Thursday, July 31, 2008

When Will Internet-Delivered Video Rival Satellite & Cable?

Everyday, we hear about how video is moving to the Internet, but so far, it's a trickle compared to Satellite & Cable. Consumers still pay hundreds of billions of dollars to traditional video service providers to get premium broadcast network and cable network TV content. Even with recent growth, Hulu, iTunes video and You Tube combined amount to less than 3% of satellite and cable revenue. Why is that, and what will make it change? I think it comes down to three things: the experience, the content, and the business model.

I'll begin with the experience. Let's face it, there's something compelling about lying on the couch watching a big-screen TV on the other side of the room. Yes, a PC might look as big if you get close to the screen, but it's not as easy to share the experience with friends and family, and it feels different. Not only is the TV experience bigger, but it's also much simpler. There aren't keyboards, mice, boot-times, configuration issues, waits for downloads or periodic service slow-downs. We all expect our TVs to just work, and the vast majority of the time they do. Yes, the interface has gotten more complex with the advent of personal video recorders (PVRs ala TiVO), but it's still simple compared to a PC, and the complexity has brought with it more than enough benefit to offset the frustrations of a more complex interface. For Internet-delivered video to eventually rival Satellite and Cable services, it will have to achieve similar levels of simplicity delivered to the TV, not the PC. And to be truly simple, it will probably need to be an integrated part of the overall experience, not a separate box and service.

Next, there's content. The way cable and satellite have justified their cost to consumers is by becoming the way consumers get access to premium live content, namely premium broadcast and cable network channels. One might think that the only way Internet-delivered video could rival traditional video services would be to offer the same content, but I think that's "old-school" thinking. As consumers embrace PVRs, they become less and less dependent on scheduled programming and promoted hits, and more and more able to watch personalized shows that appeal to them. This opens a back-door path for Internet video providers who can create services with broad appeal by combining deep libraries of tier-2 content with powerful recommendation engines (ala Amazon and Netflix) that give consumers content they want at a lower-price than recent hits. Netflix made this point at their Annual Investor Day presentations in May where they pointed out that the content their consumers enjoy the most is the content their recommendation engine promotes, and that this content is often less expensive and more available to license for streaming over the Internet. The bottom line is that Internet video will have a shot at rivaling satellite and cable services long before it duplicates their entire content selection, provided there is a broad selection of content combined with a good recommendation engine that lets consumers find things they want to watch, when they want to watch them.

And lastly, we'll look at business models. There are basically four ways our video entertainment gets funded: advertising, subscription, purchase, and rental/pay-per-view. Of these, advertising, subscription and DVD purchase dominate by far, with rental, pay-per-view and Internet purchase trailing behind. Why? Probably because consumers don't like the idea of getting a big surprise bill at the end of the month. No one likes the idea of leaving the kids on the couch with a remote control that debits their credit card with every key-click. So, what does that mean for Internet-delivered video? I think it means that consumers are more comfortable with the subscription and advertising models than the ala-carte purchase models, and that a company who delivers the combination of compelling experience, compelling content (premium, or personalized), and a subscription and/or advertising business model will have the best shot at becoming the first Internet-delivered video service to make inroads against traditional video services.

So, has anyone done it right yet? I think Netflix with their Instant Streaming service on the Roku box comes closest, but there's still a long way to go. The user experience is good -- simple remote control on the couch, with Internet-delivered video on the TV -- but it's still a long way from what we expect in the living room. It takes around 30 seconds to begin playing a show (while the buffer fills to overcome the flakiness of Internet content delivery), requires a PC to select new content, and it's still a separate video source. They're working with Microsoft, and LG to make it part of the Xbox 360 and LG's next-generation Bluray Disc player, which will help, but it's still not an integral part of the primary video source, which for many is their cable or satellite set-top box. The content story with the Netflix Instant Streaming service is good and getting better, with them now claiming 12,000 titles, and an excellent recommendation engine. Lastly, the business model is a subscription model -- one that consumers have already embraced for traditional video services and as a replacement for the traditional video rental model. Overall, I think the Netflix solution is an interesting glimpse at what the future might hold, and an excellent step in the direction of Internet-delivered video services that, in time, will come to rival satellite and cable video services that have dominated up until now.

No comments: