We won't really know until Motorola's new tablet is launched in its finished form, but first demos of the Android 3.0-based Xoom suggest it will win the hearts of many of this year’s 30+ million tablet buyers. As we reported in our free-to-download 2011 Predictions Report, global revenues from tablet sales will exceed netbooks this year. Motorola’s stand at CES is crammed to overload this morning with gadget lovers desperate to get a first sighting of Google’s new “Honeycomb” OS in action. Those who made it were not disappointed. I recorded a video of the device in action. Enjoy! David Mercer Client Reading: Global Tablet Sales Forecast by Country

A lot of the analysts that follow Google have been recently focusing on Google’s intention to acquire Groupon, an Internet collective purchasing site. While the talk between Google and Groupon has stalled with Google’s bid being rejected, the Internet search giant still managed to do some shopping for the holiday season. It has grabbed Widevine for an undisclosed amount, a Digital Management Rights (DRM) solution provider which has been on Strategy Analytics radar for a long time. As DRM business isn’t something that is interesting to consumer media, the discussion on media about this acquisition is far less than that about the Groupon deal. But as important as Widevine’s role in the premium content distribution value chain, this acquisition isn’t just discretionary spending for Google and it demonstrates Google’s dedication to be involved in the premium video content business. Widevine explains itself to be capable of doing three things: Multiplatform DRM, Enabling TV Everywhere and video optimization. These are all of great importance for Google in relations to premium video business. YouTube has been growing as the bellwether in the user generated content (UCG) business in terms of video views, while the profitability issue of UGC is still something that YouTube needs to overcome. With the DRM capability provided by Widevine, YouTube is more likely to obtain serious premium content which could markedly beef up the money-generating capability of the popular web video site. And given Widevine’s credibility for helping pretect content for Hollywood studios, it makes studios more eased to partner with Google in the video business, which has been regarded as the major disruptor for the traditional media businesses. The more premium content availability will also enhance Google TV’s competitiveness in the market, which has been reported having trouble to get deals with major Hollywood studios and being forced to cut the price for the new Google TV-embedded gadgets. Moreover, Widevine’s know-how in delivering video content to multiple platforms will benefit its Android system as well, by enabling the Android phones more securely and easily getting access to premium videos. While these implications are all positive, the acquisition of Widevine is far from a home-run for Google to succeed in the premium video distribution business. Significant challenges lie ahead that seem quite unaddressable for Google in the short term. From a revenue perspective, Google is a advertising driven company that controls online content distribution and ad distribution. Small online content creators are in a weak position to negotiate ad revenue terms with Google, whereas Hollywood studios mandate a close supervision on their ad operations. Even Hulu, the joint venture by the three major networks, has to compromise to the networks’ own sales operation when it comes to premium ad inventory sales and management. The fight over control of ad operation will be a key obstacle for Google and Hollywood to overcome before a long-term solid partnership being established. In addition, some analysts speculate that Google might be planning to offer Widevine service for free to content providers. This idea is pretty in line with Google’s Everything-free strategy, from online search to smartphone to TV strategy. It clearly will lure many content providers at least to try to start relationship with Google and potentially will shake up the entire industry. But such a drastic shake-up could result in backlash from industry incumbents and arouse anti-competition concerns. It would also be expected for Google to introduce a Google-branded video store or service in the future, armoring the tech giant in the battle with Apple, Amazon and Netflix. -Jia Wu

We've published an in-depth analysis last year examining the competition between free online video services YouTube and Hulu. We believed that Hulu was in a better position than YouTube when it comes to profitability outlook, as Hulu's premium content could charge higher ad CPM and it's lower cost for carrying User Generated Content (UGC). But apparently a pure advertising model is not the best way to maximize profit, not even sufficient for the publishing industry, let alone the TV programming and filmed entertainment industry, which carries extravagant production cost. So quite expectedly, Hulu is going to put up its pay wall as soon as May 24, according to a couple of news source. The new subscription service, Hulu Plus, would continue to provide for free the most recent episodes of shows. But viewers who want to see old episodes would have to pay $9.95 a month. $9.95? Yes, just one dollar more than the cheapest streaming plan from Netflix. We believe that it is not a coincidence for Hulu to set the price so close to Netflix. With the new subscription service, Hulu is now in head-to-head competition with Netflix. Driven by its outstanding performance in the last quarter, Netflix's stock price has surged almost by 100% since January this year. Now Netflix is one of the leading US companies in the media sector that show robust growth, primarily due to its attractive streaming service. Given Hulu's entry in the market, is Netflix going to maintain its edge in the competition? Early evidence shows that Netflix is in a strong position which might be hard for Hulu to catch up. As the subscription services from the two are mainly providing back-catalog of shows and movies, the services look almost identical, except that Netflix might sometimes have new movies for DVD rental. Although Hulu offers for free recent shows, they are also available for Netflix users. Netflix's advantages of being slightly cheaper and offering DVDs are not significant, but this could still make consumers somewhat favor Netflix over Hulu. Furthermore, Netflix has ample distribution portfolio including all major game consoles, iPad, set-top-boxes, computers and TV services such as Boxee. Netflix app on iphone is also believed to be released soon. In contrast, Hulu only distributes content through PCs despite some early attempt of multiple device access. But its owners do not want Hulu's content to be accessed on big screen TV sets at this moment, which would cannibalize their existing revenues. In addition, it is not costless for existing Netflix users to switch services, as Netflix's rating and recommendation system knows ours taste well, while switching to Hulu might require us to build up our profiles once again from scratch. Looking at users numbers, Netflix has 14 million subscribers as of Q1 2010, while Hulu has about 40 million unique viewers in February 2010 according to comScore. Industry consensus for digital media freemium model is that about 5%-10% of total users could be converted to paying users, which leads to Hulu's potential high-end subscriber number to 4 million.Based on this assumption, Hulu's annual subscription revenue could reach 4 x 10 x 12=$480 million. But of course, Netflix's competition would put pressure on Hulu's acquisition of subscribers. So maybe $200-$300 million is more realistic, if not too optimistic, number for Hulu to generate. It almost doubles Hulu's current revenue size, but is still far from people's original expectation on the company. We are sure that Hulu will eventually improve its service, distribution outlet and increase the size of catalog, while with the pressure from Netflix and its investors, Hulu has a lot to work on right now. Jia Wu

Viacom is not happy. It is not happy sharing ad revenues with Hulu for their hottest TV shows. It believes the shows should worth more than Hulu can offer now. So Hulu has to remove Comedy Central’s The Colbert Report and The Daily Show With Jon Stewart. Here is Hulu’s blog post about the issue with Viacom. This is clearly bad for consumers, who want to have their content access all at one place rather than going to different sites. As Internet is playing a more important role in TV and video content distribution, consumers benefit from the openness of Internet, where they can search for specific content they want. Meanwhile, they also have to live with the pain that content distribution is so fragmented online that they have to jump around a bunch of video websites to watch different content. Some media executives say that media industry is a convenience industry. What it means is that one of media companies’ major value propositions is to provide convenience to consumers to purchase and to enjoy media content. It is apparently true. If a media company creates great content, but makes it hard or unaffordable for consumers to access, it would end up for consumers either pirating the content or looking for something else to entertain themselves. This might not be the case for the two Viacom’s show, as consumers can still watch the show at TheDailyShow.com and ColbertNation.com, but it at least suggests that Viacom hasn’t found its ideal content distribution practice online. Hulu, founded by NBC and FOX in 2007, provides consumers an single gateway to access content from NBC and FOX as well ABC now. Its owners like Hulu, as it is their own distribution channel online that is fully controlled by them. 100% of the revenues generated by Hulu goes to the shareholders proportionally, after subtracting the costs. However, for an outsider like Viacom who does not have a stake in Hulu, the video aggregator is merely like another YouTube with more targeted audience, as Hulu will take a cut of the revenues generated by Viacom content. We at Strategy Analytics have been long positive at Hulu’s business model than at YouTube’s, given that Hulu is not required to pay upfront minimum guarantee to its owners, while for YouTube, the upfront payment is usually needed. But in Viacom’s case, Hulu has no difference from YouTube for them. I believe it is a loss for both parties to remove the show from Hulu, as Hulu loses great content whereas Viacom loses audience, despite Viacom believes that its own loss is not as big as Hulu’s. So is there a solution for the issue? Probably. Viacom could join ABC, NBC and FOX’s club to own a stake in Hulu, which could let them enjoy Hulu’s long-term growth in stead of caring about short-term money. Hulu would also benefit from Viacom’s high quality programs enhancing its current competitiveness. Consumers will love it since they don’t need to jump to different websites to watch the videos they like. Certainly, there are several barriers that need to be tackled in order for this to happen. First, it is unclear if ABC, NBC and FOX are willing to let their competitor to own a part of Hulu. Even they are, conflicts on the control of the site among these large media companies could be an issue in the future. Second, Hulu would be declared as a monoply if they gain investment from most of the big media firms. A similar online video service proposed by BBC, ITV and Channel 4, Project Kangaroo, has already been blocked by the UK Competition Commission.  Stay in the status quo or go to buy a stake of Hulu? Now it’s up to Viacom to decide. Jia Wu Client Reading: Online Video: YouTube vs. Hulu - Let the Battle Commence! Technorati Tags: Online Video

It’s now another season for earning releases. With positive numbers from major companies, the media and tech sectors return to growth track along with the general economy. Despite the recession and the changing industry landscape, News Corp still generated $30.9 billion sales in 2009, which is 1.3 times Google’s revenue for the same period. News Corp is once again on the sustainable growth trajectory since the fourth quarter of 2009. Google, returning to decent growth in Q4 as well, generated $23.7 billion in 2009. But here, the interesting thing about their financials is that Google has a market capitalization of $172 billion in February 2010, while News Corp’s market value only hit $35 billion, which suggests a 7.26 price-to-sales ratio for Google and 1.13 for News Corp. So why does a company, which earns less money than the other, end up having 5 times more market value? Of course, it’s the future growth or expected growth. (Although factors such as profit margin play a role, it is the future growth that has the most impact on Market Cap.) Google clearly grows its revenue by 8.5% in 2009 over the previous year, whereas News Corp’s sales dropped by 5.5% in 2009. But given News Corp’s decent post-recession rebound in Q4 and Google’s growth deceleration for the past years, is the two companies’ difference of current growth trends big enough to make up the entire $137 billion Market Cap gap? I doubt it. The investors definitely expect way more revenues from Google in the future than it’s generating now in order to substantiate its high market value. And given Google’s heavy investment in different areas such as mobile, computer OS and social networks, there is a fairly high possibility for Google to achieve it. But here the question becomes where Google’s next Multi-billion dollar business is? Google has publicly stated that display advertising, which includes banner ads on its online properties and video ads on YouTube, will be the next billion dollar business. I have no doubt about it. But I doubt that the growth potential in display advertising is sufficient to support people’s expectations on Google. Strategy Analytics believes online video ads will be nice business in the coming years, but it is more of a traditional business model other than that of Google search ads. Search is all about aggregating users’ intention and monetizing on that, while display ads are just old-fashioned magazine types of impression selling. There is nothing wrong with the old ways of selling impression, but that is not what Google eventually aims for. Google needs a new multi-billion dollar business to go for, as the groundbreaking AdWords it has invented many years ago. Since most of Google’s new inventions are or will be free, like Android and Chrome OS, I believe that Google’s next multi-billion dollar business will remain in search, and all that Google is doing now aims to increase the world’s Internet users and usage, which will in turn make the pie of search advertising larger and larger. It remains unclear that if there will be enough advertising dollars in the market to reward Google for its research and development, but at least Google makes the world better. Jia Wu

Global advertising revenues are forecast to decline by 8.5% this year, according to Strategy Analytics’ latest Global Advertising Forecast. In such a tough environment the need to find new communications platforms and ad-based business models is more urgent than ever. In theory the arrival of so many new IPTV services, in both managed and over-the-top environments, should give cause for optimism. If IP technologies have any advantage over traditional alternatives it is that they enable closer, more measurable relationships between those with the message (advertisers) and those receiving it (viewers). So far, however, with a few exceptions, we have seen little commercial evidence of these capabilities in the real world. These are some of the issues we will be exploring at the forthcoming “Future TV Advertising Forum” in London on December 11th. I will be chairing a session on Advertising in the Age of Convergence, with speakers from Coca-Cola, Thinkbox, RomTelecom and the Co-Operative Group. Other keynote speakers at the event include Turner Broadcasting, Sky, Channel 4, ITV, Discovery, Telenet and Ford. It promises to be a compelling and thought-provoking event. Early bird conference passes are available until the 25th November or register to watch the event live online FREE of charge at www.futuretvads.com. Twitter: twitter.com/DavidMercer_SA Client Reading: Online Video: YouTube vs. Hulu - Let the Battle Commence!

Things certainly didn't run according to the slick rollout plan Sky and Microsoft had promised us. In the grand scheme of things that is unlikely to have any major impact on tomorrow's world of connected TV. But the fact that two well financed global players can stumble so badly at the first hurdle demonstrates the severity of the challenges that lie ahead in the race to bring online TV to the big screen. The day after the official service launch Xbox posted the following message: “due to the unprecedented levels of simultaneous demand, we did not have the capacity to satisfy all service requests”. Xbox indicates that “many tens of thousands” of users tried to use the service. We, on the other hand, are surprised that this level of demand was not predicted in advance for such a high profile launch. The service will certainly have to cope with much higher volumes if Sky’s expectations are realised. The current status as far as we can tell (neither Sky nor Xbox have admitted to a more detailed analysis of the problems so far) is that some Xbox owners are successfully using Sky Player, some have downloaded it and been unable to use it, and others have yet to be offered the service. After the furore of the first day, when the application was withdrawn within hours of its launch, Xbox admitted that there were issues with some servers and that the service would instead be rolled out gradually to ensure that quality was not compromised. My own experience has veered from the excellent to the frustrating. I can say that we have managed to watch an on-demand streamed movie from beginning to end without a single glitch, and the video quality was quite acceptable. By contrast an on-demand sports game yesterday refused to play for more than a few minutes without buffering. I am currently still encoutering many buffering problems and Sky Player disconnections. I have also noted a few minor niggles with the user experience. The Xbox controller switches itself off after a few minutes of non-use, which is inevitable during the viewing of any TV show or movie. So live pause or any other functions cannot be selected until the controller has connected with the console, a process which usually takes 10 seconds or so. The aspect ratio on a number of shows, notably in Sky World News, are incorrectly set, so that tops of heads and captions are chopped off. News tickers are affected by jerky motion. The release dates of some programmes are not indicated in the programme description, which can be especially frustrating in the news genre. Most of these issues will surely be resolved over time. Both Sky and Xbox may be surprised (although they really have no excuses) at the initial demands put on their software and network systems and have to make further investments in order to maintain quality levels. One further point to note is that fast forward during advertisements during on demand shows has been disabled, which should certainly please advertisers. Assumign that these early problems can be solved quickly, it is clear, as we indicated before, that Sky on Xbox has the potential to shake up the UK's online TV market just as the BBC's iPlayer did two years ago. When it works, Sky on Xbox offers an entirely new way of selecting and watching TV on the big screen. The Sky Movies channel experience alone is transformed by the ability to choose instant start from a selection of hundreds of films. On-demand movies in our view will be one of the most used services, at least until Sky and its broadcast partners populate the libraries of television shows, which currently are somewhat restricted. We remain to be convinced that the streaming platform is yet sufficiently robust to support the expectations of subscribers who choose to get Sky for the first time using the Xbox platform. Given the monthly premium of up to £41 which Sky on Xbox customers will be paying there will be no room for the quality problems which are apparent at this early stage. We are also doubtful that many existing Sky customers will opt to pay an additional £9.75 a month to use the Xbox for live television on an additional TV set. The appeal of on-demand TV is immediately apparent, however, and we expect this to be a key selling point. It could be enough to tempt existing Sky customers to buy an Xbox 360. Xbox had better make the most of this window of opportunity: the rumours are already circulating that the PS3 will also offer Sky Player before too long. Twitter: twitter.com/DavidMercer_SA Client Reading: Online Video: YouTube vs. Hulu - Let the Battle Commence!

The UK’s 1.3m Sky TV subscribers who own Xbox 360s are about to get a real treat. Instead of putting up with Sky’s archaic EPG they will soon be surfing Sky’s content using the slick Xbox Live interface. We were given a live demonstration of the service today and everything (well, almost everything) is looking good for the commercial rollout on October 27th. Let’s get the slight caveat out of the way first of all: today’s demonstration from a central London location used a broadband connection to the production servers which will support the commercial service rollout. However, during live IP “broadcasts” one of Sky’s sports channels the picture was not 100% reliable, and occasional freezing and jerkiness was noticeable on several occasions. This would not perhaps be significant on a normal streamed video service to a PC, but it seems doubtful if TV viewers will be quite so forgiving. I’m sure Xbox and Sky will ensure that the commercial service is not plagued by these slight problems. Sky’s Griff Parry, who heads the Sky Player group, and Microsoft’s Jerry Johnson, head of Xbox Live in Europe, offered a united front to the partnership, claiming that, after initial and understandable caution, both teams had worked together extremely well and with considerable mutual respect. Of course we have seen previous apparently rosy partnerships involving Xbox fail to deliver, but this is clearly different. Sky would not be putting its substantial reputation for quality and reliability on the line if it was not convinced that the Xbox Live platform was robust, and the evidence so far (subject to the earlier qualification) is looking extremely promising. As expected the Sky programming sits behind one of the Xbox Live menu items in the Video Marketplace tab. As soon as the Sky option is selected the background and colour scheme become blue, reflecting Sky’s corporate image. The Sky menu items closely reflect the standard Sky TV EPG, down to channel and genre options. For relevant options there is the choice to watch on demand or live. In my view the biggest benefit of Sky on Xbox will be for Sky Movies subscribers to have access to a considerable library of true VOD movies on their TV set. Sky believes there are two major opportunities from this initiative: first, to secure loyalty from existing customers; and second, to tap into a lucrative 20-30 demographic for which its traditional satellite-based distribution may not be appropriate. Sky is thinking here particularly of young males who have yet to “put down roots”, who may move home frequently, and who inhabit apartments where satellite dishes are prohibited. This segment is seen as prime Xbox owning territory and therefore ripe for upgrade to premium TV services. Besides increasing the overall customer base, the Xbox Live platform offers Sky a new avenue towards advanced services. The early example of avatars sitting in front of a big home cinema screen watching live football together may or may not prove to be a gimmick. But a real opportunity for Sky certainly lies around integrating communications and content into exciting new services. Parry admitted that he sees headset-based voice chat during programmes as one of the most compelling opportunities in the early days of the Xbox Live venture. We can only imagine the possibilities as Xbox continues to add peripherals such as the set-top camera/microphone – the crowd noise during live sports could soon become the sound of a million home-based viewers shouting at the TV screen . Given what has been possible before, it would seem that Sky and Xbox together really can take the TV experience to a completely new level. If anything disrupts progress it will be corporate disagreements, rather than technology failings. Twitter: twitter.com/DavidMercer_SA Client Reading: Online Video: YouTube vs. Hulu - Let the Battle Commence!

Perform and Kentaro have confirmed that "close to" half a million viewers watched the live internet stream of Ukraine v. England on Saturday (see my previous post). While this number includes British troops and cinema audiences, these numbers are not likely to reduce the internet audience significantly. At a conservative average revenue per subscriber of £5 (given that some proportion - those who paid in the last day or so - will have paid significantly more) this means that income from the match will have exceeded £2m. Ironically £2m is also the sum Kentaro (the rights holder) was reported to have been demanding for rights to broadcast the game live on regular TV. So if these estimates and reports are accurate, Kentaro may be pleased that it has generated more income than it originally hoped. Of course, it is not quite as straightforward, since Kentaro will have shared income with its distribution and marketing partners such as the national newspapers, and will have had to bear the significant costs of internet delivery with its partner, Perform. Whether the game actually made a profit for either partner is likely to remain a well-kept secret. Kentaro’s willingness to negotiate a last-minute deal with the BBC for highlights suggests that it was not prepared, contrary to its previous statements, to rely solely on the internet for its revenues. This suggests that it was struggling to balance the books on this event through online-only distribution. It also risks alienating future online sports subscribers who may in the future be reluctant to pay on the assumption of online exclusivity, only to find highlights will be available free-to-air after all. But as I indicated previously, it seems clear that delivery of live internet sports to a mass audience is now at least technically viable, and Perform should be congratulated for the technical success. Whatever the financial results of this particular event, hundreds of thousands of sports lovers have now seen with their own eyes that live internet sports broadcasting can be delivered effectively, and that has a significant marketing value. The quality is clearly not close to the best television can offer, but it will only improve over time. Twitter: twitter.com/DavidMercer_SA Client Reading: Online Video: YouTube vs. Hulu - Let the Battle Commence!

One of the biggest ever live Internet sports events passed off (for this viewer at least) without major technial hitches this evening as the World Cup qualifier between Ukraine and England was streamed live to hundreds of thousands of viewers in the UK. Each paid upwards of £4.99 to watch the game, which was not available through any other broadcast platform. For the record, Ukraine beat England 1-0 to keep alive their hopes of joining England at the World Cup Finals next year in South Africa. My own live internet TV experience was based on a ~3Mbps BT connnection, a WiFi link to the BT Homehub, using a HPElitebook 6930p laptop with an Intel Core2 Duo 2.4GHz processor and 2GB of RAM. After resolving an initial freezing problem by disabling hardware acceleration in the Flash player I was able to watch the entire broadcast in the high quality mode with no freezing or picture breaks. I would describe video quality as close to a poor quality standard definition live football broadcast on Sky, something which major UK broadcaster ITV is well known for. One way I gauge quality is to judge how easy it is to see the numbers on the back of the players’ shirts from a distant, half-pitch shot. In live Sky SD broadcasts this is relatively easy; in live broadcast ITV games it is almost impossible, and Perform’s internet broadcast was close to this level. But the overall experience was acceptable on a 15” PC screen. I imagine it would be less so for those who connected to a large screen TV. We will know more about the commercial success of the venture once Perform and Kantaro announce subscriber numbers, which they have promised to do. They have confirmed technically that live internet sports can be delivered to mass market audiences. But with each viewer paying a minimum of £4.99, the experience had to come as close to pay TV quality as possible. Even though our experience was good, we will watch with interest for any other reports of dissatisfaction from paying customers. While internet broadcast technology is becoming more reliable, it is still by no means clear that pay-per-view sports is a viable business model, on any platform. NTL famously failed to make a business from pay-per-view football in the UK, although many believe they vastly overpaid for rights in the first place. The internet may be proven technically as a delivery platform, but the questions around willingness to pay, appropriate price points, and the profitability of this platform remain very much unanswered. Twitter: twitter.com/DavidMercer_SA Client Reading: Online Video: YouTube vs. Hulu - Let the Battle Commence!