Cutting the Cord- Are pay tv customers really unhappy ?

Last month I went along to a thought provoking panel discussion on Connected tv hosted by the Mashup events team. It got me thinking about whether the arrival of new over the top (ott) tv services will signal a big upheaval in the TV market.

Three things are clear and I think beyond argument.

Firstly a number of well known internet, technology, software and consumer electronics companies with no previous form in developing TV services (including Google, Yahoo, Apple, Boxee, and Samsung amongst others) are betting they can deliver a step change improvement in the way viewers experience tv content, and incentivise viewers to switch or upgrade to their service. The strength of this belief is underpinned by very significant investments being made in new connected TV products.

Secondly, the current user interface and customer experience of TV is outmoded. We now live in a world where consumers enjoy precision search on the web, get viewing and listening recommendations from their friends on Facebook, and share playlists on sites like last.fm. Based on customer behaviours on the internet there is appetite for change.

Thirdly there is some limited evidence that a small number of early adopters in the US are willing to cancel their cable subscriptions in favour of access to an alternative, cheaper connected tv service. (The phenomena known as ‘Cutting the Cord’)

However the $64 billion question is whether this behaviour is likely to be extended to the mass market.

The answer will be determined by whether there really is a fundamental customer need that is not currently being satisfied, the ability of new competitors to deliver against this need in both content and customer experience, and the response of pay tv incumbents.

The proponents of the cutting the cord theory argue that pay tv does not deliver a great customer experience as some customers pay for programming / channels they don’t watch, other customers pay twice for the same content (e.g movie lovers who pay for a subscription to a film channel aswell as a DVD rental club), and currently there is no means of enjoying the best & most popular internet video content on the TV.

However the reality is that viewers seem to like to pay for packages that promise choice even if they don’t always take advantage of it (and there is plenty of evidence that they prefer subscriptions to channel bundles rather than a la carte offerings).

And internet video packaged for the TV (such as Vevo’s comprehensive catalogue of music videos) whilst very popular is not pay content, and is not likely to provide a compelling incentive to switch out of a pay offering.

Critically all this assumes that the new players will be able secure an attractive programming line up. This is easier said than done, given the top programming brands rely on income incumbent pay TV platforms for survival and are likely to be cautious about licensing rights to unproven competitors.

So in summary, it doesn’t feel like there is a fundamental need for premium programming that is not being met.

However there is an appetite for an improved user interface & customer experience of programming, and my feeling is that this will be a key battle ground of the future. This is borne out by the experience of the smartphone market. Apple’s IPhone showed that innovation in presentation of services, rather than innovation in the mix of service is a key to success.

Incumbents understand this and are stepping up to the plate with upgraded products. Sky’s recent announcement of 'Sky Anytime + for TV' and Liberty Global’s forthcoming launch of the 'Horizon Gateway' provide an indication of the improvements customers will see which will over time include improved search and social features aswell as much more on demand programming.

See http://paidcontent.co.uk/article/419-on-cusp-of-web-tv-revolution-sky-soft-launches-a-conventional-vod-servi/, and http://www.siliconrepublic.com/video/v/407-liberty-globals-

Time will tell whether services offered by new players will trump this. Early releases from Google and Yahoo do look like they offer a fundamentally new and better customer experience, and with this in mind some incumbent operators may choose to partner with the new kids on the block (and take advantage of the new commercial opportunities they offer such as addressable advertising) rather than risk being left with an uncompetitive product.

So whilst there is currently no compelling evidence that ‘cutting the cord’ is going to be a mass market phenomena, established operators will need to be vigilant. We are entering a new era in TV where viewers will expect a much better, more personalised experience. Those that can meet these new expectations will prosper and see off the competitive threat. Those that don’t (and don’t invest) will be exposed in a market that will see plenty of change.

As the CEO of US operator Verizon Ivan Sedienberg recently said ‘"We take the over the top issue with video very seriously," he said. "I think cable has some life left in its model...but that it is going to get disintermediated over the next several years."


SOME EXAMPLES OF THE PROLIFERATION OF NEW CONNECTED TV SERVICES

Taking a slice of Apple's pie

There have been a raft of recent announcements about new digital content stores launching, which got me thinking about whether we are about to see some real competition to I-Tunes.

Apple’s position as the dominant global retailer of digital content has to date been unchallenged.  With an active user base of over 500 million I-Tunes users,  sales of over 250 million IPods, over 70 million IPhones, and 3 million IPads (in 80 days) Apple has been the natural choice both for customers wanting to enjoy the choice and convenience of consuming digital content and for rights holders wanting to exploit digital distribution opportunities.

No other retailer has come close to Apple’s the 10 billion music downloads and 3 billion Apps downloads.  With the IPad  sales & Apple profits well above forecast, new features & enhancement being added to I-Tunes, and many of the world’s leading media companies committing to work with Apple to develop new digital categories (like E-Publishing), the momentum behind the I-Tunes ecosystem seems (at least superficially) unstoppable. 

So why are consumer electronics & software companies like Sony (with their new Qriosity platform) , Samsung (with the Media Hub initiative) and Microsoft (with the Zune service) now betting they can carve out profitable businesses as digital content retailers & compete effectively with Apple*.

The reason is that in every genre of digital content Apple is exposed to attack.

In the digital music market, the transition to DRM free downloads means that consumers are no longer locked into I-Tunes ecosystem.  Consumers will be able to shop around for their music whilst continuing to store and manage their collections on I-Tunes.  Labels will work hard with competitor retailers to make sure consumers feel like they have a real choice.

In the TV programming and film space, the consensus view is that the market will only take off once there is a mass market device for viewing digital content on the TV set. Apple has yet to deliver it.  Players like Sony and Samsung with their strong market position in TV hardware, and incumbent TV platforms (like Sky and DirecTV) are perhaps in a better position to deliver a breakthrough service.  With this in mind, expect new digital content stores coming to market to major on TV & film content.

In E-Publishing, market immaturity means that any device / storefront combination could end up dominating.  The momentum is currently with Apple, already supported by a critical mass of leading publishers who are hoping this market will take off.  However it will be at least 18 months before we know whether competitor tablets can mount a serious challenge.

So the reality is that Sony, Samsung, Microsoft (aswell as the as yet unannounced initiatives from Amazon, Google and other industry players) all have a chance of challenging Apple’s dominance in premium digital content. 

Given the enormous growth potential in digital consumption of TV, film, music, books and other media there is still a big prize to play for. 

The winners will offer a simple & intuitive customer experience which seamlessly connects between device and store, attractively priced content libraries & hardware, and a brand and communications voice that resonates with the mass market.  To deliver all this will be quite a feat, and requires new organisational structures, new competencies & executive talent, and exceptional strong leadership.

So how should media & rights holders be responding to this evolving market landscape.  

Content owners should plan to be promiscuous forming relationships with a variety of distribution partners.  Energy should be focused on partners that have the scale, ambition and senior management backing to become major players in the market.  Business Development should reflect a view on what players you would like to see in an ideal market scenario.

Deals should be structured in the spirit of partnership with the objective of delivering a sustainable business for the new content stores.  Wherever possible distributors should be given breathing space to show momentum without being weighed down with very high fixed costs.  At the same time media owners should aim to retain a reasonable level of input in the pricing, packaging and promotion of their content.  This approach will help to foster real competition amongst whilst ensuring content does not become commoditised .

Finally content owners should be willing to experiment with new commercial models.  We are moving into an era where digital storefronts will increasingly use content as means of selling hardware, data access or other products and services.  Bundling will open up new markets for media owners, but care should be taken in deciding what content is offered within bundles & in its positioning to customers to ensure willingness to pay for premium content is not impacted.

This new era of competition should (I hope) make the digital pie a lot more appetising, with Apple as one of many flavours to choose from.

For further details on these initiatives see

Sony:  http://www.guardian.co.uk/technology/2010/sep/01/sony-qriocity-streaming-music-video). Samsung: http://www.cnet.com/8301-19736_1-20016714-251.html),

Microsoft:  http://www.zune.net/en-GB/

Keep taking the Tablets

Last week I spoke at the C21Media IPAD Summit at Bafta in London.

Thanks to the C21 team in particular Helen Pennington and David Jenkinson for putting on an informative and well attended event that delivered some good insights on how to profit from the tablet revolution. (and congratulations for securing ‘national treasure’ Stephen Fry as keynote speaker)

In my panel session I shared my prediction is that tablets will, by 2013, be the principal mobile distribution channel for rich media content, and will significantly grow the value of mobile entertainment market.

Based on current run rates & new launches, it is likely that up to 10 million tablets will be sold in the UK alone in the next 3 years.  Propensity to pay for content is relatively high (only 26% of IPAD apps are free, and average spend is $5 per app – much higher than for content bought on mobile phones).  In addition screen & player quality, intuitive UI, robust DRM and simple billing & settlement address a number of barriers to adoption of mobile content – and will open up new pay markets for mobile video, magazines, newspapers, children’s edutainment and E-Books.  Finally, OEM’s and others who are betting on this market are reliant on the support of big media brands, as content lies at the heart of the consumer proposition.

The early signs on market development are very encouraging, but there is reason to be cautious. Media companies, OEM’s and others who want to play in this space need to be cognisant of the immaturity of the space and the teething troubles that will be encountered.  My advice, carefully manage expectations.

Network quality and connection speeds remain a particular issue for rich media content.  Playing with the IPad on wi-fi last week I had a bad case of the ‘worldwide wait’.  Downloading a video enabled app took too long for comfort.

Store, player and billing integration on tablets coming to market in 2011 will not be as seamless as on the IPad.  On some devices there will be no Operator billing on OEM storefronts, and on other devices there will be several storefronts (both OEM, and MNO) competing for attention.  This will contribute to a sub-optimal customer experience.

Commercial models still remain uncertain.  Apple has carved out certain content categories from its App Store, including Music, TV programming and films.  Other categories may follow.  So opportunities for content owners to go direct to consumer may be more limited than hoped.  However the position on competitor devices may be different, as storefront owners finalise policy.

Nevertheless I would encourage experimentation now, particularly for those companies that have R&D budgets and are prepared to take the long view of the market opportunity.

My advice would be to develop products that take advantage of unique capabilities of the device and connectivity, rather than repackaging old content.  Penguin’s ‘Spot the Dog’ IPad App is a nice example.  As Stephen Fry mentioned last week, if the end user can feel the love that has gone into the product, you have at least some of the ingredients for success.

Skill up in digital retailing and learn from players who are really exploiting the dynamic & freemium pricing opportunities offered.

Think carefully about how many platforms to distribute to. With most developers only willing to develop two versions of their Apps,  storefronts outside of the top two (which are likely to remain ITunes and Android MarketPlace) may find it more difficult to scale.  In the long term I think survival for smaller retailers will be down to targeting niches (both specific customer groups and content genres).   However as the market plays out, content owners can take advantage of the willingness of storefronts to pay for market share.  Nokia’s substantial investment in an exclusive X-Factor App for their Ovi Store is a case in point.

And finally be clear about what you want to learn.  Lots of players are treating their experience in the tablet market like teenage sex.  Lots of fumbling about in the dark and no real knowledge of what they should be doing.  Fortunately it doesn’t have to be like that.  There are lessons that can be learned from the evolution of the Apps & mobile entertainment space, and by testing out a variety of product, distribution and commercial strategies.

What's it all about

Welcome to Winning in Digital.

For the past 15 years or so I have been in the business of creating, scaling and turning around digital ventures for some of the world’s biggest media and telecom brands (the BBC, Sky and Vodafone) and start  ups backed renowned internet investors (including Kleiner Perkins, Sequoia Capital, Benchmark Capital, Accel Partners and DAG Ventures).

I’ve had the privilege of working with businesses that have helped to shape the structure, dynamics and development of digital media space in Europe, as well as learning from ventures that have failed to deliver impact.

My intention with this blog is to share my insights how the market  is changing & what these changes mean for those with a stake in the digital entertainment space,  who the smart operators are & what we can learn from them, and what strategies and tactics internet, media and telecoms companies (both large and small) should consider to capitalise on new opportunities for growth & protect against the threats posed by the evolving digital environment.

Daniel Winner

October 2010