Comparing Hybrid OTT/Pay TV Solutions on Opposite Sides of the Pond: TV Everywhere and Project Canvas

It is becoming increasingly clear that the flood gates for OTT video—that is TV and movie programming over a broadband Internet connection—have opened and are forcing traditional television service providers and movie studios to build profit tributaries off this rolling river or risk having many of their paying subscribers swept away. The industry is determined not to remake the mistakes of their brethren in the music business and is therefore trying to be proactive. The most promising of these efforts are hybrid solutions that would combine the best of traditional television services with content available over the Internet. Two of the more prominent hybrid initiatives in play are on opposite sides of the pond— the U.S. based TV Everywhere partnership and UK-based Project Canvas. Though similar in that they attempt to merge the best of both worlds, there are several key differences. Let’s first take a look at TV Everywhere and then compare to Project Canvas (later in this post).

TV Everywhere (well… almost everywhere)

Originally proposed by Time Warner but now with expanded partners including fellow cable companies like Comcast and IPTV triple play providers such as Verizon FiOS, TV Everywhere is an ambitious attempt to meet the threat of Internet video head-on while limiting disruption to existing business models. TV Everywhere is primarily an authentication system whereby certain premium video content can be accessed online— assuming you are already subscribed to services from a Pay TV operator such as cable, satellite, or IPTV. The content available will include shows you could already get from your TV set, but now the operators will also have a channel to deliver “long-tail” niche content that cannot efficiently be delivered through traditional broadcast technology (since it would presumably take up scarce channel spectrum for only a small percentage of interested viewers). TV Everywhere will also build more advanced online tracking systems to allow partner operators to better measure program ratings and to charge more for targeted advertising.

While significant lip service is being given to the subscriber benefits of this system, the real beneficiaries are the Pay TV operators themselves. They are finding that more and more of the content they used to be able to uniquely deliver through their “walled gardens” is getting poached and made available online. The symbiotic trust relationship they have had for years with cable networks and programmers such as ABC, ESPN, MTV, and Fox is being frayed as these networks create their own online sites or form joint online video properties such as Hulu, stealing eyeballs and cannibalizing Pay TV advertising revenues. Their attempts to renegotiate the fees they pay for this content is just a finger in the dike as the OTT river flows around all business, legal, and regulatory attempts to constraint it. The only way to stem the tide is to build a business model boat that can flow with it— TV Everywhere is their answer.

Net Quotas?

Perhaps the other unspoken aspect of the TV Everywhere strategy is that is sets the stage for a metered broadband future and premium subscriptions. Right now it is all about getting existing content through any broadband connection, and new forms of content, but once this authentication “switch” is built into the system it seems to me a reasonable next step for Pay TV operators to extend their tiered subscription model to the broadband spigot itself—one price for double play TV Everywhere customers (TV and broadband), a better deal for triple or quad play customers, and higher rates for broadband only customers who are presumably feasting on OTT content without proper remuneration to the operator. Of course this is all speculation at this point and “net neutrality” legislation could throw all this to the wind, but remember that service providers like Comcast already have bandwidth caps in place in their subscriber agreements (though I haven’t heard many cases of it being enforced beyond a few egregious P2P file sharing cases). If my math is correct, Comcast’s 250 GB cap is good for about 1 hour of HD content viewing per day. Most consumers would not even come close to that right now, but what about “cord-cutters” wanting to replace the 8+ hours of TV viewing common to U.S. households?

While TV Everywhere claims there will be no extra charge for existing subscribers, there are other ways to extract fees. TV Everywhere will likely follow a path that even free sites like Hulu will traverse at some point—adding subscriptions or VoD fees for premium content in addition to their free basic titles. Hulu backers including Disney CEO Bob Iger and NBC CEO Jeff Zucker have suggested as much.

Don’t Look Over the Wall

Besides some of the technical challenges for TV Everywhere, which are being worked out in several ongoing trials, the major risk factor I see is changing user behavior. TV Everywhere’s logic works something like this: people like to watch video content from multiple platforms (PC, mobile, TV), so we will give it to them any way they want it assuming they are a paying subscriber; in this way we can expand the “walled garden” with more content, keep customers happy, and keep them from cutting the cord. Another possible scenario would work like this: TV Everywhere helps to train average consumers how to watch online video, they look “over the wall” to see lots of great free or low-cost content on other sites (Hulu, Netflix, ESPN360), and they decide to cut the cord on their $100 cable bill or cut back to the basic $40 package and add Netflix streaming for $9 a month. Which scenario do you think is more likely? Is it the thrill of the experience of watching walled garden content online, or it the cornucopia of free or low-cost content sources online that will drive the market? Depending on the answer to that question, TV Everywhere could be a Pay TV panacea or a pandora’s box that further breaks down the walls of the walled garden.

Project Canvas Mindset: Start with Free

Next up let’s compare and contrast the TV Everywhere hybrid approach to Project Canvas, a similar strategy but vastly different in implementation.

Project Canvas, formed by the BCC, Five, BT Group, and ITV, combines free over-the-air content with free and paid OTT content. Like TV Everywhere, Project Canvas is less of a standard and more of a commercial attempt to quickly go-to-market with an attractive solution that is easy for consumers to embrace. It will build on the BBC’s success with its computer-based iPlayer for watching Internet video and the Freeview Free-to-Air (FTA) system being used by 40% of Britain’s 25 million homes, a powerful combination for consumers. Project Canvas is also tackling the hybrid interface challenge head-on by providing an integrated electronic program guide that would allow viewers to search both FTA and OTT content at the same time (similar to what TiVo can do today). Consumers would need to purchase a new STB and a new remote.

One interesting contrast we can see right away is that Project Canvas starts with “free” mindset whereas TV Everywhere starts with a subscription mind-set. Both are trying to embrace the future by blending in Internet video content, but their business models and technical implementation approaches are vastly different. The reason for this has to do with the different regulatory, technical, and competitive backgrounds of the U.S. and European (and international) markets.

OTA Vs. FTA

In the U.S. the whole Pay TV market was carved out from the free “over-the-air” (OTA) channels that are broadcast unencrypted on UHF or VHF bands. Cable and satellite companies lured consumers away from their “rabbit ears” antennas to paid subscriptions by offering more channels and movie packages. Consumers found this expanded content irresistible and over time become accustomed to shelling out 75 to 100 bucks or more. OTA was seen as “old school” and “low rent”. That is until the recent digital TV change-over, where consumers (in certain markets) were surprised that their roof-top antennas or living room rabbit ears allowed their digital TV tuners to receive a dozen or so major local channels in crystal clear high definition (often better quality that cable). Combined with a streaming movie service like Netflix and free shows from Hulu, OTA has new life and is therefore a threat to Pay TV cable and satellite providers.

The European television market is very different. “Free-to-air” TV has a long history of support from consumers and regulators and enjoys greater market share than in the States. In most cases FTA is delivered via unencrypted satellite signals (though it might be free but still encrypted for copyright reasons) to dish receivers and set-top boxes rather than antennas and TV tuners. While described as “free”, depending on the country these channels are paid for through advertising, taxpayer funding, donations, or corporate sponsorships, as well as subsidies from the hardware required to enable the service.

The point is that Project Canvas has a starting point that everyone likes—free. From there it will be able to offer premium subscription channels or pay-per-view titles on top of the free basic offerings. It will merge the widely popular BBC iPlayer (but make it user friendly for browsing from the TV) for OTT content navigation and the familiarity and major channels of the Freeview FTA service.

Comparison Checklist

Similarities:
• Both projects are commercial initiatives launched by major industry players to profit from the growing Internet video trend.
• Both projects will be challenged to provide a blended viewing experience for traditional TV as well as OTT content; likewise both projects will need to license and package an attractive mix of content from both worlds, as well as understand new forms of advertising and how to offer interactive apps.

Differences:
• TV Everywhere is subscription-based Pay TV plus OTT (free and perhaps with paid options someday), whereas Project Canvas is free FTA plus OTT (free with options for premium paid content). As a result, Project Canvas is facing resistance from Pay TV competitors such as Sky, unless they can somehow incorporate them into the partnership.
• TV Everywhere is an incremental approach and does not require a new set-top box, but instead a new software client that will enable content from PCs and mobile handsets; Project Canvas requires a completely new integrated end-to-end system.
• Project Canvas is tackling the “living room” interface head-on, whereas TV Everywhere’s strategy is to extend its content beyond the living room to other devices (though its backers claim it will also enable new content options at the TV). In fact, the entire Pay TV business model in the U.S. is threatened by the host of new devices (e.g., Roku, Xbox, Internet-enabled TVs) that make it much easier to bring OTT video content to the TV and thereby cannibalizing Pay TV.
• Project Canvas seems to be operating in a more restrictive regulatory environment and may face limits that could sub-optimize its ability to reap profits and recoup its $200M+ initial investment.

Conclusion

There are many other business and technical contrasts to consider, but I leave you with one final thought. One of these initiatives seems to be more of an attempt to control the flow of the OTT river, whereas the other one is more geared to ride out the Internet video rapids (I’ll let you guess which ones). The question is, which of these strategies will prove to be more successful at driving consumer adoption and extracting profits for its backers without exciting the ire of regulators?

For feedback or consulting contact Brian Mahony at bmahony@trenderresearch.com