Netflix ca-ta-strophe

You don’t want your bad news to lead the main evening news in a wealthy but peripheral market.

“Netflix has just known a ca-ta-strophic day on the stock exchange”, losing $15bln, 12% of its market cap, after its first-ever drop in US subscriptions. —Sacha Daout, 19h30, RTBF, Belgium

It has been clear for years that the economic case for Netflix was not firm even when beheld at a squint. But this rather forces the reckoning into the present moment. The wall in front of you might be closer than it appears and moving faster.

If Netflix is seen to fail, and I don’t see how at least its worldwide original content could survive, it will be a terribly chilling effect on originals, at least in many linguistic groups at once.

More on the event

Image: RTBF

Crossplatform measurement urges a rethink of intab, reach

Existing definitions are already too diverse for a level playing field. We must adapt them further to work well for video measurement intended to capture all screens.

Alldience, a joint platform developed by Immetrica and eCGlobal, can measure any screen, anytime, anywhere using smartphones. The smartphone is on or within reach of most people who have one, most hours of the day; it is the closest practical approximation to the often–quoted ideal of one Nielsen client of a measurement device implanted in the sample member. Furthermore, a double-digit percentage and increasing share of viewing is done on mobile devices, mostly invisible to conventional measurement technology—but not to Alldience, where the measurement smartphone is either also the playback device or close to one.

When we set out to design this system, we confronted one problem that was conceptual rather than technological: the inadequacy of the intab definition. The intab is the cooperating part of the sample. Most viewing and listening measures are fractions in which the intab is the denominator (as in a rating), or an element of it (as in a share). The required degree of cooperation varies from a few minutes to almost the entire reporting day, but whichever it is, the intab varies directly with the sample size.
 

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Alldience: Complete audience measurement any screen, any source, anywhere, anytime

In cooperation with eCGlobal

For more information, please contact: Adriana Rocha adriana_rocha (at) ecglobalsolutions.com

More on Alldience

Immetrica, audience-measurement systems engineering specialist, and eCGlobal Research Solutions, innovative consumer insights and big data analytics company, are proud to introduce Alldience, a new ratings service built from the ground up to capture all viewing regardless of location and technology, and integrated with eCGlobal’s existing social-media use and consumer panel with approximately one million active members served by dozens of pay-TV operators. The service can measure new-technology-enabled viewing to realtime and timeshifted DVR but also sources invisible to most currency ratings providers, including VOD, OTT, websites, apps, YouTube, other social media, in and out of the home. Based on a highly reliable smartphone-enabled ACR technology, the service detects viewing in any environment in which the media audio remains intelligible, in realtime or timeshifted using any means for up to a year after broadcast—or longer. For advertisers, we offer complete audience data that permits the calculation of campaign ROI; campaign retargeting that permits the purchase of inventory that reaches the target audience; ad creative testing, covering propensity to watch in realtime and on DVR, opinion and biometrically measured emotion; and reporting on the entire consumer journey.

For premium-channel operators, we offer channel-coverage ratings (ratings among their subscribers rather than the entire sample) when eCGlobal operates subsamples of its panel specific to them. We can also offer a behavioural definition of channel use, which, however, ignores viewers who have access to these channels but do not use them.

Alldience can measure binge-watching, and can ingest the multinational streamers quickly and efficiently, and update their libraries promptly for additions and deletions. Alldience can support near-real-time programmatic advertising markets and other uses that require near-immediate turnaround of data. The unit of measurement is a demographically described individual viewer, with a rich single-source set of descriptors such as income, education and occupation; social-media use and engagement; and consumer behaviour available to drill down further to the target or de facto audience, on a panregional, nationwide, or local-market scale. In addition to audience measurement for broadcasters, we offer advertising spot ratings and competitive analysis of advertising flights. Of particular interest to advertisers is the opportunity to engage panel members who have just watched designated content with a custom survey automatically pushed to the members’ smartphones in near-realtime, in what amounts to the world’ss largest focus group.

The service is delivered through a world-leading analytics platform capable of handling the large sample sizes; an optional cost-effective custom reporting service using Immetrica’s proprietary technology; and customized means for clients with needs beyond these.
A test deployment in Brazil returned first usable data on 31 August 2018 and continues to run today, demonstrating high accuracy, stability and utility. We have also studied the viewing of 84 designated advertising creatives.

Contact us to discover what we can do to find all your audience.

Growing things in scorched earth might not yield much

One of Shakespeare’s best-known scenes is at the end of Henry V, where two armies have, with few exceptions, killed each other. Such events might not make sense to civilians, but they have occasionally resulted in the achievement of one side’s objectives. The real Henry V did win the Norman territory he regarded as his birthright—temporarily. Enter Netflix, a frightening behemoth that levels pay-TV giants all over the world with its cheap subscriptions and compelling programming, some of it original and exclusive. Cord cutters and cord nevers in one country after another either rely on streaming exclusively or in combination with digital terrestrial broadcasting with its near-perfect signal quality. Much of the streaming is Netflix. It is verily scorching the earth, and unlike Henry V, it’s doing so unilaterally. But all is not alright in the monster’s lair. The company is 22 years old. Shareholders and investors have acquired the silly notion that it’s old enough to meet expectations of a mature company. Instead it continues to have an astounding burn rate and has no obvious means of escape: even if it raised prices and/or increased market share transcending any realistic expectations, it would still take decades to break even. The notional Wall Street is tired of waiting for the adult that still behaves like a child. Netflix’s actions and statements seem to militate against reality. It is raising new fundingwhich, however, won’t even last it a year. And it predicts its burn rate will peak this yearalthough heretofore it has been growing, and at increasing rates. In fairness, no-one has tried to do what Netflix is doing: to become a provider of programming and a producer of much original programming to most of the world, all at once, and to do so at affordable prices. An effort such as this is bound to be expensive. And if it could only keep growing at the current pace a few more years it would at least stop losing money. But competition is growing (Hulu’s international expansion is just starting), access to third-party programming is shrinking in the US and will likely do so in the highest-income countries as well, and its ability to raise prices is dampened by competition and local economic reality. It can cut back investment in original programming, but that might be counterproductive (or not) by removing a motive to subscribe or keep subscribing. It can introduce advertising but ditto. So the possibility that Netflix will die having killed many others is no longer hidden behind the horizon. Particularly relevant to this blog is the audience measurement aspect. Netflix has until recently avoided any external disclosure of its own measurement, save for a very few tidbits dripped onto the press. This has raised the fame of its ratings of its own service to the level of unobtainium: although no-one outside the company knows whether it’s even any good, almost everyone would like to see it. It has recently started sharing limited data on its US viewing as Nielsen started measuring it (Nielsen also has an agreement with Hulu and measures it and Amazon Prime Video). This seems to have been a defensive move as Netflix’s numbers, at least for some of its highest-profile original programming, are higher than Nielsen’s, and thus serve Netflix management’s interest (to show that its investment in this content is rewarded with viewing). Netflix is apparently breaking with convention in how it reports its numbers. It uses cumulative audience (reach) rather than average audience (the audience at a given moment of the content, across all views in the reported time interval). Nielsen offers cumes too, but carefully deduplicates them; it’s unclear whether Netflix does, and the fact that the numbers it does share are substantially higher suggests it might not (so what it’s actually reporting is gross impressions at one per show, which would be a strange and misleading measure to use here). Beyond such ruminations is the algorithmic and technical design of Netflix’s audience measurement system itself, which remains a black box, probably unseen by anyone qualified who did not create or curate it. Unless Netflix is brazenly lying about its numbers, the possibility arises that they are nonstandard and thus too high, that management cannot understand this, and is therefore overpaying for its top external content. Another effect is also possible, and would explain why Netflix has historically regarded its audience measurement data as a trade secret: its subscription pricing suggests that, while it might be overpaying for a few high-profile third-party properties, it probably underpays for most. There’s simply not enough revenue for everyone to be paid equally relative to audience—the same problem faced in sports leagues with salary caps, which harms all players except perhaps the stars. So far, Netflix has been able to shut down any third party that tried to measure it, loudly claiming those numbers were wrong, without proof. It tried to do that to Nielsen, as well, but must realize it cannot win in a credibility contest with the leading name in the ratings industry. Had Netflix not been thus undermined, then, rapidly losing its ability to offer its investors an exit strategy, it could be expected to hang on to every perceived advantage as long as it can, including keeping its data away from content providers who would use it to force higher rates. It is still expected to do so in countries where it is not exposed to third-party measurement. As in the case of Uber, another tech company without evident means of escaping eventual fiscal doom, the fact that competition based on profound lossmaking leaves a scorched-earth battleground of dying competitors, doesn’t help the disruptor much in the end.

Content owners are breaking herd immunity

It is all the rage for fashionable content owners to set up their own streaming services. First came CBS AllAccess with original programming premiered only on it, then Disney announced Disney+ (entertainment focused on children) and a separate service for ESPN, both of which would offer exclusively programming that would be withdrawn from Netflix and other third-party distributors, in January Comcast/NBCUniversal has announced a service with exclusivity on some programming, and now AT&T has announced that Warner Studios series such as Friends, The Office (US version) and ER will be pulled from third parties and offered exclusively on its new three-tiered streaming service, to be launched next year (it already operates three, which will be subjected to some rationalization). Original programming of company’s HBO unit has always been exclusive to its own streaming services. When the same week as AT&T’s announcement, its Warner Bros. movies were downgraded from 4k to regular HD on iTunes, some thought this was a quiet and immediate imposition of a milder version of exclusivity: one could still use the content but not as well. As the MacRumours story suggests at the end, this seems not to have been intentional. Especially as it affected the entire Harry Potter series of feature films, which does not make sense as an exclusive on an AT&T streaming service because its audience is very far from overlapping. But the withdrawal of so many big turtles into their shells does feed the assumption that the downgrade was intentional. Exclusivity doesn’t make sense if you can monetize the demand for your content more fully by permitting its distribution by others. Disney can go it alone, at least in the US, because it can be reasonably sure that most customers will follow it to its new platform, for both its sui generis entertainment programming and for ESPN with its exclusive sports rights. Few others can assume they can leverage such loyalty. But brinkmanship in negotiations over money will only increase in the near future, and when talks break down a downgrade might seem temporarily (while regular HD is not seen as tantamount to no service) attractive alternative to a complete outage of that content on the distributor’s platform. It might not suffice, though (the lower resolution might not be enough of an impediment to use, neutralizing the content owner’s main weapon). I rather expect that AT&T is fooling itself when it assumes its high-profile ex-NBC series give it the market power on which Disney is relying. The proliferation of content-owner streaming services with exclusivity on the owned content—disaggregation—raises the cost and complexity beyond the tolerance of most viewers, and something will give. The lesser content will fail first but almost every player will be hurt. As the antivaccination movement shows, a few ill-advised decisions can spoil it for everyone.

Squeeze play

“Traditional Pay-TV Squeezes More Revenue Out of a Declining Asset”, writes Midia Research.

Yes, squeezed more, just barely, and probably because around a couple of percent of advertising spend was relocated this year from online to TV by advertisers unhappy with the quality of targeting online.

But it’s the last gasp. The NFL has seen lower ratings because it’s been less interesting lately (in the opinion of those who would know the difference, of whom I’m not one), but it remains a major national sport in the US, and it is headed to SVOD/OTT with the lower-value prescheduled evening fixtures first. The more interesting, dynamically scheduled games currently on Fox and CBS will surely follow.

The league’s thirst for cash has demanded an ever more increasing subsidy from broadcasters and pay-TV operators even as margins permitting them to pay this subsidy have become static or started declining. As Margaret Thatcher warned early on in an argument against tolerance of inflation, it is easy to end up pricing yourself out of the market.

The difference between stopping poachers and sustainable harvesting

Facebook's announcement of a change to the newsfeed selection algorithm in favour of personal-network posts at the expense of posts from businesses was greeted with hysterical headlines such as “RIP Facebook News Feed for Publishers”.

Business/brand activity on Facebook will show up less, not be eliminated entirely. It will certainly not RIP; Facebook has jealous shareholders now and is not becoming noncommercial. Currently businesses are enjoying a free marketing ride on Facebook, and in so doing they reduce Facebook's utility to the owners of the very eyeballs they're after: a contemporary version of slash-and-burn agriculture that destroys the ecosystem it uses. The algorithm changes will reduce the extent of such poaching. And some portion of businesses' activity will probably be redirected into paid advertising. This could meaningfully enhance revenues even if only a small portion of current business activity becomes paid.
What we haven't seen so far is an acknowledgment of the negative effects of the current complex wall/newsfeed content selection algorithm. Since its introduction, the newsfeed has become unpredictable: reload and you'll see a largely different selection of posts, so you can never be sure you're fully caught up on those from even the sources most interesting to you. The feed sequence is frequently interrupted by repetitive promotional messages from Facebook itself. And there's no escape: changing the few available configuration parameters has little effect.

Users’ lack of control also harms the utility of Facebook and the common weal by downranking news organisations, which post extensively to social media in efforts to keep themselves vital and relevant, and in so doing keep us supplied with information despite, for many newspapers in the US, negative margins. They may post news free of charge to readers to promote themselves, drive subscriptions and keep their heads above water, but they’re not able to spend to push news stories as paid advertising; that’s a nonstarter, and a dangerous one for the country at that. If I cannot instruct the Facebook algorithm to maintain the prominence of, say, The Washington Post and Science Alert in my newsfeed, the feed loses much of its utility to me, and this perforce looks like someone has decided that he knows what I want better than I do. That, perhaps unintentionally, propels us right past the point of evil (as in Google’s “don’t be evil”) and into ideological totalitarianism. The end result is likely to be the decline of the social network in favour of another, as has happened many times before (to Compuserve, Delphi, AOL, MySpace).

When the little fish gradually, over time, eat the big fish

It’s rather obvious now that nonconventional (nonlinear, non-DVR) television will account for a large share of viewing even in markets in which it doesn’t already. South America is expected to grow to almost 16% VOD/OTT penetration by 2021 (apparently excluding DVR integrated into pay-TV systems), with the other lagging countries and regions, such as Japan and South Asia, exceeding 50% by that time. Some pedestrian thoughts on what this means.

• Broadband is VOD and OTT’s partner in a virtuous cycle: it both enables them and is made necessary by them.

• With technologies such as fixed 4GLTE and others in development, broadband could be deployed at infrastructure costs well short of the monumental expense of burying cable, especially under established cities. The same advance—inexpensive deployment, and also driven by a “killer application”, earlier enabled cellular telephony across much of the third world, out of all proportion to local economic strength, usually vaulting entirely over wireline telephony.

• DBS/DTH (unless integrated into a broadband or mobile offering) has little place in this model and is thus probably moribund or subject to massive contraction. The need for broadband eats into disposable income that also would fund DBS, and the need for it is diminished as content becomes available on cable or standalone VOD/OTT. As major sports components in the wealthiest countries fall like dominos to standalone VOD/OTT distribution (such as ESPN in the U.S.), the sole advantages of DBS providers might be the last few exclusives (typically major sports events) and customer service. That is unlikely to suffice for continued economic viability in ten or twenty years.

• Conversely, cable tied to broadband delivery, in which the extra cost of television service is modest, may prolong its life. It will feed the need for conventional TV use that many viewers still have (an aging cohort, to be sure, but quite young on average). The question for many viewers is major sports events, the extent of the VOD selection, and the extra money spent in addition to the broadband-only price.

• Television is headed towards a smaller but higher-value selection. This has two motivators:

1. One is subscribers’ interest in paying only for what they use rather than hundreds of channels they don’t want. This is served by either services like Netflix and its local workalikes with very broad selections for a very low price, or more expensive services like Dish Network’s Sling in the U.S. with a limited or subscriber-controllable selection of channels. In the first case, stuffing of low-local-value U.S.-targeted content into services in other countries, currently a large portion of multinationally offered programming in which all U.S. studios engage, is economically insignificant; in the second case, it’s not even there.
2. Then there is both OTT providers’ and pay-TV channels’ need to stand out, generate buzz, differentiate themselves from the competition. They have all gravitated to the the poor (anyway, resource-limited) man’s route to world domination, which can be fairly called the Motown Records approach: pick a few star properties and pump all your production and promotion money into them. That’s what we’ve been seeing from Netflix, Amazon, AMC, even the Travel Channel, and it has worked very well in the U.S., generating more interest in any non-premium-channel content than there’s been in many years.

• Many or most countries already have incumbent, local OTT services, for whom it is natural to defend from the onslaught of foreigners (Netflix, Amazon Prime Video) by using their strength in local content. The tactic is the same for the other side: criticised broadly for undertaking its international invasion on the strength of little non-English-language programming and insufficient rights to use what it had in its new countries, Netflix is planning to invest in locally targeted and produced content. Previously, Twentieth Century Fox as a feature film distributor has successfully become the first U.S. player to do so on a substantial scale, so the model can work. This would reinforce the potential for the medium to evolve from a steamroller of globalisation and boob tube into a culturally sensitive, appointment-viewing, dare one say, art form.

• As recently covered here, advertisers have tried to throw much of their money at targeted Web advertising and were largely unsatisfied, because of poor targeting, lack of independent auditing, and possibly other reasons. This means that there are advertising budgets in search of appropriate vehicles. At the same time, as also recently mentioned here, there are no guarantees of profitability for everyone as the supply side of the content market reconfigures, or even when it settles down, because the new model will be subject to different costs and revenues. Can standalone VOD/OTT providers attract advertising by targeting better on the basis of the usage patterns they see from specific user accounts? Will a market more accustomed to conventional demographics accept such indirect indication? Some OTT companies (Netflix) may be as unwilling as HBO to accept advertising, but for others whether, how much and in which format they play ads may depend on the money they stand to earn—and how much they are willing to risk user displeasure.

Is television sustainable beyond its declining conventional variety?

“In 2015 worldwide TV sales fell by 11%, young people watched 10 minutes less television a day and in the US research showed that 62% of adults watched online video every day.” But viewing on other screens more than compensated. http://www.euronews.com/2016/04/06/how-is-tv-consumption-changing-around-the-world

The TV sales drop speaks loudly: the continuing increase in population and much faster increase in sufficiently wealthy population, the change from analogue SD CRTs to digital HD flat panels, and the dampening of demand cyclicality by the desynchronization of the economic cycles of various countries from each other should all have caused a substantial increase in sales. Eventually the diminution of conventional TV will reach even parts of the world where it is relatively minor today.

It is facile to say that viewing will shift to different sources or screens. The more interesting question is the economics. How many independent OTT services from channel operators can be sustained separately from each other or in substantially à la carte models like Dish Network’s Sling? And if they cannot, and must rely on aggregators like Netflix and Amazon Prime Video, will the low pricing deplete revenue until the more popular programming cannot be paid for? So far, both traditional broadcasters and the OTT aggregators have adapted, but this does not mean that they always will. At some point there might be a shakeout just as macroeconomics predicts (easy market entry leads to minimal profits).

Is it smart to use data from smart TVs?

Multichannel News has an article (It’s Time to Get the Return-Path Data Together) by Jane Clarke of CIMM on the complementary nature of audience data from STBs (set-top boxes) and smart TVs piped through ACR (automated content recognition). Generally, it’s a good idea, but some significant qualifiers come to mind:

• VOD can be measured through STB data collection, and more than one data collection platform already supports this, if implemented correctly. However, it is unclear what any measurement on the playback device might add to proper design of the VOD system (such that all play and trickplay, and not just the original order for the programme, is reported to the server farm) and measuring from there. A smart TV, though, is going to capture some OTT traffic from devices connected using the likes of Google Chormecast, Amazon Fire TV and Roku, but unless measurement on the playback device or at the server farm is available, this will be a partial accounting—without any means of determining how partial; the proverbial little knowledge that is dangerous.

• Likewise, the power state of the monitor, not currently available from an STB, would pertain to an unknown percentage of viewing (unless matched to same-STB data) and not be very usable for capping viewing reported by STBs. It would be far better if the STB-based data collection systems were enhanced to poll the monitor power state over HDMI, which will now be the default connection to UHD/4k as well as HD monitors. Then, as SD diminishes to zero over the coming years (faster in some countries than others), we would have real data in most cases in which currently we must use statistical approximation.

• All smart TV ACR can reliably provide is the programme identity, and quite likely not in a format relatable to pay-TV operations (as there is little chance of a common reliable identifier; such an animal could exist but licensing policies are a big obstacle). Programmes alone are not sufficient in the present environment, in which media use is still largely organised around channels and rights flow through them as well.

• Following Vizio’s comeuppance in court in the U.S. for undisclosed snooping, this practice has gained potential to become a slow meme, with even Consumer Reports explaining how to get rid of it. Especially with help from data-protection-sensitive Europe, this might become a common concern a little like the falsehood, often repeated in a certain genre of fiction, that a powered-off cellphone with a charged battery in place can be used to determine the location of its user. How much opt-out from measurement would render smart TVs not worth the trouble?

Internet advertising is being questioned, and some questions have no clear answers

Just as Internet advertising reached spending parity with television, large advertisers started doubting its effectiveness and cutting back, writes Nicole Sinclair in Yahoo Finance (Digital ads aren't working for big consumer brands). She lists two developments last year: a study that claimed the existence of rebates undisclosed to advertisers (kickbacks under another name) from media operators to advertising and media buying agencies (although not specific to Internet media), and Facebook’s admission that it included video views of under three seconds, exaggerating the overall viewing it reported by potentially as much as 80% (whatever that means). The article cites reductions in Internet spending by large consumer goods advertisers of, at most, 1.3% this year. Not much, perhaps, but the direction should give pause.

Individual advertising delivery cannot be measured by sample, but only by a census. This currently can only be self-administered by the carrier, and that has a credibility problem inherently, not just because of abuses. When chief executives of the half-dozen remaining global ad and media buying agencies, like Martin Sorrell of WPP, say that “the player and referee cannot be the same person” and the media operators should not “mark their own homework” (a phrase heard a lot lately), their companies presumably cannot then initiate the spending of large portions of clients’ budgets on such media. Can targeted digital advertising survive the lack of objective verification, never mind transparency of targeting decisions?

Furthermore, even objective reporting and realistic standards (unlike Facebook’s deeming of a video view any exposure longer than three seconds) might not rescue targeted advertising on the Internet. The current crop of targeting algorithms is rather obviously useless, with much irrelevance and ad nauseum repetitiveness of ads (often from an inappropriate competitor) for purchases already made. This is so despite cookies and tracking by the likes of Facebook. On Facebook itself, the problem is different—the complete irrelevance of most advertising messages—but it still means inappropriate expenditure in which advertisers pay high CPMs for targeting but get, at best, scattershot outdoor billboard delivery. Can targeting be seriously improved in a short time?

Not every good idea is a good idea

PayPal, Tesla and SpaceX founder Elon Musk has been generating buzz for a concept he calls “hyperloop” for intercity transport, supposedly faster than subsonic aircraft (approx. one and a half times), and cheaper. Apparently the technology, to be unveiled 12 August, is based on air pressure/vacuum and magnetic acceleration. Musk has twitted that this is not a vacuum tunnel, so it must be a vacuum above-ground enclosed tube—otherwise air resistance would prevent the claimed speed and would require continuous power. Los Angeles to San Francisco is his suggestion of a first application.

Disbelief has to forcibly choked, not merely suspended, to avoid the conclusion that whatever it is, it would be far more expensive than the conventional high-speed line now being planned between these very cities as a result of a matching-funds deadly embrace between the effectively bankrupt state of California and the rescission-bound federal government. No-one claims that that project makes sense by any commercial standard. The likely ticket prices will target mostly airline passengers, of whom there are only 13,000 per day between the multiple airports in each region in both directions, split among more than half a dozen airlines—thus ensuring minimal prices. With traffic so low and priced so close to cost, one is at a loss to justify the existing rail project as sensible even in serving some significant unmet need. Musk is proposing something with far higher capital costs than air service, probably higher operating costs, and only inconsequentially higher speeds.

Yet this as-yet undeclared idea is spam du jour. Musk has transcended his real achievements (first commonly accepted electronic payment service, first and second proper electric car, first private mission to the ISS) and filled the…vacuum formerly occupied by Steve Jobs — that of the unassailable genius pronouncing ex cathedra.

It is not that Musk isn’t that, but rather that his two well-known, business-jeopardising mistakes were both due to false economies—behaviour antithetical to a high-capex project such as a hyperloop. PayPal’s inability to bring itself to pay for any meaningful customer service quickly made it the thief’s friend, before Ebay purchased it and cleaned it up. And years later at Tesla, to save an inconsequential amount, he built charging stations that were A Bridge Too Far—one rather than two on each of Washington–New York and New York–Boston, and a little too far apart between the California coast and Las Vegas. He then gave reporters $100k+ Model S cars with the best batteries and they got stuck. And stuck. And almost stuck twice. Unsurprisingly, that is what they then wrote, for the opposite effect from the desired validation of Tesla’s fitness for the real world.

The moral of this story: don’t buy hopelessly romantic technological dreams that would make Mitterand blanch from an entrepreneur who almost impaled two otherwise successful companies on fits of irrational tightfistedness.

Design and death

In Spain’s worst rail disaster in almost 70 years, 78 people are dead and 32 are in serious condition.

The high-speed ALVIA service uses a preexisting tight curve at that location, three km south of Santiago de Compostella on the Madrid-El Ferrol line. Straightening the route would have been costly, so train drivers are required to slow sharply from 200km/h to 80.

Train drivers, like car drivers, often do not do as they should. On Spain’s dedicated high-speed lines, as in many other parts of Europe, a system named ERTMS would then apply the train’s brakes. But there was no ERTMS on this section of the route, nor any alternative automatic breaking system triggered by excessive speed, such as that used extensively in the U.K. (following a spate of horrific accidents there). Instead, Spain’s old ASFA signaling system was used, which merely informs the driver that he should slow down. But the driver hadn’t been paying adequate attention.

So the driver’s failure to slow down in time on a tight curve such as this automatically and ineluctably led to an accident. It was then up to the design of the rolling stock to minimize the harm from the result.

There is a best-practices design that has successfully done this for 32 years, with only two fatalities on a single train. It is Alstom’s TGV, used in several countries including, ironically, Spain’s own first high-speed line between Madrid and Seville, where they still run. Adjacent carriages are joined by rigid membranes and ride common bogies (trucks). The entire weight of the train acts to keep every part of it upright. It also prevents the carriages from jackknifing (folding on each other), as happened both in Spain and in the similar accident in Germany in 1998. The carriages’ departure from the track at high speed into a concrete wall, their falling down on their sides, and their jackknifing were major contributors to the carnage.

The Bombardier-Talgo S730 trainset that crashed in Spain represents a nod to some of those principles but not enough of them to prevent a bloodbath. It does have a low centre of gravity. It is not made of aluminium extrusions; those tend to tear along the windows like stamps along perforations, and apparently contributed substantially to the toll in the German ICE accident. However, it is made of light aluminum that shattered on impact, the car ends were torn from their tilting suspensions, and the aft gas turbine generator engine was thrown from its dedicated carriage, landing in its entirety on the embankment above. It does use joint bogies, but these do not by themselves guarantee stability or integrity in the absence of perhaps the most important safety factor: rigid membranes between carriages. On the S730, the latter are fully articulated as on a conventional train. They are free to fall on their sides, fly into walls, collide with each other and fold like harmonicas.

This was not, as many terrible accidents are, the result of an unlikely combination of factors. Rather, this was a blatantly design-caused, foreseeable disaster. It would be unfair to say that nobody cared. However, by default we all labour under an overwhelming weight of lack of awareness of the meaning of our choices. Here, people from four companies — the train operator RENFE, track owner ADIF, Bombardier and Talgo — allowed a design to be developed and placed into service that relied entirely on the driver’s slowing down when entering that curve. If he did not pay full and timely attention — as they themselves had failed to do — or the train’s braking system failed, there would be no automation to stop him and nothing to prevent a terrible outcome.

Leaving Las Vegas

Television — with which the average person (of course not you or I) supposedly spends hours per day — is changing much faster than befits such a dominant, time-tested institution. As media use becomes individualised, the little fish plus the Web plus streaming services are ganging up on the big fish.

The latest trend is for big terrestrial networks to threaten to switch to pay-TV distribution only (cable and DBS). So long as pay TV has near-total penetration, and pay-TV-only channels are challenging the major broadcast networks’ ratings, they say, why should we be subjected to the injustices and iniquities of regulation?

It is an obvious bluff. But not because the bluffers won’t carry out their threat if they don’t get what they want. It’s because they will carry it out even if they do. And not a moment earlier either way.

ITV, long the U.K.’s top network with a 31 full-day viewer share in 1992, has plummeted to 16 by last year (its only comparably sized competitor, BBC1, went from 25 to 20 at the end of last decade but since rose back to 23). It operates on limited-time franchises issued by a public authority. It still produces some expensive “quality” drama (although much less than it used to) and a fair bit of national and local news. Having adjudged these to be bad for its business, it started carrying the line that it was seriously thinking about leaving terrestrial distribution unless the relevant regulations were seriously relaxed. The government did not want to deal with this issue and extended ITV’s licenses until 2024.

Would ITV leave the public spectrum? What would happen to it? Its next nearest competitors BBC2 and Channel 4/S4C have shares around 7; Channel 5 has 5. The rest are at 2 or lower. And ITV is quite profitable, with a ~10% net margin last year.

Content may be king — some of that expensive programming that differentiates ITV may also permit it to soar above all but one other channel, as it still does — but it is a constitutional, primus enter pares king: pay-TV-only channels with arguably better programming, which they use against each other, cannot touch ITV, apparently because of its privileged terrestrial position. If it were to leave, it would lose access to the 46% of U.K. households that have no pay-TV, but also its disproportional appeal to those who do — based on its terrestrial distribution, ostensibly irrelevant to them. Perhaps it is the very public-service-obligation programming that it is trying to shirk that confers upon it this special status, although it may not be evident in each programme’s direct ROI. (Such indirect effects are NBC’s argument for paying for the Olympics even when they run at a loss.)

So ITV won’t leave under current conditions (barring the group insanity of its management). But it may well continue to cut programming costs and dumb down their appeal in response to declining ratings; it is the global poster child for this disease (see the previous post). And unless it stops, it may reach a point at which there won’t be much benefit to staying free-to-air.

The latest big bluffer is Fox in the U.S. It is unhappy that Aereo, a startup that streams terrestrial channels from personal antennas, refuses to pay it retransmission fees. These now approach $2.4bln but media rep SNL Kagan projects a rise to $6bln by 2018. U.S. terrestrial TV also takes in around $47bln in advertising. Fox was second this season, usually several times higher than the top pay-TV-only channel. There is no precedent for the switch of a high-cost, high-rating terrestrial network to pay-only distribution. There was, however, a high-profile failure to do what that would almost certainly require: sharply control costs. It was NBC’s replacement of drama (ER) with Jay Leno, and it failed disastrously, with affiliates criticising the network in public and replacements having to be hastily procured midseason. Network TV may be down at heels but not that down.

Aereo, precisely to avoid having to pay for retransmission, offers terrestrial channels only. As such, it supports the small but highly profitable — for terrestrial broadcasters — cohort that does not use pay TV or prefers not to use it. Aereo offers essentially an extension of conventional terrestrial distribution, for which, of course, there are no retransmission fees. The good news for the networks and their affiliates are the huge profits they make, burdened by little or no competition, off those 15% of U.S. households (and a larger percentage of viewers, now that viewing has largely become individual). The day may come when the networks conclude they have nothing to lose by abandoning terrestrial distribution; that day is still very far, and services like Aereo would not be a factor because, far from harming the networks, they restore their glory days of oligopoly — among subscribers. Until then, Fox would be nuts to move to pay TV, but it may be right in considering members of Congress and federal appellate judges daft enough to think that it would.

No news is better than good news

Large terrestrial television networks have for many years been losing audience across the industrialised world. Those with the highest programming costs — in the U.S. and the U.K. — are on a vicious cycle of declining revenues that lead to less attractive programming, rinse, repeat. ITV in the U.K. is barely recognisable from twenty years ago, La Cinq in France is long dead, The WB and UPN in the U.S. were shut down and merged into the barely profitable CW, and the country’s most-watched network on Fridays, and in the crucial 18–34 demo on other days, is now routinely the Spanish-language Univisión. Heading a major terrestrial network has become a very stressful job.

The same is happening in Russia. The top three terrestrial networks, Channel One, Russia 1 and NTV, had a combined 55.4 full-day audience share in 2005 (full-year and regardless of means of distribution) in the country’s TNS TV Index. By 2008, this dropped to 51.3. Then the rate of decline doubled, and in 2012, the three networks had a 41.0 share. At this rate, they would drop to zero in 16 years (of course they won’t but they can easily engage a vicious circle that would render them irrelevant to most).

The main reason for the big three’s decline over time seems to be their heavy bias towards older viewers. They had a 53.4 share in Jan.–Oct. 2012 among people 55+ (life expectancy there is 64.3 for men and 76.1 for women, so this cohort is proportionally smaller than in most other industrialised countries), 39.4 among people of ages 35–54, 29.9 among those 18–34, and 17.0 among children 4–17.

This is interesting not just from the perspective of broadcast management. Almost from his election in 2000, Vladimir Putin has based his autocracy on near-total control of these three networks, which he quickly established, and on the dissuasion of other terrestrial networks from any informational role (the runner-up TNT and STS networks are tolerated because they have no news programming; the once-critical REN was acquired by a progovernment owner and largely neutered). On the big three, the opposition that has emerged since the fraudulent parliamentary elections in December 2011 is occasionally pilloried as foreign agents but usually not mentioned at all. Of the several protest events since then that brought out more than 100,000 Muscovites, only one was mentioned — briefly — on two of those channels, and only because their news staff threatened to strike. The third canceled its main newscast that day. The leading opposition figure Alexei Navalny is blacklisted from any mention; his arrest last week after being sentenced to five years in prison on a trumped-up charge was covered — briefly — on just one of the big three. The Russia visible on these screens has no meaningful political choice at all.

Putin has relied heavily on the support of older, poorer and provincial Russians, most of whom vote either for him and the majority United Russia Party or for the declawed and controlled Communist Party. These are thought to watch mostly the  terrestrial channels: many cannot afford pay TV and have no interest in other channels anyway; few of them use the Internet. He is known to review only the newscasts of the big three networks, usually to the exclusion of any other media.

If the régime doesn’t topple earlier, the big three could lose half of their remaining share by the time Putin seeks reelection in 2018. If they do, television news will cease being a regular item on the menu of most Russians — an unprecedented development in the industrialised world. What will be the effect of the loss of the country’s main source of information?

The TNS report, in Russian, is at http://tnsglobal.ru/media/content/B7525726-B5E1-4C12-BE25-4C543F42F3EE/TV%20in%20Russia.pdf .

Living by one’s wits

Conventional wisdom often can’t keep up with reality. The U.S. may have lost much of its manufacturing base but still exports a lot of high-tech manufactured goods (aerospace, computers, pharmaceuticals, scientific instruments, electrical machinery, etc.). Right?

Not as much as it used to and, relative to its population, less than practically all other major industrialised countries. Here are such exports per capita (click to enlarge):

Source: World Bank analysis of the United Nations Comtrade database, http://data.worldbank.org/indicator/TX.VAL.TECH.MF.ZS/countries . Population data compiled in Wikipedia, which see for sources, http://en.wikipedia.org/wiki/List_of_countries_by_population .

Singapore earns half its GDP from high-tech exports; the U.S.—less than 1%. This would not be so alarming had the U.S. not had a huge balance-of-trade deficit. Singapore, of course, has a large surplus.

Now here’s how the major exporters of high-tech manufactured goods (above $50bln/year) are trending:

Takeaways:

1. China is on a tear, exporting half the total of the other majors combined and growing rapidly. High-tech goods now make up 26% of all its manufactured exports; the U.S. fraction is only 18%.
2. Almost all the other majors are growing except the U.S., which is now third behind Germany, a country almost four times less populous.
3. The U.S. topped out in the middle of the last decade and dropped sharply in the first year of the economic crisis, from where it hasn’t recovered.

Furthermore, the majors are not very major, having accounted for only 23% of high-tech manufactured exports (not consumption) by value in 2010 (the latest year for which complete data are available). Manufacturing dependent on high tech is already widely spread around the industrialised countries — and many others.

Like most statistics, these numbers lie, and in a very specific way. When one country (e.g. China) exports manufactured goods (e.g. computers) made possible by R&D conducted in other countries (e.g., the U.S. and Europe), it is the exporting country that books the value of the finished goods (computers). The foreign R&D contributors book little: a much smaller value for microchips exported to China for inclusion in the computer, and no value at all for the motherboard and graphics card made there under license or, probably, any of the software. The same principle applies to exports of pharmaceuticals (from, e.g., India) developed elsewhere (e.g., the U.S. or Europe). This is how China can rack up these enormous numbers while not really being competitive (yet) with the U.S. in producing high-end high-tech manufactured goods (aerospace, medical devices etc.).

However, recognising this lie results in another lie. Money, in the balance of trade, is money. Unlike China, the U.S. has a huge deficit in its trade with the rest of the world (specifically, with China). It doesn’t matter that the U.S. developed a product of interest to other countries if it cannot use most of its value to cover that gap. Of course, it could develop more products and try to live by its R&D capacity alone, but that is clearly not happening.

Microsoft rumours of own demise not greatly exaggerated

When it defended against an antitrust suit by the FTC and 14 states in the late 1990s, Microsoft, then controlling more than 90% of the operating-system installed base, spoke of itself as if it were an ephemeral butterfly. The courts did not have to intervene because this was tech, and some better-faster-nimbler competitor could arrive at any moment and steal its lunch, it said. And it cited some marginal markets where someone was energetic enough to drive a truck through the yawning maw of the bored monolith.

Yeah, right, everybody said. At the time, MS was just downright scary. It had the desktop OS market in a stranglehold and was quite effectively encroaching on Unixoid OSes' dominance on servers and machines for serious computation. It ruled supreme in the main productivity-application segment, having driven out most real competition. It was astutely capitalising on Internet Explorer. And it was increasingly inserting itself into new-media software that seemed to hold future importance, such as streaming (recall RealNetworks’ claims that Microsoft stole and used its software, which Microsoft settled years later with a large sum). So although it didn’t enter every market, and suffered a high-profile failure, despite years of heavy spending, to produce a server for streaming television on-demand, it was clear to all that Microsoft didn’t suffocate only those whom it couldn’t be bothered to crush. And Windows was both evil and eternal, like the Soviet Union.

Then there was a bit of the-rest-is-history. Judge Thomas Penfield Jackson actually tried to explain to the press his decision against MS; this was deemed unjudicial by the Court of Appeals for the District of Columbia Circuit, which eviscerated his decision. The G.W. Bush administration came to power and unsurprisingly settled on terms favourable to MS, leaving the states to twist slowly in the wind. Having triumphed, the monolith was only emboldened.

Gradually, though, the tide turned. Linux resisted and eventually turned the tide of Windows on serious servers. Smartphones were born and took years to overcome an awkward childhood; some ran Windows Mobile but others didn’t. Apple didn’t die as scheduled but rather used the last of its cash to buy the second coming of Jobs along with his strong OS engineering group, which finally (on Apple’s third attempt) gave it a proper OS. Although the slightly modified Unix-based NextStep took a long time to grow market share under the Mac OS X brand beyond Apple’s gauche and effete fans (and me), it ultimately did and was a key component in the iPhone — which turned the smartphone into an object of desire.

By 2009, Windows had a market share no longer of 95% but of 70%. However, given the flood of smartphones that this number already accommodated, one could perceive it to be a forceful assertion of Microsoft’s continued relevance and stability. Which would be bolstered by Windows 7, to be released within months, fixing much of what was wrong with the hapless Vista.

And then exactly what Microsoft predicted actually happened. In four years, Android emerged from /dev/null (nothing) and became the majority OS, with more than half the market (53% last January). iOS and Mac OS X together grew to 19%. Windows-branded OSes now control only 22%. See the top chart at http://slon.ru/appheroes/kak-vyglyadit-krakh-monopolii-microsoft-967546.xhtml?utm_source=slon&utm_medium=chartbeat&utm_campaign=trending (green is others).

Android rode in on the power of the unsatisfied market for smartphones (often any mobile phones) worldwide, coupled to their somewhat greater affordability than iPhones (I would guess that many consumers, especially outside the Golden Billion, never considered iPhones even where they were available). So Microsoft’s position now is not as shaky as it appears because it still has a large chunk of the desktop market (90% in June) and the one for lesser servers. It just didn’t benefit much from the smartphone and tablet revolution (where it has just 1%).

But that would ignore a little factor named synergy. There may have been little if any of it in the many mergers and takeovers — especially in the media world — that were peddled to shareholders on its basis in the 1990s, but it is a critical aspect of the popularity of computing devices. Microsoft leveraged the ubiquity of its key products to a tremendous extent on its way up: the operating systems — by allowing anyone to build hardware to use them, and both the OSes and Office applications — by not resisting piracy at all until recent years and halfheartedly even now. The latter forbearance is not due to technical challenges (it’s been possible to implement bulletproof but user-friendly license protection for many years) or ideology (which is to the contrary, as demonstrated by Gates’s 1976 letter to users on the consequences of piracy to innovation), but rather a way of making lemonade out of the lemons of piracy — in industrial quantities. There were so many copies of these products lying around (while WordPerfect and Lotus 1-2-3 had user-hostile copy protection) that the product lines’ penetration grew to become the path of least resistance — to be followed even when license fees were paid. The default choice. The automatic choice you made unless you had special needs or were strange. One operating system, one productivity suite, one Reich, one Führer.

The same mechanism is in play when one swtiches one device to an OS already in use on the other, or, in the case of Apple, the brand of one device in favour of the brand on another. This is where Microsoft failed. Windows Mobile was sad, bloated, buggy and broken, and the quality of the devices so awful (a touchscreen failure is a real impediment when there is no other way to interact with the device). It became apparent to anyone who cared that riding camels through eyes of needles was not a practical means of transport. But just because MS couldn’t do it doesn’t mean others can’t.

Apple did that for itself and also for others, by insisting on a working touchscreen and by validating the very concept of a functional smartphone. Now the big winner of this trend is Android. To many, a mobile phone means a smartphone and that means Android. Which also means Android on a tablet. All that’s left is for the deadly virus to go airborne, and I would be stunned if a version for full-fledged desktops and laptops didn’t follow.

As for Windows, I don’t, for one, believe that many care now that Windows 8 might be reasonably acceptable on mobile devices. The leveraging trend is against Microsoft and would be even if the company was much better at getting functionality and usability right the first time than it actually is. I expect its market share will unwind like a yo-yo. The fact that all competitors (except the moribund Blackberry) are based on some form of Unix — the only OS in history that got more popular over a long time, because it was done right from the beginning in darkest 1968 — will only help them to leverage each other and eventually turn the lights off in Redmond even faster. Sic transit gloria mundi.

I just hope someone rescues Excel, if only out of commitment to public service. Neo/Libre/OpenOffice are Potemkin villages without so much as a Motel 6.

Employment of miners’ canaries as a share of the workforce

When I started to learn programming 30 years ago, almost all the packaged software in the world was U.S.-made. There were a few examples of “Euroware” such as 4D, à la fois brilliant and bizarre, that burned brightly but briefly. And now look: ten of the top 25 software companies by revenue are European, and lower down the ranking, the U.S.’ standing is, if anything, much worse: many of the large open-source firms with their much lower earnings per copy are either based in Europe or do much of their development there: MySQL before the Oracle takeover (Sweden) or InnoDB (Finland) or the main Linux distros (U.S.-based, largely European-programmed). And the farther you go from mass markets, the more dominant Europe becomes. In my field (Audiresys stands for “audience research systems”), it has made almost a clean sweep.

And that’s a problem, my fellow Americans, because most of our manufacturing has gone and it is not coming back and we have nothing to maintain us in the style to which we’ve become accustomed, as alimony-seeking divorcées used to say, but high tech. Aaaaand... the powerful narcotic painkiller that is our country’s unique status as issuer of the world’s reserve currency is starting to wear off. The Chinese workers and bosses who make almost all our consumer goods (a) want ever more money for their products as their standard of living rises, and (b) are increasingly less amused by the increasingly funny money we must use to pay much of the bill.

In addition to that drug, we take some others that dull the pain: the pervasive sense of exceptionalism that some of us will still believe in even when we cross paths with Turkey (which, in PPP GDP per capita, we probably will between 20 and 40 years from now), and the very large numbers of dollars and jobs that even inconsequential phenomena generate in our economy, still the world’s largest, for now. (Although in most contexts, these obfuscate more than they reveal, they remain pandemic and very hard to avoid; this tells you something about how people misuse data.)

To avoid the former bias, one has to look at other countries (duh) and their and our trends. To avoid the latter one, one has to eschew amounts and use percentages.

And when one does that, one finds statements like this:

UN Conference on Trade and Development, Information Economy Report, 2012, p. 21 (the ranking of software companies by revenues is from the same source, p. 26). http://unctad.org/en/PublicationsLibrary/ier2012_en.pdf

For people with less-than-perfect eyesight, 0.6% of all employed people in the U.S. work in “computer software and services”. Not just for export, mind you, where our position is even worse, but to serve our presumably huge domestic needs as well.  The only mostly industrialized country with a lower percentage is Russia. Even Costa Rica (0.8%) and South Africa (0.7%) do somewhat better than we. India has the same 0.6% as we do. Even with all the outsourcing, that boggles the mind.

I would be surprised if this weren’t based on a lot of error (for one thing, do these numbers include the vast amount of in-house development and computer services in companies with other primary activities? Apparently not), but I would also be surprised if it affected the U.S.’s number significantly disproportionately. We’re not that exceptional.

This is not to equate “computer software and services” with high tech generally. We produce a lot of high tech in which it is a modest component of the cost (pharmaceuticals, for example). But this field, whether it includes in-house employment or not, is the canaries in the mines. It is necessary for just about everything, especially other high tech. Thus, a low number of canaries indicates a low number of mines—or the use of other kinds of carbon monoxide detectors (you know, for’ners). As the UN agency says: “Boosting software employment not only helps to build up the software sector itself, it also has downstream multiplying effects. Moreover, jobs in software and IT services can help attract skilled young people”. We are going the other way.