Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
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  • Ron Giuntini said More
    As always a good read.
    I have always... Thursday, 25 January 2018

Public vs. Private Information on the Internet

Does Hardware Drive Software, or Vice Versa?

Why Have Past Consortia for Compatibility Failed, and Why Would DECE Now Succeed?

So Are Device-Content Systems Moving Toward Compatibility or Incompatibility?

 

There are two trends occurring in the digital world that seem to be at odds with one another.  The first is that towards incompatible hardware/device – software/content ecosystems and the other is towards compatible ecosystems.

The first trend, the “splintering” of the Internet into multiple, incompatible ecosystems, is detailed in “Apple, Amazon, Google Wage Content Wars” by Ben Kunz, NYT

A battle looms, and it's not about selling new gadgets—it's about using devices to lock you into a content ecosystem. In an ironic evolution of the World Wide Web that once promised consistent access to all of the globe's information, corporate giants are now striving to wall off sections of content and charge you for access.

In a few years, the online landscape will expand to thousands of device formats. Morgan Stanley (MS) analyst Mary Meeker thinks the world will soon contain 10 billion web-enabled gadgets…

The Internet is splitting into a series of content portals... Forrester Research (FORR) analyst Josh Bernoff refers to this brave new multiplatform world as "the Splinternet," where the common Web browser experience of the past 15 years is shattered into systems of incompatible content formats.

We will all have to adapt to a world where gadgets are the new marketing medium. The device-portal tie-up isn't necessarily bad for consumers, who have plenty of choices for media consumption. But it creates a thorny puzzle for businesses striving to build audiences … Just as businesses today might create an ad campaign that can be customized for hundreds of different print formats, a marketing message must now fit into numerous technology interfaces.

The second trend is that towards multiple, compatible ecosystems in the sense that digital content can be accessed from any device, as described in “Entertainment, Tech Titans Aim for Digital Compatibility” by Anick Jesdanum, ABC News and “Digital Content Wherever You Want It” by Cliff Edwards, BusinessWeek:

Leading entertainment and consumer-electronics companies … have formed a consortium, the Digital Entertainment Content Ecosystem [DECE], to come up with technical specifications that content distributors and manufacturers can follow to ensure compatibility…

Notably absent is Apple.

The consortium … ha[s] been working since May [2008] to create rules that will let consumers share their purchased content on a number of devices in the home, or stream them over the Internet to laptops, cell phones, or other electronic gear. "No matter where you are in the world, if you previously purchased Spider-Man 3, you should be able to access Spider-Man and stream it"…

This isn't the first attempt to create standards and a set of devices where a consumer is guaranteed interoperability. Microsoft established its PlaysForSure rights scheme for digital music players as an alternative to the iPod ecosystem from Apple ... And consortia such as the Digital Living Network Alliance and Coral have been trying for years to create a framework of minimum technical specifications for devices in the home. Even Intel … flopped with its Viiv brand to get manufacturers and content providers to adhere to a specific set of guidelines.

Apple's growing dominance in the digital world has changed all that ...

I put these two sets of ideas together and came up with a seeming contradiction in trends.  After trying to figure out what’s actually going on, I came up with three separate issues that need to be understood before I can address the compatibility vs. incompatibility question:

  1. There's an important distinction between being able to access public vs. proprietary information
  2. Does hardware drive the creation of software, or does software drive hardware?
  3. DECE-like consortia are not new, but previous consortia have not been very successful.  Why have such consortia failed in the past, and why would DECE succeed now?

 

Public vs. Private Information on the Internet

In his NYT article, Ben Kunz says, “In an ironic evolution of the World Wide Web that once promised consistent access to all of the globe's information, corporate giants are now striving to wall off sections of content and charge you for access.”  I’m not sure what “consistent” means, but the second part of the sentence suggests that during the early stages of the development of the Internet, people believed that it would eventually enable everyone to be able to access “all of the globe’s information” for free.

There’s a world of difference between having (easy) access to all information and having free access to all information. Realistically, the latter was never a possibility; and whoever might have thought otherwise didn’t understand the costs and incentives associated with the generation and/or provision of information.

As for the former, having easy access to all information, both public and proprietary, I believe that is exactly what the Internet is evolving into: a medium that enables easy access to all information generated by anyone, anywhere and accessed by anyone else, anywhere.

Sure, at the beginning much proprietary information was available for free (either legally or pirated) on the Internet that you had to pay to access elsewhere, such as news and entertainment.  However, much of the new “walled off sections of content” that “corporate giants are now striving to charge you for access” is proprietary information that the information’s owners either weren’t able to provide previously on the Internet, or they were able to provide it, but they couldn’t get people to pay for it.

The earlier free provision of much proprietary information was not a sustainable model; those who understood the economics of the situation knew that something had to change.  Businesses that had previously provided information on the web but weren’t able to charge users for it, can now do so, because of (1) changing attitudes about what users will pay for, (2) the development of new encryption and/or security technologies that prevent piracy, and/or (3) the development of safe and cost-effective methods of exchanging money over the web (e.g., web banking, PayPal, micropayment systems).

And as the Internet evolves, some businesses that had never before provided information on the web are figuring out how to do so to enable easy access by customers (i.e., users of this information always had to pay for it, but the customers were only able to access the information in less convenient ways, if at all).  In particular, with the advent of cloud computing, which is making it tremendously less expensive for businesses to provide customers with access to proprietary information and services, I think there’s soon going to be an explosion of even more new information never before available to users that is now made possible through fee-based portals on the web.

As for "’the Splinternet,’ where the common Web browser experience of the past 15 years is shattered into systems of incompatible content formats”, I wouldn’t exactly call the early incarnation of the Internet a collection of “compatible content formats”.  Sure, all the content was accessible by any (most?) PCs, but that doesn’t mean anyone with a PC could access all the content.  Even in the earliest days, the Internet allowed for password-protected content, not to mention content that required any one of a thousand applications to be able to access the content, which applications were not necessarily available to everyone.  The main difference between the earlier Internet and today’s Internet is that earlier all (most?) information was accessed by PCs, mainframes, and terminals, whereas today’s Internet is accessible by zillions of different other forms of hardware, including smart phones, PDAs, handhelds (e.g., UPS, FedEx), media devices (e.g., iPods, TiVo, e-readers), and such.  In other words, I think the term “the Splinternet” is a bit of a misnomer.

 

Does Hardware Drive Software, or Vice Versa?

In his NYT article, Ben Kunz says

In a few years, the online landscape will expand to thousands of device formats. Morgan Stanley (MS) analyst Mary Meeker thinks the world will soon contain 10 billion web-enabled gadgets. Many will act as dedicated appliances, such as General Motors' OnStar or Ford's (F) SYNC in-car connectivity systems, with unique interfaces.

After thinking about this for a few moments, I asked myself, whether the availability of content, such as that on the Internet, leads people to develop devices to be able to access that content, such as PDAs and smart phones, or whether it is the other way around: does the development of devices, such as the iPhone, lead to the creation of new content, such as apps?

Clearly, and especially when it comes to the Internet, it’s both.

When there is existing content, such as movies, songs, and books, profit-seeking entrepreneurs are lead to develop new means of accessing that content, such as DVD players, iPods, and e-readers.

When there are existing gadgets, such as PDAs and smart phones, profit-seeking entrepreneurs are lead to develop new applications to be used/accessed by those gadgets, such as site (restaurants, gas stations, golf courses) locaters, currency converters, and movie timetables.

In the case of the Internet, profit-seeking entrepreneurs have been lead to figure out ways to use the Internet either to provide new content to users and/or to increase the ease of accessing existing content by users.  In this sense then, again, the concept of the “splintering” of the Internet is a bit of a misnomer.  Instead of having existing content that’s currently available through the Internet be “sectioned off”, it would be more accurate to characterize the evolution of the Internet as that toward enabling new (proprietary) content to be accessed (through sectioned off Internet portals and/or new devices).  In other words, users who have used the Internet in the past to access existing information are not being closed off from that content; rather, it is new users who haven't been able to access certain information in the past who are now able to do so. 

 

Why Have Past Consortia for Compatibility Failed, and Why Would DECE Now Succeed?

As Cliff Edwards states in his article, “This [DECE] isn't the first attempt to create standards and a set of devices where a consumer is guaranteed interoperability.”  Why have past efforts as created a compatible ecosystem of devices and content failed, and why would DECE now succeed?

As to why consortia in the past have failed, there is a tension between companies having the incentives to establish compatible ecosystems and them having the ability (leverage) to do so.

More specifically, the companies that have enough leverage to convince competitors and complimentors to establish a compatible ecosystem are often precisely those companies that are large enough to support their own proprietary ecosystems.  Apple is a case in point.  With the tremendous success of its iPods and iPhones (and Macs), Apple has enough users to support its own proprietary ecosystem.  (In fact, by orchestrating the creation of iTunes to enable the iPod, Apple’s ecosystem attained critical mass even before the iPhone was released.)  To boot, Apple’s digital rights management system already allows users to access content from multiple devices, surely a contributing factor to its success:

iTunes Authorization - This terms applies to songs, videos, and other content bought from the iTunes store.

Content at the iTunes store is only able to be shared and played on a maximum of 5 computers (due to the iTunes Store's digital rights management). In order to allow the files to play on these computers, you must authorize them.

When you try to play an item bought at the iTunes store on a computer other than the one it was originally purchased on, a window will pop up asking for authorization. When you successfully enter the correct username and password, the file will play.

As in the current case with DECE and Apple, it is often in response to one company’s success in the marketplace that some of its competitors attempt to band together to compete by creating their own ecosystem.  However, without the participation of the dominant player’s hardware and/or software in the new ecosystem, the remaining companies often fail to attract a sufficient amount of leverage to establish their own ecosystem.  Part of the problem may be due to the fact that other large companies are trying to establish their own proprietary ecosystems.

Given the failure of past consortia to achieve critical mass, will DECE succeed this time, and if so, why?

Members of the DECE consortium currently include: Adobe, Alcatel-Lucent, Ascent Media Group, Best Buy, Blueprint Digital, CableLabs®, Catch Media, Cisco, Comcast, Cox Communications, Deluxe Digital, DivX, Dolby Laboratories, DTS, ExtendMedia, Fox Entertainment Group, HP, Intel, Irdeto, Liberty Global, Lionsgate, Microsoft, MOD Systems, Motorola, Movie Labs, Nagravision, NBC Universal, Netflix, Neustar, Nokia, Panasonic, Paramount Pictures, Philips, RIAA, Rovi, Roxio CinemaNow, Samsung Electronics, Secure Path, Sony, SwitchNAP, Tesco, Thomson, Toshiba, Verimatrix, VeriSign, Warner Bros. Entertainment, Widevine Technologies Inc. and Zoran.

As “Apple Isn't only One Missing from DECE Consortium” by Erik Sherman notes:

But that [Apple] is hardly the only noticeable omission. What about Nintendo, which only makes the top two game consoles in the world? You can’t talk about entertainment without including gaming, particularly when there’s been long-term speculation that the game console could become the natural entertainment center of the home. NetFlix [has since joined DECE] or Amazon or Blockbuster, all three of which are major forces in media distribution? Not members.

Also absent from the consortium are Disney and Google.

So will DECE succeed?

As Apple’s dominance continues to grow, there will be and increasing amount of urgency by other companies, especially those producing hardware, to join together to try to retain market share.  At the same time, as the Internet evolves, the increasing proliferation of content made available, together with devices to access that content will only increase user desirability of multi-platform compatibility.

On the other hand, Google has tried to develop a compatible platform with its open source Android system.  Many hardware developers have provided Android-compatible devices, including Barnes and Noble, Dell, Lenovo, LG, Motorola, and Samsung.  However, the desire of developers to differentiate their products from other Android system devices has ended up creating compatibility issues, thereby defeating much of purpose of having a compatible system.

 

So Are Device-Content Systems Moving Toward Compatibility or Incompatibility?

So now I’ve distinguished between access of public and that of proprietary information, and I’ve determined that the trend towards the use of fee-based portals provide users new and easy ways to access information or services that either they couldn’t access before, or they could access but not as easily as they can by using the Internet.

I’ve also established both that (1) content chases devices and devices chase content and (2) the proliferation of gadgets that can access both public and proprietary information through the Internet should continue to mushroom.

Finally, I’ve established that the increasing dominance of Apple’s ecosystem is creating an increasing urgency for Apple’s competitors to come up with a way to challenge Apple.  This current urgency, together with the expected continued proliferation of gadgets and portals into the future might create the impetus that enables the consortium of Apple’s competitors to successfully establish its own ecosystem.  However, success is not assured, since important players have not yet joined the consortium.  What’s more, the difficulties associated with incompatibilities that have developed even using Google’s open source Android system do not bode well.

With this information in hand, do I think device-content systems are moving towards compatibility or incompatibility?  I think that as the Internet continues to expand and devices and information proliferate, the universe of Internet-enabled device-content systems will end up being partitioned into four categories.

1. Public information, especially that information for which people want to generate as much exposure as possible, will continue to be easily and freely accessible, to the extent that the provision of such information isn’t excessively costly.

2.  Proprietary information accessed by many people (e.g., music, songs, movies, news, books) will evolve towards mostly compatible devices and fee-based systems.  Given the staying power of the Apple ecosystem, first vis-à-vis Microsoft, and now vis-à-vis pretty much everyone else, perhaps there will remain two ecosystems, one for Apple and its allies and one for everybody else.

There is the issue of upgrades.  For example, suppose you buy a traditional version of Spider-Man that you can stream over a handful (or more) of different devices.  Suppose then you upgrade to high-def.  I don’t think you will automatically be able to stream a high-def version of the movie to high-def hardware.  Likewise, if and when 3-D takes hold, I don’t think you will automatically be able to stream a 3-D version of Spider-Man to a 3-D device.  I think the system might evolve to let you pay an upgrade fee for next generation content, if you’ve purchased a previous version.

3.  New and different forms of proprietary information that have relatively little value, such as 99¢ apps, and that is accessed by a relatively few number of users, will evolve towards compatible devices (the Apple ecosystem or the everybody else ecosystem) and fee-based systems.  In particular, providers of fee-based content will not have the incentive to supply content that has little value to each individual user unless they have a large pool of users to draw from.  This will only be the case if gadgets are compatible.

4.  New and different forms of proprietary information that have a relatively large amount of value, even if it is accessed by only a relatively small number of users, will evolve towards incompatible, specialty device, fee-based systems.  It is worth it to users to pay for separate gadgets to access valuable, specialty, proprietary information, especially if the gadgets are tailored to enhance the use of the proprietary information.  So, for example, it’s very reasonable to believe that UPS and FedEx ill continue to operate their own differentiated and proprietary systems of handhelds and tracking information.

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