Following the TV Revenue Stream: A Peaceful Canoe Trip or Attack of the Piranhas?

If you want to predict which Internet TV products and services will take off, you need to follow the revenue stream. Not that money alone makes a great product that consumers will like, but it certainly takes money to fund the efforts of tech companies to try to build the right products. The big question at the TV of Tomorrow show was: where will that money come from?

The problem is that most of the money right now comes from cable TV based business models. You pay a certain fee per month, and the cable company gives you a set-top box and a range of TV channels and a limited set of applications which work with their equipment and won’t upset their revenue applecart. Meanwhile they get to participate in sharing the national and local ad revenues. But one thing that was clear from the show is that this business model is either going to be significantly changed or go away completely.

The challenge I see for cable TV is that there are just too many holes in the walls of the walled garden, just too many ways for different players to add valuable services leveraging a broadband pipe. Perhaps no one “over the top” Internet TV approach has the elephant gun to take down the big game, but taken together the little nips and bites of these pillaging piranhas already has the cable companies seeing red as they slowly bleed revenues. While online video advertising is still quite small by comparison, estimated at less than 1.5% of total video-based advertising, it is growing fast and certainly causing the traditional powers some indigestion at the threat this represents.

To be clear, the cable companies are not sitting idly by as the Internet/interactive TV world passes them by. They are moving just as fast as they can to give consumers as much of the cool applications and interactive features they want (again with the caveat that they don’t break their equipment or their business models completely). The recent announcements about Canoe Ventures testify to this desire. Canoe Ventures, which is a joint venture between the top six cable providers and covers 60% of the top 100 million households that subscribe to TV services, is planning to launch a set of mostly advertising services over the next year that are built upon the CableLabs’ Enhanced TV Binary Interchange Format (EBIF), a simple platform for interactive applications that can run on even the most basic set-top boxes.

Most of the features Canoe is planning to deliver focus around interactivity and addressablity. The interactive functions will bake into your remote control things that you used to have to walk over to the computer to do, such as voting for your favorite American Idol, predicting the outcome of a sporting event, voting for a political candidate in a straw poll, or requesting that an email be sent to you with a recipe from Top Chef. These will now pop up on your screen and allow you to easily enter your preferences with the remote. Other interactive features will allow you to “telescope” to deeper content just as you click through buttons and ads on web pages, or engage in “t-commerce” by ordering products on TV that get directly charged to your credit card.

The addressibility portion of what Canoe wants to do will happen both in the background and with your help. Adressability is about targeted content, through intelligent suggestion engines, and even more important targeted advertising. By sharing with your provider your preferences (or them figuring it out by themselves through your viewing habits), the cable companies have the ability to serve up targeted content that has a better chance to be interesting to you, and ads that allow them to charge higher rates (if you don’t have kids, the advertiser won’t waste time trying to sell you Huggies, but will pay more to advertise other products that fit your lifestyle).

The big question for Canoe is whether consumers want all of this functionality delivered by the cable companies. Is it just these interactive features they want, or do they want a different set of features, provided a different way, at a different price (including free), and from a different provider? The answers will have a large impact on whether the cable companies can count on their TV business as the cash cow it has been, or whether they need to find a way to charge more for their broadband pipes to pay for the over-the-top services customers are already using.

As we have discussed before, there seems to be no shortage of alternative approaches to watch not only your favorite shows but also get the interactivity you want. The first is to simply watch your TV shows on the computer via portals such as Boxee and Zinc and a myriad of content sites such as Hulu and all the major networks like ABC.com and CBS.com. Interactivity comes natural to the computer. If you are not content to watch in the discomfort of the lean-forward computer approach, you can move that content to the HDTV big screen via several PC extension and Internet streaming options such as Roku, ZvBox, SlingCatcher, AppleTV, Belkin FlyWire, IOGEAR, and other devices. You will get a mix of content options (all Internet TV, Netflix, Amazon, iTunes), complexity (WiFi, Ethernet, coax, WHDI, Wireless USB), capabilities (whole house, 30-feet range in-room, point-to-point, broadcast, STB/no-STB), and price points (ranging from $99 to $1499), but at least you can decide what value package you want and how much of a challenge you can endure.

Or if you want a little interactivity with little additional cost, you can wait to buy a new HDTV powered by Yahoo TV Widgets which will give you stock quotes, weather, news, and other snippets of info. Or spend a little more and buy Silicon Mountain’s Allio TV which combines an HDTV with a PC and does it all.

Or if you want all your Internet and TV needs over a managed network from a provider other than the cable companies, you can wait until Sezmi’s all-in-one service comes to your neighborhood.

The point is, the piranhas are already out of their tank and nipping at the leviathan’s legs. While Canoe holds promise and is the life raft the cable companies desperately need, it is not clear it will be enough to stem the tide of new Internet TV options that are drastically changing user behavior, especially by the younger demographic. However, the mass market is very confused by the fragmented solutions represented by the various alternative and over-the-top TV technologies and may be looking for a more streamlined approach that fits into the way they already watch TV.

Right now, it looks like no single approach is the “right” answer. They all solve some piece of the puzzle, but look more like way stations on the road to full interactive/Internet TV than a final destination. A more complete picture may emerge downstream a bit, when the right combination of price, simplicity, and comprehensiveness gives consumers the value and understandability they seek. What remains to be seen is whether the industry will evolve as one big, happy ecosystem with many winners (big and small) that meet the needs of different demographic groups, or whether one or two large sharks will eat up all of the little fish. And that depends in large part how sharp are the teeth of the little fish in biting off pieces of TV revenues and how well the school works in unison to provide an alternative for consumers to what the cable companies are going to give them. Either way the TV revenue stream is turning a blood-red hue.

Interested in learning more? Trender Research is working on an Internet TV report from the perspective of everyday folks. For more information, please contact Brian Mahony, bmahony@trenderresearch.com.