Kate Bulkley, Media Analyst.

The rise of the connected machines

By Kate Bulkley

Cue Entertainment

Monday October 31, 2011

As US viewers disconnect their Pay TV services in favour of content delivered by connected devices, operators are warned they must offer what the consumer wants. Kate Bulkley reports.

—Gerry O' Sullivan, Deutsche Telekom Global TV and Entertainment Vice President

Gerry O' Sullivan, Deutsche Telekom Global TV and Entertainment Vice President

If Pay TV is to defend itself against the increased penetration of connected devices and the threat of disconnection – so-called “cord cutting” – it must get back to basics, according to former BSkyB Strategic Development Director Gerry O’Sullivan.

The increased level of Pay TV disconnection rates in the US market over recent months reflects the growth in connected devices that can receive IP-delivered video, O’Sullivan tells the IHS Screen Digest “The Future of Digital Media Distribution” conference.

IHS says connected devices will be mass market by 2015. Smartphones outnumber TV sets already and some 22 million tablets will be sold in western countries alone over the next four years. Despite some early concerns that people do not connect their smart TVs, digital technology company Rovi says that the connection rate for Samsung smart TVs in the UK runs at 50%.

O’Sullivan, who is now German telecom Deutsche Telekom Global TV and Entertainment Vice President, says Pay TV operators must get the user experience right and have the right content if they are to resist the cord cutters.

Deutsche Telekom, as a Pay TV operator, will prioritise the managed service side of the business but always with an eye to incorporating the next, cool device, he says: “The iPad and the mobile is taking off and so I need to at least be seen to be innovating on those platforms or our customers will go somewhere else.”

TV and music streaming technology provider Aspiro TV CEO Erling Paulsen also underlines the importance of the second device as the correct place for more personalised information and customised EPGs, including a social experience with your friends: “This second screen becomes the go-to entertainment hub.”

The big question is how to monetise it, something that O’Sullivan says the industry has so far abjectly failed to do properly.

Telecom Senior Media Analyst Italia Antonio Pavolini suggests that “maybe by 2012-2013 we will have significant incremental revenue on the second screen”, but he doesn’t sound convinced.

By contrast, Bruce Daisley, Google’s YouTube & Display UK Director says that its launch of skippable ads on YouTube has given advertisers the tools to be more creative with their ads, which leads to better monetisation and higher consumer engagement. The search giant claims that 60% of YouTube’s pre-roll ads today never finish.

Daisley says, “We decided to only charge for the ads that are watched to the end so it is quite a different business model. But the amount of data we get from that is most compelling because advertisers can see if their ad was twice as skipped as their previous ad or if a shorter ad is less frequently skipped, so data is a key part of what we are doing.”

Making money on second screen applications is still in its infancy and while Pay TV is seen to be at least somewhat recession proof, for the big telecoms such as Deutsche Telekom, IPTV is an important new revenue stream that they need to get right.

Deutsche Telekom is big in mobile and in broadband — 59 million mobile customers in Europe and 4.5 million lines in Europe — but the next target for O’Sullivan is IPTV.

Deutsche Telekom has launched IPTV in eight of the 50 countries around the world where it operates but he admits that Europe poses a particular challenge. Compared to Southeast Asia, O’Sullivan says the region “looks like a third-world country” in terms of broadband speeds and Deutsche Telekom has focused on the launch of hybrid IPTV and satellite-delivered services.

Forecasters suggest that this is the right call — IHS predicts that by 45% of pay TV set top boxes will have IP video capabilities built in by 2015.

The next big move to be made by Pay TV operators such as Liberty Global and Comcast is to create a home Content Delivery Network or hub that can serve the entire house and link up all the devices in the home. Liberty Global will launch its Horizon platform or home hub in early 2012 in Holland. YouTube, Facebook, Twitter will develop apps for the platform and basically bring the mobile app-store approach to a pay TV subscriber’s TV screen.

As more Over The Top (OTT) content is available, one of the issues central to making Pay TV work is to have the right content, O’Sullivan says: “There is no content that is too niche not to explore,” and that includes games and e-publishing along with traditional Pay TV channels.

Earlier this year, Deutsche Telekom launched an e-publishing product in Germany that delivers local German content. O’Sullivan will look to bundle it all together so someone can have their TV choices and a digital newspaper delivered to their iPad every morning. “Maybe that’s the panacea to keep the customers close to you and provide satisfaction,” he says.

Different screen sizes for smart phones and tablets plus the number of screens that people use will drive TV to be even more innovative, says O’Sullivan. He notes that while mobile screens have set the bar high for getting content on the move, “Connected TVs are not doing us a favour at the moment — they are not delivering a great consumer experience.”

Probably the biggest concern for Pay TV operators is with the power of social networks and the way they integrate with TV, particularly with big, live TV shows such as “The X-Factor”.

“I can see a scenario where people switch on their mobile and their iPads, and the gateway they use to for all the services that I want to provide to them and add value to their subscription is not my portal but they go through Facebook instead. I see this as a concern,” says O’Sullivan.

How content is authorised, sold and delivered to consumers has changed. As a result, the model for content delivery — from closed platforms like Apple’s iTunes (and soon Apple’s iCloud) to the recently launched, studio-driven digital rights locker service called UltraViolet — becomes increasingly complex.

According to Samsung Electronics Europe Head of content services Dan Saunders, UltraViolet should be taken “very seriously” especially for catch-up TV and VOD. IHS Broadband Head Dan Cryan, however, says that the extra money the studios want in order to provide consumers with a digital right to a piece of content in perpetuity is not compelling enough as content is available on plenty of other easy-to-use platforms from iTunes and Netflix to BSkyB.

“The need to own things in a world where you have vast amounts of choice from either cheaper rental models, or on subscription, and also vast amounts of free TV stuff from things like the BBC iPlayer, is arguably appreciatively diminished,” he says, and adds that it is “not clear” if consumers care about interoperability across devices.

Michael Comish, Blinkbox CEO

Michael Comish, Blinkbox CEO

Tesco-owned Blinkbox CEO Michael Comish says that UltraViolet is likely to reach a critical mass of titles at the back end of 2012 in the UK and that he will be happy to stream the UV digital versions of films purchased by subscribers because he sees it as a way to market to them: “We won’t charge the consumer anything extra for UV streaming. We will embrace them, give them a good service and ‘upsell’ them.”

Comish says that now Tesco owns Blinkbox, the question is whether or not the idea of DVDs sold at a loss as an inducement to get people to shop at Tesco stores translate into the digital world, that is, will the size of the “digital shopping basket” allow Tesco to price discount on digitally delivered content?

He says, “Store-based growth as a physical retailer is limited and so if you want to grow beyond where your stores are located already, and if there is difficulty opening new stores, then e-commerce is a sensible place to go, especially when you look at the general shift from physical to online.”

He argues that the future for Tesco and Blinkbox is to expand the relationship with its customers into multiple e-commerce categories.

He also is not keen to get into the subscription VOD business to compete with Amazon- owned Lovefilm and Netflix, which will launch in the UK in the first quarter of 2012.

“The problem is Netflix and Lovefilm are battling it out and spending lots of money (buying rights) and the rights at least in the US are being pinched and held back increasingly by studios,” says Comish.

“To be a third party in what looks to be a no-profit zone is not a battleground I want to compete on. But that doesn’t mean there are not areas to compete. It is: Where do you want to fight?”

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