Returning to temperate climes after my first “summer” visit to Las Vegas, I am more amazed than ever at Nevada residents’ ability to withstand daily temperatures of 40 degrees plus and practically zero humidity. At least I now know what 108 Fahrenheit feels like. The contrast between this and a proper British summer (a few days of 25C followed by cool cloud and rain) could not be more stark. Las Vegas’ Mandalay Bay was the venue for Cisco’s annual customer gathering, which this year also brought together a hundred or so analysts for in-depth discussion of product and commercial strategy. The highlight product announcement was the Cius, as reported by my colleague, Susan Welsh de Grimaldo. While the company has not officially announced pricing, I expect it to be closer to $1000 than $500. Cisco is quite clear that the Cius is positioned as an enterprise solution, and these prices are likely to prevent much leakage towards “unofficial” consumer markets. What was most interesting, perhaps, is the genesis of the Cius within the Cisco organisation. It was obvious from many conversations that few people were aware of its development until very shortly before its unveiling. Even John Chambers himself claims to have been unaware of it until two months ago. If the product proves successful it will be further justification of Cisco’s innovation in organisation and management which allows dynamic cross-fertilisation of ideas across multiple teams. The other news centered on home energy management, where Cisco is launching a “Home Energy Controller” allied to Cisco Energy Management Services, which will be offered by utility companies to help consumers understand and control their energy consumption. The Controller uses Zigbee, WiFi and other home networking technologies to exchange data with and, potentially, control a variety of home devices. Much of our discussion with Cisco execs centered on the challenges and opportunities for service providers offered by OTT video, as well as the potential for telepresence in the home environment. Telepresence has a been a success for Cisco in the corporate market, and it is still on track to bring a consumer solution to the market by the end of 2010. It still strikes many people, both in the industry and consumers, as odd that Cisco should have a serious consumer strategy. While its brand presence is growing, not many would consider it as a competitor to the Sonys, Samsungs and Apples of the world. And there is no doubt that the company’s financial power is built on its core network switching and routing market dominance. Cisco does have key positions in home networking and set-top boxes, as well as the TV and broadband service provider space, but the jury is still out on whether Cisco itself will become an overall leader in consumer markets over the next decade. But consumer players cannot ignore Cisco as an influence on market direction. Its innovation processes, as demonstrated by Cius, will combine with its financial strength to create a wave of consumer innovations over the coming years. Many may fail, but it will only take a few to be successful for rivals to feel the heat. Client Reading: Chasing the Elusive IPTV Business Model: NDS, Cisco and Comcast to the Rescue?

As our recent report pointed out, the potential of internet and IPTV has failed to materialise. One area of untapped potential is interactive or targeted advertising. In spite of more than a decade of red button adverts in the UK these services have never proved commercially viable and in fact were recently withdrawn completely by Sky. Trials of new technologies continue, however, and Sky has just completed a trial called Adsmart. Its partner was Mediacom, using technology from Packetvision and ads from Nat West, the UK bank. Mediacom's Managing Partner of Implementation & Futures Rhys McLachlan, presenting at this morning's Broadcast and Beyond conference, called the trial a technical success, but went on to describe the key findings, most of which seemed to present targeted TV ads not so much as an uphill battle as an attempt at Mount Everest. The first conclusion is that current television audience segmentations are 'rudimentary' at best. In spite of using Sky's own extensive customer database, McClachlan concluded that the segmentations currently used 'cannot be validated'. As far as advertisers are concerned there is simply no consensus on how such audience data should be employed. Mediacom also found that it was very difficult to find the right metric for audience measurement, and that, critically, it was very difficult to prove the ROI from targeted ads. Finally, in spite of the advanced technology used, there was simply no proof that advertisements had been delivered and viewed. Effectiveness measurement depended simply on ‘good faith and intuition'. In spite of these challenges investment in advanced advertising trials continues, and broadband is the key to the future success, according to McClachy. The biggest challenge of all is developing technology which can help advertisers differentiate between single and multi viewer consumption. As we have also noted previously, asking TV viewers to log in, as some emerging services do, does not solve this problem. Even with the latest advanced technologies in the IPTV world, it seems there is still a long way to go before advertisers will be convinced to spend money on using them. David Mercer Client Reading: Chasing the Elusive IPTV Business Model: NDS, Cisco and Comcast to the Rescue?

AT&T and Verizon both posted strong broadband numbers in Q4 on the back of their rollout of fiber-based broadband services, according to Strategy Analytics’ latest broadband benchmarking report. In terms of quarterly net new additions, Comcast and Time Warner Cable were pushed into 3rd and 4th place. AT&T took the number one spot with 242k additions, followed by Verizon with 212k. Behind the telcos’ numbers is the story that their next generation access platforms, U-Verse and Fios, are gaining ground at the expense of “legacy” ADSL services, for which subscriptions are in decline. Neither AT&T nor Verizon will confirm how many “fiber” customers previously were existing customers to their own basic ADSL services, but we can assume that they represent a fair proportion of the total. Of course, the term “fiber” is used fairly loosely in the case of both companies. Fios is a true fiber-to-the-home broadband service, although the Fios TV service is delivered over coax. And U-Verse actually uses VDSL technology. In spite of the telcos’ strong Q4 performance, our 2009 forecasts suggest that Comcast will again be the leading broadband provider this year, in terms of new additions, followed by AT&T and Verizon. But we again see a trend towards the fiber based services, and predict that AT&T’s U-Verse will be the fastest growing service in 2009 if seen in isolation from the overall AT&T broadband operation. Twitter: twitter.com/DavidMercer_SA Client Reading: Broadband Service Provider Performance Benchmarking: North America Q4 2008

We recently completed our latest survey of broadband and digital TV customer satisfaction and churn. The first analysis concentrated on broadband in the US. Future reports will also cover digital TV and the major European markets. People often claim to be satisfied with what they already have. 76% of broadband subscribers in the US suggest they are very or somewhat satisfied with their broadband service. But when they are asked if they would be willing to switch, three in every four say they would do so, depending on the price and performance of an alternative service. So why do more people not switch broadband providers more often? There are many perceived barriers which inhibit customers taking this step, such as general inconvenience, the hassle of scheduling connection and installation, dealing with returning equipment and billing issues. Our survey found that the difficulty of scheduling a suitable time for connection and installation of a new service was one of the most significant barriers for many US broadband customers. The promise of a “four-hour slot”, it seems, is not enough to persuade customers to switch providers. They expect their service provider to turn up at an agreed appointment time, and if that promise can’t be made, they will prefer to avoid the inconvience altogether. As the broadband market matures (new customer growth is significantly down this year on 2007), growth for major players like Verizon, AT&T and Comcast will hinge on their ability to poach existing broadband customers from competitors. The companies that focus on improving the customer experience during switchover will go a long way towards increasing their subscriber base. Client Reading: Broadband Satisfaction and Customer Churn: US Survey Results 2H08

We have always cited the cable industry as the archetypal vertical or closed content-to-device business model. Ever since the US cable network providers (MSOs) began to offer paid-for services and secure content using set-top boxes, they have steadily increased their hold on the television content and device market. Initially with analogue premium TV boxes, and more recently with digital cable boxes, a growing proportion of US TV viewers use a device provided by their cable operator as the gateway to all their television programming. And as the cable industry has added more advanced features to those boxes, such as DVRs and VOD, these have also been controlled by the set-top box, leaving the “TV set” as essentially a dumb terminal. The satellite TV industry followed a similar model in both the US and Europe. Cable in Europe, however, has a somewhat different history, since its early development was encouraged by government subsidy in several countries. But the US model has also found its way into several European countries, notably the UK, and as digitisation of cable has accelerated, European cable operators have also moved increasingly towards a set-top box approach. Manufacturers of TVs have been concerned at these trends for many years, realising that the “intelligence” of their devices was being bypassed and ignored as many viewers used set-top boxes. In spite of many attempts over the years to encourage the integration of various cable or satellite technologies into TVs, such as digital tuners or smart card slots, these have largely failed. The challenges for TV manufacturers have been numerous, not least the additional cost of these features and overcoming the obsolescence argument, that viewers may want to change cable or satellite providers or services without having to change their TV set. There has also been an argument that it has not been in the strategic interests of cable or satellite providers to allow integration of what are essentially their network technologies into devices that are available in an open, horizontal market. Having fought hard to win new customers, service providers should not be inclined to make it easy for those customers to move to a different supplier, and forcing them to use a proprietary device is one way of discouraging churn. Recent developments suggest that the cable industry at least is now ready to adopt a much more open stance towards the CE industry. In the US, Sony has signed an important agreement with the five largest cable operators (Comcast, Time Warner Cable, Cox Communications, Charter Communications, Cablevision and Bright House Networks) to use Tru2way technology in its TV sets and other CE devices. This will allow cable customers to use cable services, such as VOD and interactive guides, on these devices without the need for a set-top box. Given the support for Tru2way by other major CE companies, there seems a genuine possibility that it will become widely deployed over the coming years, although the cable operators still have to demonstrate that they are wholeheartedly behind the initiative by actively promoting the technology. In Europe, meanwhile, some of the cable industry’s largest operators are also moving towards endorsement of a more open system. CE companies Sony, Panasonic, Samsung and Philips have led the initiative to develop a platform known as CI+ (Common Interface Plus). German cable operators, including the largest, Kabel Deutschland, have given their support, and others are expected to follow suit. CI+ will allow users to access premium and advanced cable services without the need for a set-top box. CI+ devices will incorporate a smart card slot which will accept conditional access modules provided by cable operators. So is this a sign that cable operators are accepting that the world is moving on? Or will both Tru2way and CI+ be sucked into the black hole of promising but failed open cable technology initiatives? My bet is that this time round things may really be changing. And the difference now is that cable recognises that its long-term future lies more in broadband than in the traditional pay television market. The TV set-top box has been the gateway to content for many years, but as people consumer more content on the web some of that role is increasingly shifting towards other devices such as broadband gateways, home PCs and TV sets. For sure, the set-top box is not going to disappear overnight. It will be some years before both Tru2way and CI+ are widely enough deployed to have a significant impact. And cable companies and content providers may still decide to promote set-top boxes if the new technologies fail to support future services or fail due to content security issues. But one way or another, the cable industry is getting ready for a major transition that will have widespread implications for device manufacturers and content owners alike. Client Reading: Global Broadband Forecast 2008 - 2012

Much hype in the last 24 hours about yet another new IP video venture. Sezmi, formerly known as Building-B, has received $17.5 million in funding from venture capital firms and includes prominent engineers Buno Pati and Phil Wiser (formerly of Sony) as its founders. It hasn’t disclosed where its initial trials are taking place, nor who its broadband service provider partners are, but is now at least public about its intended offer. However the company tries to spin it, Sezmi’s new service is pretty much a reiteration of many previous attempts to use digital terrestrial television to compete with cable network providers like Comcast. Predecessors have included USDTV, Geocast and iBlast, and the most recent, Moviebeam, gave up in December last year after attracting a paltry 1800 subscribers. All these services have tried, one way or another, to use capacity in the digital TV broadcast spectrum to increase the range of programming and choice and offer an alternative to cable TV. As with Moviebeam, Sezmi will use a DVR set-top box to store programmes and give viewers a quasi-VOD experience through an integrated program guide. And it’s certainly an impressive DVR – the 1TB hard drive could store 1000 hours (42 days) of video depending on quality settings. Unlike Moviebeam, Sezmi will also use a broadband connection to download programmes, alongside the over-the-air broadcast signal. And it’s the broadband part that Sezmi claims makes it TV 2.0. It suggests that it will partner with broadband service providers, while at the same time claiming that infrastructure costs are low. Given that BSPs are moaning about the cost of transporting rapidly growing mountains of IP video, I suspect that Sezmi’s position on infrastructure costs may fall on deaf ears in the telco community. What Sezmi is doing, of course, is trying to replicate what is already happening in Europe, where telcos (eg BT Vision) are combining DTTV with IP video to create a quasi-IPTV service. There are several key differences, however. First, Sezmi is not the telco, and does not provide broadband service, so until it sorts out that part of the equation it’s not clear whether company will be competing as an over-the-top provider or simply enhancing existing managed BSP packages. Second, the US DTV service is simply not as consistent as what’s available in many parts of Europe. Sezmi claims it has developed advanced indoor antennas for the ATSC system, but until we see this perform in the real world we will have to reserve judgment. Sezmi is targeting non-digital TV customers in the US, so it had better get a move-on. The 10% or so who still really solely on analogue terrestrial will have decided what to do after switchover within the next 12 months, and those using analogue cable will be tempted with new cable offers to switch to digital. One way or another, Sezmi in its current form looks like it will go the way of its not-so-illustrious predecessors. Client Reading: US IPTV Forecast and Outlook: $13.7 Billion by 2012

Well, after day one at C-Scape I'm not much the wiser. The consumer tech vision is clear, but then it's not new either. What surprises me is that no Cisco exec has given me the same answer regarding the company's biggest challenge as it seeks growth in consumer media markets. The bulk of Cisco's revenues today comes from service providers, ie companies that depend on the end user relationship for a direct revenue stream. Scientific Atlanta, which is the company's major consumer technology division, depends on a similar relationship - consumers paying cable companies for TV and broadband service, and getting an SA set-top box for free as part of the deal. So much is transparent. Then Dan Scheinman, Cisco's SVP Media Solutions, described how Cisco is approaching media companies to help them distribute media to connected home devices, something we have talked about for many years at Strategy Analytics. Earlier in the day, as I mentioned previously, Cisco had invited the BBC's Erik Huggers to describe how the Beeb was offering full-length TV shows streamed over the web. So we naturally assumed Dan was talking about the same thing. But when I mentioned to Dan that what he was offering seemed to conflict with the SciAtl model of supporting managed delivery via network providers, he seemed taken aback. And he then suggested that he had been referring only to "short-form" video in his presentation, rather than full-length TV shows or movies. Longer-form video was apparently not quite ready for primetime, partly because it was not being distributed to TV sets yet. But then, I thought that's what Linksys was all about. Earlier in the day I spent time with Steve Silva, who joined Cisco from Comcast earlier this year. Steve is focusing on the home network device segment, and recognised the fact that the needs of service providers to manage devices across the home network could be in conflict with the needs of device manufacturers to develop products independently of service providers. In other words, Cisco's Linksys division sells products in the open retail market, but SciAtl sells devices to service providers. If Linksys sells a device that lets consumers stream video direct to the TV without the user having to subscribe to cable TV, it is competing with a set-top box provided by the cable operator (assuming the available content is similar, which is admittedly a big assumption). I am getting the impression that Cisco has just not given enough thought to managing the conflicting business relationships that are creating turmoil across the digital media and technology value chain. The company seems to expect, probably with good reason, that, whatever the outcome, it will do very nicely, thank you. After all, all content and devices will all be IP-based, one way or another. But it seems to have a blind spot about the impact all this could have on its existing customer base, and that should be cause for concern. I know Skip MacAskill, Cisco's AR man, is busy with managing the event, but these issues do seem to have been put left off the agenda. Perhaps we'll get more insight tomorrow. Client Reading: Digital Disruption: Imminent and Long Term Threats to the Audiovisual Industry Online HD: Disney’s ABC Throws Down Gauntlet To Competitors, and Access Providers