The effect of cheaper content on the digital home

By Peter White

Cheaper or free content is a big driver to move people to taking a broadband line. More recently there has been an upsurge in popularity of the triple play offering, voice, data and video. But possibly even more compelling has been the rise of both social networking sites and user generated content.

At this stage, it is unclear as to whether YouTube is popular because it is a place to upload and download copyrighted content, or if it is really all about User Generated Content, but judging by the reactions of the content companies in the form of Sony-BMG, Universal Music and CBS, all of whom have cut recent deals with YouTube, it may be both.

What we have now is an advertising supported business model, with short form video and user generated video in a hybrid. Other sites are already offering users the chance to make money out of video, and pretty soon we will see semi-professionals buying cheap new digital cameras and making quality video programming and earning a living.

Gradually an internet model based on advertising will emerge, where profit is made based on the number of viewers that watch their entire portfolio of programs, with more eyeballs focussing on a web site, or an individual piece of video, meaning that more revenue can be made. There are however big differences here, which change relationship between advertising and content.

The internet delivers all of the things that traditionally advertisers would pay more for - an audience that they know is already interested in the product, an advertising campaign that wastes not a penny by only covering the areas where the product can be sold or delivered, and the chance for a consumer to respond easily at the time the advert is seen. In the past specialist magazines, and local TV and radio have delivered only one or two of these things. The internet delivers far more ease of use for the advertiser. Each ad that is delivered is individually selected for a viewer based on pre-set criteria and gradually as services emerge that can hold and merge demographic data on each netizen, this means that advertising accuracy is at the opposite end of the spectrum to the national broadcasting networks. Internet advertising is therefore more valuable to an advertiser and can be paid for on the basis of its performance (click through), rather than entirely on the basis of splattering advertising all over a TV screen, all over the country and hoping that your ideal buyer just happens to be watching.

The Digital Video Recorder (DVR), often called the Personal Video Recorder (PVR) has made ad skipping fantastically simple, and at least 85% of all audiences that watch programming on a DVR fast forward through the advertising. Therefore, the cost per thousand viewers has effectively plummeted on broadcasting networks.

However, so far, broadcasters continue to hold the whip hand. It is they that have the spending power today and can insist that their terms are extended out onto the web, based roughly on the contractual terms the industry agreed for DVD purchase, despite the fact that the mechanics are vastly different. Failed TV series may still have a home on the internet, but they will never make it to DVD, because DVDs cost money to make and distribute.

All said and done, the underlying trend is clear - the media that best services advertisers is an interactive one, and the rise of broadband is leading to the entire video industry changing its focus to one where it exploits the internet. That same outlet can also offer the content paid for with no advertising as an alternative.

Increasingly video content will get as many viewers as it can attract and advertising or viewing revenues will be proportionate to the audience size which can find the video, as well as find time to watch it, and the internet will shortly give rise to new mechanisms for finding quality video that never made it on TV, which will appear totally new.

People will expect to be able to view such content in many different shapes and size of screens, in many resolutions, at any time, at any place, creating multiple concurrent services running the same content, and fragmenting audiences dramatically (See diagram on video fragmentation).

Extending this to its natural conclusion, there will be new broadcasters on the internet and in mobile TV, and they will be augmented and partially come from the user Generated Content Community and those software companies that are smart enough to write new ways of demonstrating and marketing video across the web.

The CBS, ABC and NBC of the future might be one of these that transforms, but could easily be called Google, YouTube or a company that has yet to emerge. Video has to splinter and fragment into much smaller audiences, and there is no place better to achieve this than on the broadband internet.

The only major obstacle in the way of all of this is that there are currently no devices which can easily deliver broadband internet web TV experiences to the household TV. Technically this is relatively trivial and can be achieved for the right price by any technology company that feels it can sell enough of them. The fact that Apple has said it will deliver such a device in the Spring doesn't mean that Apple will win this war, but it will certainly start a war that someone has to win.

At that point the 40% annual growth in internet based advertising, which does not yet include hardly any video web advertising, will begin to see a second wave in video, growing over the next three years before it begins to rival static ads on the internet. At that time the overall revenues of streaming TV services, file downloads including iTunes, UGC and broadcaster web sites will combine to place a huge dent in TV revenues not just in the US, but globally.