Thefollowing are three key questions which have emerged from the many reactions I have received from Broadband Directions' recent "Top 75" report:
Which Video is Best for Broadband?
I have heard from many people with video assets or particular subject matter expertise who would like to exploit broadband distribution. They wonder if their video is a good fit for broadband.
It's always difficult to know whether an audience will respond to particular video programming, but certainly predictions can be made by using market research and understanding the consumer interest in media that might be considered proxies.
When it comes to broadband, I believe an important qualifying criterion is how available similar (or identical) video is through alternative distribution channels. The less available it is, the more valuable broadband distribution will be. So video that is "distribution-challenged", and that has clearly identifiable audiences, is ideal for inexpensive broadband distribution. Broadband offers unique characteristics (inexpensive distribution, personalization, etc.) relative to other outlets such as TV, video rental stores and movie theaters.
To the extent that broadband is the only way to get this video, then these audiences will likely be willing to pay for it. In addition, if the video has utility or informational value, this only enhances consumers' willingness to pay. As an example, video that is instructional in nature (e.g. golf lessons, salsa dancing lessons, etc.) seems to be a really good fit for broadband. These kinds of criteria drive subscription or pay- per-use models.
However, it is important to recognize that broadband distribution today means viewing on a PC. Some audiences are OK with that, and some are not. For example, I recently heard a great idea for ethnic video programming that would clearly have an audience, but one which would likely skew to older viewers. These people are likely to be less comfortable with PC-based viewing.
Viewing on the PC further means that attention spans are likely to be short. When people aren't lounging, as they frequently are in front of the TV, you can't expect too much of a time commitment. So short-form video is critical.
Which Business Models will be Most Popular in the Near
Term?
While specialty video with few distribution alternatives will enable subscription and pay-per-use models to flourish, I continue to believe that in the near term, advertising will continue to be the most significant business model for broadband video.
This will be the case for two reasons. First, as consumer eyeballs increasingly move to broadband, advertisers are highly motivated to follow them. And second, because broadband-delivered video is still so nascent, allowing consumers to experience it for free (i.e. through ad support) is essential to increasing its acceptance and use, before asking for consumers to pay.
As consumer use of broadband video has continued to increase, I have heard from multiple cable TV networks that their advertisers are specifically asking them to create broadband video products. These advertisers are saying "we love your media brand, but we want to be associated with it in a broadband context." There are a lot of advertising dollars looking for a new home due to the challenges facing the traditional 30-second spot. With DVRs and VOD growing, advertisers are scrambling to figure out how to avoid getting left behind.
As the "Top 75" report showed, of the 32 networks reviewed that are generating revenue from their broadband video, 26 of these are ad-supported. Most often, this advertising is in the form of 15-30 second pre-roll video ads before the content plays, which is then followed by a display ad. A big bonus with these video ads is that they can't be fast-forwarded like those recorded by DVRs. Also, because they are so short, viewers are unlikely to get up in the middle to go to the bathroom, etc. This means that these viewers are semi-captive during the ad's running time. Advertisers' eyes light up at the thought of this.
Even more exciting than this current picture is what's yet to come. In addition to more broadband video advertising inventory being created, I believe that there is going to be an enormous amount of innovation in the broadband advertising space.
While payingby the CPM will remain the baseline model, increasingly the big bucks will shift from paying for exposure (which is what CPM is all about), to paying for consumers' actions. This has already happened on the internet in general. Google and others have trained thousands of marketers to target their budgets toward surgical, ROI-driven campaigns. And executive management increasingly expects their marketing teams (and agencies) to demonstrate how marketing dollars tie directly to sales results.
All of this means that in broadband advertising, a lot of innovation will be geared toward moving viewers/users through multiple levels of interaction, culminating in either actual sales or highly qualified leads. Advertisers will pay a premium for these results. Broadband video's unique ability to deliver emotionally engaging and personalized experiences that motivate the viewer to take the next step toward purchase is crucial. I believe that lots of technical and creative energy is going to be focused in the coming years on developing this engagement model.
Will MSOs Embrace Broadband Video for Revenue Generation, and if so, When?
As I described in the report, MSOs today emphasize access, not content, in their broadband service offerings. To the extent that telcos have emphasized low prices as their differentiator, MSOs have become locked in a price/performance competitive dynamic with the telcos. Meanwhile, unaffiliated third party content providers continue to generate revenues from broadband video that goes right through cable's broadband pipes, without MSOs receiving any incremental revenues. I refer to this as "cable bypass", because these third parties (e.g. Yahoo, AOL, CNET, etc.) are operating outside of the traditional cable carriage paradigm by offering their video services directly to their intended audiences.
This is an extremely threatening scenario to MSOs. With the open nature of the internet, MSOs will never be able to control what their users see, but they should be able to figure out how to get in the middle of these revenue flows. To date, they haven't focused much energy on doing so. Again, MSOs have been focused on the access side of broadband, and when it comes to content, have only built out limited portals. These are also early days for generating revenues from broadband video, and this doesn't seem to be a priority yet for MSOs. MSOs have been focusing on educating their subscribers about VOD, and broadband video could cause confusion, or worse, a sense of competition with VOD. (More on this topic in future newsletters.)
However, I believe that MSOs are getting more savvy about broadband video, and will soon be inserting themselves into the mix. There are ample ways for them to play. These include: incenting programmers to develop exclusive broadband programming, which MSOs can then package and sell through their customer service channels and portals/email. MSOs offer technical capabilities to broadband video providers with local caching and quality-of-service, which could reduce bandwidth costs for video providers and enable improved user experiences. Finally, they could provide a pathway to wider in- home and mobile distribution, by leveraging their technical field personnel and new product innovation. All of these capabilities have real value.
Conclusion
Broadband video is in the first inning of its ultimate evolution. Understanding which type of video works best, how to monetize it, and what role big MSOs will play in moving the market forward, are among the key questions to broadband- delivered video's future growth. Broadband Directions will continue to focus on addressing these and other issues to help benefit market participants.
