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Transatlantic Perspectives on Internet Video Services (3/10/2006)

By Kurt Scherf, Parks Associates

In a report early in 2006, Parks Associates hypothesized that the creators and owners of TV and movie assets would move more quickly than their counterparts in the music industry to experiment with online distribution of their content. Indeed, the content owners have rapidly embraced a full-out 'grand experimentation' of this distribution using several different models, including fee-based downloads to portable players and ad-supported free content.

As 2006 has progressed, the pace of announcements from major media producers and their distribution partners has only increased. As the major broadcast television providers in the U.S. launched their new seasons in September 2006, it is clear that online availability of their content, through a number of channels, including their corporate and local affiliate website, as well as those of their web and entertainment portal partners such as Apple, Amazon.com, and others, will be a key in growing their audiences. The online distribution of movies has also received significant attention, thanks to new announcements from such players as AOL and Amazon.com. With the major announcements that have come from the studios, the television producers, the Internet portals, the service providers, and the independent aggregators, what are the more salient takeaways at this early stage of development of Internet video services?

Two Keys to Success: Leveraging the Reach of Existing Service Providers and Extending to the Television

Video downloads to portable devices are a key driver at this stage of the market. Apple Computer Inc. reports that more than 35 million videos have been sold through the iTunes Music Store. For Internet video services to capture the attention (and subsequent revenues) of a growing base of users however, we have argued that the content must be accessible on a television. It is one reason that a company such as Akimbo Systems has been so intriguing. The premise of Akimbo has always been interesting - a multichannel Internet video service combined with a set-top box to put video content directly on the television (among other platforms, including a Media Centre PC).

The Akimbo player

We were concerned that the service might get lost in the shuffle because consumers were unwilling to accept another set-top box in the living room (along with the subscription fee), and we wondered how it would stack up in the face of anticipated competition from the mainstay players such as the cable operators, who have indicated that they will deploy a wider array of IP content when the time is right. If my cable company can offer me access to thousands of titles of documentaries, culturally-specific programming, and other so-called 'long-tail' content, why would I as a consumer feel the need to purchase an additional set-top box and pay an additional monthly fee to access the service?

Now, with Akimbo's recent announcements with Movielink and recent news that it will support AT&T's Homezone initiative, it looks as if Akimbo's real strength is as a content aggregator that can help partners deliver a host of channels and content in a much-quicker fashion. The strategy could pay off, as AT&T and other providers in need of more interactive video services (such as satellite TV providers) seek to enhance their offerings and get solutions to market faster to contend with the continuing threat posed by the cable industry.

The Role of IT Players

Another aspect of the Internet video space on which to keep an eye is the role of companies such as Microsoft, Intel, AMD, and other companies traditionally playing in the IT or PC space. Microsoft obviously is seeking an expanded presence outside of the home computer, so it has been quite aggressive in working with IPTV vendors to get its software on set-top box platforms. In addition, Microsoft may play a significant role in the living room, even if the residence is not served by an IPTV provider.

One key feature of Microsoft's Xbox console is its ability to pull content from a Media Centre PC. With a home network, this home computer does not need to be located in the living room, so it is a much less-intrusive role for the PC. Already, Microsoft reports that at least 100,000 Xbox 360 users have linked their game console to a Media Centre PC. As far as the early market for the so-called 'media adapters' (platforms that serve as a link between the PC and the TV), the Xbox clearly leads that category. So, this could be a Trojan horse of sorts to allow consumers to access Internet content without having to place the PC next to the television.

The Microsoft Xbox 360

Intel is also working aggressively to position its ViiV chipset and brand as a consumer electronics brand that will bring PC-like functionality into the living room. Intel also has some interesting content relationships forming, so its presence could help to bring a wider variety of more compelling content through the Internet and to the television.

Is Internet Video Cannibalising Primetime?

As the television networks struggle to maintain their prominence and their advertising revenues at a time in which the average viewer has many more choices, will a widespread release of television programming wind up hurting them in the long-term? One interesting aspect to the business could very well be the complementary nature of the IP programming and its role in actually driving viewers back to primetime. NBC-Universal discovered this upon releasing 'The Office' to the iTunes Music Store, and found that Thursday night ratings for the programme actually increased! Robert Iger, President and CEO of The Walt Disney Company, also indicated that the early results of ABC's Internet programming have shown no cannibalisation to primetime. Iger said that the ad-supported streams of 'Lost' and 'Desperate Housewives' (11 million reported in June 2006) have shown that most viewers are people who missed the initial showing of the episode during primetime. Furthermore, Iger notes that 85% of the viewers surveyed actually remember the 30-second advertisement that they were required to view ahead of the programme.

At a time in which the major television networks are being forced to experiment with both their content (perhaps developing programming with more of an edge) and their business models, the Internet and other alternative video delivery channels (mobile TV, for example) may wind up benefiting them long-term. With the Internet's ability to connect viewers through viral marketing, television shows that at first look like duds may in fact become viable primetime assets. The Internet's ability to more cost-effectively distribute the content and provide a mechanism to reach a disparate audience may prove to be a key component in the networks' long-term strategies.

The Entry of BT Vision as an Internet Video Offering

The introduction by BT of its BT Vision IPTV service fits within the context of a discussion about Internet video services, in that they are being developed in large part to address consumer demands for greater flexibility in choice in how they enjoy video services. In addition to the multiple television channels that will be available to subscribers, BT is engaged with multiple content providers (among them NBC Universal, Momentum Pictures, DreamWorks SKG, as well as a number of independent developers) to provide a rich on-demand experience. In a world where consumers are demanding more in the way of choice, convenience, and connectivity with their video content, the BT Vision strategy is an interesting mix of linear and on-demand programming that will deliver new experiences to its users.

In Summary

The Internet video experimentation has just begun, and we can expect a continued rush of announcements linking content producers to alternative delivery channels throughout the rest of 2006 and well into 2007. We'll continue to track the developments in this space, analysing their impact on the development of a variety of digital lifestyle markets, including access, personal computers, consumer electronics, service providers, and communications. As the saying goes ... don't touch that dial.

Kurt Scherf is the Vice President and Principal Analyst for Parks Associates. Parks Associates is a market research firm focused on all product and service segments that are 'digital' or provide connectivity within the home, including entertainment, home networking, home controls, wireless networking, broadband, and on-demand services.

www.parksassociates.com