The FCC’s recent approval, by a 4-1 margin, of the merger between Comcast and NBC Universal effectively transforms the nation’s biggest cable company into its largest media company as well. The $30 billion joint venture which was first announced in 2009 has many—including News Corporation, Time Warner and Disney—calling foul. To nobody’s surprise, the affirmative ruling (all 279 pages of it) came with some significant strings attached, including provisions around Net Neutrality, Over the Top (OTT) distribution and transparency, broadband affordability, as well as the new company’s role with Hulu.

Net Neutrality: Special Rules Unit 

The FCC’s Net Neutrality ruling last December was a compromise of sorts, leaving none of the interested parties particularly happy. In essence, the decision created “rules of road” for the Internet, though different rules for fixed and mobile services. As stated previously, we believe that the final disposition of this issue will take place in the Supreme Court.

It is interesting, then, that one of the “voluntary commitments” (as opposed to “conditions”) of the deal concerns net neutrality.  The order states that “neither Comcast nor Comcast-NBCU shall prioritize affiliated Internet content over unaffiliated Internet content,”   Furthermore, the order protects the commitment against any future (and probable) modification.  It states, “in the event of any judicial challenge affecting the latter, Comcast-NBCU’s voluntary commitments concerning adherence to those rules will be in effect.”

What this commitment essentially does is to lock NBCU into Net Neutrality, irrespective of the potential disposition in the courts.  The implications could be significant if NBCU-Comcast eventually finds itself subject to rules that its competitors aren’t.

OTT, OVD, FCC? OMG!

One condition that could potentially open the floodgates to new Online Video Distributors (OVDs) is the provision stating that “Comcast offer its video programming to legitimate OVDs on the same terms and conditions that would be available to an MVPD,” and that it make “comparable programming available on economically comparable prices, terms, and conditions to an OVD that has entered into an arrangement to distribute programming from one or more of Comcast-NBCU’s peers.

 From an OTT video service perspective, the conditions that FCC attaches to the merger approval do not harm—and could actually benefit—the value proposition of OTT services. The FCC requires that Comcast make available certain comparable content to an online distributor if one of its competitors does so. Although it does not imply a dramatic change to the current media distribution environment, it shows the FCC’s gesture to ensure OTT video services to have an equal opportunity of acquiring content and competing with MVPDs. Given emerging OTT services’ efficiency of formulating and executing strategies, an equal competitive environment gives them the upper hand to out-innovate those larger and slower MVPDs.

The single OTT video service that will benefit most from this merger approval is Netflix. As Comcast is spending its time integrating NBCU and probably will have to restructure or realign the company and redesign its online distribution strategy, Netflix is running far ahead in terms of expanding its content catalog, releasing more apps on different platforms and CE devices and improving user experience.

The Matter of Hulu

            Another provision of the ruling requires Comcast/NBCU to relinquish managerial control. uncertainty has mounted around Netflix’s main competitor in the online video space, Hulu, as Comcast/NBCU will have to relinquish managerial control in the online video distribution site. It makes possible for NBC to pull back its investment from a venture it would have little control, making Hulu less attractive to consumers and financially weaker than it is now.

For Hulu, the provision requiring Comcast to relinquish the managerial control of the OTT service could be beneficial as long as Comcast continues its investment in Hulu both in terms of financial backing and content availability. But different from NBCU, the new Comcast has had its own online strategy, which might be at odds with Hulu’s proposition. So Comcast may not want to invest in the Hulu business as much as NBC did before. On top of that, Comcast might eventually prefer to reduce or sell off its stake in Hulu due to the relinquishment requirement of managerial control on Hulu’s board.

Nobody wants to buy something that they don’t know much about and cannot control. If that were to happen, Hulu could still get NBC content as the approval requires, but it would lose its favorable position in the OTT space as the son of NBC--especially important when it comes to content deal negotiation.

Overall, the merger approval makes the prospect of Hulu fuzzier, if not gloomier.

 

‘Naked’ Broadband, Soviet Style

One of the most under-reported and potentially worrisome provisions of the order requires that Comcast provide standalone broadband access at “reasonable” prices. In theory, of course, this makes sense.  Consumers should not be required to take on a cable package in order to receive broadband, nor should it be constructed in such way that a bundled offering is, as the report notes, “the consumer’s only reasonable economic choice.”

               Where it gets hairy, though, is in the details.  The order goes so far as to mandate the minimum acceptable package and pricing (“At a minimum, Comcast shall offer a service of at least 6 Mbps down at a price no greater of $49.95 for three years”).  Seeing the FCC set pricing and package specifications should send a chill down the spines of free market enthusiasts.

Critics of the merger—and there are many— fall into two camps: those who feel the conditions go too far, and those who fear that they don’t go far enough. Dissenting FCC Commissioner Michael Copps pointed out that the ruling has implications on every corner of the media landscape, and that it “confers too much power in one company’s hands.”  Others call it a regulatory shakedown, setting a potentially worrisome precedent of the FCC inserting itself in the workings of an industry over which it has no mandate or authority.  

 

-Ben Piper and Jia Wu

 

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

Some say that OTT is the “most over-hyped and over-anticipated phenomenon in tech history,” others would have you believe the end is nigh for traditional pay television as we know it. The truth?  As usual, it’s somewhere in between. A report we’ve just published, “Over-The-Top vs. TV Everywhere: How Disruptive is OTT to the Pay TV Business?” concludes that while the reaction to OTT has been perhaps overhyped, online distribution does pose a potential threat to the traditional pay television model. The numbers to-date, however, don’t necessarily portend an imminent  collapse of pay television as we know it. . In fact, US pay TV service providers added nearly 2 million additional subscribers in the first quarter of 2010, despite an increasing threat services such as Netflix, Hulu, and YouTube. That’s not to OTT should be ignored, however.  Survey research we published in early 2010 showed that US consumers perceive a relatively low “value for money” for pay television services.   OTT services can potentially capitalize on pay TV’s biggest shortcomings, namely a lack of flexibility in selecting channel packages, and a low perceived value for money. -Ben Piper

Google last week unveiled GoogleTV, heralded by Intel CEO Paul Otellini as "the biggest improvement to television since color."  And hey, what fun is a huge announcement without unrestrained hype, hyperbole, and flashy demos?  Right? Whooops!

Never Work with Children, Animals, or Bluetooth

Demos often seem predestined to fail.  Anyone who has been on the receiving end of a trade show demo can attest to that.  Well, this isn’t working as planned, but you get the idea moments are hardly rare. So it was not a big surprise to see the Google TV demo hampered and delayed by technical glitches.  For a  technology meant to harness the power of Internet, and bring the experience to the television seamlessly, this was not particularly confidence-inspiring.  But we still get the idea…

Introducing WebTV 2.0?

Some of us are old enough to remember painful previous attempts at bringing the experience of the Web to the television screen.  Was WebTV simply misunderstood?  Or was it ahead of its time? Perhaps both.   What WebTV fundamentally missed was the singular and individual nature of Internet experience  One could argue that it did little more than render the tv screen a monitor viewable by the whole family.  The result was an experience similar to having someone read over your shoulder.  Creepy and annoying. To be sure, the technology has been there for years—it’s the business case that has been lacking.

Why it just might work this time

GoogleTV has a fighting chance this time, for several reasons…

Cord cutting is fast becoming a reality

Today things are markedly different.  With a growing abundance of online video, “Cord cutting,” the notion of Cable and Satellite customers moving to unmanaged free or almost free Internet-based platforms, is fast becoming a reality. Strategy Analytics sees the number of so-called "cord cutters" exceeding 10% of US television households by the end of the year. Video will continue to dominate, accounting for over half of all of all consumer Internet traffic in the next five years.

Source: Strategy Analytics

Although the GoogleTV talking points bill the platform as “complementary” to cable, satellite and Telco TV, make no mistake—GoogleTV is a competitor to traditional “managed” pay tv.

It satisfies a demonstrated need

While it has been possible to emulate a pay tv environment with a game console, a tv and a PC, the level of sophistication required to knit these together into a seamless and enjoyable viewing experience went far beyond the aptitude or interest of the average consumer. GoogleTV may just bridge that gap. Observational research of Connected Media Users in the US and Europe, performed under the auspices of Strategy Analytics’ Digital Home Observatory, uncovered some common missing elements consumers identified in today’s Over the Top (OTT) ecosystem In addition to the desire for an integrated experience across devices, respondents brought up the wish for a more personalized viewing experience, and the ability to discover new relevant content based upon their existing likes and interests, and more relevant advertising and payment options. These are all places where GoogleTV can deliver.

The Power of the Value Chain

As strange as it may seem to see Sony chief Howard Stringer sharing the stage with Google and talking about “openness,” a critical success factor for GoogleTV is the power of its value chain, and the A-list partners it has teamed up with. Along with Sony, the presence of Intel and Logitech, as well as BestBuy and Dish bring some credibility to the table.

TBD?

Pricing

Rumors are floating around about likely price points, but nothing firm as of yet. This could be critical, as a $399 Logitech “companion box” sounds like it may collect dust on the BestBuy shelves.

Content

Somewhat surprisingly absent from last week’s announcement was any real mention of the content side. Sure, there was lip service paid to “You Tube Lean Back,” but nothing of any great consequence. YouTube, which turns five this year, is starting to offer full-length movies, though it still lacks enough professional content to make it a viable alternative, and UGC (User Generated Content) is, by nature, ephemeral. How many times can you watch “David After Dentist?” And what about Sony’s extensive library of television series and movies?

Net Neutrality

As I mentioned in an earlier blog, the goings on with the FCC are doing very little to inject any sort of confidence or certainty into the minds of investors. And even though Chairman Genachowski’s “Third Way” strategy appears to be the current path, the fight has not even started with the MSOs and Telcos. Expect this to be tied up in court for the next few years. And that, we get. -Ben Piper

"The FCC is not having a one-night stand with Net neutrality,” said FCC Commissioner Michael Copps back in 2008, “ but an affair of the heart and commitment for life.”   Today’s ruling by the U.S. Court of Appeals for the District of Columbia may amount to a trial separation for the lovely couple.  The court delivered a painful kick in the shins to the FCC today, ruling that the agency  overstepped its boundaries in 2008 by imposing an enforcement action against Comcast, alleging the cable company’s  broadband network management practices to be in violation of the FCC's policy principles. Today’s ruling vacates the enforcement, which had called on Comcast to be more transparent in its network management practices.   While today’s decision may raise more questions than it delivers answers, it may be useful to consider some of the short and medium term implications.   The court’s decision is more about the FCC’s authority than on “Net Neutrality” per se  My number one prediction?  The mainstream media will get it wrong.   They will suggest that this is a ruling against Net Neutrality.  To be clear, today’s ruling is about the role and the regulatory boundaries of the FCC—not necessarily a ruling against Net Neutrality or the concept of an Open Internet.  The FCC in a statement said the agency remains "committed to promoting an open Internet and to policies that will bring the enormous benefits of broadband to all Americans."   This decision will be challenged, but that could take years.  In the meantime, look for the service providers to begin “testing the waters.”   I’m no lawyer, but as a more than casual industry observer, I can predict with some certainty that this is not a definitive ruling.  It will more than likely end up in the Supreme Court—but don’t make any plans yet.  Broadband is now classified by the FCC as a “lightly regulated information service,” and as such it skirts many the regulations imposed on traditional Telecom services with regards to open networks. Some suggest that the FCC, as a rulemaking body, can simply reclassify broadband, and impose tougher regulation.   Whatever the final disposition is, time is on the side of the service providers.  The glacial speed of change in DC means that in the upcoming months (and even years), Comcast and other service providers—granted a temporary reprieve—will likely begin testing the waters, and recommence traffic prioritization and other various and sundry network management antics.   What about OTT?   An affirmative decision on Net neutrality has always been a cornerstone of the future of unmanaged over-the-top (OTT) video.  Today’s ruling throws a monkey wrench in those works.  Until the next challenge, Comcast (and any service provider for that matter), reserves the right to prioritize and manage traffic streams as they see fit.   “Sure we’ll get your YouTube video—just not all at once.” And oh yeah, what about the future of the US National Broadband Policy?   Here’s hoping the FCC is reunited with its soul-mate.   -Ben Piper

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!