It's Rishi

While browsing around tonight I stumbled upon a discusson thread about imeem. The thread starter was “addicted” to the site even though he was never into other social networks like MySpace. Seeing the imeem name caught my surprise. It’s been atleast 18 months since I’d last heard heard anything new from the company. Apparently they have completely re-strategized and launched a new site with a new focus:

IMEEM is an online community where people and groups can upload, share, tag, and playlist the media they care about.

The new imeem is a very nicely done site. The site design, flash widgets, and profile customization tools are beautifully done. As the quote above suggests, the core of the site is that users can upload music and video (and photos of course) and directly share them on their profile. With imeem’s embedded flash players, you can stream music and video directly through your browser. You can also create your own playlist containing any songs and video you find on the site. As you would expect, there is an imeem flash widget which is embeddable into any other webpage (MySpace pages are the obvious one but I have a hunch this will get blocked by MySpace since this directly competes with MySpace’s own music and video widgets).

The first click I made on imeem was to view the most played songs of this week. As you might expect, songs from hot artists like Nelly Furtado and Justin Timberlake were in the top 10. Not too surprising right? Well I wasn’t surprised that those artists were amongst the most viewed, but then I looked at who uploaded those songs. As you might have suspected, it wasn’t the artist or label. It was just random users who uploaded the mp3’s of those songs. My first thought was “holy crap! if this is legal it’s pure genius!”. After all, imeem already has a impressively large library of popular songs that has been uploaded by users. In addition, unlike iTunes and other music services, you get to listen to the full song, not 30-second previews. All of this for free.

I dug a little deeper on the site and sure enough on the upload page, I saw this message: “Only upload your own music and video, or stuff you have permission to share. Uploading media that you do not own can be a violation of the artist’s copyrights and against the law if you do not have legal permission from the copyright owner. Your account may be shut down if you don’t follow the imeem terms of service.”

In the site’s Terms of Service, a statement to the same effect is found including this: “Uploading copyrighted media or content without the explicit consent of the copyright owner will result in cancellation in any and all of your accounts.” Judging by the countless number of users that have uploaded commercial music and whose accounts remain active, it’s clear imeem is not enforcing this.

And, really, why should they? As YouTube’s story proves, it’s best to just give your users what they want – free access to commercial content – and place the burden on copyright holders to enforce their rights over the content that’s uploaded to the site. As is now well-known, according to the DMCA Title II: OCILLA, as long as online services promptly remove infringing material upon notification by the copyright holder, the service has a safe harbor against copyright liability. As you can see from the Alexa graph above (both Quantcast and Compete.com show a similar pattern), this strategy is working great. imeem’s traffic stats have blown up in just the past four months.

What I find most strange is the company’s VP Marketing is a guy by the name of Steve Jang who, prior to joining imeem, was Director of Digital Business Development at EMI Music. So I think it’s safe to assume imeem’s management is well versed in digital rights. Which leads me to wonder what the heck is going on then? I was hoping to find some recent news articles about imeem but found none. With imeem’s tremendous growth of late, there is bound to be some buzz soon. Hopefully, along with the buzz there will be a conversation about the copyright issues concerning imeem. Until then, I’m confused…

NOTE: I should point out that just like YouTube, imeem does have plenty of legitimate content as well. In fact, the #1 played song in the past month, with over 1.6m plays, is Body Rock by Mike Relm. In this case, Mike Relm himself uploaded the song onto his own imeem profile page. There are other songs by independent artists which have made the most played chart. So clearly imeem, like MySpace, is a proven venue for artists to promote their music.

Cna yuo raed tihs? Olny 55% of plepoe can.

I cdnuolt blveiee waht I was rdanieg. Due to the phaonmneal pweor of the hmuan mnid, aoccdrnig to a rscheearch at Cmabrigde Uinervtisy, it dseno’t mtaetr in waht oerdr the ltteres in a wrod are. The olny iproamtnt tihng is taht the frsit and lsat ltteer be in the rghit pclae. The rset can be a taotl mses, and you can sitll raed it whotuit a pboerlm. Tihs is bcuseae the huamn mnid deos not raed ervey lteter by istlef but the wrod as a wlohe. Azanmig, huh? And I awlyas tghuhot slpeling was ipmorantt!

– tkean from a psot on Tim Ferris’ bolg.

Waht I am egaer to unrsedatnd is wyh smoe poelpe cna raed tihs adn smoe poelpe cna’t. I gsues I wlil need to dgi up teh sduty to laren mroe.

It has been estimated that over 50% of the total Internet bandwidth (~2 terabit) in the world is consumed by BitTorrent traffic. It has also been estimated that about 50% of BitTorrent traffic is video. That’s a whole lot of video. In fact, that’s 2tb/sec / 8bits x.0.5 x 0.5 * 3600sec = 225 terabytes of video files downloaded every hour! From my experience, virtually all video files are DivX/Xvid avi files (I have yet to see a video torrent that isn’t) that seem to average about 7-10MB/minute. This means that every hour, about 20-30 million minutes of video are downloaded. Based on these numbers, it is very reasonable to conclude that tens and possibly into the hundreds of millions of people around the world are illegally downloading video via BitTorrent.

Don’t get me wrong now, I’m not writing this to incriminate anyone. BitTorrent has been very good to me also. It has essentially saved me the cost of a Tivo every month. Any TV show I want, I have in a matter of minutes and with a little RSS magic, what I want is automatically fetched for me as it becomes available. Of course, a significant percentage of this video is movies, not TV. But let’s put that aside for now and focus on TV.

My roomate and I pay about $60 to Comcast every month just for cable television. I personally feel like that’s a good amount of coin and as such I don’t necessarily feel that horrible when I download torrents of shows that I miss. Without a doubt Comcast is getting hurt by BitTorrent. If the estimate is correct, half of their bandwidth is being used up by BitTorrent traffic so they have surely had to pay hefty amounts to accelerate the upgrading of their capacity. However, my guess is that very few consumers have cancelled their cable TV subscription due to the availability of TV content through BitTorrent. So, while the impact of BitTorrent on Comcast’s ISP business may be significant, I doubt their cable TV business has been affected much.

So who’s the big loser? The TV networks of course. Torrents of TV shows have all the commercials stripped from them to make the file smaller in size and for the downloader’s viewing pleasure. As of last fall, ABC’s Lost had an average 30-second spot rate of $328k (Ad Age chart). At that time, Lost had about 10m viewers. Back in October ‘06, it was measured that over a span of a week, torrents of the latest episode of Lost had been downloaded over 500k times and as much as 1m times. That represents 5-10% of Lost’s total viewership. A 1-hour show like Lost has about 30 30-second paid ads which at the rate of $328k per ad, ABC brings in almost $10m per episode in ad revenue. For the sake of simplicity, let’s say that the ad rate is directly proportional to the audience size. In the absence of BitTorrent, if half of those 5-10% of downloaders would have watched the regular broadcast of the show, that would haev added about $.25-.5m in ad revenue per episode. For a 20 episode season run that’s $5-10m per season in lost revenue for ABC from the show Lost alone.

It is important to point out that at the time of measurement, Lost was the most downloaded TV show on BitTorrent. Also, looking at the chart, Lost’s $328k 30-second ad rate is amongst the highest in primetime. With these two factors combined, the revenue impact of Lost is probably an order of magnitude higher than the typical show. Overall, though, I can definitely see a major network like ABC losing out on about $25m of ad revenue across all of its shows this year. And that is $25m of pure top line since the cost of that additional revenue is essentially zero.

So what can the networks do about this? Plenty. Moreover, just as p2p has sparked tremendous growth in the long-tail of the music industry and created new opportunities, the same is happening in TV and film. I’ll talk about what the networks and new industry players have been up to and sort out some of my thoughts in my next post.

I was reading this post by Paul Kedrosky talking about how Amazon’s gross profit margins have been consistently declining since 2001, which sort of contradicts the company’s claim, since its inception, that massive scale will make the business more profitable.

I realized that I wasn’t exactly sure of the the definition of gross profit margin versus operating profit margin. I googled it and found this Income Statement Analysis guide on About.com. Before I knew it, I had spent a good half an hour going through most of it. I found it to be a very practical crash course.

Some interesting things I learned:

1. For asset-intensive businesses, how the company accounts for depreciation is a really important thing to consider. Depreciation methods, rates, and salvage values can make big differences in a company’s bottom-line. More specifically, they can be easily played with to make the company’s earnings look better.
2. EBITDA is BS. Creditors demand interest payments, the IRS demands tax payments, and depreciation and amortization are absolutely real costs of earnings. EBITDA is sexy but really misleading.
3. Comparing operating margin versus gross margin across many competitors in the same industry can tell you a lot about each company’s business models. Like this post that talks about Tim Hortons vs. Starbucks.
4. If a company owns a minority stake (< 20%) of another business, it only reports the actual cash (dividends) it receives and NOT the % portion of earnings that the owning company is entitled to. This profit that the owning company is entitled to but doesn't report is referred to as "look-through" earnings. In one famous example, Berkshire-Hathway, actually had it's look-through earnings exceed it's own earnings, so Berkshire's actual earnings report was a horrible understatement of the company's performance.
5. “Record earnings” don’t necessarily mean jack. ROE (return on equity) is the number to look at. After all, a company which generates the exact same operating income every year, but sticks all its earnings in a 5% interest bank account, will consistently have record earnings simply because of the increased interest income on increased equity. Shareholders can put their own money in the bank and earn that interest. They don’t need a company to do it for them.

Anyways, I would highly recommend you at least browse through this guide if you aren’t already familiar with these concepts. I was somewhat familiar with many of these concepts, but this guide really tied everything together nicely. Thanks Joshua Kennon!