U.S. Digital TV Subscribers at 68 Million

With the last of the major public operators having reported fourth-quarter earnings, we've got a better sense of how 2007 shaped up in terms of subscriber growth. From 38 million digital subscribers at year-end 2002, digital subscriptions now top 60% of U.S. households.

The four major public cable operators (Cablevision, Charter, Comcast, and Time Warner Cable) averaged 14% of digital cable subscriber growth in 2007. Satellite services (DirecTV and DISH Network) subscribers now top 30 million. AT&T and Verizon combine for more than one million subscribers.

New TM Forum Device Management Summit to be held at CONNECTIONS™: The Digital Living Conference and Showcase

TM Forum, the world’s leading trade association focused on management of information, communications, and entertainment services, is hosting a pre-show device-management Summit on June 24 in conjunction with CONNECTIONS™: The Digital Living Conference and Showcase.

The TM Forum Device Management Summit on “Low-Cost Device Deployment and User Support” addresses the growing management requirements generated by intelligent interconnected devices in the home, including mobile handsets, set-top boxes, and gateways. With one trillion devices expected in the next 15-20 years, service providers must solve device-based management issues, leading to reduced support costs, improved customer experience, and potentially add additional service revenues.

CONNECTIONS™, produced by Parks Associates in partnership with CEA®, is the largest executive conference and showcase focused on the market developments and growth factors for advanced digital lifestyle solutions. The 12th annual conference will be held June 24-26 at the Santa Clara Convention Center.

For more information, check out the full press release or visit at our CONNECTIONS™ blog.

The Four-Way Judo for the Dominance of Advertising

Microsoft’s bid for Yahoo turned hostile, which spiced up the game-playing among the four major players in the online advertising space: the named two plus Google and AOL. Yahoo, as the party being acquired, can’t comment much, but the other three recently couldn’t help but trading jabs at each other. Google’s objection to the deal has been widely known and Microsoft knows that it can’t befriend with Google in any circumstances. But recent rumor between Yahoo and AOL about potential collaboration opportunities appeared hitting Microsoft’s nerves. During a speech at the IAB conference Ecosystem 2.0 on Monday, Brian McAndrews, former aQuantive CEO and currently senior vice president of Microsoft’s advertising unit, made a bold prediction that over the long term, the only two viable players in the online advertising space are Google and Microsoft. AOL people in the audience were apparently irritated by such a comment. So on Tuesday when it was AOL chief executive Randy Falco’s turn to give a speech, Mr. Falco fired back by saying: “Microsoft and Google can ignore us and leave us off the charts, but they will do it at their own peril.”

Things are getting more and more interesting in this four-way fight to command supremacy in the online advertising market, which Parks Associates estimated to grow to $35.5 billion by 2012. Search advertising is one of the pillars of this fast growing industry and also the focus of the Microsoft’s acquisition of Yahoo. But the four players apparently are jolting with one another for advertising opportunities beyond search. Google has extended its tentacles from online display ads to offline radio and TV ads. Most recently it announced video ads through its adword search program where keyword search can end up with featured videos made by advertisers, who will bid each other for positions at the top page. Yahoo hasn’t lost its focus in spite of the merger talk and the potentially nasty proxy fight with Microsoft. It has already built a partnership with major newspaper publishers to help them sell ads. At the Ecosystem 2.0 conference, Jerry Yang also unveiled Yahoo’s new Apex platform that promised to allow marketers to buy display, search, video, or mobile advertising in a convenient one-stop fashion. These four platforms combined will generate almost $29 billion in ad revenue by 2012, according to Parks Associates’ projection (analysis and projection of online video and mobile advertising industry is featured in Parks’ recently published study New Advertising Platforms and Technologies). By coincidence, AOL’s own one-stop ad platform is called “Platform A” (We quibbed at Parks that if AOL merged with Yahoo, integration would at least be easier for naming the new ad platform). As Mr. Falco put it, AOL is unlikely to compete with Google or Microsoft/Yahoo on search advertising, but in other areas, AOL boasts assets that are not inferior to any of the other three competitors’.

A year ago, all four players were in a frenzy in acquiring technologies, ad networks and other ad-related capabilities that complement their own portfolio. In 2008, they strive to make themselves more relevant to a booming online ad market and a potentially bigger and more lucrative offline world where ad delivery increasingly starts to benchmark what online world has been able to show to the advertisers. Microsoft’s Yahoo purchase attempt is only the start of a much bigger trend. Therefore if the deal is valued based on Yahoo’s search business and current portfolio, $31 per share appears to be justified. But if accounting for combined Yahoo-Microsoft influence for the entire ad industry (not just online) in the future, Microsoft might have to cough up a few more bucks per share to satisfy Yahoo’s board and its shareholders, in our view.

What about Google and AOL? Time will tell.

Disclosure: The analyst owns shares of Time Warner, Inc, parent company of AOL.

Sony's Stance on In-Game Advertising Unconfirmed, But Laudable

Adage published an article regarding Sony's plans to open up its PS3 platform for third-party game advertising companies such as IGA Worldwide, Doublefusion, and Adscape/Google.
http://adage.com/digital/article?article_id=125318.
Many websites recycled this article shortly after. Clearly the information is leaked out by one of the third-party ad serving companies and Sony has not made any formal announcements yet.

I think if Sony indeed embraces an open approach, it will benefit the overall industry. In a report we published in mid-2007 on game advertising, we commented:

Platform fragmentation is another complaint one frequently hears in the emerging in-game advertising industry. The concern is mainly due to Microsoft’s acquisition of Massive, Inc. and the potential of Microsoft shutting out other ad serving companies from the Xbox platform. If Sony and Nintendo decide to make their platforms proprietary through acquiring technologies and companies, the problem will be compounded, creating a problem for advertisers. For instance, if Nike wants to advertise in Madden 08, now instead of working with one ad serving company, it might need to work with four or five companies in order to advertise on the PC, Xbox 360, Playstation 3, Wii, and mobile versions of the game. Such a scenario will surely hurt the fledging dynamic in-game advertising industry... A more plausible scenario will be for Sony to open up its network to multiple vendors, driving Microsoft to allow other ad serving companies onto its platform. However, there are competitive concerns involved in such a decision. For instance, should Sony allow Microsoft, its competitor, to embed its SDKs into PS3 games and sell ads on its platform?

After that report was published, Sony made an announcement regarding developing their own ad-serving technologies but it has not publicized its plans regarding ad sales and management, leaving room for imagination. From a large game publisher's perspecitve, they do wish the platform fragmentation issues get solved quickly so they don't need to waste time negotiating with multiple ad-serving vendors for the different platforms they sell to. They have incentives to push Sony to open up its platform to their existing ad-serving partners.

Console clearly has the potential to become a viable game advertising platform but because of platform makers' control over their platforms and the delicate power balance between major publishers and console makers, we are likely to see less in-game advertising activities on console than the online PC platform in the next 12-18 months. There are a lot of game advertising innovations and activities around casual games and free-to-play online games. Recent entry of EA, id software, and Garage Games will help grow the inventory. Gamers are also less resistant to seeing ads if the games are free or subsidized.

Cable's Big Carrots

It's hard to feel all warm and gushy over the cable operator, particularly on a day like today. During a hearing Monday at Harvard Law School, MSOs (and Comcast in particular) came under fire yet again from the FCC for "network management" - slowing (and in some cases blocking) certain kinds of Internet traffic. The hearings brought to light the cable industry's habit of carrying big sticks in an attempt to solve some prickly problems it faces, particularly bandwidth management. It also gave the FCC more ammunition in its arguments for enforcing net neutrality.

At the same time that the cable operators are getting beat up for their perceive punitive actions, what I find exciting are some of the new applications that the operators are putting forth in an effort to - today - fend off the increasing challenge of DVR use and ad-skipping and - tomorrow - the "over-the-top" broadband video threat.

Today's New York Times indicates that Cox Communications and ABC have reached an agreement to establish an on-demand video service that would allow viewers to watch ABC shows like Lost and Desperate Housewives any time they choose - up to four weeks. The catch in the service is that ads displayed during the programming cannot be skipped. Time Warner Cable's well-publicized Start Over - which the operator wants to implement across its systems by the end of 2008 - allows viewers to begin watching a show (and they have dozens) at any point during the broadcast. A newly-deployed feature called Look Back allows viewers to see any show in a 24-hour period.

What the early experiments with online video have taught content producers and networks is that consumers don't mind ads, as long as they're limited. In fact, the networks are reporting significant bang for the buck in distributing ad-supported online content. We assume that they will continue to push on-demand and "catch-up" services as means to provide 1) more convenient services to their customers; and 2) mitigate the risk of DVRs, online video, and of course their competitors.

And the operators certainly have a significant carrot to pursue here. Our own estimates (from our newly-released report New Advertising Platforms and Technologies indicates that only 10% of free VoD streams are being monetized through ad-support. We estimate that 38% of such streams will be monetized by 2012. This leaves a significant opportunity for the operators to put out more compelling on-demand content and attach advertising to it.

North American Broadband - Webcast Update

North American broadband service providers face increasing in-kind and over-the-top competition. As a result, their focus is shifting from selling bandwidth and competing on price to competing on applications, services, and consumer experiences.

Michael Cai, Director of Broadband & Gaming at Parks Associates, presented insights on the following topics during a webcast this week:

- Changing competitive dynamics in the NA BSP market
- Trends and outlook for the deployment of a variety of access technologies (DSL, cable modem, FTTx, broadband wireless, BPL)
- The impact of 700MHz
- Carrier deployment of value added services
- Strategies for broadband service providers to fend off competition from over-the-top service providers
- Market forecasts

Here's a look at some of the numbers and forecasts included:

- 80% of Internet households connect through broadband, and four service providers split 70% of the market
- WiMAX particularly interesting with FMS potential but Sprint's financial woes might slow the process
- Telcos will focus on multi-play bundles and VAS services that incorporate their wireless assets - Investments in new technologies like IMS, Femtocell, DOCSIS 3.0
- Service provides will face competition from not just in-kind competitors, but also emerging over-the-top providers
- Loyalty programs and other customer retention tactics will soon be deployed
- 75%+ of Internet Households connect through Broadband and four SPs split 73% of the market

Don't forget to checkout future webcasts!

RealNetworks' Puzzling Buy of Trymedia

RealNetworks just announced that it is buying Trymedia from Macrovision, for an undisclosed amount. I bet the price is much lower than the $34 million Macrovision paid two and half years ago. Macrovision has done a very poor job in integrating the Trymedia division and executing its gaming strategy. Most of the original Trymedia team members left the company after the acquisition and the company hasn't really announced any significant new customers in the past two years. Therefore, it's not surprising that Macrovision is offloading the division as part of its refocusing efforts.

However, it's not clear why RealNetworks wanted to buy Trymedia. The price must be really cheap. Is it for the DRM technology? ActiveMARK is indeed a very good DRM technology but also regarded as expensive. Many of casual games companies, especially the big ones such as Wild Tangent and Big Fish Games, have developed their own DRM solutions. RealNetworks also has its own DRM solutions. Maybe it wasn't as good as ActiveMARK?

Did Real buy Trymedia for a bigger distribution network? Possibly. But many of Trymedia's customers are Real's competitors on the retail front, since Trymedia mainly functioned as a white-label platform. Will these customers stay with Trymedia now it's owned by the the casual gaming powerhouse? RealNetworks used to have a white-label platform itself but it was not widely deployed since many of the potential customers did not like Real's terms and the fact that it wants to accentuate its own brands on the storefront.

Did Real buy for digital distribution of core games? Trymedia did have some business in distributing core games. However, it seems we are still far from having a big market for digitally distributed core games. Valve's Steam has been very successful and is gathering some traction. IGN's Direct2Drive follows. But overall physical retail still dominates the market.

So why did RealNetworks buy Trymedia? The official reason cited in the press release is "doubling its games syndication". Maybe with Real's new focus on advertising models, having a big library will be increasingly important.

I'll be interested in finding out the price tag when Real announces it in its SEC filings.

High-end Entertainment Systems Market Growing

According to a new report by Parks Associates, more people will be able to afford high-end entertainment systems in their homes as the market continues to grow.

Analysts say the high-end A/V market is in a major stage of transition with new advancements in wireless and powerline networking technologies. Soon PC-based systems from companies such as Dell, HP, and Cisco will compete for customers who traditionally purchased systems from JBL, Sony, and Yamaha.

For more detailed information, check out the full press release, High-end Entertainment Systems Market Projected to Nearly Double in Five Years.

The FCC-NCTA Throwdown

I wonder what ring name would best suit the FCC's Kevin Martin for a WWE-style Monday Night Smackdown against National Cable & Telecommunications Association CEO Kyle McSlarrow? "The Rowdy Regulator"? "The Bureaucratic Beast"? We may soon find out.

So, the latest volley being fired between the FCC and the NCTA war of words relates to charges that FCC chief Martin used "incomplete data" to present a "deceptive and false" case regarding the rise in average cable prices. The NCTA head sent a letter to Rep. Ed Markey, who chairs the House Subcommittee on Telecommunications & the Internet. It was during testimony in front of this subcommittee on February 13 where Martin – in arguing for tighter cable regulation – said that the cable industry’s prices had grown 100% in the last ten years.

It’s no secret that Martin advocates re-regulation of the cable industry in the name of lowering subscriber prices. For example, we blogged last November about the FCC’s consideration of enacting the so-called “70/70 Provision,” where regulators could step in and force cable operators to reduce the rates that they charge some programmers for access to their networks. And, Martin has been very vocal in advocating a la carte channel offerings, arguing that this will lead to lower costs for subscribers.

Now, acting in an advocacy role for consumers is laudable, and we all know the anecdotal complaints that we hear from consumers about increasing television subscription rates. However, McSlarrow’s letter to Congress points out what the NCTA sees as significant problems with Martin’s testimony:

• Martin ignores the fact that one-third of pay TV subscribers receive their services from companies other than the cable operators, including satellite and the resurgent telcos’ television services (Verizon FiOS and AT&T U-verse).
• In only stating the cable industry figures, Martin failed to note that Verizon’s rates (according to the NCTA) have actually risen faster than cable rates.
• Martin makes an “apples-to-oranges” comparison when talking about cable rates over a ten-year period. For example, in 1995, there was no digital cable service available; it was all analog/basic. As subscribers have moved from analog to digital tiers, their monthly cable rates have certainly increased, but so too have the number of channels they’re receiving, the ability to have a digital video recorder, and the ability to order movies via video-on-demand. Parks Associates’ own data indicates that 18% broadband households use premium VoD at least monthly. So, yes, the average revenues being reported by the major public cable companies certainly reflect a big jump in prices, but there are significant reasons for this that certainly aren’t related to price gouging.

Our analysis of cable ARPU back the NCTA's argument that merely stating the average prices paid by cable customers over a ten-year period fails to take into account all of the potential reasons why rates are rising. As you look at the four major public cable operators, you’ll notice that revenues per basic video subscriber (customers with at least basic service) have grown considerably since 2002. However, in all but one case, the pace of upgrades to digital cable services has also increased. So, too have the number of subscribers choosing bundled services packages, where the monthly cost is going to be higher, but customers are tying two or more services together in one bill. Now, it should be noted that the Cablevision and Charter numbers presented here are from Q3 2007, and the Revenue Per Basic Subscriber figure for Time Warner Cable is our own estimate based on their most-recent financial release.

One more point made by the NCTA was that the FCC is no longer reporting a widely-used metric call “price-per-channel.” The NCTA argues that this figure was in fact declining, but Martin no longer presents this figure to Congress, and in fact “ordered the Media Bureau to suppress this information from the public and from Congress.”

Let’s get ready to rumble.

How Will 'Net TVs Stack Up Against Cable?

The Monday, February 18 issue of The Los Angeles Times covers the trend of major television manufacturers adding network connectivity to their sets as part of new strategy to go "over-the-top" and provide direct access to Web services. It's a topic that we covered in a blog back in January, when we commented on the announcements and demos at the Consumer Electronics Show.

One question that today's article asks is whether a 'Net-connected TV is going to be a threat to cable companies. One key aspect of video delivery to watch is the race to pump out more high-definition offerings. As go the traditional TV providers, so will need to follow the over-the-top guys if they're going to keep pace. We anticipate that discerning consumers are going to look to more high-definition offerings in both linear and on-demand programs and movies as the number of high-definition displays in households continues to rise (see our blog about the latest numbers of HDTVs in U.S. households). Particularly with the digital transition set to take place in less than a year, we're doing to see a big bump in the number of homes that decide to upgrade to full digital and presumably HDTV displays and services.

To date, here are how the major television providers stack up in terms of high-definition offerings:

• AT&T U-verse: 40 high-definition channels.
• Cablevision: Currently offers 45 high-definition programming services.
• DirecTV: 90 HD channels as of the end of 2007, and is mulling the launch of a third satellite in 2008 to expand further.
• DISH Network: Expects to increase its national high-definition channel lineup from 76 to 100 channels by the end of the year.
• Comcast: By the end of the year, expects to offer 50-60 linear channels and ramp VoD offerings from 300 today to 1,000 by the end of the year.
• Time Warner Cable: Has 42 channels in high definition, eight HD movie on-demand channels and 112 HD on-demand titles.
• Verizon FiOS: 30 high-definition channels.

Both the Apple iTunes service (100 HD offerings) and VUDU (about 70 offerings) are close to matching the big boys with on-demand HD.

What will be interesting to see is how all of the other broadband video players respond to ramp up their own HD offerings.

In terms of the number of homes capable of receiving at least one HD stream in the next five years, this is going to increase significantly as broadband providers increase downstream throughput to reach at least 10 Mbps (assuming that an HD stream will require 5-7 Mbps) As of year-end 2007, we estimate that there were more than five million U.S. households receiving at least 10 Mbps service as of year-end 2007. This will grow to more than 30 million by year-end 2012.

Of course, there's no guarantee that the over-the-top players are actually going to have that kind of bandwidth with which to work. With cable operators such as Time Warner experimenting with capping the quantity of downloads (an experiment in Beaumont, TX), this could be a big threat to some of these 'Net TV experiments. If the cable industry pursues some punitive measures along these lines, it's really going to put the squeeze on the direct-to-consumer services. In a recent Newsweek column, Steven Levy argues that Time Warner’s most-limited download cap pretty much would limit customers to downloading two movies per month (5 Gbps)! It’s obvious that the cable industry is doing as much as it can to protect its bandwidth and to encourage use of its organic video-on-demand services, which have obviously struggled (at least the premium usage).

Mr. Mobile Goes to Pyongyang

Egypt’s Orascom, the largest mobile carriers in Middle East, recently announced their acquisition of a mobile license in North Korea, the most notorious totalitarian country in the world, and its plan to invest $400 million in the next three years to provide mobile communication services in the country, including a 3G network. This deal is certainly not glamorous as Microsoft’s $44 billion bid of Yahoo. Nonetheless, I think it carries the message equivalent to…say, Barnes and Nobles is going to open branches in Afghanistan, or something like that. I can’t help but trying to find something meaningful in it:

1. Are mobile carriers really running out of attractive markets where mobile penetration is low and growth potential is high? If we can remember, a year ago, Vodafone spent $11 billion on Hutchison Essar, one of the major mobile carriers in India. But there we are talking about a country with a burgeoning middle class and 10 million new mobile users every month. And North Korea? A country that is usually associated with nuclear tests, UN sanctions and human rights issues. Yeah, we know Cairo and Pyongyang are buddies. Still, if risk-averse investors are venturing into North Korea, they must have a plan and thought they had to take a bet to make exceptional profits. FYI, Orascom has a track record of entering regions largely forgotten by the rest of the telecom world such as Bangladesh and Zimbabwe.
2. The puzzling question is who is going to consume expensive mobile communications in N. Korea? The country did have 20,000 mobile subscribers at the end of 2003. But shortly afterwards, mobile phones were officially banned in 2004 in order to prevent the foreign culture permeation. In 2003, it cost $750 to enjoy a mobile service including the handset, which equates to years of salary for an ordinary worker. So the logical conclusion is that besides a handful of party and military elites, the foreigners, in restricted areas, of course, may be the initial target of the new mobile service. Is this a harbinger of a new round of economic reform and maybe a new special economic zone? I am not sure, but by all means, this is a significant signal for anyone watching the country.
3. Off the record, the paramount leader Kim Jong Il is a self-claimed Internet expert. Maybe he read about how cool it is to browse the Internet on a mobile phone and watch mobile TV, and pretty much the only users of the 3G network will be himself, his concubines and his confidants? And he signed the deal totally out of whims? Well, in that hypothetical scenario, I hope Orascom has already formed an exit strategy.

Yahoo Acquires Maven Networks

Even though Yahoo’s struggles are well known today, its presence as a leading portal is huge. Yahoo is one of few sites on the Internet that has the scale of linking together lots of content and services, and its presence will grow, particularly in Web video. Yesterday’s announcement that Yahoo's acqusition of Maven Networks for $160 million will be key to Yahoo’s long-term strategy in Web video. Maven is a Web video platform provider that gives it strength in publishing and aggregation on the Internet. This will allow Yahoo to provide more services to Web video providers, particularly Hollywood studios who seek support in syndication. Maven's platform is currently used to manage, distribute and monetize premium online video content for over 30 major media companies, including Fox News, Sony BMG, CBS Sports, Hearst, Gannett, Scripps Networks, and the Financial Times as well as hundreds of their affiliates.

Among the three major portals - AOL, Google, and Yahoo - I'd give Yahoo the edge as a company that may be in a good position to take advantage of the convergence between Internet-connected devices and content. The Maven acquisition is one part of this analysis - we sense that AOL and Google may be more content to operate behind the scenes in ad serving and brokering services, whereas Yahoo will offer more in the way of consumer-facing applications.

Hollywood Writers Get Piece of $11.3 Billion Online Video Pie

Bottom Line
Hollywood writers look to approve a new contract that will end their strike against the studios. A significant change to the new contract is compensation (2% of what the producer receives) for TV shows streamed over the Internet. It also includes 1.2% for movies streamed over the Internet (this information comes from a February 11 article in The Wall Street Journal).

In dollar terms, what is the total pie (online video revenues) for which the writers will now receive compensation? Parks Associates estimates that revenues (both user-paid and ad-supported) for online video will grow from $2.8 billion in 2008 to $11.3 billion in 2012.

Roll Out the Red Carpet
Joan and Melissa Rivers can breathe a sigh of relief; it looks like they'll be able to dish all they want during the red carpet walk at the Academy Awards in a couple of weeks. The Los Angeles Times reported Sunday that the board of the Writers Guild of America has approved the contract settlement reached with the studios. The next step is a guild vote on Tuesday, which could officially put the strike to bed.

As has been widely reported, the writers wanted a bigger share of the revenues from digital distribution, including downloads to the iPod and via services such as VUDU or Apple TV. If you look at the total online video market in 2007, this is still pretty tiny, but our forecasts have it growing significantly through 2012. All online video revenues (U.S.) for 2007 were estimated by Parks Associates at around $1.7 billion. This includes advertising linked to online videos, as well as TV downloads, movie rentals/downloads, and subscription services. Out of a total video entertainment revenue bucket of more than $100 billion (including TV advertising, box office revenues, and DVD sales and rentals), this is obviously a drop in the bucket. However, we forecast that online video revenues will grow to $11.3 billion by year-end 2012.

Advertising Dollars Not Included
According to today's Journal, the writers will only be receiving the flat percentage (2% for TV shows and 1.2% for movies) of the content distributed online. Furthermore, this current contract will not include any residuals for the advertising revenues generated from online video. This is significant, as the share of revenues coming from ad-sponsored online video actually accounted for 79% of last year's revenues! Granted, this is going to shrink to 51% in 2012 as user-paid services get up-to-speed. I'd fully expect that the writers are going to demand compensation for the ads when the next contract negotations occur in 2011.

Movies Still a Small Portion of the Total Pie
The movie side of the online video market is still a very small portion. We estimate that movie sales and downloads only comprimised $95 million in revenues in 2007. At Macworld, Steve Jobs noted that even mighty Apple had failed so far to ignite online movie downloads - he said that there had been seven million movies sold through iTunes. And, the low purchaes price of Movielink by Blockbuster in 2007 ($6.6 million) plus the shuttering of Moviebeam by Movie Gallery (which had bought it earlier in 2007 for an estimated $10 million) indicate that online movie distribution has a long way to go.

A big part of the challenge of online movie rentals and viewing has obviously been the ease (or lack thereof) of renting the title and actually enjoying it. We are actually optimistic that the newly-emerging download-to-burn efforts of major retailers (kiosks will be appearing soon at Walgreen's and Wal-Mart stores) will see success. Retailers are going to like the fact that they don't have to stock physical inventory and can see good returns for kiosks set up to sell lower-cost catalogue content. We're estimating that download-to-burn movie revenues will reach more than $1 billion by 2012.

TV Shows - Where Hollywood Strikes Gold
Finally, let's not forget about TV shows. Although the model for online TV show distribution has been via the download services (where an estimated $128 million was generated in 2007), the ad-supported piece of the pie for primetime and other TV shows is going to be significant over the next five years. Consider, for example, the strategies that are probably going to serve Hollywood best as they deal with an increase in DVR penetration and increased ad-skipping taking place. You can bet that TV shows streamed over the Internet (as well as an increase in on-demand offerings, including such features as Time Warner Cable's Start Over service) will be a key strategy in boosting ad dollars throughout the forecast period. With ad-supported primetime content now supported by all of the major broadcasters, however, look for a significant jump in revenues over the next five years. Our total forecast for ad-supported online video content is growing from $1.9 billion this year to $5.7 billion in 2012.

Concluding Comments
It'll be good for the writers to get back to work. As consumers have shown, they're willing to put their money (and their attention) towards well-written stories, whether delivered on the sliver screen, the PC screen, the mobile phone screen, the iPod screen, or the flat-screen sitting in the living room. We're expecting some solid growth in the online video space over the next few years, with significant announcements expected concerning new distribution rights and platform partnerships. As they say in Hollywood, "Don't change that channel!"

Now, how quickly can NBC get Scrubs back on the air?

Open Up and Say Android

Rumor has it, on Monday British chip player ARM will unveil a mobile phone that uses Google’s new open-source platform for cellphones aka Android. No details have yet been released (both companies were quoted as saying zip) but details aren’t really the point here in my opinion. It will be a phone. It will have Android. It will be written about by the press. Why? Partially because Google is involved and people are beginning to suspect that Google really runs the world. (They took over from the Freemason’s around 2003.) If Google does anything it must have significance because Google itself is so significant, right?

Beyond that, however, I think the real trend this highlights is the gradual opening up of the cellular world. Mobile phones are becoming more like PCs not only by having a more capabilities but also by having more in common. The balkanized technical landscape of the cellular world has always made it hard to develop applications and services. Google’s Android highlights efforts by big industry players to make mobile phones more similar and more usable by third parties.

HDTV Penetration and Sales Figures

Bottom Line
Our early estimate is 16-19 million units sold to U.S. consumers in 2007, with total penetration sitting between 35-38%. We'd love feedback on these figures.

Searching High and Low
So, just how many high-definition television sets were sold in 2007? You'd think that this would be a figure that everybody is quoting, particularly with with Q4 results coming in, and having just past both the holiday shopping season and the pre-Super Bowl television-buying spree. It turns out, however, that the numbers aren't quite as easy to find. We did find a recent Wired article that noted that HDTV sales preceding last year's Super Bowl were for 2.5 million units (quoting The National Retail Federation). However, given much of the promotions during the 2007 holiday season, it was expected that sales after Christmas but before the game would be fewer.

Given the difficulty in determining the HDTV landscape, we wanted to provide some guidance on where we think HDTV penetration and sales sit. Let's start with penetration.

HDTV Penetration
The Consumer Electronics Association pegged HDTV penetration at 33% of U.S. households as of July 2007, and has predicted HDTV shipments to dealers at around 20 million for the year. This is from the organization's report from July 2007 - U.S. Consumer Electronics Sales and Forecasts 2003-2008.

As of this writing, we are preparing to go to field with our third-annual National Scan of Technology Ownership study. This random digit-dial study will be a truly-representative survey of all U.S. households. In this study, we are asking directly about high-definition television penetration, so we’ll have a target number to provide in early March. In the meantime, we did conduct a study in December 2007 called The Changing Consumer Electronics Purchase Process, a survey of 2,700 U.S. broadband households. In this study, we find that 49% of broadband households reported owning at least one “flat-panel television” (it should be noted that we did not make a distinction as to whether these were actual high-definition televisions). Given 60 million broadband households in the U.S. as year-end 2007, this would equate into 29 million households (or 26% of all households). If you add the ownership of non-flat-panel HD tube televisions as well as non-broadband households owning an HDTV, we think that 36% penetration is reasonable. I’ll be interested to see how that ties back into The National Scan.

HDTV Sales
From The Changing Consumer Electronics Purchase Process, we have some interesting data on the different types of (potential) HDTV displays that were purchased in the past 12 months.

• 21% of the households reported buying an LCD flat-panel TV within the last 12 months (this would equate into 12.6 million households);
• 8% of the households reported buying a plasma flat-panel TV within the last 12 months (this would equate into 4.8 million households); and
• 6% of the households reported buying an HD tube TV (this would equate into 3.6 million households)

If we add up these numbers, we arrive at 21 million households and 21 million unit sales (assuming only one HD display per household). Taking into account that not all of the televisions were HD, I think that sales figures might be closer to 16-19 million, and probably closer to 18 million. I am really interested in seeing the results of our nationally-representative study to see if the numbers are aligning.

AT&T Fleeing Low Pricing Swamp

AT&T announced that it will raise the price of several of their DSL tiers by $5. The company's Basic (768kbps) tier is increasing from $14.95 to $19.95, their Express (1.5Mbps) tier is increasing from $19.99 to $25, and their Pro (3Mbps) service is increasing from $24.99 to $30. Indeed, Parks Associates predicted this to happen in a new report that we just published called U.S. Broadband Market Update 2007.

AT&T has to increase prices because they are losing the ARPU (average revenue per user) war, which has been hurting their bottom line. According to Parks Associates’ consumer analysis, in 2007, cable MSOs continued to lead DSL providers in ARPU. Their ARPU stood at $41, compared to $32 for telcos’ DSL services. Among all the telcos, AT&T had the lowest ARPU of $27. The difference between AT&T and Time Warner, the leader among cable MSOs, was an astounding $18.

Actually, this is not the first time AT&T lifted its prices in the past 12 months. Earlier, AT&T has increased the introductory price of its 1.5Mbps Express tier from $12.99 to $19.99 per month and 3Mbps Pro tier from $17.99 to $24.99. Meanwhile, AT&T’s Elite tier’s price went down from $49.99 to $34.99, in a bid to encourage upgrade. The tactic worked. In Q3 2007, 46% of AT&T’s DSL users were subscribing to speed tiers of 3Mbps or faster. Thus, these companies are hoping this strategy will narrow the gap between themselves and the cable MSOs.

The continuous price hikes indicate that low pricing is increasingly becoming an inferior competitive strategy in the fast-changing broadband landscape. Faster speeds, bundled services, differentiating value-added services and converged services that stimulate bundles will certainly gain in importance and popularity in 2008 and the years to come.

NVIDIA Buys Ageia

This will definitely affect both console and PC gaming. A dedicated Physics processing unit (PPU) delivers much better experiences for end gamers. Games using Physics SDKs from Ageia and Havoc do a good job in improving the gaming experience, but if the gamer’s computer has a dedicated PPU, the experience is even better. For power gamers who always want the latest and greatest, they will be willing to spend the extra money to buy PPU, similar to what happened in the early days of dedicated GPUs.

PPU not only makes the gaming experience more realistic since it delivers real-time physics, it also can potentially extend the value/life of a game since each time gamers will see different consequences to their actions. This type of ever-changing gameplay has been termed ‘emergent gameplay’ to illustrate the ability of a game to provide new experiences beyond the surface gameplay concepts. These concepts have been trickling down from the core PC and console games such as Half-Life 2 to more mainstream casual games as seen in recent titles The Tower of Goo, Gish, and Crayon Physics.

Nvidia has been a leader in GPU and although it has branched out into other areas, its root is always in gaming.Buying Ageia makes a lot of sense to us. As a matter of fact, a couple of years ago, Parks Associates made the recommendation to several large semiconductor companies that they should pay close attention to Ageia. Nvidia has the marketing muscle and operational scale to bring down the cost and make PPUs more mainstream.

Hello DVR/Goodbye DVR

I am somewhat leery about writing about digital lifestyle industry predictions the day after one of the most surprising Super Bowl victories. I am not a gambling man, but on Friday my prediction was New England by 10-11 points. Given the close game that the Giants had given New England during the last game of the regular season, I thought that the game would be closer than the spread indicated. However, I certainly didn't foresee a New York win.

That was some amateur prognostication; let's talk about one of the forecats that we recently issued for 2008. You'll recall that we ended our recent Webcast "What's Great in '08"with a few predictions about what we would expect to see, and we referenced one regarding video-on-demand:

"The first major cracks will appear in the movie distribution widows, and video-on-demand services will be enhanced by the earlier availability of certain content."

The video-on-demand numbers coming from the cable industry are pretty staggering. Using Comcast's own reported numbers for VoD streams in 2007, we estimate that 3.3 billion streams of VoD content were served to Comcast subscribers last year. Time Warner Cable was equally impressive, streaming an estimated 1.2 billion pieces of content. This is all positive, but the vast majority of that programming (90%) is the free content that comes as part of a standard digital cable system. So, it's not Hollywood blockbusters that are lighting up the VoD servers; it's HGTV or Discovery Channel programming. And, the cable industry needs to ramp up advertising for these programs to really start to monetize their potential.

The Hollywood offerings for VoD haven't caught on yet due to the timing of the content - it's stale by the time it hits the window. Basically, the breakdown of movie release windows is as follows:
1. Theatrical
2. Hospitality (airlines and hotels): +2-4 months
3. Home Video/Rental: +4-6 months
4. PPV/VoD: +6-9 months
5. Premium TV (HBO, Showtime, etc.): +12-15 months
6. Networks/Cable TV: +24-30 months
7. Syndication: +36-42 months

Given the rise of Netflix (7.5 million subscribers as of year-end 2007) and Blockbuster's TOTAL ACCESS (3.1 million subscribers as of Q3 2007) DVD-by-mail rental businesses, it's no wonder that premium VoD offerings are hardly touched. If you compare the results from our two Global Digital Living surveys, you find that the needle has hardly budged in terms of the percentage of broadband households indicating use of a premium VoD service on at least a monthly basis. At the end of 2004, it was 16%; at the end of 2006 it was only 18%.

Pay television providers, however, are going to be key to Hollywood's re-thinking of the movie release window timing. Even as the next-generation DVD format war appears to be winding down, the DVD cash cow has lost much of its luster in the past few years. We have long argued that the stall or even decline of DVD sales and rental revenues would be the primary impetus for some "window cracking." Now, it looks as though this may be a significant trend for 2008.

We've already seen some experimentation in day-and-date release in the VoD distribution channel. Comcast has experimented with it in the Pittsburgh and Denver area. Verizon notched a win last summer by receiving the rights to air High School Musical 2 via FiOS on-demand prior to the August 17 showing on The Disney Channel.

Now, Cablevision has entered into the day-and-date world with a service that will allow New York-area subscribers order a DVD and receive instant access to titles such as "American Gangster." This should be the first of many such announcements that we see this year as pay TV operators seek to strengthen their on-demand offerings and as Hollywood continues to grapple with significant changes to business models, brought on by both declining audiences and because of technology's impact on their traditional entertainment services.

The DVR is definitely a double-edged sword for pay TV operators, and I would expect that we'll see on-demand offerings increase in scale, scope, and content availability to offset the expected rise in time-shifting capabilities in U.S. homes. Consider, for example, that DVRs provided by service providers reached 25 million households in 2007 - that's more than one-third of all homes with pay digital TV services (and is projected to be more than two-thirds by year-end 2012). Although DVRs (and multi-room DVRs) will continue to be critical components of TV service provider offerings for the foreseeable future, I'd expect that we're going to see pay TV providers and their content partners seek ways to push more on-demand content to consumers (with non-skippable ads).

That's enough on this subject for today. I've got to go online to find all of the great Super Bowl commercials that I missed thanks to my frequent visits to the chicken wing table!

Will Yahoo Survive as An Independent?

Last Friday, Microsoft’s unsolicited bid for Yahoo made many Yahoo investors very happy. Long-battered Yahoo stock price soared nearly 50% in one day with surging trading volume. But the closing price on Friday fell about $2.50 short of the bid per-share price offered by Microsoft, partly due to Microsoft’s stock price decline that day (a portion of the deal is financed by Microsoft’s stock), partly a reflection of market’s concern that the deal might not consummate in Steve Ballmer’s way.

There are many questions raised by this bid, anti-trust concerns, integration difficulties due to overlapping businesses, culture clashes, etc. The prospect of the deal is further clouded after Google manifested its objection to the deal during the weekend and rumor has it that Yahoo is considering allying with Google as a means to repel Microsoft’s offer.

Will Yahoo remain independent? Suitors for Yahoo are just a couple in this world. Google is one, but Google’s bid for Yahoo will face stiff anti-trust scrutiny that Google has to make substantial asset divestitures to satisfy regulators. Microsoft is making its largest bet ever, but clearly Yahoo saw the offer price a little lean. Its “strategic alliance talk with Google” might force Microsoft to raise the bid.

Therefore, it all comes down to how badly Microsoft wants Yahoo. At a good price between $35 and $38 a share, Yahoo is likely to surrender its independence under the pressure from shareholders, given the company’s poor track record of boosting search advertising revenue and its vulnerability to a downturn in the display ad market.

Who Won the C-Block of 700 MHz?

The national C-block of 700 MHz auction hit $4.6 billion yesterday. Reportedly, the bidding price was $4.7 billion, just $100 million over FCC’s reserve price. Although the news came at no surprise because Google announced it harbored just $4.6 billion before the auction, the win represents a stride for a proposed “open access” mobile network in the U.S.

Just for some background information, despite early opponents, Google had successfully lobbied the FCC for the “openness principles” including open application and open device attached to the current auction, debating that they will result in a proliferation of better wireless Internet services for American mobile users.

The interesting and critical question right now is who won the C-block? It is like we watched a good movie without knowing the ending. No one but the FCC knows at this point because the agency decided that the bidders’ identities will remain secret until after the auction closes. But we have the right to guesstimate, don’t we? The winner must simultaneously have three characteristics:

1. A deep pocket to pay $4.7 billion for the spectrum, or at least having enough credit to leverage the payment
2. It must be motivated enough, or even desperate to hold the spectrum
3. It must be confident or experienced to assemble an ecosystem of network gear vendors, mobile device manufacturers, CE manufacturers, software developers and financial community to support the open access network

Google, AT&T and Verizon are the usual suspects among the bidders. I think, however, AT&T and Verizon, especially Verizon, are more likely to be the winner. Why? For Google, at this point we don’t know much about its plan except its determination to ensure the open-access rules. Does it really want to build a network or just grab a large piece of mobile advertising and mobile services market by forming wide partnerships? On the other side, both AT&T and Verizon have all the motivation and ability to build a national 4G network. But, AT&T already paid $2.5 billion last year for Aloha’s 700 MHz spectrum that covers 196 million populations. Will it splash $4.7 billion again to beef up its 700 MHz assets? It may, but I doubt. While Verizon initially opposed the open-access rule, its CTO acknowledged that 700 MHz is optimal for its 4G LTE network because of its physical merits. And, it may have sanely realized, learning from Facebook maybe, an open ecosystem could be beneficial to everyone.

If Verizon is the likely winner and AT&T already has some assets in its barn, what about the other two mobile operators – Sprint and T-Mobile? Well, Sprint just joined hands again with Clearwire to set up a national WiMAX network, which champions an open network. Its new CEO is also working on some major deals and reconstructions that hopefully will push the Xohm project forward rapidly. The smallest of the four, T-Mobile needs to hurry up on its mobile broadband network construction. True, its operational results look good so far thanks to smart marketing, fixed-mobile convergence initiatives and superb customer service. But, its long-delayed 3G network may squeeze it into sidelines when all the other three become entrenched in mobile broadband offerings. Someone may argue that a late comer could potentially enjoy the benefits of heightened consumer awareness of advanced data services, more mature ecosystem and cheaper devices. Yet, even taking these factors into account, T-Mobile may still fight not to become the child left-behind.

Rebuttal from Doublefusion

It didn't take long before I received the following rebuttal from Jon Epstein, CEO of Doublefusion.

"I think 2K, Rockstar, Ubisoft, THQ, NCSoft, Sony Online, Eidos, Midway and the many other publishers we work with would be surprised to hear their titles characterized as "B and C-type" games. Of course, Ford sells a lot more cars than Ferrari, so Justin's analogy is accurate in regards to our respective successes in the sales field."

See what I meant? We want healthy debate but bickering leads to more quarrels and that's not good for the industry.


If you already forgot the original comments from Justin Townsend. Here it is again.


The Ferrari Of In-Game Ad Networks?
Of course, IGA is not the only company eyeing the lucrative ad industry around video games. Double Fusion, for example, notably has begun retrofitting back catalog titles for ads, and supports interactive ad elements. We asked Townsend directly why IGA is different.
"It's a fine line; it may be a nuance," Townsend says, "But our focus is predominantly on mainstream gaming titles, be it PC or console, whereas Double Fusion is not so mainstream. Yes, you can have all sorts of interactive ads inside what you might call B and C-type games, but it's unlikely something like that would be in Madden NFL or a similar type game. On the surface it's not dissimilar, but I guess the difference between driving a Ferrari and driving a Ford."

IGA Worldwide is a Ferrari and Doublefusion is a Ford?

This was a quote from a Gamasutra interview with Justin Townsend, the CEO of IGA Worldwide, one of the two independent in-game advertising networks focusing on the PC and console platforms. I guess he's referring to IGA Worldwide as a Ferrari and Doublefusion (the other independent) as a Ford? I'm sure Jonathan Epstein at Doublefusion will send over his rebuttal soon...

"The Ferrari Of In-Game Ad Networks? Of course, IGA is not the only company eyeing the lucrative ad industry around video games. Double Fusion, for example, notably has begun retrofitting back catalog titles for ads, and supports interactive ad elements. We asked Townsend directly why IGA is different."It’s a fine line; it may be a nuance," Townsend says, "But our focus is predominantly on mainstream gaming titles, be it PC or console, whereas Double Fusion is not so mainstream. Yes, you can have all sorts of interactive ads inside what you might call B and C-type games, but it’s unlikely something like that would be in Madden NFL or a similar type game. On the surface it's not dissimilar, but I guess the difference between driving a Ferrari and driving a Ford."

IGA Worldwide has made a string of significant announcements in the past several weeks, including a strategic partnership with NBCU, new investment from several Japanese firms, in-game advertisement for EA's Burnout Paradise game, and several publisher relationships in Spain and other countries. However, the industry is still young, and bickering doesn't serve the fledging market very well. Come on, even Hilary and Obama were showing some love for each other after last night's debate. We are all in the same boat. To have enough inventory and audience, it's important to work with both established publishers and emerging publishers relying on alternative business models. The battle between Microsoft (with its Massive division) and Sony (which recently announced its own in-game advertising SDK) is already bad for the industry and we really don't need further fragmentation.