VOD II: The Empire Strikes Back

The smart guys at The Diffusion Group published a stat the other day that I found interesting: 37% of cord cutters watch half or more of their TV on Netflix.

I suppose there are a lot of interesting things about that, but what struck me was the extent to which people are using OTT platforms like Netflix to basically just watch TV. Old TV shows. Movies that have been through their windows. "Gunsmoke" and "Breakfast at Tiffany's." Really?

The question is: Can that really last?  

While tossing that around in my head, I spent last week at The Cable Show in Chicago. Based upon the trends I'm seeing, I think the Rebellion is in for a much tougher fight than they suspect. Two major trends look to me like very serious problems for Silicon Valley rebels that want to poach media distribution from traditional service providers.  

First, the supply of content on traditional video-on-demand (VOD) platforms is likely to expand dramatically in the coming years. Right now, it's pretty bad. My wife and I decided to check an AMC series called "The Killing" a couple weeks ago. It was week 8 of the series. After some digging, we found the series on our FiOS VOD service, but they only had weeks 6 and 7. We wanted to start at week 1, of course, so I changed to HDMI 2 on my TV, warmed up my Apple TV, and paid $23 for the whole season commercial-free.    

If you discuss this with your TV programming pals, you find out that the limited supply of episodes on the VOD server is the direct result of a simple fact: content providers don't get paid for content on VOD. No license fees for free VOD (or FOD, as most call it). So, they provide a few token episodes but they really hope consumers will find their content on a platform where they can monetize.   

So, what might cause that to change? Why, new ways to make money, of course. 

The first major trend I see is the rise of profitability on VOD. The cable industry is finally getting dynamic ad insertion to work. It's scaling now for local TV ad insertion, and over the course of the next year I think the technical details for monetization of ads by TV programmers will finally come together. As that matures and ad revenues start to lift, programmers will finally be motivated to build more fulsome offerings on the VOD platforms.

Another way to make money with VOD, is paradoxically, on the Internet. TV Everywhere is, essentially, VOD offered by TV programmers and cable operators using Internet technology. It is the means by which cable programming networks will make their content available on a time-shifted basis directly to consumers. Quixotically, it probably will not be extended to smart TV's, where it would be really useful.

From a monetization standpoint, TV programming networks will likely use ordinary Internet ad models, though there are many interesting folds in the sails on that topic. But the main point is, TV Everywhere is an enfranchised video distribution model. Its main purpose is to thwart efforts to disintermediate service providers. And it will likely flourish because it has a decent monetization model.

The second major trend is a sudden rise in improved navigation systems. These are breaking out all over. With TV Everywhere, navigation is fine/great. HBO GO rocks. There are no real limits on navigation.  

Comcast captured headlines by demonstrating their new "Parker Box" which they have developed as the network terminal for their next-generation network. Navigation on the new box is clearly much better. Cisco has Videoscape. Set-tops are actually getting better.

But new set-tops are not the most important trend. I think the rapid rise of navigation solutions using tablets and smartphones to search and find content on your cable, satellite or telco system is much more important, if only because the path to volume usage is so much more obvious and rapid. And, per my post a couple weeks ago, within the year, I'll bet we see new EPG solutions from service providers designed to take advantage of the robust application framework of smart TV's. Just another connected device, really. Why not fire for effect?

It probably takes time for John Q. Public to figure out how to use the smart TV app from Verizon to find week 1 of "The Killing," but not that much time. I'll bet we see 10 million homes on advanced navigation systems much more quickly than we saw 10 million DVR homes, for example.   

What's all that mean? Service providers like Comcast, DirecTV and Verizon really have no reason to cede "watching TV" to Internet rebels. As they update their platforms to offer competitive money models, they'll regain competitiveness as suppliers of time-shifted programming. And as they implement new navigation systems, they'll be able to eliminate navigation advantages that Internet providers have today. They currently manage the vast majority of eyeball minutes and can leverage that traffic superiority to suck all the air out of the room for would-be TV distribution competitors.   

Longer term, I think you'll see advanced advertising systems that enable highly targeted advertising that makes use of the service provider's knowledge of their audience. That knowledge is much deeper than IP-based services and, while privacy law applies, there's still much than can be done either by maintaining anonymity or through opt-ins. Those are data structures that are not available to rebels and that means ad premiums that are only available through service provider pipes and platforms.

It will all take time--a lot of time. TV time is much, much slower than Internet time. But the direction of TV distribution, in my view, harbors far less erosion of traditional TV institutions than most investors and entrepreneurs might suspect.

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Michael has over 18 years of experience in early-stage media technology companies. Before MediaTech Strategies he was CEO of PhyFlex Networks, a broadband access solutions provider that was sold to Ciena. Prior to that, he served (in reverse chronological order) as CEO of Ucentric systems, an embedded software company that pioneered multiroom DVR technology and that was subsequently sold to Motorola; as SVP of marketing and business development at interactive TV middleware provider, OpenTV; as SVP of marketing and business development at cloud-based interactive TV technology provider, ICTV (now ActiveVideo Networks); and as president and CEO of interactive TV consulting firm, MediaTech Strategies. He also founded The Bandies, one of the first--if not the first--awards programs for interactive TV.