proceedings will start to explore whether they can morph into legal operations.”

I think he’s right about that. I think the services that were formed as for-profit services will try to pass muster because of their economic interests. But what about the services without any economic interests? What about the fully distributed, open-source developed P2P solutions that don’t promote copyright infringement and don’t ever intend to profit from it?

My concern for the incumbent media companies is that if they continue down the path of locking down their distribution channels, moving link by link on the value chain, (in exactly the same way you would if you were in their shoes) they could push their problem entirely out of their control: To the farthest edges of the network where there is literally nobody to sue. I hope they don’t think that it would be a big win to effectively discourage any enterprise from trying build a business model around P2P. I hope for their own sake that they don’t think that the Grokster ruling will help create “a constructive dialogue between content and technology companies” and that is where it ends.

Edgar is right that the Grokster ruling will bring some parties to the table looking to become legitimate “industry-sanctioned” file distribution services, but I’ll bet there are enough geeks in this world willing to build P2P software who don’t have any interest in engaging in constructive dialog. Then, like I said in my previous post, the incumbent media companies will have to go after other links on the value chain to protect their intellectual property. That won’t be fun for anyone.

The Upside Of Piracy
For a great many artists, P2P distribution networks represent an opportunity to present their content to an audience that would not otherwise be available to them. Digital distribution has made it possible for small music labels to flourish where the incumbent media companies cannot. Even independent artists with no representation are using P2P networks to distribute their content because it builds audience. Every band starts out wanting someone to listen to their music. Only later do they need for someone to pay for their music. The average independent band makes far more money from ticket sales at small venues and selling t-shirts than they do selling albums. Somewhat ironically, the technology of mass distribution may be empowering a resurgence of the independent artist and the value of the local market to music. P2P technology enables trends to be identified faster, and so it is no wonder that even the top music labels use P2P networks to research what’s hot and to push certain bands in their stable.

Not that there’s anything wrong with it. I am just saying that maybe a little piracy is a good thing if you are a major media company faced with spending a certain amount of money on market research and your two options are inaccurate focus groups or highly accurate hard numbers on how many people are downloading what kind of music. And maybe a little piracy is a great thing if you are an independent band trying to build audience and loyalty to your brand by involving your fans in your art.

The Grateful Dead encouraged fans to record their live shows. They built arguably the most rabid fan base of any band in history. I don’t think the Grateful Dead or their record label calculated the negative impact of amateur recordings of their concerts on album sales. I have a feeling that at the end of the day so much money was made in general that nobody really cared from a financial standpoint, and I don’t know a single record executive who wouldn’t love to have a marketing team built into the audience for one of their acts that could even come close to the legions of Deadheads who followed the band around and elevated their shows to near-religious status. If those Deadheads were sharing their tapes of various shows and that was building audience over time, then isn’t P2P software the evolved version of that?

Today’s independent band wouldn’t call their songs being traded on P2P networks “piracy” – they would call it “promotion.” In the music business, the dividing line between the two concepts is simple: If you have a record deal and someone else is trying to profit by selling your music on little shiny discs, then P2P is piracy. If you don’t have a record deal and you are trying to get people to come to your show at the 100-seat venue this weekend, then P2P is promotion. There is no distinction between “user-generated content” and “independent artist,” because by definition independent art is user-generated. So what if the incumbent media companies chase down the various involved perpetrators in the P2P piracy chain to the extent that you cannot get any major-label content on P2P networks? Could the strategy backfire and actually enable the creation of a more efficient way for music fans to discover new “user-generated” music from independent artists that cannot be found anywhere else?

The tipping point will be when the internet is no longer a secondary distribution channel for media. Today, it is more the case that you hear a song on the radio before you hear it anywhere else. You hear it over and over again and then develop an affinity for it, and then you want to own it so that you can weave it into your life. If you are like millions of consumers, you then go to the internet to steal it. But when the tables turn and fewer people are listening to radio compared to people surfing the internet for new music, or when people are receiving new music streamed right to their MP3 players, then the market for all user-generated content will truly blossom. When the internet is a primary distribution channel for new content, there will be no reason to ever sell a compact disc again. Rather, all of the value around the content will be the reason for artists to create, and today’s battle over distribution will seem unproductive. The smart media incumbents are already recognizing this and taking steps to embrace digital distribution. I know I have said it before, but I’ll say it again: The biggest threat to incumbent media companies today is not competition from other media companies, it is competition from their own customers. Media companies beware the 14-year-old girl with a mobile connected camcorder producing her own mobisode-based reality show.

If you are not on the enabling side of the coming wave of user-generated content, there is absolutely no hope of building the media incumbent of tomorrow – a media company focused on participative media, overlapping personal networks as distribution channels, media sharing as promotion and location-based media production and consumption tools that turn media into communication.

Raise your hand if you have ever rented a movie. Ok, now raise your hand if you have ever recorded a TV show so that you could watch it later. What if you couldn’t rent a movie? What if VCRs were illegal? It is hard to imagine a world where these basic consumer behaviors didn’t exist. It would be harder to imagine that they almost did but then didn’t because in 1984 Universal Studios sued Sony over their Betamax VCR and won, effectively halting innovation and at the same time the evolution of a media industry that today includes Blockbuster, Netflix, TiVo, every major consumer electronics manufacturer and hundreds of millions of happy consumers parting ways with their hard-earned money.

Ok, now raise your hand if you are part of the $33 billion dollar DVD industry. Yeah, you would have a different job. And the media incumbents collectively would have been $33 billion dollars poorer in 2004. It is a good thing for Universal Studios (and all of the media industry incumbents) that they lost the landmark Sony Betamax case because in retrospect their myopic position at the time, while logical given their view of their industry, would have cost them literally trillions of dollars. Universal Studios at the time thought of themselves as the “the movie industry” and not the “entertainment industry.” They never thought of the VCR as an opportunity – only a threat. They assumed that VCRs could damage their business which was based on box office receipts, even though VCRs had legitimate uses beyond the wholesale piracy of Hollywood movies. That was a reasonable assumption, but it was because of the other legitimate uses of the VCR that Universal lost that case and gained the most important revenue stream in the entertainment industry. The basis of the Betamax decision was that a distributor of a multi-purpose tool cannot be held liable for copyright infringing actions of its users if substantial non-infringing uses of the tool exist.

Grok This
The 9th Circuit found in the MGM v. Grokster case that P2P file sharing services were capable of, and indeed being used for, noninfringing uses. Using the Betamax precedent, they ruled that such services could not be held liable for the infringing actions by their users.

Then today, the Supreme Court disagreed and reversed that decision.

MGM v. Grokster was brought by 28 of the world’s largest entertainment companies against the makers of the Morpheus, Grokster, and KaZaA filesharing software products in 2001. The entertainment companies hoped to obtain a legal precedent that would hold all technology makers responsible for the infringements committed by the users of their products. Today’s decision against Grokster may well give the entertainment companies that power.

This is one of the Forces Shaping Mobile Media. I mentioned previously my strong belief that the owners of intellectual property rights should have the ability to control and sell their content in whatever way suits them. I also mentioned the importance to the entire value chain of the independence of Device Manufacturers and Application Providers in #2 of 3 posts on the topic of the same title.

The Grokster decision will lead us down an interesting path along the value chain, wherein the incumbent media companies will execute a series of steps to regain control of their content and their resultant revenue streams.

Step 1: Lock Down The Internet
ALL the P2P services get sued into oblivion. It won’t matter if they are primarily using their powers for good. It doesn’t matter that P2P is a more efficient and cost-effective distribution mechanism for homogenous files, nor does it matter that P2P enables viral distribution of legitimate content via a network of overlapping personal networks. The companies that have legitimate business models based on legitimate technology will bear the cost of lawsuits as a result of this decision and will ultimately serve at the pleasure of the incumbent media companies.

Step 2: Lock Down The Device Manufacturers
Revisit the Sony Betamax ruling. It’s not just your VCR that is capable of infringement but also has legitimate uses. It is also your iPod, your PC, your photocopier, your router and your CD burner. From the standpoint of the media incumbents, a three-pronged approach is required to lock down the device manufacturers:

First, if a P2P service is liable for copyright infringement, then a revisitation of what can be construed as “P2P” is in order. If our computers are connected, that is a peering environment and cannot be allowed without oversight and control. Your mobile phone has bluetooth? Not in the near future. By shifting the risk of willful infringement to the device manufacturers of certain enabling technologies, those enabling technologies will be taken out of the devices or will only be allowed if wrapped in some kind of Digital Rights Management scheme.

Second, if a cornerstone of the Grokster ruling was that Grokster and services like it “…are used overwhelmingly for infringement,” then a revisitation of what can be construed as “used overwhelmingly for infringement” is in order. It will only take one lawsuit to get most of the device manufacturers in line. CD and DVD burners will get serious scrutiny. Rather than face the cost of getting sued, many device manufacturers will instead choose to modify their products to please Hollywood.

Third, lobbying and legislation will be a critical component of the incumbent media companies’ efforts to regain control over their media. The Broadcast Flag died in the D.C. Circuit Court of Appeals in ALA vs. FCC, but that doesn’t mean it can’t be taken to Congress. From the EFF: “The broadcast flag rule would have required all signal demodulators to ‘recognize and give effect to’ a broadcast flag, forcing them not to record or output an unencrypted high-def digital signal if the flag were set. This technology mandate, set to take effect July 1, would have stopped the manufacture of open hardware that has enabled us to our own digital television recorders.” Understand what that means – if the entertainment industry gets the rule pushed through somehow, you will no longer be able to record your DTV signal freely to execute your fair use rights.

Step 3: Lock Down The Network Operators
To truly eradicate copyright infringement in a digital connected world, content owners must have complicity from the network operators because they own the pipes. The entertainment industry should assume it cannot eliminate every P2P network. It should further assume, as an element of a strong legal strategy, that it will not win every case against every device manufacturer it pursues. As a hedge, there should be no time wasted going after the network operators. Even after an avalanche of lawsuits, congressional hearings and a lot of time and money spent, the entertainment industry could find itself in not as strong a position as it would like to be. The answer is to take separate steps to achieve the strongest possible position. Without the digital pipes to transfer the content, it won’t matter if you have a device capable of copyright infringement. This will require a two-pronged approach:

First, spread the liability to the network operators. They came close to achieving a precedent in RIAA v. Verizon, which would have required Verizon to disclose the identity of a subscriber who allegedly used KaZaA P2P software to share music online, but Verizon won. Based on today’s ruling in the Grokster case, if I were in their shoes, I would present the argument that the network is an integral part of the P2P solution and should therefore be subject to regulation. If I were them, I would start with college campuses as a stepping stone, because they operate networks within their domains. A ruling in favor there would set the stage to go to the ISPs.

The second prong was accelerated today with a ruling in favor of the FCC in FCC v. Brand X, which essentially upheld a rule that enables cable companies to refuse to share their networks with competing ISPs. This comes down to a technical definition: Under the current rule, cable internet companies are providers of “information services” whereas DSL internet companies are providers of “telecommunication services.” “Information service” providers are not subject to the same regulation as “telecommunication service” providers. Does a decrease in competition mean a decrease in consumer choice? Time will tell.

In my opinion, that is a smallish issue compared to the strategy that I would be crafting if I worked for the cable industry: I would be setting up an argument and spinning up my lobbying machine for a more specific definition of “telecommunication services” and would specifically argue that such services should be limited in some way, for instance to voice, or only those services that are truly “communication” in the traditional sense like between two people. A long shot? Maybe. But if successful, I could own the market for high-speed data and relegate a long list of would-be competitors to services that will be essentially valueless at some point in the future.

There’s a lot to do to ensure that consumers pay for the media that Hollywood creates. It’s a big business, and afterall, it is their content and they have the right to charge as much as they want for it as long as the market will pay for it. As nefarious as all the tactics and maneuvering may seem, if it was your billion dollars at stake, you would be doing whatever you could to protect it, too. Furthermore, everyone should have a right to protect the value of what is legally theirs, and I will always take the position in favor of the incumbent media companies on that issue alone. With respect to all of the issues in this post, I quite honestly believe in the capitalistic pursuit of value through the exploitation of intellectual property rights.

However, my issue with the decisions today is that they come at the great cost of individual freedom. That is what makes today such a dark day in the history of media. I literally felt my personal freedom decrease when I read the decisions today because I know that the only way to truly eradicate copyright infringement is to infringe on your privacy. While certainly not always the case, when legislation dictates what you can or cannot do, there is a good chance that it is not in the best interest of your personal freedom. If the incumbent media companies cannot be certain that the copy of the ::whatever:: you made is going to be used only for personal use, then they have to implement some means of observational control to be sure. (And they will.) And here is the most annoying thing about June 27th, 2005: This is all so that I don’t steal whatever music from whatever American Idol star is considered hot right now. I know there is a market for it, so I’m not commenting on the inherent value of the media itself. Rather, I am comparing the inherent value of my personal freedom to the inherent value of whatever music from whatever American Idol star is considered hot right now. I simply cannot make that equation balance. Between the two, I would give up American Idol before I would give up my ability to freely press ‘record’ on my DVR.

My Thoughts On LBS
In case you cannot make the LBS panel at BREW2005, here is some food for thought on Location-Based Services: The most compelling consumer apps are also the ones that scare the hell out of the carriers, and there is a chance that they will never see the light of day.

In case you don’t already know, LBS only exists because of E-911. The E stands for Enhanced, not Emergency, as might seem logical. It is the ultimate Caller ID – no numbers can be blocked, not even unlisted numbers, etc. When you call 911 from a landline, your phone number and physical location are passed to the PSTN (Public Switched Telephone Network.) It is called ANI/ALI – Automatic Number Identification/Automatic Location Identification. This information then routes your call to the PSAP (Public Safety Answering Point) dispatch center closest to you so that they can send an ambulance or whatever you need. Think about it – you don’t dial an area code before 911, so how else is the call going to get to the dispatch center nearest you without knowing your location?

The proliferation of mobile phones created a problem. The wireless networks are like their own clouds in that their network of base stations and towers form a closed communication system. For simplicity’s sake, imagine them plugging the whole wireless network cloud into the PSTN via one big cable. So without the ANI/ALI system used for landlines, all the PSTN could possibly know is that a call originated from someone somewhere on the wireless carrier’s network, which could be anywhere in the country. Not good, when you get connected to the emergency dispatch center in New York but you live in LA.

So then the industry had to develop their version of ANI/ALI to pinpoint the locations of mobile consumers who call 911. There are different ways to do this. You can put a GPS transponder in every handset or you can triangulate a user’s location based on how close they are to various cell towers, or you can do a combination of both. The goal is to get the closest proximity of a user to route the call to the correct dispatch center and then quickly dispatch emergency assistance without having to get further location details from the caller, which is sometimes impossible.

This stuff still fascinates me - I started my career as an engineering wireless consultant at a firm that specialized in trunked radio communication systems for public safety. We helped deploy regional wireless trunked VHF and 800 MHz radio communication systems. (And some UHF, but don’t take that as a sign of my age – analog UHF and VHF arguably propagate better through trees, so the fire chiefs used to like it better.) I don’t think I was very good at it. I liked flying around in helicopters with topographic maps deciding where to put towers, but antenna tilt-down calculations were not my forte. It is a nontrivial problem to solve the communication needs of Fire/Police/EMS all using a scarce spectrum resource and having to share maybe only a few channels among dozens of groups to coordinate an agency-wide response to something major like an earthquake or other disaster. 911 dispatch centers are intense places, particularly at night and on full moons, when everything bad and weird seems to happen. The entire emergency services communications infrastructure is an awesome thing to contemplate, from wireless 911 to call routing to dispatch centers back over closed wireless networks to mobile emergency personnel in the field. Now picture it all held together with spit and tape.

Anyway. The wireless industry has done a fine job of addressing the issue even given various delays, as I am sure it has not been easy. And now we have handsets that know where they are, which is an engineering feat. Nevermind that the whole reason for it is safety – what about all the cool and useful applications that could be developed if the carriers passed this information to application developers? Location adds a sort of Z-axis to many existing applications and creates the very reason for other to exist. The opportunity in value that can be created for consumers is easily in the billions of dollars per year.

So What’s The Problem?
The biggest challenge facing our industry is not a technical issue, it is a policy issue. We need to decide how exactly we are going to handle the very personal information that is a person’s specific location at a specific time. Fleet management is one thing. That is a low-risk deployment that can be fairly well controlled. But what about the guy using LBS to stalk his ex-girlfriend? Weird creepy guy, and his approach was decidedly low-tech, taping the handset to the bottom of her car, but still it shows the dark side of real-time specific-location applications. Or how about the guy who got fined $450 for speeding - not by the cops, but by his rental car company that had installed GPS on its cars. Parents are tracking their kids’ whereabouts.
Read about these here.

I am reminded of the Sopranos episode where Tony gets a new SUV and the first thing he does is rip the navigation system out of the dashboard because he doesn’t want to risk the feds possibly knowing where he is.

Real-time specific-location applications can only be developed on a slippery slope, and I must say that I personally side with Tony Soprano on the issue. Just because I am paranoid doesn’t mean they aren’t out to get me.

I should note that we worked for a very long time with our carrier partners to understand their tolerance for LBS pain. As such, Rabble handles location in a very unique and intuitive way that enhances the application’s functionality without ever revealing a user’s location, not even if they want to, and not even to someone they trust. This is another reason carriers love Rabble – it is a location-aware application but not necessarily a location-based application, and it was built with a carrier’s view of the world in mind. Once you see Rabble, I think you will agree that it makes perfect sense.

I do not know of any industry-wide agreement on a policy around LBS, but it is the first thing that has to be addressed before carriers start handing out LBS APIs to everyone.

I wonder if the ACLU is going to question the way LBS handles location information. It is one thing to transmit my location only after I dial 911, but what about constantly pinging the network with my specific location? Is that an invasion of my privacy and a violation of my civil liberties? How accessible is this information? Who gets to see it at any given time? What are the policies around it? Does the user always have the option to turn the feature off so that he or she cannot be tracked?

The network operators see an opportunity to monetize location information in consumer applications, but they also see risk. They have the data, and it would be a shame not to offer compelling new functionality for their subscribers. This is basically an issue of privacy, and this discussion has been going on for years. I stated my personal opinion in the last sentence of this USA Today article a couple of years ago. Generally speaking, I believe that privacy is something that people are willing to give up in increments, based on the cost and benefit of doing so. You want to rescue me from a ravine I fell into while hiking? Yeah, track my location. You want to give my boss the ability to see that I am drinking at Harry’s Bar on my lunch break? Now that I don’t like. (We only occassionally drink at Harry’s Bar at lunch, btw.)

Personal privacy in the mobile connected world will be available, but it will be expensive and only a very few people will pay for it. The rest of us will plug into the location-based grid because of the efficient markets that will be built around location information. At some point, the risk will be bled out of the system and there won’t be any other way to participate in society. The network effect takes over. I remember a time before fax machines, and my life didn’t seem incomplete. Then all of a sudden everyone had one and they simply expected that they could send you a fax. It became a part of business society. Email was the same way. Then IM. Now everyone I talk to in Europe asks where they can find me on Skype. When you think about it, IM sort of transmits your location in a way. It tells people right where you are – in front of your computer. All communication is converging into the simple concept of presence: The right communication medium for the right place and time. I think LBS is going to play a huge part in the mobile connected future because location will become an aspect of communication. The market will find the sweet spot, and the network operators and content providers will agree on a solution for location information that makes sense for everyone. In the meantime, the market will not wait for policymakers to bring value to consumers if they are willing to pay for it.

LBS is the key to the citizen journalism future
(Okay, maybe this is a post about populist media.) Privacy issues aside, the network operators should be looking to media as their biggest opportunity to monetize location information without incurring the safety and privacy issues of real-time location applications. As a populist media company, we built Rabble purposely as one such application, btw. Location of a person is one thing, but the location of the media they create is another. One of the keys to building a trusted citizen journalism network is a network-certified and generally tamper-proof time and date stamp. If Reuters is going to employ a million amateur stringers around the world armed with mobile connected camcorders recording content as it happens, such a content collection system has to be trusted – the content simply has to be real. The vetting process won’t exist when you are dealing with the ordinary rabble of the world, so something else has to take its place. If Reuters is going to act as an editor of such content, they have to know that they can stake their reputation on it. This is easy to solve with a network-certified time and location stamp. Without it, how can Reuters know for sure that I didn’t Photoshop the picture I sent? Or that the picture I sent is happening in the location in which I claim it is happening? The network operators hold the keys to this information and they can charge for it.

Now think about the collection side of citizen journalism. Imagine a map of the world with little dots lighting up whenever someone sends Reuters an interesting picture or video. When something big happens, a lot of people take interesting pictures and you will see a particularly bright spot on the map. Imagine combing the world for hotspots in this way and being able to zoom in with a click and extract the media and represent it to the rest of the world through your distribution network. In fact, the purest form of this would not even have an intermediary, rather consumers would be in control of the interface, freely combing the world for whatever media interests them by location and topic.

That is the future of the news media: Enabler, not editor. And this media future cannot exist without LBS.

I love that phrase. I cannot think of a better mental picture of someone putting forth a good effort to fix a problem that won’t exist soon because of a much larger problem that would obviate the solution they are attempting to implement.

“Bravo Jenkins - smashing job tidying up those deck chairs. Say, have you noticed the 39,000 tons of water pouring into the forward compartment pulling the ship down? Bloody unfortunate news – seems we only have an hour or so and that water looks chilly. Sorry to tear you away from this important work, but when you’re done here, let’s see if we can lend a hand, eh chap?”

It wasn’t Jenkins’ fault. He didn’t see it coming. Neither did anyone else. And that’s the way it goes. Steaming through icebergs at 20 knots requires some visibility into what lies ahead. If you read my previous posts on the Forces Shaping Mobile Media, (1, 2 and 3) you know where I am going on this. To recap, today’s mobile data business model relies upon closed networks and closed devices to sustainably monetize the content being sold. Like we noticed on the internet, the most open of networks connecting the most open of devices, when a consumer has a choice between paying for a song or getting it for free, they will choose free 99% of the time. And no matter how many 12-year-old girls the RIAA sues, consumers apparently are not afraid enough to stop doing it.

Do You See An Iceberg Out There?
WiFi handsets are here, enabling users to make (potentially) free VoIP calls from any hotspot.

Kyocera and Boingo recently announced a dual-mode handset that presumably will sense when you are near a hotspot and route your data over the free connection.

Which smells like a market opportunity to companies like Kineto Wireless which are filling in the spaces by bridging the gap between WAN and WiFi.

And that’s just the tip of the iceberg. (Get it?) Devices themselves are evolving, changing from closed “black boxes” to open hardware platforms with operating systems and software applications. Bluetooth and removable media represent progress for the mobile space, but they also present some problems in that they could disrupt existing and potential future revenue streams.

I don’t even have to offer you a link to one of the many articles about falling voice ARPU. Just look in this Sunday’s paper for the latest offer from any carrier to convince yourself of the simple fact that voice has reached commodity status: “10 billion minutes for just $29.99/month, including 5 billion evening and weekend minutes.”

So although as an industry we need closed networks and closed devices to make money selling ringtones, graphics and games, on the horizon we have open networks, open devices and dwindling revenue from our core product. What should we do?

Full Steam Ahead
No problem there, though, because even if mobile voice calls go to an ISP model flat rate for unlimited use (like what T-Mobile appears to be preparing for) or at worst follow the internet trend and go to free, (and they likely will, though I would personally always pay for some level of QOS if the alternative were to be even more dropped calls) data is the thing that will sustain growth in our industry.

Investment capital is pouring into mobile TV companies, and judging from the new Forbes cover story, (“It’s Cellevision”) we are all going to get rich off of mobile data. Hollywood came to CTIA this year and threw some great parties. There is a palpable optimism in the air.

It feels like 1998, doesn’t it? That was the last time I felt this much optimism - when the Internets was going to be the new distribution channel for all manner of media.

And it was, just not in the way the media companies expected. The original, cool Napster showed us that.

Let’s Try DRM Again
Albert Einstein said that the definition of insanity is doing the same thing over and over again and expecting different results. DRM exists on the web today. The very small percentage of consumers who actually pay for music and movies on the internet are usually downloading content in some sort of DRM wrapper. The vast majority of the rest of the consumers who are downloading music and movies for free via P2P networks are not. And so I wonder if anyone at the GSMA or MPEG LA or OMA have asked this fundamental question: Does it really matter? Is it possible that they are rearranging DRM deckchairs on the mobile data Titanic? If all the signs point to opening devices and opening networks, what value does any security scheme really provide? I read with great interest the latest rejection by the GSMA of the MPEG LA’s revised proposed fees for the OMA members’ collection of DRM patents. Well of course it is too expensive. DRM will exist in the open mobile space only to satisfy a legal requirement to make some effort to protect intellectual property rights. Then some geek will crack the DRM code and the genie will be out of the bottle. The vast majority of content in the open mobile space will get napsterized. If you are trying to build future value beyond the next two years, now is a bad time to start dealing in mobile content downloads.

Jump Ship
I may have just tipped my hand that I am against DRM. True. I have written before that I am in favor of a closed network and closed devices as a better alternative to an open environment with DRM. The carriers have control of their networks and I think they should hold out as long as possible to monetize their very valuable infrastructure. As such, I am a true believer in paid mobile media. But the writing is on the wall. I ran the largest ringtone company in North America and I don’t even buy ringtones anymore. Now I record song clips on my phone and make them my ringtones. So if we are getting more and more indications that there is going to be an alternative mobile network that cannot be closed because it is inherently distributed, what’s a mobile media entrepreneur to do?

The answer is simple: Don’t deal in mobile content downloads. Today, you should. In two years, you should not. We will see dozens of compelling mobile data applications over the next few years. I predict that when devices and networks are open, none of them will be based on business models that rely on selling a discreet piece of content to a consumer. Services that enhance communication by giving users a multimedia publishing platform in their pocket are valuable future apps. Make my phone easily integrate with my shared distributed calendar to increase productivity – that will be valuable. Turn my mobile device into a location-based remote control to interface with the world around me – that will be valuable. Go beyond general search to verticalize applications by interest area so I can find a particular kind of person, place or thing with some reliability. Extend existing data services like mobile IM to include true multi-dimensional presence functionality – that’s a good idea. Network layers like lat/lon and time stamp, when attached to media, will be valuable certification services that carriers can monetize and will revolutionize the news industry. Then make every user part of a participative media network with the mobile phone as interface, blurring the lines between media, marketing and communication. Make the mobile device a commerce tool to replace or augment the current credit card industry – that’s a new value chain waiting to be built. Make my phone a personal assistant complete with seamless integration to my other modes of communication so that people who I want to talk to can find me, but those who don’t can view either my personal or work channel instead, complete with assignable rights to access certain information by individual.

This industry hasn’t come close to unlocking the massive value of data. There is literally nowhere to go but up. That’s good news. It is even bettter news that even if there is an alternative and free distribution channel for data, the carriers still have a seemingly limitless number of opportunities to monetize their subscriber relationships through applications and services that are future-proof because they cannot be napsterized. A little Hollywood is good, frankly, and mobile video is cool and it should have its place in our industry. I just hope to see more companies look past the current traditional media repackaging frenzy and capitalize on the massive opportunity in mobile data that lies just beyond the next iceberg.

In the play (and movie) Six Degrees of Separation, Ouisa Kittredge’s famous quote explains its theme and purpose. She says, “I read somewhere that everybody on this planet is separated by only six other people. Six degrees of separation between us and everyone else on this planet. Everyone is a new door opening into other worlds. Six degrees of separation between us and everyone else on this planet. But, to find the right six people…”

The story is about a rich New York couple who are visited one night by a man claiming to be a friend of their son’s from Harvard. Strangeness ensues.

Every “social networking” site is based upon this simple concept – that we are all connected by only six degrees of separation. It’s me to you to him to her to Kevin Bacon to the President of the United States. These sites generally allow you to visualize your “network” of friends and friends of friends. The purpose is to effect some sort of value from codifying this elaborate network of yours. And that’s the problem – that “some sort of value” is not generally understood.

6 is a Big Number
I have one problem with most social networking tools: They generally don’t do anything. Seeing the famous formula “E=MC²” written on a chalkboard does not make the theory of relativity any more useful to me. What I mean is if it is an axiomatic truth that we are all separated by six degrees, then why do I need to model it? I mean really, what value does that provide me if we all believe that we are each six phone calls away from the President of the United States anyway? Let’s say I use Friendster to model my network and on my sixth degree of separation I find George Dubya Bush. Would I call him? That’s ridiculous, right? But isn’t that exactly what these sites want us to do so they can take credit for making the connection? It is, and someone better start doing it, or this social networking thing is going to flame out fast. What if he were on my second degree? Surely that is much closer. Would I call him then? To ask for a favor or to introduce me to one of his daughters? No. In fact, I’m not sure how it happened but it turns out I am a ‘friend’ in the first degree of John Kerry. Now he’s only a senator, but still, I wouldn’t think to call him. (I am also three degrees away from General Zod, but jIH ta’ ghobe’ Sov Klingon, so I can’t call him anyway.)

In fact, I have seen no feel-good stories nor heard any anecdotal evidence from anyone I know that has signed up for a social networking site to the effect that they “…signed up for (insert social networking site here) and ohmigodwouldyoubelieve I met (person they didn’t know they knew) and now he/she is my friend/boss/lover/activity partner.”

Utility is Key
The issue here is that there is a reason our friends are our friends. Our friendships, at their core, are based on utility. We go from being total strangers to having some sort of relationship because we get something for each other, plain and simple. At work, we separate our “coworkers” from “work friends” based on how closely we have worked together, late nights finishing a deal or that time we were all in Vegas for the trade show and later that night Jenkins got up on the table and, well, what happens in Vegas stays in Vegas, but that Jenkins is okay in my book. Even if they aren’t our friends, we can connect with total strangers if we have a presumed commonality from which we may derive some value, however scant that value may be. My business partner was in a fraternity in college. He tells me that whenever he wants to stay at one of his fraternity’s houses, he can. This is based on the simple fact that he was in the same fraternity in college. If he meets someone in a bar who happens to mention they were in the same fraternity at some point in time, they are instantly buying each other drinks and talking about their college days even though they weren’t there together. There is a glue that binds us together based on experience and emotion that simply cannot be modeled. And if it cannot be modeled, it cannot be exploited.

Or perhaps it can. Similarly to Einstein’s theory of relativity, my new equation defines friendship. F=UC². F denotes Friendship, U is Utility and I kept the factor C², the square of the velocity of light, the same as in Einstein’s formula. So Utility can be turned into Friendship at the speed of light. (Or something like that – I went to a state school and our science requirements were possibly lower than at your school.)

Don’t believe me? Let’s say General Zod was giving away $100 bills. Would you be his friend then? Would you click on the link that makes you his friend? Of course you would. I’d do whatever internet version of socializing is required to get my $100. That’s Utility. This happens all the time on Monster.com. Strangers connect to form a deeper relationship, in this case in the form of an employment agreement.

In fact, the networking services that connect people for a purpose (Monster.com, Match.com) make a ton of money whereas “social networking” services that simply allow you to model your network and let you decide on the purpose don’t appear to have a viable source of income at the moment. Monster.com and Match.com are Media Networking sites, not social networking sites. That’s right – your profile on Match.com is Media. It is user-generated content that you produce for a specific purpose, namely to Network with others through the Media they create. Match.com is an LMNO. And Match.com Mobile is a better LMNO. The reason Match.com makes hundreds of millions of dollars and Friendster has no detectable source of revenue and is declining in usage is because Match.com provides utility, whereas Friendster doesn’t. (BTW, I think Friendster is starting to figure this out – they have blogging now.)

So, the way I see it, there are two ways to evolve social networking as conceived of today to make it actually useful: 1) Connect me to people I DON’T know. I already know who my friends are, but if you can introduce me to people for a reason, like getting a job or finding a date, then I’m in. The trouble is that there are already well-established companies doing this and it is unclear whether the social networking sites can evolve enough to do this well. 2) If you don’t want to provide me utility as the nexus to create friendships, at least provide a particular purpose for us all to get together. Let’s get our friends together to decode the human genome puzzle or search for extraterrestrial life. Give us a reason to use all of our friends and friends of friends for some productive purpose that creates something that we can all then benefit from. At the very least, give us something to transact.

Bottom line: There is more value in providing purpose between strangers than no purpose between friends. People want to meet people they don’t know and have proven they will pay for it if there is some utility in it. This is the cornerstone of Media Networking.

Postcards From The Edge

The basic competing economic forces I outlined previously will lead to a redefinition of Media. While the traditional media incumbents are taking the proper precautionary steps to ensure their content doesn’t get Napsterized, what if Media in the mobile space simply got redefined? Yes, I want to watch video on my phone because that’s cool, but did I say what kind of video I want to watch? Today’s condensed mobisode form of television will evolve into a new type of media: producers will simply create two-minute mobisodes specifically for the mobile environment. Why repackage and pay a license fee when I can create native content with no cost basis? Makes sense. Now the important part: Who makes the content? Does it have to be Hollywood studios? Not when the production studio is in your pocket.

With my LG VX8000 PMD I can create my own two-minute mobisode-based reality show and I’ll bet you I can get an audience. How big would my audience be? It doesn’t matter, because the incremental cost of distributing my mobisode to the next consumer does not decrease with an increase in the size of the audience. Every new viewer will pay for the bits to transfer it to their phone as they do today. So for a network operator making money on the transfer of content it doesn’t matter if that content is my mobiseries or a repackaged episode of “24.” They incur the same network cost basis and can charge the same markup to the end user. The difference is that they don’t have to pay me a license fee to distribute my mobiseries. The math is simple: One mobisode can be watched by a million people or a million mobisodes can be watched by one person each and the economics don’t change for the owner of the network. (Except that they may improve their margins because they are not paying any licensing fees.) In the time it takes the MPEG LA and the GSMA to decide on a DRM standard (see the First Law) The Network owner will monetize their infrastructure by realizing they can make money without having to pay any attention at all to DRM.

All the tools are in place right now, too. The subscribers have the content production and consumption devices, they are happily paying for data and there is no shortage of demand for self-expression. Because there is no derivative work being created, there is no licensing minefield to navigate. The network operator simply states in their EULA that the end user releases all claims to the work and that it can be used however they see fit. Then the end user has no need for DRM, and frankly the content being produced would have such a short shelf life that it wouldn’t even make sense to protect it’s future value. Finally, the end user would not be asking the network operator for a cut of the revenue on every new user they add to their audience. In fact, today we create media that generates additional revenue for the network operator and we pay them for the privilege. Every time I send an SMS, I pay for it. And every SMS I send results in someone else opening it, and they pay for it. The more I send, the more people open them, and the more money I am making for the network operator. These little electronic postcards are not created at the center of the network by a Hollywood studio – they are created and distributed at the edge of the network by ordinary individuals like you and me.

Now amplify this concept so that whenever I produce a mobisode, I pay for it. And whenever I post it to my channel, my list of subscribers views it, and they pay for it, too. Simple. This is the future of mobile media. As devices and networks open, the ability to secure traditional media will become more and more difficult. Personalizing media and distributing it from a trusted source is a way to ensure viewership, and creates a different kind of “closed system,” one that is essentially open to everyone, but relevant to a smaller number of participants. This scalable model has already started with blogging and will continue into multimedia.

User-generated content is one of the biggest issues shaping mobile media because the mobile space overall is enabling a migration in media production to the farthest edge of the network - into the pockets of every wireless subscriber. I have said before that the biggest threat to incumbent media companies is a teenager with a mobile connected camcorder. But this is the biggest opportunity to the LMNO media titans of the future who have the vision to enable these prosumers to redefine media, and the mobile space is where it is going to happen.

Three Kings Bearing Gifts of a Closed System

To distribute digital media without encumbering consumers with DRM, you simply need a closed system. This is easy to accomplish. There are basically Three Kings on the value chain that must collaborate in an attempt to secure digital media: The Device, The Application Provider and The Network. All three are at odds with each other, so collaboration appears to be impossible. (And so see the Second Law.) My explanation…

The Device Manufacturer
The Device manufacturer wants to add value to their devices in the form of features and functionality. The more devices they sell, the more money they make, so the more features and functionality they want to cram into each device, and the more competitive it will be in the marketplace, which is their goal. You want to play MP3 files on your device? No problem. After all, it is not the responsibility of the device manufacturer to secure the digital intellectual property rights for the Media industry. RIAA vs. Diamond Multimedia decided that.

Why did the RIAA have to sue Diamond? Because the Diamond Rio can enable people to make unsecured copies of unlicensed content and distribute it without any degradation of quality. This is essentially the same argument that the MPAA used against Sony back in the day to try to stop the introduction of the VCR. It is funny now to think that the MPAA didn’t want the VCR to happen. This is the same VCR that is now responsible for more revenue than box office receipts. Of course, hindsight is 20/20. Sony wanted to sell VCRs (but Betamax ones, oops) enough to take on the movie industry and by winning, they created an entire industry that benefited consumers, device manufacturers and the movie industry in addition to creating a multibillion dollar movie rental cottage industry that never existed before. The net result is that we cannot rely upon the Device Manufacturer to accept responsibility for digital media security because they have no economic interest in selling media. Funny that I can only articulate this bluntly, but if you sell devices, all you care about is selling devices. If I made mobile phones with razor-thin margins among cutthroat competitors and an SDMI-like organization was trying to force me to put their DRM solution in every handset I sell and on top of it they were trying to make me pay for it, I would rigorously defend my position that it is not my problem.

Nonetheless, creating a superior consumer device that in any way opens a closed system, no matter how much consumers value your innovation, apparently will eventually get you sued.

The Application Provider
The application provider’s business model is simple: I sell you the media, you pay me the money. Simple enough, except when you are selling a commodity that people can buy or get for free elsewhere. Let’s say Apple is selling a million songs per month on their popular iTunes site. According to Big Champagne’s Eric Garland, the RIAA claims 2.6 billion unauthorized downloads per month. “…so the whole of the legitimate marketplace accounts for less than 1% of total downloads.”

Ok, so there is and always has been illegal activity. It seems fairly out of control, but the lawyers of the people who own the very valuable intellectual property rights are doing their best to get it under control, so that’s good. And even with this rampant illegal activity, there appears to be a market for paid digital media, so that’s good, too.

But put that aside for a moment and look at a classic content distribution model: Radio. When enough people have receivers, they become a market for whoever is providing content, in this case the broadcasters. And there are a lot of broadcasters. The iPod is sort of an evolution of radio in that it can receive content. If the only way to get digital media into your iPod is to buy it from the iTunes digital media site, then the collective iPod users become a market, but only for one content provider. They become a closed market and the mechanism to deliver the content is a closed system, like a radio that only tunes in one station. I say that if you can sell that kind of radio, more power to you. The content is secure enough to satisfy the music industry, consumers are happy with the apparently fairly priced media, and Apple is happy with their gross profit of $.06 per download or whatever it is because even if they aren’t making a ton of money on digital downloads, they sure seem to be selling a lot of iPods. Everyone’s happy, right? Well, everyone except other companies that make money selling digital media and all of a sudden find themselves shut out of the huge market that is the iPod consumer collective. Real Networks is a good example of a company shut out of the market. So what did they do? They hacked the iPod so that iPod users could download digital media from their competing service. The iPod/iTunes construct was a good example of The Device Manufacturer collaborating with The Application Provider to create a closed system. The problem is that the system doesn’t work when you try to include other application providers. Unlike Apple, Real doesn’t sell iPods and so doesn’t care about the careful plans Apple has laid for media distribution domination. If all you do is sell media, all you care about is selling media. So creating a market of your own, however logical it sounds, puts you at odds with other Application Providers and apparently you will eventually get hacked, possibly sued or at least elicit some strong words from a congressman or two.

The Network
Make a mobile phone that can download digital media and don’t talk to The Network about it first. See what happens.

Either you didn’t consider the cost of getting all of that data across the network (which would result in enough money to make The Network happy, but would make the price of a song somewhere around $27) and so it is impossible for them to sell your product because nobody would buy it or you knew it would be too expensive so you put together some sort of bluetooth or USB solution to transfer content, which admittedly isn’t the best user experience, but hey – it’s the first of its kind so people will buy it.

So you just cut out The Network. And guess what? They don’t sell your device to their subscribers.

When you own the network, you know it is very, very valuable because you own the customer. Of the three kings of digital media distribution, it is the most valuable because people will pay for access even when the content isn’t valuable enough to pay for.

Which brings us to Conahan’s Third Law of Digital Media Distribution: “The network gets paid whether the content is secure or not.”

We have a secure digital media distribution model in place right now, wherein the three kings, The Device Manufacturer, The Application Provider and The Network all cooperate harmoniously because they are all making money. Ringtones are sold in this country through a simple distribution chain where The Network gets a percentage for distribution, The Application Provider gets a percentage for provisioning the content, and The Device Manufacturer need only disable the ability for a user to forward a ringtone to someone else. It is called “forward lock” and it works well enough to support a multibillion dollar industry. In the case of ringtones, nobody is forcing the handset makers to install expensive DRM, the ringtone companies aren’t wrapping their files in DRM and the network operators aren’t encrypting transmissions. It is a completely closed system and everyone is happy, including consumers.

So if everyone is happy and making money, why wouldn’t they keep it a completely closed system? Here is where the interests of participating parties diverge.

Say you make handsets and to be competitive with other handset manufacturers, you put Bluetooth in your phones because people like it, maybe to enable a wireless headset. That’s good until you realize that you also just disrupted the closed system and people can transfer ringtones from their PCs or other devices for free.

Remember earlier this year when Verizon Wireless crippled the Bluetooth functionality on the V710?
They did this so that a user could connect a wireless headset, but couldn’t transfer media from their computer to their handset for free, requiring instead that the user pay for the media through the closed network. The response was largely negative and someone even initiated a class-action lawsuit against them. Why? Are we saying Verizon Wireless isn’t entitled to make money from the transfer of content in the same way they have been doing for years, namely by monetizing their very expensive investment in their network infrastructure that enables them to make money in this way? That is absolutely ridiculous. Yet, here they are having to spend time and money to defend their closed system that makes money for them and many others, which they probably partially did because of an assumed liability that some intellectual property rights holder could hold them accountable for not securing their media.

I could go on, but the point is that when you are repackaging and reselling someone else’s content that is protected by rigid intellectual property laws, you have a responsibility to distribute it in a relatively secure environment, lest you get sued. The traditional media industry can only survive if those intellectual property rights are vigorously protected, and now that they are finding the wireless space to be a legitimate distribution channel for their Media, they have (quite correctly) dragged the handset manufacturers and network operators into the fray to defend their rights by attempting to make them pay for expensive DRM.

The inevitability of the open network is one of the biggest issues shaping mobile media because the interests of competing links on the same value chain are at odds with each other. This will result in a standoff because each link has a legitimate business model that unfortunately requires at least one other link on the chain to cooperate in order to realize its full potential, and it only takes one small seemingly innocuous hole to pry the whole closed system wide open. The value always flows to the link on the chain that consolidates, rather than feeds, the ultimate value to the consumer. Ask any network operator what they sell the most of and they will tell you, “Whatever is at the top of the deck.” When the Network’s ability to monetize their infrastructure investment by selling content to their consumers is delayed by the inability of other companies to agree on the method to secure that content, the Network will find something else to sell.