The rise of online video

By the end of the next decade, I would not be surprised if over 50% of the video revenues are generated from online services, says MARTIN OLAUSSON, Senior Analyst at Strategy Analytics. Today, they still account for only 8% of total in-store home video entertainment market.

The move from linear content consumption to on-demand content consumption is the macro trend that embodies media today, an evolution underpinned by the unstoppable rise of broadband Internet that is fuelling emerging online video services.

There are today close to 300 million broadband households around the world, a figure we estimate will reach half of billion by the end of the decade. That equates somewhere between 1.2 and 1.5 billion broadband users. Everyone online is quickly migrating to broadband services. This is now a mass market for both products and services.

Already some of these new broadband adopters are taking up broadband not primarily for PC Internet access, but for other services such as VoIP (Voice over Internet Protocol) and IPTV (Internet Protocol TV). In fact, some households taking up broadband services don’t even own a PC. In some of the more mature IPTV markets, such as France, some households sign up for a triple-play service (telephone, television and Internet) in order to get TV services.

Compared to other consumer communication technologies, broadband is actually the fastest growing communication technology of all time. In Western Europe, broadband adoption has, since the beginning of 2000, grown almost twice as fast as that of mobile telephone in the 1990s.

So, what does this all mean? It opens the door to a large array of new service providers. Whether or not one believes Digital Subscriber Loop (DSL) networks will actually offer high-quality video, the sheer possibility that it might is what is driving the market.

Look at the UK market. Everyone is turning away from a single service offering – be it a mobile operator or a satellite operator like Sky. Consumers are now embracing multi-service offering, triple-play, even quadruple-play offering, that is, the bundling of landline telephony, broadband internet, TV/video and mobile services.

Even companies such as Vodafone that, for the last 25 years, have said ‘we are a wireless-only company and we will never do anything on a fixed network’ is now bundling DSL services, partnering with broadband service providers across Europe.

Sky is probably one of the best examples of a TV service provider launching broadband services and fixed telephony. And I would not be surprised if, three years from now, Sky offers a mobile voice solution as well.

The prospect of being able to offer all TV services and all communication services over one network brings very substantial cost benefits for any service provider. But it also creates heightened competition across the full range of communication services.

Though they emerge from different industries, the providers are rushing to offer bundles of services that end up being similar. The result is that the basic communications services, be it fixed telephony, broadband, but also basic TV offers become commoditised. Adding value through premium content becomes the name of the game to build businesses with unique selling points.

All actors, but especially telecom operators, are now engaged in a relentless pursuit to acquire rights, movie rights, sports rights, etc, to create money-generating value-added packages.

Initially a victim of online downloading made possible by the growth of Internet broadband, the music industry has taken the bull by the horns and started embracing this mode of delivery rather than fighting it.
The music industry is starting to turn around. A lot of music is now being sold online. Indeed, around 70% to 80% of all singles in the UK today is online sales. Within the next years, digital downloads is expected to account for 100% of all single sales.

This has not yet happened with the video industry mainly because of lack of speed and capacity in the networks.

The trend away from linear consumption toward on-demand is underpinned by key drivers. One of them is the concept of a central repository of content: Though I have a large collection of CDs, they are in a cupboard. I transferred all the music content on the hard disk of my laptop from which I extract what I want to hear onto the delivery means I choose.

This central repository of content is, today, typically a PC, and often filled with illegally-obtained video content, especially in the case of the younger generation of users. However, the idea of being able to access content from one central point is a concept that is gaining momentum among the consumers of today.

Consumers increasingly expect to have access to anything, anywhere and anytime. No surprises that service providers are trying to deliver content on this premise.

Digital video recorders, and multi-room digital video, introduced by Sky, for example, are trying to do just that starting with time-shifting, then proceeding to distribute content from a central place in the living-room, around the TV set, to other rooms, even taking it outside the home altogether.

On the one hand, new devices such as the sling-box, connected to a set-top box, enable consumers to access video over the Internet wherever they are in the world. On the other hand, it becomes possible to transfer content stored on a PC or a DVR onto a portable device – not necessarily to be viewed on that portable device, but used as a portable video storage device when travelling or moving about.

Limitations in terms of speed and capacity of broadband networks as well as limitations in video compression have until recently hampered the delivery of high-quality video over the Internet, but things are quickly changing. Today, it might take up to four hours to download a feature-length movie on a 2Mbit/s connection. In three, four, five years in Western Europe, it will be hard to find anyone with less than a 10Mbit/s connection.

Already today, Japan and Korea offer speeds of up to 100Mbit/s. Indeed, my home in Sweden is provided with a 100MB optical fibre connection!
Hollywood wants to avoid the mistakes of the music industry which was slow to react to the rise of broadband. Though legal actions are tools to fight off piracy, film studios are now keen to come on board the Internet bandwagon by offering online video delivery solutions. They are experimenting with technologies, trying out various business models. Considering how long it took the music industry to start embracing online delivery, the film industry will have been remarkably quick to do so.

Three for-pay business models are given a go to bring video to consumer online: download-to-own, download-to-rent and subscription-based services or combinations of all three.

The download-to-own model replicates the retail store operating in the sell-through market. The best example is Apple’s iTunes Music Store. To date, 50 million TV episodes and 1.3 million feature films have been reported sold. Apple, of course, is still in the business of selling hardware, the source of its profit. Selling content at cost has been the driver for hardware sales. This model would certainly not be attractive to a company that sells content as core business in a competitive marketplace.

The download-to-rent model replicates the rental market. It is similar to what satellite or cable TV call ‘pay-per-view’ or the ‘on demand’ services telecom operators intend to offer. CinemaNow is one of the earliest examples of online video services. It makes pay-per-view titles or rental titles available for anywhere between 50¢ and $3.99. Last year, CinemaNow also started to offer download-to-own and became the first one to offer a burn-to-DVD option.

The subscription service model replicates what cable operators call a monthly subscription. Netflix also functions along this line in the physical world: it is about securing a steady monthly fee from consumers. An online example is Vongo in the US. It charges users a monthly fee of $9.99 for unlimited access to over 2,000 titles. Each title has an ‘available until’ date, which may be changed: anything from 3 months up to a year, at which time access to content is automatically disabled.

Do consumers want online video? We conducted a survey of 2,000 broadband users in eight countries to find out. We queried about their interests and their willingness to pay for different services. About 25% of respondents in Western Europe and 29% in the US say that they are interested in these types of services.

There was a large proportion – about 50% in both markets – that showed no interest whatever but, then again, not everyone is interested in video or music or any other type of content services.

The problem, of course, is that there is no service out there today which is really priced at the right level to make it attractive to most consumers in Europe, namely, $6.90. Our research reveals that at this optimal price point, video download should generate about $140 million a month across the Western Europe market.

On a global basis, we estimate online video will grow at more than a 200% compound annual growth rate and reach about $6 billion by 2010.
It is a significant business by any standard. However, when compared with total ‘off-line’ home entertainment market revenues (data supplied by PriceWaterhouseCoopers), this $6 billion online video industry accounts for only 8% of the total in-store home video market.

There is no doubt there is a pent-up demand for online video services, and already the younger generation is doing a lot of illegal downloading of video content. The legal versions will grow significantly within the next few years, but will still be a minor share of the total market. Having said that, the trend is clear – we are moving toward online or network distribution on a wide range of media.

By the end of the next decade, I would not be surprised if over 50% of the video revenues are generated from the various types of online services.

Looking at the broader picture, the businesses of music, video, television and games are being transformed by universal availability of broadband as a distribution platform for digital media services.

At the same time, disruptive technology advances in devices, networks and applications increasingly influence how consumers attain, interact with and consume content.

The promise of ‘all your media, all the time, everywhere’ is now becoming a reality, and traditional media businesses have two options: adapt or die....

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