Comcast, TiVo, and… PayPal?

Attention: QVC Shoppers! Open up those home equity credit lines because shopping online is about to get faster and easier!

On Tuesday, Scott Dunlap, vice president of emerging opportunities with PayPal, announced a new partnership with Comcast and TiVo. What could a cable giant, a DVR maker, and an online payment processor possibly do together? Let you buy stuff directly from your television, that’s what!

This means that you’ll be able to make purchases or donations in response to interactive ads that you see on your TV. Press a couple buttons on your remote control, and you can complete the deal using your PayPal account. And you can even pause the programming while you take care of business, then resume without missing anything.

This process has been dubbed “t-commerce” (like “e-commerce” but with a “t” for “television). PayPal did a survey last fall and found that nearly half of the TV subscribers polled were interested in making on-screen purchases. And a large portion of them were interested in using PayPal to make the payments. Viewers could start to see implementation of this system as early as this fall.

Until now, TV commercials have been simply advertising, part of a marketing campaign. This ability to interact with the screen and engage PayPal in the process could be a game changer as it adds the sales function, and removing extra steps for the consumer to buy. It also could breathe new life into commercials. If the ads frequently offer products or services that you care about, and if those ads offer special discounts or bonuses that are only available during the commercial, I can see how this could encourage more consumers to pay more attention to the commercials. And as any student of operant conditioning can tell you, an infrequent and random payoff is the best way to reinforce a behavior that is very difficult to extinguish. (Just ask anyone playing a slot machine.) It would not take many attractive deals sprinkled among the wasteland of commercials to make viewers want to sift through all of them, just so they don’t miss something.

This could make television commercials interesting again.

Best Buy Breaks More Bad News

The fourth quarter of every year for consumer electronic retailers is like the rainy season for farmers; it’s a make-or-break time of year when you have to compensate for the slower sales from the other three quarters. So it was like the  Dust Bowl when Best Buy posted a $1.7 billion loss. This is not quite as bad as it might seem, because their fiscal year ends on March 3, so this only includes December’s sales from last year. Also, the bulk of the loss was due to one-time charges for items including its mobile phone business and the closure of its big box stores in the United Kingdom.

All the same, $1.7 billion is a big number, and the company has announced plans to deal with the loss. It will close 50 of its United States big box stores this year and cut about 400 additional jobs. In spite of these $800 million cuts, the company expects to increase its presence by opening more stores with much smaller footprints.

Clearly, the landscape for consumer electronics retailing is changing in this country. There appear to be more forces at work than just the down economy, as the Internet gives consumers more places to shop and to compare prices. Best Buy is trying to survive these shifts, but looking at the recent history of retailers such as Circuit City, CompUSA, and 6th Ave Electronics suggests that this could be a challenging task.

More Homes Are Hooked Up

A new report from The Diffusion Group (TDG) updates the company’s research on broadband in U.S. homes. One interesting point is that about eight out of every 10 homes with broadband Internet connections now have home networks. This is presumably driven by the consumers’ interest in connecting more devices to the Internet than before.

TDG Home Network Research Results

[Credit: TDG]

Perhaps the most interesting development, however, is the location of those home network routers. TDG’s research shows that they have been moving steadily out of home offices and into living rooms. Presumably, home entertainment is taking priority over home computing, as the users want to connect their video game consoles, televisions, network media players, and Internet-ready Blu-ray players to the world.

This is one more bit of evidence that consumers are turning to the Internet more and more for entertainment and information, and the traditional channels of broadcast and subscription television services are going to continue to lose mindshare among U.S. audiences.

The Power of Aggregated Data

TiVo's viewership graph for the SuperBowl.

What do people really watch when they watch the SuperBowl? Thanks to the new world of connected entertainment systems, TiVo has a very good idea. By monitoring an anonymous sample of 41,666 households equipped with TiVo DVRs, the company can compile a map of “live and same-day” viewing of content that was watched at “play” speed on the systems. And guess what? People really do like the SuperBowl commercials.

According to the TiVo results, the Dorito’s “Man’s Best Friend” showed the greatest increase compared with the viewing numbers for the adjacent 15 minutes. Even this was well below the numbers for Madonna’s halftime show, and the highest viewership number for the entire program was the desperation “hail mary” pass that ended the game.

The big take-away from this, however, is not about the SuperBowl. It simply demonstrates how granular our data can be now about who watches what. These “temperature” graphs showing what viewers find most interesting is going to help content producers attract sponsors both for in-line commercials and for embedded product placements in the content itself. This data is likely to become the foundation for new funding models that will make it possible to reach specific markets more effectively, which means that individual sponsors can spend more per viewer in a smaller audience, because they will know what that audience is watching and what holds their interest.

For me, the main point is that the future does not belong to the companies that can deliver the stars and blockbuster content. Instead, the winners will be those best equipped to handle Big Data and be able to match viewers with content and sponsors in a tightly-integrated system. The world of video entertainment is indeed changing.

How Much Time-Shifting Do We Really Do?

The good old VHS recorder started something that Tivo took to a higher level, and the result has shaken the video broadcast industry to its very foundations.

Or has it?

Conventional wisdom says that U.S. television viewing households hate commercials. It says that they use digital video recorders (DVRs) so that they can skip over the advertisements. It says that this time-shifting of viewing has a negative impact on the value of the commercial messages that are sprinkled throughout the traditional linear programming. And it could be wrong.

The industry analysis company Centris has released a new white paper on DVRs. Their research paints an interesting picture of DVR usage in this country that runs counter to some of our expectations.

First, fewer than two out of five television-viewing households in the U.S. have one or more DVR. It is also interesting to note that few own their own device; about three-quarters are rented from their television service provider. (Fiber optic subscribers are more likely to rent a DVR than cable or satellite subscribers.)

But the result that surprised me was this: half of all DVR users watch 20% or less of their programming on the DVR. In fact, one out of six DVR users don’t watch programming on the DVR at all! That says to me that the threat to Big Advertising on linear television programming is not nearly as serious as some of us might think.

I guess that the other lesson I learned from this report is to not extrapolate too much from your own experience. I’d estimate that more than 90% of the video programming that we watch in our house (and we watch plenty!) is either recorded or streamed. And we do skip commercials (except last Monday night during the SuperBowl, and on Hulu where we don’t have a choice). The only broadcast linear programming that we watch is the occasional news show and live sports. And even then, we often will use our DVR’s “Pause” function and then skip the commercials as we compress the viewing time.

TiVo and DISH Bury the Hatchet

TiVo was one of the first two companies to come out with digital video recorders (DVR) and the one to eventually dominate the market and kill off the video cassette recorders (VCR). (They will not be missed!) But then the consumers rapidly shifted from over-the-air television to subscription service with cable or satellite. TiVo deftly stepped into the new market, putting its technology into the subscription service set top boxes. For a price. DISH Network and its former subsidiary, EchoStar, decided to offer their own DVR technology to their customers, and TiVo sued them for patent infringement.

Seven years later, after a series of seesaw decisions that went one way then the other, the two sides have settled. Each has agreed to grant licenses to the other for certain patents. And DISH and EchoStar will make a cash settlement with TiVo, paying $300 million now, plus an additional $200 million divided into annual payments for the next six years.

The end result is that DISH and EchoStar will be able to continue to offer its DVR products and services to its customers, and TiVo has a tidy bundle of cash to help fund its future.

CEA Offers Individual Memberships

The Consumer Electronics Association hosts a little event in Las Vegas every January called the “Consumer Electronics Show,” better known by its initials: CES. The original intent was to hold a trade show for electronics dealers, such as home stereos and televisions. Then the corporate side of the computer market got boring and Comdex went away, so the slack was picked up by CES and it became the biggest personal computer show in this country as well. And now it includes car electronics and mobile phones and digital cameras. If it has digital chips and is intended for consumer markets, chances are that it’s represented at CES.

The problem is that the CEA exists for the dealers and the manufacturers. It’s not really for the consumers (who figure so prominently in the organization’s name). If you are part of an eligible company, it is still an expensive proposition to join the organization. At least that was the case until now.

Last week, the CEA announced a new “Tech Enthusiast” membership. For $29 a year (discounted from $49), you can now get an individual membership. The organization is setting up a special website for these members where you’ll find news on the latest trends, discounts and give-aways, and more. You can find out more at www.CEAtechenthusiast.com for more information; enter the promotional code “CES2012” to get the discounted rate.

What does this mean for the CEA and the CES? In the short term, it’s probably a good move, but I’m not so sure about the long term. I went to Comdex (once; nobody ever said I had to go again). I also went to PC Expo in New York City many times; it was one of the top trade shows in the personal computer market for many years. PC Expo declined rather rapidly from its peak. The show floor got incredibly crowded. The show organizers seemed more interested in collecting admission fees than screening for the dealers who were the intended audience. As a result, an increasing portion of the crowd was made up of individual consumers, not dealers and corporate buyers. The aisles were clogged with people who were not prospects for large sales. This held little appeal for the exhibitors, and many of them moved to private display spaces in area hotels so that they could meet with their key prospects. As major exhibitors abandoned the show floor, the crowds thinned and other exhibitors dropped out, and the return on the investment shrank. And before long, the show blew away like dust over the Hudson River.

If the CEA encourages more consumers to attend CES (which is plenty crowded already), what implications will this have for the exhibitors who are trying to fill their order books? I have already seen more and more major brands move off-site, often into spaces that are not part of the official CES which means a loss of revenue for the CEA.

I can see how this new membership category will likely create new revenue for the CEA, I wonder if the gains might not be offset by decreased revenues from exhibitors who flee the exhibit halls and set up their own parallel event. I don’t expect CES to disappear any time soon — there isn’t any real alternative available in this country — but it will be worth watching to see the exhibitors’ reaction if the crowds increase.

Tough Times for CE Retailers

Some chains are expanding, some are standing still, some are pulling back, and some are just plain going away.

In the last category, the final shoe has dropped and Ultimate Electronics has asked the bankruptcy court for permission to throw in the towel. The company has not been able to secure credit for new inventory, and plans to sell off the remaining product to raise cash and pay off its creditors. Expect it to be all over by April.

And then there’s 6th Avenue Electronics, which is a well-established regional retailer in the greater New York City area. They launched an aggressive expansion campaign two years ago, pushing outward into the Philadelphia market (including a store in Montgomeryville, PA that is just a short drive from here). Now the company is closing the three stores in the Philadelphia area and is phasing out two more in New Jersey. The problem is that these are taking too long to become profitable, and presumably they’d rather use their cash (or credit) for something else.

It’s been a tough couple of years in general, and for the consumer electronics market in particular. While signs of economic recovery are strong, I suspect that the competition for consumers’ dollars for electronics will remain stiff for the next few years. So don’t be surprised to see more changes in the retail market.

Microsoft Sues TiVo; So What?

The story is breaking that Microsoft has sued TiVo for alleged patent infringements. What fascinates me is that so many industry pundits are ready to jump in with an explanation of the suit and its implications for the two companies and their markets. Here’s what I think we know for sure about this lawsuit:

We’ll probably never know the story behind it.

I checked in with a couple of my patent experts for some feedback on this, and they generally confirmed what I already suspected. Companies sue other companies for patent infringement all the time, and the motivations are deep and varied. For example, a suit can be a ploy to encourage the other company to enter into a cross-licensing agreement where both get to use each other’s patents. Or such a suit can be the result of a breakdown in direct negotiations — which sometimes can have been running for years — and one side decides to give up trying to reach an agreement and go to the courts instead. Or it can simply be an attempt at intimidation or retaliation, to inflict some damage on other company for your own competitive advantage. And the fact of the matter is that we rarely hear about the true motivation or the outcomes of this sort of action.

One important detail about this particular suit is that Microsoft filed the complaint with the US International Trade Commission, which has the power to ban imports of any products deemed to contain components that violate patent rights. According to one of my sources, Microsoft will likely have to spend millions of dollars on such a suit, which means that more is at stake than just a cross-licensing deal. In any case, it will be interesting to see if anything comes of this suit, and if we ever hear about the details.

HDCP Code Cracked

FOX News has reported confirmation by Intel that the High Definition Copy Protection (HDCP) code has been cracked. This code is designed to protect digital content such as high-definition Blu-ray movies, so that digitally-identical copies cannot be made from a commercial disc. The HDMI digital connections include HDCP support, for example.

According to the reports, this development is not likely to result in an explosion of pirated BD movies hitting the market. In order to take advantage of this exploit, it apparently would have to be implemented in a chip, and then installed in a device such as a Blu-ray player or a disc-duplicating machine. At this point, that seems like an expensive proposition, and there may not be enough profit available to the pirates to make the effort worth it.

Still, this does demonstrate that “locks keep honest people out” and it’s just a matter of time before just about any copy-protection scheme will fall.