The only thing in the middle of the road are dead skunks and yellow lines

Or so goes the Texas adage. Today’s 3-2 FCC vote on rules pertaining to so-called “Net Neutrality” may once again prove that compromise guarantees only one thing.  That nobody’s happy. The debate, which has been a five year long rollercoaster ride, came to a head in what is being described as “rules of the road” for the Internet. The inherent fuzziness of the provisions, which include such vague concepts such as “transparency,” “network management,” and “unreasonable discrimination” all but guarantee that the matter will ultimately be decided in the courts. Furthermore, the same rules don’t apply to fixed and mobile networks.

Fair to Middling

FCC Chairman Julius Genachowski made a point of characterizing the rules as “middle of the road” approach—though likely one where no side even feels a little bit ok about it. “On one end of the spectrum, there are those who say government should do nothing at all, on the other end of the spectrum are those who would adopt a set of detailed and rigid regulations.” The Chairman said he rejects “both extremes in favor of a strong and sensible framework - one that protects Internet freedom and openness and promotes robust innovation and investment."

A Little Hyperbole Goes a Long Way

Indeed, critics are vocal on both sides, with opponents comparing it to the “government takeover of the Internet,” and Net Neutrality supporters calling it “worse than nothing.” Outspoken Senator Al Franken calls it the “most important free speech issue of our time,” and surmised that “ If corporations are allowed to prioritize content on the Internet, or they are allowed to block applications you access on your iPhone, there is nothing to prevent those same corporations from censoring political speech.” Republican FCC Commissioner Robert McDowell, in a Wall Street Journal Op/Ed piece said that the new rules will squelch innovation and investment, and reflect more “coercion than consensus or compromise.” He goes on to say: “On this winter solstice, we will witness jaw-dropping interventionist chutzpah as the FCC bypasses branches of our government in the dogged pursuit of needless and harmful regulation. The darkest day of the year may end up marking the beginning of a long winter's night for Internet freedom.”

Netting Out Net Neutrality

It’s still not over

It’s not over—not even by a long shot. April’s ruling by the U.S. Court of Appeals for the District of Columbia challenged the very role of the FCC in regulating broadband. Certainly, this is yet to be scrutinized and debated in Congress, and ultimately in the courts.

Please Have Exact Change

While the rules voted on today preclude service providers from blocking “lawful content,” they apparently do little to discourage the practice of “paid prioritization. ” The rules, set to go into effect in 2011, create a “toll road” of sorts on the metaphorical information superhighway—a road that companies such Google and Netflix may be forced to take.

FUD Factor 2.0

Markets don’t like fear, uncertainty and doubt. We all know that. And while Chairman Genachowski suggest that the rules “increase certainty in the marketplace, and spur investment both at the edge and in the core of our broadband networks”, the result may be just the opposite. Well, that’s what it smells like anyway.  -Ben Piper

Already heated tempers reached a boiling point last week in the current mêlée between Fox's parent company, News Corporation and New York-based Cablevision. At issue is the question of "retransmission," the fees cable companies must pay networks to carry their programming in the line-up. In the latest salvo, News Corp elected to deploy a "nuclear option" of sorts--blacking out not just Fox channels, but also Cablevision subscriber access to sites such as fox.com and hulu.com. The access blocking, while short-lived, sent a clear message-Fox holds the cards. Was this move a shot across the bow of `traditional' cable, as some have suggested, or rather a shot in the foot for News Corp?

This Whole ‘Cord Cutting’ Thing?  Yeah, it’s Here to Stay

Dismissing or minimizing the severity of cord cutting has been de rigeur of late in the analyst community.  Many service providers and industry pundits alike have effectively buried their heads in the sand for the past 18 months over the issue, writing it off as “over hyped phenomenon.” Survey research we just fielded suggests that doubters might want to rethink their position.  According to the survey of 2,000 Americans in late Q3’10, 13% intend to drop their pay TV subscription in the upcoming year—and not replace it with another one.  We have long held that cord cutting is a very real problem, and what we’re seeing now is likely just the tip of iceberg.  What happens when today’s teenagers start controlling the pocket strings in five or ten years?

120 Channels and Nothing On

The average US household receives nearly 120 channels, though many would argue that they watch only a handful of those. Our survey found that, when asked to rank their five "must have" channels, Pay TV consumers chose the four "free networks" (CBS, ABC, NBC, FOX) as the top slots. ESPN rounded out the top 5. This is rather astonishing, and adds further credence to the notion of cord cutting.  After all, if  four of the top five channels an individual watches are available for free (either online or over the air), why on earth would one pay upwards of $70/month for a subscription?  Force of habit?  Because the cable company told you to?  To avoid having to switch an “input” button on the remote control?

Not the End for Pay TV—But Maybe Pay TV As We Know It

To be clear, we are in no way predicting the imminent demise of pay TV.  There will always be a market for premium content, and that customers will continue to be receptive to paying for content relevant to them. Rather, we believe that service providers must rethink business models. Some have already begun to do this, through initiatives like TV Everywhere.  That, however, solves only the where part of the problem.  Next to tackle is the what. A la carte?

When I switched my home television service  from DirecTV to Comcast last summer, the slick sales guy on the other end of the line promised me that I would be receiving an identical channel lineup to the one I was currently receiving.  “Apples to apples,” he promised. “Only cheaper.”   What’s not to like? You’d think that I, someone who gets paid to research and write about digital television, would have done more due diligence on his own account.  I didn’t. So, when it became apparent that two “must have” channels for me (NatGeo and BBC America) were not in my Comcast tier, I called again to inquire.  Seems that to get those, I would have pay an additional $15 a month to buy up to the next highest tier, one filled with numerous channels of no use or interest to me.   Suddenly the calculus changed.  This was no longer a good deal.  

This time, it’s not coming from the FCC

Recent movements suggest that change may be afoot.  No sooner had Comcast announced the launch of its OTT-mitigating Fancast Xfinity TV service than rumors started circulating about Apple’s talks with CBS and ABC.  Seems the folks in Cupertino are mulling a subscription-based video service, obviating the need for iPhone/iPod users to depend solely on the Apple iTunes service for downloads. If the Apple service is successful at elegantly bridging  the '’screen gap,” and delivering compelling online content to the tv screen, it could fundamentally alter the way MSOs sell content.  The much maligned “bundled” system currently in place, whereby consumers are required to purchase content in blocks of channels--rather than individually--could finally be on the chopping block.  And that’s good news. What is interesting, though, is that the catalyst for this change will be the market—not a government mandate as previously feared. A la carte used to be somewhat of a cause célèbre in the television world, and one that the FCC has been wrestling for years. It was only the more recent emergence of “net neutrality” that has stolen the spotlight from the issue. Former FCC Commissioner Powell’s administration commissioned a 2004 report finding that, under an mandated a la carte scheme, customers would end up paying more.  That report has since been largely discredited and found to be riddled with misinformation and half-baked analysis.  Successor Kevin Martin embraced “cable choice,” though apparently more for the way it allows parents to monitor and block channels, than for household consumer budgetary reasons. One analyst firm  rather dramatically predicted ‘economic ruin’ if the FCC went ahead with its plan.

Who moved my talking points?

Government-mandated a la carte is bad for cable consumers, who would wind up paying higher prices to receive the same level of service and fewer channels than they receive today.”-NCTA Issue Brief, January 2009

The National Cable Television Association (NCTA ) talking points were crafted to respond to a possible “government takeover” of television.  In the context of a market driven change, the memo reads somewhat differently.  Most of the arguments fly out the window, and the market will call the cable industry’s bluff on the supposed technological barriers to offering personalized programming. As usual, the problem does not lie in the technology, but rather in the business model The very nature of cable advertising is in flux, brought upon largely by digital television.  The 30-year old model in place today, whereby flagship channels lead certain tiers and support fledgling new ones, could be facing some changes.  While the NCTA estimates that half of cable companies’ revenues come from national ad sales, this is certainly shifting.  Intelligent two-way networks will herald in addressable advertising—the next step in demographic targeting. Indeed, vendors I spoke with only months ago alluded to some “user identification” scenarios that could pinpoint actual viewers within a household, based on their “jitter signature.”  Seems that we all shake and tremble in our own unique ways, and it is possible to use these signatures like fingerprints, and serve up completely targeted advertising.  To be sure, , vendors will need to overcome the “creep out” factor first, but the general idea is the same.  Linear advertising as we know it is going the way of the dodo, and the MSO’s ‘old math’ will need to change.

It’s not about choice…it’s about the illusion of choice

Our research shows time and time again that consumers are tired are feeling that they are being screwed by their pay television providers.  The nickel and diming in all aspects of consumers’ lives has grown out of control.  Our latest survey work (to be published in Q1) found that only about 20% of pay tv customers felt that the ““value for money” they were getting from their pay television operator exceeded expectations. Part of the issue is consumers’ feeling that they have no control, that they are somehow being  taken advantage of.. Choice—or more importantly, the illusion of choice—is an extremely powerful tool.   Think of the immensely popular Build a Bear Workshop franchise, whose stores dot shopping malls across the world.  BABW allows customers to design and personalize their very own stuffed creatures by visiting eight “stuffed animal-making stations,” where they can choose (and buy) everything from stuffing to clothing.  The concept has been a huge hit, and the company is now a $300 million/year concern, with over 400 stores worldwide.  What is the secret to the company’s success?  Certainly not selling adorable plush animals; anyone can do that.  Rather, BABW has perfected the illusion of choice and flexibility.  All customer start at the same default position: buying a bear.  The trick is, they end up paying more for the additional  features relevant to them.

How about “Build a Bundle?”

What prevents MSOs from employing a similar strategy—allowing customers to design their own bundled offerings?  All would start at the same default position, the $XX/month basic tier.  The real money comes in the add-ons.  Critics say this is not how advertising works in the cable industry.  Guess what?  It’s about to change. My (still untested) hypothesis is that, if customers were given the choice to “personalize” a  television bundle, ARPUs would actually increase--or at least stay the same.  Allowing them to configure a package conveys the illusion of choice and control, and makes customers think they are in the driver’s seat. Sounds like a great project-opportunity…phone lines are open if someone out there wants us to test the concept.

I raised my concerns over potential conflicts in Cisco's consumer strategy a few weeks ago. This week I had the opportunity to raise them directly with John Chambers during an analyst round table here at CES. Most of the hour's discussion centered in one way or another on the question of the changing role of service providers in the residential space, the challenges they face, and how Cisco is helping them evolve and compete. Chambers confirmed that his company planned to move into consumer markets "aggressively", so we should expect a lot more activity from the Linksys and Scientific Atlanta teams in the coming months. The answer to the question, "which do you choose - service providers or media companies?" is, perhaps inevitably, "both". Cisco plans to remain completely neutral, support open technologies, and ultimately let the market decide. This seems to be an entirely logical position - perhaps too logical. Time will tell whether Cisco's current service provider customers are happy that the company supports its emerging competitors. And, if they are not happy, whether there is even anything they can do about it... Let's face it, Switzerland doesn't appear to have suffered too much from being everybody's friend. 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

One of Cisco's execs summed it up nicely today when he said John Chambers is extremely careful in treading the fine line between serving media companies and service providers. The company's Media Solutions group is at the front line of what should be a major new revenue stream, for Cisco and others, as media companies seek to distribute digital content to connected devices (See Disney/Streamboat's investment in Edgecast this week), ie, become service providers. At the same time, the Scientific Atlanta team are focused squarely on helping today's "service providers", ie cablecos and telcos, to meet the challenge of digital media. Most Cisco people do a good job of arguing that media firms aren't likely to compete directly with network access providers, at least in the near term. Either the internet isn't ready for media prime time, or cable and telcos will fight back with QoS and QoE tactics. Or media firms don't really want to bypass those folks, but are simply looking for new channels to supplement their existing ones. All those things may be true, and only time will tell. The outcome is inevitably going to be a mix of the two in the marketplace. What is uncertain is how influential advertisers can become in deciding the future. Cisco, like other tech firms, now needs to demonstrate to those companies just how much more effective the internet can be in maximising the effectiveness of their commercial messages. If they do a good job on that score, new business models around content will certainly emerge to take away some of the pain resulting from the inevitable downward pressure on paid content distribution models. The long term direction is unlikely to become clear for the next 2-3 years at least. 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

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

Or at least, boxes that are provided, ie "managed" by traditional TV companies like cable, satellite and IPTV service providers. The rumours are rife that Google is planning an Android for the TV space, and should be no surprise since Vincent Dureau joined the company a couple of years ago, having been CTO at OpenTV, the interactive TV market leader. He isn't there to improve search, that's for sure... What commentators such as Techcrunch are missing is the critical distinction between a TV service delivered, managed and controlled by a set-top box as part of a vertical platform, and TV that is available through open systems. I'm sure Google can come up with plenty of cool interactive TV apps, but that is neither here nor there if the vertical service provider doesn't see them as a profit generator for themselves, not Google. Google's models, for the moment, depend on open technology frameworks, not getting into bed with vertical service providers. So the company should focus its TV efforts on pairing up with emerging web TV players like Akamai and Move Networks, which are forging a path towards Round the Back delivery of HDTV over the internet. It should also work with manufacturers of "Digital media devices" as its route the end user, ie TV plug-ins that get the web video straight to the big screen where people want to see it. What web TV lacks right now is a sound business model, and that may be where Google's advertising savvy comes in rather handy. 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

Most of the commentary on BT's announcement of its second quarter results focused on its BT Vision numbers - 60,000 customers - and whether this was below or on target (BT suggests it is going to meet its target, although there is dispute as to what that target really is). These debates are missing the key point, which is how much revenue BT Vision is generating. On this question the company maintains an ominous silence. The point being, of course, that you can be a "customer" of BT Vision without paying the company anything at all, beyond the basic broadband access fee. In fact, BT can be in deficit to a customer who chooses to take up the offer a free DVR (set-top box with recorder) and uses it simply to watch and record off-air Freeview. The BT Vision VOD service works perfectly well in my own experience, although the tortuous setting up of the service earlier this year might have driven many customers to cancel their order. Once BT confirmed that my line was able to support video, everything was fine, but at times it was giving very mixed messages - one day my line was adequate, the next it wasn't. Once it's up and running, choosing and watching VOD programmes is easy enough, although I haven't chosen to do so very often as they are nearly all pay-per-view. And that is the point: VOD was going to be a major revenue stream for BT, but it has not released this key information. It likewise remains silent on the question of how many of its "customers" are actually paying, and how much, for any level of subscription service. Until this vital data is released the BT Vision jury remains out.

Disney's ABC Networks has recently beta-launched its new online HD service. US surfers can now stream HD versions of popular shows such as Lost, Desperate Housewives, Grey's Anatomy and Ugly Betty. ABC is using Move Networks technology, a company it invested in December 2006. Other technology providers are also moving into the online HD space. In terms of video performance, we have been most impressed with Vividas, whose approach involves downloading video players on a one-time basis to the user's PC and thus, the company claims, avoids many of the pitfalls associated with traditional peer-to-peer streaming approaches. Itiva is another company to watch out for. ABC claims to be the first network to stream HD on a regular basis, but Fox has also been offering HD shows at www.myspace.com/fox. It seems clear that online HD, in spite of the obvious network and technology challenges, is firmly on the roadmap for media conglomerates. As they explore this new approach to reaching and keeping customers, they are likely to find that traditional access providers, such as cablecos and telcos, may resist their attempts to bypass their carefully managed HDTV services. The net neutrality debate is not dead yet. Strategy Analytics clients can read more here.

A few tasters from tonight's media preview:

3D headsets from TDVision: take any video content processed on a PC and transform them into a 3D image using a dual-image headset display. Worked quite well using demonstration video - a regular TV football game was transformed into a 3D event. But video headsets will remain a niche market however good they are.

Addlogix: demonstrated its wireless media adapter that claims to be the only one that can accommodate streamed Internet content. Demo'ed ABC's Desperate Housewives streamed from the web to a PC, then wirelessly to an LCD TV.

Norint's Falcon 3D game controller: an excellent new control device that lets the user navigate in a 3D environment with realistic force feedback.

Infusion internet radio player: a compact wireless internet radio player from Australian firm Torian. I'm a big fan of internet radio and this is another step in the direction of a breakthrough device, though I'm not sure it quite ticks all the boxes.

Pulse-Link was demonstrating 2 simultaneous HD streams over a UWB-over-coax network. Impressive video, but there appeared to be problems with the graphics when the credits rolled.

More to follow....