Service providers consider the OTT proposition

Over-the-top content has taken the spotlight as IPTV continues to face challenges, but expectations for an Internet/TV collision are mixed.

The market for video content offered over the top of broadband networks has attracted a lot of attention — both positive and negative — in the last year. With more players offering cheaper access to a breadth of content on the Web and the termination of SES Americom’s wholesale IPTV service IP-Prime, telcos are weighing the opportunities against the challenges of going OTT. 

The options for OTT vendors have also grown exponentially in the past year. This week, open-Web delivery vendor Verismo introduced its palm-sized VuNow set-top box (STB). In November, Blockbuster unveiled an a la carte movie-streaming STB, joining Vudu, Netflix’s Roku, Apple TV, wholesale video provider Sezmi, Boxee and several others in the OTT space. While no company has yet to gain significant traction in the market, 2009 should be the year that starts to change.

“I think 2009 is a huge wake-up year,” said Danny Briere, CEO of TeleChoice. “2009 is going to be when the IPTV business plans — built around the statement that there was only one competitor, cable — really start to encounter some new other types of competition.”
 
SES Americom’s cancellation of IP-Prime due to slow IPTV adoption was the start of this turning point in IPTV business plans, Briere said. IP-Prime brought down the economics and simplified the technology of IPTV, but its termination suggested many telcos weren’t convinced deploying the required infrastructure was going to get them a commensurate return on investment. Instead, if they can create products built around a more simplified infrastructure — i.e. broadband — and focus on delivering content to people through Web 2.0 technologies, they could pave a path towards being competitive with a lot less money, Briere said.

“Up to now, the consensus is everyone goes and launches an IPTV service,” he said. “CEOs go to conferences and see sexy stuff and think how they’ll play in it. There’s a lot of pressure to follow. Now people are waking up to the fact that it’s not easy; it’s expensive. Even if you build a massive network, IPTV is not going to pay for the network; you have to do other stuff.”

OTT is one example of “other stuff” that can differentiate a TV service. Yoav Schreiber, senior analyst of digital media infrastructure for Current Analysis, said that OTT vendors can offer lower-tier North American telco operators a potentially lower-cost alternative for video delivery, but the market has several obstacles to overcome. These include current bandwidth limitations to offering a viable video service over the Internet, less access to popular content as a result of fewer agreements with major content providers, and relatively weaker navigation guides.

“It is a lot more cost-effective,” agreed Mike Wolf, research director for ABI Research. “They don’t have to build out their whole infrastructure; they can leverage the Internet, and they don’t have to invest in a headend. The only downside is the lower quality of service and the lack of control for the consumer.”

Because of these roadblocks, service providers today are firmly in the investigation stage, he said. To appeal to consumers who don’t want stacks of boxes in the home, most are looking at integrating Web services into the most popular boxes, including existing STBs or game consoles. Services such as Roku or Vudu, which represent the third or fourth in the home, will only see limited penetration, perhaps unless they partner with a service provider, Wolf said.

OTT’s biggest appeal comes from letting consumers access specialized content without committing to 150 channels of extraneous programming. This premium content may be the biggest selling point, but the right amount of content at the right price is another missing link, said Bruce McGregor, principal analyst with Current Analysis. Consumers have to make trade-offs for older content, limited access or hefty fees. McGregor said he’d be interested in seeing what a service such as Hulu does if it were to be introduced into an STB. As a provider of premium content, free through an ad-supported business model, it is starting to see significant uptake on the fixed PC.

“They are starting to see an uptake because they are winning on the front by having the best content,” McGregor said. “Netflix isn’t winning the streaming battle because they don’t have the best content. They are getting adoption because their consumers can get it for free. You need a hook to attract some consumers.”
Still, not everyone is convinced OTT vendors have any long-term sustainability, regardless of their hook. Bob Rosenberg, president of Insight Research, pointed out that most are venture-funded and their investors are looking to get their money and get out, whereas a telco has a much longer-term view of business. If telcos were truly interested, he said, they may be more inclined to acquire an OTT rather than partner. To date, that hasn’t happened.

“I don’t think anyone would ignore it,” Rosenberg said. “The question is, though, once you start to make investments and partnerships — which assumes investment — are you going to be able to get in and get out quick enough for a payback? It’s really difficult because there is no barrier to entry. What’s popular today might not be popular the next day.”

Anyone with a browser who can put something on the Web can essentially adopt the role of service provider, he added. The players with the real advantage are the owners of the content. Even if vendors can secure the content, it won’t get distributed without the copyright holder. Once that ability is obtained, anyone can enter the game, Rosenberg said.

For a telco, it may make the most sense to offer a terrestrial box that receives ATSC signals and incorporates content from a broadband pipe that is managed by a telco, said Shane Walker, research analyst of consumer electronics for IMS Research. There aren’t examples of this yet today, but vendors are focused on incorporating more Web content than just videos. In terms of partnerships, providing consumers access to this content without having to take responsibility for the STB can be a tremendous cost saving for the telco, Walker added. Whether a telco can make money from managing the content itself or through a revenue-sharing agreement with an OTT vendor would determine if a partnership made the most sense. Either way, with nearly 65 million households capable of viewing Internet video on the TV, OTT could become a force to be reckoned with.

“I see that growing to 305 million by the end of 2013,” Walker said. “That is due to growth in game console sales and PCs, extenders and TVs with IP. We will see more TVs incorporating IP connectivity to enable one or two aggregators, with more appearing around 2010. To date, there’s very little demand for that. I don’t see that becoming significant until the end of 2010. From then to the end of the forecast, I do expect IP to be really significant.”

Today, no one vendor has cracked the OTT code, but each is close to perfecting certain aspects of the experience, and all continue to innovate. The bottom line, said TeleChoice’s Briere, is that there is a real opportunity for telcos to outcompete others by teaming with IP players looking to innovate versus essentially building another cable company, which is what most are doing today. It boils down to whether telcos want to view OTT players as a threat or a potential partner, and 2009 will be the year they have to draw that line in the sand.

“The next generation is going to nail it in 2009,” Briere said. “Someone is going to put all this together, and it will be like the iPhone of OTT. That is a telco’s worst nightmare is an OTT achieving iPhone status … unless they partner with them and work it to their advantage.”