Away from the controversy caused by the inevitable if justified hoopla surrounding Samsung's legal battles with Apple, the Korean giant was pursuing its strategic visions on several fronts at last weekend's IBC show in Amsterdam. The vision was made more evident at one level as David Eun, EVP Global Media Group, discussed the company's options in the content industry. Of most note was his admission that we should not completely rule out Samsung's entry into the content business as developer or owner ("Never say never"), although in general Eun, who was appointed to the role in early 2012, hedged his bets on specifics regarding the company's relationship to the content industry. Samsung "will take a slice of the content value chain" and all options remain open.

The most significant demonstration at the IBC show was on Samsung’s booth, where the company was demonstrating the pay TV app which will be launched later in 2012 by TeliaSonera’s Estonian subsidiary, Elion. This was the closest thing we have seen so far to a virtual set-top box implementation. The app or service runs the entire portfolio of Elion pay TV channels and VOD services, and also provides a virtual (cloud) DVR functionality to replace the hard disk drive which would appear in the (real) set-top box solution.

Most impressive of all was the way in which the pay TV takes over control of Samsung’s smart TV. As soon as the user signs up to Elion’s service via the app, it becomes the default setting, overriding even Samsung’s own Smart Hub. If the viewer switches off the TV at night after watching Elion’s TV channels, as we would expect, the TV boots straight into the Elion app when switched on again in the morning. In order to exit Elion the viewer must select the input select button on the remote control in order to get back to the “regular” TV functions, including the TV’s built-in Smart Hub. We know well from our user experience research that this is not something many consumers will find easy.

The Elion demonstration illustrates the degree to whcih the traditional video ecosystem may be disrupted by apps and cloud technologies over the coming years. Clients wanting a deeper analysis can consult our latest Insight report.

Freeview's Managing Director, Ilse Howling, today warned UK regulators and politicians that the free digital TV service could only continue to grow if it had access to the 600MHz and 700MHz bands. Speaking at this morning's Westminster eForum event, she also reconfirmed her company's opposition to the current proposals for use of the 800MHz band by 4G services, which could, according to Arqiva's Charles Constable, lead to many more than two million homes losing access to some or all Freeview services.

Howling praised the Government's decision to fund the cost of the filters required to minimise disruption to television services, but criticised the fact that there was currently no proposal to fund the cost of installing these devices in homes, which is estimated at between £150 and £160 per home. Howling believes that the 'polluter pays' principle should apply, the 'polluters' in this case being providers of 4G services, in case there was any doubt.

Howling's position was supported, not surprisingly, by the DTG's Richard Lindsay-Davies, who said that management of 4G spectrum and white spaces were the most important challenges facing DTT's future. To that end he announced that the DTG's own test centre had been chosen by the UK government to assess the threat of 4G interference with DTT receivers. Professor Sylvia Harvey made the important point that the term 'interference' is inappropriate in the digital world, since rather than deteriorating gradually or suffering partial degredation, services would immediately disappear altogether.

There was also general agreement with the suggestion made by Barry Fox, renowned technology journlist, that a real world trial of 4G, possibly in the Oxfordshire area (containing the constituencies of Prime Minister David Cameron and Minister for Culture, Communications and Creative Industries, Ed Vaizey) would allow everyone to see exactly how many homes and devices would be affected by the introduction of 4G services, since however rigorous the testing, real world conditions are impossible to predict. One can imagine that the disappearance from the Freeview airwaves of a major live sports event – the Olympics 100m final perhaps – caused by a temporary 4G switch-on might be effective in bringing the issue to national attention.

In spite of their natural allegiance to the television industry, most eForum speakers recognised the importance of 4G services in the UK’s overall information infrastructure, but there are clearly battles ahead when it comes to the fine details of which spectrum gets used for which services and who pays for disruption to established businesses caused by the introduction of new technologies.

The wider context of the debate centres on the relative importance of traditional television in the context of the continued expansion and influence of personal and mobile devices such as a smartphones and tablets as media consumption platforms. These issues were also addressed at the conference but with an inevitable bias towards traditional models, in the sense of both “big screen” and “free to access” as key components of what many (British and European) people still understand as “television”.

The key unknown in much of this discussion is whether the current sharp demographic variation in media device consumption patterns indicates a permanently altered landscape. In other words, will today’s young, small screen video viewers remain that way as they grow older or will they seize the opportunity to migrate to a large screen HDTV as soon as they form their own households in later life? Because the assumption of many “wireless” provider seems to be that “wireless broadband” is the only service many people will need in the future to consume whatever content (video, music, games) on their personal smart devices as well as larger screens. The US is already debating whether LTE broadcasting can provide a long term replacement for traditional over-the-air signals (see Ericsson IEEE paper). If such debates come to Europe then the DTT/4G arguments seem set to become even more complex.

David Mercer

Established IPTV and OTT vendors Viaccess and Orca Interactive have now merged their operations and will now be known as VO. This is presented as a structural change with no impact on employment in either firm. In the near term the branding will remind customers of the companies’ combined origins. Judging from discussions with management in Paris earlier this week, VO’s pronunciation itself remains to be determined: “Vee-Oh” appears to be the preferred option although we will see whether market forces push things in the direction of a more obvious if less melodious “Voh”.

Both Viaccess and Orca have been part of the France Telecom (Orange) group for some years, since Orca was acquired back in 2008. And therein lies one of the main problems the new company is trying to solve: it believes it is widely and less than accurately perceived as focusing on the interests of its parent company. In fact VO counts YouSee, Eutelsat, Canal+, Reliance and Boxer amongst its customers. The key objective of the merger is to help kickstart a further expansion of VO’s customer base, notably in the Americas, although it is also presented as offering existing clients the benefits of closer synergies between the two firms and a more complete solution to the content discovery and management needs of companies deploying IP (OTT or managed) TV services.

There is a perennial debate in the TV technology space about the relative merits of smaller (nimble, agile) versus larger (one-stop shop) vendors. VO readily admits that it now falls into the medium sized bracket, but seems particularly keen to stress the advantages it has against bigger competitors which, if anything, have become larger in recent times with the acquisitions of NDS by Cisco and Widevine by Google.

If a company’s success was determined simply by its relative size forecasting would be a simple business, but presumably also no new companies would ever succeed. VO’s creation will only be justified as successful, by France Telecom as well as the outside world, if the company grows. Demonstrations of VO’s multiscreen and hbbTV solutions suggest it has a package of products and services worth considering. As VO’s deputy CEO, Haggai Barel noted, Orca was demonstrating multiscreen on a Nokia smartphone ten years ago, and this pedigree has evolved into a set of multiscreen options which appear to tap into most of the possible needs of managed or OTT service providers.

What I would most like to see is further evolution in VO’s content discovery and intelligence technologies. As I have pointed out previously this remains one of the unresolved challenges and opportunities in the new TV era and the company that comes up with solutions which truly revolutionise the way viewers discover and enjoy television content will be creating new value.

David Mercer

Big news today as Cisco announces its intention to acquire NDS for $5bn. Both company boards have approved the deal which is expected to close during 2H 2012. NDS is currently owned by News Corp and Permira.

Cisco made headlines last year for most of the wrong reasons, including famously pulling out of most of its consumer-facing businesses such as the Flip camcorder. Acquiring NDS puts it firmly back on the acquisitions radar, and confirms what John Chambers told me during our analyst roundtable at the 2012 CES: “the consumer still remains a key element in Cisco’s strategy”. Cisco supports service providers who support consumers, and NDS fits nicely into that positioning. According to Chambers during the financial analyst call today, NDS’s strength in software is exactly what Cisco’s customers have been looking for.

NDS helped create the pay TV industry. Originally developed out of the News Corp organisation, its smart card technology was a critical element in the development of Sky in the UK, and from that base it expanded into many pay TV operators around the world. Along the way it expanded into interactive (now more fashionably known as smart TV middleware and many other components of the television technology chain. And while the company’s charismatic leader, Abe Peled, used to make great play of the longevity and importance of the smart card/set-top box model, his company nevertheless has been preparing the way for the OTT/connected TV era. The fact that News Corp is willing to sell NDS is another sign (after Sky recently announced its own independent OTT service) that media companies see their subscription businesses as less reliant on the television set-top box, instead moving towards a multi-device, software and network based model.

If anyone doubted Cisco’s seriousness about the consumer video space (rumours about the future of its Scientific Atlanta business regularly resurface), this acquisition confirms it still intends to play a critical role in television’s transformation over the coming years. Assuming that the transaction goes ahead and NDS can be successfully integrated, NDS’s operator relationships, R&D strength and technology visions should help Cisco’s service provider and media customers make better sense of the value chain disruptions which lie ahead.

David Mercer

A common theme during last week’s excellent Future TV Ads conference in London was the battle between “platforms” (TV service providers) and broadcasters. Platforms such as Sky and Virgin gave upbeat assessments of the opportunities presented by IP technologies to improve the power and value of advertising. Broadcasters, on the other hand, were markedly more nervous about the impact on their own businesses.

 

Virgin Media is currently gung-ho about its TiVo boxes: 220,000 households (6% of Virgin’s TV customers) were using these devices by the end of October and we were assured that the number is already “much higher”. 79% of those households are accessing an average of 4.5 “apps” each week.

 

By deploying more advanced technologies such as TiVo, Virgin has been able to trial new advertising models, and claims that they have “all been highly successful”. While this somehow doesn’t quite ring true, Virgin believes it is in a good position to “create the next generation advertising marketplace” and furthermore that “apps will be a fundamental and significant part of the television advertising toolkit”.

 

Sky’s Jeremy ester (director, brand strategy) highlighted two key challenges for advanced advertising: ad serving technology, and measurement. Sky is helping to address the latter challenge by finally fulfilling the potential of its interactive set-top boxes to develop improved advertising research. The company already has 20,000 households in its SkyView customer panel, which have opted in to sharing set-top box-based information about viewing patterns. Sky plans to expand this panel towards “hundreds” of thousands of homes over the coming year or so, and in fact Tester suggested there was no reason why the base should not ultimately comprise millions of households. Sky’s strategy is leading towards the deployment of Sky’s AdSmart targeted advertising service on set-top boxes by spring 2013.

 

Another important piece of BSkyB’s strategy is SkyIQ, a subsidiary which evolved out of the acquisition of a division of Experian in 2010. SkyIQ supports advertisers with database and customer intelligence services, and, according to Tester, is offering advertising research which is “better than anything seen before”.

 Sky’s counterparts around the world may be curious how the company is managing data privacy issues, which can be notoriously stringent in many countries. Sky contacted its customers earlier in 2011 seeking permission to collect anonymous customer data, and claims that “very few” of its customer households did not give their consent. There seems to be a lesson that if data collection is presented as offering clear benefits, many customers do not see it as a problem.

 

In response to my question about social networking, which Tester had not mentioned during his presentation, he admitted that Sky is seeing a “huge impact on viewing behaviour” from social networking apps and services. I did sense a slightly defensive stance, since Tester was quick to reassure us that Sky “did not want to get left behind” and was developing its own social networking tools. It sounded as though that was a little bit more than Sky’s corporate communications team wanted to be publicised, so we can assume significant announcements in this space over the coming months.

 

The “battle” was certainly raging during my own panel at the end of day two. Decipher’s Nigel Walley stood up for broadcasters “vigorously”, let’s say, in the face of questioning about the supposed threat from Google, Facebook et al. I just hope Videonet, the conference organisers, have invested in a bleep machine before they edit the videos for online availability.

The bottom line, as GroupM’s Simon Thomas noted, is that advertising expenditure as a whole can not be expected to grow very much over the coming years. While there is a great deal of advertising experimentation, advertisers, like every business in tough economic times, have to quantify ROI before investing in new solutions. “If we can’t measure it, we don’t get paid by the advertiser.” And as ITV’s Eric Guillaume admitted, broadcasters are “really bad” at understanding customer data. As we’ve seen, that is a huge contrast to what’s going on at Sky, Virgin and the TV platforms in general, and explains why broadcasters have a great deal of catching up to do if they are to thrive in the new interactive television era.

David Mercer

Reuters is reporting that cable operators are working on a plan to allow customers to purchase channels on an individual basis, also known as à la carte. This represents a 180 degree change in strategy and position, from an industry that has long held that established advertising models preclude any departure from the 'tiered' channel system. 

Glad to see you're finally coming around, Cable.

Not that you had much choice. And not to be uncharitable, but golly, it feels good.

You see, our camp (those who have been citing the need for à la carte bundling for the past 4+ years) has been rather sparsely populated of late. In countless reports, presentations and one-on-one meetings with Cable executives over the years, we have pointed out that à la carte is not just a consumer preference, it is a Pay TV imperative. Meanwhile, through industry blowhards and paid quote-models, we have been told that it can't work, that it won't work.

Our response has always been that it has to work, if Pay TV is to survive.

And after years of dismissing it out of hand, of categorically rejecting any survey data or consumer insights contradicting their established talking points, Cable is finally listening, the wires and airwaves are filling up with the sounds of pundits finally changing their tunes.

"There is a growing recognition that the current model is broken," one epically overexposed talking head quipped yesterday.

How's that for groundbreaking insight?

US Pay Cable operators posted net subscriber losses for the 15^th consecutive quarter in Q2'11. For fourteen of those fifteen quarters, the industry has regularly pivoted on its explanation.

First, they said net losses were just a 'blip', an anomaly. When losses persisted in sequential quarters, the stagnant economy and high unemployment were to blame. When that no longer held water, the talking point morphed into a we didn't want you anyway argument, that those churning or dropping were low value customers. A report we just published completely discredits that explanation as well.

Fresh out explanations, and having bled 400,000 subscribers in Q2'11, Pay TV really has no choice.

For as long as I've been covering this space, I've cited survey after survey confirming a strong consumer preference for à la carte and indeed, a willingness to pay MORE for à la carte. Consumers feel ripped off, they want to feel that they are in the drivers' seat. They need choice or the illusion of choice.

And contrary to what some suggest, money is not the primary motivator for consumer churn, it's about perceived value. It's about control of content.

Indeed, our latest report, which draws on a recent survey of of 2,000 US households, further confirms this notion. It shows that 21% of American Pay TV subscribers would be willing to pay more than they currently do if it means they have some say in what channels they get.

Glad you've seen the light, Cable. What took you so long?

The past two years have been tough on Pay Cable TV. In 2010 alone, the industry saw over two million video subscribers drop their subscriptions. While certainly not great news, there was a silver lining. In the same seven quarters, Cable High Speed Internet (HSI) gains more than compensated for Pay TV losses.

Has Cable been in the wrong business all these years?

Following that same trend, Time Warner Cable today announced that it had lost another 66,000 Pay TV subscribers in the first quarter. The good news? It added 177,000 broadband subscribers.

We've heard (and indeed, have been saying) for so long that traditional Service Providers were threatened with "disintermediation" and risked being relegated to the role of a "dumb pipe." I, along with many analysts, have advised Service Providers to avoid this trap at all costs.

But in retrospect, is being a "dumb pipe" such a bad idea?

High Growth, High Margin

As Pay TV subscribers (and margins) continue to dwindle, Cable Broadband profitability is growing. Our analysis shows that HSI margins are anywhere from 70% to 110% higher than Pay TV (depending on whether or not advertising is included in the calculation). Broadband is likewise changing the face of the "traditional" Cable bundle. In 2008, Video contributed 59% to Cable's Revenues. In 2010, the number was 53%.

TWC's CEO Glen Britt told analysts on the company's Q1'11 earnings call that the company is rethinking the role of broadband in the company's portfolio. "High-speed data is quickly becoming the anchor product in the eyes of our customers," he said.

Don't reprint those business cards quite yet

While on the surface it may seem like a no-brainer, doubling down on broadband may not be the best long-term strategy for Cable.

As a highly commoditized consumer offering, it is extraordinarily challenging to differentiate, and is one easily duplicated by competitors. Furthermore, prospects for increased ARPUs in fixed broadband are decidedly limited, as few have been able to successfully monetize incremental bandwidth offerings.

To be sure, it's doubtful that any MSO would abandon its core TV offering. But as Cable ponders its next move on the OTT front, it should be of some comfort that broadband continues to take up the slack.

-Ben Piper

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

 

With a couple of hours to go before this year’s technofest in Las Vegas gets under way, I thought I’d issue a friendly warning to the growing number of firms (Intel, Samsung, LG are culprits so far) who seem to be planning to major on “Smart TV” as a key theme of this year’s show. Even before the doors open we already have a quotation from LG Electronics' Baeguen Kang: "Smart TV is an inevitable trend: As people experienced smartphones and tablet PCs, the larger screen on a TV is very attractive for apps and Web content.” So whatever people do on phones and PCs, they will inevitably do on their TVs? If this is an indication of the strategic thinking behind many of the innovations we are about to see unveiled this week, I can scarcely imagine the horrors which await us. When will manufacturers learn? As Google’s disastrous first attempt at connected TV has neatly demonstrated, people do not want the web on TV. How many times do we have to go through this learning process? What people want on TV is video content, and if that’s going to be “smart” it had better deliver some level of intelligence about what video content viewers are likely to enjoy. As I said in our (free to download) 2011 Predictions report, television viewers don’t want a million things to choose from: they want their TV to tell them what they are likely to enjoy. Surprise me, enlighten me! That has value, and if it unexpectedly appears at this year’s show I’ll be the first to label it “smart”. David Mercer

We don’t do this very often folks, but as a seasonal gift we have made our 2011 Digital Home Predictions report available to everyone, whether a Strategy Analytics client or not. You can download the full report here. A lot of the talk at the moment is about Google’s troubles with its TV offer: there will be little to see at CES after all, much to the annoyance of Google’s many partners no doubt. But this setback should not be seen as a a sign of general malaise in the connected TV industry: Apple has just reported that its TV solution is finally gaining some traction, and we expect continued progress from other key players in the rollout of internet TV to the big screen during 2011. We may even see Facebook moving into this space. Headline number of the year will be tablet revenues, which we predict will exceed netbooks. We also think Apple needs to revamp iTunes to take account of the connected device era, and Nintendo may have to take the plunge and launch the successor to the Wii. We’ll see further innovations in the TV control arena, with touchscreens, phone apps and motion control all featuring more widely. But 3DTV is likely to see only slow progress: sure, people will be buying 3D-enabled sets, but less than 20% will be watching 3D content on them. And one more stat to whet your appetite: more than one billion people worldwide will be using social networks for the first time during 2011. And since you are one of them, please go ahead and read the full report, and any comments and feedback are always appreciated. Best wishes for a peaceful holiday season. David Mercer Client Reading: Profiling the Connected Media Consumer - UK