More consumer electronics/digital rights management/adaptive streaming announcements

This past week exemplified the move that companies traditionally in the digital rights management space are making in connected consumer electronics. I have talked about this trend in several posts this year. Here are the announcements:

Widevine and Panasonic

Panasonic Corporation selected Widevine as its preferred provider of video optimization and digital rights management (DRM) solutions. Widevine’s video optimization will provide adaptive streaming and virtual DVD experiences, while its DRM will keep content protected on Panasonic consumer electronics such as Viera® connected TVs, Blu-ray disc players and more.

As a preferred provider, Widevine’s client will be included on millions of Panasonic connected media devices, enabling content providers to securely deliver content utilizing Internet protocols to the Panasonic device of the consumer’s choice. Widevine’s client will be initially installed on Panasonic Viera connected TVs, followed by other Panasonic devices in the near future.

Irdeto and Logitech

Irdeto announced announced on Wednesday that its technology has been selected to enable access to premium online content from the Logitech Revue™ with Google TV™. Based on the Google TV platform, Logitech Revue offers – in an integrated user interface – TV programming, the Web and Android-based apps that can deliver premium content services and enable entirely new experiences. Logitech is drawing on Irdeto’s technology to deliver premium content services through apps such as Netflix Watch Instantly.

Top Trends in the Last Year

We're continuing to compile the key takeways from the CONNECTIONS conference last week. One interesting compilation of information came from our own Stuart Sikes, as he opened the conference proceedings on Tuesday, May 1. In introducing our first keynote from Ray Sokola (Motorola), Stuart provided a summary (from the Parks' analyst team) of the top events and trends we all noted from the last 12 months. Here's the list:

• Broadband penetration in the U.S. will surpass 50% of residences around mid-2007. On a global basis, statistics indicate that we are approaching the 300 million household mark.
• The two large U.S. telcos – AT&T and Verizon – officially entered the IPTV space in 2006, accounting for more than 200,000 subscribers in their first full year of availability. On a global basis, Europe surpassed Asia in terms of overall subscribers, and we’re seeing much more activity in Europe in terms of cross-border competition among different telecommunications providers. Parks Associates’ year-end 2006 estimate for the total number of IPTV subscribers worldwide sat north of four million.
• Entertainment content disruption accelerated, as MySpace was bought by News Corp. and YouTube was sold to Google – leading to the “NewTube.”
• The launch of all the three new game consoles (Microsoft Xbox 360, Sony PlayStation3, and the Nintendo Wii. The Xbox 360 and its associated content services are now positioned – according to Microsoft – as second only behind Apple for video downloads.
• Agreement on the underlying protocols that make up the next Wi-Fi standard – 802.11n – was reached. We’re already seeing high volume shipments of Draft-N products, and wireless is aiming at the entertainment and multimedia space.
• Apple announced a month ago that they had sold 100 million iPods (plus two billion music downloads as of year-end 2006), a testament to consumers’ desire for more accessible and easy-to-use media enjoyment services and products. In addition, the company released AppleTV, which may be a significant boost to the growth of multimedia networks, where PCs and CE seamlessly interoperate to enhance entertainment applications.
• Microsoft officially launched the Vista operating system, which places a new level of media creation and consumption capabilities in front of end-users.
• Virtual economies are booming. From World of Warcraft's nine million subs and Second Life's more than five million users, the online gaming community is becoming more entwined with unique social and commerce applications.
• Digital rights management issues continue to ebb and flow:

- High-end media server company Kaleidescape was found to be within compliance of the DVD Copy Control Association's license to the Content Scramble System, the method used to encrypt video and audio data on DVDs. Speculation is that this may open the door to “managed copy,” where the studios agree that consumers can take their owned DVDs and make a copy on a server for safekeeping.

- On another positive front, the head of the Motion Picture Association of America (MPAA) – Dan Glickman – recently affirmed the studios’ blessing on “authorized copies of the content they purchase.”

- Always making headlines whenever he speaks, Steve Jobs at Apple recently discussed the abolition of rights management for digital music. After all, he argues, fewer than 2 billion songs were sold under DRM with digital music services (such as iTunes); at the same time, the music industry sold 20 billion unprotected songs on CDs.

- At the same time that some positive news was coming out of the industry, legal challenges remain. Cablevision was recently blocked by a federal judge from continuing its RS-DVR service, which basically put time-shifting capabilities in the head-end. We view Europe and Asia as much more significant markets for “nDVR” applications. And, XM Satellite is being sued by music publishers for allowing subscribers to copy broadcasts to MP3 players.

• Home control systems companies continued consolidation with Nortek and Legrand acquiring LiteTouch & Gefen and Vantage and US Tec, respectively. BestBuy released its Home System in a Box, called ConnectedLife.Home. BT and Bell Canada marked the entry of telcos into the home security space.
• Retailers, service providers, and third-party entities are discovering that there are significant businesses to be built from digital home tech and customer support services. Revenues from Best Buy’s Geek Squad services (including product installation, configuration, troubleshooting, and repair) alone exceed $1 billion in U.S. We’ve also seen other major big box retailers either launch or rebrand their own digital home technology service offerings. Circuit City launched its firedogSM service in September 2006, and OfficeMax® just launched ctrlcenter™ for remote tech support in April 2007. Both CompUSA and Staples rebranded their tech support services, to TechPro and EasyTech, respectively.

Verimatrix Announces Support of Microsoft PlayReady DRM for VCAS 3.0 MultiRights Solution

Verimatrix announced it has licensed Microsoft PlayReady Server technology in order to provide integrated MultiRights™ support for devices that support Microsoft PlayReady digital rights management (DRM). As a component of the Verimatrix Video Content Authority System (VCAS™) 3, the company’s MultiRights™ framework enables transparent rights management across a range of networks and devices for streamlined multi-network and multi-screen video services.

Microsoft PlayReady is the latest DRM technology that Verimatrix is supporting through its MultiRights strategy. Under a common unified VCAS 3 security solution, Verimatrix’s digital TV operators can extend their multi-screen services to a wide range of platforms and devices, including those that support Microsoft Silverlight. PlayReady technology is currently protecting content for several top service providers including Netflix, BSkyB’s Sky Player, Yahoo! Japan and Canal+ among others. Furthermore, the Digital Entertainment Content Ecosystem (DECE) selected PlayReady as one of the DRM technologies it will support.

Who's going to control the "Digital Locker"?

We've been pleased to have Mitch Singer from Sony Pictures and the Digital Entertainment Content Ecosystem (DECE) coalition speak at our recent CONNECTIONS events and speak about the potential of "digital locker" services. Roughly defined, these would be services that could authenticate and manage a wide variety of user-owned content in a virtual environment. One key element of the digital locker is widely agreed-upon digital rights management protocols, where multiple connected devices across a wide array of platforms can connect to content coming from multiple sources. The other key is the virtual storage and management of content that will become more important as the number of Web-connected media players (smartphones, tablets, TVs, Blu-ray players, etc.) proliferate.

The DECE is not alone in pursuing the development of digital locker solutions. The Walt Disney Company is promoting Keychest, which Disney CEO Robert Iger describes as a way to allow a consumer to purchase content and play it back on multiple platforms without having to worry about interoperability.

Now, there is the report from CNET that Apple is in discussions with the studios to enable iTunes users to store their content on the company's servers. Apple has told the studios that under the plan, iTunes users will access video from various Internet-connected devices.

We've taken an early look at consumer acceptance of a digital locker type of service, and have found that 30% find the idea highly appealing. I think that the trust issue is going to be more of a problem with the studios than the consumer!

Is the Fancast Store a Mistake?

In the age of online entertainment, consumers get virtually unlimited choice of content and unlimited means to entertain themselves. They can stream their favorite episode of Lost from ABC.com, watch full-length movies on Hulu or even download episodes of shows like the The Office from NBCDirect and they can do it all for free.

These choices offer consumers unprecedented amount of control over their entertainment experience, which is bad news for incumbent content aggregators: cable, satellite and IPTV companies. The incumbents have to create a way to deliver increasingly-sophisticated entertainment to consumers for free.

Amy Banse, the president of Comcast Interactive Media, alluded to some of these
challenges during her keynote at the Parks Associates CONNECTIONS™ event in July
(http://parksassociates.com/events/connections/2008/attendees/materials.htm).

Comcast is a great example of an incumbent provider working hard at establishing new entertainment avenues for consumers. In 2006, it launched Ziddio, a user-generated portal similar to YouTube. It followed up with FearNET.com, a horror movie and community site. In 2008, it launched Fancast, a video aggregation and streaming site.

Not all its experiments have been a success. In August, Ziddio has closed its doors (or shut down its servers) for good. FearNET, on the other hand, is alive and growing. In 2007, Comcast expanded it onto the video-on-demand (VoD) platform. This is a critical step for Comcast, as it is trying to build a holistic consumer experience, linking TV, internet and mobile into one.

Comcast’s latest foray into the digital media distribution is the launch of it’s Fancast store in September of 2008. Using the store, any broadband customer in the US can download from over 3,000 titles. Comcast plans to expand the library to 10,000 by the end of 2008. With the new store, users will have an option to buy or rent the video and download it to their PC at prices comparable to Amazons: $10-15 to buy and $4 to rent.

This latest expansion makes me pause to think about what Comcast is trying to accomplish. Have they not learned from iTunes, Hulu and Veoh? What about Netflix and Walmart, who got their own bruises trying to set up digital distribution?

Without a doubt, Comcast will face many of the same challenges as distributors listed above, however, in Comcast’s case, there are significant benefits that would make this strategy worth the risk and give Comcast a chance to succeed. Let’s take a look at each in greater detail. First, let’s consider the challenges:

•Unfavorable economics. Same argument as applied to Hulu and Veoh and Joost applies to Comcast: content owners keep the bulk of the video advertising revenue. Although Comcast did not comment on the revenue arrangements, it did admit that content owners sell ads in the videos featured on Fancast, which usually means that content owner retains 70-90% of the revenue. With the launch of the Fancast store, Comcast acquires an additional revenue source: consumer purchase and rental fees, however, it is also likely that content owners keep the bulk of those.

•Digital rights ruin consumer experience. Content owners manage media rights very carefully, to ensure revenue maximization. This would hinder the delivery of the holistic consumer experience mentioned above. For example, a movie, or a TV episode may be available on Fancast site, but not available on VoD.
Additionally, content owners are adamant about protecting their content with the Digital Rights Management (DRM) software. Fancast is no exception, using Windows Media DRM. DRM further restricts how viewers can enjoy video, for example, consumers can only watch video on a PC, not a Mac, mobile device or a TV.
Such limitations also interfere with “for pay” business models outlined above. Rather than downloading a heavily-protected video file that can only be watched on a PC, consumers will opt to buy (or rent) a DVD, which can be watched on TV or PC and now even on a mobile device as some DVDs include digital versions.

•Competition will hinder success. Online video field is extremely hot with many hands reaching for very little revenue. From the broadcast networks to the device manufacturers, companies like ABC, NBC, Apple, and Microsoft are all striving to deliver the next generation of the consumer entertainment experience. Standing out in this crowd will require an exceptional product with clear differentiation.

There are, however, opportunities for Comcast in pursuing this strategy:

•Content owners crave secure, multi-platform distribution. As consumers increasingly engage in concurrent media consumption and ad avoidance, the effectiveness of advertising in media decreases. Advertising revenues pose the bulk of revenue for many content owners and they want to ensure that if effectiveness of one channel, such as TV, diminishes, they have another channel, such as internet to supplant it with. Service providers such as Comcast make very good partners for media companies, potentially yielding better revenue splits and more lenient distribution rights.
According to Alix Cottrell, general manager of Fancast, this is the route that Comcast intends to follow. Current plans will allow Comcast customers with VoD or DVR to either copy online content into their VoD folder or have it recorded on their DVR (if the show is only available on linear TV). Comcast plans to implement this service within 12 months. In the next 24-48 months, Fancast also plans to launch a mobile component. Initially, consumers will still have to download content to PC and then port it to a mobile device. If the Clearwire partnership is successful, however, Comcast may also launch a direct-to-device service on par with at&t’s Mediaflo or Verizon’s VCAST. Finally, thePlatform, Comcast’s video delivery arm, has recently acquired Chirp, a social application developer, suggesting that Comcast is gearing to dramatically expand social features of its Fancast service.

•Can build biggest libraries. As a media aggregator and distributor, it is easier for Comcast (and most service providers) to build large video libraries. It can leverage its linear distribution relationships to secure content from many providers. It is also not bound by the media ownership regulations that restrict some of the other aggregators. For example, Hulu still doesn’t have ABC’s and CBS’ content in its libraries and it likely never will. Even if the ideological differences between partners get resolved, media ownership regulations will preclude Hulu from adding more content partners.

So does Comcast’s launch of the Fancast store make sense? Will the store succeed? I think it’s safe to say that it does and it will. Of course it is important to keep in mind that success will NOT be measured by revenue or profitability of an individual property like Fancast. Fancast will, however, condition consumers to seek video online and will also build stronger links in consumers’ minds between internet video and traditional TV. As content owners relax their rights requirements, Comcast will be in the position to deliver the holistic consumer experience, which envelops consumers in content (and advertising) regardless of where they are or which device they are using. That service may even be compelling enough for consumers to consider opening their wallets!

Cisco and BT Collaborate on Content Delivery to Connected Devices

As we look at the rapid evolution of "TV Everywhere" services beyond simply authenticating cable channel lineups on PCs, the role of connected CE as premium video clients is a key trend. You can see the pieces coming together, as publishers join forces with content and ad management companies, content delivery network providers, digital rights management and adaptive streaming purveyors, and companies that specialize in consumer electronics clients.

Now, things are starting to get even more integrated, particularly as we look at the giants of network infrastructure - Cisco, Alcatel-Lucent, Motorola, Nokia Siemens, Ericsson, etc. Cisco, in particular, has been making news recently, first with the acquisition of ExtendMedia, which brings expertise of how to deliver multi-platform video over IP. Now, a collaboration with BT, in which BT has chosen Cisco's Content Delivery System as the 'backbone' for its, open online video delivery network - Content Connect - designed to improve the experience of watching and listening to digital content on the web.

The Cisco Content Delivery System (CDS) using medianet technologies enables BT Wholesale to establish broadband as a TV platform. Content Connect will deliver digital content to any computer, TV or mobile device on behalf of UK internet service providers giving broadcasters access to a large end user base – irrespective of service provider or technology.

I'd say stay tuned. I would think that we would see some additional acquisitions and announcements coming from these infrastructure leaders.

Blockbuster, Google, and Lessons Learned about Broadband Video

The advent of digital distribution for theatrical, television, and user-generated content comes at a time of enormous pressure for the traditional entertainment industry. After enjoying years of strong box office and DVD rental and purchase revenues from the late 1990s into the early part of this decade, growth in U.S. revenues has slowed significantly. After averaging a healthy growth of around 8% between 1996 and 2002, box office revenues haven’t budged since 2003 (and in fact declined nearly 6% between 2004 and 2005 before rebounding 6% between 2005 and 2006). DVD rentals and sales have also lost their luster in recent years. After very strong growth between 2001 and 2004 (nearly 240%), DVD sales revenues were close to flat between 2005 and 2006. DVD rental revenues have also settled into a slower growth rate in 2005 and 2006 – around 10-14% by many estimates.

Television networks have similarly struggled with the impact of digital distractions (the Internet, game consoles, DVRs, etc.) that have gradually eroded the primetime audience for many programs (American Idol notwithstanding). Their revenues have been impacted in the form of decreased ad "upfront" ad sales (typically referring to the early buying of advertising for the fall primetime season). In June, The Wall Street Journal reported that upfront sales had rebounded slightly compared to previous years, but television networks continue to reevaluate their ad strategies as major advertisers seek alternative outlets, particularly the Internet. When an online video service such as Joost can land 30 major brand-name companies as primary advertisers (among them Coca-Cola, Nike, and HP), you definitely sense that the rules for traditional media have officially changed.

We've been watching how both traditional and upstart media outlets have been addressing digital distribution, culminating in a report that was co-authored late in 2006 by Michael Cai and me (Internet Video: Direct-to-Consumer Services). In that report, we found that while big media of all types were actively engaged in digital distribution of some form, pure user-paid movies-on-demand services would consitute a much-smaller pie of total U.S. revenue than ad-supported models, including the work of the major TV networks to put delayed primetime programming on the Interenet - embodied by the efforts of ABC.com, CBS's Innertube, NBC's Rewind, and Fox Corp.'s MySpace. So far, this has held true, as the major broadcasters are still reporting good returns on their Web properties (as in an active viewership, no signs of cannibalization, and the ability to charge higher rates for ad inventory). Outside of the iTunes TV show and movie download service (which at last report had generated 53 million downloads), we indicated that the user-paid services - and particulary those specific to movies would face hurdles. In the report, we wrote:

"Internet Video for movie content faces stronger challenges in terms of technological challenges, resistance from major retailers, lack of easy connectivity between broadband services and the television, and the continued consumer reliance on tangible media."

Our own consumer data backs the notion that the early successes for broadband video are certainly those efforts more focused on shorter ("snackable") videos, versus a movie download. The good news is that the number of broadband users reporting paying at least monthly to download or stream video doubled between 2005 and 2006 (we compared data from a couple of our studies - Digital Entertainment: Changing Consumer Habits and Digital Media Habits). Five percent of broadband users in Q3 2006 reported paying for video streams and downloads. We're going to be really interested at the results from Digital Media Habits II, which should be available quite shortly. However, consumers active in watching video on the Internet were twice as likely to be downloading short clips (such as movie trailers, news clips, animated cartoons) than longer videos such as feature-length movies or TV shows).

The challenges of selling premium video content have been reflected in a couple of significant announcements from the user-paid broadband video space. First, it was announced on August 8 that Blockbuster was acquiring the online movie service Movielink. Now, rumblings about Blockbuster's potential acquisition of Movielink had been around since March, when the purchase price was rumored to be $50 million. In last week's news articles, the purchase price was rumored to be $20. It turns out that both of these price points were off by several multiples. In an August 14 SEC filing, Blockbuster reported that it had purchased Movielink for $6.6 million in cash. For a service that was created from a reported $100 million in investment from the major movie studios, this is one clear sign that a pure movies-on-demand business over the Internet just isn't ready for primetime.

The second broadband video announcement of significance came on August 13, when Google dropped its user-paid video services, the Google Video Store. Both of these news items certainly reflect the continued challenges facing the online services, but also opportunities for content developers and distributors. We wanted to share a few thoughts about both of these news items.

Blockbuster Seeks an Edge

As a company, Blockbuster’ experience in the video distribution business largely mirrors the opportunities and threats for the industry as a whole. As a movie rental company, Blockbuster’s reach in the U.S. is unparalleled. The company operates more than 5,000 stores in the United States and its territories. In 2006, Blockbuster reported gross profit of more than $3 billion on revenues exceeding $5.5 billion. However, the company’s financials have declined in the last two years. In 2006, Blockbuster experienced a 3.1% decline in DVD rental revenues and an 18% decline in DVD sales revenues. Blockbuster’s core rental business has been under pressure by Netflix, which held a nearly three-to-one margin of subscribers to its online DVD rental service than Blockbuster. Mass retailers, Blockbuster notes, also serve as a threat to its DVD rental and sales businesses because of a movie studio practice known as “sell-through pricing.” This means that the studios release nearly all DVDs to retailers at a price low enough to allow them to entice customers with a small mark-up of the price on their end. For large volume retailers such as Wal-Mart or Target, this is less of a challenge, as they can sell higher volumes of movies than a Blockbuster. For Blockbuster, however, this puts pressure on them.

Blockbuster is no stranger to experimentation with online content. In 2000, it announced a deal with Enron and other broadband providers to deploy a video-on-demand service over 1.5 Mbps DSL lines. Needless to say, given the collapse of Enron and the fact that broadband connections were not nearly as widespread nor as robust as they are today, that the effort was shelved. Now, Blockbuster has announced the purchase of Movielink, one of the first online movies-on-demand services that was established by the major motion picture studios in 2002.

The recent commentary and analysis from major news and financial media outlets has provided an interesting insight into both Blockbuster’s business and predictions about the overall broadband video-on-demand space. Our own takeaways from this sale include the following thoughts:

• Blockbuster is perceived as a follower of Netflix. Netflix initiated the online DVD rental business in 2001; Blockbuster began its online DVD rental business in 2004. Netflix announced its digital movie service in January 2007 (and it was commercially available in June 2007); Blockbuster announced its acquisition of Movielink in August 2007.
• Blockbuster’s brick-and-mortar retail stores are seen by the investment community as both a blessing and a curse. They are a curse, because they account for high overhead. However, recent comparisons of the growth of Blockbuster and Netflix’s online DVD rental businesses indicate that Blockbuster has been experiencing much higher growth in the last year, probably because the retail stores are available for more flexible rental options.
• Movielink et. al. hasn’t been popular because of restrictive digital rights management that doesn’t provide full flexibility. We'd also argue that the lack of freshness of the content is also a reason. Why use a movie download service if the content isn’t any newer than what one could get via a DVD rental?A more successful model for broadband video is wide distribution of content across multiple aggregators, as opposed to creating exclusive portals.
• A more successful model for broadband video is wide distribution of content across multiple aggregators, as opposed to creating exclusive portals. An early lesson learned by the TV broadcasters was that - certainly in this early stage - that exlusive portals providing only one source for accessing the content is a non-starter among an ever-fragmented audience. Certain pockets of the viewing audience, including teens and ethnic groups, are already dramatically changing their media consumption behavior. As the viewing audience becomes fragmented, the channels need to diversify. For media companies trying to establish their own online presence, it is essential to define a clear identity for each of their online channels.

Google Bails on User-paid Content

The Google Video Store was announced in January 2006. This service provided a variety of video, including sports, movies, and TV shows. Google offered these programs for download or rental at prices ranging from about $1 to $20. Although Google's ability to drive revenue from search-generated ads is unmatched, the company - according to critics - struggles in areas outside of this core competency. The Google Video Store was one of these areas. Critics such as David Pogue at The New York Times panned the site its poor design and for not allowing users to play copy-protected content on portable devices such as iPods and notebook computers. Second, Google faced an identity crisis of sorts in providing user-paid and relatively high-value content while at the same time pursuing (and ultimately acquiring) YouTube, which was made famous (or infamous, depending on one's stance) by providing lots of user-generated video and for (in some cases) serving as a clearinghouse for copyrighted content. One could argue that Google's efforts managed to alienate two key constituencies - users who critized a lack of flexibility in enjoying their paid video, and owners of high-value content, suspicious of Google's motives and upset that YouTube wasn't (in their minds) acting quickly enough to squelch the posting of copyrighted content.

On August 13, 2007, it was announced that Google shutting down the user-paid service, ending the 19-month experiment. Our takeaways from Google's pullback including the following thoughts:

• Google’s own YouTube posed a threat to a user-paid video service. Google is struggling to gain credibility with major content producers, because the YouTube site has come under fire for its use as an illegal distributor of copy-protected content.
• As in the case of Movielink, consumers struggled to find value with copy-protected broadband video when 1) much of it was free to view (illegally) on YouTube (or peer-to-peer sites); and 2) a DVD can be played pretty much anywhere.
  Google’s core strength lies in ad-supported Web content, and it has struggled with challenging PayPal with Web payment schemes. This means that advertising will be Google’s “currency” of choice for generating revenues on the Internet.
• Google has sown the seeds of discontent with consumers, who feel burned about having paid for broadband video clips and who longer have access to that content. This can raise even more skepticism about the broadband video services – why would a consumer trust any of these sites versus buying a DVD that they can own “forever?”

Reshaping the Internet Video Market

Just as we put the finishing touches on our Internet Video: Direct-to-Consumer Services (Second Edition) report this week, word came that a couple more Internet video pioneers were closing their doors, or at least seriously revamping their game plan. Vongo (the subscription movies-on-demand service from Starz) will end its service on September 20, 2008. As you'll recall, Starz recently announced a collaboration with Verizon, which provided some clues as to why the company pulled the plug on its stand-alone Internet movie service. The Starz Play service is the first of what Starz officials expect to be more white-labeled deployments of its service. In the meantime, ClickStar, which was a collaboration between Morgan Freeman and Revelations Entertainment, officially closed.

There is no question that among many of the premium Internet video efforts that exist today, the movie services have suffered the most, and largely due to the inabiltiy by consumers to view the content directly on their televisions. If you throw out the significant users of Internet video services such as Xbox LIVE! (and we'll get to its impact later), our TV 2.0: The Consumer Perspective study, conducted in Q2 2008, finds that a very small sliver - 1.5% - of broadband users surveyed are actually paying to rent or download movies in any given month. This compares to 24% who watch primetime TV shows on the Internet in any given month, and about 3.5% who pay to download TV shows from iTunes or other sites.

If you look just at the August 2007 fire sale of Movielink ($6.6 million from Blockbuster) - in which five major motion pictures studios had invested close to $150 million, the economics of the movies-only services have not been favorable. At the time of the purchase (the first half of 2007), Movielink had lost about $10 million on revenues of $1.9 million.

Something's gotta give here, and the movie services recognize this. In April, for example, CinemaNow (another early entrant in the online movie distribution business) announced that it would work with Technicolor to build a platform for the electronic delivery of movies, TV shows, music and software to consumers via a broadband Internet connection. This platform will include content encoding and encryption, digital rights management (DRM), hosting and storage, promotions and ad management, streaming or download delivery, order fulfillment, reporting, and forensics. Like Starz, CinemaNow sees that while the consumer-facing services for movie rentals and downloads may not scale, they can certainly offer white-label services that do create new opportunities to distribute content to wider audiences.

The second key point is that - to both survive and thrive - the Internet video services have to be easily accessible from the television set. This is something that Netflix has pursued quite successfully, as the Roku Netflix player has sold quite well since introduction in May. With LG's introduction of the BD300 Network Blu-ray Disc Player and the Xbox 360 supporting Netflix's Instant Queue, Netflix has set itself up well to take advantage of today's predominant video consumption model (the DVD), while keeping its options for digital distribution open to a larger audience down the road. We would fully expect Blockbuster to follow a similar approach with Movielink.

Here was a startling figure from our TV 2.0 study - among consumers who watch Internet video, only 5% use an iPod or other portable multimedia player to do so! The vast majority of Internet video consumption today is still occuring at the PC. With Apple's great penchant for self-promotion, one almost bought into the iPod as being the panacea for driving paid Internet video services. Guess what? Apple doesn't rule in Internet video. It's Microsoft! In estimating the revenues that Apple and Microsoft are deriving from video downloads and rentals this year (U.S. households), our estimates indicate that Xbox LIVE will bring in about $291 million in video revenues to Microsoft, whereas Apple is looking at $213 million!

The results from TV 2.0 are indicative of the direction that the Internet video market needs to move ... straight to the TV. Whether it's the broadband connected TiVo box (35% of users access Amazon.com's Unbox service on at least a monthly basis) or the Xbox 360 (24% of users pay for video content on at least a monthly basis), Internet video services show a significantly-higher growth potential when they are linked directly to the household's primary entertainment center. When 2.8% of all U.S. broadband households are paying for Internet video from an Xbox 360 - and only 1.5% are paying for Internet video consumed at the PC or the portable MP3 player, the results are clear. To not only survive but thrive, Internet video services must be more accessible directly from the primary entertainment center in the home. How the consumer electronics industry evolves to take advantage of growing array of premium Internet video content (both user-paid and ad-supported) will be a key development to watch in the coming years.

European Service Providers Embracing the Connected Home

We're in London for the Connected Home World Summit, and I chaired yesterday's sessions. The operators in attendance are from a wide spread of European markets - everywhere from Greenland, Estonia, Italy, Germany, France, Russia, and countries in between. I was furiously writing notes during the keynotes and the panels, and came away with the following takeaways:

• There are very different takes on the economics of deploying the "God Box"/über-box, which would bring in the functionality of the residential gateway (modem, routing, remote manageability, etc.) along with multiple set-top boxes (tuners, transcoding, server capability, etc.). For reasons related to cost, lifecyle differences in CPE, and the risk of one point of failure, many operators are taking a very conservative approach in deploying a fully integrated customer premise equipment hardware. At the same time, Intel (which was represented at the event by Brendan Traw) has had early success with some service providers, including Telecom Italia and Liberty Global, to deliver a high-powered gateway that takes on much of the functionality of the über-box.
• The effort formerly known as Project Canvas (now known as YouView is making progress, and we can expect to see set-top boxes and then connected televisions with the implementation in 2011.
• There are some interesting thoughts about whether the concept of TV Everywhere is simply a nice-to-add feature or a true revenue generator. Our own research finds a good percentage of consumers willing to pay a $5 premium per month for access to their cable channels on different IP-connected devices, and Irdeto - which delivers content protection solutions - indicates that one of its European service provider customers is getting a good take rate on a TV Everywhere service at a €5-6 premium.
• Irdeto's representative also spoke of the evolution of digital rights management, indicating the the renewability DRM - that is, its ability to be updated as new threats emerge - will be a critical trend. It's one of the key reasons that Irdeto acquired Cloakware.
• A speaker from Vodafone shared the company's key connected home strategies, which includes the deployment of both residential gateways (with a port for a 3G modem) and femtocells in the U.K., French, and Spanish markets. In terms of value-added services, they have found good success with delivering an online backup service, which is one of the key value-added services that Parks Associates identified in our Customer Support in the Digital Home: Europe study in major Western European markets. Finally, they have embraced at least some basic home control applications with remote home monitoring through the mobile phone. This is an area that we're watching closely, as we expect that energy, home control, and health applications as value-added services will be important for operators to investigate in the next few years.
• Operators are mainly very pleased with the capabilities that DLNA provides to them, particularly in applications such as media servers and multi-device entertainment servers.
• Several service providers spoke of their concern about the high number of video formats that will need to be supported.
• A speaker from A1 Telekom Austria also spoke of the importance of its online backup service as a value-added service (as did a speaker from Telefónica). A1 Telekom Austria offers 1 GB of storage for free, but also will upsell tiers. The company developed their own UI and Media Manager software so different devices (TV, PC, mobile, etc.) could access and share content. The sharing of content is a critical element as well. You can push things like photos to your parents by simply entering in their telephone number into the interface on the TV or the PC, so sharing digital photos with non-tech savvy people becomes much easier.

I'm off to Budapest to speak at the CTAM EuroSummit'10 tomorrow. It will be interesting to hear the perspectives of the cable operators in Europe regarding the connected home, and what similarities and differences exist with technology, strategy, and business models.

Blockbuster and Sonic Want a Piece of a $4.6 Billion Pie

Today, movie rental giant Blockbuster announced a partnership with Sonic Solutions that will allow it to stream movies and shows not only on TVs and PCs, but also on mobile phones, portable media players, Blu-ray players, set-top boxes and digital video recorders. Between them, Blockbuster and Sonic already have deals with such CE manufacturers as LG Electronics, Samsung, and VIZIO. VIZIO had just taken the wraps off of its “Connected HDTV” Platform at CES last week. VIZIO’s other content partners include Accedo Broadband, Adobe, Amazon.com, Flickr, Netflix, Pandora, Rhapsody, and Yahoo! The Blockbuster and Sonic direct-to-CE service is expected to launch in the second quarter of 2009.

The bulk of the content available through the service will be newer titles, which will be available to consumers a la carte. Pricing has not been disclosed yet; however, Blockbuster will have to charge around $5 per movie to remain competitive with pay video-on-demand offerings from the cable operators. Blockbuster is also contemplating a subscription model.

The partnership comes as no surprise. One may say it’s in the partners’ blood (pardon the expression), since Blockbuster owns Movielink and Sonic Solutions recently acquired CinemaNow (both companies offer online video purchase and rentals). However, both Blockbuster and Sonic Solutions must beware of the pitfalls that have made Movielink and CinemaNow acquisition targets in the first place:

•Business model: consumers already pay for content by going to movies, renting videos and paying their monthly cable/satellite/IPTV bills. Getting them to buy/rent more content will be tricky.

•Consumer experience: The digital rights management (DRM) software has the potential of undermining the consumer digital media experience. Content partners require strict DRM to protect content from being pirated. The side-effect of strict DRM is that consumers may only play content on a limited number of devices (such as the original PC to which the content has been downloaded). Poor experience will limit consumer interest in the offering.

•Competition: Obviously, Blockbuster’s direct competition is Netflix, which has made its Watch Instantly feature available through numerous consumer electronics devices (LG HDTVs and Blu-ray players, Samsung Blu-ray players, the Roku Netflix Player, the Xbox 360, and TiVo). Additionally, this new partnership will compete with cable operators’ ever-growing VoD collections. It will also compete with numerous free offerings directly from content owners, including Hulu, CBS, and Disney, to name a few.

Parks Associates recent study TV 2.0: The Consumer Perspective, indicates that the potential exists to convert the more than 26 million monthly users of online video services to premium offerings, as Blockbuster and Sonic Solutions are offering. Bringing premium Web video content directly to the consumer electronics device – whether it is the TV, the set-top box, the Blu-ray player, or other devices should be a lucrative business in the next few years. From our report Internet Video: Direct-to-Consumer Services: Second Edition, we forecast that that transactional revenues for online video consumed directly at the TV (via a connected CE device) will grow from $1.2 billion in 2009 to $4.6 billion in 2013. Not only could Blockbuster drive new transactional revenues from both a PC- and CE-oriented online video strategy, but there is much to be said about simply offering the additional online video content as a value-add, and – longer term – there may be some opportunities to derive ad revenues. However, Blockbuster’s success depends on the specifics of how the offering is implemented in terms of business model and the user experience, predominantly. As always, the devil is in the detail.

Major Connected CE Announcements this Week

In a CONNECTIONS™ wrap-up post last week, I had predicted that we would see many more announcements regarding the linkages between premium video services (from pay-TV providers) and the connected CE world. Widevine's announcement this week with Samsung speaks to the technology relationships being formed to enable just these types of features on connected TVs and Blu-ray players.

With the agreement, Widevine will provide Samsung with live and on-demand adaptive streaming, virtual DVD-like “trick play” and digital rights management (DRM) on Samsung connected devices. These technologies from Widevine will enable Samsung to support TV Everywhere and over-the-top delivery initiatives from Internet content providers and large cable, satellite and telecommunication companies. Widevine's CEO - Brian Baker - made sure that I noted the "live" part of the announcement when I briefed with him on Monday. The same kind of adaptive streaming technology that Widevine is providing for DISH Networks's TV Everywhere initiative is in play in this case. So, it's not unimaginable that service providers can use this technology to bring pay-TV channels directly to a consumer electronics platform other than the set-top box.

Yesterday, thePlatform unveiled publishing profiles for connected consumer electronics devices such as as IP-connected set-top boxes, TVs, and Blu-ray Players, and indicated its readiness to support publishing profiles for Google TV when that service launches.

Next, we knew that Best Buy and Walmart were getting serious about creating online video storefronts for the consumer electronics they sell, but now you can add Sears and Kmart into the mix. Sonic Solutions will provide the retailer with the RoxioNow™ platform, which will power digital entertainment delivery services for both Sears and Kmart. The new services are expected to launch later this year and be broadly promoted at retail stores nationwide.

Moving premium video services to non-set-top box equipment will be a critical measure of success for both content and service providers. Already, we are predicting that sales of connected TVs, game consoles, Blu-ray players, and digital media player set-top boxes will exceed the worldwide shipment of set-top boxes in 2011. Service providers are going to have a great many more touchpoints for their premium video services, so getting the connections right today will be critical.

Widevine selected by DIVA TV to protect premium online video in Europe

Widevine has had a very good 2010 in terms of announcements with both online video providers and connected TV device manufacturers. Last week, the company added a European online VoD provider to its list of customers.

DIVA AG, a cross-platform supplier of digital media movie and TV content, will utilize Widevine’s video optimization and digital rights management (DRM) platform to enable the delivery of DIVA AG’s content to mobile devices including Android phones, iPhones, iPads, and specific connected TV sets.

DIVA AG upplies content to global entertainment platforms. DIVA has recently introduced its newest offering, Viewster, which provides content directly to consumers on a variety of devices including smartphones, TV sets, Blu-ray players and home cinema systems from 18 different manufacturers. Widevine’s DRM ensures DIVA’s content remains secure on any device. Widevine’s adaptive streaming monitors the available bandwidth at the device and adaptively chooses the appropriate bitrate for playback, eliminating constant buffering interruptions. The video optimization platform also enables fast-forward, rewind, bookmarking and chaptering functions for the ultimate viewing experience.

Widevine and Accedo Broadband Partner to Bring Online Video to Connected TVs

We knew that Accedo Broadband was expanding beyond its gaming roots, and today's announcement with Widevine illustrates this. The companies are marrying Widevine's adaptive streaming, virtual DVD controls and digital rights management (DRM) platform with Accedo's application solutions.

RealDVD and a court case worth watching

I'll try to be tracking developments of this issue related to the release of the RealDVD solution from RealNetworks Home Entertainment Inc. It allows consumers to save their DVDs to their computers, but Real notes that it is a fully licensed DVD CCA product, that allows users to make "legitimate, fair-use copies of the DVDs they own while employing a digital rights management scheme to help prevent illegal copying and sharing."

Now, Real is following on the heels of the Kaleidescape ruling from 2007, where a court ruled that Kaleidescape's product was in full compliance with the DVD Copy Control Association's license to the Content Scramble System, the method used to encrypt video and audio data on DVDs. RealNetworks filed suit against a number of Hollywood studios and the DVD Copy Control Association on September 30, asking for the district court to rule that RealNetworks Home Entertainment, Inc.'s RealDVD software fully complies with the DVD Copy Control Association's license agreement

The latest news involves the district court judge's decision to keep a restraining order in place until she learns more from experts about how the software works.

Connected TVs in the managed video realm - announcements from Widevine and ADB today

There were a couple of announcements today that point to an expanded role for connected TVs beyond "over-the-top" video. Instead, the connected TV can also serve as a gateway for managed video services. Companies such as Verimatrix, Clearleap, thePlatform, Cisco, Motorola, ActiveVideo Networks, Alcatel-Lucent, Nokia Siemens, and Ericsson have all made recent announcements in this area.

Now, ADB has joined the fray, offering a solution called the Virtual Gateway. This sofware solution distributes multimedia capabilities throughout the home. Some use cases that ADB highlights are a user's ability to enjoy pay-TV, music and videos from wherever they are in the home: subscribers can use their gaming consoles to tune to a pay-TV channel or watch recorded programs, or access music tracks and videos stored on their DVR and play them on their smart phones.

Also, Widevine continues to make announcements regarding its adaptive streaming solution. The company announced that it has signed a global agreement with LG Electronics (LG) to distribute Widevine’s live and on-demand adaptive streaming, virtual DVD controls and digital rights management (DRM) on LG connected products. Widevine’s DRM and adaptive streaming software are already included in 2009 models of LG Blu-ray players and home theaters shipped in the United States. This agreement enables LG to expand distribution to more devices, on a worldwide basis.

Widevine’s video optimization and DRM platform will now be included on a wide variety of additional LG products, including connected TVs. Widevine’s video optimization technology ensures that consumers using LG products receive an excellent quality of viewing experience for both live and on-demand content. Widevine’s DRM keeps premium content secure, regardless of the LG device to which it is delivered .

Alcatel-Lucent's Velocix and Its Strategic Alliance Program

Here's more evidence that the incumbent video infrastructure companies are quickly rolling the devleopment of solutions for multi-content and multi-platform delivery.

On Wednesday, Alcatel-Lucent announced a strategic alliance program for the Velocix Digital Media Delivery Platform to ensure that service providers can benefit from a range of pre-integrated technology components to accelerate the deployment of multiscreen consumer solutions.

Initial members of this alliance program include: 3Crowd, Adobe, Aspera, Blue Coat Systems, Clearleap, Elemental Technologies, Harmonic, Inlet Technologies, Microsoft, RGB Networks, Rights Tracker, thePlatform™, and VidZapper.

Focused on digital media delivery solutions, this program creates an ecosystem of some of the major players in the application and content provider space similar to Alcatel-Lucent’s leading role in the award winning, multi-industry ng Connect Program, which focuses on the development of next generation of broadband services based on Long Term Evolution (LTE). This open collaboration will result in innovative and creative bundled multimedia offers that service provides can quickly deploy and take to market.

This new strategic alliance program brings together key players throughout the industry to foster collaboration in four main focus areas: • Manage – For Content Management, Ingestion and Encoding • Publish – Players, EPG/UI and Feed Aggregation • Monetise – Ad management, Revenue enablers, Transaction processing • Deliver – Velocix Digital Media Delivery Platform provides the delivery capabilities Alliance members will benefit from direct interaction with engineering and development teams to accelerate solution design and enable knowledge and skill sharing to accelerate deal cycles.

Cable Europe Parties Like its 1999

Remember the lavish, luxurious corporate functions frequently hosted by technology companies in the roaring 90’s? Tonight the European cable industry celebrated a solid year of nearly 10% growth (at least Telenet enjoyed nearly 10% growth) in an otherwise lackluster economy. The party, hosted by Telenet for delegates of the European Cable Congress in Brussels, felt more like a coming out party. The IT industry’s fascination with IPTV has finally quieted as IPTV growth has slowed over the past year and cable, evidently, has decided it is time to come out and celebrate. Perhaps the byline of the event should have been “the demise of the cable industry in Europe has been greatly exaggerated.” Telenet spared no expense, renting out the Belgian Bourse, an elegant Palladian style building – quite possibly symbolic of the solid returns the company is providing its shareholders. In cocktail conversation, a member of the Cable Europe trade association stated that ICT has become one of the most significant contributors to the EUs GDP. That would explain the guest appearance of Belgium’s Prime Minister, Yves Leterme.

The distinguished guests at the event included one of the FCC’s lead economists working on the U.S. Broadband Plan which will be presented to Congress this month. Other notables were the Multimedia over Coax Alliance (MoCA) team, the sales team of the steadily growing digital rights company Irdeto, some familiar faces from OpenTV, Broadcom, management of Liberty Global and subsidiary UPC as well as the majority of European cable providers.

To further celebrate not only cable-pride but also Belgian-pride, Telenet served not only the gamut of Belgian champagnes and beers, but trotted out cuisine from two of the country’s most famous chefs, top chocolatier, and award winning latte artist (he creates images in the milk floating atop your espresso). Later in the evening the party featured fashion models sporting outfits from Belgium’s top clothing designers, and finally the pulsating sounds of Belgium’s top DJ.

When IPTV World Forum opens in London on the 23^rd of this month, will we see the industry hosting such a bold celebration of success?