SharkJumping

When we first started Donnerwood in March of 2005, I bought our first set of wireless phones from Wirefly.com, the consumer site for Inphonic   Seemed to me that the web was an efficient way to sell phones, and that their prices were better than almost anywhere else, even after understanding the low prices were due to rebates that could only be sent in during a certain 30-day window six months into your service.  We bought 4 phones from them, but then gave up buying more after they wanted me to confirm some information before activating the last phone, but put me on hold for 65 minutes first -  an amazing exercise in customer service.   But I dutifully saved the earlier receipts and marked the dates in Outlook so that we could get the rebates from the first phones.

August rolls around, and we send in the rebates, with all of the necessary supporting documents - and we wait...and wait...and wait...5 months later, all we have received are some emails indicating that our rebates are in process and have even been approved, but we still don't have the money.  Now how is this not an Eliot Spitzer-style issue?  How long can it take to fill a rebate in the age of the Internet, especially when all of the supporting information is there and when we actually bought the phones directly from them, as opposed to another retailer?  1 month, 2?  But 5 months and counting??

If I go to Costco or to Best Buy, they have gone out of their way to make rebates easier to file, but not at InPhonic.  Oh yes, I forgot - Inphonic actually profits when consumers forget to send in rebates, don't have the proper docs, etc, so it's actually in their best interest, external pressure notwithstanding, not to go out of their way to make the rebate process more efficient.

So, like all examples of horrible customer service, do not buy product from them.  It's simply not worth the pain, either trying to contact customer service, or in trying to get the rebates.

We were setting up the XBox 360 at the new office this weekend (will post later on the significant pain involved in linking it to Media Center) and I remembered that the new Full Auto demo had been posted to XBox Live Marketplace.  Within 15 minutes we had downloaded the 650MB file to the XBox and there was immediately a lot of yelling going on since the game is a huge amount of fun to play!  Based on the demo, it's definitely on our purchase list for Feb 15 when the full game ships - see Sega description

So why is this important - PC users have been downloading PC demos for a long time, and even Xbox or PS2 users could get demos off of disks distributed through magazines and other outlets.  The Full Auto experience was important because it was SO EASY.   The XBox Marketplace makes it comparatively simple to download movie trailers, game demos, and eventually, a host of game add-ons, new levels, etc. (although it doesn't allow you to do anything else while downloading files - see earlier post)  This functionality has been discussed for years, but has been too hard to implement in consoles without broadband functionality, hard drives and a robust online interface - today's simple great game demo download pointed the way for me on Xbox since the initial content I reviewed in late November wasn't very compelling, outside of a couple of fun Live Arcade games.

The general consensus is that Sony is not as committed to online functionality as Microsoft is, and may not even have a built-in hard drive in order to reduce costs stemming from the choice to include a Blu Ray drive and more powerful processor.  I'm not sure Sony needs to have as robust a system as Xbox Live, but to ship PS3 without a reasonable online game matching system, basic community functionality and the ability to download extra game content would be a serious error.  This current generation of console users is accustomed to the benefits of online communication and file transfers - simply having a faster processor and cool DVD won't be enough over the course of a console cycle.  And as we've seen with Kart Racer in Korea and host of other RMT (as detailed here in Wikipedia) games in Asia, the potential revenue from selling add-on items is going to be quite large, at least in Asia and probably around the world.

Must have been a slow news week since various news outlets breathlessly announced the rumor that Google may launch a music download service within 6 months, supposedly called Google Tunes.  Bear Stearns analyst Robert Peck apparently speculated that this made sense given the explosive growth of iTunes site, and then indicated that this speculation was based on "Mosaic Theory", which must be somewhat akin to Scientology theory, based on the lack of rigorous analysis involved here, although Wikipedia shed some light on it here.

Given the problems with the initial launch of Google Video (recently apologized for by senior Google executives), why would a music launch make any sense?  We're looking at a business with 15% gross margins, no ability to differentiate content, a need to work closely with hardware to be successful (with overwhelming market share leader iPod not in that equation), and limited ability to monetize advertising around it - try reading a digital download contract and you'll understand what I mean.  Plus they would have to either work with a music aggregator like Musicnet or Loudeye (lowering margins to almost zero), or go through all of the pain of signing label deals, encoding content, adding metadata, etc.   Of all of the possible opportunities to expand business, why would Google choose this one rather than focusing on making a much better music/digital media search experience, and monetizing that at the high rate they do for other similar categories?

Now Google is the reigning web powerhouse, so do I think Google may toss out some early version of a product just to see what happens?  Yes, that's possible, based on what we've seen from Google Base, Video, Reader, Music Search, Talk, etc., but I would be astonished if the music download business was in their top 25 priorities for 2006 - and you simply can't do music as a side project and expect to be successful since it's deeply related to the hardware, content relationships and editorial, none of which are currently core strengths for Google.  Maybe I should have spent more time studying "Mosaic Theory" though...

Since the new year has passed, the top tier Silicon Valley law firms have handed down their annual rate increases (similar to cable bills and private school tuition, they always seem to exceed inflation), which now means that many partners at these firms appear to be charging $550-$600+ an hour.  I had to pull out the calculator for this one since there were so many zeros, but the resulting annual payment for a 40 hour work week would be almost $1.2M!  For some reason, $400 an hour used to seem expensive, but not outrageous, while this latest number seems to me to be totally over the top.

Given that bandwidth and hardware continue to drop in price/increase in performance, and that commercial rents are still much lower than what took place in the last bubble, we're left primarily with personnel costs as the only increasing cost for any start up company.  It's true that general hiring and employment costs continue to go up in general, at least in the Bay Area, but we're able to outsource or offshore activities to lower a lot of those operating costs, including 1/3 of our personnel here at Donnerwood - but not in the legal field...

Now I understand that there is specialized expertise involved here (but not that specialized - they're not doing brain surgery), and that the effects of mistakes due to poor judgment or representation can involve a penalty far higher than the measly $300 one pays for a 30 minute phone call, but doesn't it seem like there should be alternatives in today's World is Flat scenario?  And yes, we all try not to use the partners very much unless we really need them so that it's not really that big a bill each month, but wow, it's still a mind boggling number for a start up when you're buying used furniture and sub-leasing office space to save money.

So what can you do?  You can switch to a less prestigious firm where the prices are probably in the low $400 range, but the VC's aren't always comfortable with that.   You can bring it in-house as soon as possible, where a General Counsel can not only handle much of the work formerly sent out to the firm, but he/she can also manage the outside firm with presumably greater expertise - but that's not always possible with earlier stage companies, especially since many lawyers are not known for their risk tolerance.  And you can do much of the work yourself and pray that you got it right, but that can seem a little scary sometimes. 

Or you can just stick with the deal you have with the big firm (no one ever got fired for choosing Wilson, Gunderson, Fenwick, Pillsbury, etc), attempt not to use them too much, and find other cheaper lawyers to help with deals while you grow enough to eventually bring it in-house.  But why isn't there a firm hammering home the mantra - "same quality as the big guys, but lower price"?  Or one which is aggressively using technology and/or outsourcing to lower the costs?  There must be some way to reign in the constant increases in outside legal fees, just as new Internet start ups are finally starting to reign in the 5-6% standard fee paid to sell a house - but I haven't seen it yet.

After almost a month with Vongo, Starz' new online movie service, I'm canceling it rather than extend the subscription.  The strengths and weaknesses I detailed 3 weeks ago are still there after a lot of use, but what really stands out is a surprising lack of quality in the video delivery.  The graininess is most evident when output to a TV, but even on my laptop, the quality is noticeably weak, probably close to a VHS or worse.  It's not a deal killer by itself, but I now notice it every time I use the product.  It doesn't heve to be HD quality, but I'm not sure that this level is sufficient by today's standards, even it accelerates the download process a bit and takes up less room on the hard drive.

The second issue continues to be breadth and quality of content - having had 3 weeks of new product releases now, it's clear that even with 500+ movies, media junkies like me will have trouble finding more than a few movies a month worth watching, at least after one has plowed through the backlog of movies you want to watch.   There just isn't enough new product flow each month.  This is not easily fixed, but if Starz could bring in additional library content such as tv shows, then it would probably change the value equation.

Finally, the editorial approach is certainly better than on the Real Movie service, but is still pretty lackluster.  It doesn't surface the breadth of content actually in the system, forcing users to laboriously search for content, and the front door isn't alive enough to direct users in any direction.  This should be easily fixable at relatively low cost, but there hasn't been any progress there.

Verdict - not worth $10 a month in current form, but still a step forward vs previous subscription alternatives.

As projected in previous posts here, Gizmondo Europe for bankruptcy on Friday to try to restructure its finances - its Swedish subsidiary is expected to follow, but the US one will supposedly not declare ch 11 as well.  The company (TGTL.PK) has recently attempted to reduce costs by laying off staff, it tried to restructure its debt (held by former executives) by putting up the company's advertising assets as collateral, and it announced additional financing ($5M line of credit convertible at $.50/share).  There is talk of some private equity fund in Switzerland willing to invest $50M, but it's hard to see that as a credible option given the situation here.

Just unfortunate it was always so hard to sell the stock short, but it's still amazing that the stock was at $32 a year ago with such an obvious set of problems.

Having spent a lot of time with Comcast business folks I have a huge amount of respect for their skills and intelligence.  So I have to ask the obvious question as to why it makes sense to have such lousy customer service since I assume there is a economic reason for doing so. 

I recently ordered digital cable, HBO, DVR, HD and high speed internet services from Comcast - that's about $150 a month, probably worth about $5,000 in life time value to Comcast.  I get a 4 hour service window from 12-4 (why that makes sense in today's environment, no one knows since it was obvious I was the last customer of the day)   - after 3 hours, I start getting nervous and I call them, where they tell me the installer will definitely be there before 4PM.  At 4:15 with no word from anyone and no installer, I call again, where after being first put on hold for multiple minutes while they search for the dispatcher in SF, I am told that the installer will probably be there sometime after 5PM, but "that I would get a $20 credit for my problems".  With that humorous statement in mind, I spent the next few minutes explaining how that wasn't going to work, but there didn't seem to be any way to reach a person with any authority, even after repeated attempts.  So after leaving messages, having my call dropped, and speaking with at least 6 different Comcast reps, I cancelled the order and will continue with my DSL and satellite providers.

What I don't understand is the yield management issue here.  In a highly competitive video and data environment, with 2-3 providers in each area (plus emerging Internet options), one would think that Comcast would go out of its way to make sure the initial experience for a new premium video & data customer would be a good one rather than rehashing the old "Cable Guy" horror movie.  I realize everyone has to make their operating numbers and that installers cost money ($50/hour?), but my guess is that Comcast SF is running a little too lean on installers, or they need a better prioritization plan, since their inability to deliver service cost them a new customer who would pay $150 a month.  Just mystifying to me.

The running joke in SF is trying to peg the next bubble.  Last year we called the current rising consumer phase "frothy" to differentiate it from the late 90's/early 2000 phase "bubble".  But the signs appearing now seem to call out "Bubble 2.0".  So what are those signs we all recognize from last time?

1.  Every candidate has multiple offers, some from seemingly insane companies - during the last bubble, I lost an employee to "BBQ.com - the portal for outdoor cooking", which lasted a total of 9 months after that period.  We're seeing early signs of this - e.g  a friend's company recently lost an account manager who doubled their compensation as a VP at a new start up, and we now hear people say "I have an offer from XYZ You Tubes-like site, or XYZ Xanga-like 2.0 site - it's going to be huge!"  What's going to be huge this year are the search firm fees.

2.  New acronymns entering vocabulary - after CES I needed to look up the term "UGC", which apparently became mainstream in the 6 weeks between Thanksgiving and CES - yes, that would be User Generated Content.  And the Facebook or MySpace vocab changes so quickly I can't keep up

3.  Internet Companies Sponsoring TV Shows - tonight I watched Match.com sponsor a new show called "Love Monkey" from the former Bowling-Lawyer guy "Ed", who's now an A&R exec struggling to find love.   Now Match.com is no where near as hilarious as a sock puppet showing Super Bowl ads, but I think we're well on our way.  Given that Fox decided to show MySpace ads during Arrrested Development a few weeks ago (because 50M viral users really needed to see an amazingly fun, but niche show watched by a few million viewers), I'd say we'll see more of this nuttiness.  But the real sign will occur when no one even recognizes the company which is in the commercial - we're not quite there yet.

4.  Companies going public at ludicrous valuations with almost no revenue - See Digital Music Group posts - 'nuff said...

5.  The Term "Feature Flip" becomes common nomenclature - when you meet with a new company, they will often say that they don't think that it's a standalone company, but that they don't need a revenue model since "someone will buy it", aka "Feature Flip".  Every music recommendation or new indie aggregation site is like this - Sounds like 2001...

6.  Enterprise VC's and Non Standard VC's funding Consumer Companies - I now receive the most bizarre calls from VC's (names have been concealed to protect the guilty) who have formerly funded only micro chip firms and enterprise software ideas, but have now decided that they must invest in casual games or User Generated video firms.  On the other hand, a good friend at a private equity firm just admitted that his firm is now investing in VC-stage companies in the search for higher returns - yet another sign of the last bubble.

7.  Better Parties - the stakes are going up again.   The party after the Web 2.0 conference was just rocking, outside of the 90% male ratio and total geek focus (no one should scream and beg for Flock T-shirts, a company soon to be featured on VH-1's "Where Are They Now?").  That having been said, the Xmas parties from the VCs went up a notch this year, and I've seen marketing budgets for all events, including companies I've never heard of, start getting more fun for all involved - Huey Lewis should be excited since his gigs should increase.

8.  Commercial real estate in SF going Up - I can't speak for other cities, but higher-end real estate is finally firming up in SF, with the other lower end  leases seeing at least a little bit of interest.   You used to be able to dicate terms to landlords, but we saw them firming up on terms as we finalized our new deal in downtown SF.  We're still 50% below the peak rent during the last bubble, so this more of a recovery than a bubble, but everyone I know is looking for more space.

Is there a Bubble 2.0 emerging?  Yes, the bubble is emerging since mainstream companies finally figured out that most of their consumers are now on line vs off line - I mean who actually listens to late night radio shows like I did as a teenager?  In addition, the opportunities are now emerging since investment capital is now widely available for great consumer ideas, although many will admittedly fail as the key consumer sectors consolidate.  e.g do we really think P&G and Kraft want to advertise in front of the hypothetical Worlds Dumbest Internet Videos?  It will shake out by later 2007 when quality finds its value.

Selfishly, it's great from my point of view since it's especially SF city-oriented vs other former chip or enterprise-oriented trends which tended to favor Silicon Valley.  It's clearly going to end badly for a lot of firms when the bubble collapses, but it's going to be a great year for those who succeed since a lot of consumers are waiting for new  opportunities.  Just like last time...

We're hiring a 3D game engine developer for Donnerwood to expand and enhance our existing engine.  Spec is below, but the developer would preferably have handheld, mobile or casual game experience since this engine is about addressing as broad an audience as possible vs pushing as much performance as possible.  If interested, email

Donnerwood Media, a digital content and commerce company based in the South of Market neighborhood of SF is seeking a Lead Game Engine Programmer to enhance and expand a small, fast 3D game engine for our upcoming digital entertainment service.

Donnerwood offers a competitive base salary, plus options, benefits and a fun work environment.

Responsibilities
·Develop and maintain a small, fast 3D game engine
·Write clear technical design and specification documents
·Communicate well with designers, producers, artists, QA, and other engineers

Required skills
·Must possess strong game programming skills
·Expertise in C/C++ and/or Java
·3+ years experience working on mobile, PC, or console titles
·Experience with the complete life cycle of software development
·Bachelor's Degree

Additional skills and qualifications
·Previous game engine development experience
·Strong vector/matrix math
·Solid 2D/3D engine background
·Experience with animation algorithms
·Experience with lighting/shading algorithms
·Experience with collision detection/resolution
·Experience with game-AI
·Experience with low-level rendering concepts (software rasterization, etc)

The news coming out of CES regarding possible pricing for next generation DVD players continues to grow, but I'm more curious about what it means for Sony and the cost of the PS3.  Toshiba HD-DVD models for a March launch at $499 and $799 - that's high, but maybe not outrageous for a next gen platform with very cool capabilities, if not a lot of content.  Pioneer announced the first Blu-ray DVD model for the astonishing price of $1,800, presumably with a launch date around the Summer, which is when Sony announced they would ship their first models, as will an announced $1,000 player from Panasonic.

What's interesting is that analysts seem to feel that Toshiba will actually lose money on the $499 model, but is selling it below cost to jump start the HD DVD marketplace to keep Blu-ray from running away with it when PS3 ships.  The first question is "what costs so much in a next gen player?" I assume the casing, power supply, external connections, and basic memory/chip are not radically different than today's $100 DVD players - it's the laser and related new technology parts which cost so much more, as well as the need to ramp up overall production and pay off the cost of new equipment, but that's a huge jump in cost, some of which is due to royalties, mostly paid to Sony.

So let's assume the raw cost of the new core technology components of a Blu-ray DVD machine is $400-500 if Pioneer and Panasonic are selling the initial SKUs above $1000, and if Toshiba is supposedly losing money on a cheaper HD DVD player priced at $500.  iSuppli did a thorough teardown of an XBox 360 in November, estimating that the motherboard components (core processor, graphics processor, memory, etc.) cost around $370, with an overall cost of $525 - but that was with a simple DVD-ROM costing an estimated $25.  So for PS3 add in the guts of a next gen Blu-ray drive costing $400-500, as well as a presumably more expensive Cell processor and graphics CPU, and Sony is looking at a Bill of Materials above $1,000 for the PS3 - that is compared to an estimated $499 retail price point.

It's normal to lose money on consoles for the first few years since manufacturing efficiencies bring the cost down once tens of millions of units ship (and software royalties kick-in), but I don't know that there has ever been a loss of this magnitude on a per unit basis.  This starts to make that Blu-Ray bet look more expensive than I first thought, although I'm sure Sony regards this as one of the key wars they need to win since the royalties from a winning bet would more than pay for the PS3 subsidies.  If you're Microsoft and Intel, they're probably going to go out of their way to subsidize HD-DVD in order to increase the pain threshold for Sony, so it's going to be a bloody battle for everyone.  Unfortunately, consumers will inevitably lose out while the battle is waged, just as we did with the DVD Audio/SACD fiasco, which destroyed that promising market and left the music labels with today's non-secure music CDs since consumers became so confused that the machines never caught on.

When I started Donnerwood 9 months ago, I definitely was on the VOIP bandwagon.  I did my research, looked for small office solutions and went with the 8X8 solution since it seemed to offer the right mix of up front costs, monthly costs, and overall features.  To be blunt, it has been a total disaster for every month we have had the system.  Our CTO JP has had a hilarious time with this choice, constantly switching the phone system between our DSL line and our T-1 line in order to reduce the load, re-configuring the firewall, and downloading every patch in existence, all to no avail.  Multiple times a month I have callers ask if I can call them back on another line since this one cuts in and out - and conference calls are a joke, lasting a few minutes before we switch to Skype.  The end result is that all of our calls take place on our personal cell phones while we wait to move to new offices where we will use a combination of old fashion analog lines and Skype to speak to others.  There may be other good 8 x 8 experiences, but after a hell of a lot of effort, we have not had one of them.  Buy something else.

Having now fled the mayhem that defines CES, my initial thoughts are that this was an evolutionary show, not a revolutionary one, as some were initially hoping.  The show was full of the usual bigger TVs, more capable phones, and unlimited ways to upgrade your car audio system, but there was not a single device or product that stood out as a "wow" product.   

The overall digital media trend was about new ways and devices to network your home theater experience, with Intel pushing Viiv and Microsoft pushing Windows Media Center, but it still looks too hard to do for an average user, without enough strong devices to deliver the content to the TV.  The rise of the XBox 360/Media Center Extender may address that issue by 2007 since there will be 10M+ of them in the marketplace, but none of the other options seemed like potential large sellers.  And on the portable audio or video side, there was simply nothing to threaten Apple's dominance of that category (even before we see what happens this week at Macworld) - only a compelling subscription offering tied to an great device could do that, and the ones I saw were still not as compelling as a video IPod.  If Sony could get its act together on the PSP, that would be the only device I can see which could compete with the iPod as a great media player, although it's too big to carry in a pocket.

From a buzz perspective, I'd have to give the award to for their Sling Box, which seems to be a pretty easy way to access your video content from a remote device.  I'll pick one up this month to review it, but the demo was compelling, especially since it promises to work with almost any device you have in a home theater system, and it allows you to access the content already stored on your DVR. 

On the business model front, there was a bewildering array of announcements about various ways to buy video content, from paying $2.99 to watch shows before they're broadcast, to paying $.99 to watch them a week later on demand, to paying $1.99 to take them portable, either with an iPod or Portable Media Player.   With the Google Video and Yahoo Go announcements, this set of options will continue to expand, but none of them feel like a consistent and broad proposition tied to exciting hardware, so I believe we'll see another year of Video iPod growth, especially since one of the labels told me they were surprised how many music videos are being sold already on iTunes.

Next is MacWorld and the rumored Apple announcement of a Mac Mini DVR or some type of home theater component.

Upon receiving a note from the Chairman of Digital Music Group correctly pointing out a significant error in my market cap calculations, I need to issue a Correction to the previous post.  Given the complexity of the merger of Digital Music International and Rio Bravo to form Digital Music Group, I did not correctly take into account the elimination of the vast majority of the original Preferred Shares of Digital Music International when DMG was formed - therefore, the correct market value of the merged company is not $270M, but is approximately $75M.   The rest of the post still stands as to the overvaluation issues with the offering, but the ratios of valution to sales, and employee value to sales are clearly lower than in the previous post - I regret the error.

Correction:  the original post below did not correctly calculate the number of shares outstanding in the merged company of DMG.  The new market cap is actually closer to $75M, vs $270M, lowering the ratios described below, although not changing the overall thesis.

When I wrote about the S-1 filing of Digital Music Group in late 2005, I assumed that it was the last we would hear about it since it's such a ridiculous concept, even in today's increasingly bubble-like atmosphere.  However, amazingly enough, the IPO appears to be moving forward based on the recently filed . 

There is no point in completely rehashing the first post since nothing has changed to make this offering any less ludicrous.  However, we can at least look at the valuation justification now that they have released expected pricing.  At the median offering price of $9, this would value the company at approximately $270M, based on a total of almost 30M shares, fully diluted.  To put it in context, the average price to sales valuation paid for large, fast growth digital media companies has been approximately 5x sales - that would be JamDat, IGN, MySpace, etc.  That's a rich, but defensible valuation assuming market leadership, high growth and high gross margins.

So how does Digital Music Group stack up?  The revenue in the most recent quarter (Q3 2005) was $235K,  giving it an annual run rate of $1M.  Therefore, we're looking at an astonishing 270x Sales valuation with a gross margin of 39% for Q3.  Another metric would be valuation per employee - since DMG has a grand total of 12 employees, each one is apparently worth $22.5M+, a slightly higher number than you would find at most other companies :)  A final way to look at it would be to consider that in August & again in late September 2005 (just 4-5 months ago), the DMG Board of Directors decided that the fair value of the company stock was $.01 a share when it sold 775,000 common shares to insiders for the grand total of $7,750 - yet now the stock is $9 a share?  A more correct valuation would be in the $5-10M range, so avoid this one like the plague, or short it like crazy if possible.  There are too many other better investments in the private sector with larger, more established players such as IRIS, DRA, IODA, and The Orchard.

Other interesting tidbits in the filing are:

• iTunes (which accounts for 92% of their revenue) pays them $.70 per single download and $7.00 per album, and that appears to be a standard rate in the industry.
• In short term agreements with content owners, DMG pays the owner 80-85% of revenue
• In longer term agreements, DMG pays the publishing royalties, and then pays 25-50% of revenue to the content owner, as well as advances to secure the rights
• Peter Csathy, the former President of MusicMatch, is joining DMG's Board, as is John Kilkullen, the Publisher of Billboard
• DMG has borrowed $500K on a $750K line of credit from a Director/Shareholder's company in order to fund the costs of the IPO
• DMG has paid royalty advances of $1.150M as of 9/05, yet amortized only $10K of it in the last 9 months with another $50K now payable.  Luckily these deals are long term deals since this amortization is going to take a long time at anything close to the current rate.

I spent some time today with Starz' new Vongo digital video service which launched in beta yesterday as part of the pre-CES drum roll of product announcements.  I would describe this as version 1.5 of the Starz Ticket service I reviewed earlier - cheaper, more content, better interface, and some portable capabilities, but not quite redefining the category enough yet for mainstream users as ITunes did for music and podcasting.  That having been said, I cancelled my Starz Ticket service and switched to Vongo since it's a better value for me.  It looks like CES will have a large focus around various aspects of video portability, so I'm sure we'll see more hardware and service announcements.

You must currently download a separate 10MB client to use Vongo, although I assume it will be integrated into the Windows Media player and Sony Connect clients when those partnerships launch.  Although the sign up process is too long and doesn't allow for any free trial concept, it's smooth and nicely integrates a parental control option.  A subscription is $10/month and more recent movies are available for $4 on a PPV basis, similar to Movielink    The editorial approach is a big improvement over Starz Ticket, with a highly graphical approach utilizing DVD covers instead of text, user ratings a la Net Flix, and integrated video trailers for almost every movie.   There are hundreds of movies available , as well as 20+ concerts and 10+ extreme sports programs, so you can see that Starz will be expanding the catalog above movies.

As I discussed in the earlier Starz Ticket review, the lack of easy portability to devices or to a TV is a big drawback for many mainstream users.  Starz doesn't currently address the TV situation since it doesn't appear to work with Windows Media Center, but it does offer downloads to Portable Media Center devices.  However, since about ten of these have been sold in the last year, I couldn't find one to test it on - if they can make it work on a Sony PSP as part of the Sony relationship, then this could be a big win since the PSP is the only device I can see which can rival the video iPod for looks, units sold and functionality.

Benefits

• $10 a month gets you hundreds of movies and the PPV option is a nice option
• Reasonably good editorial approach - user ratings, graphics, trailers, filters
• Starting to address the portability need, but still needs work

Problems

• The client is still in beta - it repeatedly showed a fairly bad memory leak which resulted in the client taking 60% of the processor and 400+MB of memory before I finally shut it down to stop my computer from grounding to a halt, although the issue went away when I was just watching a movie rather than moving around the client.
• There is a lot of content, but they could do a better job of providing ways to filter it, such as adding "Most Popular" and "Recently Added" in each genre, not just at the top level
• The live Starz stream is pretty low quality at full screen, probably running at 300K, but I don't think most people use this option anyway
• The overall quality seems to be lower than the Real Starz Ticket option, at least at full screen, but that may be a subjective issue.
• Installs some type of Macrovision update manager without asking you

Update:  A day after I wrote the post below, Starz today announced that they would be launching their own downloadable video service, called Vongo, which would be $10/month, use the Windows Media codec/DRM, and support Windows portable media devices, as well as contain content beyond movies.  I'll review it shortly, but this is a minor blow for RealNetworks and a win for Microsoft. 

I recently tried out the Starz Ticket on Real Movies (yes, that's actually the name) downloadable movie service for the first time in a year since I wanted to see how it was coming along.  I still believe that this service is undermarketed and underappreciated, but it's true that it works best for a niche set of consumers since it's too hard to deploy on a TV.  However, I believe that the subscription aspects of "all you can eat" make it a vastly more compelling experience than an a la carte service and point to potential future mainstream services.

Starz Ticket is a $13/month downloadable movie service where the subscriber can access hundreds of movies, all of which are currently playing somewhere in the Starz movie channels.  One must have the Real Player, as well as an automatically downloaded security plug-in.  You can watch the movies as much as you want (no horrible experience of being required to finish the movie once you start it), store lots of them on the hard drive (they're about 700MB each), and be generally happy with the quality, probably between VHS tape and DVD.  New movies are added every week, and they have a pretty good catalog, from anime to art house to comedy, covering about 40% of the movies released the previous year - the Starz release window is roughly 1-5 years after theater release.  I had hoped that Real would have expanded the video catalog beyond just Starz content, but does not appear to have happened in the last year.

Since no one I can find has ever heard of this service, who should it appeal to?  Frequent travelers who have their laptop with them, students who use their PC as their primary media consumption device, and those geeky enough to hook it up to their TV, as I do.  For those segments, the subscription service opens up a wide world of movies that you can watch on your terms without worrying about which DVD's you have with you.  You choose a movie, wait the 30 minutes for it to download (although you can start watching during the download) and you're ready to go - it really changes how you think about renting movies.

The primary drawback is that Real's video codec/DRM has almost no hardware support that I can find, so that there is no way to easily deliver the movies to a TV through a digital media adapter or media extender, like an XBox 360.   Nor is there a way to download them to a portable video player, which would make it much more compelling, but that would require a codec switch to Windows Media. Instead you have to hook the laptop to the TV with an S Video cable and audio plug, which is a bit of a pain, and which lowers the quality, especially in sound.

So why is it interesting, especially since Real never releases any numbers for the service, which probably means it doesn't have a lot of subscribers?  Because it's another cable bypass effort, just like the XBox market place and similar to the TV shows now available on the video iPod.  It shows the high potential for these services to expand revenue and subscribers for video content owners (especially niche/"long tail content), but it also points out the challenges inherent in DRM and hardware support.  If you make the consumer buy/rent yet another box, then the business becomes quite difficult, as Akimbo is finding out, and which has been the bane of Tivo's existence.  At CES next week, I'm hoping to see a lot of progress in that area, tying together services and hardware, particularly if Intel's Viiv (another bizarre name) initiative works as promised in the consumer electronics arena.