1.0 Key Findings
1.1 Revisiting Some Earlier Assumptions
Parks Associates has been watching how both traditional and upstart media outlets have been addressing digital distribution for some time now, culminating in the report Internet Video: Direct-to-Consumer Services, released in late 2006. In that report, we found that while big media of all types are actively engaged in some form of digital distribution, pure user-paid, movies-on-demand services will constitute a much smaller piece of total U.S. revenue than will ad-supported models, including the work of the major TV networks to put delayed primetime programming on the Internet via outlets such as ABC.com, CBS’s Innertube, NBC’s Rewind, and Fox Corp.’s MySpace. So far, this assumption has held true, as the major broadcasters are still reporting good returns on their Web properties (an active viewership, no signs of cannibalization, and the ability to charge higher rates for ad inventory). Outside of the iTunes TV show and movie download service (which at last report had generated 53 million downloads), user-paid services â€“ and particularly those specific to movies â€“ are facing many hurdles. In the report, we wrote:
â€œInternet video for movie content faces stronger challenges in terms of technological challenges, resistance from major retailers, lack of easy connectivity between broadband services and the television, and the continued consumer reliance on tangible media.”
Our own consumer data back the notion that the early successes for broadband video are the efforts focused on shorter (â€œsnackable”) videos as opposed to movie downloads. The good news is that the number of broadband users paying at least monthly to download or stream video has grown significantly since we began tracking the space in 2005. As Figure 1 indicates, the percentage of U.S. households with broadband that report paying for broadband video content now stands at 19%. The average amount of money being spent on broadband video content is also on the rise, an indication that some key success variables have been met. Certainly, the broader availability of content through a number of channels has increased, and as broadband speeds continue to improve and content-to-device linkages have simplified the process of getting content to viewing platforms, services have improved and demand has followed. So, that’s the good news.
Figure 1 Broadband Households Paying for Online Video Content
1.2 Recent News of Note
However, the broadband video space is still in a strong degree of flux. Major players still have not figured out the formula to make the provisioning of online video a complete success. As Figure 2 indicates, the recent news in the space reflects. The hybrid approaches of Netflix and Blockbuster are intriguing. Both companies are betting on the DVD’s relevance for the next few years, and this is a prudent choice to make. We have not yet reached the point when all of the content that consumers want can be found on the Internet. We are also intrigued by the ad-supported content model, as early returns from the major networks (ABC, NBC, Fox, and CBS) have shown that consumers are willing to watch a few ads in return for free content. Certainly, most of the amateur video on YouTube will not have an ad value, but Google is addressing premium content for now. Also, several direct-to-TV solutions have emerged recently, which warrant attention as they could solve some of the critical challenges in providing a quality viewing experience in the living room. They could set the stage for a real shift in consumer video consumption and provide us with new models to study.
Figure 2 Recent Broadband Video News
2.0 Changes in Media Distribution and Consumption
2.1 The Role of Electronic Media
The advent of digital distribution for theatrical, television, and user-generated content comes at a time of enormous pressure for the traditional entertainment industry. After enjoying strong box office and DVD rental and purchase revenues from the late 1990s into the early part of this decade, growth in U.S. revenue has slowed significantly. Box office revenue averaged a healthy growth of around 8% between 1996 and 2002 but have not budged since 2003 (and in fact declined nearly 6% between 2004 and 2005 before rebounding by 6% between 2005 and 2006). DVD rentals and sales have also lust their luster in recent years. After very strong growth between 2001 and 2004 (nearly 240%), DVD sales revenue was close to flat between 2005 and 2006. DVD rental revenues have also settled into a slower growth rate in 2005 and 2006 â€“10-14% by many estimates.
Figure 3 U.S. Theatrical Box Office and DVD Revenue
The slower growth (or outright decline) in traditional theatrical revenue cannot be attributed to a single cause. For example, many movie critics would argue that 2005 was a less-than-stellar year in U.S. theatrical movie quality and that consumers simply â€œvoted with their wallets” and chose not to visit theaters to watch inferior films. However, data collected by Parks Associates earlier in 2005 indicates that the decline of interest in theatrical movies was an established trend before that year’s crop of movies even hit the silver screen. More than 40% of consumers surveyed indicated that they were seeing fewer movies in the theater than they were a few years ago.
Figure 4 How Have Media Habits Changed?
By 2005, the data indicate that more consumers were trading an in-home movie viewing experience for the theatrical experience (DVD rental and sales revenue growth in 2005 outpaced theatrical growth). However, there were other distractions that were potentially leading consumers away from theaters and even DVD rentals and sales. As digital video recorders (DVRs) were making their way into more homes, consumers were likely choosing recorded television as an alternative to some of the movie viewing that they were doing either in the theater or via rentals. (Parks Associates estimates that DVR penetration stood at about 11% of all U.S. households at this time). After all, as a DVR made finding and recording television shows (and movies being shown on cable and satellite) easier, this would surely have an impact on at least a few rentals.
Video-on-demand from cable operators was also becoming more commonplace by 2005. Comcast, for example, reports that its video-on-demand service â€“ of which 95% of the content is free to digital cable subscribers, grew tremendously from 2004-2006 (see figure below). Video-on-demand is yet another alternative to the traditional movie-viewing experience, either in the theater or in the home.
Figure 5 Comcast VoD: Billions of Views per Year
Television networks have similarly struggled against digital distractions (the Internet, game consoles, DVRs, etc.) that have eroded the primetime audience for many programs (American Idol notwithstanding). Their revenue has been impacted in the form of decreased “up-front” ad sales (typically referring to the early buying of advertising for the fall primetime season). In June, The Wall Street Journal reported that up-front sales had rebounded slightly compared to previous years, but television networks continue to reevaluate their ad strategies as major advertisers seek alternative outlets, particularly the Internet. When an online video service such as Joost can land 30 major companies as primary advertisers (among them Coca-Cola, Nike, and HP), it is clear that the rules for traditional media have changed.
Figure 6 Apple iPod Shipments
Figure 7 U.S. Household Penetration: Broadband Internet and Game Consoles
2.2 Traditional TV Providers Strengthen their Efforts
Although much of the press today has been aimed at broadband video efforts, current TV providers are not complacent about delivering a higher-quality video-on-demand experience. Comcast is best-known for its VoD efforts. As the largest digital video provider in the U.S., the company has seen tremendous growth in its VoD usage, as Figure 5 indicated. Comcast, along with other cable MSOs, is experimenting with offering premium on-demand content (movies) under â€œday-and-date” rules. The company is also aligning more closely with broadcasters to offer more primetime TV episodes through its VoD services.
Verizon is an interesting player as a new alternative to cable companies. Because the Verizon FiOS TV service can include subscriber options to connect the set-top box to the PC (using Verizon’s Media Manager software and the home network that is installed when the TV service is connected), Verizon is using it for some broadband video applications. For example, FiOS TV will soon offer the ability to watch videos from the site Revver.
Key VoD Strategies from Service Providers
Â§ Comcast: Currently testing day-and-date VoD movies at the same time as DVD releases in Pittsburgh and Denver
Â§ Cox: Disney/ABC/ESPN content where ads cannot be skipped.
Â§ Time Warner Cable: Making the Start Over feature available to a wider subscriber base.
Â§ Verizon: Experimenting with some exclusive content and also linking FiOS TV subscribers to content from Revver â€“ linking the set-top box to the PC with the in-home network.
Â§ AT&T: Focusing on building traditional VoD offerings for now. The OnTheGo feature: will eventually allow users to see on-demand previews from any Internet-connected computer.
Â§ DIRECTV On-Demand is in beta test phase, and it is both a hard drive- and broadband-based VoD service expected to launch in the fall of 2007.
Â§ DISH Network: relies on its DISH On Demand service, a DVR-based approach.
Figure 8 Key VoD Strategies from Service Providers
3.0 Broadband Video: Has its Time Come?
Many video providers, particularly in the television and movie spaces, made significant strides to provide their content via a growing number of on-demand channels, including the Internet, in 2005. For video providers, the decision to embrace on-demand distribution was born as a response to both the opportunity and the dilemma posed by broadband Internet and DVR growth. Although the peer-to-peer distribution of content is still far less prevalent for video than for music, it is clear that many video producers (The Walt Disney Co., et. al.) want to proactively address the potential for piracy by releasing a growing number of titles via legitimate on-demand channels. Also, many video providers see a true opportunity for on-demand content that goes beyond a $1.99 download to include advertising models and the development of complementary programming specific to mobile platforms, such as the mobile phone.
Parks Associates provides different categories of broadband video-related services. We define the categories by examining the offering that each service provider makes available (TV shows, movies, etc.). We also define the categories by business models. For example, DVD + Electronic Delivery, Broadband Video Providers, and Hardware + Content services are mainly all user-paid services. In other words, consumers pay directly for individual content or for subscriptions for these services. On the other hand, Broadcaster Initiatives, Portals, and Web TV business models mainly center on advertisement-supported content.
Figure 9 Broadband Video Categories and Players
As we examine these main categories, we have the following thoughts as key takeaways:
Â· The movies-only services have underperformed: The low sales price for both Movielink and Moviebeam (to Blockbuster and to Movie Gallery, respectively) indicates that these services have been woefully lower in revenue generation than originally planned.
Â· DVD rentals complemented with online offerings: For the foreseeable future, the fortunes of Blockbuster and Netflix will be tied to offering both DVD rentals through the mail and complementary electronic content through the Internet. Blockbuster’s go-to-TV strategy is still unclear, but Netflix indicates that it has invested $40 million into the space in 2007, and its strategy will be unveiled in 2008. Blockbuster has been equally reticent about how exactly the Movielink acquisition will impact its business, only saying that it sees electronic distribution as an important part of its business .
Â· Broadcast networks are reporting early success for their online offerings: Companies such as NBC Universal and Disney/ABC indicate that their efforts to launch video sites (which became available in late 2006) have been a success so far, under two key metrics. First, they report that putting primetime TV episodes online has not resulted in cannibalization away from primetime TV itself. An NBC Universal executive indicates that 78% of its online users are simply using the Web to catch up on episodes that they missed on TV. Disney/ABC officials note that they are getting a good demographic profile of the user (average age is 28), and 84% of users can remember an ad when surveyed later. Disney says that 92 million shows have been requested since the company launched its online offering in September 2006.
Â· Web TV is going to be a hot category in 2007 and 2008: The high-profile launches of companies such as Joost and Veoh Networks will generate strong interest. These companies are focused on providing a high-quality viewing experience, both from a content choice standpoint as well as how the video is displayed online. These companies see significant opportunity to generate revenue through ad sales.
Â· Portals will be emphasizing more choice and leading with business models: AOL video recently unveiled a new look and feel for its AOL Video service. Companies such as Google, MSN, and Yahoo will be targeting a higher-quality video experience and focusing on ad-supported content.
Â· There will be a renewed emphasis on linking content services to hardware: A key inhibitor to the growth of the broadband VoD market to date has been the lack of both easy and high-quality connections between the VoD service and the TV. We expect to see an increase in products and services aimed at connecting content to platforms in 2008 and beyond.
4.0 Key Takeaways
In revisiting the broadband VoD space, the following analysis can be made:
1. Current â€œwinners” in the broadband VoD space are the television broadcast networks, which are reporting good success with their online initiatives. For example, they are reporting high ad retention, no evidence of primetime cannibalization, and targeting the right viewer in terms of demographics.
2. Other strategies that appear to be gaining traction are 1) offering a wider variety of programming (not just movies, for example); 2) distributing across multiple Web sites (to account for the wide fragmentation of the Internet audience); and 3) accounting for multiple business models (user-paid, ad-supported, video search-generated advertising, and licensing and distribution agreements).
3. Although we have seen a significant jump in the percentage of broadband users actually paying for content, this increase does not appear to be focused on the movies-on-demand side of the business. We suspect that $1.99 TV show downloads and adult content probably make up the vast majority of online video revenue.
4. There is a new effort to provide an alternative set-top box for movies-on-demand, particularly with the well-publicized launch of VUDU this week. However, we still see low demand for a stand-alone box (requiring a separate purchase plus extra fees for the rentals or downloads). If history is a lesson (Akimbo Systems and Moviebeam), we are not convinced that the separate receiver makes sense, as consumers will always have an alternative in VoD offerings from their current service provider. For specific niche audiences and longer-form content, alternative video services may find traction, but premium content will remain largely the purview of the traditional TV service providers.
5. A major challenge for the broadband VoD space is simply obtaining the rights to the appropriate content. Studios have different agreements for their movies, and the availability of a certain title via on-demand may be restricted by whether there is a broadcast right associated with it. Also, we are told that the studios are holding back high-definition content from electronic distribution because they favor a DVD release.
6. The interactive and on-demand efforts of existing service providers â€“ cable, satellite, and now IPTV players â€“ could serve to dampen broadband VoD revenues, particularly in a few years. Granted, there is not yet widespread availability of a service through which to download content to portable and mobile devices, but it is coming soon. In the meantime, the existing service providers are being aggressive about the amount of on-demand content they can provide, looking to ramp up their high-definition offerings, and working more closely with the television networks to provide either â€œStart Over” or full-blown on-demand TV shows. If these services become more widespread, it could certainly put a damper on some of the Net TV or TV download services.
7. Incumbent service providers are not averse to considering linkages between their closed networks and so-called over-the-top content. In fact, we are already witnessing some experimentation in this area (Verizon announced the availability of Revver content to its broadband and FiOS TV customers). As soon as the incumbents find ways to monetize the revenue (or at the very least offer it as a differentiated feature), they will do so. The key to these services from service providers’ perspective is a higher-quality content experience.
8. Perhaps one of the more intriguing opportunities for broadband video is as a complement to existing service providers and their interactive/on-demand efforts. For example, a number of service providers worldwide (AT&T, British Telecom, China Netcom, HanseNet, KPN, Telecom Italia, and TelefÃ³nica) have rolled out services that use cable, satellite, or terrestrial broadcast services and supplement IP content for interactive and on-demand features. This development may be a real area of opportunity, and in fact VUDU has indicated that it would like to seek out smaller partners in the cable industry.
9. Business models for broadband video remain widely experimental at this point. Consumers continue to have different preferences for how they obtain and watch content. Some want to own their content, some prefer renting, and others wait for broadcast networks’ premiers. For content owners, retail or electronic sell-through yields the highest profit margins and will remain the preferred model. Cable TV service providers want to offer a mix of all business models. Currently, monthly subscription is the biggest revenue stream, but they are interested in growing their a la carte revenue through PPV, digital rental, and potentially electronic sell-through. Broadcast TV networks rely heavily on advertising revenue, and they are likely to position broadband video as a complementary platform in order to offer a 360-degree solution for advertising. Nevertheless, the TV networks are also interested in testing out electronic sell-through models since they are generating good returns on DVD sales for hit TV shows.
10. Advertising will become an increasingly important component of the broadband video space. With a substantial user base of online video viewers, advertisers will be drawn over the short term to volume and â€œeyeballs” rather than measurable advertising.
11. Additional hardware companies are pushing to attach a VoD service to their platforms. For example, Sony is exploring ways to make its Bravia televisions on-demand compatible (along with the PlayStation), plus HP’s MediaSmart products, which incorporate CinemaNow as a content provider. Obviously, TiVo and other players are more closely aligned with broadband VoD content providers. Although these are certainly services that will offer some key differentiation for product manufacturers, CE vendor should not expect major revenue to flow their way as the immediate result of these partnerships. Longer-term growth may certainly come as the result of marrying content + advertisements to the platforms.
12. With OCAP and mandates such as separable security, the cable set-top box is definitely opening up, and the FCC should see more retail availability of alternative set-top box platforms. However, a CableCARD or DCAS-compliant device that can receive premium two-way content will still be priced relatively high â€“ perhaps $300 or more. It will be difficult for consumers to see value in this platform compared to the set-top box that they rent for a few dollars per month from their existing television provider.
13. Permanent downloads (download-to-burn/download-to-own) will grow as an important component of the broadband video market. With licensing agreements now in place, companies can pursue a direct-to-DVD strategy. For studios, the advantage in this electronic distribution is the monetization of back-catalog content. For retailers, they can offer a greater selection of titles without having to stock physical media. With an Internet distribution model, the cost to deliver these movies is low, and the studios do not run the risk of offending their current retail partners, who are mainly stocking new release films on their shelves. The advent of download-to-burn solutions such as CSS and analog copy protection, which allow the studios to release catalog content on DVD discs with the same copy protection as professionally stamped DVDs, may provide a boost to the studios’ bottom lines by allowing them to monetize catalog content that would have been uneconomical to distribute in a stamped fashion. In addition, download-to-burn kiosks and manufacturing-on-demand (MOD) may help retailers and video rental outfits to better meet the demands of customers who are seeking older or more obscure titles.
About the Author:
Kurt Scherf studies developments in home networks, residential gateways, digital entertainment, technology development in the housing market, and residential and building management and controls. Kurt is the sole author or contributing author/analyst to more than 50 research reports and studies produced by Parks Associates since 1998.
Kurt is a frequent speaker at conferences and events around the world, and is frequently cited in the industry and general business press. Kurt is a certified Focus Group Director.
Kurt joined Parks Associates following a career in political research and multi-tenant dwelling management. He earned his BA from The University of Iowa.
INDUSTRY EXPERTISE: Home Networks & Residential Gateways, Wireless LAN and PAN solutions, Home Networking Media, Media Center PCs, Set-top Boxes & Residential Gateways, Consumer Storage, Consumers and Digital Entertainment, IPTV, and Customer Support for the Digital Home.
Parks Associates is an internationally recognized market research and consulting company specializing in emerging consumer technology products and services. Founded in 1986, Parks Associates creates research capital for companies ranging from Fortune 500 to small start-ups through market reports, primary studies, consumer research, custom research, workshops, executive conferences, and annual service subscriptions.
The company’s expertise includes new media, digital entertainment and gaming, home networks, Internet and television services, digital health, mobile applications and services, consumer electronics, and home control systems and security.
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