I have been in New York City this week attending the IP&TV Forum North America event. Many of the major telcos and cable MSOs are here, including Verizon, AT&T, Cox, Comcast, SureWest, QWEST, Orange (France Telecom), and Rogers. Though skewed towards players in the Pay TV/IPTV realms, there is also a smattering of over-the-top video (OTT) devices and services including Sezmi, Popcorn Hour, BeeTV and Finally! TV.
The message that is coming through loud and clear from the Pay TV camp is, while there is some concern about the threat from OTT, they believe that Pay TV is on solid ground and not going away anytime soon. In fact, some think they can harness some of the capabilities of OTT to provide a more compelling and interactive TV and VoD experience for subscribers.
AT&T’s VP of Product and Strategy Jeff Weber gave the example of their Master’s golf application piloted last year. Viewers were able to watch the action while simultaneously tracking player info and statistics. It is a great example of a blended viewing experience that leverages Internet content. The problem is that this was a one-off app that required a great deal of effort to create and is not easily repeatable. But it fit into U-Verse’s walled garden and provided a great experience during the event.
The challenge for AT&T and other Pay TV service providers is how to harness the interactivity, content, and applications on the Internet in a way that fits into the limits of their hardware (especially the set-top-box) and works well with their existing electronic program guides. App development is easy using web-based tools, but this same open and easy development environment does not exist with Pay TV providers, who must always make sure any new app does not “break” their user experience or equipment. As Jeff points out, while they do have an API and work with third-party app developers, it will never be as open as the Apple App Store for example. So while the Master’s golf app was a good one, it raises the question whether the Pay TV providers will truly be able to integrate the multitude of apps and content on the Internet.
Why not just open a browser and let the subscriber go to ESPN to check stats? We all know the answer to this, which has everything to do with content licensing and protecting the walled gardens of the Pay TV operators. This is not to say that U-verse is not a great service, which it is, and one that can offer better content, apps, and user experience than cable TV. I just raise this issue to point out that the technical and business model limitations in the Pay TV world may never allow the full potential of everything that can be done with OTT today. Just look at what happened when cable’s Canoe Ventures tried to launch a universal interactive advertising platform—they were forced to back pedal away from their ambitious plans when they realized that many of the different STBs in the market would not support it.
Verizon’s Joseph Ambeault, Director of Interactive Services and Video Product Management, was even more direct. When asked about all of the different types of OTT threats, including new STB devices, PC-based services, as well as the new Internet HDTVs coming on the market, he responded emphatically:
“Bring it on!”
Joseph went on to explain how, while Verizon FiOS will always looks for ways to monetize the services they provide for subscribers, the more OTT content or apps being used by subscribers the more valuable their “fat pipe” becomes. This answer was refreshing. I had always suspected that Verizon’s FiOS strategy was about the fiber-based fat pipe, even a “dumb” fat pipe where others are monetizing the traffic. But is Verizon really serious about this? Cisco recently published a study that showed that 90% of IP network traffic by 2013 will be IP video services, including streaming and P2P. If this is true, and Pay TV operators see at least some portion of their TV revenues moving to OTT-based services, how are they going to be able to pay for the network equipment upgrades required to support all this IP video traffic?
I posed this question to Lisa Pickelsimer, Cox’s Executive Director of Video Product Development. While Lisa said Cox will certainly try to find ways to monetize this traffic through their own advanced applications, all options are on the table—including raising the fees they charge for broadband Internet, or enforcing bandwidth capping schemes that other cable MSOs such as Comcast have already initiated. And therein lies the “release valve” for the pressure that OTT video might present to the Pay TV model— if you control the fat pipe you can control what subscribers pay for it (more so, of course, if there is little or no competition from other service providers).
One of the mistakes the Pay TV world is trying to avoid is the resistance to change that doomed their music industry brethren. That is why so many of the TV and movie content houses have jumped on the Hulu bandwagon. One of the examples given at the IPTV Forum show is how retailers like Tower Records were so badly hurt by iTunes and other online music services. But there is a difference between the business models for audio and video. While consumers could virtually walk by the Tower Records store on the digital highway in favor of iTunes, what if they had to walk through the store to get to the sidewalk? They might not buy anything in the store, but the store could charge them a “toll” to walk through it. That is the analogy for online video and why they could charge more for broadband access, even if they fail to monetize their own OTT-like applications and content.
Pay TV service providers feel that OTT won’t steal their lunch money any time soon, at least not with mainstream consumers. They enjoy many defenses against the OTT threat. These defenses include an understood and easy to use viewing experience, fresher content, extensive HD content, live events such as sports, and existing billing and support relationships. Perhaps the biggest advantage Pay TV has versus OTT is an existing in-home video distribution mechanism (mostly coax, though U-Verse uses Ruckus wireless for some customers). This is a huge issue holding back the fragmented OTT market, which must sort through a menagerie of video distribution standards and protocols including Ethernet, WiFi, WHDI, Wireless HD, MoCA, HomePlug, and Ultra-wideband. Until OTT players can find an easy way for consumers to connect Internet video to their big screen TVs, the market will have limited appeal to mainstream consumers.
And according to Steven Goldstein, Director at Samsung, this dynamic is not likely to change soon. Steve suggests that since Samsung builds a variety of CE devices (TVs, STBs, mobile phones, etc.) in a variety of geographies, they are forced to slurp from the standards body alphabet soup. Steve explains: “Whether it is TVs or set-top boxes… it’s a mass market device. If you start riddling the television with things that are very specific to one particular market, it becomes very difficult to get the scale you need.”
So if you combine some of these OTT stumbling blocks with some of Pay TV’s nascent enhanced and interactive apps, at least by the IPTV service providers, one can argue that the optimism of FiOS and U-verse is well-founded. Maybe if you are a cable company you have a little more to worry about, since your outdated network equipment and stodgy EPGs might repel some consumers looking for more. But then again, if you control access to the “digital sidewalk”, you can always find a way to charge to access it.
Brian Mahony is CEO and Principal Analyst of Trender Research. For research or consulting projects, contact him at firstname.lastname@example.org.