The Future of Online Video

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Presenter nameCompany name

The Future of On-line Video Distribution

Alan Patrick, Senior Associate Analyst, STL Partners

[email protected]

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Summary Points

• On-line video growth exacerbates the ‘broadband incentive problem’

• 3 generic future scenarios (from new STL research):• Old Order• Pirate World• New Order

• ISPs and Telcos can affect future outcome and build valuable position

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‘On-line Video Distribution’ – our research definition

‘On-line Video Distribution’

Any video material (movies, TV, infotainment, sports, UCG) distributed via internet technologies (IPTV, web streaming or P2P downloading) over

any bearer (fixed or mobile broadband networks) to any device (PC, TV, handheld).

We exclude traditional broadcasting and physical means of distribution, although the consequences of internet video distribution for these sectors

are considered in our research.

http://www.stlpartners.com/research/future-content-distribution.php

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Shifting Sands in the Video Value Chain

DevicesContent Creation

DistributionConsumer

Aggregation

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Online Video – Current revenue forecasts are uncertain

Current Forecasts of Global Video & TV Market$ billion

Source: The Diffusion Group, Informa, STL Partners Analysis

Total Online Video market

c $2bn in 2008

c $18bn in 2012???

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Emerging industry shape

Creation

Aggregation

Curated Content

Professional Content

Pure Aggregation

User-Generated Content

JoostYouTube

Phreadz

Source: Revision 3, STL Partners analysis

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3 possible scenarios for the future

Old Order

• Re-establish content rights• Maintain control on sources of funding (Ads, Subscription)

Pirate World

• No control of rights, Free wins• Offset-based funding

New Order

• New copyright model allows pricing control by new aggregators / creators

• Migrate control on sources of funding (Ads, Subscription)

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3 Possible Scenarios (more detail)Content Creation Aggregation Distribution Customer Environment

Old Order

• Re-establish rights management over YouTube etc means Old Order:

• pay creators• control archives

•MSM re-establishes control, maybe by:• controlling access to pipes• controlling rights • adapting own models plus defending old plays

• Distributors establish control of pipes, regulate access - motivates Telcos to invest in transport capacity• Two sided market to capture upstream value

• All but the minority of users return to the “Back to the Future”Scenario – old players, old content, new devices• Continual threat from radical new service developments

Pirate World

•Cannot control rights, “Free” wins• Mass copy of archives• Huge amount of Free UGC

•Algorithm Aggregators rule, the lowest cost market forces all other cost models to the wall

• Telcos do not invest as they cannot justify investment•Throttle / QoS options• Continual Net Neutrality debates

•Users consume Free services, pay only for bandwidth and consumer devices• CPE market attractive as one of the few where value can be captured

New Order

• A “New Order” for copyright allows some form of control over pricing by creators• This allows quality to re-enter market, low value UGC is driven out as a major driver

• Old Pirates become new players, Old Order have new plays• A “normal” market re-establishes itself – low priced UGC, high priced quality long form content

• Platform design required to capture added value services• Mobile Companies have to open pipes to a more telco like model

• Acceptable level of piracy (new IP rules?) allows new business models to emerge• Mix of services over new devices – dispered markets

Source: STL Partners Telco 2.0 Internet Video Distribution Report, to be published December 2008

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….and how they play out over time

Old Order

Pirate World

New Order

2 - 3 years c 5 years

Market Share

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User-Generated Video creates traffic, but Long Form creates value

Source: The Diffusion Group

Online Video Traffic ... ...and Advertising Revenues 2013

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The wisdom of surveys: Telcos/ISPs lose out

Big Winner

Big Loser

Source: STL Partners Telco 2.0 Internet Video Distribution, Experts Survey, October 2008; n=176

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The wisdom of surveys: IPTV does not save the day

Most Popular

Least Popular

Source: STL Partners Telco 2.0 Internet Video Distribution , Experts Survey, October 2008; n=176

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Telco/ISP response: Restore market rationality fastOld Order Pirate World New Order

Now c 5 years

Control of CPE in the home

Policing content rights

2-sided business model & customer data mining fully established

Eco-system of partners

Flat Rate User Subsidy

User VAS & Bundles

Additional upstream services

Upstream VAS Platform

CDN & QoS Upstream service

Source: STL Partners Telco 2.0 Internet Video Distribution Report, to be published December 2008

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Summary of Playout Assumptions in modelNow 2 – 5 Years 5 Years 10 Years

Old Order

• Old order has market power but Pirate World is crushing its economics with free services

• Some examples emerging of Old Order building NewOrder businesses (iPlayer, Hulu)

• Old Order continues to fight decline by existing legal methods but start to change – exit some areas, change proposition where they have USP

• More launch (acquire?) New Order type businesses

• Old Order models that don’t work are killed off, new (working) models survive – smaller but more appropriate industry emerges

• More rational copyright emerges

• Rationalisation of older businesses into New Order- combined plays

• Mainly STB based

Pirate World

• Pirate World is copying and distributing copyrighted archive material

• “FreeConomic” model (ie VC funding, offset economics) is funding a lot of Pirate World

• Money is made by Pirate Aggregators when they are bought for traffic by New Order Players

• “More of the Same” – but they start to face some issues:

• Crunch means even they start to run out of funding

• Digital Sharecropping – quality UGC providers, then customers, exit

• New Order aggregators start to withdraw support due to legal battles

• Pirate World starts to lose velocity as:• Most people can get content they want

at “good enough” price• They prefer this to the hassle of legal

pursuit• There is no longer any appetite to fund

these plays

• Pirate World limited to high time / low income people – Advertisers want to chase the youth, but know they will be prosecuted

• Emergence of compulsory payment on CPE/Distribution equipment taxes most Pirate World consumers anyway, removes sting

New Order

• Some New Order players are using Pirate World for own ends

• Others are trying to build Old Order businesses with New Order aggregation / CPE technology (eg Joost)

• Also have lower cost base and/or are subsidising from revenue elsewhere

• New Order players face increasing legal pressure for supporting Pirate World

• Crunch means parents / subsidisers start to insist on business models

• Likewise customers indicate wish to pay premiums for quality

• New Order enter period of major growth, “Normal” market emerges as pricing, customers and quality are matched

• New Order is actually a mix of converted Old Order and real New Order businesses

• Rationalisation of New Order businesses as sector matures – large players plus diverse economy of small specialists

• Mainly Web TV based

Source: STL Partners Telco 2.0 Internet Video Distribution Report, to be published December 2008

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Today’s Questions

• Do you think our view that a new order will emerge within 3-5 years is:• Optimistic• Realistic• Pessimistic

• Why?

• What do you think of our potential options for Distributors (telcos) to compete:• Optimistic• Realistic• Pessimistic

• Why?