Summary: Apple is becoming an increasingly important distributor of Film and TV content online. But plans to sell films at $0.99 could cause massive disruption to the business models of the major studios. Telcos could offer a powerful alternative, not just as a retail channel but as an enabler of richer, more profitable interactions with consumers.
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The Telco 2.0 Initiative has been asked by a number of the major Film and TV studios to look at new models of collaboration between themselves and the telecoms industry. The aim is to develop new methods of monetising online content that leverage the full gamut of telco assets and provide complementary alternatives to Apple, Cable and the Internet Players.
Running parallel to this, we are doing some in-depth work to define and size this market opportunity as part of a major ‘Telco 2.0 Ecosystems' syndicated research project. This builds on previous analysis of the Online Video market, Future Broadband Business Models and ‘Two-Sided' Platform Plays (see www.telco2research.com).
In this article, we set out the major tension points for content owners and telcos around the challenges and opportunities online video distribution represents to existing and new revenue streams. We will follow up this article with three more over the next few weeks, concentrating in turn on specific issues in the film, TV and games markets.
Apple sets the pace
Apple has set the benchmark for online content with iTunes and its App Store, however, its business model is based around hardware sales and content revenues come a distant second, meaning the value of content is not paramount to Apple. By developing scale quickly with an engaging user experience, Apple secured the capability to dictate low prices to the music industry in order to broaden the appeal of its hardware and is (potentially) looking to do the same with video content.
If telcos are now to play a constructive and proactive role in the emerging online video market, they must work with content owners to better Apple's user experience and add functionality that enables them to ‘out-Apple Apple'.
To do this the two industries must understand and answer three key questions that are driving their strategic developments.
Key Content Owner Issues
How can they protect intellectual property online?
How can they engage directly with billions of consumers via the mobile channel?
How can they increase the methods of monetisation for Film, TV and Gaming content online?
Telco Opportunity in the Digital Entertainment Market
Can telcos generate new sources of revenue by providing ‘enabling' services?
Can telcos improve the mobile user experience?
Can telcos provide a complementary channel to Cable, Internet Players and Apple?
Why Online Distribution Matters
Online video makes up one-third of consumer internet traffic today and is forecast to grow more than ten times by 2013 to account for over 90% of consumer traffic overall. It is becoming one of, if not the key distribution channel for video content of all kinds including movies, TV and games and the challenge is to ensure that the online transition does not undermine the value of video as it has for music.
To do this, the entertainment industry must establish new commercial models that can counter the pirates and establish themselves as the primary players in the distribution of their content, influencing its value and not allowing others to dominate the legal online distribution channel as Apple has done for music.
Rating Telco Assets
At Telco 2.0, we believe that telcos have a unique set of assets that enable them to become a true partner with content owners, not just another retail channel. These include: the ability to provide payments, multi-modal content delivery, support a user experience across three screens (TV, PC and mobile), provide interactive marketing and CRM data and support hands on customer care.
Separately these are certainly interesting but combined they set telcos apart from the other partners and give telcos potentially the ability to ‘out-Apple Apple' by providing easy to use end-to-end solutions for monetising online video content, as illustrated in the table below.
Figure 1 - Players Vs. Capabilities
Source: Telco 2.0 Analysis
*Apple and Amazon gather customer data but do not pass this on to content owners.
Interactive Marketing and CRM - Data goldmine
Telcos and particularly mobile operators have a huge amount of data on the activities of their customers which, when aggregated, can be highly valuable for targeted advertising and marketing activities, as well as Identification and authentication. Unlike others, such as Apple and Amazon that acquire data on users and their behaviours, this is information that telcos are willing to share with others, as has already been demonstrated by the development in mobile advertising.
Customer care is a central part of a telco's DNA. Telcos have direct relationships with their customers in the way that content owners and distributors don't. Online distribution brings with it the need to ensure that customers get the products they are expecting, and that requires a customer care function. This could of course be built from scratch or outsourced to call centres but both options are costly and require a level of expertise that is not in skill sets of content owners.
The 3 Screen Experience
Delivering an effective 3-screen experience is something that sits in the sweet spot for telcos. Many are converged players and therefore have the technical capability to deliver content and a user experience across TV, Internet and mobile screens on their own networks. Furthermore, global distribution is provided through the existing interconnect an roaming structures, which when supported by the right licensing model, further differentiates telcos from alternatives.
Online payment mechanisms obviously exist but telcos can offer payment through their own bill, opening up the market to customers that don't have bank or credit card facilities but do have a mobile phone, such as the teenage market. Furthermore, they can do this without expensive scratch card systems used by the likes of Apple. Telcos also have a global payment exchange and clearing capability which also supports micropayments. Originally designed for the transfer of roaming payments between operators, this functionality is now being extended to third parties to deliver a secure, easy and trusted payment capability, again all through the operator's bill.
Identity-based Content Delivery
Finally, telcos have the ability to distribute content across platforms and also to identify and authenticate users across those platforms. These will be essential features if studio revenues are to be protected as the rights and window model becomes less appropriate.
The Online Video Challenge
Before we look at the issues and opportunities in more detail, it is important to define what we mean by online video as it comes in several forms. In this instance, we include all online capabilities, including: Digital Video Recording (DVR), Video on Demand (VoD), Web TV, and other direct serving content models for games etc, IPTV and mobile.
Online video is therefore many things to many people and impacts on the traditional distribution cycle at multiple points as it offers studios, cable companies and distributors the potential to cut out others in the chain and go straight to consumers. This direct channel potential together with its significantly lower cost base, provide it USP. However, as it removes the need for physical products from the value chain it throws up a host of complications and questions about the ownership and control of that chain, both legal and illegal.
These complications and questions can broadly be grouped as follows under three questions we identified earlier as fundamental to content owners.
Figure 2 - Online Video Content Producer Issues
Source: Telco 2.0 Analysis
Pirate horror show
Video content owners, most notably movie studios, have always suffered a degree of revenue leakage from piracy. Illegal DVDs are available to purchase on dark street corners but the major difference in the online world is that software is freely available which makes high quality copies extremely simple to distribute. Broadband speeds have improved allowing downloads of complete movies in minutes rather than overnight and streaming to be possible. Even worse, a whole generation of people think it is quite acceptable to fill an iPod, or similar device, with pirated material.
Accepted wisdom is that combating piracy requires both a carrot and a stick. The carrot comes from making movies widely available online for both rental and purchase in a manner which is easier to use than the popular pirate sites. The stick is legislation which fights both pirate sites and, more controversially, repeat end-user offenders.
Figure 3 - Telco 2.0 Online Video Distribution Scenarios
Source: Telco 2.0 Analysis
Studios will continue to fight pirates through legislation and the courts with a zeal not seen in music. Last year, the Stockholm district court has sentenced the four Pirate Bay founders to a year in prison, and over $USD 3.5 million in fines for violating their country's copyright laws and this was by no means the only incident. However, studios must still look to differentiate their legitimate product offerings on quality, ease of use and additional features to create a new order for video distribution that minimise the appeal of pirates.
The implementation of "3-strikes" legislation in both the UK and France appears to offer the studios a much easier mechanism of discovering and punishing the repeat offenders. However, it will take time for the effect of these laws to reduce piracy. More importantly, time will be needed to alter the public perception of innocence of piracy and the damaging effect piracy is having on creative industries in general.
There is also significant uncertainty about which players will benefit from the emergence of a New Order in online video distribution. Many of venture capital funded start-ups, such as Babelgum and Joost, have disappeared. The current King of Online Video, YouTube, is subject to a major legal suit from Viacom, the UK Premier League and others which if not threatening its existence, certainly threatens its business model and operating procedures. More success appears to being made by traditional media players, such as the UKs BBC with its iPlayer and various TV Studios joint-ownership of Hulu. However, it is certain that new distributors, such as Apple, will play a significant role going forward.
Blurred Battle Lines
On the right side of the law, online is equally disruptive. It is blurring the lines between the players and encouraging entrants into the ecosystem, thus challenging the shares of traditional entertainment players. Content owners must decide on which value chains provide them with the greatest value proposition and change their licensing and distribution models accordingly. They must differentiate from free/pirate alternatives and cannot follow the music labels that put their heads in the sand and refused to believe digital formats would replace the physical ones.
For fixed and mobile telcos and other broadband service providers, a large part of future strategic success in broadband therefore rests on understanding how the online video market and ecosystem will evolve and on interacting with it effectively.