It is a surprising scenario, considering all the hubbub about how digital interactivity is transforming every aspect of our lives. But the transformation, while absolute, is not occurring as quickly as it could, according to a new report from Bernstein Research.
Some of their observations are especially meaningful in light of the recent turn of events--including the launch of the new NBC Universal and Fox online Hulu TV model, charges of Comcast content interception, and the contrary quarterly financial performance of competing cable and Telco giants. The glaring shortcoming to their team report--"The Revolution will be Televised...on the Web"--is not providing enough credence that portable interactive Internet-connected devices--most notably digital mobile phones--will impact all players and issues. The catalyst is technology-empowered consumers, who would rather have their communications, entertainment and connections to go, no matter how small the screen.
However, the interlocking dependencies of the entrenched business models of movie studios, television broadcasters and advertisers impede the progress that would result in full-fledged Internet Protocol video, the analysts say. Content owners granting more permission for the legitimate use of their products online would drive consumer demand for IP video, which in turn could ratchet up bandwidth growth 50% to 80% annually. The kicker is that true broadband access remains scarce--the telcos' massive fiber build-out will reach fewer than half of U.S. homes, while cable operators are in no hurry to abandon their current revenue model," the analysts say. The only hardware vendor making any serious efforts to establish a long-promised digital media hub in the home is Apple, whose iPod and iPhone ecosystem has singlehandedly forged a new generation of portable interactive devices.
But companies will not shift gears away from their old business models and infrastructures until there are enough economic incentives to do so. Film studios are reluctant to embrace the Internet as a platform because the industry's current business model--selling movies over again to theater owners, big-box retailers, video renters, movie channels, cable and broadcast networks--allows them to recoup about 57% of all consumer film sending. Until that model is more threatened by digital piracy or alternative credible IP windows, nothing will change. The film industry also privately harbors concerns about succumbing to the same loss in revenues, consumer spending and value that the music industry has suffered to digital distribution.
Alternatively, television content producers and distributors must embrace new business models as their old one-way, ad-supported analog systems deteriorate in the developing digital marketplace. The television syndication model that has buoyed broadcast and cable networks for decades has been under steady fire from time-shifting technology (DVRs, TiVos), advertisers searching for engaged targeted consumers (the catalyst behind the 70% of incremental advertiser sending going to Web video), and the television networks' quest for additional revenue streams, which can only come from IP video. As a result, the TV industry eventually will experience a lift from television content providers and consumers, who are platform and window agnostic.
Analysts point to the fact that "American Idol" attracts 28 million households in its weekly 90-minute HD prime-time broadcast, which translates into 340 million gigabytes of data--or 100 times the data transmission of YouTube's most popular video clip ever, the six-minute "Evolution of Dance" viewed 48 million times. So much for the prediction that TV will die at the hands of IP video.
A glimpse at some of the new television economics at work: Walt Disney's ABC comes out equal-to-ahead in overall revenues if its "Desperate Housewives" series is bought on DVD after initially airing on the broadcast network, then is purchased as an Apple's iTunes download or is viewed on ABC.com with commercials intact. However, network-owned or affiliated stations do not share in that value. The ratings and advertising revenues for their profitable local newscasts are hurt by the disrupted audience flow from original prime-time series or syndicated programs that can be viewed elsewhere on-demand. Those changes are only just beginning to be felt as only three of the top 15 syndicated series on broadcast television have seen ratings growth, and even the popular "Seinfeld" and "Friends" have experienced as much as 33% declines this year, Bernstein analysts say.
Cable networks will not risk cannibalizing their "cable subscription gravy train" that assures shared revenues for their program offerings, regardless of how much or whether they are viewed. (For instance, Disney collects about $5 per cable subscriber every month in affiliate fees and advertising for its portfolio of networks. There is no model on the Web where Disney collects $5 a month for every Web user, whether they use their services or not.) Barring any new economic incentives, cable networks will not be pursuing video Web alternatives anytime soon.
The fuss over Telco broadband competition to cable requires some perspective. Verizon's $20 billion-plus fiber-to-home broadband network, when completed, will cover only 15% of U.S. households passed, or just 3% of all market share. AT&T's fiber-to-neighborhood system will reach another 25%. All told, telephone company fiber networks will reach about 40% of domestic households, where satellite operators tag along for the interactive ride. True cable and Telco duopoly will cover about 15% of the country. "In 60% of the country, the need for speed means that cable wins in a walk-off--and not just in broadband," the analysts say.
If the digital home does not drive $272 billion in revenues through 2010, as Bernstein analysts forecast in 2004, it is because only Apple has answered the call for a home digital media hub, although it also lacks a complete solution. Other traditional hardware vendors "have largely failed to take advantage of these opportunities," despite the proliferation of digital content and declining storage costs. Plus, more than half of U.S. households have broadband (mostly wireless) access and media playback devices.
There is plenty of unrealized economic incentive. If as a cable TV replacement, AppleTV eventually achieves 5% penetration--or about 5 million units generating about $1.5 billion--it could realize nearly $5 billion in content sales annually simply by selling its users 20 TV programs and four movies every month. Still, a true media hub that overcomes all obstacles and brings together all necessary elements, even from Apple, is still at least three years away.