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There was lots of good discussion last time about cyber warfare, cyber security, and U.S. policy, but what most respondents seemed to miss was the international nature of the IT business — all the outsourcing and offshoring that we were told was so great — and its implications for U.S. security.  The upshot is that any U.S. cyber warfare czar will have to effectively function as a WORLD cyber warfare czar, a fact that neither Republican nor Democratic Administrations have yet been willing to embrace, at least in public.

Forget for the moment about data incursions within the DC beltway, what happens when  Pakistan takes down the Internet in India?  Here we have technologically sophisticated regional rivals who have gone to war periodically for six decades.  There will be more wars between these two. And to think that Pakistan or India are incapable or unlikely to take such action against the Internet is simply naive.  The next time these two nations fight YOU KNOW there will be a cyber component to that war.

And with what effect on the U.S.?  It will go far beyond nuking customer support for nearly every bank and PC company, though that’s sure to happen.  A strategic component of any such attack would be to hobble tech services in both economies by destroying source code repositories.  And an interesting aspect of destroying such repositories — in Third World countries OR in the U.S. — is that the logical bet is to destroy them all without regard to what they contain, which for the most part negates any effort to obscure those contents.

You can have 1000 safe deposit boxes with only three holding anything of real value, but that obfuscation is meaningless if the target is ALL safety deposit boxes.

To this point cyber security conferences tend to concentrate on intelligence (probing attacks to learn about a potential enemy, gather information and map defenses) and tactical deployment (using that intelligence information to blind, disable, or defend some network resources in what’s usually perceived as an encounter lasting hours).  There is little to no regard for strategic use of cyber warfare as in the India-Pakistan example or the nuking of source code libraries.  We don’t talk about it because it is too horrific, not because it can’t happen.

The result, of course, is that any major power has to be concerned about the cyber security of all its technology partners, which over the last decade has come to include a lot of Third World nations.  Try to do a security audit of Argentina or Bangladesh and see what nightmare is unveiled.  Yet this is exactly where major international companies are deploying more and more technical resources.

The military answer of course is to isolate network traffic, as many readers have suggested.  But how do you enforce that in other countries?  And how effective is it at all against a strategic attack on essentially commercial resources?  Not very.

This is not a battle but a war and wars take a long time to prepare for and wage.  As readers have pointed out we’re not just concerned with malware and viruses but even hardware-based attacks. Who knows if that flash memory from Malaysia or that router card from Taiwan is compromised?  Who CAN know?  And if you’ve found one hardware exploit in a product does that mean you’ve found all that are there?  Hardly.

One point of view is that this makes both old tech and traditional firepower more valuable.  Analog systems, for example, are unlikely to be compromised by digital exploits. And 2000-pound bombs are a pretty darned effective response to a cyber attack IF you can clearly identify the attacker and figure out where to drop the bombs.  Both effects tend to neutralize the effect of advanced systems, making Syria a more effective opponent against Israel, AND push superpowers toward brandishing their biggest guns — nuclear weapons.

So cyber warfare is internationally destabilizing in whole new ways with the world being dramatically less safe as a result.  This works mainly to the advantage of the bad guys.

Then there’s the Code God Effect — the potential strategic impact of a single programmer with commanding skills.  That very guy or gal who typically is the creative heart of an entire company (but they never admit it) because he is the equivalent of 100 average coders can be the secret weapon in a cyber war, too.  And the distribution of such megabrains is random enough that to say one or more aren’t working right now in North Korea would be a bad bet — one that a nation like the United States would be unwise to make.

We see the Code God Effect happening right now with publicized Chinese Internet incursions and those are just amateurs: the real damage is being done by much more skillful players we have yet to even detect.

What this means for any major power is that they aren’t as powerful as they think they are and that power is even less across borders.  There isn’t a U.S. agency I know of — ANY agency — that is prepared to win such a war against a clever and determined opponent of almost any size.

If the game is U.S. versus Albania, who wins?  I don’t know.

We need new tools and new weapons.  We need to find ways of changing the battlefield to negate opponents (this is HUGE), not just shooting back.  We need leadership that understands this.  Maybe President Obama understands it, maybe not.  He hasn’t demonstrated yet that he does, at least not to me.

Let’s hope that’s just part of an incredibly clever master plan.

Yeah, right.

My last column generated a lively debate on the prospects for various business and technical options for the delivery of Internet TV so it makes sense to continue this topic and build it into a more full-featured model.  I used to write quite a bit about this back when I was trying to get NerdTV going.  The core of what I’ll write here can be found in a couple dozen columns from back then — columns that would seem to have been for the most part forgotten given the direction last week’s discussion took.  You see the future of television IS Internet television.  There is no other in sight.

No business or technology exists in a vacuum.  They all have customers, users, competitors, and make use of resources in an environment that is not one of total abundance.  This means that if there is going to be something like television in the future it is going to adapt to the distribution model that offers the highest price/performance, which is to say the highest performance for the lowest cost.  That is not how one would traditionally describe the Internet, but then times are changing.

Whatever country you live in there are generally four models for live entertainment video distribution — broadcast, cable, satellite, and Internet.

Broadcast is a limited local resource and therefore more highly regulated than the others but it has traditionally featured the lowest cost per marginal user.  That means it costs a lot to build and maintain a TV station but additional viewers within the service area can be added pretty much for free.

Cable offers more channel capacity than does broadcast but requires building a distribution network that’s fairly expensive.  While one could imagine a cable TV “station,” the way the industry has grown is through cable operators becoming content aggregators offering many services over their expensive networks.  That’s the most efficient way for cable companies to serve the broadest audience and the only way that enables them to sell extra-cost services like pay-per-view, premium movie channels or, indeed, Internet service.  Remember, though, that cable operators pay for nearly all of the content they carry, which is different from broadcast, where a lot of content is free to the broadcaster and some content even comes with money attached.

Satellite operators pay for their content, too.  Satellite initially used wireless technology to offer cable content in rural areas where it was too expensive to build a wired network.  Having gained economies of scale in the rural markets cable couldn’t compete for, satellite has come to town competing generally on price.  But satellite offers no practical Internet service.  I know there are some and I tried one years ago (Starband) but they don’t work well.

Internet TV is different from all these others.  It began as a parasite on telephone and cable networks so the cost of building the network generally wasn’t there, having already been covered for the most part by those earlier services.  Internet TV is less of a network than a conduit; at present the Internet Service Providers don’t pay for video content but then neither do they get paid for it.  Yet this common carrier attribute also makes Internet service often more profitable for telcos and cable companies than the core services those companies were established to provide.  Whatever you pay for Internet service, it is mainly profit for your ISP.

The important lesson to learn when it comes to these competitive services is that the first three — broadcast, cable, and satellite — are all going up in cost to their providers while the cost of providing Internet service is going down.  In the USA, broadcast viewership is dropping, which means the cost per viewer is rising.  Same for cable where viewers are stagnant, viewership is declining (number of hours of viewing) and the cost of content is rising.  Satellite has been growing marginally but that could end at any moment and it shares the same content cost increases as cable.  Meanwhile Internet service just gets faster and cheaper thanks to a Moore’s Law double whammy.

Remember Moore’s Law works in two ways.  It makes digital products ever cheaper AND ever more powerful.  This has profound meaning for Internet TV because it continually increases the bandwidth we can get for the same dollar while giving our devices the capability to do even more with the same bandwidth.

Here’s an example.  My primary Internet connection is an 8 megabit-per-second business cable line with a service level agreement and static IP addresses.  I pay more than you do but then I get more, too, though even my service is crap compared to what you can get in Japan, Korea, and much of Europe.  My primary computer WAS a Mac Pro G5/1.6 circa 2004.  I should have replaced the G5 a couple years ago, I know, but my kids are in private schools and I keep buying airplane parts. I finally replaced the G5 last week, though, with a dual-core Mac Mini 2.0.  Both the old and new computers had four gigs of RAM.  Though my Internet connection can easily carry one or more 1080p H.264 video streams, there is no way that old G5 (which cost me $1999 in 2004 dollars) could play it.  It didn’t do much better with 720p for that matter.  But the $750 Mini (small drive but lots of RAM) can easily decode 1080p.

This is the trend, then: our available bandwidth will go up while our devices will become more powerful, making better use of the bandwidth.  The result, as always with Moore’s Law, is either better services or lower total cost or maybe a little of both.

What this means for the future of television is that we’re approaching a point where Internet service will equal and then be lower than the marginal per-viewer cost of the broadcast TV model.  This crossover will inevitably happen with the only question being when. That’s a function of bandwidth costs decreasing at 50 percent per year and processing power increasing at 50 percent per year.  My calculations suggest the crossover will happen around 2015, which used to seem like a long time away but no longer does.

When Internet TV becomes dramatically, unequivocally, and inexorably cheaper than the other three distribution models, those other models will quickly go away.  That’s why I argued in PBS meetings to forget about spending $1.8 billion to upgrade local stations for digital TV and instead sell or lease that spectrum for commercial data use and throw the resulting $3 billion (lease revenue plus the $1.8 billion savings) into rebuilding the network solely as an Internet service.

Nobody listened.

So there is a cliff rapidly approaching for television.  Five years from now local TV stations will have the same complaints that local newspapers have today as many of them go out of business.  Cable TV operators will become ISPs, period.  Phone companies will be ISPs, too, and analog voice service will be gone completely.  The regulatory implications of these changes should be interesting.

Who, then, will be the players in this future TV?  For the most part they will be the content providers, which probably doesn’t mean traditional networks.  And the networks know this, by the way. Hulu.com isn’t called NBCFoxABC.com and TV.com isn’t called cbs.com for a reason. Networks will go away.

But content will endure, bringing new value to I Love Lucy episodes and almost anything else people like to watch.

The TV networks are throwing their lot together.  CBS chairman Sumner Redstone will come to his senses one day and merge tv.com into Hulu, I am sure.  Their big competitors will be Google, Apple, and a player yet to be even founded (definitely NOT Yahoo OR Microsoft).

Google will differentiate itself as always through technology.  Those shipping container data centers I first wrote about in 2005 exist not just because they are easy to stack inside big Google plants.  Why botehr with weatherproof containers if they are to be used exclusive indoors? Because they are even easier to put in the parking lot at the telephone company central office or at the cable company head-end, both of which will by then be strictly ISPs.  Google will proxy content at every major ISP in America.  And they’ll do this because Google has no idea what people want to watch on TV, nor do they particularly care.

Apple, on the other hand, cares.  Following the content development scheme I laid out last time Apple will attempt to become the dominant content provider to the 20 percent of the market that spends 80 percent of the money, with margins high enough to use Google distribution and still come out ahead, leaving to Page and Brin the 80 percent of content that generates 20 percent of revenue.

But wait, isn’t Apple just a maker of hardware?  Don’t they do iTunes just to sell iPods?

No.

Apple is a software company that has traditionally packaged its software in attractive hardware boxes.  The fact that any new Mac is essentially a Windows computer proves that.  But price points have been eroding in every hardware category and will continue to do so.  Microsoft right now makes more profit from every Windows PC than does the maker of that PC.  Apple is not immune to this trend.  So the company needs to find ways to sell more and more software.

Content is software.  TV is software.  And the great thing about entertainment is that it is software we can be induced under some circumstances to buy over and over again like those teenage girls who paid to see Titanic dozens of times.

What does that leave, then, for that player to be named later?  I’ll get to that next time.

This column has a global audience so sometimes I have to defend my tendency to see things from an American perspective.  But I’m not sure there even IS a defense for this particular item so I’ll just jump into it, because I think even readers from Kazahkstan and Kuwait (my two big K’s) may ultimately find it interesting.  It’s about Apple and Hulu and the direction Internet TV is going in the United States.

It’s not headed where you think it is.

Hulu is the ad-supported video distribution site set up by NBC-Universal and Fox.  It’s where, in addition to the TV network pages, viewers can go to watch thousands of television shows, old and new, supported by commercials.  Of the four big broadcast (as opposed to cable) networks in the U.S., Hulu until recently had half of them with CBS hiding out at TV.com and ABC residing solely at ABC.com.  But now ABC, which is owned by Disney, has decided to join Hulu and the pundits think that’s generally a big deal, not only because of the whole three-to-one thing but because Steve Jobs is the largest shareholder in Disney and on the Disney board and this would appear to be a kick in the face to Apple’s iTunes, where people rent or buy the same shows without commercials.

Is it or isn’t it a big deal?  And what does this move mean for Apple?

There have always been two general methods of distributing Internet video — downloading or streaming — and three business models — buying, renting, or watching with commercials.  Conventional wisdom — what THEY say — has it that streaming (YouTube) is better than downloading (iTunes) and watching with commercials (Hulu and TV.com) are better than renting or buying (iTunes again).

No, they aren’t, at least not as businesses, not yet.

Business Week, among others, made a grand effort this week to present Hulu as a masterstroke that will hurt or kill iTunes rather than what it is — an expensive streaming service that doesn’t make money.

My wife and I last night watched an episode of Chuck on Hulu.  We started on nbc.com where I thought we might see the show in HD but that wasn’t the case.  And even the standard definition version at nbc.com didn’t play well despite our dual-core 2.4-GHz system with four gigs of RAM and an eight megabit business broadband connection.  So we switched to Hulu where the 480p version stuttered a bit so we dropped to 360p where it played fine except for having to rebuffer a couple of times during the show.

In contrast to this with iTunes you have to wait for downloading but then none of this performance stuff happens. If you want HD you get HD, but then again you are PAYING for HD.

We watched the episode (fun) and all but one commercial was for Rwandan relief.  There is no way Hulu or NBC-Universal were making a profit on that stream, and this was a very popular show.

When you buy an episode on iTunes everyone in the production food chain makes a profit.

Hulu and its ilk are money-losing services that rely largely on concessions in various guild contracts that pretty much keep the writers and producers and actors from sharing in profits that aren’t there anyway, at least not yet.

How is this a threat to iTunes?

Fox owns a big chunk of Hulu, yet American Idol performances are exclusively available on iTunes, not Hulu.  Why is that?  Because American Idol performances on iTunes make a lot of MONEY, that’s why.  Adam Lambert downloads alone make more money every week — a LOT more money — than do ALL the shows on Hulu put together.

So Apple is being criticized and seen as an Internet antique because it is making a profit?  I don’t get it.

I’m not saying here, by the way, that there is no room for commercials on Internet TV.  Nor am I saying that Apple won’t possibly move to commercials or streaming at some point.  This is not gratuitous Apple ass-kissing. What I AM saying is that it is a lot easier to move from paid to free than it is to go from free to paid.  Hulu can’t choose to emulate Apple and become profitable that way because viewers would flee.

As I’ve written over and over, Apple is moving slowly and steadily toward becoming primarily a content provider.  Microsoft is trying to do the same but without Apple’s discipline.  Apple is putting in place all the pieces it needs to make a run at dominating the future of TV, but they know it takes time to get all those bits where they need to be.

What’s needed are devices and services and bandwidth at a given price point where it all works smoothly not just from a technical but also from a commercial standpoint.  Apple is there right now when it comes to downloading and selling or renting, but not for streaming or commercials — the numbers aren’t right yet, nor is the mix of devices.  But the time is coming soon when it will be right, certainly in no more than two years and maybe less.

Now here’s the key for all the pundits who see Apple failing or faltering: you are looking in the wrong direction.  It doesn’t matter how many networks are part of Hulu.  In time they will probably all be there.  But Hulu will remain an artifact of network labor agreements and will be vulnerable for that reason.  Hulu can’t afford to PAY its way.

Follow the money.

Apple has at this moment just under $29 billion in cash and not many good ways to get a reasonable return on that money.  Only Microsoft has more cash than Apple and Microsoft is being pulled in a lot more directions so Microsoft doesn’t have Apple’s flexibility.

What will Apple do with that money?

Most of it will remain unspent is my prediction, but I’m guessing we’ll shortly see $3 billion or so per year go into buying Internet rights for TV shows — not old TV shows but NEW TV shows, shows of all types.

TV production in the U.S. is approximately a $15 billion industry.  An extra $3 billion thrown into that business would change its dynamics completely.  Most production isn’t done by networks but by independent producers who are hungry for revenue and risk reduction.  Three billion Apple dollars spread around that crowd every year would buy Internet rights for EVERY show — more than every show in fact.  Whole new classes of shows would be invented, sapping talent from other parts of the industry.  It would be invigorating and destabilizing at the same time.  And because it is Apple — a company with real style — the new shows wouldn’t at all be crap programming.  They’d be new and innovative.

And just as the artistic heart of TV shifted to cable with HBO in the 1980s, so it will shift to the Internet and Apple.

And where will be Hulu?

Nobody will care.

This week more than 20 million people watched on YouTube and other video sharing sites a single performance from the ITV show Britain’s Got Talent in which a frumpy spinster from Scotland sang like an angel. You can see her astonishing performance here.

It’s not the singing that makes me write this, though the singing was good. I lived as a boy in the north of England and knew ladies like this Susan Boyle. What makes me write about it is the effect she and her singing had on the Internet and the Internet in turn had on the performance and its aftermath.

The video file as presented on YouTube is just over seven minutes and 26 megabytes long. Twenty million (and counting!) times 26 megabytes is 520 terabytes or approximately half the size of the Internet Archive. That’s 520,000 gigabytes or the equivalent of maxing-out in a single week the monthly bandwidth allotment of 260 co-lo servers at Rackspace.com. Running at top speed for a week would require 1040 such servers to do the job and we haven’t even made it to a week yet. That’s 520 million-million bytes.

Okay, so it was a nice lady singing a nice song, but what’s astounding is the performance had been round the earth twice or three times before the broadcast in the UK was even over. It was one of those seminal moments of mass-communication that showed the world was different than it used to be and thank God it didn’t require a wardrobe malfunction to do so.

What resonated with audiences about this performance was that it hit everyone – everyone – the same, as a long-coming reward for a life of good cheer and choir practice. I make documentary films from time to time and this performance is one of those emotional moments that every documentary director dreams of. It’s not the facts, you see, or even the stories that matter, it’s the emotional state of the people on-screen and how the viewer relates to them that matters. Real feelings count.

And thanks to the Internet in this instance such feelings count everywhere, it seems. For one happy moment we’re drawn together as a single audience to share a single emotional high that involves, for a change, no losers at all.

Think how rare that is, which explains its power.

Marshall McLuhan, who seems smarter every day, called it The Global Village. He said communication technology would link us together in ways we couldn’t imagine and those ways would lead to common experiences and shared values. McLuhan didn’t know about the Internet when he wrote that and he sure as Hell didn’t know about Twitter. But his prediction came true.

This Susan Boyle experience doesn’t come along very often, but with the growth of broadband technology it can’t help but happen more and more. It’s not the Super Bowl or the World Cup — it’s better. That’s because it is personal – a moment we all can share, well so far 20 million of us, one at a time.

Now the folks at Google are no doubt scratching their heads, as are the TV producers back in the UK, trying to figure how to put this effect in a bottle and make a living from it. But it can’t be done.

This is an event that was created for TV but not really anticipated by its creators, I’m guessing. They couldn’t reliably repeat it if they tried.

If they did try, it wouldn’t work.

That’s the beauty, because every time this happens, every time our Global Village comes together in this way, it’s because of a shared delight that makes us feel more alike and less apart.

We could all use more of that.

And the next time it happens, now we all know what to do.