Transcript of BriefingsDirect Podcast on DRM and Business Trends for Internet Media

Edited transcript of BriefingsDirect[TM] podcast on DRM and business services for Internet media with host Dana Gardner, recorded Dec. 15, 2006. Podcast sponsor: Akamai Technologies Inc.

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Dana Gardner: Hi, this is Dana Gardner, principal analyst at Interarbor Solutions, and you’re listening to BriefingsDirect. Today, a discussion with Tim Napoleon of Akamai Technologies. He’s their Media and Entertainment Product Line Director, and we’re going to discuss a very interesting topic: Digital rights management (DRM), the collection of use metrics, and the business model around media and entertainment on the Internet today.

A great deal is being discussed about who controls what when it comes to content, particularly when you’re distributing it openly and freely on the Web, when you’re exploring new distribution models, and when you’re using new technologies. Tim is joining us for a second BriefingsDirect podcast. Tim, tell us a little about the state of Web commerce, and why DRM is such an important topic today?

Tim Napoleon: Digital rights management is doing well. It’s alive and healthy. There was a general concern a few years back that the consumers wouldn’t adapt to paper-media-type experience online, and I think the ubiquitous nature of the iPod has proved that wrong. There are a lot of other great devices that are coming out, or have come out, with really solid content protection schemes in place that the studios are comfortable with.

It’s everything from TiVo’s broadband platform, to the Zune player from Microsoft, to several other soon-to-be-announced platforms that are getting people excited again about what is possible to do with digital content in a real business-model fashion.

Gardner: One of the things I’ve heard from listeners, users of content, is “Wow, there seems to be so many of these DRM approaches, do we need a different one for every media company, for every modality? Shouldn’t there be some standards?” What is the state of standardization, or at least some de facto industry accepted approaches, with DRM?

Napoleon: If you’re a business development officer at a content-owner studio, you probably have a very clear agenda. You want a platform that has almost no royalty to it and you want something that’s ubiquitous, so you can sell as many units to consumers as possible. If you’re a technologist or if you’re a company that’s based upon getting royalties for your technology platform, you probably want to try to create such a great technology platform that you can charge a royalty for it and potentially have some strategic effect of lock-in on that platform.

If you’re a consumer, basically you want your favorite artist, music, title, in whatever format that you want it, wherever you want it, whether that’s on your TV, your PC or your iPod. There has been a willingness we’ve seen from consumers to pay for the same media across multiple platforms. It’s not uncommon for someone to buy the DVD as well as the iTunes download, as well as to go to the Website and watch the episode online.

All these different vehicles and delivery mechanisms aren’t necessarily taking money out of the studio’s pocket. They’re actually creating an additive effect. We’re seeing an overall trend. As you make this media more convenient and more usable, consumers are in a consumption pattern, and if consumption is going up, they’re using more of this media.

Right now, studios are trying to figure out what platforms have enough scale and enough users to make it worthwhile for them to have their content on that platform, but there’s definitely still room for that one global standard for content protection.

Gardner: Just for the sake of all of our listeners, when we talk about digital rights management, we’re talking about something such as iTunes, which many people might be familiar with. You can buy a song from the iTunes Store and you can use that through iTunes on as many as five different devices, and then it’s shut off. That’s the management part of digital rights management.

The goal here is to preserve the copyright, the protection, and the ownership of media or artistic production, from the perspective of the artist or the distributor -- but at the same time to give users a bit more flexibility in terms of how they can enjoy media. Do you have anything else to offer that’s a general definition of DRM in today’s working environment?

Napoleon: Sure, if you go back to the business sense of DRM -- why do we even need to control content? Studios have very complex business processes when they develop content. For example, with a movie, it’s not uncommon for a studio to pre-sell the international rights to fund the development of that movie. They go to each different region and pre-sell that right to have the future revenue from that movie to different finance companies around the world. Then, they might keep the rights from the North America release.

When go onto the Internet with that movie title, you don’t own the rights to all these different geographies. There’s the need for the studio to make their business arrangements and the contracts map the use pattern of the Internet. There are some nice technologies from Microsoft and others that facilitate this business transaction for the studio. The great news is they’ve gotten a lot better, so the consumers are willing to put up with the little extra overhead that’s required.

Gardner: Consumers might not even appreciate the level of complexity when we’re dealing with multiple geographies, multiple legal systems, different approaches that are culturally accepted for how people absorb or use technology-driven media. Tell us a little about how an applications and media-management and -optimization provider like Akamai is addressing some of this complexity?

Napoleon: First, everybody knows Akamai for scale. Now you’re starting to see major live events like World Cup and others come online. That’s one of the first very good use-cases of meeting DRM services that scale. Akamai has one of the largest, if not the largest, license delivery services in the world. So when people go to watch a DRM-encoded stream, then you receive credentials to watch that stream.

The Akamai License Delivery Service is a global, secure distribution platform for those licenses. It also packages tools that usually allows the rights owner to assign what rights they want to give -- or not give -- to the end customers, based upon some different parameters.

Lastly, there are some advanced services that Akamai can wrap around that. For example, in sports, geography is very important. Different teams have the ability to have their games play and not play in different areas on the Web. We have geo-restrictions built in to our platforms so that we can protect the content owner and make sure that rights for certain areas only play streams in certain areas. It’s a very key feature for sports.

Gardner: That’s the equivalent of blacking out a game for electronic viewing when there are still plenty of empty seats at the stadium. Is that what you’re getting at?

Napoleon: Yes, absolutely. For example, ESPN may own the North American rights to a football game, but another company may own the UK rights. There might be a UK website that wants to put a live event up, but they don’t have the rights to it in the North American market.

Previously, they couldn’t do it, because they couldn’t guarantee that people from around the world wouldn’t come to their site and watch it. Now, we have the ability to allow them to put up a lot more content, because they can enforce all the policy around it.

Gardner: So, before the media companies and the producers of content -- for example, in this case the sports franchise or even a league or a foundation of some kind -- open the floodgates and let their content out they need to make sure that they can adhere to the licenses they’ve already got in place, the contracts that they’ve already set up with the various media outlets or even stadium owners and local business owners that are there.

Then, they also have to think about what they want in terms of a business model, by taking this out to the Web and the Internet. So for them to get the content to the end users, there has to be a system in place to manage all of this complicated provisioning. I guess you can think of it as service level agreement management, right?

Napoleon: Absolutely. As you can imagine, just describing that at a high level is complicated. When you actually go to implement it, it can be even more complicated. You can have all sorts of questions about your business model, but it’s nice to know that with Akamai at least the technology hurdles aren’t going to be as high. Its going to be much easier to get the technology implemented. You can focus all your resource on that mouthful of business challenges that you’re going to have getting your content aligned.

Gardner: In order for end users to enjoy this ability to access content through their Internet protocol, packet-driven pipe -- that might be their broadband connection -- a lot has to happen behind the scenes in order for the people who produce and distribute content to feel comfortable about it. And you’re trying to bring that to the table.

Napoleon: My sound byte there is: How long does it take to do a live event on the Web? Well, it takes about 10 years and 10 minutes. It takes you about 10 years to learn everything you need to know to do it, and about 10 minutes to actually do it. The learning curve is definitely something that Akamai can assist with when you want to monetize and bring your content online.

Gardner: Tell us a little bit about the business models that this enables. Once we’ve crossed this threshold of putting in a technological capability to allow companies to adhere to the contracts and their service-level agreements (SLAs), what is possible in terms of new types of subscription? We see what Apple’s been doing with video recently. We see what Google is doing with YouTube and distributing more content. Now that we’ve got the technology to manage sort of the old model, what’s on the horizon for new models of media distribution, entertainment, and business?

Napoleon: Maybe we should just rewind a little bit and talk about one of the biggest challenges that studios have had since their inception, and that’s physical distribution. If you look back at Warner Brothers, when they rolled out Atari, they over-estimated their popularity; what Atari would be at the time when they released the product. They ended up with all these consoles coming back from retailers, and they ultimately had to sell off some very valuable online cable properties to pay for that inventory.

Studios have heart palpitations when they have to know how many DVDs to press, or how much physical inventory to create. With online and a scaleable system -- that’s variable capacity from Akamai -- you can scale it all up to billions of users, if you need to. You don’t have the physical cost of pressing a disk or having to forecast inventory. You never run out of it. A consumer never goes to store that doesn’t have the title they want to rent. The opposite benefit is that you don’t have a warehouse full of disks on your balance sheet account.

You’ve got just the right amount of inventory. It’s probably the one business issue that this solves better than anything for the studios -- having the ability to get into the hands of consumers hot content, and also capture a fragment of the market with maybe just a little bit of content. In the past, the distribution pipeline for projects that might not be mainstream didn’t find a voice.

People often call us the long tail of content, but really it’s having unlimited inventory and the ability to really let the consumers self-select from a very large library and filter that down to exactly what they’re interested in, and then order it. That’s just making people order and buy more media.

The Internet is also enabling a larger audience to view more titles. Some of them are okay with watching media via advertising instead of having to pay for it. One of the hottest trends right now is the ad market, and being able to put ad insertion and other things around your content to generate ad revenue. We’re seeing properties like Fox and NBC and other U.S. broadcasters roll out full-length television shows on the Web that are ad-supported. The feedback from advertisers and consumers has been that these are extremely popular, and the trend is definitely going to continue and accelerate.

Gardner: We’ve got a nice problem-solution set here. That's because users get to watch the content they want. They can take advantage of the long tail -- if your tastes are eclectic, you can find what you like; it doesn’t have to be mainstream. The providers of the content like these solutions because they can manage inventory. They don’t have to predict physical numbers of units to get distributed and then either come up short or over-deliver, which is a waste of money for them. So, it’s in their best interest to distribute via the Internet. And in doing so, we can now start injecting advertising into these content properties.

Now, help me understand this. Are we putting the same ad across a 100,000 audience-wide distributions, or can we target the long-tail effect and its advertising capabilities? Can you actually decide that someone’s interest in a certain type of content and so they might align through their interests with whatever an advertiser wants to provide to them?

Napoleon: It goes into a marketplace of content. What you’re seeing is that publishers now are facilitating their audience. In the case of channels like speedtv.com, you have this very focused property on cars. Not only can you put all your own original programming on that about cars, you can also look out to other content owners who have auto enthusiast-type material, and bring that all together into a very focused portal for auto fans.

Now that you have an audience that’s self-selecting into auto, and it’s the right demographic and the right type of consumer for car parts or new cars, you can charge them a much higher ad rate. We refer to ad rates of CPMs, or cost per thousand. Once you have a focused target audience like that, the ad rates go up. Instead of seeing all this general mainstream programming, you’re starting to see a lot of these more-focused and more-niche sites really accelerate and take off, because -- in a sense -- on the Internet there’s unlimited broadcast time. You could have as much programming as you need to get a large enough audience. You don’t have to worry that you only have eight hours in a day to broadcast television.

Gardner: You’ve injected another thing in here. I guess we could call it user-generated content. If there are some great bloggers or video bloggers out there who are creating really compelling content on a certain subject, then whatever the organization is that’s creating a community approach around that subject could bring that in, as well as professionally produce new media. That creates this notion of a channel, just like we would think of with cable television.

You’ve got Animal Planet, Discovery, Biography and so forth on cable. Now we can get much more discrete -- down to car enthusiasts or home and gardening -- or even something as nichey as a business topic like jet engine maintenance. Putting the content together creates a much more valuable audience for a specific advertising community. People are matching buyers and sellers, and because they’re better matched, it’s less a waste of time for the viewers because they’re getting advertising that might actually be relevant to their interest and needs. Advertisers are getting a much more efficient approach, because they can direct ads specifically at those who are most interested in that information.

So, the theory is great. However, as we discussed earlier, complexity is layer upon layer here. How does a network services and business services provider like Akamai help create this sense of buyer and seller community that’s really aligned well?

Napoleon: I think the first step in any of this is reporting and tracking. You’ve got to see what your audience is today and what type of media consumption you’re seeing across your content.

Gardner: This won’t work without metrics.

Napoleon: Exactly. Media is one of the most metrics-driven businesses out there. Getting the stats and getting the things digestible, so you really understand where you’re at, is step one. Akamai has world-class reporting that facilitates that.

Step two is bringing in relationships, and this goes into the concept of syndication. We talked about some of the technologies there, rights control, as well as a nice easy interface for users to get content in and out of your portfolio. Akamai offers ubiquity in the media space and interoperability. Our systems work with most media companies out there, and they use them. There is a familiarity with it, and it’s a common language.

Lastly, there’s the innovation curve. Akamai really strives to study the business, and learn the best practices and tips and tricks, and then share those. If you go to our site, there’s some great podcasts from this guy named Dana Gardner on there, as well as a lot of white papers, sample source codes, all kinds of things that facilitate building out these applications. And, we’ve got a rather large professional services organization. If you don’t want to learn how to fish, we can do the fishing for you, and just build out these business systems for you.

Gardner: It seems to me, because of what you said about unlimited inventory and much more efficient management and alignment of advertisers and information seekers, that the Internet is perhaps the only place to be in five or 10 years for content. Broadcast is waning, even when it goes to HD.

I expect that the number of people who are accessing this stuff through an antenna on their roof is going to be relatively small, and the level of service they get is going to be rather kludgey. It’s going to be an obtuse approach to media. Whereas if you go to the Internet, it’s even better than cable. It’s where you can bring all of these services and efficiencies together, where you get the benefit of a long tail. You get the blockbuster movie the week it comes out, and you can access it in your home. Am I going overboard in painting what could be a very interesting future in a couple of years?

Napoleon: You’re painting a rosy picture, but we have a long way to go. Today our stance is that we’re additive to all the different technologies out there. If you’re a traditional broadcaster, and you have television and radio stations -- those are incredibly valuable assets today. There are still a lot of people who like to just turn on the TV and watch professional programmers program for them. In the sense of television programming, I don’t see that changing in the near-term. If anything, I think the Internet has invigorated and created an innovation curve.

If you’re a television broadcaster, it’s kind of like having a new competitor that might get you a little bit fired up. You’re seeing that in the network lineup this year. There’s just some great programming, from “Lost” to “Heroes.” Television has definitely stepped up the game, and right now they’re one of the platforms that has enough distribution to afford creating these really highly visual, big-star type shows. The Internet is absolutely dependent right now on the television revenue to fund and produce original content.

We’re providing a great mechanism for additional distribution right now, but there’s no way that the current monetization system of the Internet is big enough on its own to facilitate shows by the J.J. Abrams of the world. So, I don’t think that we should ever look at it as "us-versus-them." Hopefully, it’s a "we" and the "we" is better than all the other platforms are today.

Gardner: It’s an interesting environment from my perspective. The Internet is the big opportunity for the future. And if someone likes to have to professional programmers pick-out their programming, they can access that through the Internet as well. It’s just that the Internet offers additional granularity, mixing and matching, and better metrics.

On the other hand, as you point out, the amount of revenue that’s derived through the Internet with media is still quite small, a fraction of what you get through traditional media distribution channels. Therefore, we’re at this very interesting juncture, where we need to maintain both systems, one for the future and the other for, in a sense, the monetization that allows that future to come about.

Napoleon: Absolutely. We’ve learned so many valuable lessons from working with traditional broadcasters. I don’t think you ever want to throw everything out and reinvent the entire industry. There’s lots of great best practices that have come out of broadcasting over the last 100 years. We want to make to sure that we learn the best of those, and we incorporate them into the Internet. That is what's so fun about working in the Internet space right now. All the rules aren’t defined. We don’t have all the standards baked. We don’t have everything completely done.

This core group of interactive teams at all these different organizations -- and even individuals -- are right now creating what’s going to be the future. That’s exciting, and that’s why we see a lot of the college guys coming into this space. The thing I’m most excited about is the talent that the interactive space is recruiting. So many people want to work at the Yahoos, the Googles, the Microsofts, the Akamais. We’re getting the best of the best to come and work for us. That’s what’s fun about this industry right now.

Gardner: Definitely an exciting time. Now, we talked a little bit how there could be a greater CPM payoff by matching up advertisers and knowledge or entertainment seekers, but what about pay-per-view? Isn’t there an opportunity for me as an Internet viewer to say, “Listen, I’m willing to spend $8 or $10 on a movie. I’m going to spend that going down to the theater this week anyway. I would like to buy a new run, new release movie.” Is there a way for you all to facilitate a pay-per-view approach through the Internet, as well as taking advantage of some of these more precise advertising and metrics-driven approaches?

Napoleon: That’s the way I like to do it, personally. I’m speaking about my own personal experience. I watched all my shows via iTunes this year. I found that I’ve not watched as much TV, but I’m watching the shows I want. I just don’t have to watch all the commercials. That’s my preferred choice -- just spend a little bit more money, and then not have to watch as much advertising.

I like that approach, but it’s somewhat expensive. So I can see that a consumer who doesn’t want to spend $2 for something he can get for free based on ad-support on television might not want to do that model. But there’s definitely intelligence from consumers that they know that they can now buy media. There are some great payment mechanisms out there that make it almost transparent to purchase media.

I think that has lowered the bar for people to participate. You’re seeing a lot more of that revenue coming into the space. We had some new stats from comScore today. I think Apple’s online digital revenues from iTunes are up over 80% year-to-date. So, it’s definitely taken off.

Gardner: That would include, of course, this ability to buy trailers and short animation clips and television shows, and I would think, increasingly, full-run movies.

Napoleon: Your hard drive gets full fast in this modern world.

Gardner: Does every distributor, whether it’s Apple or Time Warner or Paramount, want to come up with their own pay-per-view technology platform and infrastructure, or is this something that’s going to become a component on the network and a de facto industry standard approach?

Napoleon: Studios came in early on with Movielink. That was a collaborative effort among the studios. They saw the need to have an aggregated content library. No one content producer has enough content to provide a full suite of entertainment choices for a consumer. So the aggregators, like the Comcasts and the iTunes of the world are very important to the consumer experience, because people really don’t want to have a relationship with 30 different sites to get the content they’re interested in. They appreciate the fact of a really solid aggregator to get them everything that they’re interested in at one place.

There are also technologies that are replacing the aggregator. If you look at RSS readers and tools like that, consumers are now controlling their own aggregation in bringing together media experiences. It’s very easy to be entertained by podcasts. So you can go and subscribe to a bunch of podcasts via RSS, and that can be your way of programming your content. I think we’re still up in the air in what the ultimate model there is. I think you’re going to have studios doing some things directly.

You’re going to have them definitely syndicating and participating with affiliates and different regional people that can regionalize the content. There’s still is the need for regionalization and language. Then, lastly, you're going to see different types of models emerge that we’re probably not even aware of yet. Social networking was a great example of that. People adding to content by creating derivatives of it, mash ups and things like that on the social networking site.

It’s still completely up in the air, and there’s going to be hundreds of startups this year to try new ideas and new concepts around it.

Gardner: So once again we’re in a very interesting period, a dynamic period. There are all these great notions and visions about where media can go and how the Internet can provide a platform and a distribution approach for that. There’s also some parallels to the past. Some business models that have been very lucrative are now under some threat, certainly under a cloud of change. I suppose right now we’re at the point of creating the foundations for some of these unknown approaches.

One of those foundation bricks is DRM, another is metrics, another is the ability to align advertisers with highly qualified viewers. What else is there? What other major bricks need to go into this foundation, before we can move forward on some of these visions?

Napoleon: My challenge to everybody in the industry is to make sure it works. Consumers want to try something, free samples, if you will. They’re going on the Web to try something. If they don’t have a perfect experience, it’s easy for them to go back to television, to go back to these other forms in media that do work very well. So, our challenge with Akamai -- and what we want to try to deliver -- is that perfect experience. When you click on the video, it should come up instantly in place, with all the business and tracking and the reporting working flawlessly.

Right now, what we’re trying to focus on is just flawless execution and making sure it all works and works well. So whatever part in the value-chain that you are coming at this from, you’re having a good experience. That’s what Akamai is about. It’s about the end experience, and the goal is perfect, flawless video every time.

Gardner: So another major brick is simply the technology and the network integrity to provide a pleasing, repetitive, dependable experience -- regardless of the type of media that’s coming down the pipe.

Napoleon: Absolutely.

Gardner: Okay, thanks. This has been a sponsored BriefingsDirect podcast. We’ve been talking with Tim Napoleon, the Media and Entertainment Product Line Director for Akamai Technologies.

Thank you for listening. I think it’s been an interesting discussion that’s sort of opened my eyes a bit more to the possibilities -- but more importantly it's opened my eyes to the level of complexity that needs to be managed before we can get even realize what we have today, never mind reaching this vision of where we could be in the several years. Anything else to offer on this subject, Tim?

Napoleon: I think there are some great resources at Akamai.com. I will invite you to look at our expert section there and then please email us. Let us know future podcasts what we can do and what type of information would be helpful.

Gardner: Great. Thanks once again for listening and thanks to you, Tim and Akamai for sponsoring this podcast.

Napoleon: Thanks, Dana.

Listen to the podcast here.

Podcast sponsor: Akamai Technologies, Inc. See more Akamai podcasts.

Transcript of Dana Gardner’s BriefingsDirect podcast on Internet media trends. Copyright Interarbor Solutions, LLC, 2005-2007. All rights reserved.