ENVISIONEERING -- Informed Intelligence for Decision Makers Jan 7, 1997   In This Issue DVD Perfecta? Sony Bets on Sftware, Player Quality Hundt Sets Agenda For 1997 And FCC Influence Surges..... .....Priority Actions For The FCC in 1997...... Old Soldier Quello Departs, Marking Power Shift New Encryption Rules Still Don't Pass Industry Muster   In Our Opinion... On Delivering Digital ...And Apple's Future DVD Perfecta? Sony Bets on Software, Player Quality By RICHARD DOHERTY The potential of DVD is virtually unlimited. Even the poorest quality transfer DVD will bring more new visual quality to TV screens than has any other medium, and it may by itself tame the emerging monsters of digital cable and Digital Broadcast Satellite. Who knows, perhaps consumers will once more be tempted to build personal movie and performance libraries. But the chances of success will only be the greater as the quality of the DVD image increases, and there are three ways to assure that: Make a better source DVD title, make a better DVD player, or do both. It should come as no surprise that it's Sony which has apparently accomplished the feat. Judging by the demo late last month of the Sony Pictures movie Jumanji, which was certainly the best VBR MPEG 2 imagery so far displayed, Sony's initial movie software and DVD player products won't disappoint. What is not yet clear is how studios other than Sony Pictures or Sony Wonder will get access to this higher quality DVD authoring. A reasonable assumption, though, is that Sony's professional video group will offer select MPEG 2 and DVD authoring tools to established digital video post houses. This approach carries a certain technical risk. Efficient Variable Bit Rate (VBR) encoding of DVD movies, the kind Sony employs, requires multiple examinations of the source material so that the most efficient encoding is possible for highly detailed and fast-action movie sequences. However, Sony Professional Video is the dominant force in digital video post production in the world, and is as well positioned as anyone to succeed with VBR MPEG 2 encoding. Success could also lead to even greater things. There is currently no agreed standard for VBR MPEG 2, and probably will not be for some time. It's more likely than not, therefore, that the format recognized as providing the best quality will become the industry's defacto standard, and for that Sony definitely has the lead. Sony will initially master titles in Japan, and at its huge Terre Haute, IN, DADC plant due to come on-line later this year. Sony executives foresee 1997 sales of some 500,000 players industry wide, with around 10 million a year projected by 2000. Sony's initial DVD player will retail for about $1,000 and arrive in mid-Spring. It features a slick motorized platter drawer and front panel, with 2X, 10X and 30X forward and reverse scan modes. The aspect ratio is selectable between a 4:3 scan andfull letterbox display. Video outputs are composite, S-video and component R-G-B, all sure to appeal to the home theater purist that Sony is hoping will be the main buyer during the early adopter phase of marketing. It uses discrete optical pickups and processing logic for both DVD and CD-style media, dispensing with both lens swapping and correction platters. Dedicated optics are optimized for each style of media. This may seem an unnecessary frill, until you take into account that bit streams and data rates of each media, at least for now, are best fed to dedicated paths. Structurally, the player uses a honeycomb chassis to ensure rigidity of all the components while keeping overall weight down. Sony expects to reveal more details of its video approach at this week's Winter CES in Las Vegas, though suffice to say it is using 10-bit deep video D-to-A converters to deliver the ultimate in video decoding quality and color purity. The company expects great things will quickly come its way through this investment in DVD. It will use Sony-enhanced MPEG on its VIAO line of premium consumer PCs, for example, with Sony DVD-ROM drives being used in both its own PCs and in rivals' systems after their spring introduction. It also expects the rapid growth of DVD to provide it with an excellent opportunity to start a DVD-ROM content business. Ben Feingold, president ofSony/TriStar Home Video, sees DVD as the best possible way to realize Sony's corporate dreams for quality content, authoring and replication. Also, to Feingold it's not just a visual medium. Audio format specs are being debated and, with talks continuing in earnest among most of the industry's representative organizations, he expects the format to be decided "in the very near future." Audio will be an excellent way to build value for the entire Sony TriStar catalog, he believes. "From MTV to Anime, we expect DVD titles to be broad in variety and style," he said. "Remember, LaserDisk did very well with music videos." For the future, Feingold and others at Sony do not seem bothered about any initial lack of consumer DVD recordability since they believe that consumers, even at the $3,000 price discussed by some Sony rivals, are not that concerned about recordability and won't be for a while, "at least, not in this decade." Further in the future, Feingold expects the features of Internet sites such as Sony's to be enhanced by the capability offered by the local storage capacity and quality of DVD to create a new category of interactive titles. DVD, he thinks, will also help with some of the thorniest issues affecting digital entertainment. For one, he expects replication investments to be so huge for some time to come that it will not affect DVD the way that VHS piracy has, giving Sony a low-risk way to grow its business in regions such as Asia. Unresolved Hollywood copyright issues should be dealt with by this spring, leaving the way open for a stream of DVD offerings. Initial titles will include Jumanji, Fly Away Home, Taxi Driver and such old staples as From Here To Eternity. In all, Feingold said Sony will have the capability of delivering between 25 and 50 titles in the first year of operation to 52 countries, with pricing "in the Laser to VHS range." More than anything, however, Feingold realizes that the pent up expectations of DVD have to be realized if Sony's projections are to be met. Led on by media hype, many consumers thought they would be able to buy DVD players this past Fall, he admitted, and "That is where many consumer electronic dollars went this past Holiday season, in the form of credit cards poised to buy DVD players and titles. But we had no goods for them to purchase." Which is the immediate dilemma the DVD industry has to address. After all, a consumer's desire to spend is a terrible thing to waste. [ Back To Top ]   Hundt Sets Agenda For 1997 And FCC Influence Surges..... By BRIAN ROBINSON The received wisdom of political Washington in 1996 was that, with passage of the Telecommunications Act in February and the gradual "deregulating" of the communications industries, the Federal Communications Commission would become less influential and, eventually, wither away for the lack of anything to do. Not for the first time the pundits bombed and the FCC, heading into 1997, will have the first and last say in many pivotal decisions. If anything, the commission will be even busier than during the last year, encumbered as it was by some ridiculously tight deadlines set by Congress in formulating rules to implement the Telecommunications Act. It still has a lot of those rules to construct and issue, but commission chair Reed Hundt is also promising other FCC actions above and beyond those required by last year's Act. In a highly unusual, 30-page memo published the day after Christmas, Hundt alluded to these added FCC responsibilities. Implementation of the Act remains the commission's primary day-to-day agenda, he wrote, but referred to the legislation as "part of a larger movement to a competitive communications marketplace, to equitable public benefits from communications and to a smarter, slimmer Commission. "During the next year this Commission will take numerous actions designed to move us toward that competitive marketplace in communications and that general enjoyment of public benefits from communications." Indeed, Hundt seems to be taking very seriously Congress' charge that the FCC issue decisions to promote competition in the communications and video industries. His hand is strengthened by fears over the number of major mergers of telecommunications companies of the past few months, and the reluctance of companies to cross-compete in the video and telephony markets, which was one of the results expected of the Telecommunications Act. His memo is laced with this pro-competition bias. One of the FCC's guiding principles, he wrote, is to "Make sure that the discovered truth about competition is nowhere frustrated by the chronic urge to monopolize. Like a Hindu tale of the struggle between good and evil, the battle between competition and monopoly will last as long as the markets exist. And government should always be on the good side: the side of competition." Elsewhere he referred to the "inevitable and imminent" convergence that has been predicted for some years, through which cable would provide telephony and telephone companies would offer cable service. "We still hope that eventually cable companies and telephone companies will compete with each other in all geographic markets," he said, "but as of now expectations for a full front two-wire war are not being met." The self-important tone of the memo aside, it's clear that Hundt feels the FCC is in a more commanding position than it was this time last year. Then, opponents of the commission were crowing about its irrelevancy in a new age of deregulation and competition, and were eagerly predicting its inevitable demise. However, the rush to the new age has thrown up problems of its own, and the need for some continuing federal oversight has only been reinforced, at least for the foreseeable future. As much as its detractors in industry and Congress would like to see it go away, the only agency capable of this right now is the FCC. And Hundt knows it. That's why he feels confident enough to trumpet his 1997 agenda, and even to hint at requests for more funding for the FCC. [ Back To Top ]   .....Priority Actions For The FCC in 1997...... Among the slew of actions he intends the FCC to take, Hundt mentioned the following as some of the high-profile issues: Interstate access reform and universal service: Hundt described these as the "key proceedings" that the FCC will undertake in order to remove the economic barriers to competition. Both will be addressed by April. He hoped that the "key tenets" of a reform plan would be in hand sometime in February. Development of phone networks: Ways should be found to encourage investment and innovation in the networks "protected by our dominant telephone companies," Hundt said. The FCC will begin a proceeding to do just that sometime in February or March. Broad access to bandwidth: The availability of high-bandwidth communications is recognized as potentially the main problem to future development of the Internet. In January the FCC intends to convene a forum to examine what economic and regulatory barriers might be preventing that availability, and what can be done to foster use of packet-switched services. Spectrum use: The auction of spectrum for Personal Communication Services is seen as one of the greatest recent successes for the FCC, and Hundt wants to build on that. Commission staff are preparing a "spectrum policy paper" that will provide guidelines for future FCC decisions that will enable "rapid deployment" of spectrum. DTV: Now that the amended standard has been adopted, Hundt will push for a vote on channel allotment and service rules items before the scheduled April 1 date. He plans to resolve quickly issues for the auction of spectrum now allocated to channels 60-69. Multichannel video and LMDS: The FCC sees this as a bright spot in the video programming market, and intends to adopt final allocation and service rules for LMDS in the first few weeks of the new year, and to set LMDS spectrum auctions for early in 1998. Unlicensed wireless: The FCC is preparing a final report and order that will establish rules for an Unlicensed NII Spectrum to be used by unlicensed devices for high-speed data and multimedia video transmission within buildings, campus settings and along community networks. [ Back To Top ]   Old Soldier Quello Departs, Marking Power Shift By BRIAN ROBINSON James Quello, who was nominated as a commissioner by Richard Nixon in 1974, will be leaving the Federal Communications Commission, probably some time in 1997. With him will go a good part of the institutional memory of the commission, and it could mark a formal shift in emphasis in Washington away from the old guard of broadcast and telecommunications industries. Quello's term at the FCC actually expired in June of last year. He continued serving as a commissioner because the Clinton administration failed to nominate a successor. However, it is set to do so shortly and, probably mindful that his stock with the White House is low, Quello has opted to leave on his own terms by asking that the administration not nominate him to another term. Though he has his supporters in Congress, Quello has been at odds with the administration in his defense of the broadcast and telecommunications industries. And though his public relationship with FCC chair Reed Hundt has been cordial enough, there's no love lost between the two. With Quello's departure, Hundt's hand in setting the FCC's agenda will strengthen. For broadcasters, this is certainly a blow. Quello has been the industry's major defender on the commission and, though remaining commissioners Ness and Chong have offered their support of some broadcast positions, they are not considered the equal of Quello when it comes to influence and the ability to maneuver FCC positions. With Hundt clearly in the driver's seat, the FCC is likely to be a colder place for broadcasters. As shown in the recent Digital TV proceeding, Hundt favors a dilution of what he considers to be outdated broadcast views in favor of policies that actively promote other video outlets, such as personal computers. In a recent memo outlining the FCC's 1997 agenda, Hundt said the recently adopted DTV standard effectively "killed the idea that DTV broadcasts only to DTV receivers." It means that DTV (as it would have been under the "old" acronym of HDTV) won't be just TV shows "glossed up" to a very high resolution. "It opens a whole new world of opportunities for broadcasters to transmit multimedia, including voice, video, data and software," Hundt said. It also provides the computer industry with a much more amenable path into the broadcasting business, something the broadcasters have been trying to resist on the not-altogether unreasonable line that, since they are putting in most of the investment for development of the medium, they should be the ones to benefit the most from DTV. They view the computer companies as unworthy upstarts, if they consider them at all. Hundt is looked on with disdain by many in the broadcast industry. Their feelings have only been heightened by Hundt's partisan support of the computer industry's position in the fight over DTV. Now that Quello has gone, they should expect little support from the FCC in future dealings. The White House has so far not announced its nomination to replace Quello. He could stay on throughout the rest of the year, if none is forthcoming. However, Washington observers expect a nomination soon. FCC counsel William Kennard currently leads the pack of contenders. [ Back To Top ]   New Encryption Rules Still Don't Pass Industry Muster By BRIAN ROBINSON The Commerce Department last Monday issued final rules for a new policy on "liberalized" exports of encryption products. But it is little changed from earlier draft versions that the U.S. computer and software industries had criticized as too little and too constricted to be of value in the global reality of the Internet. The Business Software Alliance, one of the major industry groups involved in the arguments over encryption, said it "seriously doubts the regulations will work, meet computer user demands, or be accepted by the private sector" unless the Clinton Administration changes its approach. If it doesn't, the BSA warns, "the new policy is destined to fail just like its predecessor Clipper efforts." The to-and-fro over encryption is an old game in Washington. During the Cold War, the access of the U.S. and its allies to encryption products which seemed far in advance of anything the Soviet Union had, was considered a vital strategic asset. Consequently, export of encryption products was regulated closely under the same munitions laws that governed other vital goods such as nuclear materials. The new rules at least recognize the Cold War thaw by switching responsibility for oversight of encryption exports away from the State Department (and its behind-the-scenes collaborators in the Defense Department) to the Commerce Department. However, security concerns still drive U.S. encryption policy, only now they are aimed more at domestic law enforcement. The Federal Bureau of Investigation has been campaigning for a number of years for legislative acceptance of its belief that the new digital age presents problems to law enforcement that analog technology never could. Tapping into old-time phone or radio conversations, for example, was just a matter of time and effort. But digitized communications can be protected with almost unbreakable encryption, which poses wholly new kinds of problems. The new export policies are nothing less than the administration's attempt to strongarm American industry into complying with an FBI-inspired "key recovery" system. In this, encrypted products employ both public and private "keys" which are used to de-encrypt software by the commercial user. The government wants companies, in return for being able to export encrytpion products, to sign on to a scheme whereby law enforcement agencies such as the FBI, under court order, can gain access to a user's private key when they need to. Various arguments against this approach have been raised. One is the obvious concern of privacy. A user's key would be held by a "trusted" party, according to the government, but there has so far been no satisfactory definition of "trusted" that has been able to satisfy critics' fears of potential abuse. Industry groups have acknowledged the desirability and commercial demand for products that enable the recovery of stored encrypted data, but they see no use for key recovery applied to real-time communications, which the government's new export policy requires. And this is at the heart of industry's concerns over the policy, since most of the new encryption features in both software and hardware products are aimed at the Internet. Industry also is concerned over the limits the policy places on the strength of exportable products. It has argued for liberalized (i.e. non-regulated) exports of at least 56-bit encryption products, and the ability to export 128-bit products for such things as financial applications, though with safeguards. However, under the rules published last week, 56-bit exports must still undergo licensing and review by the Commerce Department, this time under FBI scrutiny. Industry casts the situation as one of jobs and international competitiveness. Without the unhindered ability to provide strong encryption in products, it believes American companies will lose out in major global markets to others not encumbered by U.S. export laws. Fast Time to market is essential, particularly in these days of explosive growth in the Internet, and U.S. companies fear the time and trouble needed to comply with the new rules will strangle their abilities to react. In truth, a lot depends on how the new rules are interpreted by the Commerce Department. Under the old regime, the State and Defense Departments proved relatively inflexible and national security won out, in most cases, over economic opportunity. The Commerce Department then was industry's champion. National "economic" security is supposed to be a watchword for the new age in Washington, so who knows how the new system of engagement will swing? If you want to know more about this, you can download a full version of the final rules at http://jya.com/bxa123096.txt, or talk to the Commerce Department's Bruce Kutz at (202) 482-0092. The BSA's objections can be seen at www.bsa.org. [ Back To Top ]   IN OUR OPINION.......   On Delivering Digital This past retail selling season was not all some in the consumer electronics industry had hoped for. But as the Winter CES this week witnesses the introduction of more new digital consumer electronics products than all the previous CESs combined, the industry faces new challenges and opportunities to deliver the magic of digital technology. Is there a race between the PC and consumer electronic industries? You bet, and it's a fierce one. But it's also one that we believe will make consumer electronics stronger, with higher margins and surging recurring service revenues that will leave many in the PC industry wondering just how it happened. We never cease to be amazed at how simplistically the PC industry tends to brand consumer electronics product development, manufacturing and distribution opportunities. It's not nearly as easy as it looks. That's one reason why so many more Silicon Valley executives and PC makers from around the globe trek to Las Vegas each January, and why many again will visit the CES next June in Atlanta. There is a dark side to digital PC technology: All too easy copying, piracy and transferring of digital content, which justifiably scares many studio executives in Hollywood, as well as their counterparts in London, India and elsewhere. These fears exist more through ignorance than fact, but nonetheless they do exist and they must be overcome if the consumer electronics industry is to succeed in future markets. In fact, the industry has a better chance of delivering new products, services and content than the PC industry, despite the latter's heady growth and voluminous sales figures. CEMA alone has far more more experience in helping Hollywood and TV broadcasters enter new businesses than the entire PC industry. That will be a distinct advantage as digital content and delivery appliances become increasingly tied together. Walk the floor of the Winter CES, and you'll see far happier people than at any recent Comdex. The CES is a good show, a fun show, and a great place to do business. Make the most of it that you can. So far, there's no other place like it. [ Back To Top ]   .....And Apple's Future Speaking of PCs and digital technology, however, we should be keeping at least one eye on the Macworld show in San Francisco that's also happening this week. From its very beginning, Apple Computer has delivered innovative digital solutions. Despite the inroads being made by Intel and Microsoft, it's probably no stretch to say that Apple is still far ahead in delivering digital PC technology. We've as much idea as anyone else about what the future holds for Apple. Perhaps we'll get a better notion after this week, after Apple chief Gil Amelio and Steve Jobs have a chance to lay out their vision. Whatever happens, it's vital for the future of digital technology in all mediums that a strong, confident and persistent Apple be the result. [ Back To Top ] Questions, Comments? We would like to hear from you! All contents are Copyright © 1998, The Envisioneering Group.