With demand for video services on the rise, it's a good time to be in the pay-TV business, according to figures from ABI Research. The total global pay-TV market raked in $58 billion at the end of Q2 2010, almost a 10% increase year on year, driven by higher priced programming packages and advanced services like high-definition programming.
Cable TV still accounts for the majority of the money - albeit a slim majority at 52% - but it's also the slowest growing segment. Satellite TV and IPTV account for the rest (in that order), and the IPTV sector is growing in terms of both ARPU and aggregate service revenue. ABI expects that to keep growing at a CAGR approaching 20% to over $40 billion by the end of 2015.
But while the market is growing, it's also changing. Consumer TV viewing patterns are shifting drastically - not to the point of killing the traditional linear broadcast TV model, but enough to give linear broadcast extra competition from non-linear video services, particularly internet-based video (see "How we watch TV in 2010").
So-called over-the-top (OTT) video has loomed on the IPTV horizon arguably since YouTube became a household name. But while web TV efforts from the likes of Microsoft and Apple - as well as pure IP video content plays like Hulu and Joost - have threatened for some time to compete against IPTV players by offering free direct-to-consumer video over the same broadband pipes, such services haven't made a noticeable impact on the pay-TV sector.
That might change, however, with recent and more aggressive OTT-video initiatives from big-name web players leveraging the business model established by application storefronts and home-gateway devices that make living-room access to OTT video easier than ever. The good news is that the impact could actually work in favor of IPTV players that are savvy enough to cash in rather than resist the OTT wave.
OTT push
Search-engine giant Google is pushing for OTT video on two fronts. One is its upcoming Google TV platform, which is slated to launch in the US later this year and worldwide in 2011.
In a keynote speech at the IFA technology trade fair, CEO Eric Schmidt said Google is working with content providers to populate the Google TV service with video and other entertainment content. Users will also be able to access online content and live TV listings via a search bar on the top of television screens, according to a WSJ.com report.
Under the plan first announced in May, Google TV will be incorporated into Sony televisions and can also be added to existing televisions through the Buddy Box set-top box. Meanwhile, Samsung has said it is considering using Google's Android OS to build web-TV devices (although it is also working on an OS that can be used for both phones and TVs).
Meanwhile, Google-owned YouTube is venturing further into the broadcasting space. In mid-September, the site launched a two-week trial of a live-streaming video platform featuring content from Howcast, Next New Networks, Rocketboom and Young Hollywood. YouTube has featured live streaming in the past for specific events such as Indian Premier League cricket matches and a U2 concert, but the latest trial is intended to evaluate a future global rollout of the platform.
Then there's Apple, which launched Apple TV 2.0 in September, with a smaller form factor and an even smaller price tag of $99. Apple also announced the availability of TV shows for rental via iTunes for $0.99 a pop, sparking a price war with Amazon.com, which cut prices for online TV show rentals to $0.99 hours later.
Apple has been aiming for the living room with Apple TV for several years now, but interestingly, some industry observers have said Apple's real living-room coup isn't a cheaper Apple TV device and cheap TV shows on iTunes, but its other announcement the same day - AirPlay.
Adrian Drury, Ovum's lead media, broadcast and telecoms analyst, describes Apple's proprietary WLAN media streaming application as "a major feature of the coming operating system updates for its iDevices" that will allow users to stream music, photos and video content from an iPad, iPhone or iPod Touch direct to the TV set.
"This turns the TV screen into a companion accessory to socially share content from devices that are otherwise highly personal," Drury said in a research note. "Rather than place another computer underneath the TV, Apple is seeking to leverage the computing power, network effect, and potentially, the App Store distribution channel of its 120 million iDevices."
If it works, Drury says, Apple could chase the same mainstream broadcast market that Google is targeting.
That doesn't necessarily spell trouble for existing pay-TV and evolving free-to-air broadcast players, says Drury, "but it would be unwise for any of Apple's competitors to dismiss the iDevice network effect."
Apple will also see plenty of competition in the consumer electronics side of the equation, says Jordan Selburn, principal analyst for consumer platforms at iSuppli. He points to a slew of internet-enabled living room devices coming into the market, from Blu-ray players, Microsoft's Xbox and Sony's PlayStation to standalone media players from companies like Roku, Vudu, and the upcoming Boxee Box from D-Link Corp.
iSuppli forecasts that shipments of internet-enabled living-room devices will amount to more than 430 million units in 2014, up from 99.3 million in 2009, at a CAGR of 34.1% (a faster growth rate than smartphones for that period). Sales of internet-enabled TVs will climb to 27.7 million units globally this year, compared to 12.3 million in 2009, iSuppli adds. So if nothing else, the CPE for over-the-top video is already primed to invade living rooms in the next five years.
Living room disconnect
Of course, OTT web video has been a pipe dream for some time, and while the media and networking standards are in place, semiconductors have the power to keep up with media performance demands and fast, reliable connectivity are available, the concept of the "digital living room" still has serious obstacles to overcome, says Selburn.
"There are many boxes, it's true - each connected to the ultimate consumption device of the display - but only rarely are the boxes connected to one another," Selburn says. "Sure, the 'connected home' is connected to the outside world, but the idea of seamless access remains far from the ideal paradigm of ubiquitous access to content."
It doesn't help that online video content has discoverability issues that can be complicated by content deals going sour, such as the time that Viacom-owned Comedy Central removed content from Hulu.com. Linear broadcasters, in contrast, have built their success on programming schedules that are comparatively more predictable.
Selburn says content owners and service providers need to establish business models that provide sufficient return while still offering customers value, to include helping them find the content they want.
OTT cash-in
And interestingly, that can include OTT video content as well. In fact, says Bernd Matejek, head of IPTV at Nokia Siemens Networks, IPTV service providers and OTT players have more to gain from working together than against one another.
"OTT content addresses one segment of a full TV experience - it can't provide and distribute for example all premium content to the end-user," Matejek says. "The best approach for operators is an easy integration of OTT content offering into their own service and content offering."
By using a single-platform approach, operators can offer recommendations and personalization, and the end-user doesn't need to switch to different platforms to access content, he adds.
"Flexibility in integration of upcoming new OTT is key for these service provider platforms," he says.
Dario Choi, from Ericsson Television, agrees, saying that OTT content is an opportunity, not a threat, to telcos.
"Telcos have unduplicatable assets that broadcasters, CE manufacturers and internet TV providers need for their service to succeed," he says. "QoS, billing, CRM and the possibility of multi-screen bundled offerings to the home are items that are critical for OTT players, and we believe that a managed OTT proposition is win-win for both OTT and telcos."
In any case, he adds, telcos might as well support OTT content access because one way or another, their customers are going to expect it.
"Consumer behavior will, and is already starting to, change to a world where viewers demand content whenever they want it," Choi says. "The increase in the number of connected devices will drive this forward, and therefore OTT services will play a major role in this change in consumption."
How we watch TV in 2010
Linear broadcast TV is far from dead, but it's just one video content channel of many as viewers seek and watch video wherever they can find it.
According to Ericsson's ConsumerLab - which released a report last month collecting data from China, Germany, Spain, Sweden, Taiwan, the UK and US, with the sample representing over 300 million consumers - people spend well over a third of their leisure time watching TV and video content, and 93% are still watching scheduled linear broadcast TV. But they're also becoming increasingly aware of other video options, which in turn is creating new media consumption patterns.
To wit, more than 70% of consumers surveyed are streaming, downloading or watching recorded broadcast TV on a weekly basis, and half are watching internet-based on-demand TV/video every week. Respondents still place high value on live TV, but the ability to decide when and how to watch TV will affect the role of linear broadcast as consumers demand a personalized, easy-to-use, on-demand service without commercial breaks as their next TV service.
Put simply, says Ericsson ConsumerLab senior advisor Anders Erlandsson, "[Video] consumption is fragmented and complex. There are few established consumption patterns and it's a trial-and-error market with lots of curiosity around it. The consumer is looking for a solution that can offer them the freedom to choose what they want, when they want it and how they want it. The user experience is in focus, rather than the technical platform."
As for the key question - will they pay for video, and if so, how much? - the study found that consumer spending on video is not proportionate to the viewing time invested. The average consumer spends 38 euros a month on TV viewing, almost 60% of which relates to broadcast TV, but broadcast only accounts for 40% of their viewing time. Erlandsson says that consumer spending will shift in the future, with a significant increase in on-demand spending, provided it's high-quality, easy to use and they can access the content they want.
One other interesting finding: 37% of respondents are "very interested in using a tablet as a remote control."
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