Anyone who thinks that online video is a stand-alone proposition isn't paying attention.
Mobile smart phones, as well as other mobile connected devices, will remain the global screen of choice. Much of the content produced for online viewing has to be fashioned for audiences on the go. But in a ubiquitous digital media world, video will flow freely between all platforms and devices, whether transmitted by users or companies. Both content and advertising eventually will be routinely styled for interactivity, capitalizing on the interactions with mobile consumers that will include e-commerce, communications and permission-based marketing research.
Collectively, the emerging broadband and mobile video opportunity is what BMO Capital Markets analyst Lee Westerfield has dubbed "Television 2.0." With broadband penetration rising as much as 80% by decade's end (from today's 62%), and mobile phones and PDAs at 70% domestic penetration now, Westerfield says the combined video space will generate new, rapid growth in advertising and fee revenues, reconfigure TV distribution and "retool investment returns across much of the media value chain."
The separate but mutually supportive platforms of broadband and mobile video are being spurred by rapidly declining broadband network transmission and storage costs, with consumers viewing as much as 20% more by shifting to content access outside the home. Although projections are speculative at best, Westerfield estimates, by 2011, 40% growth in broadband revenues and cash-flow margins driven primarily by advertising, and 40% growth in mobile revenues and cash-flow margins driven primarily by paid content fees.
Among the beneficiaries will be more than 40 e-video innovators spanning from media conglomerates' e-video content brands, such as Hulu.com and CBS.com, technology delivery platforms, such as BitTorrent and BitGravity, monetization engines, such as Ooyala and Digitalsmiths, and search leaders, such as News Corp.'s MySpace and Google's YouTube. Westerfield details the thesis and provides instructive, concise profiles of these companies in a comprehensive new report titled "eMerging Video Markets."
Especially telling is a summary of each company's future challenges: YouTube faces lawsuits and copyright disagreements, Hulu.com must expand its offerings, NBC and CBS are bound by their hit creations, Fox Interactive must better gauge consumer response to content and pricing.
Monetizing broadband video through advertising (particularly branded advertising), and secondary subscriber fees and pay-for-play, will grow and solidify over time. Westerfield estimates that North American online video will generate $3 billion in advertising by 2011 (or less than 5% of total TV advertising revenues), while mobile video will be primarily supported by subscriptions, totaling about $3 billion annually by then. Domestic online e-video has soared 64% over the past 18 months, according to comScore. Over time, Internet video delivery systems will converge DVR time-shifting with VOD as consumers access and transport more video on their portable mobile devices outside the home, he said.
Whether as capital-intensive branded media aggregators of video-licensed content or "contextual syndicators" targeting e-video content to a network of Web publishers, broadband video faces several obstacles to realizing full Television 2.0 development. These include piracy that undercuts content values, Net neutrality-related legislation, bandwidth concerns and the lack of interoperability among platforms and devices. If there is a dark side to the future of Television 2.0, it is--ironically--the gradual demise of Television 1.0.
"From here, the impact on traditional TV from e-video 2.0 will be profound, not marginal," Westerfield warns. "We expect lasting pressure not only on the conventional economics of broadcast stations, but also on the intertwined economics of network programming and studio production." Over the next five to eight years, there will be a shift in equity value away from linear broadcast/cable distribution and network programming brands--the result of faster broadband access to homes, plummeting bandwidth costs for unicast video across the Web and the expansion of online marketing services.
The resulting economic hit could be devastating. The profitability of television studios could drop by one-half to two-thirds. Westerfield notes that's the outcome of the de facto deregulation of media that has left the Internet ungoverned by the FCC, and cable and broadcast TV restricted.
As a result, studios will increasingly syndicate shows to the Web separate from TV station licensing to stabilize their return on investment. That will create advertising revenue voids for television stations, which do not move aggressively to leverage their local programming and resources onto broadband and mobile channels. The five- to-eight-year time frame will provide players time enough to adapt to the new bifurcated media value chain to cultivate offsetting new revenue sources, he said.
Accessing and viewing video anywhere on a mobile "third screen" will be one of the richest new mines to tap, fueled by the advancement of 3G and other wireless networks. But the mobile video market is nascent compared to the steady stream of broadband video services into the home. As always, the overriding question is whether the media players involved can generate broadband and mobile video revenues fast enough to permanently offset and even exceed their declining traditional revenues in the steady, sure shift of advertiser and consumer dollars to new platforms and devices.