October, 2006
Broadband video is red-hot. These days, everyone seems to be jumping on the broadband video bandwagon. One group of companies that is well-poised for success with broadband video are the top 75 cable TV networks.
In July 2005, my firm released its first market intelligence report, analyzing the top 75 cable TV networks' broadband video initiatives. One of the report's key conclusions was that while broadband video represented a significant new business opportunity for these cable networks, many of these networks primarily considered broadband video a tool to promote their on-air programming.
This past week, we released our 2006 report on the subject, entitled "The Top 75 Cable TV Networks and Broadband Video: A New Revenue Engine Takes Shape". We conducted an exclusive survey for the report with broadband video executives at 42 of the top 75 cable TV networks, which found that broadband video is now the #1 advanced services priority for many of the top 75 cable TV networks, far outpacing video-on-demand (VOD) and other advanced services.
The report also found that many of the top 75 cable TV networks, in a dramatic shift from just a year ago, now consider broadband video to be an important source of new revenue, not just a way to promote on-air programming. Currently 99% of these networks — 74 out of 75 — offer broadband video from their web sites, with 50, or 68% of them now deriving revenue from their broadband video initiatives.
Broadband video is now the front-and-center business opportunity for many top cable TV networks, demonstrating a remarkably swift evolution for these networks in just the past year since our initial report on this subject was released in July 2005.
Opportunities and Challenges Abound
Our survey revealed consistent reasons for why broadband video is now viewed as mission critical. Though still early, these executives see that broadband video generates real, not potential, revenues from audiences whose video consumption behavior is shifting radically. They've learned that broadband video is easy for cable networks to implement. Plus, it gives them creative control of the user experience, and frees them from cumbersome technology platforms controlled by distributors.
These executives also noted that broadband video opens up unprecedented brand extension opportunities for top cable TV networks. It is increasingly evident that cable TV networks must compete in the broader video marketplace which now includes highly successful new market entrants such as YouTube, MySpace and many others.
However, the report also reveals that top cable TV networks see restrictions in current "carriage" agreements with cable TV and satellite operators as the single biggest challenge to their eventual success with broadband video. However, these agreements provide a crucial revenue stream for top cable TV networks, which is highly valued. As a result, top cable TV networks must manage a delicate balancing act, which I believe will only get trickier as new technologies drive convergence between broadband video and TV-based experiences.
Advertising is the Name of the Game
Looking more specifically at the 50 cable TV networks that are now generating revenues from their broadband video initiatives, it is apparent that advertising is their business model of choice. From our observations of their sites, the report concludes that 43, or 86% of these networks use advertising exclusively to generate revenue from their on-site broadband video, while another two networks use subscriptions in addition to advertising, and one network uses paid downloads on its site in addition to advertising. The report also notes that 31 networks are currently also exploiting the individual program download business model by partnering with three primary video aggregators, Apple's iTunes, Amazon Unbox and AOL Video.
Broadband video advertising is a natural for top cable TV networks given their existing relationships with advertisers and agencies for their linear cable networks. But these networks are also pursuing broadband video ads for the same reason Willie Sutton chose banks as his targets ("because that's where the money is!"). Today, advertising is where the money is in broadband video (and will continue to be, I believe, at least in the near-term). Our survey revealed that cable TV networks are besieged with interest from advertisers and agencies, who are clamoring to advertise against the networks' high-quality broadband video. Advertisers love pre-roll ad formats in particular because they can re-use existing TV spots, users can't skip by the broadband video ads as they now can with DVRs, users can click-through on companion banners and far richer usage reporting data is available.
Content Remains King
Meanwhile, the network executives we spoke to said their own internal research on their users' broadband video preferences has shown that distinctive, original content is the primary reason these users value the networks' broadband video. Many Internet users have now embraced broadband video as a bona fide part of their entertainment diet. This trend is another reason why top cable TV networks have shifted their focus from promotional-only activities to those that generate new revenues.
Further, these networks' own research has disclosed that users love the on-demand nature of broadband video. In this respect, broadband is contributing to consumer behaviors being inculcated by both video-on-demand and digital video recorders. Finally, the networks' research has found early interest among certain segments in community-building and user-participation. These findings clearly dovetail with the explosive growth of sites such as MySpace and YouTube, which have tapped into a deep reservoir of consumer interest in being a part of the media experience.
Conclusion
The above represents just a small fraction of the results found in my firm's new report. As many of you know, I have been saying for a while that broadband is the single most disruptive influence on the traditional video distribution value chain. The top 75 cable TV networks are the glue that holds together a complex ecosystem of producers, syndicators and other rights holders, cable TV and satellite operators, advertisers and audiences, with billions of dollars at stake. As these networks continue to embrace broadband video, it is evident that big-time change is afoot for the traditional video world.
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