When I was ten, my grandmother offered to give me her piano. I wanted it, but my father said no.  So I got a crappy guitar instead, took a few lessons from some folkie and quit.  Then, around fifth grade, my friend Allan and I started listening to his dad’s old Beatle records.

It was, to paraphrase Keith Richards, like the world went from black and white to color.

For the next ten years, guitars were the center of my life. I loved the power of them, the beauty of the bodies, the variety and the imperfection of them (when you think about it, an Em11 tuning makes absolutely no sense). I played an average of three hours a day, became a composer, started an indie label, was a musician for a decade and a half, till I left for this weird new thing called “digital” in 1993… in retrospect, all on the initial thrust of that love.

Then I got caught up in digital video, coding, birth of the web, games, interactive TV, all of this stuff I love.  By 2003, I had been working in digital full-time for 10 years, been at DIRECTV for three. I was getting bored. In the wake of 9/11, I missed New York – for some reason that got me playing again.  The only difference was that now I could afford the good stuff. So I went on a tear, collecting guitars and gear, playing a lot, picking up where I’d left off.

If you’ve never lived with a guitar geek, you’re not missing much. We’re like golf geeks but we sleep late. Like fly fisherman without the exercise.  Guitar geeks debate what year companies moved out of their Kalamazoo factory. They sneer at those who use .008 strings instead of the manly .013. They argue whether it’s shrewd or retarded to put fiberglass in F holes. That’s the world I rejoined.

In the process, I found a patron saint of lunatics, a man whose rants on the stupidity of big guitar makers and other companies – how to do things right, which only a handful of Earthlings did, apparently– left me speechless.  I read everything he wrote.  He was insane. He was a genius. His name was Ed Roman.

I called him. He owned a guitar in Fairfield CT but was sick of it. Lots of headaches, traffic, various idiots. He was shutting the place down and re-opening in Vegas. It was not going to be another McShitburger Guitar Center, he told me:  it was going to be a guitar palace. Only the very best, handpicked Paul Reed Smiths – not the post-95 ones with the absurd neck heel. Whole rooms of Rickenbacker 12 strings. The best arch tops. Custom made solid bodies from exotic woods.

Holy shit, I remember thinking. This guy building Heaven.

He did. I watched the pictures go up on his new site.  I drove to Vegas, played twenty guitars for six hours and spent $9,000.

Life went on, as it does. My guitar room became my daughter’s bedroom. I missed my old friends, in their cases, but I’d been through it before. When I had lunch with my friend Fred Goldring (another guitar guy) and talked about it, he said ” You have to play. You need to.” He found the time, and he was a busy guy.

I knew he was right, but I didn’t do it.

When we decided to get a second place in Vegas, I had a secret joy: I would be down the road from Ed Roman Guitars.  I thought about that as we packed in the heat and looked at houses. It kept me sane.

I’m in Vegas this week. I’ve been missing playing a lot. So yesterday, in a burst of energy, I got in the car and called the store.

Turns out Ed Roman passed away two weeks ago. The store shut down a ways back. In seven years of trips to CES and NAB, every time I’d come to Vegas, I always meant to stop off and play. I never did.

I never really knew Ed Roman. I spoke to him maybe five times on the phone and met him in his store maybe four times.  But I miss him.

All of this is essentially meaningless except to say: if you love something, do it.

Here’s to you Ed.

Founded in 2007, Hulu has done a superior job, creating a great user experience for online TV. Unlike most big media-funded video sites, Hulu’s interface is clean and modern. Unlike Netflix, its TV offering is fresh and current.  Its ad products have been increasingly forward-thinking, and have penetrated the majority of major American brands.

Creating revenue in online content isn’t easy for anyone. It’s especially trying when your business may threaten the companies that own you. Hulu’s team has built a business while walking a tightrope… maintaining a free high-quality service while keeping the fears of its media owners (News Corp/FOX, Comcast/NBCU and later Disney/ABC) in check. The departure of both the CEOs (Chernin at FOX and Zucker at NBC) who approved Hulu in the first place, and the acquisition of NBCU by Comcast, added to the challenges they surfed.

Hulu is a fascinating company. I’d argue that it’s the most interesting company to watch in Over the Top, largely because it’s such a different animal. Compared to Netflix,Google, Apple and Amazon:

1. Hulu is the only one not publicly traded
2. Hulu is the only one owned by Big Media
3. Hulu is the only one not routinely floated as the Second Coming

As there have been for Netlflix, there have been a rough days. One occurred when Viacom pulled The Daily Show and The Colbert Report from Hulu in March 2010. This was not a surprise, and had more to do with the economics of traditional distribution than with anything Hulu could have controlled for. I presented the details at SXSW that year (email me if you’re interested) and summarized the economic threat that cannibalization of these big Comedy Central shows could have posed during Viacom’s renegotiations with its MSO partners.

A second drama occurred at the resolution of the Viacom standoff, when CEO Jason Kilar issued a very public, Jerry Maguire-like manifesto on the appropriate future of the TV in Feb 2011.  It included several reasonable arguments from an unlikely source… such as “Traditional TV has too many ads”, which were well-received by the public, but not so much by the folks who owned the company.

While tensions may have flared, Hulu’s viewership has continued to grow steadily – a fact reflected by New Corp’s COO Chase Carey’s public statements, which have moved from skepticism about free models, to a recent assertion that Hulu’s value “dwarfed some of the values that were being put on it”.

Hulu itself primarily a free service.  But Hulu Plus, a $7.99 per month subscription service (a price comparable to Netflix), was announced in July 2010, opening the door to new subscription-based revenues on the types of devices which Netflix has dominated. According to another blog post by Kilar, Hulu Plus was on track reach one million paid subs in 20011, and “on pace to approach half a billion in 2011 revenue”.

Another major asset for Hulu, I’d argue, is a widely unrecognized reality of the media buisiness itself.  This is that the most profitable area of the media universe – by far – are cable television networks.

Why does that matter for Hulu and Netflix?

Here’s why.  Netflix reported 21.45M streaming subs and 13.9M DVD subs last quarter.But Netflix controls virtually no content; it licenses the vast majority of its shows from the Big Six media companies – who could one day take a page from the HBO/TimeWarner book and decide to boycott Netflix.

Contrast this with Comcast, who have around 21-22M TV subs (roughly the same number, give or take).  But they control NBC, CNBC, MSNBC, Bravo Networks, USA Networks, Syfy, Telemudo, NBC Europe, CNBC Europe, NBC Asia, CNBC Asia, E Entertainment, Style Network, G4, the Golf Channel, Versus… plus Universal Pictures and its motion picture distribution assets: Imagine, Illumination, Mandalay, etc… as well as over 14 million broadband subs.

Now consider Hulu. It’s owned by Comcast, Disney and News Corp (Comcast ceded NBCU’s voting rights as part of the acquisition but still has the equity) and Providence Equity. This means that Hulu’s owners control all of the content sources listed above… plus ESPN Networks, FOX Broadcasting, ABC, Pixar, Disney Pictures, Marvel, Touchstone., 20th Century, FOX Searchlight, FOX Sports, FOX News, the SKY assets, STAR in Asia, Disney Channel, A&E, History Channel, Lifetime etc.

Not a bad place to be in a content war.

The recent big news for Hulu was this summer’s announcement that it was for sale. Breathless reports handicapped leaked bids from Google, Yahoo, DIRECTV, DISH and others. The truth was that an acquisition never seemed particularly likely.  As I’ve said before, if Comcast, Disney and News can get $2B for Hulu, it’s a nice payday for a company that has run (compared to YouTube or Netflix) very modest expenses… and which is still almost completely dependent on the long-term rights granted by the very people selling the company.

Some smart people have been skeptical about Hulu. These include Barry Diller, who speculated FOX’s and Disney’s spawning of Hulu was the equivalent of “setting off a rocket and then running to where the rocket landed.” It’s a great image, but I disagree. In a landscape riddled with big media online plays that completely suck. Hulu is the lesding exception.  In spite of friction points, Hulu has built an admirable business and an attractive service.  And the economic variable we’ll never be able to compute for is how much bigger the pirate TV business would have grown, had the TV business not been willing to back at least one quality alternative.

Next time, we’ll begin to unpack  the 800 pound gorilla in the global video business: Google/YouTube.

As always, please send any questions to seth@newamsmedia.com.

So far, we’ve taken a deep dive on Netflix, looking at its rise to become the largest subscription service in America… followed by a loss of 800K subs and a massive decline in value  (a trend that continued this week with  the company’s announcement of a $400M cash raise).

As Netflix began to soar in 2007, another online video service was announced. As with Netflix’ launch, the venture was greeted with both enthusiasm and cynicism.  But unlike Netflix, the newco was a joint venture – of NBC, News Corp and Prividence Equity. It was a widely perceived as a defense play, and one that the ostrich-like TV networks were not qualified to build.  It didn’t have a name at first. Eventually, a press release mentioned that it would be called Hulu.

The original public mission of Hulu –as many forget – was to create a legal online destination for the “professional”online video of studios and networks.

To understand this, it’s essential to remember what was up at the time.  Business news was full of squabbles between the TV networks and a different startup. This one was called YouTube.

YouTube had been founded in early 2005, one of a slew of online video sites that cropped up as, after a decade of false starts, video technology finally matured and bandwidth improved.  YouTube had a better brand (“Broadcast Yourself”), a clean UI, and a relatively painless upload process. It took the lead in the UGC space, moving from a novelty to an astonishing #5 Alexa rank by 2006.

It also became a great place to post video that you liked, but hadn’t created. Things like the ten good minutes from a Saturday Night Live episode.  More importantly, it turned out to be a fantastic place to watch the ten good minutes from this week’s Saturday Night Live: someone else did the dirty job of wading through 60 minutes of meh for the good stuff, then came back with the jewels – the TV equivalent of a great DJ pulling breaks and beats.

This was the beginning (or the tipping point, depending on your seat) of something extremely big: the extension of the massive editorial value that the internet already brought to millions, now employed to reshape big media, to make its product more relevant, more useful and more entertaining. It was also the moment when it was became obvious tthat the audience was now smarter than the networks.

There was also a counter-argument: if YouTube uploaded clips of SNL, didn’t that really amount to a free commercial for SNL? Weren’t uploaders who promoted good shows doing those shows a favor? This argument got much more consideration than networks admitted at the time, as they grappled with the fact that YouTube undercut the advertising model that paid for both these shows and their salaries.

Then, in October of 2006, something happened that transformed the argument forever: Google purchased YouTube.  For $1.65 billion.

After this, in the minds of big media, YouTube went from being an annoyance to a terror, from the big weird home of cat videos to a well-funded threat to traditional television – financed by those two geeks with billions to play with.

More than anything, I’d argue that this was the moment that risk-averse Big Six Media had been dreading for fifteen years.  Even the laziest suits could see that the video business could indeed go the way of the music business. The assassin would be Google, and the bullet would be YouTube.

So at long last, the old guys started working on a way to play the new game. It would be a rocky road, but it would pay off.  Hulu would do its best to walk the tightrope between user experience (where its parents were horrible failures), and content strategy (where the tech cos it emulated were horrible failures).

Meanwhile, YouTube would embark a parallel tortured journey, to create a viable home for quality creative content. The challenge would be to do it, not as Chad Hurley and Steve Chen’s startup, but as part of a Google engineering culture with less expertise in content culture.

Next time, we’ll look at YouTube’s brand new channel strategy, the strengths of Hulu today, and where they’ll both go from here.  Then we’ll devote some time to discussing the pros and cons of dumping cable, and the best ways to do it.

Last week, we looked at the factors that made Netflix one of the best media brands in America. We reviewed the amazing growth of their DVD business, peaking when it surpassed Comcast this summer as the #1 subscription service.

This triumph was followed by a massive stock selloff and widespread customer fury.  What happened? I’d suggest the breakdown came from a perfect storm of factors:

1. Streaming is a much tougher space than DVD.  Netflix dominates the DVD rental space. With the exception of one competitor (Redbox), they virtually own the business.  But streaming video, where they see their future, is a vastly different business.

In streaming video, Netflix competes with the A List of digital media:  Apple, Amazon, Google, Comcast and Hulu. All of these but Hulu (which is still privately owned) dwarf Netflix in market cap and cash on hand. Amazon’s current value, for example, is about 23 times that of Netflix. And Apple is worth about 85 times Netflix. Those are much bigger warchests for content licensing.  So if it comes to a price war for movie and TV streaming rights, Netflix has got a job on its hands.

2. Rights for Streaming and DVD are completely different.  The angriest complaints I’ve heard from Netflix subs concern why so much content is on DVD but not on Netflix Watch Instantly. Customers see that Netflix has a movie, and wonder why the company doesn’t let them watch it now.  The reason is that Netflix does not have the legal right to do so.

In fact, I’d argue this is one of the major missteps Netflix has made: they have not explained to customers that having the right to loan DVDs does not give Netflix the right to stream the same program. Of course, the reason they do not have these rights is that those rights are expensive – and that there is much more competition for internet On Demand rights than there is for buying and loaning DVDs.

3. Communication Breakdown.  CEO Reed Hastings has been a darling of Wall Street and the press, a chill entrepreneur striking fear into Hollywood fat cats.

Until August.  Then came the decision to split Netflix into two separate businesses – resulting in a massive price increase for subs – and major outrage from customers and fans.  The decision to split its DVD and streaming services into two separate businesses caused massive customer outcry, eventually resulting in losses of over 800,000 US subscribers.

The low point was Hastings’ widely-quoted apology email, in which he took responsibility for clumsy communication… but went on to announce the rebranding of Netflix DVD, to a separate business known as Quikster.

Huh?  This seemed to many to increase the perceived cluelessness, culminating in this awesome Netflix parody on Saturday Night Live.

That was probably the bottom. The subscriber losses may have run their course, the company is once again closing distribution deals with studios, and international expansion plans continue in places like Brazil and Spain.  Netflix is still a great value for many people, and the 10-20% or so of their titles available on streaming still amounts to over 50,000 titles, supported by a fantastic recommendation engine and a customer experience people love.

Even the best-known Netflix skeptic, fund manager Whitney Tilson, has had a change of heart.  Tilson famously shorted Netflix–  then declared defeat and took his losses as the stock hurtled towards 300.

Tilson was vindicated in the end, when the stock plummeted to 72. But he made financial headlines when he declared that he’s now looking to get long:

“If you go back and read our original Netflix piece, we pretty well nailed it… But we were quite early … almost a year early. So we got clobbered to the point that we couldn’t take the pain, and we just said, ‘You know what? There are better shorts out here.’ So we covered and got out.  Watching our investment thesis eventually play out and not participating in it has been very annoying,” he said.  Now, Tilson is thinking about going long; the only question is when.

Like much of the cord cutting story, discussions of Netflix are often ruled by hand-waving and over-reaction.  Here’s the bottom line:

1. Don’t believe the hype. Is Netflix going to go out of business? Absolutely not. Is Netflix going destroy Big Cable? Absolutely not.

2. A great source of convenient video. Netflix will hold onto its place as an inexpensive source of video wrapped in a great service, available on a ton of devices. Consumers will continue to pay for it, as part of a larger group of places they go to get video.

3. Netflix = catalog. Netflix will offer a good selection of somewhat older movies and TV – not as fresh as the options in other places, but much better than Comcast CEO Brian Roberts implied when he quipped “What used to be called ‘reruns’ is now called Netflix.”

4. Boutique Original Programming Down the road, look to Netflix to offer some great original programming, taking a page from the HBO playbook.

Next Up. Where will we get the rest of our video?   Next week, we’ll look at the major role Hulu could play in the future of distribution, and why. Then we’ll uncover the long-term strategy of Comcast, before we go on to look at Amazon, Apple and Google.

As always, looking forward to your great feedback and questions – please keep them coming.