Online Video - The Demise of the MSO?

My wife and I were traveling recently and enjoyed the confines of a friend's home at our destination.  Prior to departure I asked if the home was WiFi enabled so we could communicate with the outside world and was informed yes, indeed the house had WiFi, but no Cable TV.  Being "newsers" my wife and I were at first a little perplexed but instantly realized we could use the wireless connection and our laptop to keep up with the daily goings on from our home region (NYC) and nationally.  We just happened to have departed JFK airport on January 15th, in a snow storm.  We made it out, after deicing, without a hitch.  Flight 1549 from LaGuardia ended up in the Hudson River a few hours later. As we drove through the Rocky Mtns to our destination the local NPR affiliate relayed the tragic events that led to Flight 1549 landing in the Hudson.  We both fully expected to hear there were no survivors and were amazed to find everyone was rescued and safe.  Fast forward to the home where we would spend the next few days.  We immediately fired up the computer to look for video of the flight, new stories of the incident or any other information available.  While we could not find live streaming from the the West Side of Manhattan we were able to locate interviews from the local and national news outlets and many video segments the next day from all of the major morning TV shows.  Who needs cable?  We realized we didn't.  We took this a step further during our stay and were able to find episodes of some of our favorite shows, many of which we had recorded on our DVR prior to departure.  In our downtime we were able to keep abreast of not only the tragic events of Flight 1549 but the routines of our weekly life. 

Given this I can see why the Cable MSOs are anxious to stike deals with the major cable programming entities to limit the online distribution of their content to the MSOs online platforms, for which only paying Cable Subscribers would be able to access.  A recent Nielsen Online report indicated that more than 136 MILLION people watched online video content in January of this year.  That's about 45% of the total population of the USA.  45%!  Can you imagine why the Cable MSOs are interested in striking this deal?  If they don't and all video content migrates to a free online platforms, as many Broadcast TV shows already have, what's the incentive for consumers to keep their cable TV subscription?  The MSO becomes just another network operator with no value-added video service and would compete with other broadband providers on price for a consumer's broadband connection.  This begins round 2, or 3, of the consolidation of the the major network operators, akin to what happened in the early 90's. 

Perhaps one business model for the MSO could be as a content "warehouse" for content developers and programmers.  These creative types are not in the business of content distribution and would look for an aggregator to distribute content.  Think Movielink.  Movie studios are not in the business of movie distribution.  That's why companies like Deluxe and Panavision exist, and why other companies are taking the lead in Digital Cinema initiatives.  Its not farfetched that this could happen, hence the discussions that are underway between the MSOs and the major Cable Programming companies.  Its really just the next step in the evolution of the distribution of programming content for the MSOs.  Given the Cable MSOs paid the cable programmers in excess of $22.5B in subscription fees in 2008, as reported in the WSJ, the MSOs do have some leverage in the discussions.  In the meantime I'm happy to be able to access FREE video content from broadcasters regardless of my location.

Kudos to Sully and the rest of the US Airways team for putting that bird safely in the water, and to the first responders for getting everyone out.

MediaFLO and Branding

I had the occasion in the past several months to visit Qualcomm in San Diego.  I met with several executives in the MediaFLO group which provides the underlying video distribution platform for the VCast service of Verizon Wireless and the Mobile TV service of AT&T.  Did you know this fact?  Probably not.  You see, Qualcomm's deals with the mobile TV providers prevents them from co-branding the service on the phone or any literature.  Think "Intel Inside".  Understandable from Verizon and AT&T's perspective since they own the customer relationship.  But if Qualcomm desires to enter the market with its own consumer device, or to use its impressive network to deliver content to other viewing environments, like automobiles, commuter trains or even airplanes, money spent on a branding or consumer awareness campaign is money well spent (think "Powered by MediaFLO!").  Especially after spending upwards of $1.0B to build the MediaFLO operation and infrastructure.  Another value of a branding and awareness campaign would be to create a "push" sales initiative.  Let me explain.  If I were to visit a local Verizon Wireless store in the nearest mall do you think the sales person will be effusive in telling me about the VCast service if he is being spiffed to upsell the new Real Rhapsody service, which already has name recognition with digital audio fans?  Both cost the same amount of money on a monthly basis so if you purchased phone service, data service, SMS, mobile video AND Real Rhapsody your mobile phone bill now looks like your cable TV bill!.  Creating buzz around the brand and the service may help consumers discover the value of the offering, prompting them to ask about it when they visit the local VZW store.  It would make sense to spend money on more than co-op advertising with VZW or AT&T if you plan to expand the scope of the media distribution to other environments and markets.

The other thing that would drive buzz and awareness is breadth of content.  But that's for another post.

SezWho?

SezMi.  That's the name of the latest service, yet to launch, that promises to deliver Digital TV and on demand services over a combination of the excess digital spectrum of its broadcast partner and a user's broadband connection.  SezMi is the brainchild of Phil Wiser, founder of Liquid Audio and former CTO of SONY Corp of America, and Dr. Buno Pati, founder of Numerical Technologies who guided the company through its IPO and subsequent sale to Synopsys. The gyst of the offering is this - SezMi offers one digital media box, with one terabyte of storage, plus a DTV receiver that replaces your existing cable or satellite box.  The service is expected to be co-branded with ISPs, Telcos without a DTV solution and, potentially, retailers.  The service can be personalized for up to 5 users by establishing separate profiles on the remote control.  The digital broadcast channels (NBC, CBS, ABC, etc.) are captured by the DTV tuner that comes with the service with the cable and special channels served via the spare spectrum leased from SezMi's broadcast partners, at the moment Harris Corp.  The on-demand content is stored on the terabyte of space on the hard disk and served via the consumer's broadband internet connection.

Got all of that?  Here's what caught my attention.  SezMi's management claims the service will cost about 50% of the existing tier of the average cable service.  That tier on my home service (Cablevision) retails for $50 without discounts for a subscription to Cablevision's high speed internet service.  Does that mean Sezmi's service will cost me $25 with the same level of quality and service?  If so, sign me up!!  Cablevision's latest 10Q claims their average revenue per video subscriber is $78.45, which includes VOD and other on-demand revenues.  Comcast claims their average revenue per sub to be $63.00 in its latest 10Q.   Even at 50% of these rates can SezMi be profitable?

On the cost side of the equation SezMi will not require a field operations network a la the traditional cable system to perform installations and repairs.  It will not require a head end in each market since it will, most likely, co-locate its broadast equipment with its local broadcast partner.  Its subscriber acquisition cost may be similar ($300/sub+) as it still needs to advertise for product and service awareness, but that cost could be shared with its local partner (i.e. telco, ISP, etc.).  No word on the retail cost of the digital media box, but all CE product managers know the key price point for mass consumer adoption is $299.  Cable programming costs will, most likely, still be per sub driven and, as a new service with only projections and not an exact number of subs or homes passed, the entry cost will be higher than the encumbents.  Cablevision's latest 10Q suggests, using their revenue generating units (sum of users of all services, so someone who has the "triple play" creates 3 RGUs) as a divisor, the operating cost and SG&A per RGU to be just shy of $35.00. 

Thus, at somewhere between $25 and $35 revenue per sub can SezMi make money?  Seems like breakeven at best, not factoring in advertising revenue and revenue from other on-demand services.  Perhaps the lease costs paid to the broadcast partners will be significantly less than the equivalent cost to build and operate a head end and to have a field operations staff.  But the programmers are relentless, so expect these costs to be greater than average at first until scale is reached. 

One thing SezMi has going against it is the lack of success of others who have built a business model around distribution of video content using the excess DTV capacity of local broadcasters.  US DTV had limited success in the few markets in which it operates (ed) (I believe a few former US DTV employees are now members of the SezMi team, according to the SezMi web site).  Disney's Moviebeam service has been discussed in previous posts with its remaining assets again for sale for less than $5M.  Perhaps learnings from these experiences can be applied to SezMi to make the service a success.  A DTV service priced between $25 - $35 dollars, with on-demand and DVR functionality, will certainly get consumer's attention, if it works.

Another Box Bites the Dust

Did anyone else see this coming?   I just read that Akimbo, the manufacturer of the Akimbo set top box, and video service provider to said box, has laid off all but a handfull of staff in the hopes of selling their platform and/or technology to recoup a portion of the estimated $47M (I've also read the total is $56M) investors have given to this enterprise.  Has an independent service that requires a consumer to purchase a box to download and view videos been successful?  Does anyone remember Moviebeam, another venture that closed $50M+ in money only for the assets to be sold for approximately $10M and the service shuttered, and now those same assets are back on the block for less than $5M?  I offer the following for the next entrepreneur who thinks they can build a new box that consumers will purchase to dowload and view video content:

1. Consumers do not want another box to connect to the myriad of boxes they already have in their entertainment centers;

2. Consumers will not be interested in a service that has limited offerings and no recent titles.  Ask Apple about their foray into this space with a limited suite of content;

3. If you think you need a set top box to demonstrate a slick new User Inteface that will transform how consumers interact with cable content and other digital media, think again.  Your solution is a software platform that will end up in a Cable STB, if you can convince the cable operators to use your platform, and that will take several years of discussion and testing.  Longer with CE companies.  I offer Moxi's Digeo platform, Ucentric (now owned by Motorola) and even Hillcrest Lab's "Loop" as evidence. 

 I am still waiting for the day when the HDTV has the components inside that permit navigation of web sites to view, select, download and play any video content from any web site.  If Apple can condense the components to operate an iMac into the back of a monitor, surely the CE companies can do the same with an HDTV set.  I understand some models were displayed at the CE Show in January.  On the content side, all of the broadcast networks offer their programming for FREE on several web sites, so the content is available.  Just waiting for the CE companies to catch up, as usual.  It still astounds me that it took Sony so long to link video content to its Playstation device. 

Clearwire - is it really that Clear?

I have enjoyed reading the articles and comments by pundits about the recent Clearwire:Sprint, et.al. hook-up to create a national WiMax network.  Other participants in this love fest include Google, Comcast, Time Warner and Intel.  Hope I haven't forgotten anyone.  The pundits, news media and bloggers talk about data speeds, 3G Vs 4G, LTE Vs WiMax and a variety of other factors one can analyze.  While this is all well and good let's put out there the obvious - how will these prima donna's of their respective industries ever agree on a strategy and business plan that meets everyone's objectives?  The cable companies are investing $1.0B each, Google about a half billion and Intel somewhere in the same range.  On paper the combination makes sense.  In reality the self-interests of the participants will overshadow the execution of the business strategy.  I harken back to my days working for the Tele-TV JV between 3 RBOCS and Creative Artisits Agency.  The JV was formed to develop a service for one platform and to take advantage of economies of scale in developing and rolling out the service.  Almost immediately issues arose with the ability to execute the business plan on that platform.  Within one year tests were being performed to evaluate wireless MMDS and advanced fiber technologies while the partners battled other issues in the respective markets and with each other, creating diverging objectives and eliminating the economies of scale the venture was formed to achieve.

As in the TTV JV, this WiMax venture includes participants who are monopolists in their markets, and market leaders in other industries, who are used to getting their way.  Stories about the venture never getting off the ground because competing interests could not be resolved have appeared in several industry blogs.  Not to mention that by the time this JV rolls out its service (2010 nationwide?) technology will have advanced, that Moore's Law thing, that will undoubtedly force the partners to revisit the business model and their positions/objectives in the JV.  Case in point, ask Earthlink about the muni-wifi services they rolled out in several cities, like Philadelphia (look out Anaheim!), that they are now exiting.  Maybe it was foolish to think an advertising based model would fund the capital requirements and operating costs of the muni-wifi network.  As I always say, financial modeling is an art, not a science.  Tell me what picture you want to paint and I can create a model to support it!

I don't mean to be douse the fire with water.  I wish the partners the best of luck, especially if they create a viable service that creates competition in the marketplace.  I'd just love to be a fly on the wall at the Board meetings of the venture as the partners work to protect their interest and insure they maximize their ROI in this JV.

VZW's Open Network - You Buying The Hype?

I've been reading as many articles and comments as I can about the intent of Verizon Wireless to "open" its network to outside devices that meet the appropriate standards and have been approved for use by VZW.  Having operated a closed network for so long, as many others in the wireless industry in the USA do, are you buying this?  There must be a catch somewhere and, since all of the details of the plan have yet to be divulged, the proverbial other shoe has to drop sometime, doesn't it? I hate to be skeptical, but experience requires further investigation.  Just look at the timing of the announcement.  VZW has been promoting its position on the upcoming spectrum sale that has been anti-open, which is the exact opposite of the position taken by Google and others who believe the spectrum, or a portion thereof, should be made available to companies offering applications for the benefit of ANY device that can connect with the network.  Google has made statements about participating in the spectrum auction.  It has even been rumored that Google has developed a wireless network in Silicon Valley to test the applications it is developing for mobile devices.  Has VZW capitulated to a perceived threat by Google in an attempt to eliminate Google and its vast financial resources from the bidding process?  Does anyone really think Google, whose business model is driven by advertising revenues, wants to operate a fixed asset based nationwide wireless network?  If you do I have some land to sell you in Florida.

Frankly, I've seen this move before from the Telecom industry when an apparent threat to its "turf" was presented.  Let me take you back to the early 1990s, when the Cable industry was making pronouncements about its desire to offer consumer telephony services to its subscribers.  In response the phone companies, all six of them at the time, began their own series of press releases claiming they would offer video over their telephony platforms using a new technology called ADSL. The phone companies did not know the extent to which the cable companies could offer telephony services and, frankly, the cable companies did not know if the phone companies could offer video services.  It was a novel idea, a way to create buzz in the marketplace and nothing more than a smoke screen while each industry evaluated whether it was technically feasible to deliver the other industry's service.  Hundreds of millions of dollars were spent investigating the technology and business models to make the "double play" a reality.  Joint Ventures like Tele-TV and Americast were formed to pool resources by separate RBOC groups to further evaluate the potential of video delivery over twisted pair copper, FTTC and Wireless MMDS technologies.  Cable companies realized they would have to invest hundreds of millions of dollars in network and physical plant upgrades to enable voice services.  This dance went on for several years before reality set in and each companies backed off their initial proclamations.  Oh, the industries slowly moved toward identical service capabilities, but more than 10 years later!

What we are witnessing between VZW and Google is yet another dance between industry giants, perhaps round 1 of a boxing match, where each company is feeling the other out.  Google, like the cable companies of yore, has the financial wherewithall and political connections to be a formidable opponent to the wireless industry "norm".  By communicating its position on the spectrum auction early on, including their intent to bid, they have been able to engage the wireless industry, VZW initially, and the FCC, in an open discussion about the use of this wireless spectrum.  The result of these actions will partially modify the business model of another industry for its own benefit, delivering advertising based services to users of Google's applications on any connected mobile device.  Without an "open" network each wireless network operator can determine which, if any, application could be used by its consumers.  Doesn't VZW already turn off certain applications on several mobile phone models because it wants the consumer to use the applications where it generates more revenue?  This does not benefit Google or any other application developer who wishes to drive revenues from mobile services.

Who knows how long this will take, and what other pronouncements will be made, but Google is smart enough to know the next big area of opportunity for their continued exponential growth is in the mobile device marketplace.   And VZW knows its core competency is operating a nationwide wireless network.  The more traffic on the network, from any source, the more revenue for VZW. 

So don't be fooled by the hype and positioning.   Offering to "open" their network is a defensive strategy by VZW.  It keeps Google from actually exploring the development of a nationwide wireless network, for now, and it gives the perception that VZW is taking this action for the benefit of all mobile consumers.  Who knows where the hype and positioning will lead.  Perhaps we will know in another 10 years.

Un-Interactive TV

The latest issue of Business Week included an article updating the status of Interactive TV (iTV) or, as the article states, the lack thereof.  Its not surprising this conclusion is the same as it was several years ago.  Technically the ability to create a pure iTV experience exists.  Economically it does not.  True iTV is predicated on the ability to develop a business model that provides economic incentive for all participants and a technological solution that protects content from piracy or illegal distribution.  A broad, integrated, service has yet to be developed that meets the requirements of all constituents of the business model.  Movielink has stumbled.  Moviebeam has failed (one of the backers of this idea, a former Disney exec, will now lead Bus Dev at NBCU).  A littany of devices has been developed that connect to the TV that lack the video library to gain traction.  Even the vaunted Apple's iTV product has failed due to a lack of content.  The Slingbox is a great idea but has not gained critical mass, and hence their tie-up with Echostar.

I wonder why the CE manufacturers have yet to build a TV set that includes the technology, and a User Interface, that would permit downloads from sites like Joost, Netflix, or other media aggregators.  It seems feasible to include a broadband connection and the internal hardware in a flat panel TV to permit such a service.  If Apple can build a computer with all of the components in the screen (iMac) shouldn't a TV manufacturer have the same capability?  One would think a business model for such an Alliance could be accomplished.  Doesn't Sony own both content AND a TV factory?  The problem is CE manufacturers are just that, manufacturers.  My experience with them is they are not the ones to proactively pursue relationships to develop end-to-end consumer "solutions".  They have historically let others build the solution and have waited for someone to present them with the opportunity or technology to participate, with little ability to drive the business model.

Apple's success with the iPod and the iPod store have scared the bejesus out of the video industry, and their attempts to create an online video distribution business have failed as well.  Until the content owners are comfortable with a business model and service that protects their revenue streams and distribution cycles, and CE manufacturers wake up, iTV will remain a pipe-dream.

Overt Benefits of Subscription Music Services

On this, the 25th anniversary of the CD, I contemplate a conversation I had two weeks ago with executives of Universal Music Group.  In separate conversations, the executives and I discussed and debated why more people are not subscribing to music download services, like Real's Rhapsody or Yahoo! Music, where you can have millions of songs at your fingertips, rather than buying them in CD form (at least for now) or as digital files.  One interesting point made was how consumers perceive music acquisiton.  For years consumers have been conditioned, and the business model has been, that one purchases an album or CD for their personal collection and has the right to play this physical form factor wherever they can or desire.  While some individuals have slowly moved to the concept of "renting" music the music industry, and its digital media distribution partners, have done little to market this paradigm shift to the vast majority of consumers who still think they should own a physical form factor for their collection.  Think of the benefits of having access to millions of songs in an instant with the ability to download them to any device that uses a standard DRM, like Windows Media.  Think about the economics.  It would cost $1.0M to download and OWN 1 million songs (not that many people would do this, but bear with me).  At $15 per month, one could rent this many songs for 5,555 YEARS before they reached $1.0M.  So why not rent?  If you rented music for 55 years of your life (ages 15 - 70) you would only spend $9,900 (not adjusted for inflation).  Sounds like a bargain!  Of course, most consumers would ague that they do NOT own or plan to own 1.0M songs, but the point is there is a plethora of music that consumers listen to, even if they do not purchase it, that they would probably listen to during certain events, activities in their home while entertaining, or athletic activities, for example, if it were available.

I entered the discussions with the UMG executives from the perspective that a consumer OWNS the music he/she buys.  I left thinking, hmmm, maybe there is a better way.  It would benefit the music industry and its partners to educate consumers on the economics, "Overt Benefits" and "Dramatic Difference", quoting from Doug Hall's Laws of Marketing Physics, of a consumer service of this nature.  As Mr. Hall states in his book, Jumpstart Your Business Brain, "customers can not and will not read your mind.  If the benefit is not overtly articulated, it isn't there." 

Its hard for consumers of traditional form factors (e.g CDs) to understand the value of converting to a music service when the Labels keep marketing, distributing and investing in physical media over digital subscription services.  If subscription services are a key point in the Music Industry's strategy for driving new revenue streams, its time to overtly articulate the benefits to consumers.

Downbound DRM Train

It seems everyone has an opinion on how the Music Industry should solve the problem of eroding CD sales and the fact that online sales of digital files are not filling the revenue gap this is creating.  I've read several articles in the past week on the subject, including excerpts from a few blogs on the topic.  Perhaps the most interesting was the blog of Dallas Maverick's owner Mark Cuban who suggests the way to solve the problem is to make the purchase of music as ubiquitous as buying Starbucks coffee by putting kiosks in every location one can imagine to give consumers access to digital downloads anytime, anywhere.  This might be an element of a broader solution but it doesn't solve the problem of "social" ripping or burning of CDs among friends.  The NY Times article by Jeff Leeds (The Plunge of CD Sales Shakes up Big Labels, May 28, 2007) offered research performed by the NPD Group indicating that social ripping accounted for 37% of all music consumption, even more than file sharing.  Thus, while placing kiosks in every possible location may increase consumer opportunities to purchase digital media, this will not solve the issue created by social ripping unless the CD, as a form factor, is either eliminated or coded in some way to prevent distribution to devices not owned by the buyer.  This harkens back to an earlier post where I discussed the concept of licensing the content to a USER, not a device, for playback only on devices authenticated as owned by the same person who purchased the digital file.  State DMVs have massive, secure, databases of user licenses, and banks have massive, secure (I hope!) databases of user information linked to credit and debit cards.  Why couldn't a massive, secure, database of consumer digital certficates, watermarks or some other identifying monikor be feasible?  This system would work in concert with the kiosk concept offered by Mr. Cuban.  The Labels realize going completely free of some method of tracking purchase and use by each consumer is suicide for the their existing business model.

The Labels have had a long time to digest this issue and seek alternatives.  Unfortunately most of the executives of these companies are goaled on short term financial performance and have taken a short term approach to solving the problem, usually "dropping" a new CD by one of their hot artists to meet quarterly targets and objectives.  All the while a core revenue source, the sale of CDs, has eroded as the consumption of music by other means has risen.  If you're at a Label fighting this battle, don't it feel like you're riding, on a downbound train?

The Digital Home

I read an interesting article by Erica Ogg of CNET yesterday about the digital home (The Digital Home: Still a Handyman's Special? Wednesday May 9, 2007)).  The premise of the article was although advances have been made in technology, devices and broadband adoption the digital home "puzzle" is still missing some pieces.   The article listed several the devices for delivering digital content to the "centerpiece of the connected-home", video, including the new Apple TV box and the SlingCatcher from Sling Media.  One company with whom I am working may have a solution.  The Company, Digital Media Research (www.dmrworld.com), has developed a device, called the Personal Digital Hub (PDH) that wirelessly controls the digital home, including moving digital content from the device to TVs connected to the network in other rooms.  The device uses the ZWave Alliance Protocol as the basis for wirelessly distributing digital media.  The device has massive storage capability for one's library of movies and music, is easy to set up and use - an important feature for consumer adoption - and also wirelessly controls home automation features, like lighting and blinds.  The GUI is being redesigned by the award winning team who developed the user interface for Digeo's Moxi Set Top Box/Media Center.  The timing of the introduction of the PDH could be right as the FCC continues its campaign for the set top box to be as ubiquitous in CE Stores as the TV. 

Perhaps the most interesting aspect of the device is the impulse purchase funtionality that is being developed.  Suppose you are watching your favorite movie and decide you'd like to own the soundtrack, or even purchase the title for your personal library.  DMR's platform is being designed to enable you to make such a purchase without leaving your chair.  This feature should be one the Movie Studios and Music Labels will love!   

DMR is currently in discussions with several major CE companies to license the device for manufacture and merchandising under existing consumer brands.  DMR's business model is to be the ASP providing the impulse purchases and other commerce, having learned a lesson from other companies who have developed and marketed a "new consumer device" when the real benefit of the device was the software platform that managed a consumer's content (e.g. ReplayTV).

There's much more information about the device than I can describe here, so I invite you to check out the PDH at www.dmrworld.com.  Its a clever idea that could be a key piece to the "puzzle" enabling a true digital home.