Netflix on channel 1

In a transaction estimated to cost Netflix about US$1 billion over 5 years, the DVD and streaming company partnered up with Epix, a cable and internet streaming channel backed by Paramount, Lionsgate, and MGM studios. Considering the fact that Netflix already has an established streaming relationship with Starz, a company that already has streaming rights to Disney movies, this means that Netflix now has a substantial portion of the recent blockbuster movies tied up for its streaming service (Fast Company reports that the combined box office market share of Epix backers was around 21%).

The deal carefully avoids create any controversies around DVDs to establish supremacy in the online streaming space. Netflix is betting, strategically, that the DVD business that brought it to where it is today is a buggy whip type business in a world that is slowly to moving to the cars-like business of online streaming. Now that the netflix player is embedded in a series of devices that allow for streaming across a large footprint (computers, TV and, soon, mobile devices), the company is building up its content catalog.

What Netflix is doing is basically creating a new “on-demand” channel that can sit next to the other channels on a TV screen. The company is sidestepping “appointment viewing,” which requires people to set a particular time and date to see a particular piece of entertainment, to provide instead the equivalent of an always-ready, always-on-demand format of entertainment viewing (kind of like “there’s a movie for that”). It’s a future AT&T predicted in 1993 (as an interesting aside, that very ad campaign was also one of the first banner ad campaigns on the internet) and the company to bring it to you is Netflix.

Basic Internet Tenets

Regular readers of tnl.net will recognize the trend of everything moving to an IP stack. I’ve long held the view (at least since 2004, according to this entry) that cable channels ought to be delivered a la carte over the internet and Netflix may be the first company to successfully deliver an internet-only on-demand channel.

This model, however is predicated on a few key tenets that have made the internet such a great arena for innovation:

• The internet is a level playing field: Large companies do not have an advantage over smaller ones as everyone gets the same level of access to internet resources, no matter whether they are two guys in a garage or a multinational corporation.
• The internet allows any platforms to connect: There is no discrimination on what type of device can connect to the internet, as long as the device respects rules around addressing (getting a unique identifier on the net) and respects every other devices on the net. As a result, computers are seen no differently than mobile phones, TV set-top boxes, game stations, watches, coke machines, or whatever anyone willing to agree with the basic rule set attaches to the net
• There is only one internet: The minute you agree with the basic tenets of the internet, you take it upon yourself to continue supporting them if you want to be part of the internet commons. You are free to leave the internet and go to another network if you want to but you cannot call that the internet if it’s a different network.

A different view

But not everyone seems to agree. Earlier this week, Google, a company that has greatly benefited from the current tenets of the internet, decided that now that it was a large company, it could throw the internet under the bus by breaking some of those very tenets.

In a joint announcement with Verizon, the company proposed a compromise on net neutrality discussions that starts out with the right concepts and eventually gets off-track to a point where the basic tenets of the internet would no longer be valid.

Before I go into the details of what’s wrong with the proposal, let’s first look at what’s right (although I have to take what they say with a grain of salt since I’ve trusted the company in the past only to see it turn its back on earlier announcements):

A broadband Internet access service provider would be prohibited from preventing users of its broadband service from:

1. sending and receiving lawful content of their choice;
2. running lawful applications and using lawful services of their choice; and
3. connecting their choice of legal devices that do not harm the network or service, facilitate theft of service, or harm other users of the service.

I would have some questions on the definition of “harm” here but, for the most part, these seem to be points that could be agreed upon.

The lines would also carry a non-discrimination principle that are, for the most part OK, except for the following sentence (emphasis is mine):

Prioritization of Internet traffic would be presumed inconsistent with the non-discrimination standard, but the presumption could be rebutted.

I would argue that striking those last 6 words would make the rest of that section OK.

The next section is about transparency and the proposition of providers telling people when they do discriminate or make other modifications seems sound.

However, it starts going downhill from there. Provisions like network management (a tricky area that ends up being the place of most disagreement), additional online services, wireless broadband and case-by-case enforcement give up on the notion of the internet as a simple (or stupid) network.

It is true that network management is necessary to the proper functioning of the internet commons but, as Barbara Van Schewick (via Fred Wilson) points out, there is a simple rule on dealing with net neutrality:

A non-discrimination rule that bans all application-specific discrimination, but allows all application-agnostic discrimination. Discrimination is application-specific if the discrimination is based on the specific application or content (e.g. Skype is treated differently  from Vonage), or based on classes of applications or content (e.g. Internet telephony is treated  differently from e-mail).

The main challenge in Google and Verizon’s proposal is the idea of a differentiated internet. If the first two components of their proposal (consumer protection and non-discrimination) were considered valid, the rest of the policy framework would be invalid. One cannot say in the same sentence that a broadband provider is prevented from allowing users and applications almost unfettered access to the net and then turn around to say that this may not be the case for new applications or parts of the net.

Like it or not, the wireless internet is part of the internet. While there are parts where it can be controlled, internet is still a word that works as singular and has no plural. Anything else (a differentiated network) is not the internet and don’t let people tell you otherwise.

Motivations

So what motivated such proposal? Well, first of all, it appears that there are a number of strategic areas where Google could do well in appeasing the telecom and cable industry:

• The Android OS is a natural fit here as Google is working on ensuring that it will do better than Apple in the mobile space.
• GoogleTV is another arena where the company would benefit from sitting on a “differentiated network” where it could serve content as a premium package. In its fight with Apple (Apple’s business model is still largely predicated on selling hardware, like AppleTV), Google could offer an advertising-sponsored model carried on differentiated pipes.
• Of course, another arena would be wherever there are tools that are potentially threatening Google. For example, pictures from Picasa could be served at a faster rate than pictures from Facebook on that network. Or movies from YouTube could get priority access over movies from Netflix.

So, having established that Google has much in terms of alignment with the telco industry, it is now time to question whether its motives are truly in line with its previous policy of not being evil or whether they are better aligned with pure profitability motives. The decision could allow the internet to grow or the world to return to the pre-internet world of balkanized networks.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title The internet at a crossroad. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

10. IBM acquires PwC Consulting

In 2002, IBM acquired the consulting arm of Price-Waterhouse for US$3.5 billion. The move helped solidify IBM’s position in the consulting business and helped it move away from being a hardware and software manufacturer and more into the higher-margins consulting arena. The deal was very favorable to IBM in that it was able to acquire the company for less than 1 time revenue.

10.b PayPal acquired by Ebay

When Ebay acquired Paypal for US$1.5 billion, the move seemed to be a very risky one. Why would an auction house want to get an emerging payment system that really didn’t seem to fit much with its business model.

Ultimately, the deal has turned out to be quite a good bet as Paypal is now the engine of Ebay’s growth. In fact, most of the value of Ebay now resides in a payment system that has left many financial institution envious of its reach.

9. Lenovo acquires IBM’s computer division

In 2005, the company that had launched the personal computer revolution into the office changed hand as Lenovo, previously a local chinese computer manufacturer with no real global footprint, acquired IBM’s personal computer division for US$1.3 billion. The deal established Lenovo as a global player in the PC market and heralded the arrival of Chinese companies on the global scene.

8. Verizon acquires MCI

In the 1990s, MCI became one of the largest players in the telecommunication business, acquiring and rolling up small regional telephone companies and internet backbone operators. The problem, however, was that most of the growth it demonstrated on paper was based on fraudulent statements and accounting tricks that ended up with the company filing the largest bankruptcy on record at the time (this has since been superceded by other bankruptcies).  Verizon acquired the company in 2005 for $US 6.7 billion, picking up one of the largest internet backbone operator in the process.

The deal, which had come on the heel of SBC’s acquisition of AT&T, was the last one in the landline telecom consolidation that left most of the country’s telephone and internet infrastructure under the control of either AT&T or Verizon.

7. Microsoft / Yahoo partner on Search

Sometimes, the importance of a deal has move to do with the disruptive effect it has on the parties involved than the successful outcome it may represent. Such is the case of the Microsoft/Yahoo partnership which came after years of discussions between the two companies. From 2005 to 2007, Microsoft attempted to quietly acquire Yahoo but the reluctance of Yahoo’s leadership at the time left those calls unanswered. In February 2008, Microsoft decided to take the discussion to a whole new level by making an unsolicited takeover bid of $US44.6 billion in cash and stock in early 2008. The goal was to combine the two companies into a combined one that could compete with Google. Over the next quarter, the two company would battle publicly, with Microsoft eventually giving up on its attempt.

For the next year and a half, Yahoo went through major upheavals due to its refusal to take Microsoft’s offer and the negative impact it ended up having on its market capitalization. With a new CEO installed, Yahoo then went on to agree to outsource its search business to Microsoft, taking it away from the business that had initially served as the foundation of the company. While the link-up has not been completed as of this writing, the disruption that all those negotiations created for the two companies allowed their chief rival, Google, to consolidate its hold on the markets that were at stake. As of this writing, the market share of search held by a combined Yahoo/Microsoft partnership has dropped substantially from where it was when the Microsoft bid was initially made.

6. Weblogs Inc. acquired by AOL

Weblogs Inc. was founded by Jason Calacanis (and Brian Alvey) as a network of blogs, including the popular engadget, which was run by Pete Rojas (also the founder of Gizmodo). When AOL bought the company, in 2005, the price was rumored to be around US$25 to US$30 million. At the time, some felt AOL had overpaid. Today, some feel Weblogs Inc. sold for too cheap.

The reason I would consider this deal significant is that it was the first major deal involving blogs (some would argue that Google’s acquisition of blogger fit the bill but my counter to that was that blogger was a blog tool company while weblogs inc. was a blog content company). Because AOL, an arm of Time-Warner at the time, was a large corporate entity, this acquisition legitimized blogging within the corporate world and made it easier for any subsequent blog-related deal to happen.

In the next entry, we will look at the top 5 on the list. Some of them may surprise you.

Update: Part 2 is up.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title 10 Tech Deals that defined the decade — Part 1. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Let’s first take a look at the data points from recent weeks:

1. RockStar Games releases “Grand Theft Auto 4″, picking up US$500 million in its first week of release.
2. Barack Obama uses younger demographics to win democratic nomination.
3. Primetime no longer so prime as younger viewers shift time and place of shows.
4. Some VCs look to demographics as an opportunity space.

All those data points seem to highlight a major shift in the demographics of influence. For most of my lifetime, the core influencers have been the baby boom generation (aka. my parents’ generation) and their hold on politics and consumer behavior from the late 1960s on has been uncontested up until now.

But that may be changing.

Media

Up until recently, media consumption was divided between TV, radio, and print when it came to news and movie theaters, recorded media (VCR in the 80s and DVD now), TV, and live performance (and I’m grouping both live music and theater in that category) for entertainment.

In the 90s, we successfully established the Internet as a source of delivery for news but most efforts to do turn the net into an entertainment channel failed due to network and CPU constraints. Those constraints disappeared since the turn of the century and the net started to take a stronger place as an entertainment channel in the last few years.

While the net is slowly eating up the traditional media budget, another market is started to eat into the pie and that is videogames: it first started within a small subset of the overall population (males under 35) but is slowly starting to spread to a wider population as can be seen with the success of the Nintendo Wii and of certain virtual worlds (like Club Penguin or WebKinz, aimed at kids).

Similarly, it appears that traditional media is suffering from a slump in their own advertising revenue as a result of not only decreasing audience but also decreasing amounts of support from advertisers due largely to the fact that most non-digital assets are not easy to track in terms of response rates (an issue I’ve addressed in the past in several different posts.)

So the question now is where the value will reside moving forward. Many of the smarter media companies are now starting to understand that their product is not necessarily in the delivery medium (for the longest time, print publishers have assumed that their goal is to deliver paper-based products; music publishers were tied to whatever format, be it record, 8 tracks, tapes, or CD, they packaged their product in; TV producers have looked to their channel as the center) but that the value they add is in the packaging and financing of interesting offerings in a cross-media fashion. This is the driver behind efforts like the recent acquisition offering of CNET by CBS and Ars Technica by Conde Nast.

What we will see here is a progressive move to anytime, anyplace as far as any entertainment or news package is concerned. Mass media is not really dead, it’s just made up of an aggregated model now. This is a model that some stars like Madonna understand and have adapted to, according to the New York Times (emphasis mine):

Madonna’s show, to promote her new album, “Hard Candy,” was also part of a technologically sophisticated, 21st-century product rollout that involved multiple media tie-ins. It was broadcast live on the Internet by MSN and on cell phones worldwide by Verizon and Vodafone. In addition to the 750 spots given to fans on the line — that’s on a line, not online — about 1,000 were given to radio contest winners, and 200 to members of Madonna’s fan club, which now has a social-networking component.

The secret here is to appeal to the audience on its own terms and where it is. Some less savvy executives may think this is a temporary blip but I suspect that, as far as media is concerned, it’s only the tip of the iceberg. Talk to teenagers today and they have little understanding or patience for media that does not fit their needs.

This, however, does not mean that everything needs to be free. Many new media advocates will claim that, in the new world, copyright is dead and value from media can only be extracted indirectly. For example, they see rock concerts as the way to extract value from music tracks that are distributed for free. While those types of economics are fine, they seem to leave some money on the table. For example, it is true that teenagers look to the value of an MP3 track as low or even 0. However, the same teenagers buy music from the itunes store or download and pay for ringtones. And let’s not forget last year’s experiment by Radionhead, which put all of its album online for free in a “pay what you wish” model: if people will always opt to go for the free option on a good, then Radiohead’s US$10 million first week sale for their CD doesn’t make sense. Once again, this goes back to the new fundamental rule that, as long as you offer your goods across a wide array of media, you will maximize your offerings.

Politics

In the intro, I also talked about Barack Obama and how he appears to defy the prognostication made by many commentators. I would venture to say that the reason for his continued success in the face of any existing model is also based on the realization that he, as a candidate, can make himself available in any media form. A measure of the online success in multiple media shows the story (thanks to Techpresident, we can easily see that data as it relates to MySpace, Facebook,  YouTube, Technorati, eventful, meetup,  and traffic data accoring to Compete and Hitwise.) When looked through the traditional lens of comparing election cycles to earlier ones, as most TV commentators appear to do, the Obama campaign can’t survive. But the problem is that such lens does not include the data above.

For all my lifetime, the storyline of American media consumption and of politics has been largely formed around one single demographics class: baby boomers. My generation, Generation X, was considered a wasted one as Baby boomers looked at it as poitically apathetic, and generally seen as a bunch of slackers with no interest in corporate lives. There might have been some element of truth to the story line as members of Generation X came of age in a cynical world where they were told that the corporate life was no longer a guarantee of lifetime employement and where they were consistently reminded that social security would fail and they would pay for the system but not benefit from it. As a result, many turned away from traditional institutions and started building alternatives.

The most visible alternative model is the rise of the Internet economy which was largely built by 20 and 30 something and funded by older people who understood some of the value being created. But along the line, many other things changed: first, the work-hard/play-hard ethic moved, as people got a bit older, to a need for a better work/life balance. This was a byproduct of dropping the boundaries between office and home. As the two merged, a new set of boundaries needed to be created.

As more of those boundaries changed, some social mores were also affected. In a way, one could argue that the boomer’s self-obsession created a counter effort that led to more collaborative and more society-centric views. Because they had been beaten down by their elders, GenXers tried to build a system that swung the pendulum on the other side: one where age/culture/race/sex/etc… were de-emphasized through the electronically mediated space of the Internet. This is not to say that all the problems associated with those categories went away but I suspect that a study of demographics would show younger people to be more tolerant and generally more on the left side of the political spectrum than older people (maybe a representation of Churchill’s “Show me a young conservative and I’ll show you a man without a heart. Show me an old liberal and I’ll show you a man without a brain”)

Enters Obama, a candidate who, by most measure can be considered further to the left than Hillary Clinton. When he talks, he highlights partnership, and generally looks to a more “European” approach to society. This seems to be a rebuke of much of the individualist type of policies highlighted since the Republican era. And that’s where the pundits start having trouble. Is the 2008 presidential cycle like 2004? 2000? 1996? 1992?

The truth of the matter is that the 2008 election cycle is unlike the other ones because of a substantial demographic change. Obama’s voters tend to be people who have not previously been very involved in the political process. Some are from particular racial background but I suspect that a bigger part of the story is the demographic clash that’s coming our way.

The interesting thing is also the type of opportunity this can present from a political messaging standpoint and an issue standpoint. Some of the issues that were considered as dangerous to approach in previous election might now be safer due to the different outlook (for example, I have read somewhere (and don’t remember where, which is why I’m not linking to it) that younger Americans tend to be more willing to pay higher taxes in exchange for a bigger social net).

I suspect that the Obama campaign is currently surprising pundits for three main reasons:

1. It understands that media and politics are intertwined and works hard to run itself as a media organization.
2. The campaign understands that media is now participatory, and ought to be consumed across multiple channels when the consumer wants to.
3. The campaign understands that it can find voters where no other campaign has gone to get them. That means bigger registration drives and an increase in the number of new people signed up on the voter’s rolls, something that could have a very important impact not only in this election but in a lot of future ones too.

Conclusion

I am sure that I’m only scratching the surface of a pretty important phenomenon with this entry but I have to admit a fair amount of surprise as to why this doesn’t seem to be more noticed. I also wonder whether my assumption here are wrong and what the larger impact of such a demographic shift could be. I’d appreciate comments from others as to what they think it ought to be.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Demographic Shift. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

It’s a very smart move on the part of Apple, which highlighted the change in the way the company is operating by changing its name from Apple Computer, Inc. to Apple, Inc. , reflecting the fact that they are no longer just a computer company.There were a few interesting items of interest, though.

For starters, no mention of how the phone will sync up with a computer. Are we to assume that it’s Mac Only or will it synchronize with computers running Windows too? If so, does that mean that a new set of applications will be available to Windows users to sync their address book, calendar and email with systems like Outlook or will the device require to manage those things specifically using Apple applications on Windows?

The other thing that was interesting is the announcement that the phone will run on quad-band GSM and will be using EDGE network. This means that the phone will get decent but not great data service. Perfect for email and light web browsing but not quite fast enough for video streaming. However, the introduction of WiFi in the device, which many other companies have avoided for fear of losing battery capacity, could take care of that.

The other interesting thing is that the operating system on this device is OSX. This seems to point out to two possible issues: First, what does that mean for PortalPlayer, which has traditionally provided Apple with the operating system (embedded on a chip) for the iPod? The second question is what does it mean in general: What Apple has introduced is basically a mac in a small form factor, which could easily compete with the UMPC specifications introduced by Microsoft. It’s pretty clear that Apple has a lot of plans in the future for that device but they didn’t say much about the significance of OSX, providing it almost as an aside (and what does it mean for the next version of OSX, which was not mentioned during this keynote at all, a surprising omission in itself.)

Who loses?

Judging from the reaction on the stock market, it’s pretty obvious to see who loses: Palm (makers of the Treo), RIM (makers of the Blackberry), and Motorola and Nokia will obviously not be thrilled with the entrance of Apple in this market. The exclusive deal with AT&T (ooops, sorry, Cingular) will also have a negative impact on Verizon, Sprint, and T-mobile as Verizon will see a number of users switching to them in order to get their hands on this device (in informal discussion with a number of fellow geeks, the disadvantages of moving to Cingular were far outweighted by the coolness of this device).

Let’s take a quick look at specs and see how the difference devices fare against this new entrant:

So looking at it, this phone is pretty expensive (you pay for the Apple premium) but packs a lot more features than other phones in the same category. It’s got a better camera, more memory and a larger screen as well as WiFi. It’s talk time (for the category) is actually pretty good (only bested by Nokia’s E-62) and it is a little heavier than the competition. For a first entry in the market, I’d say that Apple has a winner on its hands.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title The iPhone is here. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Understanding the mobile landscape

In a lot of ways, the mobile phone landscape in the United States could be considered a case study into how sometimes the free market fails end users. Let me explain: in the late 80s and early 90s, there were two different types of technologies available in the US for mobile phone delivery: CDMA and TDMA. However, due to vendor differences, the market fragmented even further with Sprint PCS (now Sprint Nextel) adopting a different flavor of CDMA than Verizon. Meanwhile, Nextel (now part of Sprint Nextel) adopted a proprietary technology called iDen, which was based on TDMA while T-Mobile and Cingular adopted GSM, a flavor of TDMA that has become the global standard outside of the US.

The bottom line on this whole acronym soup is that most mobile operators in the United States cannot operate on each other’s networks because they are using different technologies. This is why foreigners visiting the US generally lament about the poor quality of the mobile experience in this country and why the US is falling behind in the global mobile race. This is also why most American mobile phones don’t work abroad.

Because Cingular and T-mobile used the same GSM technology, they agreed to share their networks, allowing their customers to use both networks transparently, in a situation similar to the one one would witness outside of the US. The fact that they use GSM is also why a lot of cool phones make it to their networks before they are available to other providers. Verizon is now hedging its bets by introducing hybrid CDMA/GSM phones under the heading of Global Phone Service. To many outside the US, it looks like GSM is already the winning format in the standards war.

Enters Apple

Traditionally, Apple has been known for its exceptional industrial design (creating hardware people lust after) and marketing (also known as the reality distortion field). However, one of the other interesting features of Apple is the company’s willingness to take a standard and move forward with it. For example, by rebranding the 802.11b standard into Airport and later the 802.11g standard into Airport extreme, Apple pushed forward usage of wireless networking. Apple was also the mainstream PC first company to decide to drop disk drives being installed by default on their machines, prompting the rest of the industry to follow suit. The recent removal of modems from their new laptop lines does, in my view, harbor the death of modems being built into computers by default.

Meanwhile, the recent success of the iPod eco-system has gotten many vendors to rethink their strategy when it comes to the portable media player.Microsoft is now creating a closed system called Zune, following the Apple iPod + iTunes strategy and Sandisk and Real Networks are working on a similar walled garden approach. These trends seem to be defying common wisdom as to the progression of markets, whereas markets would generally tend towards standardization.

But what does all this have to do with mobile, you might ask?

Well, the question here is how successful Apple can be. If it creates a product that is so compelling that users will be interested in switching carrier for it, Apple may actually tip the scale on adoption of GSM in the United States. Going back to the ThinkSecret piece

insiders say Apple is internally estimating that shipments of the iPhone will top a staggering 25 million in 2007 alone

According to Gartner, roughly 700 million phones will be sold this year so it’s not improbable that Apple would try to sell 25 million, which would garner it a marketshare of 3 percent. But the overall market numbers may be misleading as many of those mobile phones are on the lower end of the price range, aiming at the developing world, a market Apple is not current going after. The numbers get more interesting when one considers single operators: for example, Cingular is the largest US operator with 56 million subscribers. If Apple were to work its magic here, Cingular could see anywhere up to a 10% growth or more in their subscriber base just on that one product. These users would move to a GSM network and away from CDMA technology.

From there, two possible scenarios could evolve: Apple could decide to license CDMA technology from Quallcom (CDMA is a proprietary technology so every vendor has to pay Quallcom for its use) or say that they are happy in the GSM-only market. If they were to do the latter, they could potentially tip the scale in a life-long fight in the US, making GSM the standard.

But why is Apple interested in mobile?

When considering rumors about an iPhone, one might wonder the interest Apple may have in that marketplace. After all, it’s not one that the company has ever entered and there doesn’t seem to be much overlap with their current existing products.

However, one has to look at the natural progression of the music business to understand why Apple would be interested in this market segment. While its current iTunes store sells roughly US$2 million a week of tracks, the ringtone market is much larger and the margins are supposedly better. So Apple is getting into the market for two possible reasons: first, it needs to protect the market it’s created with the iPod and sees mobile as the next evolution and a potential competitor to their single use device. Second, the company sees a market it wants to dominate. So that adds up to a new phone

But can Apple tip the scale on GSM?

As it stands, GSM in the US is supported by 2 of the big four operators. If Apple is successful, one could see defection from the other two. It’s not going to be an overnight kind of thing but, much like Apple has forced its competitors in the music field to reconsider their position, it could happen in the communication field.

Of course, all this is predicated on those standards still being relevant further down the line. If phones move towards more of a VoIP model, as I suspect will happen over the long run, this may all be irrelevant but, for the time being, a major shift of that kind could have tremendous impact in the telecom world.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Could Apple Solidify GSM in the US?. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

For the past few years, Microsoft has been trying to figure out how to remain relevant in an era of increasing openness. The rise of HTML and of HTTP as the underlying protocol for distribution on the Internet have challenged the level of control that Microsoft had on the computing world. The initial control was borne out of a partnership between Intel and Microsoft, which allowed them to establish both companies as the essential players in the desktop computing world (the partnership often being recognized as the Wintel (Windows plus Intel) behemoth.

When the Internet started to rise, the network jeopardized that relationship as open standards offered the ability to move more of the software logic to servers and rely less on the client desktop, with HTML being pretty much the universal interface to those new systems. With the advent of Linux, a cheap alternative to Windows, Intel found itself remaining in a very strong position (as Linux can run on Intel boxes) and Microsoft sees the possibility of being increasingly marginalized. The problem comes from the fact that Microsoft, as holder of the software component is really only working as a middle tier in a relationship that involves processors, network bandwidth, software, and content. Let’s review why this development is significant in the new world.

Ten years ago, the big challenge in computing was processing power. Software was always coming out that needed to gobble up more processing power and more memory. In the last couple of years, though, the equation has shifted radically. Increasingly, users have more processing power on their desktop than they can use. Unless you are a hardcore gamer, the combination of Moore’s Law (which has pushed CPU speed to a point where any gain is of little relevance to most users) and the steady decline of prices for memory has meant that today’s user is finding himself/herself with a computer that is only gated by one factor: speed of access to the Internet. The challenge here is that, for most people, access to the Internet still happens over a regular modem, hence limiting what they can do online. While adoption of broadband access is growing, it still represents a gating factor in what most users can do. As a result, most people are now looking at how they can access the Internet faster, moving the discussion away from the desktop and onto that bit of the network that has traditionally been the realm of telephone companies.

With the rise of cable companies as access providers to the Internet, Microsoft now needs to find partners in two access camps: on the one hand, it needs to partner up with cable companies, and on the other, it needs to partner up with phone companies. For the first time in its life, Microsoft is actually forced to play in an arena where the monopoly players are somewhere else than in its own company.

With the AOL partnership, Microsoft is closing one part of the equation, by getting access to the pipes offered by Road Runner, the high speed access company offered by AOL/Time Warner. Coupled with relationship established with Verizon and Qwest, Microsoft has gained a foothold in the access space. However, this is potentially short-lived, as Microsoft could easily be replaced if any of those companies decided that they wanted to partner themselves with someone else.

So securing access to the pipe is one way to ensure continued relevance but it does not ensure the level of control that the desktop monopoly once allowed. In order to get that level of control, one must find a way to leverage the existing platform (windows) and create a lock-in with it. This is where partnerships on content can become useful.

In order to create a long term strategic control, Microsoft must ensure that it will be difficult to move away from its offering. This is where the Windows media strategy comes in. If Microsoft manages to get control of content created on the Internet, it will be much more difficult to unseat it in the future. With last week’s announcement that AOL would collaborate with Microsoft on digital media, the companies have started to establish something that may give Microsoft much more control in the future. Once content is encoded using the Microsoft Windows Media solution, it will be difficult to move away from it. A partnership on Digital Rights Management also ensures that Microsoft will hold the keys for content encoded using its solution, hence ensuring its tight control of a very lucrative market.

The ace card Microsoft holds in this is its installed base. By moving the dialogue from web servers (a battle it lost long ago) to video and audio servers (a battle that has yet to be fought), Microsoft is positioning itself for the future of the Internet. This early position will ensure that it will be able to offer Windows Servers that power the next generation of Internet content. The key in making its case is that, because it has control of the desktop, Microsoft can offer millions of users with a media player already running on their machines. This is an attractive public, and allows the company to make a strong case for an integrated suite of products and services (“here’s the player, here’s the server.. oh and while you’re using our streaming media server, how about using our rights management system… and you know all that stuff actually runs better on our windows platform…”)

So this is the worst case scenario. But, one can easily say, there are competitors and there’s no guarantee that this will work. Furthermore, the open standards are always creating a limit on the company’s power, right?

Well, that’s not even a guarantee. As we know, Microsoft came from behind in the browser wars. First, there was Netscape, and it was controlling 80% of the market. Then Microsoft launched IE but things didn’t really change much in the beginning. As Microsoft improved its browser (and Netscape, drunk on its own hype, believed it couldn’t be defeated), the percentage of control shifted.

AOL, with its established customer base of 30 million, and its ownership of the Netscape browser (bought as the company was already losing marketshares), was the only company that could have change the balance back. By bundling Mozilla first in Compuserve and then in the mac client for AOL, it indicated to Microsoft that this was something they might be willing to do, if Microsoft didn’t work with them. It quickly became obvious to Microsoft that they could be locked out of the browser market if they didn’t play nice with AOL. So they cut a deal and gave AOL a royalty free license to use the browser for the next seven years. That seemed to pretty much lock everything in place to keep tight control.

But the story doesn’t end here…

Apparently, Microsoft does not intend to build a standalone version of IE anymore. The relevant lines in that discussions are as follows:

Q: when / will there be the next version of IE?A: As part of the OS, IE will continue to evolve, but there will be no future standalone installations. IE6 SP1 is the final standalone installation.

Zeldman points out that IE will be built into future version of MSN for the mac but that otherwise, it will be part of the OS. This is an interesting development.

Let’s extend this concept out to beyond seven years: Microsoft and AOL are at the end of the current agreement. AOL did indeed use the Windows Media suite and is using the OS-embedded IE. Microsoft decides to renegotiate terms. AOL balks. Microsoft says that it will change its browser so that AOL doesn’t work on it. What happens then? What is AOL’s fallback position? On one hand, it’s got 7 years worth of media now encoded in Windows Media format (and would need to reformat all that in order to move off the Microsoft platform, a huge undertaking unto itself), and is locked into the Microsoft OS.

It seems that, unless AOL is keeping Mozilla alive, it is about to sign a deal that could eventually put it in a tough position on the browser end. It also seems that unless it hedges its best and encodes content in windows media and another format, it risks lock-in.

On the web development end, this also has huge repercussions. If we all develop solely to Microsoft, and agree to extensions they might make to HTML once its in the OS, we run the risk of all becoming windows developers, beholden to Microsoft.

This is a really all about a fight for the soul of the Internet. In the 90s, Microsoft announced a strategy of “embrace and extend”, which was often derided as “engulf and devour”. We’re now starting to see the extension happening, and it seems to point back to windows. Do we want to be locked in?

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Microsoft Lock-in?. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

On one side, you have smaller operators like Boingo that are trying to make a go of it without anything else. My bet is that the future of such operators lies in being acquired, either by a telephone company (in that particular case, I would bet on Sprint acquiring them since Boingo already has a relationship with their PCS division).

On another side are existing large mobile operators like T-mobile who are trying to create a bundle that includes mobile phone service and data service all in one package. Those will probably continue to move successfully but will be forced to lower prices as time goes on.

Now, with the Verizon offer, I expect to see not only DSL operators (a market which has gone through a lot of consolidation, leaving mostly the incumbent telcos in charge) but also cable companies looking into bundling this type of solution. As a result, Wi-Fi may actually become a loss leader in a battle that includes a much wider range of services. What this will mean for new business betting the future on a Wi-Fi only revenue strategy will need to change their message if they hope to survive.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Verizon and Wi-Fi. You can follow him on twitter here or receive his weekly newsletter by subscribing here.