At the time, it was reported that Blockbuster, the former video giant that is aging anything but gracefully, was also backing this 30-day window idea (where it might see a 30-day rental exclusive on some titles). With the company bleeding money, it shouldn’t be surprising that they’re aligning themselves with the studios. But more recently, there has been some very disheartening news: Netflix seems to be willing to back this idea too. Yes, the poster child for much of what is right about the consumer movie business these days may be on the verge of making a deal with the devil.

Let’s be clear about what this means: If you’re a Netflix subscriber, you will no longer be able to rent new movies until 30 days after they’ve been released on DVD.

The show business trade publication Video Business reported last week that Netflix would be willing to accept this 30-day model for huge discounts on the movies after that period — perhaps as much as 50%. As a business decision, this would seem to make sense since 70% of Netflix’s main business is catalog (older) release rentals. As a long-term strategy, this is just about the dumbest thing I’ve ever heard.

Here’s what this will do: It may drive sales of DVDs a bit short term. But soon, online movie piracy will pick up to new heights. If the movie studios have nightmares about piracy now, their reality will be truly terrifying with this plan in place.

There are two major factors that stop movie piracy from being as bad as music piracy was a few years ago: Broadband speeds and convenience. Let’s speak to the latter one first: With services like Netflix, Redbox, iTunes, and the like all offering fairly easy ways to get movies you want, when you want them, it’s less of a headache for most people to use them rather than digging around online to get them for free.

But with this new 30-day window in place, the masses would be driven online to search for more illegal content — and more importantly, it would begin to fuel a piracy ecosystem for Hollywood content. There would be more people downloading, but also more people sharing. That’s the key.

Broadband remains an issue in many parts of the country, but increasingly, it’s not as big of one as the studios might believe. With devices like the Xbox 360, Apple TV, PS3, and services like Hulu and YouTube, people are getting used to downloading or streaming content over their connections. If you take away the convenience of something like Netflix, these same people will eventually put two and two together that these connections can also be used to get new content online for free, illegally.

Hollywood is making a fatal error with this strategy. In their greed-clouded view, they seem to really believe that most people are renting movies rather than buying them because they’re given an option. Kill the option, kill the problem, right?

The truth is that most people are renting movies rather than buying them because the majority of movies released are crap that no one wants to buy. There’s a huge difference between paying $3 (or less, with Netflix) to rent a movie that may be entertaining to watch once (or might not be), than having to spend $20 to buy something you don’t really want and will have forever.

Hollywood assumes that because they’ve sort of made this type of buy-first, rent-later environment work on services like iTunes and Xbox Live (where it doesn’t really work and is just hampering both services) that it will translate to Netflix as well. But if you give a mouse a cookie, then try to take away that cookie, he’s going to bite your hand off.

What’s really befuddling is that Netflix lacks the vision to see through this BS. They don’t seem to realize that longterm it’s going to screw them too. While new movies may not be as core to their business as they are to Redbox (which is suing many of the studios to stop something like this), new movies are the sexy lures that bring in new business. If I can’t get at those sexy lures for 30 days, they’re not nearly as sexy.

The Internet, meanwhile, offers plenty of those sexy lures. Sure, there’s some risk in grabbing them, but it’s really pretty minimal. Did I mention they’re free? Because Hollywood and now Netflix are practically screaming it.

[images: Miramax and New Line Cinemas]

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In short, these games try to get people to pay cash for in game currency so they can level up faster and have a better overall experience. Which is fine. But for users who won’t pay cash, a wide variety of “offers” are available where they can get in-game currency in exchange for lead gen-type offers. Most of these offers are bad for consumers because it confusingly gets them to pay far more for in-game currency than if they just paid cash (there are notable exceptions, but the scammy stuff tends to crowd out the legitimate offers). And it’s also bad for legitimate advertisers.

The reason why I call this an ecosystem is that it’s a self-reinforcing downward cycle. Users are tricked into these lead gen scams. The games get paid, and they plow that money back into Facebook and MySpace in advertising, getting more users. Who are then monetized via lead gen scams. That money is then plowed back into Facebook and MySpace in advertising to get more users…

Here’s the really insidious part: game developers who monetize the best (and that’s Zynga) make the most money and can spend the most on advertising. Those that won’t touch this stuff (Slide and others) fall further and further behind. Other game developers have to either get in on the monetization or fall behind as well. Companies like Playdom and Playfish seem to be struggling with their conscience and are constantly shifting their policies on lead gen.

The games that scam the most, win.

And some users aren’t dumb, either. For every user who gets tricked into some fake mobile subscription, there’s another who can beat the system. That’s where the legitimate advertisers, like Netflix and Blockbuster, get hit. Users sign up for a free trial with a credit card, get their game currency, then cancel the membership and start over. Netflix has a policy of only paying for a user once. But game developers use a complex set of partner chains to launder these leads and try to get them through for payment. Netflix sees an overall lowering of quality and pays less for leads. Game developers, desperate to monetize, then search for ever more questionable offers to make up the difference. In the end, the decent advertisers are out, and only the worst of the worst remain.

Left alone, the system really will slide into a full blown disaster. The platforms (Facebook and MySpace) are in a position to regulate this, and even have rules prohibiting some scams. But those rules are routinely ignored by developers, and are rarely enforced by Facebook and MySpace.

There can be only one reason Facebook and MySpace turn a blind eye to user protection – they’re getting such a huge cut of revenue back from these developers in advertising. If they turn off the spigot, they hurt themselves.

Zynga may be spending $50 million a year on Facebook advertising alone, fueled partially by lead gen scams. Wonder how Facebook got to profitability way ahead of schedule? It was a surge in this kind of advertising. The money looks clean – it’s from Zynga, Playfish, Playdom and others. But a large portion of it is coming from users who’ve been tricked into one scam or another.

And recent moves by Facebook to shut down application spam only make the problem worse in some way – game developers have to spend more money on advertisers to get users now that the viral channels are shut down. That means the games have to monetize even better. Which means more scams.

It’s time for this to stop. Facebook and MySpace need to create and enforce rules against it so that game developers aren’t tempted to get a competitive edge by scamming users. And if Facebook/MySpace won’t protect users, then the government will have to step in.

There’s an easy way to determine if something is a scam or not. For any particular offer, ask yourself if anyone would buy the product or service if the terms were clearly spelled out for them, and they weren’t being bribed with in-game currency. The answer for many of these is a resounding “no.” A few examples are below.

Examples Of Scams:

A typical scam: users are offered in game currency in exchange for filling out an IQ survey. Four simple questions are asked. The answers are irrelevant. When the user gets to the last question they are told their results will be text messaged to them. They are asked to enter in their mobile phone number, and are texted a pin code to enter on the quiz. Once they’ve done that, they’ve just subscribed to a $9.99/month subscription. Tatto Media is the company at the very end of the line on most mobile scams, and they flow it up through Offerpal, SuperRewards and others to the game developers.

As you can see in the image below, nothing in the offer says that the user will be billed $10/month forever for a useless service.

Another scam: Video Professor. Users are offered in game currency if they sign up to receive a free learning CD from Video Professor. The user is told they pay nothing except a $10 shipping charge. But the fine print, on a different page from checkout, tells them they are really getting a whole set of CDs and will be billed $189.95 unless they return them. Most users never return them because they don’t know about the extra charge. Woot. Again, sites like Offerpal and SuperRewards flow these offers through to game developers. See here for more on the Video Professor scam.

Of course, there’s no mention of any of these payments in the offer itself:

An Industry In Denial

Yesterday I attended the Virtual Goods Summit in San Francisco. In the Q&A session of one panel I asked Offerpal CEO Anu Shukla to explain the ethics of her business, and outlined my ecosystem of hell argument above. Shukla went on a tirade, calling my points “shit, doubleshit, and bullshit” (yes, really), but never really addressed the points. A video of the exchange is below, care of Alexa Lee.

Offerpal now has a blog post up on the exchange, but they still don’t address the issues. They offer misdirection, denials and a shield of rules that are never actually enforced.

Sadly, most of the audience of game developers was on Offerpal’s side. Many of these developers see quick dollars with lead gen scams and they don’t really care about how users are affected.

In one session earlier in the day, IGG Cofounder Kevin Xu recommended that game developers “get users in the door to play free, then monetize the hell out of them once they’re hooked.” Sadly, it’s simply human nature to push the rules until they break. It’s time for Facebook and MySpace to protect their users from this stuff and make sure it stops.

p.s. – An interesting development. Offerpal defended their mobile survey scams on stage and in the blog post referenced above, saying there was no scam involved. But today those offers have quietly been pulled down from all the games I’ve checked. If there’s no scam, why remove them? At least some good is coming from my ongoing rants.

Update: Two Companies That Said No To Social Media Scams

Update 2: How To Spam Facebook Like A Pro: An Insider’s Confession

Update 3: Scamville: Zynga Says 1/3 Of Revenue Comes From Lead Gen And Other Offers

Update 4: Zynga Takes Steps To Remove Scams From Games

Update 5: RockYou Joins The No Scams Parade. But What’s Facebook Up To?

Update 6: MySpace Says Zero Tolerance For App Scams, Changes Terms Of Use

Update 7: Tragedy Of The Social Gaming Commons: A Blueprint For Change

Update 8: Offerpal Tries Out A New CEO. Shukla, Queen Of Scams, Is Out.

Update 9: Facebook To Increase Enforcement Of Anti-Scam Rule

Update 10: ScamVille: New Offerpal CEO Admits Mistakes, Makes Bold Promises

Update 11: Zynga CEO Mark Pincus: “I Did Every Horrible Thing In The Book Just To Get Revenues”
Pincus’ response: to zwink or not?

Update 12: Time Magazine: Are You Getting Scammed by Facebook Games?

Update 13: Is Facebook a Paradise for Scammers?

Update 14: “Horrible Things” Slink Back Into Zynga

Update 15: Zynga’s FishVille Sleeps With The Fishes For Ad Violations

Update 16: Zynga To Remove All In Game Offers

Update 17: Zynga’s FishVille Gets Out Of The Penalty Box At Midnight

Update 18: The ScamVille Lawsuit: Facebook, MySpace, Zynga And More Face Possible Class Action Suit

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While certainly there is some element of hearing something so many times that you start to believe it, that’s nothing new, any good salesman will do the same thing. But why I think the tactic works so well with Apple is because they actually believe what they’re saying. Just watch Steve Jobs in that video. It sure seems like he’s damn sure that what he’s talking about is amazing. He’s excited about it. So is Phil Schiller and the others on the Apple team. And that excitement translates on a level unseen.

You’ve undoubtedly seen used car commercials where the used car salesman uses superlatives as well to the nth degree. But the difference is that he’s not genuine. Do you think he loves the junky cars he’s trying to pass off to you? No. Contrast that with Jobs. Do you believe that he loves the Apple products he’s trying to pass off to you? Yes.

This is hardly an Apple-only phenomenon. They’re just one of the best at translating their enthusiasm on a big stage several times a year thanks mainly to the charismatic Jobs. But really, I think you’ll find in most successful companies, the enthusiasm about their product is a key to how well that product is doing.

Another good example is Twitter. I’ve had to opportunity to meet a lot of Twitter employees over the past few years. One thing I noticed about each of them is their passion and excitement for what they’re doing. Certainly, if you look at it from the outside, the concept of Twitter was something that was just as likely to be a complete failure as it was a success. But the people running it and even the newest employees have a passion about it. When co-founder Biz Stone says he thinks Twitter can change the world, it may sound crazy, but it’s not, because he believes it.

Speaking of the newest employees, Twitter’s new COO, Dick Costolo, just started at the company recently. During TechCrunch50, he was asked on stage why he joined Twitter. After all, he had sold his previous company, FeedBurner, to Google for $100 million, and upon leaving Google, he probably never needed to work again. But his response is telling, “My first reaction was, you don’t get a chance to work on potentially one of the pivotal companies.”

He’s not going to work at Twitter for the paycheck, he’s going to work there because he believes in what they are doing. And that enthusiasm can only further the company.

This type of enthusiasm also seems to be prevalent at companies like Facebook, Netflix, and Zappos (which was of course recently acquired by Amazon). And not surprisingly, people seem to love working at those companies.

For a long time, Google was in that realm too. To some extent, it still is, but as it gets bigger and bigger, there seems to be no shortage of people who leave, discontent. Google is still making great products, but whenever you have talent leaving, for whatever reason, that’s not a great sign. Maybe Google can overcome that, but you simply can’t discount the recent talk about a possible Google decline.

Not to single out Yahoo, but they are one company where employee enthusiasm has seemed waning in recent years, to say the least. It’s hard to know if that started before or after the great products stopped and it fell into decline, but it’s a serious problem, nonetheless. That’s not to say no one is enthusiastic about being there, but I do get the feeling that plenty are there simply to get a paycheck. And a company will never win that way.

Microsoft is more of a mixed bag. There are plenty at the company who love it passionately. Most notable of these is of course, CEO Steve Ballmer. While I don’t believe he’s being disingenuous with his Microsoft zealotry, I know that his passion is not shared by everyone at the company. And I believe that translates one way or another to the public (be it by sub-par products, or other less tangible means). And to some extent, that may be why we don’t see the same type of “fanboy” fervor that a company like Apple gets.

But you’ll notice a common theme among the last three examples: They’re all huge companies. It’s undoubtedly very hard to keep everyone happy and on the same page about the products as you grow in size. That’s really why Steve Jobs is more important to Apple than doing any tangible work he may be doing. He is the glue that seems to make enthusiasm stick at the large company. When he wasn’t there in the mid-1980s to the mid-1990s, things went downhill, and undoubtedly the enthusiasm went downhill.

It was interesting talking to startups at TechCrunch50 this past week. A lot of them seemed to have the passion for what they were doing, and that was great to see. But I’m not sure that all of them did, and I have no doubt that those companies are going to be much more prone to failure.

My point is an obvious one, but I think it’s often overlooked. Enthusiasm and passion are so important, no matter what you do. If you don’t feel like you have that towards the company you are with, you should seriously consider leaving. Of course, there is something to be said about a paycheck, especially in tough economic times, but if you have the means and are simply spinning your wheels doing something that you don’t believe in, you’re really not helping anyone, and especially not yourself.

And you’re not helping us, the public, either, because if you’re not enthusiastic about something, we’re certainly not going to be.

Better yet, if you have the power in your company to start something that you are passionate about, do it. Even if it’s something that seems silly, like say, Twitter (which of course, started as a side project at Odeo), your enthusiasm about it just may push it through. And it may slowly bubble up into something bigger. And it may just blow up into the next big thing. Because enthusiasm translates.

[photo: flickr/acaben]

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Tonight, Netflix emailed a large number of its subscribers to apologize for a Xbox Live streaming outage that occurred yesterday. They’re offering to refund 2% of users’ monthly bills back to them, if they simply click on the link that was emailed. It’s not a lot of money, but what’s remarkable is that Netflix did this for most of us completely unprompted.

Now, I’m sure someone somewhere complained, but rather than either arguing with that person or just quietly giving them some sort of discount, it looks like Netflix just emailed everyone that could have possibly seen this hiccup in service, and offered a refund — including users who didn’t suffer through it at all.

Refunding 2% of a monthly bill to all of these users will probably add up to a decent sized chunk of change (assuming a large portion of users click on the link), but the positive reaction they’re getting for the move on places like Twitter (and yes, this blog), has got to be worth more than whatever they’re paying. In a time of poor tech customer care, Netflix is the sterling example of how do it the right way.

Last month, we covered a Netflix internal presentation on how the company is run. It is simply an awesome guide that not nearly enough companies are anywhere close to following. It’s baffling how Netflix could be doing things so right, while there are so many companies out there doing things so wrong. It’d be one thing if Netflix wasn’t successful, but it’s extremely successful.

I’ve had basically no service from AT&T for large portions of my day in various parts of San Francisco for two months now. Do you think I’ll ever see a dime back from them? And before I just recently quit Comcast, my service would go out almost everyday without fail. Did I get an email apology and a refund? Nope. Maybe if I bitched loud enough for long enough, I could get something back from those two companies, but the point is that maybe I shouldn’t have to.

Netflix emails me from time to time to see about my movie streaming quality, and also to see if movies I’ve rented through the mail appear on time. If they don’t or the quality of my movies is poor, they apologize. That’s all I want. The refund is just icing on the cake. Too many other companies not only give you no icing, and no cake, but they steal your cake, punch you in the face, and then blame you for the whole ordeal.

But when it comes time to renew my plans with those companies, guess which one I’m going to stick with? Netflix. Companies often seem curious how other companies get “fanboys” — this is how.

[photo: TriStar Pictures]

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The studios are starting to rally around a horrible new idea: Keeping new releases out of Redbox and more importantly, Netflix for 30 days. Let me repeat that: They think Netflix shouldn’t be able to ship many new movies to you until 30 days after they’re released on DVD.

Now, this doesn’t appear to be set in stone yet for Netflix, as the studios are said to be currently negotiating this with the company, but it is what the studios want. And the strategy is going forward with Redbox, which recently filed a lawsuit against 20th Century Fox over the same issue. And now, with Universal and Warner Brothers getting on board, another lawsuit seems likely.

And in a move that couldn’t be less surprising, Blockbuster is on the wrong side of this. Despite the company having a strategy to do a massive roll-out of kiosks like the ones Redbox has, it is all in favor of the 30-day window, based on comments CEO Jim Keyes made during its Q2 earnings call.

Why? Well the company once again completely bombed in those earnings, posting a net loss of $36.9 million, while overall sales fell 22 percent in the quarter. It is getting fleeced by the likes of Redbox and Netflix and needs to gain some sort of competitive advantage in movie rentals. A 30-day rental window for its stores would certainly offer that.

Of course, as the name synonymous with movie rentals for the past couple of decades, Blockbuster could have used its power to get ahead of some of these trends (by-mail rentals, cheap kiosks, online rentals/streaming), but didn’t. So now they will have to rely on the movie studios attempting to put stricter rules in place for gaining access to its movies right away. Rules, that would seem to be basically prodding users to obtain those movies illegally.

If the studios are allowing some places like Blockbuster stores to rent movies on day one, but limit Netflix from doing the same, how many of the millions of Netflix users are going to drive to a Blockbuster store to get that movie? Some certainly will, but a lot will also turn to the web and simply download the movie. And some who have never done that before will learn how to get around such a ridiculous restriction.

And Blockbuster’s comments on this are pitiful. Having failed so far with its movies-by-mail approach, online approach, and set-top box approach, Blockbuster is now turning to kiosks. It hopes to have some 2,500 of them by the end of the year and 7,000 of them by next year. Some of their ideas for them are pretty laughable (a good example is the digital transfer of movies to portable media players, but no iPod/iPhone support, meaning that basically no one would use them), but more importantly, Blockbuster is against the two things that made this solution work for Redbox: Availability and price.

Keyes comments during the earnings call indicate that he believe the $0.99 price that Redbox offers its movies for is far too low for a sustainable model. He probably doesn’t mean for Redbox’s end, because they seem to be doing just fine — which is to say, just about the opposite of Blockbuster — using that model. Instead, he seems to be saying that Hollywood can’t survive on such a model, which again, is probably not true, but it’s good that Keyes is the movie studios new PR agent.

Here’s the best part of what he said though:

A vending rental window would enhance the complementary relationship between Blockbuster stores and Blockbuster kiosks. On Fox, Universal, and now Warner titles, for example, we can be far more aggressive in filling the store shelves with product to assure 100% availability of hot new releases. After 30 to 45 days, we can then make use of that product in our vending channel at a substantially reduced cost of goods, since that product will be partially amortized. Our customers can then use Blockbuster stores for depth and breadth of selection and assurance of hot new releases being available on Friday night or Saturday night. The customer can use vending kiosks then for value and convenience.

So basically, he wants to use the studio’s ridiculous 30-day window to prop up his own stores, which are flailing badly. He sees a movie rental ecosystem in which you get new releases from Blockbuster stores, and then slightly older options from the kiosks. Of course, both of those methods of getting movies are already dead, Keyes just doesn’t realize it yet.

He’s investing in these kiosks because Blockbuster has failed elsewhere to make inroads against competitors. But eventually, everyone knows that all of this distribution is going to go online, and then Blockbuster will be left with thousands of kiosks that are useless, just like its store are becoming. At least those won’t be the black holes for money that the stores are, I guess.

Supporting Hollywood’s ridiculous and dangerous idea to place 30-day rental holds on Netflix and Redbox, might prop up his failing brick and mortar stores a bit, but the idea that it will save them long term is laughable.

And Hollywood shouldn’t be tricked into thinking this 30-day rental window is a good idea because they have Blockbuster’s support. Blockbuster doesn’t matter anymore. And they well pay for that mistake in piracy.

[photo: flickr/gwaar]

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The presentation, which you can see for yourself below, is as interesting as any 128-page document can be. If you read it over, about half-way through, you’ll probably start wishing you worked for Netflix. This was meant to be an internal document for employees to read, but it’s also one hell of a recruitment pitch.

Early on, a lot of it deals with workplace efficiency, and not being afraid to let someone go if they’re not doing their job. The idea is that if someone just wants to do mediocre works, that’s fine, they’ll get a nice severance package. It extends this into an emphasis on effectiveness over effort — the company doesn’t want to necessarily reward people who stay late versus those who don’t, but get the same amount of work done. It then turns to some internal policies including management best practices. And then to retention practices — making sure the company pays the top people a high enough salary that they’ll never want to leave.

There’s a big emphasis within the company on salary, rather than stock options and bonuses. The thought is that you should give the employees as much money as possible up front and let them decide what to do with it.

This is all pretty interesting stuff for a fairly large, publicly-traded company. The emphasis is obviously not to act like other big companies do. Given Netflix’s recent successes, it would seem that the strategy is working. And yes, there is stuff in there about the vacation policy.

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Multichannel News wrote a story a few days ago that Netflix’s Watch Instantly streaming service would soon have an app in Apple’s App Store as well be available on the Nintendo Wii, citing an industry executive familiar with Netflix’s plans. Both of these devices would seem to play well into Netflix’s strategy of getting its service on as many consumer devices as possible (already it’s on the Xbox 360, Blu-ray players, the Roku box and built into a few TVs). But this rumor is interesting for a few reasons.

First, Netflix on the iPhone would be awesome, but you have to wonder if Apple wouldn’t worry about it cutting into services it already provides. That has been the basis for a few app rejections, and it would seem that with on-demand movie streaming, it would remove at least some of the need to buy movies for your device through iTunes.

Second, talk of the service coming to both the iPhone and the Wii is interesting because of Netflix CEO Reed Hastings‘ position on Microsoft’s board of directors. While I’m sure Netflix’s overall agenda is outside the influence of Microsoft, remember that Netflix streaming is currently only available on Microsoft’s Xbox 360, and none of the other gaming consoles. This is a big advantage for it in terms of being a living room entertainment hub (which all of the consoles aspire to be).

And one would have to imagine that Microsoft would love to see a Netflix streaming app on its Windows Phones (the artists formerly known as Windows Mobile phones) before it sees it on iPhones. I’m not saying that will happen, but that it may come up between Hastings and Microsoft.

Third, and most importantly, if such an app were to exist, it would undoubtedly bring up the AT&T bandwidth restriction debate again. While AT&T and Apple allow apps like MLB At Bat to stream video over the network, other apps, like SlingPlayer, are restricted to stream video over WiFi only. AT&T has stated that it doesn’t want all this video streaming to further clog its pipes, which is also why it would likely restrict a Hulu app that was rumored a few months ago.

But streaming over WiFi is significantly less interesting than being able to do so over 3G. If a Netflix streaming app were to be released and limited to WiFi, you can be sure it wouldn’t dampen the booing of AT&T that has been going on recently. The fact of the matter is that eventually apps such as this are going to need to work over cellular networks and not just WiFi.

Again, the existence of a Netflix streaming app on the iPhone is very much a rumor based on one source, but it is interesting for the potential can of worms it opens.

[via Hacking Netflix]

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It’s been a long road to get here. Over the last three years computer science teams around the world have been vying for the Netflix Prize — a competition that invited teams to try to improve on Netflix’s movie recommendation algorithm by 10%, with a reward of $1 million to the best submission. Since then teams have gotten progressively closer to the magical 10% mark, but it wasn’t until last month when a number of top teams joined forces to form BellKor’s Pragmatic Chaos that the barrier was finally broken, with a score of 10.08%. However, their announcement kicked off a 30 day last call period where other teams were invited to make their final submissions.

Last night, a team called The Ensemble managed to one-up team BelKor with a score of 10.09%, less than 24 hours before the close of the competition. Things were looking bad for team BellKor (some suggested that they might be out trying to drown their sorrows). But the team was clearly still hard at work — it managed to tie the Ensemble with a score of 10.09% with only around 24 minutes remaining in the competition. But they were to be foiled once more: with only four minutes left, The Ensemble struck back with a score of 10.10% to regain the top spot on the Netflix leaderboard. Soon thereafter a notice went up on the Netflix homepage stating that there were to be no more submissions.

This is all very exciting, but there’s a reason that Netflix has not yet annouced the winner, even though the leaderboard is quite clear. That’s because the Netflix prize is actually based on two sets of data. The first is called the Quiz set, which is used to publicly display how a team is faring to the public and to determine when the contest would kick into its 30 day last call mode. But the set that really matters, the Test set, is still a secret, and nobody knows if The Ensemble or team BellKor performs better. Netflix will make the final contest announcement in the next few weeks.

Update: Yehuda Koren of BellKor’s Pragmatic Chaos has posted on the contest’s forums that BellKor came out with the lowest Test score, though it appears that Netflix has yet to confirm this.

Thanks to Almir Karic for the tip.

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According to its homepage, the Ensemble is made up of two teams who chose to join forces: “Grand Prize Team” and “Opera Solutions and Vandelay United”. The Ensemble has just posted the following blog post to its official site:

We are happy today to have made a submission which surpasses Netflix’s 10% Grand Prize target. The Ensemble is the second team to do this in less than a month. We are very proud of our achievements, and those of our top competitor, Bellkor’s Pragmatic Chaos.

The competition will end tomorrow morning, so teams still have a little bit of time left to make their last-second submissions, but things are looking good for The Ensemble. This has to be absolutely brutal for team BellKor.

Update: With only minutes remaining in the last call period, BellKor’s Pragmatic Chaos submitted an entry that tied The Ensemble, with a score of 10.09%. Twenty minutes later, and only four minutes before the competition ended, The Ensemble struck back with a buzzer-beating 10.10% submission.

Thanks to TechCrunch intern Dan Romero for the tip.

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The stock is currently up over 7% in trading today, at an 11-week high. Sources seem pretty thin, based seemingly on stock analysis from places like WhatsTrading.com. And neither company is commenting. But the idea is a hot one.

Both Amazon and Netflix are in the midst of a full-on push to get digital video content into the living room. Amazon via its On Demand service, and Netflix through its streaming service. The two are battling the likes of Apple (with the Apple TV) and to some extent Microsoft (though Netflix also works on the Xbox 360 — and Netflix CEO Reed Hastings is actually on Microsoft’s board).

But combined, the two would offer a very formidable combination. The reason is that while Netflix mostly offers older titles through its streaming service, Amazon offers all the new movies. Netflix of course sends out new movies via DVD by mail, but that service will one day go away in favor of streaming or downloading.

Again, who knows if this is in anyway true, but the stock fluctuations don’t lie, something is up with Netflix right now. From Bloomberg:

Trading of call options, which give the right to buy the shares, surged to 11,477 contracts, more than triple the four- week average and five times the volume for puts, which give the right to sell.

[thanks Andrew]

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A couple years ago, Netflix began supplementing its DVD mail rental business with movie streams over the Web. for a few thousand select titles. Today, millions of Netflix customers stream their movies instead of waiting for them to come in the mail (or, more often, do both). ComScore Video Metrix estimates Netflix’s online viewership a bit lower at 645,000 unique viewers in March. They watched 6.9 million video streams and the average time spent watching per viewer is an amazing 128 minutes for the month, which is right up there with YouTube in terms of time spent (having full-length feature films helps keep people around longer).

You pay Netflix a subscription, and you can watch your monthly allotment of movies any way you want. Netflix doesn’t care where you watch your movies, whether it is on your TV, xBox 360, Windows Media Center, or other devices.

Streams still make up a small portion of the overall movies watched by Netflix customers, but it is growing as the company expands its streaming catalog, broadband improves, and computers become more like TVs (and vice versa). I ran into Netflix CEO Reed Hastings at the AllThingsD conference this week, and asked him in the video above how his streaming service is going and how its economics compare to that of mailing out DVDs. As you can imagine, it costs much less to stream a movie over the Internet than it does to mail it as a DVD. But Netflix ends up paying twice anyway because it already owns the movies on DVD. It has to pay the studios an additional streaming fee. The studios like that. “If the studios have their way, we’ll pay them two or three times,” quips Hastings. But he is resigned to paying wtice for movies he’s already bought. The way he looks at it, Netflix is paying the studios instead of the Post Office.

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On the surface, it seems like Hollywood is doing a better job of getting consumers to use their approved methods for transferring content over the web — but the reality is that it’s a mess. And the only reason piracy isn’t so rampant in the US is that our broadband speeds, for the most part, suck.

Sure, there are a lot of channels to get films legally over the web. iTunes, Xbox Live, Amazon, Netflix and Hulu are all doing a fairly good job at making the content they’re given, accessible. Unfortunately, it’s the content that’s the problem. If you go to any of those services looking for a specific movie, there’s a very good chance that it won’t be available. And that can be true even if it was available on the service in the past. It’s a nightmare.

Farhad Manjoo had a good article yesterday on Slate outlining some of the major problems. One of the biggest ones is that Hollywood’s archaic syndication rules are in play with digital distribution over the web. For example, Hollywood now gives some movies to services like iTunes for rental immediately or soon after they’re released. But because of the deals studios have in place with premium content channels like HBO, after the pay-per-view window closes (iTunes and the other services’ rentals systems are considered pay-per-view), these movies have to be pulled off of the rental services so that the premium channels can get their exclusive rights to broadcast them.

Those movies then stay exclusive to the premium channels for 15 to 18 months — let me repeat 15 to 18 months! And from there it only gets worse. After the year and a half in premium channel jail, movies then go to the regular cable channels and big networks for airing. As I understand it, some online rentals are again okay during this time, but then, they often go back to the premium channels for a second run. That means they get pulled once again.

This whole process often lasts for seven years or more, as Manjoo notes. It’s only after that time period that movies are really free to be distributed a bunch of different ways. That includes Netflix’s popular Watch Instantly streaming feature — so now you see why the selection of movies on that service is mostly older films. In fact, basically, the only newer ones they offer is because of their deal with Starz, the premium cable channel. That deal may have been one of the smartest ones Netflix has made yet, because at least it gives us access to some movies this side of 2002.

The fact that online distribution has to play in this foolish game of broadcast rights tennis, is of course, bullshit. The brick and mortar rental stores of yesteryear, like Blockbuster, don’t have to play by these ridiculous rules. Movies don’t vanish from their shelves because they’re playing on HBO for the next 18 months. If they did, Blockbuster would have been in trouble a lot sooner than its most recent woes (tied to its failure to get out in front of new forms of distribution).

So how can anyone really expect any of the online movie services to flourish under such restrictions? They shouldn’t, because none of them truly will until Hollywood changes these rules. And with billions of dollars at stake, Hollywood probably isn’t going to do it anytime soon. In fact, I’d venture to guess that the only thing that will force their hands is if services like BitTorrent, which people use to distribute pirated movies, continue to gain popularity as broadband access and speeds improve.

In other words, things may change when Hollywood starts getting screwed just like the music industry got screwed.

Seriously, search for a bunch of new movies you want on iTunes rentals, Netflix Watch Instantly and a torrent tracker. Which has the best selection? It’s certainly going to be the torrent tracker — and that gives you the movies for free.

The success of iTunes music store has proven that people are willing to pay for content (it’s now the largest music retailer, bigger than even Wal-mart), but the key factor is ease of use — of which, selection is a big part. It’s beyond frustrating to search a service for something you really want to pay to watch, only to find it doesn’t offer it. Hollywood is leaving money on the table.

I could go on about other ridiculous things is doing to screw up online distribution. For example, the fact that while a lot movies are available to buy on the day they’re release, most cannot be rented online until a few weeks later. But it’s all part of the same problem.

Hollywood is scared to embrace the move to online distribution. It’s still holding out hope that Blu-ray will catch on and become their next multi-billion dollar cash cow. That’s not happening. For most people, Blu-ray simply doesn’t offer enough of an improvement over DVD. Online distribution, with its instant access, does. Will Hollywood realize that too late?

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After watching your share of this year’s Oscar nominees, you might find yourself following the time-honored tradition of renting every tangentially related film in the hopes of finding something else just as good. Type in Slumdog Millionaire or The Wrestler, and Netflix will offer up recommendations that are “more like this.” But if you are looking for quirkier recommendations, the kind that you’d find at your local independent video store, then head on over to Clerkdogs. The human-curated movie recommendation site has an OscarMatch feature that suggests 400 films similar to this year’s crop of Oscar nominees.

On Netflix, if you are looking for movies that are like The Wrestler, for instance, it comes up with Requiem For a Dream (same director), Slums of Beverly Hills, Sideways, and Sin City (also starred Mickey Rourke). On Clerkdogs, it comes up with a bunch of down-on-their-luck fighter films: Raging Bull, Requiem for a Heavyweight, and Fat City, a 1972 boxing movie described as “equally downbeat.” The Mickey Rourke pick is the classic Barfly, which seems more appropriate, and the sleeper pick is a 2008 movie called Ballast, a movie about a poor family in Mississippi described as having a “similar style” as The Wrestler. I doubt any computerized recommendation engine would make that match unless it saw an overlap in people who rented both movies.

Take a look at the other nominees and you’ll find the same type of serendipitous recommendations. For Slumdog Millionaire , you get Monsoon Wedding and Salaam Bombay! Those make more sense to me than Netflix’s suggestions of Little Miss Sunshine, Trainspotting, and Thank You For Smoking. I’m not sure Clerkdogs’ OscarMatch always comes up with better recommendations, but it does come up with ones you won’t find elsewhere.

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Update: Sony, which makes the rival PS3, is not allowing movies from Sony Pictures to be streamed through the Netflix service to the Xbox.

Adding to the options of streaming movies to your PC, Mac, or TiVo, Netflix now streams 12,000 movies to the Xbox360. That includes 300 HD movies.

Xbox watchers have been waiting for this since last July. Add the Netflix streams with the Xbox 360’s Live Party feature and you can watch a movie with your friends remotely.

Bringing Netflix streams to Internet-connected devices is part of CEO Reed Hastings’ overall strategy. At the NewTeeVee Live conference last week, he talked about the need ultimately for browsers to become TV-capable. From NewTeeVee editor Katie Fehrenbacher’s notes of his talk:

We need web browsers — Explorer, Firefox, Safari, etc. — to play web on televisions. People tried it 10 years ago without success but that was in the age of low-speed dial-up. Today for the web-on-TV experience to begin we need broadband, high-def screens, and a pointer remote. The video game generation is quite comfortable with using a pointer on the TV.

Starting at CES next year I see breakthroughs for the web on television. The logical start is video game consoles — the Wii is so close, but we need high-def and to support modern codecs. Also built into televisions we’ll have Internet tuners. The issue with that is that device makers don’t want to bet too big on too-advanced tech, because then they could bet wrong on big devices. Web video will continue to grow, nurtured by PC and laptop-based ecosystem, then will expand to web browsers on the TV screen.

That web browser for TVs sounds like Boxee.

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In an interesting move by Netflix and Starz, about 2,500 featured movies and concerts are now available for instant streaming over the Internet and using the Roku Netflix box. Because Starz offers first run “premium” content, this move expands the overall streaming offerings from Netflix considerably.

My only complaint about Netflix streaming has thus far been movie selection – man cannot live on National Lampoon’s European Vacation alone, no matter how many times Rusty gets some – and this assuages that grief by adding first-run movies to the mix. The unlimited subscription with access to streaming content is $8.99 a month and the on-line library is up to 12,000 titles now, considerably more than when we tested the service a few months ago.

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Good for them. Instead of wading into a losing battle over cheap downloads and rentals (see Vudu, BlockBuster, AppleTV, Google, etc., which charge for each movie), they jump right to free. They know what the consumer wants.

Of course, the service isn’t really free. Users have to buy the $100 box, and continue to keep a Netflix subscription active ($18/month). There are 10,000 movies available on on the box, which is significantly less than the 100,000 or so titles on Netflix’s DVD mailing service (and it’s old titles, not new releases). But it’s also an order of magnitude more titles than are currently available on demand via Comcast, my cable provider. And just like Comcast and the other cable guys adopted Tivo’s DVR functionality into their boxes before Tivo could do much damage, look for them to eventually copy Netflix, too, and offer a much wider variety of on demand content.

Netflix is taking a big financial hit with this service, which originally launched via PC viewing only and has since expanded. Last year they said they were putting $40 million/year towards licensing and overhead costs.

But really, what choice do they have? BlockBuster is gnawing away at one side of their business (physical DVDs), while online services (and don’t forget BitTorrent) come at them from the other end. And now the cable companies will be focused on them, too.

It’s a wonder Netflix continues to flourish in such a hyper competitive market. They now have over 8 million subscribers, 21% more than a year ago, and 32% gross margins on their core business. Those margins have decreased somewhat, what subscriber acquisition costs have also dropped from $47 to just $30 per new member. But as long as they continue to give consumers what they want, they’re at least in the game.

Look for more devices with Netflix built in, including one from LG, later this year.

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The Netflix Player by Roku is the first in what portends to be a long line of devices designed to download and stream movies from Netflix. While in its current incarnation the device is fairly limited, I can firmly recommend it with the expectation that the movie selection will improve.

How does it work? You buy the box for $99 and connect it to your TV via HDMI, composite, or component. You connect the stereo outs to your receiver or run out digital optical. You must have a Netflix account to make it work, but then you simply connect the box to the Internet via Wi-Fi or Ethernet, send a request to Netflix, and then type in a code in your Netflix account. The box is paired and you’re ready to add digital movies to the box.

The movies are mostly oldies but goodies. There were very few first-run titles in the mix but there were older seasons of some popular television shows like Weeds and The Office. Right now there are about 10,000 titles in the mix, enough to keep most die-hard movie fans occupied. The only problem is that some of the movies I really wanted to watch from Netflix — which are already available on DVD — weren’t available for streaming. This is not Netflix’s fault, obviously, but if you’re a first-run movie fan I’d stay away from the box until you’re sure the service is for you. At $99, the box isn’t prohibitively expensive and the technology may end up in televisions soon so questions about an external box might be moot.

Full story at CrunchGear.

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After years of negotiating with the movie studios, Steve Jobs finally got them to agree to put their movies on iTunes the same day as they release them on DVD. Now, in addition to Disney—which has been selling movies on iTunes since September, 2006—Apple is distributing 1,500 films from 20th Century Fox, The Walt Disney Studios, Warner Bros., Paramount Pictures, Universal Studios Home Entertainment, Sony Pictures Entertainment, Lionsgate, Image Entertainment and First Look Studio. New movies can now be purchased for $15, or rented for $4 (older movies are $10 for purchase or $3 for rental).

Apple watchers have been expecting this for a long time. It announced a deal to distribute rentals in January, and even that leaked out beforehand. But both Amazon and Netflix already have their own movie download and/or streaming services. And both offer more titles—Netflix has more than 6,000 and Amazon has nearly 12,000. (Although, Amazon may be rethinking its Unbox service).

It was only a matter of time before the studios relented and struck a deal with Apple. They could only stand on the sidelines and watch Disney ring in the coin for so long. The idea of distribution windows is so Twentieth Century anyway. How long before movies appear online the same day they hit the movie theaters? Come on Steve, we’re counting on you.

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It’s an argument I want to support and many of you reading this will feel is a sound one, but it’s not going to happen anytime shortly. Here’s a few reasons why

Old Habits/ Age Dies Hard
I’m probably in the last generation who will ever remember a world without widespread computer use and internet everywhere. Younger generations (often called the “digital generation”) only know a world where anything can be accessed or downloaded at the click of a mouse button. To paraphrase many a politician, the young people are the future, and the next generation has nearly already abandoned CD’s, and physical media like DVDs and Blu-ray are next. But that doesn’t account for the many others who, as Rob Beschizza points out, already buy DVDs by the millions and will likely buy Blu-Ray now that HD wars are over (and as they did before DVD’s with VHS). Substantial generations have grown up with physical media, and this isn’t about to change tomorrow. Like music downloads though it will start to change, but like music that is going to take at least 5-10 years.

Access (or I want to watch movies on my TV)
I asked my mother the other day why she hadn’t downloaded something (legally of course) after she had purchased the physical media instead. Her response was simply that she didn’t want to watch it on her computer. Although many reading this will never give a second thought to watching video on their computer, there are still people who prefer consuming video on their TV sets. To be fair, HD on a 1080p 40″ TV set provides a better experience that on my 17″ Macbook Pro, although the TV set doesn’t easily come to bed with me.

There are ways of brining digital downloads to TV sets, but none have anywhere near the penetration yet to offer a serious alternative to DVD and Blu-Ray. Apple is now offering HD movie downloads via their Apple TV box, but try and find more than a handful of people who own an Apple TV. Others offer a similar service such as Vudu, and there’s even Microsoft Media Center, and yet none are mainstream. Until such time net or network enabled devices become mainstream, TV and physical media will retain the upper hand.

Broadband limitations
The US internet community cried long and hard when Time Warner announced it was considering capping downloads on its internet plans in January, and yet I’m sure most non-Americans reading about it would have simply said welcome to our reality. The problem going forward is the days of cheap unlimited internet access in the United States may well be coming to an end as more and more download video and use P2P services. The low cost of bandwidth itself was a historical quirk that came about due to the first dot com bubble. That extra remnant capacity is being used now, and the costs of increasing capacity will likely be passed on to consumers. If this means more capped internet plans that immediately puts a constraint on the amount of video that can be downloaded. Outside of the United States this is already the case with capped plans in many countries, restraining potential growth in downloads (simply users will only be able to download so much content.)

Combine this with the need for high speed internet access that isn’t universally available. Digital video will not become dominant where it takes hours, sometimes days to download, when users can simply rent or buy the title on physical media.

Conclusion
As I said in the introduction, I’m all for the supremacy of digital downloads. I own two net enabled TV devices, a Zensonic network DVD player that allows me to stream content from any computer in the house or my NAS drive to my main TV set, and I’ve recently added an Apple TV to my line up. I wouldn’t swap this setup, and yet I’m still in the vast minority. Blu-Ray will likely be the last big/ mainstream physical media technology ever and it will have a strong future. The various factors needed for mainstream digital downloading and viewing will eventually combine to finally kill Blu-Ray (and the domination of all physical media) sometime between 2010 and 2020.

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Netflix

The move is said to be in response to the expected announcement by Apple CEO Steve Jobs at the Macworld Expo Tuesday that iTunes will offer movie rentals from most major studios. The expected price of the iTunes rented movies is $3.99 each, putting Netflix is a competitive position for high value regular movie watchers.

Netflix has previously offered limited movie streaming to its 7 million + customers, but capped the streaming access at 17 hours a month.

According to AP, the offer will not be available to Netflix customers currently on the $4.99/ mth 2 DVD plan.

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LG Electronics is not saying much about its networked set-top box other than it will be available in the second half of 2008 and will include access to Netflix videos. The problem is that nobody is going to go out and buy a set-top box that can only let you watch movies from Netflix. Anyone who buys this set-top box will most likely buy it for another reason.  The ability to stream Netflix movies to their TV will be just a nice added bonus.

An LG electronics spokesperson told me that there would be other features as well, but would not specify what they might be. Some possibilities: a combo set-top box and Blu-Ray/HD-DVD player, a networked set-top box that streams video from other Websites besides Netflix, a Windows Media Center Extender with WiFi that lets you stream all your music, photos, and personal videos from your PC to your TV, or all of the above.

But no matter what bells and whistles it comes with, any after-market set-top box is a hard sell. Who needs yet another set-top box under their TV? People only have room for a few boxes in their living rooms, not to mention the hassles of wiring it up to a broadband modem that may be in another room. Until Netflix gets this feature integrated into the set-top boxes distributed (and subsidized) by the cable and satellite TV companies, it won’t make much difference to Netflix’s overall business. Netflix has indicated that this is just the first such set-top box deal and that it will try to strike more with other set-top box manufacturers. (Maybe it should talk to Google about including Netflix in Google’s secret set-top box project). Before it gets to critical mass, though, Netflix might have to pay for carriage on some of these devices, and it will take years for it to gain meaningful distribution in American homes.

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When Evan DiBiase bothered to look at the code of the new version of iTunes and compare it to the last version, these eight lines popped out at him:

rental-content

rental-bag

rbsync

source-rental-info

dest-rental-info

getvodaccountselectionlist

GET VOD ACCOUNT SELECTION LIST

supportsRentals

Apple has not announced anything on the movie rental or video-on-demand (VOD) front, but these lines suggest that these options may be turned on soon. It is not clear what the difference between a rental and a digital VOD would be. Perhaps the VOD option will be for Apple TV?

When it comes to movies, rentals are more appealing to consumers, who tend to watch most movies only once or twice and have been trained to rent them cheaply. Who wants to fill up their hard drive with huge movie file downloads that cost $9.99 apiece? (A digital rental would presumably disappear after a certain time, as opposed to a permanent download that you might be hesitant to trash after you watch it because you actually paid for it). Sounds like Apple is finally coming around to the realization that movies are for renting. Too bad Amazon and Netflix are already way ahead of Apple on the digital movie rental front.

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