The broadband video consultant and tracker of all things new media says that while TV stations are beginning to feel the competitive heat from Web video, the temperature is going to rise as more and more viewers install second-generation digital TVs that will take Web video from the desktop to the living room.
During the 1970s, two powerful technologies — wideband coaxial cable and satellite communications — coupled to revolutionize television. Cable cracked broadcasting’s monopoly on TV and made it a two-medium business.
Now, 30 years later, a second revolution is taking place — this one led by newer technologies, video compression and high-speed Internet distribution. Offering on-demand access to enormous libraries, Web or broadband video shows all the signs of being as disruptive as cable was.
Closely tracking this second revolution and considering what it means for the old media of broadcasting and cable has been Will Richmond, president of Broadband Directions LLC, a Boston-based consulting firm and publisher of VideoNuze, a blog and daily e-newsletter.
In this interview with TVNewsCheck Editor Harry A. Jessell, Richmond says the old media ought to be feeling the heat from Web video and that the temperature is going to rise as more and more viewers install second-generation digital TVs that will take Web video from the desktop to the living room.
An edited transcript:
Some TV stations feel threatened by the networks’ offering their primetime programming on the Web. Should they be?
Yes, they should. The world is evolving from one where the local stations had a de facto exclusivity on network programs to one where network programs are now available in lots of different places. By definition, that means audience fragmentation is going to occur.
The studies that I’ve seen, however, suggest that online video is just a tiny fraction of traditional TV viewing.
Absolutely. There’s no comparison. Online video viewing is still very nascent. There’s no question that most viewers would still prefer to watch TV programs on their big screen TVs. What we’re seeing, though, are the beginnings of trends where online video is starting to displace traditional TV viewing. Anybody who has a child or college student in the home or has heard college students talk knows how that age group’s TV consumption has changed. That’s the leading edge of where things are going.
Everybody needs to keep in mind is that, increasingly, we’re seeing broadband in the home connected directly to TVs. Watching Hulu, for instance, on your TV is going to become the reality for more and more people. We’re going to start seeing viewers shift to whatever source is providing the best experience for them. The best experience is on-demand access with the least amount of ads with the highest quality viewing experience.
When are we going to have user-friendly, Internet-ready TVs, ones that anybody can install and hook up and start watching?
At the Consumer Electronics Show this year, all of the big TV manufacturers introduced models that have Internet access built in. They’re going to be rolling those TVs out during the course of ’09. There are also lots of different devices — whether it’s a TiVo or a Roku or an Xbox or any of a handful of other Blu-ray players — that are now bridging broadband over to the TV. So from my perspective, it’s inevitable that we’re going to see broadband connected directly to the TVs in the majority of homes that are Internet users now. Of course, there are some that this won’t appeal to, but among the most coveted audiences — younger, heavier spending, more tech savvy — it’s a 100 percent inevitable that we’re going to see broadband connected to TVs.
So I guess the question is how quickly will that penetration occur?
It’s hard to put a specific number on it, but I would say that five years out virtually all of the tech savvy/early adopter homes with broadband are going to have it connected to their TVs in one way, shape or form.
What about overall penetration of homes?
It’s probably fair to say that at least 10 to 15 percent of all TV homes are going to have broadband access all the way into their TVs within five years.
And then what happens to traditional TV in those homes?
You have to look at the broadcast networks’ strategy regarding Hulu to start getting an answer to that question. What we’ve seen to date is that Hulu has been a great platform for people to sample network programs and for the most part it doesn’t really displace their traditional TV viewing.
But what will happen as we have broadband connected all the way to the TV is that some users will start watching network programs on Hulu through broadband on their TVs as opposed to watching the conventional way.
The problem is that the ad model on Hulu is a fraction of what the ad model is on a conventional TV. By my calculations, a program on Hulu probably generates somewhere between 10 and 20 percent of the ad revenue the same program does on conventional television.
So, if you project that out and think about people substituting their viewing on Hulu instead of on traditional TV, the networks’ P&Ls would be hurt pretty significantly as would, of course, local stations because they would be completely cut out of the loop.
So are the networks wise to drive this business?
On the one hand, they’re very smart in embracing the online medium, trying to take control of their own destinies, making sure that they don’t get attacked by the same piracy that we’ve seen in the music industry.
On the other hand, I’m concerned that they’re spoiling the consumer by presenting this incredibly high-quality user experience that has very little advertising with it. What’s happening is that consumer expectations are being set in real time. They can watch a program like Heroes the day after it airs with very little commercial interruption. Now, as a consumer, that’s great, but from the network standpoint that’s obviously on the road to nowhere.
Profitless viewership is not a long-term sustainable strategy for the networks. They’ve got huge costs — production costs, marketing costs — to cover. To the extent that the networks are undermining their traditional P&L with the profitless approach that Hulu represents, they are damaging their businesses.
Is high-definition television a bulwark against Internet TV?
That’s partially true today, but long-term HD is not a bulwark against online video consumption because what’s happening already is that a lot of new technology, including what’s called adaptive bitrate streaming, is helping make delivery networks more efficient so that higher quality video can be offered to consumers.
The other thing that’s happening is that broadband ISPs — the local connections into the home — are expanding the capacity of its networks. Most of the cable operators are now offering 50 megabit service or 100 megabit service. Cablevision just announced a 100 megabit service in New York for $100 a month. That’s plenty of capacity for HD programming to be delivered online. So I think what we’re seeing is a clear trend toward higher quality delivery online. It’s only going to get better.
Hulu is getting most of the attention. What are the other important video aggregation sites?
Before talking about aggregation, you have to look at the networks themselves: abc.com, nbc.com, fox.com, cbs.com. All have been very successful in launching their own video destinations. CBS has also relaunched TV.com, which it inherited as part of its C-NET acquisition. It went through a redesign about six or nine months ago and is growing very rapidly.
Of course, YouTube is the aggregator that you can’t ignore. It’s gone from 16 percent of all video streams two years ago to more than 40 percent. It’s been holding steady at more than 40 percent now for months.
Do you see a path for profitability for YouTube or is it just going to collapse under its own weight one day?
First of all, it’s never going to collapse as long as Google with its deep pockets is willing to support it. What YouTube has intelligently done is realize that there are basically two different parts for this business. There’s the user-generated business that is likely never to be monetized, but is terrific at attracting eyeballs to the site. It is now trying to bring along the second side of the business by making partnerships with premium content providers.
It’s made a ton of progress. It’s been a bit stymied in terms of getting access to broadcast TV network content, which is now for the most part exclusively with Hulu, but it’s got partnerships with all kinds of different studios, sports leagues and other independent producers. All of that can be monetized and they are monetizing it. So what they have going for them is this huge amount of traffic, the ability to monetize, particularly with the Google AdWords engine. So, I don’t see it dying anytime soon, but clearly Google has got a lot of work to do in order to fully monetize it.
Is there room for other video aggregation sites?
It’s a great question and the answer at this point is that there has been very little room for others. There are other aggregators out there — Joost, Veoh and others — but quite frankly they are still struggling to nail down their models. The issue is that access to high-quality content is relatively limited. Hulu has taken a big share of that. The other problem is that there’s a finite number of ad dollars to go around and the recession isn’t helping any. So I think that the aggregation game is going to be limited to established players that are already in the market — Youtube, a Hulu, a TV.com, fancast.com from Comcast and others like that.
What’s the state of made-for-the-Web programming?
Not great, unfortunately. Over the last several years, a lot of funding has come into this space, but what we see now is that with the recession and the drop in ad spending it’s been harder and harder for these digital studios to make it. We recently saw the demise of 60Frames. Others have recognized that they couldn’t make a go of it. Some players like Next New Networks and Revision3 are still holding up pretty well, but it’s a tough environment for the independents.
With the help of a handful of vendors, some TV stations are taking their local newscasts and chopping them up into individual news clips and then trying to syndicate them on the Web. Is there a market for that?
Yes, absolutely. All these stations create lots of great content on a daily basis, but they’ve only directed that content to a strict geographical area even though some of that content is going to be of interest to people who live outside of that geographical area. The problem is that they really haven’t had mechanisms in the past to distribute to other areas. What we’re now seeing is technology coming into the market from companies like Grab Networks or Syndicaster that is allowing local stations to easily slice and dice their content, tag it, distribute it and make it available in search engines. It’s still early days, but I think it’s going to be a pretty important issue to stations’ business models.
People talk about a three-screen world of TV, desktop computer and mobile. Can you see the third screen – mobile – moving past the desktop in importance?
I have to go back to what I was saying earlier about broadband and TV merging over time. The reality is that there probably is one merged screen called TV/broadband and then there’s a second screen called mobile. The stats on mobile video usage are off the charts. I was just talking to the people who run nbc.com and they said they’ve seen a dramatic increase in usage in the first quarter of this year over last.
So mobile video is coming on pretty fast. The iPhone has had a huge impact on driving viewership, and a lot of other smart phones that are coming into the market. It all that bodes well for mobile video consumption.
So, needless to say, TV stations need to be in that mobile space one way or another.
Absolutely. There’s an increase in consumer expectations that video will be available anywhere any time and on any device. If your content is not being distributed in that way or prepared properly for those different devices, you’re going to be lagging.
Is mobile video a subscription-supported or ad-supported business?
It’s both. Mobile to date has been primarily a subscription business. We’ve seen subscription offerings from Verizon VCast, MobiTV and MediaFLO and others, but what’s happening more and more is that we’re seeing ad-supported mobile video. It’s essentially an extension of what content providers have been doing online and on TV. As the nbc.com executives explained to me, they basically want to present a check list to advertisers. Do you want to insert your ads on TV? Check. Do you want to insert your ads on broadband? Check. Do you want to insert your ads on mobile? Check. So, they’ll be able to present inventory across those three screens to their advertisers.
Any last word?
The only last thing I’d say is that things are happening very, very fast. There’s a ton of energy going into broadband and mobile distribution and content development. Content providers across the spectrum are recognizing that consumer behavior is changing and that they need to stay in tune with that.