Pay TV wants the best of the Web

Internet TV and user-generated content threaten to diminish the control Pay TV operators enjoy in the video entertainment market. But as John Moulding reports, the television industry is ready to fight back.

The arrival of premium programming like Desperate Housewives and Lost on Apple's iTunes video download portal in 2005/06 marked the beginning of a new chapter in Internet TV. For the first time, so-called 'over-the-top' services had some compelling content for sale. The threat posed by content aggregators using the public Internet as a distribution channel, often over the broadband access supplied by existing Pay TV operators, came into clear focus.

Since then the power of the Internet as an entertainment medium has been confirmed by the user-generated content (UGC) phenomenon and the rise of social networking. These new services, combined with Internet TV via file download or streaming, are the foundations of Web 2.0. But it looks increasingly now as if threat is turning to opportunity for the Pay TV industry and that the approaching disruption will work in both directions.

It is no surprise that major content owners and broadcasters are trying to harness the Web: it is the willingness of company's like Disney/ABC to license their shows to iTunes that caused such a stir in the first place. The determination of content owners to get into the UGC game is now clear and there is increasing evidence that Pay TV operators with two-way networks (cable and IPTV) are going to try to take the best of the Web and make it part of the TV-centric living room experience.

The big hitters from the 'old' media world could be about to make their presence felt online. News Corporation and NBC Universal are launching a video site that will compete with YouTube, offering thousands of hours of full-length TV programming, clips and movies. It will feature premium content (and that alone could become a differentiator if copyright breaches on other sites are not compensated) from over 12 networks and two major film studios. The content will be distributed via major web destinations including AOL, MSN, MySpace (now owned by News Corp.) and Yahoo!.

US cable giant Comcast recently agreed to distribute this service from its Comcast.net and Fancast.com websites. Comcast is also making its own content available for non-exclusive distribution in the US on the News Corp/NBC Universal destination, including shows like E! and Golf Channel. Comcast also has its own YouTube-like offering called Ziddio.

In the UK, satellite operator BSkyB is building its own multi-platform 'User Generated Video' portal (using Google's syndicated video tools). Consumers will be able to use their mobile phones for both upload and download as part of this service. UGC is part of the big picture for Sky. The company has always recognised that it could exploit its video heritage in the broadband market (having bought its own unbundled DSL network) and the UGC portal "will form part of a content-rich experience for Sky Broadband customers that will enhance the appeal of Sky's broadband services, build community and promote Sky content to online audiences."

In Switzerland, Swisscom has invested in a company called decentral.tv, which is behind the new online TV service, kyte.tv. Users can broadcast their content online or to mobile phones and Swisscom notes: "There is a very high demand for user-generated content."

User-generated content is being made a part of the television experience, too. The US channel Current TV takes user-generated content (short-form non-fiction and even viewer created adverts) and turns it into a 'traditional' package for transmission to the TV set. Just under one-third of content is submitted by consumers. Virgin Media announced its arrival on its UK cable system earlier this year, declaring that the concept "puts viewers in control and hands them the reins."

At NAB in April, SeaChange International (best known for its on-demand delivery solutions and, more recently, an IPTV service delivery platform) unveiled a concept for making UGC part of a cable/IPTV operator's VOD offer. Known internally as 'White Rabbit', it relies on user content being uploaded via a PC to a content manager/aggregator or taken off existing video share sites as part of a partnership approach.

The content manager/aggregator transcodes the files into MPEG-2 or MPEG-4 AVC and transfers these into the VOD server in the 'traditional' cable/IPTV headend. After that the UGC content is treated like any other VOD asset, available on-demand at broadcast quality resolution into any VOD-capable set-top box.

UGC is not the only kind of Internet video heading for the TV screen either. California-based ICTV has a technology that 'stitches together' MPEG video streams made from various components including web video, banner ads and buttons. It then transmits them over traditional cable TV infrastructure into the set-top box. ICTV's solution enables content owners to combine the immediacy (website updates are made available instantly) and interactivity of the web with the comfort of the living room. The web-centric channels are broadcast like a TV programme to legacy set-top boxes.

Viewers can 'navigate' the screen using their remote control, click on a banner and link into more programming delivered via the ICTV system. Adverts can be targeted and this interactive and personalised quality is a key benefit for programmers who are losing traditional TV advertising revenues while Internet advertising booms. The ICTV ActiveVideo platform is being used by Time Warner (in Alabama) and two Comcast networks today.

The programme provider and platform operator remain in full control of the viewer experience with ActiveVideo. Meanwhile, viewers enjoy a full-screen TV experience in what looks like an interesting web/TV hybrid.

As web video is extended to the television, transcoding is going to become increasingly important. One company that has already built an impressive customer base by servicing old and new media transcoding needs is Rhozet Corporation, which was recently acquired by Harmonic Inc. The company lists BT, CBS, ESPN, MSN, MTV Networks, ProSieben.Sat1, Sony, Technicolor, Telekom Austria, thePlatform and The Weather Channel among its customers.

Rhozet transcodes content into the many codecs, resolutions and formats required today for mobile and online video publishing. It also helps broadcast facilities move content internally and in the world of user-generated content the company's Carbon Coder software transcoding and its Carbon Server distributed transcoding management solution are helping convert uploaded clips into the playout formats required. The company provides the transcoding for MSN's Soapbox UGC site.

David Trescot, CEO of Rhozet, points out that broadcasters are already making use of UGC in the form of news footage delivered off cellphones, etc. He expects Pay TV platforms like cable operators to follow their lead, offering best-of-the-Web type UGC services to the television. He predicts this will then lead to a race to improve the quality of user-generated content.

"If a cable operator introduces the best of the web onto television channels the people producing the content will have a desire to make that content look as good as possible," Trescot explains. "They will upload it into a high quality format and that will help differentiate cable."

Adrian Drozd, Senior Analyst at Canalys, the Reading, UK-based high tech analyst firm, believes user-generated content can provide a compelling differentiator for IPTV operators in particular. He believes they can exploit IP-centric, two-way connectivity for this application. He acknowledges that partnerships between the Pay TV and online worlds are "worth looking into" but believes network operators want something unique to set themselves apart. "Whether it would be successful is another matter," he adds.

Drozd believes satellite platforms will build their UGC presence online (because of their lack of two-way connectivity) while IPTV providers will try to make UGC a set-top box, television based experience - even if they already have a web presence of their own.

Turning UGC into a television experience carries its risks. According to Martin Olausson, Director, Digital Media Strategies at the research and consulting company Strategy Analytics, "It needs scale to be compelling and you are competing with the benchmark that has been set online. We carried out [consumer] testing on mobile user-generated content and the feedback was that it was not as good as the online offers because it did not have the same content, or as much.

"You could open yourself up to lawsuits because you will undoubtedly have copyrighted content on there. And despite the hype of the last few years it is still difficult to figure out where revenues are coming from. I think Pay TV operators need to tread carefully. It is not entirely clear how they will benefit other than having consumers watch something they have control over."

Michael Inouye, Research Analyst at In-Stat, believes UGC has a big place in the Pay TV market but highlights similar challenges. "There may be an endless supply of content flowing into the Web but a good portion of this content is unusable for various reasons - either the company doesn't have the copyrights or the material itself is questionable. This in part is what makes advertising so difficult - with the importance of branding, some companies are reluctant to have theirs paired with videos they have little or no control over."

There are also question marks about how beneficial social networking can be. The fear is that Pay TV operators could get embroiled in a race for eyeballs with no obvious revenue stream attached. In-Stat noted in April that social networking site operators are "still struggling to find profitable business models" and said their future remains somewhat uncertain, despite their stellar growth.

And according to IDATE, there is real pressure to increase audience sizes. The Montpellier, France-based research firm says the Internet giants know they must contend with serious rivals from the media and telecom industries. The company notes that you generally monetise Internet-based services with advertising and "this model naturally favours the dominant players and justifies their unending race to secure audience."

So if Pay TV operators want to play the social networking game, they have to be fully committed.

Martin Olausson believes UGC short form content and social networking are a threat to Pay TV in the sense that they keep people away from the TV. But he believes the real danger lies in the over-the-top distribution of long-form content like movies. Having said that, he thinks there is always a place for the content aggregator. "Most consumers will need some guidance or a broker that collates things for them because not everyone wants to be active in seeking out content all the time - sometimes people like to sit back and be fed content," he explains.

But despite this, the way the Internet has opened up a new distribution channel means Pay TV companies will have to adjust. "If people spend more time online cherry-picking channels it becomes more and more important to control the intellectual property itself," Olausson states. "It becomes more important to have a stake in content rather than just playing a repackaging and distribution role.

"I believe we will see Pay TV operators moving into content, becoming less dependent on transport networks and controlling content over whatever platform."

Adrian Drozd at Canalys agrees. "Pay TV operators have high quality and compelling content that consumers want. They need to leverage that content and exploit new platforms and build business models around that."

The good news is that Pay TV operators have some time before Internet -centric video services really start to bite. Drozd argues that the Internet is not in a position to challenge Pay TV operators for content today. "Consumers might use it to catch up with the latest news but at the moment it is not a major conduit for content. The Quality of Experience is just not there."

A survey by ABI Research revealed last December that only five per cent of Internet users in North America who watch Internet video have actually rented or purchased a digital movie download. Movie downloads, both legal and illegal, remain the least watched genre of online video - with short-form sports and news clips the content people really view.

The company asked consumers why they chose not to watch movies downloaded or streamed from the Internet and the answer? "The biggest reason was satisfaction with existing cable and satellite services as well as DVDs." According to ABI, 48 per cent of respondents indicated they would never purchase a movie online for download because they were satisfied with their current providers and the rental market.

Another ABI survey (revealed in May) found that 12 per cent of online video viewers have purchased some form of video content via the Internet and that of these, 16 per cent watched it on a TV using a burned DVD. The willingness to burn to disk to achieve the TV experience must be grounds for optimism among Pay TV providers.

ABI Research has more good news for the television industry (from May this year). "While the majority of consumers who watch online video today do so on a PC, the ultimate destination for much of this content will be the TV," the New York based firm has concluded. "The biggest challenge for online video providers and consumer platform companies today is bridging to the TV."

This is all comforting news for as long as Pay TV operators remain the gatekeepers to the TV set. But another stage of disruption could be unleashed with the arrival of Internet-connected TV sets that allow Consumer Electronics manufacturers to 'intercept' the consumer before they enter their satellite, cable or IPTV walled garden.

Michael Inouye at In-Stat flags this danger, pointing to HP (Hewlett Packard) and its MediaSmart TV in the prime 40 inch LCD set category. "These TVs include built-in wired or wireless networking and draw content from the PC and the Internet. HP have already partnered with CinemaNow and are looking to add a UGC company."

Inouye highlights the way Sony is pushing its own properties in a more walled-garden approach on its Internet-capable TV. The services include Crackle (previously Grouper), which owners Sony Pictures Entertainment Company describe as 'a streaming entertainment network dedicated to the discovery and development of pioneering video creators across a diverse range of genres'.

"All of these are reasons for the service providers, and indeed content providers, to take notice and start to engender their own presence in these markets," concludes Inouye. He highlights various acquisitions (including NBC/iVillage, News Corporation/MySpace, CBS/Wallstrip and Viacom/iFilm) to illustrate the fact that the media giants understand the threat. "This is about more than just content, advertising, exposure and marketing, etc. It is about holding on to control."

In this fight for control there will be competition, but also perhaps, an increasing amount of cooperation. The giants of TV and Web are already doing business at different levels (in May, Comcast announced a deal for Yahoo! Inc. to become the primary marketing and sales channel for Comcast.net display and video advertising, for example). And where there is money to be made, pragmatism usually follows.

David Price, VP Business Development & Marketing Communications at Harmonic, which is already integrating its on-demand ingest and playout solutions with Rhozet transcoding, believes cooperation is the way ahead.

"People were speculating that 'over-the-top' was going to compete directly with the service providers who operate walled-gardens, like cable, and I originally thought there was going to be a big battle but I have slowly been encouraged that there will be a collaborative model," he says.

"I don't think Google will go out and put content over dark fibre. There have to be revenue share deals with the service providers so that they can provide good Quality of Service rather than offering best-effort and hoping there is enough bandwidth for a reasonable Quality of Experience.

Whether it is via cooperation or competition, the Pay TV industry looks set to harness Web 2.0 for its own purposes. Network operators may be nervous; web giants have reason to look over their shoulders too. Perhaps Price is right - they need to talk.