More Hints of Change for Video Distribution Business

Thoughts on Carrier Evolution (Feb 21 2012)

1. It is one more sign of change in the video business that YouTube is spending about $100 million to create original programming for 96 new YouTube channels. The channels will carry 25 hours of programming per day, according to plans. That is but one example of the ways new video entertainment content and distribution infrastructure are being laid into place.

   It would be premature to say big change is on the immediate horizon. The overwhelming percentage of U.S. entertainment video customers buy a subscription from a cable, satellite or telco provider. 

   Some 95 percent of U.S. households subscribe to a video entertainment service. Less than five percent of TV households do not buy a video service. But homes with broadband Internet and free, broadcast TV grew 22.8 percent in 2011. The belief is that many of those homes are watching online video and broadcast TV. 

   It would be incorrect to overestimate the impact of that one particular trend. But it is not the only sign of growing change. 

   In fact, the market and technology preconditions for a shift in end user entertainment video consumption continue to be put into place, as recent activities by Apple, Amazon and Verizon indicate. Verizon is launching a nationwide streaming video service, working with Coinstar, which operates the Redbox DVD rental business.
   
   Apple is rumored to be working on a new “Apple television set” optimized, among other things, for displaying any content an iPhone or iPad can receive. And Amazon, which already is in the streaming video business, has gotten into the tablet business in a big way, for the most part because it must transition its business to digital content.
   
   Morgan Stanley analyst Scott Devitt says Amazon is in the middle of a key product transition from physical goods to digital goods, a change that has affected its near term earnings, but which is going to strengthen Amazon over the longer term.
   
   "Apple’s strength in iPhone and iPad sales are negatively affecting Amazon.com by accelerating the company’s transition from physical to digital media sales (which has effects on sales, margins and ROIC) as well as impacting Electronics & General Merchandise growth," Devitt argues.
   
   The problem is that "mobile device proliferation is accelerating the shift of books, music, video and video games to digital distribution,” he says, which has direct implications for Amazon.com, since Amazon is currently the market share leader in book sales.
   
   Devitt estimates that about 40 percent of Amazon’s media sales, or about 16 percent of total sales, come from non-book media sales. Those revenue streams of course have substantial and growing competition. So Amazon has ample incentives to justify its presence in the tablet and e-reader business, which are platforms for growing its digital content business.
   
   Apple’a new AirPlay, a feature of Apple's new "Mountain Lion" operating system, allows users to beam what's on the screen of an iPhone, iPad, or Mac to a TV, if a user has an AppleTV.
   
   That means suitably-equipped users can send "webpages, YouTube videos, iTunes rentals or anything else you can think of onto an AppleTV unit without wires," says Jason Snell at MacWorld. Apple AirPlay will boost OTT video
   
   The capability will mean it is much easier to view any web content directly on a TV, which means the user experience for any over the top TV viewing is vastly better.
   
   Some might say the issue, going forward, is how long it takes for "piracy" to become a big enough issue that content owners will have different incentives to permit lawful viewing of movies and licensed TV content without having to do so illegally.
   
   AirPlay on the Mac doesn't materially change the economics of entertainment video, at least for the moment. But it is one more building block for the eventual infrastructure that will pressure the existing economics of the video entertainment business.
   
   But we are seeing more and more of such “building blocks” being put into place. That doesn’t necessarily mean content owners are any more willing to destroy their existing business franchises. It does mean the ability to create large new audiences is growing. Sooner or later, that matters.
   
   At some point, protecting the old is more dangerous than embracing the new. Selling
   subscription video to 103 million U.S. homes is a big business. At some point, selling video to users of hundreds of millions of additional screens will simply be too compelling to ignore.

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