Parks Associates Blog

Wednesday, February 28, 2007

Virtualization = real money?

We had a really curious experience the other day with a virtual hotel concierge! Instead of posting a live body behind the desk, the hotel in which we were staying had a flat-screen television behind the desk with a video feed. On the screen was the concierge, working in a remote office. If you had a request for her, she would detect your presence with the camera in the hotel and begin a dialogue. To provide you with information, she could send a print command, and the information would appear at the printer at the concierge desk. The kicker of this experience? We found out that she was working from home! She had designed her home office to look just like a hotel office, complete with her uniform and the hotel's name in a plaque on the wall.

This is not just an outlying example of where the notion of "virtual presence" is being felt. Certainly, improvements to videoconferencing are one example where collaboration can now occur without business travel. Cisco Systems, for example, touts quite strongly its Telepresence solution for allowing a more highly-interactive and collaborative environment among colleagues, even when they're not in the same room.

At the same time, given the high level of interest in virtualization as it has applied to the gaming industry (Second Life, for example) and the online world (wikis, as one example), there is strong interest among players in both network infrastructure and in end-user platforms in evaluating the opportunities in this space. We think that virtualization in the customer support area could be one interesting opportunity for companies who regularly deal with a good many customer service calls. Given the intelligence that is being built into today's home networking, IT, and consumer electronics equipment, a virtual customer service agent that can run some automatic diagnostics and send suggestions for quick fixes or even new product purchases may put us one step closer to a full-fledged market for the trusted digital home advisor services that we've discussed on a few blogs.

It's definitely an area to watch, and perhaps yet one more example of where the lessons learned in the gaming business (on top of digital distribution and the monetization of virtual assets) may also translate into big business for the rest of the digital lifestyles value chain members.

Monday, February 26, 2007

Let Them Have Content, Says Studios to BitTorrent

After much anticipation and some expected delays (convincing content providers to use a new platform is very time consuming, if you have not heard), BitTorrent is finally launching it's entertainment network. We are believers in P2P content delivery, be it P2P download or P2P streaming, and it's great to see major content providers finally embracing it. In a recently published report on Internet Video, we wrote:

"The peer-to-peer space is extremely intriguing. Although a pure peer-to-peer network has inherent technology and business limitations (such as the lack of guaranteed service quality and need for high upstream bandwidth), modified or managed peer-to-peer technologies, due to their high scalability and efficient delivery, are receiving a lot of interest in the media and service industry. Parks Associates believes that managed peer-to-peer technologies have tremendous growth opportunities."

BitTorrent has great algorithm, efficient network economics, a huge audience, growing penetration in embedded consumer electronics (the TV connection is still key for digital movies, as evidenced by the success of Xbox movie downloads and the launch of AppltTV), and now great content as well. Now the only thing it needs is for its audience to embrace this new offer (with their wallet) from a company they have come to love because of the amount of free content they could find. It's still a debate regarding whether P2P users are forced to steal or they simply steal because they cannot find the digital content they want through a legitimate way. Our consumer data shows that P2P users are much more likely to purchase movies than those who are not using a P2P network, leading us to believe that many P2P users are forced to steal.

The launching line-up is very impressive, with over 5,000 movies, TV shows, PC games, and music content. New release titles include hits such as “Superman Returns,” “Mission: Impossible III,” “World Trade Center,” “Jackass: Number Two,” “An Inconvenient Truth,” and TV programming include hits such as “24” and “Prison Break” from 20th Century Fox; “Punk’d” from MTV: Music Television; and “Chappelle’s Show” from Comedy Central. Content providers include

Compared to iTunes and Xbox Live Marketplace, the other two popular electronic sell through destinations, BT has the strongest studio support, with 20th Century Fox, Lions Gate, MTV Networks, Paramount, Warner Bros. Home Entertainment and Metro-Goldwyn-Mayer Studios, Inc. (MGM). The only major studio missing from the list is Disney but BT executives have strong faith in their ability of convincing Disney to be a part of this revolution. Based on its announced business models (movies for rent and TV programs for purchase), apparently BitTorrent is using Microsoft's DRM solutions, like most of the other online video sits such as Movielink and Cinemanow.

Thursday, February 22, 2007

Apple and Cisco: the start of a beautiful friendship?

Today's announcement from Apple and Cisco regarding the resolution of the iPhone trademark is really short on specifics. Other than announcing that both companies can jointly use the trademark on their products, the only other public statement was that they would "explore opportunities for interoperability in the areas of security, and consumer and enterprise communications."

So, maybe I'm reading into the tea leaves a bit too much on this one, but I'm wondering if Cisco's hard-stance on the trademark was really a shrewd negotiating tool that allows them to begin working more closely with Apple in such areas as video distribution. Apple is still a notoriously closed company, loathe to open up its OS and media formats to outsiders (the open letters from Steve Jobs notwithstanding). However, Apple does need help from content delivery providers (Akamai), and Cisco's bread-and-butter these days has been selling network upgrades to account for a massive growth in video distribution over the Internet. So, [and this is pure analyst speculation], I'm wondering if the trademark brouhaha actually gave both companies the opportunity to come together and figure out some ways in which Cisco's NGN solutions might be able to help Apple scale Apple TV to actual television network status.

Just a few thoughts from an overly-caffeinated analyst today.

Wednesday, February 21, 2007

Adobe Finally Brings its Video Editing Expertise Online

Adobe announced today the availability of its web-based video remix and editing technology to online photo and video hosting site Photobucket. The company expects to announce more partnerships with Internet companies and media properties over the coming months.

This announcement reminds me of an interesting dialogue I had with an Adobe executive at last year’s PMA show (Feb 06) where Adobe had a small analyst meeting and reception. When he approached me and asked about what new trends could benefit Adobe, I told him that since the company had such a stronghold in the imaging professional and “serious amateur” market, the next step was to make the expertise available to online consumers by partnering with successful digital imaging websites and offering web-based editing tools. I remembered that he gave me a quick “are-you-out-of-mind” look before regaining his posture.

But today’s news indicates how quickly Adobe as a company has reacted to the changing market dynamics and adjusted corporate strategy accordingly. Perhaps it realizes that its current business model, which depends heavily on iterate software upgrades on the desktop computers, will inevitably grow slower over time. Or perhaps it shares the same pain with Microsoft in that each upgrade of the software will cost it more time and money to develop, maintain, and run resource-efficiently on a desktop platform. But the most likely reason is that it has witnessed the explosive growth of the online video market and consumers’ enthusiasm in this new online experience over the past year. Parks Associates published a report on online video services in 2006 and will continue to deliver in-depth analysis on the UGC (user-generated content) phenomenon in 2007.

The move is timely, and the approach (using a lightweight version embedded in a web browser, according to the press) is appropriate, and the quick mindset change at the headquarters is particularly encouraging. The key is user experience. Too many times we have seen software developers got tripped when they try to move their desktop versions to the Web. The common pitfall is that the company becomes too proud of its expertise that it delivers an overkill solution to ordinary consumers. Whether or not Adobe can successfully deliver on the Web a “trim-down” version that offers video up-loaders an easy use experience remains to be seen.

Public disclosure: I personally own Adobe stock

Tuesday, February 20, 2007

Digging down into Remote Management Systems

Hooboy ... can you think of a more stimulating discussion on this Mardis Gras than one about the remote management needs for service providers? Although it seems like a less-than-stimulating discussion, we've spent some time in the last weeks interviewing companies implementing remote management system solutions to better understand the needs of service providers and the role of RMS in helping reduce customer service costs.

The issue of how service providers are going to support all of the products and services in their bundled services and home network strategies is critical, since early estimates indicate that call volumes and call times to customer service representatives (CSRs) tend to double with the installation of a home network. No service provider in its right mind would want to bear the added cost of taking all of those phone calls when their pricing is pretty tight as it is.

Enter RMS. This is basically a fancy term for holistic solutions that provide service providers with four key benefits in four main areas:

  • Service activation. This can include the provisioning of a broadband connection and activation of the requisite equipment (modem or residential gateway) in a self-installed fashion.
  • Deploying new value-added services. Many customers sign up intitially for a few basic services - perhaps just a broadband connection at first. However, as service providers roll out new services (voice-over-IP, IPTV, Web camera monitoring, etc.), they'll not only want to activate the accompanying hardware required, but also make sure that back-end systems (billing) are notified that the customer has activitated Service X and should be billed accordingly.
  • Proactive maintenance. RMS sytems can be set up to receive automatic diagnostic information and resolve conflicts before they result in a phone call. Some of these solutions could include resolving TCP/IP or port settings that may have gotten out of whack.
  • Remote diagnostics and troubleshooting. RMS is being used to allow customer service representatives to handle troubleshooting phone calls with greater efficiency. Some RMS vendors indicate that one big problem that they are currently solving is avoiding the "Annoying 20 Questions," where a CSR agent has to painfully go through a list of standard questions ("What is your modem brand, what kind of operating system do you have, etc.). Instead, much of this information is presented automatically to the CSR agent, and he or she can instead focus on fixing the problem.

We're following this space closely, as we're anticipating that this year and next will be significant in the development and deployment of additional RMS features. Today, the RMS benefits argument is pretty much all about saving costs on the customer care side of the service provider's business. In the future, however, we're likely looking at an environment in which dynamic reporting, data collection, and automatic troubleshooting are integrated into even more holistic customer care packages and solutions that we like to call "Trusted Digital Advisor" services. We wrote about this opportunity in a recent white paper titled Business Models for Managing the Digital Home.

Non-technical thought of the day: In addition to being Mardis Gras, today is also known as "Shrove Tuesday." It has also been called "Pancake Day." In honor of today, IHOP is giving away a free short-stack of buttermilk pancakes! Our advice? Take advantage of this offer!

Wednesday, February 14, 2007

U.S. Telco TV: Year-end 2006

We've got our number, and we'd like to hear your feedback! Based on our new research in IPTV: From Quadruple Play to Multiplay, we're estimating year-end U.S. telco TV deployments (including both IPTV and the QAM-based rollout from Verizon) at around 360,000 subscribers. Verizon obviously makes up the bulk of that figure, with more than 200,000 subscribers. It's followed by others, including Qwest, SureWest, Pioneer Telephone, D&E Communications, and others. Don't discount those little guys! Consolidated Communications reports a couple of quarters of solid growth - north of 20% - for its IPTV subs.

Much of the press focus for both AT&T and Verizon's television rollouts has been on the number of homes they expect to pass with their FTTN and FTTP deployments in the next few years. AT&T, for example, notes that it plans to "pass eight million living units" with its U-verse TV service by the end of 2007. In its first quarter earnings call, Verizon officials indicated that they believe that year-end 2007 availability of FiOS TV will be around five million households up from 2.4 million at the end of 2006.

Having the technology in place to deploy the television services is an important part of the equation, but having the regulatory authority to sell television services in specific markets - franchising authority - is another key component. As of this week, AT&T confirmed that it has agreements with 28 municipalities and "broad video reform" in 11 states. For its part, Verizon confirmed that it had secured 651 local video franchises covering approximately 7.8 million households.

We'd love to hear your thoughts - does our Telco/IPTV subscriber number sound on target? Feel free to e-mail me back at

Content owners should call the shots!!!

The Internet video marketplace is still in its infancy. Although YouTube has been getting all the traffic and attention from the press, most of the professional content it is distributing still has a shade of gray color. In addition, as much hype as long tail content gets, most of the revenue derived from online video content, either through user-paid models or ad-supported models, still comes form professional content. In this high-stake poker game, why should content providers show their cards voluntarily? Why should they collaborate and foster a monster who may suck their blood one day? Doesn't it make more sense for the major media companies to build more direct-to-consumer channels and relationships and just treat Youtube as one of the affiliate networks, instead of "the" online video destination? The difference is profound. Media companies probably perhaps will share only 30% of their revenue with an affiliate, vs. 50% with an "online video destination". The Internet is an open platform after all and media companies should leverage this characteristic to their own advantage. Content providers should call the shots, instead of handing over their negotiation power to Googtube or any other aspiring online video distribution site.

This is a paragraph we wrote in the online video report we published in Dec. 2006.
"Partners are important, but do not get tied up in exclusive deals with one dominant player. In this early stage of the game, it is to the content providers’ best advantage to build their negotiation leverage and foster channel diversification and competition, in order to avoid the conundrum they already face in the retail market (with Wal-Mart and Target being the dominant players)."

Monday, February 12, 2007

Microsoft Launches “PlayReady”

Amid industry-wide speculation of where the DRM technologies will be heading in the next few years, Microsoft today debut a new DRM system “PlayReady” at 3GSM Conference.

Technical details are sketchy at this point, but the concept of “PlayReady” is a system- or platform-agnostic technology that does not hide access keys for individual devices. Rather, it holds a common key to a set of devices (defined as “a domain”) and content providers and device manufacturers can decide how many and what types of devices the key can unlock. From Microsoft’s press release, it appears that the technology is designed for the ultimate convergence experience: consumers will be able to enjoy multimedia content across PC, TV, and mobile phone.

This announcement will have a rippling effect on the media, technology and hardware industries. Immediately jumping out of my mind are three questions:

  1. PlayReady is definitely designed for interoperability, but what about “Playsforsure” and Zune’s own DRM system built upon the same Windows Media technology portfolio? Will PlayReady interoperate with “Playsforsure” and Zune’s “Playformyown?”
  2. Do the PlayReady’s launch and initial support from a group of marquee service providers indicate OMA 2.0’s demise in the mobile world? I don’t see Vodafone listed as a supporter, which leads me to believe service providers in Europe still have hope for the OMA standard, although the flare is dimming.
  3. PlayReady in many ways resembles Marlin/Coral’s approach to tie rights to users who own a domain of multiple devices. Registered devices can exchange paid content without restrictions, but devices outside the domain will be forbidden to trade content. Coral has demonstrated that in a lab environment but no commercial deployment has been reported yet. Now that Microsoft has gone one step ahead, but will this type of user authentication-based DRM perform as designed in a real world?

Answers to these questions will remain elusive for some time. But in an environment where anti-DRMism was recently hyped by Steve Jobs’ open letter, service providers’ warm reception on Microsoft’s solution, at least initially, is a silent “NO” to his proposal. We believe DRM interoperability is the future, but it might take some time for the battle to control the right technology behind interoperability implementation to settle down. Maybe Apple can contribute on that front, we hope.

Year-end 2006 U.S. broadband numbers

We're in the middle of verifying the year-end 2006 residential broadband numbers, and I have to say that I'm impressed! Michael Cai's early 2006 report Broadband Market Updates had forecast total U.S. residential broadband subscribers of 53.8 million. It looks like the year ended about as close to that as you can get. The delta between the forecast and the actual numbers looks like it'll be within 2%, if not less.

The cable MSOs reported good gains between 2005 and 2006 (looks to be 18%), and we're following up on the DSL and FTTP and FTTN numbers now. Verizon's FiOS high-speed data customers grew 160% between Q1 and Q4 2006. Their FiOS TV growth was extremely high for 2006 - 935% between Q1 and Q4, surpassing 207,000 subscribers.

I'll share our year-end estimates for Telco TV subscribers in another post - we're getting close to cementing those figures from the earnings reports and other sources.

Friday, February 09, 2007

Virtual Item Exchange Should Be Legalized

Economics 101 says that when there's a demand, there should be supply. That is exactly what's happening with virtual item exchange. For those who don't follow the game market, virtual item exchange means using real-world currency to purchase virtual items. For instance, a player of World of Warcraft could buy a special sword from another player for $5 and enhance his gaming experience and a player of Second Life could acquire a virtual castle for her avatar for $1,000.

Up until 18 months ago, most of the virtual item exchange activities happen in the "black market". The End User Licensing Agreement (EULA) of most major MMOGs states that the game content cannot be owned, transferred, or modified by the subscribers. However, this legal detail has not prevented the emergence of a secondary market for in-game goods and services. Once a strictly avoided middle ground between players and developers, the emerging secondary market has generated significant revenues for players willing to risk potential penalty, such as account cancellation. On the other hand, the secondary market may allow moderate and casual gamers who otherwise wouldn’t have time to develop their characters to high levels to explore new worlds by acquiring characters or levels. Total sales are estimated to be worth more than $800 million a year, all of which is currently going to players and organizations outside the traditional MMOG value chain. IGE and Ebay are both important players in the market, and they generate revenue by charging listing fees and commissions. Ebay announced last week that it will ban such activities going forward due to legal concerns.

Sony Online Entertainment was among the first publisher embracing virtual item exchange. It announced yesterday that "the online auction site it launched in June 2005 to allow players of its "EverQuest II" multiplayer online game to pay real money for virtual characters and items, generated $1.87 million in player transactions during its first year. SOE said players paid as much as $2,000 for a single character, with one seller earning over $37,000 from 351 auctions. The company said a stable exchange rate emerged for virtual currency within the game, which for the year averaged out at $7.35 for one piece of in-game platinum."

Station Exchange went live in July 2005 and charges a $1-10 listing fee and an additional 10% transaction fee based on the final sale price. Only available on a pair of Everquest 2 servers, it logged more than $180,000 in transactions in the first month of operation. In that first month, average players on the Exchange used the service to purchase $70 worth of in-game goods.

Due to the lack of legal status and regulation of such activities, the secondary market remains a polarizing issue among both MMOG operators and players. Developers/publishers should push for legalization of virtual item exchange and decide how to make use of this market mechanism. Players have proven that there is significant demand for such a service, and it can develop into a lucrative market. Game publishers and service providers should embrace the secondary market instead of fighting it. If they don’t monetize this trend, others will. And if it's not legalized, social problems such as robbery and money laundering are more likely to occur.

Wednesday, February 07, 2007

On this week's episode of "Leave it to TiVo"...

There's a joke in this industry that you can always tell who the pioneers are from the arrows in the back of their back. I recall Peter Lee from The Walt Disney Co. using this phrase at last year's CONNECTIONS conference as he was discussing ABC's moves into online video distribution and how they were getting pushback from some local affiliates. Well, the ABC folks can take some comfort in the data as they bind their wounds. According to Disney's latest earnings information, more than 19 million streams of ABC programs have been requested through, ad retention rates stand around 85%, and CPM numbers for the online videos are 4-5x those of primetime viewers age 18-49.

TiVo is another company that has pushed the envelope with new video distribution, viewing, and business models. From introducing one of the first PVRs to incorporating whole-house DVR capability and the ability for users to transfer shows to portable devices, TiVo's innovations have laid the foundation for many followers. DVRs? Table stakes for television operators. Home networking? Check out Motorola, Scientific-Atlanta (Cisco), Pace, and all of the major set-top box vendors today - they're all pushing whole-house DVR solutions? Linking a PC to the TV to view photos? Look at the Verizon Home Media DVR functionality. Transfer to portable devices? Intel and Motorola are a couple of companies demonstrating fixed-to-portable video handoffs.

Now, comes the news today that TiVo is partnering with the Unbox(tm) service to allow TiVo users to download Amazon's video content directly to a TiVo box. It's not only a nifty-sounding idea (although I'll hold final judgement until I see the quality of the video experience on an actual television set), but for online video, it's an absolute must - removing the barrier between a video download to a PC and viewing it on a TV. In fact, we just wrote about the critical missing element of Internet video direct-to-the-TV in a blog post last week. And, we wrote late last year in our Internet Video: Direct-to-Consumer Services report:

"One inhibitor for the growth of online distribution of movies and TV programs was the low penetration of PC-to-TV connectivity solutions. Most consumers still want to watch long-form videos on their TVs instead of PC monitors but they don’t have solutions. Although the product category of digital media adapter has existed for a few years, sales have been lackluster due to lack of consumer awareness, limited high-quality Internet video content, and technical issues."

So, we're excited to see another bold step taken by TiVo to push an innovative use case to its users. It's a boost for Amazon's online video offering certainly, and we'd expect this to be a model followed closely by the TiVo-wannabees soon.

Friday, February 02, 2007

Great week for the Geeks

The Sunday, January 28, edition 60 Minutes reminds me of why I need to continue to watch with more regularity. (I'm also reminded that NPR's Marketplace is worth 30 minutes of my time when I'm lucky enough to catch it.)

One of last Sunday's 60 Minute pieces was on a subject near and dear to our hearts: "Get Me the Geeks: How Tricky Technology is Giving Rise to the Geeks." Steve Kroft's story centered on the growth of Best Buy's Geek Squad business, with an overall look at how technology complexity is both maddening to consumers and a business opportunity for companies willing to step up to the plate and provide installation, configuration, and troubleshooting services to a customer base more than willing to pay for it.
The statistics coming from The Geek Squad point to the pain consumers are experiencing and the opportuntity that this provides an enterprising customer care business:

  • Geek Squad processes 4,000 computers in need of repair in its facility near Louisville, KY, every day;
  • Geek Squad founder Robert Stephens says that more than one-third of wireless routers and modems that are purchased at Best Buy are returned because, "people think that they are just too complicated."

More troubling in the story was the admission from companies that customer support often is still more about passing responsibility on a problem than actually solving it:

"Software companies will try and convince you it’s a hardware problem and hardware companies will do the reverse. According to one survey, 29 percent of all callers swear at their customer service representative, 21 percent just scream. The rest presumably are too exhausted to do either."

In a time in which customers can churn from one provider of broadband or television services with little challenge, we'd assert that the time for finger pointing and playing "the blame game" has got to stop, certainly among the service provider community, but also manufacturers of digital home products. This year, it's going to be critical that companies not proactively addressing customer care and support put plans in place to do so. Not only is this a cost issue (our own estimate is that calls to broadband service providers regarding home networking problems may be a $200-$500 million burden every year), but there are real business opportunities (and dare we say revenue-generating businesses?) to explore.

  • Consider a service provider such as Bell Canada. In deploying a holistic Internet security suite from Radialpoint (about CN$10 per month), the telco still reports that this is among its biggest value-added services in terms of revenue.
  • Another interesting case study is BT, the British telco. Last year, it rolled out a service called Home IT Advisor. For about £10 a month, BT offers remote technical support to assist with home computer troubleshooting. A product manager with whom we briefed last week tells us that the service is selling incredibly well.

We kicked off our research in the area of customer technical support and help in 2004 with a consumer study titled Profiles of PC Usage. This was followed by a significant study last year titled Managing the Digital Home: Installation and Support Services. While both of these studies quantify some of the major technical hassles in the home, the 2006 study went even further, determing the market demand and willingness to pay for technical support services and additional customer care options - extended warranties and protection contracts, remote and on-site support, enhanced digital home advisory services, among many different options. The data helped us build the profile of the so-called "needy consumer" - the person or household likely to pay for these services.

Our industry reports are also focusing on the issue of customer care and support as a critical function of the sucess of digital lifestyle product and services deployment. These studies have mainly covered the space from a business and technical perspective, and previous studies have included Storage and Management for the Connected Home and Home Networks and Residential Gateways: Analysis and Forecasts.

Now, we're pleased to begin 2007 with the release of a freely-available white paper, Business Models for Managing the Digital Home. In this brief, we cover eight business opportunities - both short- and longer-term - that focus on digital home technical and advisory support. We published this brief after this year's CES, where these issues were brought up time and again during company one-on-one meetings and during panel discussions on which our analysts participated. This brief is a precurser to the release of our Digital Home Services: Carriers, Retailers, and the Customer, where we are profiling close to 50 companies and developing forecasts for revenue growth in these categories.

For both the industry and the consumer, getting these services and automated technology help solutions can't come at a more critical time. Digital lifestyle products and applications continue to grow in terms of penetration, and the job of "home IT support" is growing more difficult by the day for the intrepid bunch of do-it-yourselfers. Better yet, as the Geek Squad's Robert Stephens said, there's hope for even the most frustrated of customers:

"There's the do-it-yourselfers. There's the do-it-for-me. And what we're discovering is the even bigger market of ‘I-thought-I-could-it-myself’ crowd," Stephens told 60 Minutes.

Talk to me when you get ESPN

Wow, so Comcast reports one of its best quarters ever, and some in the investment community have decided it's time to short the company. Cody Willard on argued in a brief titled "Control is Dead" One why "broadcast is about to become a dying business model":
  • YouTube and are "ruining" the broadcaster's ability to bundle 100,000 hours of programming per month that the television operators are "forcing" upon viewers;
  • There is no way for the television operators and their centrally-controlled programming to compete with the "over-the-top" offerings.

Well, credit the author for sticking his neck out on an opinion. And, there are certainly dynamics in today's digital lifestyle (television audience fragmentation, declines in up-front ad sales the last few years, some data that shows certain consumers trading TV time for PC time, etc.) that are definitely worth watching if you're an incument television operator. And, companies like Verizon and Comcast are spending lots of money right now in the pursuit of more robust networks and stronger growth in both customers and spending per subscriber. Wall Street hasn't taken kindly to this kind of spending, definitely over the short-term.

Since we're not financial analysts, our take on what is happening in today's television world is defninitely longer-term than next quarter's earnings. Not only do today's incumbent television operators need to invest in their capabilities to deliver outstanding basic services to their customers, but they have shown in the last couple of years a stronger willingness to experiment with additional offerings, even dabbling in "over-the-top" convergence and more open platforms for content mobility, sharing, and flexibility.

Where we really disagree with the "Control is Dead" commentary is the notion that seems to be automatically applied that today's consumer will drop their existing television provider simply because "lots of content" exists on the greater Internet. Oh, there's plenty of video on the Internet, but there are lots of challenges to the notion that consumers are automatically going to look to a Web portal or a content aggregator for all of their video needs and drop a Comcast or Verizon altogether.

  • As much as people are supposedly chomping at the bit to ditch their over-controlling television provider, I don't buy it. I think that consumers appreciate the fact that a television operator provides them not only 200 channels of programming, but 200 well-organized and easy-to-find channels. In studies we've conducted on what features are most-important to digital television subscribers, the EPG is third only behind more channels and better picture quality and sound.
  • Related to this point, there's a reason why much attention is being paid to firms like Blinkx, TVEyes, and others. The world of Internet video is right now very messy, and there doesn't exist an optimized way for viewers to find and organize all of the different content that they'd like to view.
  • Here's a biggie: amid all of the user-generated clips of Coke bottles blowing up and people lip-synching to their favorite song, what legitimate Web portal has bundled together the rights for such TV stalwarts as ESPN, CNN, Fox News, The History Channel, The Food Network, and all of the channels that viewers really want to see? Long-tail content is fun and can be interesting and quite relevant to many niches of people, but we'd argue that having the rights to 40-50 base channels are an absolute must for a video programmer.
  • There's still no assured way of getting the content to the TV. The home network and media adapter challenge is one that is slowly being solved (and it involves lots of help from companies in video encoding, DRM, networking, and middleware). It's not a simple solution, given all of the different video codecs and formats that exist on the Wild West of the Internet. And, for all of the wonderful high-definition televisions that are going to be purchased ahead of the Super Bowl on Sunday, what percentage of the video content on the Internet will play well on those screens?

There is no question that today's television incumbents face some enormous challenges in addressing the changing entertainment requirements of their customers. If they don't execute the transition from pure "walled garden" programming options, and allow room (both in their networks and in how their set-tops decode and receive alternative programming), their fit in the digital lifestyle of 2010 will become less relevant than it is today. However, we see them making the moves today, and we fully expect that tomorrow's television offerings will be markedly different in terms of the flexibility and freedom that subscribers have to search out and find alternative entertainment content.

Again, we are not investment analysts and we don't make stock recommendations. However, given what I've written about today, we think that some exciting developments are going to occur within the framework of the managed delivery of content and applications to end-users and subscribers. We're following companies in many different areas of this space, including those that are helping incumbents integrate third-party content into their existing services, manage and opitmize their networks for even more channel options, provide better search tools, more relevantly target advertising, transcode the wild west of video, and place micropayment solutions in place in the existing BSS systems.

By the way, "Mad Money Cramer" put a "buy" on Comcast yesterday. Just goes to show you that there's plenty of room for opinion in this space!

Thursday, February 01, 2007

Parks Associates' Views on Music Industry's Woes and DRM Dispute

Three pieces of news this morning from Digital Music News caught my attention. They are so interrelated that putting them together you can have a bigger picture of what woes and challenges that the music industry is facing during its transition to digital distribution.

News No. 1: After six months of hype about the potential that the record labels will distribute music in unprotected MP3 format, different voices finally surfaced within the labels that just expressed the opposite view. At Music 2.0 Conference, George White, senior vice president of Strategy and Product Development at Warner Music Group, told audience squarely: “I don’t think the wholesale abolition of DRM is a solution.” Universal Music eLabs president Larry Kenswil was equally unenthusiastic about the prospect of MP3 sales. An interesting comment from Larry was about the experiment Yahoo did with a Norah Jones’ single late last year, which I blogged about. Here are his words: “Ask [Yahoo Music executive David Goldberg] how much Norah Jones has sold in open MP3, it might be an interesting answer.”

News No. 2: Also at the Music 2.0 conference, the sentiment about the music subscription service is not optimistic. Again, Larry Kenswil pointedly commented that “No one has figured out how to market it [subscription service], and people don’t know what it is.”

News No. 3: Record labels reportedly become more and more anxious about whether digital sales can ramp up as quickly as they hope to offset the decline of physical sales. CD sales dipped another 7-8% from 2005 to 2006, and sales in the first month of 2007 appeared continuing that trend.

Well, we all know what a dire situation the music industry is facing. And it is time for the record labels not to mourn over bad moves in the past but to acknowledge the fundamental changes in how consumers buy music today and in the future, make adjustments in business strategies, and be not afraid of experimenting with new pricing models and distribution channels.

For one thing, the record labels have to admit the prospect that because consumers now have the option to buy single tracks instead of being forced to buy a bundle (i.e. CD), increase in digital sales will probably never offset decline CD revenues in the next five to six years. They need to extend the payback horizon of the digital sales to farther out and adjust their performance benchmark and business strategies accordingly. Longer term, as the digital distribution improves access and ease of consumption, I, like other record labels, am still optimistic that music sales will top those in the heyday of the CD era.

Next, DRM should not be blamed for lackluster sales of digital music from vendors other than Apple, which I elaborated in my December 6, 2006 blog entry that commented on Yahoo and other music service providers’ experiments with MP3 downloads. The woe today is partly attributed to record labels’ own mistake in the past of adding no content protection scheme on CDs and letting consumers freely rip tracks. Now that consumers have an established expectation on the CD consumption, things cannot be altered anymore. Until CD format is no longer the dominant distribution format will a whole new set of consumption behaviors and consumer expectations be established. During this transitional period, the growing pain must be endured by the record labels and non-Apple music distributors. They have to get realistic about the goals and prepare for another few years of challenges.

And the revival of the music industry still depends on DRM. I agree with George White’s view that labels should try “a number of alternative models, including those that price tracks differently based on factors like popularity, timing, and rights levels involved.” Standing in labels’ shoe, not consumers’, I think they have to change the current universal pricing structure and monetize both their backlog assets and hot properties. Those moves involves standing up against Apple, quickening the pace of digitizing dated catalogs, and a willingness to sacrifice near-term sales in exchange for long-term healthy growth of the industry. It will be a tough choice and a test on the music industry decision makers whether they are short-sighted or more long-term oriented.

As to the subscription service, the music industry must realize that pure subscription service is not appealing at current price level. Parks Associates has done research in the past showing that consumers’ price expectation for the all-can-you-eat service is much lower than current pricing model. Either the labels need to revise the economics of content pricing, or the distributors need to be more innovative. A few brainstorming ideas for distributors: 1) offering a limited subscription service based on genres with a lower price; 2) adopting eMusic’s model of subscription for a fixed number of downloads; 3) offering a hybrid model with both subscription service and a bonus of a fixed number of downloads to keep; 4) scraping the music subscription, replacing it with Internet radio subscription plus a fixed number of music downloads. All these ideas can help lower monthly fees consumers are willing to pay and help encourage adoption.

Last but not least, we have been arguing for music subscription service as a bundling choice in broadband service providers’ service package. As soon as the $10 per-month music subscription fee is integrated into the monthly bill of Internet service, landline phone and wireless service, the amount is not standing out to consumers anymore. In today’s world, young people perhaps will subscribe lifetime to the Internet service, and the music ownership against rent argument is softened under this bundling option. Why not give it a more extensive try? The catch here is, making the subscription part portable so whenever people want to switch providers, the music stay with them.

In any of such experimentations to find out the right business models for the non-Apple music distributors and the music industry as a whole, DRM will be the enabling technology and monetization engine, and cannot be dismissed as holding back the industry. That’s my opinion.