IPTV: Disrupting the Balance of Power in the US Media Industry

Michael Tang MBA Candidate | Class of 2012

Marshall School of Business University of Southern California

Popovich Hall 310 Los Angeles, CA 90089-‐2632

Kenneth Ying MBA Candidate | Class of 2012

Marshall School of Business University of Southern California

Popovich Hall 310 Los Angeles, CA 90089-‐2632

Image source: http://www.sxc.hu/photo/496914

IPTV: Disrupting the Balance of Power in the US Media Industry

Prepared by Michael Tang and Kenneth Ying for Professor Omar El Sawy (GSBA 556) March 8, 2011

IPTV: Disrupting the Balance of Power in the US Media Industry | 1

Table of Contents EXECUTIVE SUMMARY ............................................................................ 2

OVERVIEW OF IPTV WITHIN THE US MARKET ................................................ 3 IPTV Reducing Barriers To Entry For Video Distribution .............................................................................. 3 Online Content Aggregators Emerging As Disruptor ................................................................................... 4

THE IPTV ECOSYSTEM ............................................................................ 5 Relatively Fragmented, Leading To Multiple Layers Of Intermediaries ....................................................... 5 Figure 1 – Map of IPTV Ecosystem ........................................................................................................... 5 Publishers Originate Professionally Sourced Video Content ..................................................................... 5 Aggregators Provide Content Owners With Secure Distribution And Shared Revenue ............................ 5

IPTV Receiver Platforms Set To Emerge Into Mainstream ........................................................................... 6 IPTV Receiver Platforms Moving Into Financial Intermediation ............................................................... 7

ECOSYSTEM HEALTH ASSESSMENT ............................................................. 8 High Productivity, Driven By Increasing Consumer Demand and Advertising Revenue .............................. 8 Figure 2 – North America Market Size for Online Video Advertising (ex Mobile; 2004-‐2013p) ............... 9

Robustness Highly Dependent Upon Cooperation From Content Owners .................................................. 9 Niches Emerging In Amateur Content, Gaming ......................................................................................... 10 Overall, Ecosystem Healthy With Strong Growth Prospects ..................................................................... 11

GAME CHANGERS ................................................................................. 12 AllVid Could Dramatically Increase Consumer Access To IPTV Content .................................................... 12 Rollout Of 4G Networks Enables Wireless IPTV Content Delivery ............................................................. 12 Dynamic Ad Placement Brings Targeted Advertising To Television ........................................................... 13

APPENDIX .......................................................................................... 14 Exhibit 1 – Map of IPTV Ecosystem (Landscape Orientation) .................................................................... 14


EXECUTIVE SUMMARY

The Internet Protocol Television (IPTV) ecosystem in the United States is poised to move into the mainstream, driven by growing consumer demand and advertising revenues. High productivity, with niches emerging in amateur content and online gaming, points to a cautiously healthy ecosystem, that if allowed to develop fairly and unrestrictedly, may radically alter the market for consumer television.

Market research firm Strategy Analytics predicts revenue from the US IPTV ecosystem will reach $15 billion by 2013, while PricewaterhouseCoopers (PwC), a consultancy, estimates that 17 million households in the US will subscribe to IPTV services by 2013. This increase represents a 50% compound annual growth rate over the period from 2009 to 2013.1,2 The majority of players in the ecosystem—from IPTV receiver platform manufacturers to content owners and aggregators—exceeded sales and revenue targets in 2010. PwC also predicts that advertising spend for online video will reach $3.5 billion in 2012, an 8.4% compound growth annual rate.3

The health of the ecosystem faces risks from content owners withdrawing content from aggregators, restricting consumer access to direct distribution channels. In the absence of rich premium content available through aggregators such as Hulu and Netflix, the consumer value proposition would be greatly reduced, significantly hindering the further development of the ecosystem.

Several game changers are set to dramatically alter the environment of the IPTV ecosystem:

• AllVid could significantly increase consumer access to IPTV content: The Federal Communications Commission is pushing the home entertainment industry to adopt AllVid, a proposed technology that aims to provide consumers with a universal interface to paid video content. In theory, this technology would enable IPTV content to be seamlessly distributed throughout a home without the aid of set-‐top boxes, greatly increasing the accessibility of IPTV services. As such, IPTV content would be placed on a level playing field with cable and satellite content, greatly increasing IPTV’s share of subscriber and advertising revenues. Furthermore, AllVid could place significant pressure upon the current bundled pricing model for subscription television, leading a shift towards a la carte pricing.

• Rollout of 4G networks will enable wireless IPTV content delivery: Unlike 3G networks, 4G networks provide sufficient bandwidth for IPTV transmission, resulting in increased penetration of IPTV services to mobile devices and rural markets. Further shifts balance of power from cable and satellite operators to wireless providers, with increases in market share due to lower deployment costs.

• Dynamic ad placements will bring targeted advertising to television: Integrating viewing data with online behavior and transaction history, dynamic ad placement allows IPTV providers to build far more robust user profiles, providing advertisers with a significantly greater value proposition than that offered by cable and satellite providers.

1 “Global entertainment and media outlook 2009 –2013”, PwC, Jun 2009, p 182 2 Viviek Naik, “U.S. IPTV to hit $15 Billion in Revenues by 2013, Study Says”, TMCNet, Sep 2 2009, http://iptv.tmcnet.com/topics/iptv/articles/63554-‐us-‐iptv-‐hit-‐15-‐billion-‐revenues-‐2013-‐study.htm, accessed Mar 5 2011 3 Ibid.


OVERVIEW OF IPTV WITHIN THE US MARKET

IPTV Reducing Barriers To Entry For Video Distribution

Internet Protocol Television (IPTV) is a system for delivering video that leverages the networks and protocols of the internet, replacing traditional broadcasting technologies. IPTV is a rapidly growing market. According to Strategy Analytics, a market research firm, revenue from the US IPTV ecosystem will reach ~$15 billion by 2013.4 PricewaterhouseCoopers (PwC), a consultancy, estimates that 17 million households in the US will subscribe to IPTV services by 2013, representing ~50% compound annual growth over the period from 2009 to 2013.5

Broadly speaking, IPTV dramatically reduces the barriers to entry for video distribution.

Broadcast television, the first technology that enabled widespread transmission of video, requires costly licenses for access to spectrum, a finite resource, limiting video distribution to well-‐capitalized entities.

Cable television, the next evolution in video distribution, brought significantly greater capacity, enabling consumers to access hundreds of channels through a single wire. As wiring a household for cable required significant investment, cities created natural monopolies by awarding exclusive franchises to cable companies, giving these firms significant market power.

Unlike broadcast and cable, IPTV provides a relatively open platform for video distribution. Services such as YouTube and Vimeo enable content creators to reach a global audience with negligible upfront investment. There are two key properties of IPTV that enable this openness:

• Packet-‐switching: With broadcast and analog cable, all channels are continuously piped through the transmission medium, regardless of whether any receiver is using that signal. IPTV uses the infrastructure underlying the internet for video transmission. Instead of continuous transmission, with IPTV, a video stream is broken into discrete packets that are reassembled by the receiver. This provides a fertile platform for video-‐on-‐demand, as a receiver’s bandwidth remains open until a video stream is requested.

• Network neutrality: The Federal Communications Commission (FCC), the main telecommunications regulatory body in the United States, ruled in late 2010 that internet service providers (ISPs) can not discriminate between their own services and those provided by third-‐parties.6 In recent years, tensions have escalated between ISPs and online video distributors, such as Netflix, over high-‐bandwidth use. Prior to the FCC’s ruling, Comcast, the largest cable company in the United States, had demanded that Netflix’s content delivery provider, Level 3 Communications, pay Comcast as compensation for handling Netflix’s incoming traffic to Comcast subscribers.7 By upholding network neutrality, the FCC maintains the status quo whereby consumers can access any video distributor through the connection provided by their ISP. This is a significant departure from the business models of cable and broadcast

4 Viviek Naik, “U.S. IPTV to hit $15 Billion in Revenues by 2013, Study Says”, TMCNet, Sep 2 2009, http://iptv.tmcnet.com/topics/iptv/articles/63554-‐us-‐iptv-‐hit-‐15-‐billion-‐revenues-‐2013-‐study.htm, accessed Mar 5 2011 5 “Global entertainment and media outlook 2009 –2013”, PwC, Jun 2009, p 182 6 Jeffry Bartash, “FCC approves new rules governing Internet”, Marketwatch, Dec 21 2010, http://www.marketwatch.com/story/fcc-‐backs-‐new-‐rules-‐governing-‐internet-‐2010-‐12-‐21, accessed Mar 6 2011 7 Jeffry Bartash, “Comcast in dispute over Netflix downloads”, Marketwatch, Nov 30 2010, http://www.marketwatch.com/story/comcast-‐in-‐dispute-‐over-‐netflix-‐downloads-‐2010-‐11-‐30, accessed Mar 6 2011


television, as these structures historically provided telecommunications firms with near total control over the video content that subscribers could receive through their services.

Online Content Aggregators Emerging As Disruptor

The openness enabled by IPTV platforms has resulted in two distinct business models within the US market:

• IPTV as a product-‐line extension for telecommunications firms: Prior to IPTV, telecommunications firms lacked the capability to directly offer video services to their subscribers. In contrast, cable companies’ infrastructure provided sufficient bandwidth to offer voice, data, and video through a single connection. AT&T, a leading US provider of traditional phone and DSL data services, launched an ambitious network upgrade in 2006 to increase the capacity of its infrastructure to support an IPTV service branded as “U-‐verse”.8 Executives at AT&T have stated that these upgrades require a “couple billion” in capital expenditures each year. 9 Services such as U-‐verse compete directly with traditional video services from cable and satellite firms. Ongoing subscriptions for access to a basket of channels are the primary source of revenue.

• Online content aggregators: Services such as Netflix, Amazon Instant Video, iTunes, Hulu, and YouTube provide consumers with a library of video content, accessible through a high-‐speed internet connection across multiple platforms, such as personal computers, mobile devices, and televisions. This category can be further segmented into aggregators that focus on professional content, such as Netflix and Hulu, and those that focus on amateur content, such as YouTube and Vimeo.

These online content aggregators are disrupting the business model of the traditional subscription video services offered by telecommunications, cable, and satellite companies, unleashing significant whitespace for opportunistic firms to capitalize on opportunities within the IPTV ecosystem. As such, the remainder of this report will focus on IPTV as delivered through online content aggregators.

8 Peter Grant, “Business Technology: AT&T Raises TV Stakes With Bigger HD Lineup; Aiming to Trump Cable, Service Adds 27 Channels; Big Test of Internet Tools”, The Wall Street Journal, Dec 19 2006, via ProQuest, accessed Mar 6 2011 9 Niraj Sheth, “AT&T Rethinks U-‐Verse Spending After FCC Move”, The Wall Street Journal, Jun 15 2010, via ProQuest, accessed Mar 6 2011


THE IPTV ECOSYSTEM

Relatively Fragmented, Leading To Multiple Layers Of Intermediaries

Figure 1 – Map of IPTV Ecosystem

Note: A larger version of this map has been reproduced in the Appendix as “Exhibit 1 – Map of IPTV Ecosystem (Landscape Orientation)”

Publishers Originate Professionally Sourced Video Content

The path from content owners and publishers to the end consumer crosses multiple boundaries in the IPTV ecosystem. Media companies, such as ABC, FOX, and NBC, originate the flow of professionally sourced content. Most publishers then push their content to aggregators, while some also offer consumers direct access through their website. For those publishers that offer direct access, viewing is restricted to personal computers.

Aggregators Provide Content Owners With Secure Distribution And Shared Revenue

In contrast, aggregators provide consumers the ability to view content across a wider variety of receivers, such as smartphones, dedicated IPTV set-‐top boxes, and newer high-‐end televisions. Content owners are the main driver behind the success of aggregators. For example, Hulu, one of the most

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successful content aggregators, is jointly owned by Disney (parent of ABC), NBC, and FOX.10 Jeff Zucker, CEO of NBC Universal, explained in an interview with The Wall Street Journal that Hulu came about as a way to “train people to legally view [content] online”.11 As broadband providers increased the speed of their offerings, video content owners feared that consumers would turn towards unauthorized distribution channels, a trend that had cannibalized much of the revenue within the music industry. Aggregators offer content owners with a secure distribution platform and established business model for monetizing content.

Three primary business models have emerged from online aggregators: pay-‐per download, subscription, and advertising – along with a “freemium” model that blends elements of the latter two business models.

The iTunes Store is the most recognizable operator of the pay-‐per download model. Consumers must pay a set price for each program they choose to view.

Netflix is an example of a subscription-‐based model. In exchange for a monthly fee, consumers are provided unlimited access to a library of content.

YouTube uses an advertising supported model, leveraging Google’s strength in text ads as an extension into video. In an interview with The Wall Street Journal, an executive with Neo@Ogilvy, a digital ad agency, explained that some advertisers are not comfortable with running ads alongside user-‐generated content. This has complicated Google’s efforts to increase YouTube’s revenue, resulting in continued operating losses. 12

Hulu is an example of the freemium model. The company offers consumers free access to select video content on personal computers. For a monthly fee, consumers can upgrade to Hulu Plus, which offers a wider variety of content across multiple viewing platforms.

IPTV Receiver Platforms Set To Emerge Into Mainstream

In 2010, internet-‐connected televisions emerged, bringing online content aggregators directly into the living room. One of the most visible illustrations of this trend is Google’s launch of Google TV, an IPTV receiver platform based on the Android operating system. Through a partnership with Sony, Google’s software has been embedded within select television models.13 Google has also licensed its software to manufacturers of set-‐top boxes, such as Logitech. Through these deals, Google aims to enable consumers to watch video from any website directly through their television, providing direct access to content owners. The business model for Google TV is similar to that of Android: the Google TV platform is available to device manufacturers without charge from Google, and in return, Google can reach consumers in the living room with advertisements. Although some content owners have been supportive-‐notably Time Warner, owner of HBO-‐have reacted negatively. ABC, NBC, CBS, and Hulu are among the services that block Google TV devices from viewing video content.14 By creating a keystone

10 Paul Thomasch, “UPDATE 3-‐Disney joins Hulu video site, takes ownership stake”, Reuters, Apr 30 2009, http://www.forbes.com/feeds/afx/2009/04/30/afx6364646.html, accessed Mar 6 2011 11 Peter Kafka, “NBC CEO Jeff Zucker: Hulu Will Start Breaking Even “Soon””, The Wall Street Journal, May 28 2009, http://d7.allthingsd.com/20090528/d7-‐interview-‐nbc-‐universal-‐ceo-‐jeff-‐zucker/, accessed Mar 6 2011 12 Kevin J. Delaney, “Google Push To Sell Ads On YouTube Hits Snags -‐-‐-‐ Video Site Is Key To Diversification; The Lawsuit Factor”, The Wall Street Journal, Jul 9 2008, via Factiva, accessed Mar 6 2011 13 Don Clark, “Google Unveils Software to Join TV, Web”, The Wall Street Journal, May 21 2010, via ProQuest, accessed Mar 6 2011 14 Sam Schechner, Amir Efrati, “Networks, Google Spar Over Web TV”, The Wall Street Journal, Oct 22 2010, via ProQuest, accessed Mar 6 2011


platform, the success of Google TV could ultimately supplant more established players such as Hulu and its primary owners: ABC, NBC, and FOX.

Other companies offering IPTV receiver platforms include Apple (Apple TV), Roku, Microsoft (Xbox 360 Mediaroom), and Cisco (Videoscape). While these platforms are increasing availability of IPTV in the living room, it is unlikely that cable set-‐top boxes, the most common add-‐on device, will support content aggregators. Content aggregators provide an alternative source for video content distinct from the traditional subscription model offered by cable companies. Therefore, for a cable set-‐top box to support a service such as Netflix or Hulu would diminish the value of the cable operator’s core video offerings. Nevertheless, the continued proliferation of IPTV receiver platforms into televisions and other devices will increase the reach of content aggregators into the living room.

IPTV Receiver Platforms Moving Into Financial Intermediation

Device manufacturers are primarily limited to one-‐off revenue from a consumer’s initial purchase of that item. In contrast, consumer payments to publishers and aggregators for content represent an on-‐going revenue stream. Developers of IPTV receiver platforms have begun to recognize this opportunity by integrating the capability to purchase content directly from their platform.

Apple’s iTunes Store is an example of dominator strategy that seeks to maximize Apple’s share of the overall ecosystem. In February 2011, Apple announced that companies who sell digital content for applications on iOS devices must use Apple’s in-‐app payment mechanism to process transactions. In exchange for 30% of the revenue from each transaction, Apple would provide publishers with seamless integration into iOS devices. Although Apple has yet to publically state whether online video aggregators, such as Hulu and Netflix, would be subject to the new rule, other aggregators such as Rhapsody, a music subscription service, have stated that Apple’s stance is “economically untenable”.15 Apple, as an existing market leader in Content Aggregation / Financial Intermediation (iTunes Music Store), Electronics Retailers (Apple Store), and IPTV Receiver Platform (iOS, Apple TV), is using its strong market position to capture a highly attractive space within the IPTV ecosystem.

15 Yukari Iwatani Kane, Russell Adams. “Apple Opens a Door, Keeps Keys”, The Wall Street Journal, Feb 16 ‘11, via ProQuest, accessed Mar 6 ‘11


ECOSYSTEM HEALTH ASSESSMENT

The health of the ecosystem will be evaluated based on three “critical measures of health”: productivity, robustness, and niche creation.16

High Productivity, Driven By Increasing Consumer Demand and Advertising Revenue

The primary measure of productivity of an ecosystem is the ability of firms within that ecosystem to generate revenues. For the evaluation of the IPTV ecosystem, we will be looking at value and cash generation through three primary sources: device unit sales, subscriber/pay-‐per-‐view, and advertising.

Unit sales of IPTV receiver platforms have been growing steadily over the last few years. In 2010, Apple and Roku both announced that they have sold one million units of the Apple TV and Roku Player respectively.17 Revenues at Roku exceeded $50 million in 2010, and are expected to reach $100 million in 2011.18 While this represents just a small proportion of the US television market, hitting the one-‐millionth unit sales mark was still a significant milestone. Demand for such IPTV receiver sets delivering niche, non-‐traditional television content has seen an uptick in recent years. While it took Apple four years to hit this target when it launched the Apple TV in January 2007, Roku achieved this same target in a little over a year. 19,20

Sales of other non-‐dedicated IPTV devices have seen even faster growth. Game consoles such as the Xbox 360, PlayStation 3, and Nintendo Wii all have capabilities to connect via Wi-‐Fi to IPTV content aggregators such as Netflix. Since its launch, the Nintendo Wii has generated worldwide sales of 85 million units (33 million in the US), while the Xbox 360 and PlayStation 3 has sold over 50 million units (19 million in the US) and 48 million units (12 million in the US) respectively.21,22,23 Furthermore, many consumer electronic goods such as HD television sets and Blu-‐ray players by LG, Samsung, Sony, and Philips come standard with Wi-‐Fi connectivity, providing connectivity to IPTV content on a limited basis.

In late 2010, Roku announced that it would begin licensing its platform to third-‐party hardware manufacturers.24 In a move seen as a direct challenge to the much delayed Google TV platform, this is predicted to greatly increase market penetration for Roku, and allow many more consumers access to IPTV content available only through the Roku Channel Store.

On the content subscription front, content aggregator Netflix announced revenue increases of 34%, with a 52% surge in profits during their forth quarter earnings call.25 The Wall Street Journal reported that Netflix’s “movie-‐streaming service fueled the addition of 3.1 million subscribers over the holidays”,

16 Marco Iansiti, Roy Levien. “Strategy as Ecology”, Harvard Business Review. Mar 2004, p. 72 17 Tracey Schelmetic, “Apple TV and Roku to Announce Million-‐Sales Milestone; Google TV Lags”, TMCNet, http://iptv.tmcnet.com/topics/iptv/articles/128696-‐apple-‐tv-‐roku-‐announce-‐million-‐sales-‐milestones-‐google.htm, accessed Mar 05 2011 18 Ibid. 19 Wolfgang Gruener, “Apple’s History Lesson: The iPhone and AppleTV”, TGDaily, http://www.tgdaily.com/mobility-‐features/30712-‐apples-‐history-‐lesson-‐the-‐iphone-‐and-‐appletv, accessed Mar 06 2011 20 Press Release, “Roku Launches Open Platform for Delivery of Content to the TV”, http://www.roku.com/Libraries/Press_Releases/Roku_Channel_Store_Release.sflb.ashx, Nov 2009, accessed Mar 06 2011 21 Nintendo Co. Ltd. Consolidated Financial Highlights, http://www.nintendo.co.jp/ir/pdf/2011/110127e.pdf, accessed Mar 06 2011 22 Tor Thorsen, “Xbox Sells 50 million; Kinect ships 8 million”, Gamespot, http://ces.gamespot.com/story/6285921/xbox-‐360-‐sells-‐50-‐million-‐kinect-‐8-‐million, accessed Mar 06 2011 23 “PlayStation®3 Worldwide Hardware Unit Sales | CORPORATE INFORMATION｜ Sony Computer Entertainment Inc:”, http://www.scei.co.jp/corporate/data/bizdataps3_sale_e.html, accessed Mar 06 2011 24 Mark Hachman, “Roku Says It Will License Platform”, PCMag, http://www.pcmag.com/article2/0,2817,2371611,00.asp, accessed Mar 06 ‘11 25 Nick Wingfield, “Netflix Sees Surge in Subscribers”, The Wall Street Journal, Jan 27 2011, via Factiva, accessed Mar 06 2011


bringing its total subscriber base to over 20 million.26 Other IPTV subscription based content aggregators are also slowly gaining traction. One Touch Intelligence recently estimated that Hulu Plus, a relatively new entrant into the subscription-‐based IPTV model, has achieved 4% conversion across Hulu’s total user base of 30 million.27 Another report by Screen Digest puts Apple’s iTunes Store at the forefront of on-‐demand video sales and rentals, noting that overall sales increased 60% in 2010 compared to 2009.28

Online video advertising has experienced a resurgence in recent years as “rising broadband penetration and increased broadband speeds” has increased the market for streaming video, and made online video advertising feasible.29 PwC predicts that online “video advertising spend in North America will grow at an 8.4% compound annual rate to $3.5 billion in 2012 from $2.4 billion in 2008.”30 Several factors are driving this trend. Multiple studies show that more and more consumers are watching television programs on the web, climbing to 22% in 2010 from 8% in 2006.31 In addition, research from comScore indicates “people who watch TV shows online will tolerate about twice the amount of ads the medium now averages”.32 All these factors working together are predicted to drive online video advertising revenues for both content owners/creators and aggregators in the years ahead.

Figure 2 – North America Market Size for Online Video Advertising (ex Mobile; 2004-‐2013p)

Source: “Global entertainment and media outlook 2009 –2013”, PwC, Jun 2009

Robustness Highly Dependent Upon Cooperation From Content Owners

Robustness of an ecosystem may be measured several ways. One method is to analyze the intensity of partnerships within the ecosystem with content aggregators as a measure of the quality of content available for consumers. Content that consumers are willing to pay for creates value that can be divided and shared for the benefit of the entire ecosystem.

26 Ibid. 27 Will Richmond, “Report: Hulu Plus Starting to Get Some Traction”, Seeking Alpha, http://seekingalpha.com/article/237232-‐report-‐hulu-‐plus-‐starting-‐to-‐get-‐some-‐traction, accessed Mar 06 2011 28 “Apple’s iTunes Store Dominates Online DVD Sales, VOD”, Studio Briefing, http://www.studiobriefing.net/2011/02/apples-‐itunes-‐store-‐dominates-‐online-‐dvd-‐sales-‐vod/, accessed Mar 06 2011 29 “Global entertainment and media outlook 2009 –2013”, PwC, Jun 2009, p. 155 30 Ibid. 31 Wayne Friedman, “TV Trends: More Internet TV Viewers Erode Trad Media”, MediaDailyNews, http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=124522, accessed Mar 06 2011 32 “Online TV Viewers will Tolerate Twice As Many Ads”, Television Broadcast, http://www.televisionbroadcast.com/article/106518, accessed Mar 06 2011

156 PricewaterhouseCoopers | Global entertainment and media outlook: 2009–2013

We expect declines in display and classified to offset gains in search and video in 2009, with the result that overall wired Internet advertising will decrease.

We expect a 3.9 percent decline in 2009, with the US falling by 4 percent and Canada by 3.5 percent. Spending will edge up in 2010 as gains in search and video offset declines in display and classified. In both countries we expect mid-single-digit increases in 2011 and double-digit growth in 2012–13.

Including e-mail, sponsorships, lead generation, and other categories, wired online advertising for the overall forecast period will advance at a 5.8 percent compound annual rate to $32.9 billion in 2013 from $24.8 billion in 2008. The United States will increase at a 5.7 percent rate compounded annually to $30.9 billion, and Canada will grow by 7.7 percent on a compound annual basis to $2 billion.

Wired Internet rich media/video advertising market† (US$ millions)

North America

2004 2005 2006 2007 2008p 2009 2010 2011 2012 2013

United States 960 1,000 1,010 2,120 2,350 2,450 2,575 2,765 3,070 3,500

Canada NA NA NA 8 16 18 20 24 32 45

Total 960 1,000 1,010 2,128 2,366 2,468 2,595 2,789 3,102 3,545

†At average 2008 exchange rates.Sources: Interactive Advertising Bureau, Interactive Advertising Bureau of Canada, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

Wired Internet rich media/video advertising market growth (%)

North America 2004 2005 2006 2007 2008p 2009 2010 2011 2012 20132009–13

CAGR

United States 46.6 4.2 1.0 109.9 10.8 4.3 5.1 7.4 11.0 14.0 8.3

Canada — — — — 100.0 12.5 11.1 20.0 33.3 40.6 23.0

Total 46.6 4.2 1.0 110.7 11.2 4.3 5.1 7.5 11.2 14.3 8.4

Sources: Interactive Advertising Bureau, Interactive Advertising Bureau of Canada, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

Wired Internet advertising market† (US$ millions)

North America

2004 2005 2006 2007 2008p 2009 2010 2011 2012 2013

United States 9,626 12,542 16,879 21,206 23,448 22,520 22,750 24,330 27,230 30,935

Canada 341 527 844 1,164 1,360 1,313 1,336 1,407 1,641 1,970

Total 9,967 13,069 17,723 22,370 24,808 23,833 24,086 25,737 28,871 32,905

†At average 2008 exchange rates.Sources: Interactive Advertising Bureau, Interactive Advertising Bureau of Canada, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates


Firms in the IPTV receiver platform niche such as Roku have been actively seeking new channels and content for inclusion into their channel lineup. With over 100 channels to choose from, both free and subscription based, Roku is a leader as a provider of non-‐traditional television content. Roku provides a broadcast platform for niche and international channels to deliver their content, often with too narrow of a focus to appeal to traditional cable and satellite television broadcasters.

Content aggregators such as Netflix and Hulu are also adding partners to continuously boost their content library. Hulu, as a joint venture of Disney, Fox, and NBC, has access to a rich library of content to draw upon from its equity partners. Most notably absent from the Hulu lineup is CBS and Warner Brother’s CW network. However, what has been regarded as Hulu’s loss is Netflix’s gain. Netflix recently signed a deal with CBS to begin distributing CBS’s content to its subscribers.33

The licensing of the Roku platform and Google TV platform to third-‐party hardware manufacturers indicates the beginnings of a convergence between standard home-‐theater equipment, such as HDTVs and Blu-‐ray players, with IPTV hardware. Until recently, IPTV receivers have been considered a niche supplemental device. As these platforms become standard equipment in consumer electronic goods, they become more accessible to the mass consumer, increasing the robustness of the ecosystem.

However, the continued robustness of the IPTV ecosystem hinges on content owners continuing to provide aggregators with quality content. A large draw for consumers towards IPTV today is the result of the rich content available through aggregators such as Hulu and Netflix. If content owners shift towards a dominator strategy by withdrawing content from aggregators and limiting consumer access to direct distribution channels, a reduced consumer value proposition could lead to the failure of the ecosystem.

Niches Emerging In Amateur Content, Gaming

The growth of IPTV has spun off a flurry of niche creation in the ecosystem. Television content production in the past was limited to large studios with big budgets, and supported by heavy subscriber fees and advertising revenue. With IPTV, independent producers, some with just a cell phone camera, can create content and deliver it to millions of viewers through content aggregators such as YouTube and Vimeo. While advertisers have hesitated to fully embrace amateur content, Google’s acquisition of YouTube illustrates the potential for monetizing independent and amateur video.

Gaming through IPTV receiver platforms may be the next emerging market opportunity, and already, this is generating niche creation within the space. With the integration of the iPad and Apple TV, several app creators have designed multiplayer games that utilize the iPad as a game controller, with graphics projected onto a television display through the Apple TV set-‐top box. Furthermore, rumors in the blogosphere hint that “new code in the iOS 4.3 beta 3 firmware may soon support online gaming”.34 Roku also currently offers several basic games through its Roku Channel Store. As the market for gaming emerges within the IPTV ecosystem, niche creation is sure to follow as entrepreneurs seek to capture value from this market segment.

33 “CBS and Netflix announce 2-‐year Licensing Agreement for Library Content”, Daily News, http://www.dailynews.com/news/ci_17453787, accessed Mar 06 2011 34 Ross Miller, “Apple TV Gaming Hinted Strongly in iOS 4.3 beta code”, Engadget, http://www.engadget.com/2011/02/09/apple-‐tv-‐gaming-‐hinted-‐strongly-‐in-‐ios-‐4-‐3-‐beta-‐code/, accessed Mar 06 2011


Overall, Ecosystem Healthy With Strong Growth Prospects

As the ecology of IPTV evolves, forward-‐looking statements of revenues generated by the ecosystem seem healthy; robustness of the ecosystem is strong, but not without the absence of risks that could destroy the ecosystem; and niche creation continues to advance in this relatively young ecosystem. All this points to a cautiously healthy ecosystem. Allowed to develop fairly and unrestrictedly, IPTV is expected to radically alter the market for consumer television.


GAME CHANGERS

AllVid Could Dramatically Increase Consumer Access To IPTV Content

AllVid is an IP gateway adaptor proposed by the Federal Communications Commission (FCC) as a replacement for the failed CableCARD initiative.35 In its current form, the AllVid requirement will “require U.S. cable, satellite and telecommunication TV operators to supply all their customers a device or gateway – capable of delivering as many as six different IP video streams to TVs, DVRs or other equipment in the home – beginning no later than the end of 2012.”36

The implementation of AllVid will significantly impact the IPTV ecosystem, as it places IPTV content on an equal playing field as traditional cable television content. Viewers will be able to search for content across the entire spectrum of IPTV niche channels, as well as traditional channels offered by cable, satellite, and telecommunications providers. The effect of this is two fold.

First, niche, independent, or amateur content currently only available on an IPTV receiver platform such as Roku, can directly compete for viewers, subscribership, and advertising dollars against the much larger broadcast and cable channels. This will lead to an expansion of such niche channels, and possible migration of some smaller channels from a broadcast to an IP platform.

Secondly, content owners will view aggregators like Hulu as a substitute to their broadcast channels, causing tension in the relationship between the content owners and aggregators. Furthermore, fragmentation of the channel lineups of cable and satellite operators may occur, as more and more niche channels migrate towards the IP platform, in an attempt to capture value through direct subscription. As a result, the traditional bundled pricing models of the incumbent cable and satellite broadcasters could shift towards a la carte pricing, ending the current common industry practice of cross-‐subsidizing channels within a content owner’s portfolio.

Rollout Of 4G Networks Enables Wireless IPTV Content Delivery

4G, the forth generation cellular wireless standard, promises to deliver download speeds of up to 100 Mbps over a wireless cellular network.37 This will enable mobile users to stream multiple channels of HD video content on their mobile devices, and more importantly, allow users to unplug from fixed-‐line broadband connections.

The biggest limiting factor for IPTV growth today is its reliance on broadband internet connections. While broadband penetration in the US reached 94.5% in 2009, broadband speeds still lag against the EU, with US connections averaging 9.54 Mbps.38,39 4G connectivity, without the need to improve any physical wired infrastructure, while providing uninterrupted mobile coverage, is projected to solve these issues and impact the IPTV ecosystem in several ways.

35 Clint Boulton, “Google Touts AllVid to FCC for Google TV”, eWeek, http://www.eweek.com/c/a/Web-‐Services-‐Web-‐20-‐and-‐SOA/Google-‐Touts-‐AllVid-‐to-‐FCC-‐for-‐Google-‐TV-‐743680/, accessed Mar 06 2011 36 Todd Spangler, “FCC AllVid Rule Would Ban The Set-‐Top As We Know It”, MultiChannel News, http://www.multichannel.com/article/451984-‐FCC_AllVid_Rule_Would_Ban_The_Set_Top_As_We_Know_It_Analyst.php, accessed Mar 06 2011 37 “ITU global standard for international mobile telecommunications”, http://www.itu.int/ITU-‐R/index.asp, accessed Mar 06 2011 38 “Study: Americans Lead World in Broadband Use -‐ US Broadband Penetration Jumps to 94.5% -‐ December 2009 Bandwidth Report”, http://www.websiteoptimization.com/bw/0912/, accessed Mar 06 2011 39 Tim Conneally, “US Broadband Speeds Improve in 2010, Still Second Rate Against EU”, Betanews, http://www.betanews.com/article/US-‐broadband-‐speeds-‐improved-‐in-‐2010-‐still-‐second-‐rate-‐against-‐EU/1297805705, accessed Mar 06 2011


First, IPTV receiver platforms will integrate support for embedded wireless chips to tap into 4G wireless networks. Wireless chipmakers such as Qualcomm will realize an uptick in demand as the “internet of things” concept takes hold in IPTV consumer electronic products. Furthermore, fixed-‐line broadband providers, such as Comcast and Time Warner, will face renewed competition from wireless broadband providers, such as AT&T and T-‐Mobile.

Second, 4G connectivity will enable real-‐time interactivity with video content, and new niches will form within the ecosystem to develop interactive content and ways of monetizing such activity. Content owners and producers must rethink how they produce television content, and how best to leverage this interactivity for maximum profit generation. In addition, the shift toward 4G will reduce bandwidth unit costs for operators, whose savings can then be passed on to consumers. Broadband penetration in rural areas still lags that of urban areas, in large part due to the lower potential return on investment fixed-‐line operators face in rural communities. MatrixStream, a start-‐up within the IPTV ecosystem, believes that mobile operators could deploy IPTV networks over 4G networks at just 20% of the cost for a similar deployment over a fixed-‐line network.40

Dynamic Ad Placement Brings Targeted Advertising To Television

Cable and satellite companies are experimenting with technologies that allow them to provide highly targeted ads to individual households, based on that household’s viewing behavior and other personal and demographic data.41

The concept of dynamic ad placement is not new. Internet users have been exposed to online ads that aggregate user information from a variety sources to deliver targeted messaging. With dynamic ad placement on cable and satellite, data mining companies can combine viewing data with frequent shopper cards for a specific address, and “turn up surprising associations such as: “Jersey Shore” viewers are frequent buyers of yogurt.”42 The fundamental limitation that cable and satellite companies face is that the data collected is aggregated by household, meaning that a teenager’s constant viewing of the MTV channel, and her parent’s shopping behavior may combine to result in ads being shown that appeal and relate to neither.

With IPTV, and especially with the growth in IPTV being viewed over mobile platforms, user data collected for dynamic ad placement can be far more individualized than what traditional cable and satellite companies can obtain. By integrating IPTV viewing data with online behavior and transaction history, IPTV providers are positioned to build far more robust user profiles, providing advertisers with a significantly greater value proposition than that offered by cable and satellite providers.

40 “New 4G IPTV Platform Includes 3D, 1080p, HD and 7.1 Surround Sound”, http://www.worldtvpc.com/blog/4g-‐iptv-‐platform-‐includes-‐3d-‐1080p-‐hd-‐71-‐surround-‐sound/, accessed Mar 06 2011 41 Jessica Vascellaro, “TV’s Next Wave: Tuning Into You”, The Wall Street Journal, Mar 07 2011 42 Ibid.


APPENDIX

Exhibit 1 – Map of IPTV Ecosystem (Landscape Orientation)

IPTV

%Receiver%P

la.o

rms%

Conten

t%Owne

rs%/%

Publishe

rs%

Conten

t%Aggregators%

Electron

ics+R

etailers+

Conten

t+Delivery+

Networks+

Fina

ncial%Intermed

iarie

s%

Internet+Service+

Providers+

B2B%TransacAons% C2B%TransacAons%

Consum

ers%

AdverAsing%Networks%

IPTV

%Ecosystem

:%RelaA

vely%Fragm

ented,%Leading%to

%MulAp

le%Layers%o

f%Intermed

iarie

s%Legend

%(note:%size%of%a

rrow

s%rep

resents%m

agnitude

%of%fl

ows)%%

Financial+Flow+

Conten

t+Flow+

ILLU

STRA

TIVE

%

Sources:+Team+analysis;+logos+re

prod

uced

+und

er+Fair+U

se+excep

Con+(17+U.S.C.+§+107)+for+non

Lprofit+edu

caCo

nal+purpo

ses;+icon

s+obtaine

d+from

+icon

archive.com;+tv+im

age+ob

tained

+from

+sxc.hu

+(royaltyLfree)+

Documents

IPTV: Disrupting the Balance of Power in the US Media Industry