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The Entitlement Proposition: The challenge and opportunity for distributors

Fri, 07/31/2009 - 8:00pm
Keith Kocho, founder and president of ExtendMedia

I’m struggling with one of the hottest topics in the rapidly changing world of consumer video entertainment: entitlement. Matching consumers to the content, services and rights (entitlements) they desire is both a technical and business model challenge. It seems everyone has an opinion on this subject, and the range of opinions is very broad indeed. Who really benefits from this notion, and who pays for it?

THE ENTITLEMENT DILEMMA
Let’s start with consumers. Hey, I’m one too, so I guess I am as legitimate a resource as any. As a consumer, I want what I want, when I want it, on the device of my choosing, and under commercial terms that suit me at the time. Current views on entitlement seem to address the “what” and the “when” quite nicely. Certainly the various initiatives recently announced by major distributors would bring a broader selection of programming to my broadband-connected PC. That’s clearly a good thing for consumers.

However, one of the tricky parts is figuring out where I go to consume this catalog of video. Can I watch on broadband-connected devices on my television? What about mobile devices? Given that this content will be on demand and not always broadcast with an associated guide, does this create a monetization challenge for operators? I mean, since I’m asking for it and you know who I am, where I am and what services I already subscribe to, isn’t the ad inventory arguably going to be worth more? Will ads be sold and promoted as a package along with the traditional broadcast package, or as a standalone unit? There is a lot of opportunity for revenue, but several challenges, as well.

This leads to the last of my needs as a consumer. That is, I want to be able to choose between ad-supported free content or pay for an advertising-free version. That’s one of the major reasons I pay a monthly surcharge for my PVR/DVR, and so it’s logical that I’d like the same flexibility with my content over broadband. I should be able to pay something to get that, right?

Well, maybe not.  At least, I’m not so sure how that’s going to work for the distributors.

The central premise upon which the entitlement value proposition is built relies heavily on the notion that distributors pay big bucks to the rights holders in the form of carriage contracts. It’s hard to see how those economics translate into the online world today, especially when you consider that consumers can get a great deal of stuff online for free.

This is where the rubber meets the road with entitlement. If distributors are going to be asked to pay millions to the rights holders for carriage, then it’s just not fair that those same rights holders are offering their content for free to consumers online – and making money via advertising along the way. Hulu is a prime example of this complex dilemma.

Jeff Zucker’s famous “trading analog dollars for digital pennies” captures this situation well. If the rights holders are going directly to Hulu, then distributors are in a reasonable position to say, “Hey, we want that deal too,” – no carriage fees. That won’t work for the rights holders, as there simply isn’t enough ad revenue for them to forgo the lucrative carriage fees generated by the cable subscription business. Not yet, anyway.

Of course, this cuts both ways. If the distributors don’t charge for entitlement services, all should be OK. However, if they start to think about making money off of these ride-along services, it might prove to be an issue for rights holders – one that might result in more carriage checks being cut for broadband-accessible content.

So how is this fair to the distributors? Should they be expected to invest in more infrastructure without charging customers a nickel? Distributors would need to ensure that they launch quality services that actually grow their customer base to justify this type of investment. Should rights holders participate in the new ad model through revenue sharing, etc.?

Well, the alternatives aren’t very appetizing, either. Rights holders can’t simply offer their content directly to consumers over broadband networks that are bundled in triple- or quad-play discounts. That creates the risk that consumers might just say “no” to their existing cable service. That’s not going to happen overnight, but it’s a sizeable problem for both the rights holders and their distributors.

The risk to the distributors is that the rights holders view this trend as inevitable, and creating a slow trickle of revenue in direct or OTT (over-the-top) services is in their interest. They also need to consider the well-capitalized, tech-savvy behemoths (see: Apple) circling in wait to become the primary portals of entertainment as this trend continues.

How should distributors defend against this? Tie the broadband access to content and to the subscription service or you can’t have it? Uh, no. If recent history has anything to say, consumer-driven (Internet) business models are like water – they exploit weakness, a leak appears, and soon you have a torrent.

THE PRESCRIPTION: EMBRACE AND INNOVATE
Let’s look again at the consumer:

I want what I want, when I want it 
Distributors are aggregators. They have deep experience and investments in acquiring, marketing and distributing content to prospective audiences. New technologies and new business approaches are needed to bring these strengths to the fore. Leverage the lessons of early VOD initiatives, the deep skills of the business teams that craft on-demand licensing deals, and the long-standing experience in recurring commercial relationships with millions of individual consumers – they are all tremendous assets.

To use these building blocks effectively, distributors need to be aggressively creative on both the business and technology fronts. Creating new packages for consumers that can reach the television via traditional TV platforms, as well as via broadband and mobile, is a good start. Distributors need to stretch beyond their comfort zone to think and act “over-the-top” and “out-of-footprint.”

On the device of my choosing
Getting the content delivered to the myriad of devices that consumers are purchasing (and will continue to purchase) is table stakes. In addition, opening “a channel” in the existing TV device ecosystem to deliver the ever-growing world of online video content is a crucial bridge to the future. The high ground here will be applications or services that tie the devices together and make the experience simple, straightforward and pleasurable    (again, see: Apple).

On my commercial terms
Let me speak the unspeakable. I don’t know anyone who truly likes advertising, except the people who make it. That said, we all recognize its inherent value in the entertainment ecosystem, and many consumers have even demonstrated a willingness to embrace advertising in exchange for free online content. Mechanisms that make advertising more effective for advertisers and less intrusive and more relevant to consumers are needed. Even then, there will continue to be times, places and contexts where the consumer may choose to pay for content so they can enjoy an ad-free experience.

THE BOTTOM LINE
Success in an entitlement-driven landscape will depend on distributors’ ability to leverage their strengths in customer service and apply them to multi-screen/multi-business model services. Consumers don’t just want content a la carte and on demand – they expect it. The way to their hearts and minds is through a personalized media experience that is enhanced by seamless access across devices – not tripped up by it. If that happens, as Apple has so adeptly shown, consumers will pay more, not less, for what-I-want, when-I-want, where-I-want, how-I-want video services.

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