IP Video: King of the (Media) World

Looking beyond the simplistic notion that Internet video eventually will decimate traditional media distribution, content economics can yield some surprising insights about a world that will be dominated by the Internet Bypass.

Such an exercise is at the heart of a notable series of related research reports produced by Bernstein analysts Craig Moffett, Michael Nathanson, Jeffrey Lindsay and Jeff Evenson. They generally conclude that cable operators and cable networks, telcos and VOD distributors, new ad agencies and IP video equipment suppliers will be ultimate winners in the Web video game. Losers will include one-way distributors: TV stations and satellite operators. The fate of broadcast networks, TV and film studios are murky, based on how they manage paid IP access.

The thought-provoking rationale behind these assertions is driven by several assumptions: Content producers and distributors must be paid. There is no free lunch for consumers. Broadband will be the prevailing platform. If that is the end game, then the business models for all media, entertainment and communications -- as well as the marketing and commerce that binds them -- will dramatically change in a digital marketplace. Consider these nuggets:



If cable ultimately forfeits its video involvement to the Internet Bypass, operators will be better off economically. As a "dumb pipe" provider of raw broadband connectivity, cable operators would eliminate program costs and halve capital investments, incur lower penetration, revenues and overall expenses -- but enjoy higher profit margins of 40%-plus and cash flow of 30%-plus.

More than one-third of cable subscribers surveyed by Bernstein contemplate cutting the cord in the next five years over content selection rather than cost. "Unlike music or newspapers, the pipe this time is an interested party...cable distributors will take action that affects this evolution," Moffett notes.

Broadcast television economics will be compromised and its content cannibalized as more video comes to the Web. A clear solution is to leverage and its mushrooming "Hulu households" into a new business model of subscription-based content and premium-priced advertising to reflect better effectiveness, recall and behavioral audience targeting. Properly executed, Hulu could dominate YouTube, still the most-watched domestic video site by a factor of 6x, as well as the lesser Yahoo video, Veoh, Joost and Revver.

Cable networks determined to protect their lucrative multi-pronged income from affiliate fees (now comprising half their revenues), subscriptions and advertising will rally around Time Warner's proposed TV Everywhere plan. It allows their content to be viewed online or on any connected device by one-time paying subscribers.

The more controversial alternative -- Usage Based Pricing, where users pay more to get more -- would "essentially indemnify cable operators against all potential (IP video) outcomes," Moffett says. With only 8% of ad revenues generated online, cable networks will aggressively pursue both business models to prevent disintermediation, primarily by

IP-based aggregators, such as Amazon, Netflix and iTunes, will assist film studios in maintaining the lucrative windowed release of movies and provide cable networks with a pay-to-download model that will not disrupt affiliate fees.

The free lunch is over for consumers, who can expect to pay for bandwidth usage, access to content and services, and overall subscriptions, which will become the collective norm for IP video. "If [consumers] have to subscribe anyway in order to get the content, then the advantage of bypass is gone," Moffett observes. Piracy will continue to be a nagging counterpoint, although Bernstein analysts question whether "the supposed magnitude has reached urban legend status."

Ubiquitous Internet-connected television will become standard over the next five years, providing a better viewing experience, more content and service choices, such as browsing, search, anytime on-demand viewing, and easy transfer to and from all mobile devices. That will be a win for equipment and service suppliers such as Cisco, Juniper, Equinix, Akamai and Corning. Even with broadband growing 50% annually, costs will remain low and margins high.

User-generated media, while wildly popular with the Twitter and Facebook crowd, will remain the most challenging IP content, lacking advertising horsepower and commanding exorbitant hosting costs. (Even YouTube only generates about $200 million in annual revenues for Google.) These "technologically clever services that consumers really like but are unwilling to pay for ... have no business model," Lindsay notes.

Tech-savvy consumers will pay for professional IP video -- as long as it can be accessed, stored, shared and manipulated to their liking. Personal relevance is everything -- for instance, MLB TV, Major League Baseball's Web-based video service. Subscribers pay about $120 annually to watch four out-of-market games simultaneously in HD with such personalized viewing options as browsing for favorite players and announcers.

Although advertising clearly remains part of the professional video revenue mix, the Bernstein reports do not explore inevitable changes in its form, value or interactive commerce extensions. The analysts concede that it is early in the process, underlying models are fluctuating and revenues are small. Still, the recent deterioration of home-entertainment economics is evidence of how quickly digital technology can alter businesses and consumer buying habits.

While DVDs remain in a freefall and video-on-demand remains tepid, online streaming, kiosk rentals, subscription services, electronic sell-through and video games will continue to bolster secular home entertainment.

If there is a weakness in the reports' overall premise, it is relying too heavily on the so-called "current reality," which is a guess at best. Consumer adoption and use of online video is nascent and extremely fluid -- hence, the general characterization of all-ages users accessing Internet video mostly from aggregators, opting mostly for short clips while multitasking.

The only sure thing: usage will continue to trend up. Analyst concerns about the overstatement of IP video usage, implied by an ongoing user study by the Council for Research Excellence, seem out-of-place given rapidly changing adoption and the general guesswork underlying all media metrics. (Bernstein is a member of the council, funded by Nielsen, whose controversial ratings of estimated viewers are television's lifeline.)

The real issue that the analysts keep coming back to is the impact of IP video's continuing growth and eventual dominance on existing content, distribution and advertising economics.

The official mantra of the U.S. Marine Corp -- adapt, improvise and overcome -- that the analysts apply to the resilient film industry actually is the MO for all things digital. It is implicit in the cautionary notes underlying these enterprising interrelated reports: An uncertain interactive future will yield some surprising outcomes and prove lucrative for players who "adjust and rebalance."

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