Scott Adams is the man behind Dilbert Comics–one of my favorites. 18 months ago he lost his conversational speech to a rare condition called Spasmodic Dysphonia. Recently he reported having miraculously regained his speech. The strange thing about this condition–and how the mind works–is that he could sing and give professional speeches but he could not carry out casual conversations since different types of speech are processed in different regions of the brain and follow different neural routes.

Interestingly, he recovered his speech by talking in rhymes and trying to blur the line between rhymes and regular speech. How does the mind know what rhymes and what doesn’t? What is the difference between “Yellow” and “Yellow Fellow”?

Neural networks are a complex collection of neurons which talk to each other through chemical signals generated from electrical impulses within the brain. Like a current running through the wire, information flows across the neural network through a series of chain reactions much like a ballet, where each performer responds to a cue from another performer and the chain reaction of responses accomplishes an act. So a particular neural mapping is the path followed by a chain reaction, however, if a certain mapping is damaged then the physiological function accomplished by that mapping is lost. In lab rats for example you could tap a certain part of their split open brain and cause their leg to move. However, if that part is damaged altogether it might so happen that they would not be able to move their legs anymore. In Scott’s case it was conversational speech he had lost. However, the chain reaction required for rhymes follows a slightly different path and that neural mapping was still intact.

One can only speculate on how things work but it appears that Scott conditioned his mind to reinforce the functioning neural maps responsible for rhymes and manipulated them in slight iterations (by using rhymes to lean toward conversational speech) to find a new mapping to accomplish the the same function of conversational speech. It’s almost as if when the mind is searching within itself for a rhyme, it ends up at a different state in the neural network map from where it then proceeds to deliver that rhyme as speech through a still functional mapping.

So going forward if you can land your mind in that state by consciously making an effort to concoct a rhyme (or conditioning your mind so that subconsciously you always consider a rhyme) you can then proceed from there to deliver regular speech instead of the rhyme–akin to taking a detour and making that detour your regular route.

Gives a whole new meaning to the simple mind over matter issue.

I don’t really know Scoble but he is terribly popular and he has interfaced with lots of smart people at Microsoft. However, his response to my previous post didn’t provide anything substantial to chew on but I’ll address it anyway. His response:

you can’t live off your existing community and be “cool”.

Why not? That’s what all companies do. Make money off consumers and get to be cool in the process (iPod, Google, et al).

His reasoning:

Why? Cause if you’re a consumer company and you want to see growth, you’ve gotta be interesting at minimum.

So “you can’t live off your existing community and be cool because if you’re a consumer company, you’ve got to be interesting”. That reasoning doesn’t follow and is incoherent.

Either way, one has to question: Why can’t SoapBox or any other video service besides YouTube be interesting? AltaVista was interesting, Netscape was interesting, The Rolling Stones were interesting. This is classic fad mentality and the science of fads is exactly what is feeding this frenzy and clouding judgment. Buying YouTube would not have made Microsoft instantly cool. I wish that were the case. I wish people would stop judging us by the cool things we purchase. That’s so superficial.

Some flame bait, and I’m biting:

That big audience that Microsoft has? It’s theirs to lose.

That’s unwarranted hyperbole. The MSN network has grown consistently and expanded into other services as I pointed out previously.

As a business we have a due diligence to make money. Maybe we got the valuation on YouTube wrong (things of value: denying the competition, acquiring content, creating PR or becoming cool, revenue projections etc). Or maybe we did not want to engage in yet another bidding war knowing Google’s ability to better monetize YouTube would’ve left us in a trailing position. Those are both intelligible arguments and things I am sure we considered.

Again Scoble is widely read and I hope that his post doesn’t entice a gross underestimation of the MSN community and Microsoft’s position on this. I don’t see us backing down and the video market isn’t running away. We will channel MSN users toward SoapBox when its ripe for the serving much the same way Google channels its users to their Sidebar, Videos, Froogle etc.

The Microsoft Story

Let me start with my take on Scoble’s post that Microsoft should have bought YouTube rather than take the build-it-yourself route. Scoble is saying we should pay 1.65 billion odd dollars for the community, not for the service. Some others are saying Microsoft failed to close the deal. But the truth is that Microsoft didn’t really lose out on this deal–it just didn’t make business sense at those prices. Steve Berkowitz (Senior VP, Online services) recently sent a mail to employees outlining our position:

…MSN has a huge global audience of 465M users per month that we can tap into and focus on Soapbox to contribute and share videos. We have a far better strategy around integrating Soapbox across MSN, Windows Live and Microsoft services like Windows Mobile, Xbox and Zune, that we couldn’t have matched with an acquisition.

We don’t need to buy any community, we already have a really large one we can tap into.

Consider how we leveraged the Hotmail community. What we get from Hotmail is far greater than one could attribute to the dollars generated. Hotmail could be attributed as the primary grower of the MSN network. We delivered the Hotmail Notifier that sat in the system tray and evolved into a messaging application and drove Hotmail users to what eventually became MSN Messenger. Messenger drove traffic to MSN Spaces with the gleam feature which helped us dominate the blog market share overnight. Messenger now has built in search that drives traffic to MSN Search and the default install of Messenger is also driving traffic to the IE toolbar, Live Sign-in Assistant etc. All those users originally came from Hotmail–users who wanted to connect.

Microsoft has plenty of users. Building a video service is very easy.

The Value of YouTube to Google

I would’ve considered the $1.65bn price tag to be exorbitant and reminiscent of the dot com era. But Google found it justifiable.

However, what YouTube means to Google is much more than what it means to Microsoft or Yahoo. The simple reason is that Google has a better ad infrastructure at present which will allow it to better monetize YouTube. They can recover their costs much faster than anyone else out there and so they can afford to pay more. There’s also the competitive aspect. Google would rather not see YouTube go to anyone else. YouTube is a big driver for Google’s ad traffic and losing it to someone else like Microsoft might mean the loss of all those ad dollars.

Further, Google does not have a large registered user base. Google Search is their primary traffic driver and it’s a hit-and-run type of deal. Google could potentially convert YouTube users into registered Google users or channel them to other Google services much like Microsoft did with Hotmail. The reason they will have more success with getting these users to register versus search users is that these users are lurkers. They hang around YouTube spending idle minutes entertaining themselves. Search users on the other hand are task driven–they want to find whatever it is they are looking for and be on with it. This makes YouTube all the more lucrative for Google.

YouTube’s Legal Hurdles

The most intriguing aspect regarding this whole ordeal will be the reaction of MPAA and RIAA to YouTube which is basking in the glory of copyright infringing videos. This will be similar to Napster albeit Napster’s traffic was almost entirely composed of copyrighted material while YouTube thrives on plenty of legitimate content. Further, if YouTube falls under the “safe harbors” of the Digital Millennium Copyright Act of 1998, the burden of finding copyright material will lie with the copyright holders who will be required to provide a list of copyrighted material to Google to take down. Napster failed here for technical reasons as they could not satisfactorily comply with or facilitate the major copyright holders to weed out infringing materials.

YouTube’s story is different as theirs is a much more tractable problem. One idea might be for Google to provide administrative accounts to the large media companies (and complying primarily with the major copyright holders is the key here) to remove infringing content themselves or possibly build a “community moderation” system. The latter will probably not work due to conflict of interest–the community finds value in free copyrighted content but the design could be modified to reward the community of moderators. YouTube could also hire auditors working around the clock to comply with the smaller players though Google is a strong believer of autonomous, scalable systems so its unlikely they will take this route in the longer term.

YouTube also differs from Napster in that their architecture is considerably different. Napster’s P2P network meant there were millions of infringers floating millions of copies of any particular song with hundreds of variations. YouTube has a very limited number of duplicates and uploading the same videos under different guises doesn’t make sense as the user will not be able to find or share it without the copyright owners being able to do the same. Further YouTube controls the content format which means that copyrighted content cannot be wrapped inside an encrypted layer which is how Napster users were able to share banned songs.

Finally, since the big copyright holders are the ones with which Google will primarily be concerned it will mean that YouTube can do traffic profiling to find videos with massive infringement. It doesn’t make sense to go after a copyright video that’s being viewed by < 1K users when there are videos out there being viewed by 50K+ users.

For all these reasons and more, Google/YouTube should be able to pull this off. The problem is easily surmountable.

In Summary

Google will weed out the copyrighted content and the problem is not hard to solve. They will get their moneys worth through direct monetization via AdSense and also by channeling these users to other Google services. It did not make sense for Microsoft to pay a similar amount for YouTube’s users since it already has a large registered user base from which it can carve out a community of video watchers and it could not have monetized as much from these users. Microsoft will continue to build upon its ground-up service, SoapBox which will be woven with other technologies like Zune, Spaces, Messenger and Mobile.

The legal hurdles should continue to hit the press in the coming weeks/months possibly wavering Google’s stock up and down. Bloggers at the same time will continue to feed the frenzy calling Google crazy and brilliant.

The valuation of PortalPlayer Inc. (NASDAQ: PLAY) and its future prospects make PortalPlayer quite attractive at current prices (~$11). You can find quite a thorough analysis of the company’s valuation here so I will not run through it again save to highlight some key aspects that attracted me to this stock (based on 2006 Q2 balance sheet):

* Net cash of $194MM or about $7.50 per share. Their current assets and Intellectual property are valued at $75-125MM bringing share price in the $10.50-12.50 range
* PortalPlayer’s sockets are in use in Sandisk Sansa e200 (currently has ~10% market share) and iPod video players. It has also announced that it has won a wireless socket deal.
* PortalPlayer’s Preface technology for Microsoft Windows Sideshow device will be a part of Vista due to ship in January 2007. PortalPlayer announced “collaborations with Acer, ASUSTeK, Compal and Quanta, two of the largest notebook OEMs and two of the largest notebook ODMs in Taiwan”.
* The CEO Gary Johnson will be leaving to pursue other startup opportunities, however, his profile reveals that he has not stuck with any company more than 2-3 years in his recent career. In fact it might be a good thing as PortalPlayer forays into richer portables someone with a sales background for example could bring new vigor and reach to the company.
* Earnings Yield of 45% and return on capital greater than 100% (see Magic Formula Investing screen)
* PortalPlayer’s low-power and WiFi enabled chipsets along with audio/video/image support makes these chips very lucrative for new and existing portable media devices. They already have a proven track record with Nanos and iPod videos and have also worked with Creative and Samsung among others.
* PortalPlayer is partnered with Microsoft to develop Preface technology for Windows Sideshow for Vista. Preface will aim to extend notebook use to a full day on one charge while allowing users to use the auxillary Personal Media Display (PMD) to access data and content on the notebook including email, calendars, music, video and photos. Further, Sideshow devices can be wireless and don’t have to be physically embedded within the notebooks. Sideshow devices will also feature Gadgets which will be a part of Windows Vista Sidebar and are already a part of Windows Live.

Other interesting pieces of the puzzle and possible technological convergences that you could see sooner than you think:

* Microsoft’s Zune player has wireless capabilities, however, in my previous post on Microsoft Zune I noted that WiFi use-case scenarios are very limited (6th bullet). WiFi capabilities are under-utilized at the moment but it’s imminent that they will open up to support more interesting use-case scenarios. It would be an awful waste of hardware space, battery life and production and materials costs to enable WiFi for just photo sharing.
* As an aside, convergence and interoperability of WiFi devices can also be seen in home and media. Apple’s latest foray into iTV which will feature 802.11n to support high quality video streaming from your PC along with picture slideshows, music, apps and possibly even games on your television. Windows Media Center which has been around for much longer also supports the same scenarios.
* Windows Vista has powerful P2P networking support. This will mean good things for Zune and other WiFi enabled devices that will be able to interoperate with Vista and PortalPlayer’s chips offer an easy platform to build these devices.
* I believe Zune has the capability to act as a sideshow device even in its current form based on Microsoft’s Sideshow specifications. It is possible that PortalPlayer might get a socket in Zune along the line though this is highly speculative.
* Even if Zune has nothing to do with it, SideShow devices interfacing with Vista computers open up the playing field for 3rd party hardware plugins similar to the ones that exist for the iPod today, only these will be for the PC. For example a cheap SideShow device could interface with your PC and run the Weather gadget or display recipes and be mounted in your kitchen–essentially acting as dumb terminals. If Microsoft does manage to create a rich ecosystem here, PortalPlayer’s outlook could become very promising. Again, this is highly speculative though I don’t doubt it much but then again I have a technological bias. Also these scenarios would not be enabled for another year or so.

These bullets highlight PortalPlayer’s cheaper valuation which give it little downside but at the same time there is huge upside due to the technological potential. PortalPlayer chip designs have also been through quite a few iterations providing a stable platform for Portable Media Devices.

Another interesting find: PortalPlayer’s Indian design and development center currently has a number of positions listed for WinCE engineers, WiFi and other curious positions posted in the last month or two.

Disclaimer: I work for Microsoft but have no internal visibility into any of this; all information here was garnered from public resources and is highly speculative. I currently own PortalPlayer (PLAY) stock (for pretty much the same reasons I mention here).

Microsoft’s Zune player will hit the shelves on Nov 14 retailing at $249.99 and to set it apart from the ipod it will have a radio as well as WiFi capabilities to interact with other Zunes. A few interesting things about the Zune:

1. It is very similar to the Portable Media Center devices, however, it is purpotedly different from the core out.
2. It comes in brown, black and white. I believe this is to help it establish its own image and achieve a balanced product differentation in the style category without going for a total cultural shift in design.
3. The Zune player will retail for $249.99. There were rumors that it might undercut the Apple iPods on pricing, however, this price seems more apt–a cheaper price might lead some to believe it’s cheaper quality and that would start Zune off on the wrong footing. At $250, most people won’t be swayed in their decision by the $10 savings in either case.
4. Zune Marketplace will compete with iTunes but instead of having a pay-per-song model, a $14.99 monthly subscription for Zune Pass will give subscribers unlimited access to millions of songs. I don’t like the tune (unintentional pun) of this for fears that if the DRM gets compromised, users will be able to unlock the thousands of songs they download off the music service. The counter-argument is that if users wanted to get free songs they could just get them off existing P2P networks.
5. Existing iTunes users who have purchased songs on iTunes will get those same songs for free on Zune Marketplace (since they have already purchased those songs). However, existing DRM’d Apple Fairplay songs can’t be loaded on to the Zune. User’s who have loaded their CDs onto the iPod/iTunes software will have to reload them to the Zune software–there is no trivial migration solution supported by Microsoft due to legalities around DRM.
6. Zune’s WiFi capabilities in the v1 release will be limited to sharing songs (probably videos as well) and pictures with other Zune users. Due to DRM issues, the songs can only be played 3 times or for 3 days–whichever comes first. Future generations of Zune I assume will extend the WiFi capabilities to more interesting use-case scenarios. At present even the trivial scenarios such as staying in sync with your PC using WiFi aren’t supported. From a technological standpoint it makes sense to get the basic model right and then build upon it with subsequent revisions.
7. I am speculating that Zune will also act as a SideShow device which could open it up to some really cool scenarios but I don’t expected this to happen until the third or fourth generation of Zune.
8. Quite a few existing Portable Music Players in the market support Microsoft’s PlaysForSure technology which allows them to integrate with online music stores. Zune will not support PlaysForSure and not be a part of that ecosystem. Instead it will have it’s own exclusive Zune Marketplace for downloading songs and its own new proprietary technology for DRM/storing/playback on the Zune. It will simply do away with all the confusion and just provide a tightly integrated iTunes/iPod type model that works end-to-end.

Zune’s WiFi capabilities will pose some initial concerns around privacy (you can auto-discover other users in range similar to bluetooth) and possibly security but more importantly there will be quite a few interesting DRM and licensing issues which is partially the reason why any songs transferred between devices are limited to 3 days or 3 plays. The DRM restrictions, I imagine, will probably hold true even for free songs (and podcasts) so as to prevent Zune from being reduced to a physical version of a Napster like P2P filesharing network.

2007 will be a tough year for portables. RealNetworks and SanDisk have partnered up to strengthen their position and create a vertical offering. At present SanDisk commands 10% of the Portable Music Player marketshare with an added edge due to its core business in flash memory, while RealNetwork has a small chunk of the audio market with its Real Player product, making these two powerful allies. However, I consider Microsoft to be a dominanting force due to its stronger brand, marketing experience, global reach, deep pockets, and software, platforms and strategic experience which will allow them succeed where others like Sony and Rio have failed.

It’s been a while since my last post partially due to other priorities and a bit of travelling. I have migrated the site to WordPress and away from Movable Type. Primarly the move was because Movable Type being written in Perl is a real turn off–I don’t want to touch that code with a 10 foot pole. WordPress is written in PHP which makes it very easy to play around with. Secondly, WordPress is a lot easier to manage and a real relief after Movable Type. Migrating the posts, writing my own theme for the site design, fixing some char encoding issues that were lurking in the posts, adding some plugins for syntax highlighting, fixing some htaccess issues, creating WordPress Pages, updating the BlogRoll and ensuring XHTML validation and other tweaks used up a good chunk of my weekend… which isn’t so bad considering the bulk of this time was spent on designing and coding a new theme for the website.

One hiccup: some of the older pages that have been googled have to be kept alive and accessible–at some point I’ll see if a 301 permanent redirect can be done on them to update Google’s links without affecting Page Rank.

Expect to see a lot more in the coming weeks.