Cable can take the threat and turn it into an asset.
There is a great deal of controversy around cable’s new role in delivering video over the Web. While the increasing appeal of online video makes high-speed Internet service invaluable, video on the Web is also perceived to threaten the cable industry’s traditional TV revenue streams.
Where online video once meant YouTube, 2008 marked the year when professionally produced TV arrived on the Web in a big way. The major networks all have a significant online presence, and traffic at Hulu (owned by Fox and NBC) has soared, with more than 241 million videos viewed on the site in December 2008 alone. In addition, online movie viewing is growing more common. Consumers can stream movies directly from a number of sites or pick up one of a plethora of new retail boxes designed to stream licensed movie content to the TV.
If you go by the numbers, or better yet the dollars, Internet video is still a small-time business compared with its broadcast television counterpart. Companies spend close to $70 billion a year in TV advertising, while online video advertising still gets less than $1 billion annually, according to industry analysts.
However, the growth rate of online video and the emotional chord it strikes with consumers – who love to control what video they watch, as well as when and where they watch it – makes Internet video an uncomfortable, lurking presence for many TV service providers. Add to that the fact that online video eats up a lot of bandwidth, and you have a serious thorn in cable’s side.
The problem for the cable industry, however, is really one of perspective. While the concerns surrounding Internet video are valid, the opportunity is greater than the threat. Who is better positioned than existing television service providers to deliver any kind of video into the consumer home? Cable operators already own the broadband pipes, enjoy an extensive customer base, know how to monetize both live and time-shifted content, and understand how television technology is evolving. By capitalizing on these strengths, cable providers can make Internet video a complementary asset to their existing television content and profit from the ability to deliver media seamlessly from different sources. Internet video opens the door for cable operators to enable the new networked home.
SHOW ME THE MONEY
Cable operators sit on a huge amount of spectrum in their existing wired broadband networks. There is, and always will be, demand for more bandwidth, but that doesn’t negate the fact that cable companies already have broad pipes into the home. And yet the percentage of cable bandwidth used for Internet or data services is miniscule. On average, cable operators dedicate only 2 percent of their spectrum for data delivery, and, out of that 2 percent, they bring in 30 percent of subscriber revenue. The huge disparity comes from the fact that traditional video delivery takes up a great deal of bandwidth, while broadband Internet service takes up relatively little for what it delivers. Add more spectrum for data and you get a better return ratio than you could by adding bandwidth purely for new video services.
The return benefits for investing in data delivery are twofold. First, more interest in online video equates to more Internet dependence, and that translates into consistent, reliable revenue. Consumers are less likely to cut a monthly service bill if it’s for a service they use many times a day for multiple purposes. Second, premium Internet users have the potential to provide new revenue streams with new Internet speed tiers at higher prices. As more valuable applications like online video require more bandwidth – and as bit rates continue to increase and new multi-window applications are appearing – more consume rs will be willing to pay higher prices for faster Internet access. While it’s true that cable operators must invest money to support the increased throughput, demand for higher speeds also feeds their business in important ways.
Allocating more spectrum for data services doesn’t mean cable operators should take bandwidth away from traditional video services, particularly given consumers’ endless appetite for HDTV. DOCSIS 3.0 channel bonding, reclamation of analog spectrum, switched digital video techniques, 1 gigahertz upgrades and deeper fiber extensions in the HFC network all offer ways to increase bandwidth utilization. Some operators have also begun to look at ways of migrating portions of their networks to all-fiber through intermediate rollouts of RF over glass (RFoG).
No matter what method is used, the reality is that bandwidth-expansion techniques can offer significant return on investment. Greater bandwidth and more efficient use of bandwidth enhance cable operators’ ability to deliver all kinds of video services, from more HD content through the traditional broadcast medium to more online video via high-margin data services.
|Cable operators are looking for ways to work with over-the-top video. Comcast, for example, is private-labeling the Hulu service, renaming it Fancast.|
FINDING A BUSINESS MODEL
Because online video is an emerging market, content producers and distributors are still looking to find the most lucrative business models – something which works to cable’s advantage. Companies are experimenting widely with online targeted and interactive advertising, sponsorships, paid downloads and subscription fees. But while the experiments are out there, no one has laid claim to a magic formula. This is partly because online video sites are still spending a great deal of time trying to attract large audiences. Even successful sites draw in far fewer viewers than those brought in by traditional television.
The early nature of the Internet video market creates a huge opportunity for the cable industry. Cable operators that get in the game now, like Comcast with its Fancast site, can establish a position with their pay-TV subscribers as online video purveyors. For cable providers, the customer footprint that new online video companies crave already exists. They have set-tops installed on millions of TVs. The trick is to transfer that audience to the Internet through cross-promotions and service bundling while the online video market is still in its early stages.
Because cable operators have already invested in DVRs and VOD, they have bridged the gap in the eyes of consumers from being simply transmitters of TV signals to service providers that can deliver a more complete and personalized entertainment experience – an important step along the road to entertainment convergence. Cable subscribers can record their own hit television lineups through their DVRs and access a range of VOD selections – from popular TV shows to fitness routines. It’s a much different experience than cable a decade ago, and consumers have bought into it. Cable’s strength means that Internet video is still something of a digital island. Since most of what consumers watch is still on TV, it makes a great deal of sense to join Internet video to the TV mainland, and that’s something only existing TV service providers can do.
Finally, operators have the distribution clout to make new types of licensing deals work. They don’t want to pay huge amounts of money for content that consumers can access for free on the Web, but while they still have the advantage of large audience sizes, they also have the leverage to work out with content providers a way to make TV and online video complementary. It may require bundling content across both mediums for a single price, or emphasizing a value-add for cable delivery, such as higher picture resolution, longer content availability, or perhaps some new type of interactive TV application. Whatever the final scenario looks like, now is the time to figure those new licensing models out. Cable can create the convergence roadmap.
IP TO THE LIVING ROOM
The crossover between traditional TV and online video is where the Holy Grail of television lies. Even as both mediums develop along their own roadmaps, the paths are converging. It’s not just the content, either. The first major gold mine for cable operators is convergent advertising and promotions. Three-screen video delivery means opportunities for greater engagement with consumers, more interactivity and a more measurable response to advertising investments. Consumers don’t get all of their content from one screen, so the ability to follow them across different domains becomes increasingly valuable.
For example, imagine a fan of the hit show “Lost.” While a cable operator can hold that viewer captive one hour a week with a new episode, the other six days and twenty-three hours are generally beyond cable’s reach. However, if an operator aggregates and offers behind-the-scenes clips, trailers, interviews, reviews, polls, contests, entertainment news and other content online, that would translate into greater overall viewing time across multiple screens. Advertisers, in turn, would be able to coordinate campaigns and promotions to that engaged “Lost” fan (and many others) in a number of different places, taking advantage of the full “Lost” experience and not just a weekly, one-hour window of TV viewing. Having an online presence opens up greater access to consumers and reinforces traditional television outreach.
Near-term, cross-platform advertising opportunities represent a major step forward for cable operators looking to close the gap between their TV and Internet delivery systems. Ultimately, however, there should be no gap at all. Set-tops with embedded cable modems, new home media gateway devices and Internet-associated applications delivered over the tru2way platform all offer a glimpse of how well-integrated television and the Internet will be in the not-too-distant future. There are a lot of ways to approach that integration, but there is no doubt that it will come.
ONLINE VIDEO: FROM THREAT TO ASSET
Cable has rarely had to react quickly to competition, which makes online video a new challenge for the industry. However, to sustain their market position and continue to grow, cable operators need to view the challenge in terms of the opportunities it presents. Online video is a threat to cable operators when it comes to new content providers and aggregators springing up on the Web, but the content itself, and the Internet medium, is an asset. The cable industry has broadband networks with room for growth, a huge installed base, the ability to determine new content licensing models, and the technology at hand to promote the convergence of online video and traditional TV. The concept of online video as cable’s next big opportunity may seem counterintuitive, but if cable plays its cards right, leadership in the online video space will soon seem as natural a progression for the industry as the development of digital voice and DVRs. The revolution is in cable’s hands.