How Broadband is Changing Video Distribution

It wasn't so long ago that the video distribution value chain was pretty straightforward.

Producers created programming. Occasionally a new TV season would bring truly fresh ideas from these creative minds, but more often than not, it simply meant thinly-veiled imitations of last season's successful concepts. Nevertheless, the cost to produce these programs grew and grew as brand- name actors and other talent demanded and received sweeter and sweeter deals.

Cable and broadcast networks obtained the rights to these programs and then developed their schedules. Retail distributors like cable and satellite operators were largely free to decide which of these networks to carry, and then negotiated contracts for appropriate carriage rights. The fees paid by these distributors to the networks often rose each year, regardless of how popular the programming turned out to be. The retailers then packaged these networks into subscription service tiers. The price of these tiers rose at regular intervals, often leading to lots of hand-waving by subscribers and regulators, but little other action.

Advertising agencies bought 30-second spots, the price of which the networks increased each year, sometimes in the face of declining audience sizes. Advertisers then largely kept their fingers crossed that viewers would watch these spots, be influenced by them and buy their products.

At the tail end of the value chain, viewers were required to adapt their lives to watch their preferred programs at their appointed times, while suffering through often irrelevant advertising for products that, despite their frequent claims to being "newly improved", were more likely to be just smaller and/or more expensive.

Just when viewers finally internalized the times of their favorite programs, these times were mysteriously changed, and then changed again, as the networks jockeyed with each other during coveted "sweeps" periods, when audiences would be measured and ad rates set. Once viewers finally adapted their lives to the new schedules, they might come to find out that a show was being unexpectedly cancelled, often due to — you guessed it — low ratings.

While life wasn't perfect for all of the participants in this video value chain, it was pretty darned predictable, and for that alone, many gave thanks.

However, that predictability has recently been upended by new technologies that enable consumers to gain unprecedented control over their viewing experiences. To me, the brightest star in this new technology constellation is broadband-delivered video.

"Behold the Power of Broadband"

With Passover just around the corner, I have recently been conjuring a vision of Cecil B. Demille directing Charlton Heston throwing a cable or DSL modem down at the feet of all of the current video value chain market participants and belting out in his memorable "Ten Commandments" baritone, "Behold the power of broadband-delivered video — do not doubt its ability to change all of your business models!!!"

Ok, maybe that's a bit melodramatic. However, the reality is that nothing like broadband has ever happened to the video content industry. That's because broadband enables, for the first time in history, a high-quality, open video delivery network. Producers and aggregators of video not only have the ability to target and deliver their content directly to intended audiences, but also vast potential to monetize it. Meanwhile, consumers are able to access all this programming completely on- demand, while having it surrounded by interactivity opportunities that make it far more engaging than ever before.

This world without gatekeepers means that the role and value of incumbent video distributors (i.e. cable and satellite operators), as well as the roles and values of other market participants are entering a period of significant change.

Understanding Broadband's Disruptive Potential

Fortunately for these companies, change does not happen overnight. In my firm's upcoming report, "How Broadband is Creating a New Generation of Video Distributors: The Market Opportunity for Google, Yahoo, Microsoft, AOL, Apple and Others", we have rigorously broken down how this change is happening and what's driving it, as well as where broadband-delivered video currently stands in its ultimate evolution.

To help structure this part of our analysis, we have used a strategic framework outlined by Harvard Business School professor Clayton Christensen in his landmark book "The Innovator's Dilemma". We found this framework, which is used to analyze disruptive technologies' market appeal, to be extremely applicable in explaining how the broadband video platform has transformed itself in a short amount of time from its humble origins of delivering herky- jerky streams of fringe video to where it is today: an emerging syndication window for broadcast networks' most popular TV programming.

Yet, despite this rapid progress, our report finds that broadband-delivered video is currently entering what we call a "range of uncertainty", concerning its future growth and success. This period is characterized by massive experimentation, as market participants attempt to get their heads around this new medium. Significant questions remain such as: What will consumers pay for? Under what circumstances is one business model preferable to others? What competitive advantage is sustainable vs. merely short-term? In fact, we are continually amazed by market participants' acknowledgment of how much they still do not know about broadband and where it is heading.

The key to our analysis of broadband's disruption is understanding the evolving cultural influences and video-related expectations of three constituencies who benefit from broadband's proliferation. We have identified macro, societal-level drivers that have gradually taken root over the last ten years as technology and the Internet's role in people's every day lives has deepened. And we have identified micro, video-related expectations for these three constituencies — consumers, advertisers and content providers. These groups' traditional and new video-related expectations are itemized and put into an appropriate context.

Finally, as this "range of uncertainty" continues, we have also detailed the five key challenges that broadband video faces as it gains more appeal among mainstream consumers. These challenges are not insignificant, and all market participants will play a role in resolving them, so that broadband continues to gain in acceptance.

Enter the "Group of Five"

In this disruptive context, we believe that not all companies are positioned equally well to succeed in the broadband video world. In fact, we believe that five companies, Google, Yahoo, Microsoft, AOL and Apple, are best (though not uniquely) positioned to benefit from the shift to broadband.

The report describes in detail how these companies can insert themselves into the existing video distribution value chain, and indeed how they are already doing so. But even within the Group of Five, these companies are not uniformly well-positioned. To better assess their respective strengths and weaknesses, we have scored their capabilities against the traditional and new video-related expectations of the three primary constituencies (consumers, advertisers and content providers). This analysis yields key clues about which areas these companies may emphasize and invest in for future success.

Our analysis of these companies was greatly enhanced by the cooperation of four of the five companies (all except Apple). These companies provided us with generous time with key executives responsible for their video initiatives. We conducted in-depth briefings with them, gleaning insights that included their own analysis of the broadband video opportunity, their companies' current and future strategies in this critical area and the key success factors and challenges they foresee going forward. As these companies' actions are widely followed, we have been diligent in fairly translating and articulating what we learned from each. Further, we have compared and contrasted what we heard, yielding a rich analysis of how each of the Group of Five companies will try to influence the broadband video market for its own benefit.

In this respect, the report will be a highly useful roadmap for companies either seeking partnerships with the Group of Five or focused on their competitive impact. Given the likelihood of their future importance, the Group of Five's actions are of critical importance to players along the video value chain. The last section of the report describes a long-term scenario, which we characterize as speculative given the numerous variables currently in play, in which the Group of Five's broadband video services are competitive with today's multi-channel subscription video offerings. The result of this is that Group of Five companies would become direct competitors of incumbent distributors (i.e. cable and satellite operators).

Lastly, while we are bullish on the Group of Five's opportunity, we believe that there is a second tier of companies that have the potential to also emerge as leading video distributors as broadband delivery of video grows in importance. We have included in this group broadband ISPs like Comcast and AT&T, e-commerce providers like Amazon.com, online publishers like CNET and iVillage, popular community/user-focused sites like MySpace and YouTube, large video aggregators like RealNetworks as well as others. Each of these companies has its own particular capabilities and we will be watching their market activity closely to see how they continue to evolve.

Wrapping up

Trying to summarize the key points of an 80+ page report in approximately 1,500 words is not an easy task. Hopefully, this month's newsletter has given you a taste for the report's content. I invite you to attend the April 19th webcast, in which I will share more detail. In addition, the National Show panel will certainly shed much more light on the subject. And if you are interested in learning more about how to purchase the report, or subscribe to Broadband Video Focus^SM, please do not hesitate to contact me.