Analysis: Over-the-top’s busy week

The over-the-top (OTT) space has always been exciting to watch, but this past week has seen more action than ever. Sezmi unveiled its distribution plans, discount retailer snatched up OTT content provider Vudu, Cablevision introduced its own personalized Internet channel and, although not announced, a legal-document leak confirmed telco Qwest’s investment in ZillionTV.

Connected Planet caught up with The Diffusion Group founding partner and director of research Michael Greeson, whose been covering the OTT space (and watching his predictions come true) for the past five years. He weighed in on what will change the game in OTT, what will fall short and where telcos fit into this rapidly changing market place.

SEZMI OPEN FOR BUSINESS

On the importance of Sezmi pulling the trigger: As a consumer, it’s not that I want all 300 channels I receive. According to Nielsen, I only watch around 20. The question is what am I watching, and which are so important their absence would discourage me from signing up for that service? That will vary, but there are some I’m comfortable pointing to, like HBO and ESPN. A lot will say if I can’t get those channels, I’m not subscribing to that service. My concern is that [Sezmi] are lacking those trigger channels. They are lacking HBO and ESPN, but there’s a reason why they are lacking. It’s either the fact that retransmission agreements with existing operators prohibit doing business with someone like Sezmi or an OTT operator. We don’t know the exact nature of those retransmit agreements.

On why Sezmi is in danger of looking like a pay TV provider: More obviously, [Sezmi] is restricted in terms of pricing. It’s $4.50 that the operators pay ESPN. If you add that to the content mix, it’s $25, and now you are competing head-to-head with the entry-level DirecTV subscription. So where’s your differentiator there? ‘Well, we have some cool online video and an on-demand service.’ DirecTV will have all that within a month. They are starting limited and will build content over time. I understand that, but are you going to add the right content, and what will be the implications to the business model if you do? Chances are you will start looking just like a pay TV service, that’s priced the same, but not as good as content. Pretty soon, you’re out of business.

WAL-MART ACQUIRES VUDU

On why it’s the best-case scenario for both: The best company to acquire a company like Vudu is a mass-market retailer, especially one that is heavily dependent on DVD sales. Wal-Mart accounts for 40% of DVD sales in this country, and their sales are declining. The entire movie industry suffers from an ongoing decline in DVD sales. We ask ourselves why, and it’s not because people quit watching movies. It’s because they have other ways of accessing those movies now. Theatres had their best year last year. People are going to theatre to see movies. They are watching them at home, but they’re also watching them online, and there’s a host of new services like Vudu working their way into consumer living rooms. With connected consumer electronics now more popular among manufacturers and certainly among consumers, we’ll end up in a situation where default expectation for modern devices is to have an Ethernet port.

On Wal-Mart’s embedded strategy: Wal-Mart knows its needs to get into the game now and do it right – not a tiny PC service, but direct to the TV and embedded into all their TVs and white labels, the house brands, the large manufacturers Wal-Mart can negotiate in. ‘We’ll sell millions of TV if you allow us to embed our movie hardware and software in the TV.’ Wal-Mart has a lot of clout for things like that. They can start out with a modest play, take Vudu as it is, get it incorporated and use it as a means to generate an in-home presence and ultimately generate revenue.

On why Wal-Mart needs to think long term: Every time Wal-Mart steps into this market, they do it half-assed. They’ll seem to be making a commitment, but they’ll throw their arms up in two years and say it didn’t work. I don’t think dropping $100 million is chump change, and the timing is much different than their prior efforts. Netflix has completely validated the embedded play. Now, Wal-Mart knows they have to get in and can’t afford Netflix for several billion dollars. So, they look for the cream of the crop in terms of streaming delivery, and that’s Vudu. Vudu has their act together from a technology business. Then they take a five-to-10 year plan. They don’t want to discourage DVD sales, but the reality is consumers will continue to move away from it. So, this gives them a way to serve both those who desire to purchase DVD and those who already do digital downloads and the larger group in between – those who are purchasing DVDs, but have learned about digital downloads.

On the power Wal-Mart brings to the table: Vudu isn’t all it’s come out to be. It has the technology together and the user experience is awesome, but there are several limitations that keep it from being the best and greatest. Wal-Mart’s interests aren’t in trying to further DVD sales; they want a bridge to the future. They want to offer a service to consumers that – with their help, their extraordinary clout and ability to buy bulk on DVDs – imagine negotiations with Disney: now, digital distribution is on the table for Wal-Mart. They are capable of getting distribution rights that a small company like Vudu in their wildest dreams could never obtain.

On how Wal-Mart can do what Apple couldn’t: Wal-Mart could do what Apple has been unable to do, which is really get the prices lower on that content to encourage digital distribution. Apple has failed to do that with its own TV platform. Wal-Mart can say look, I’m shipping ‘x’ millions of TVs next year, and 25%will have Vudu embedded, so I can deliver a possible customer base for the new service of ‘x.’ I’m delivering volume to a market that hasn’t had volume. And, boy volume changes the game. If Wal-Mart does what we know it’s capable of and what we expect it to do, it will be a game changer. It will change the OTT market.

On how Wal-Mart is helping Web video fragmentation: Any emerging market in its early stages is highly fragmented. You have a ton of players, most of which aren’t making money. Some have cool technology, but very few consumers know about them and large companies don’t have interest in them. When proof of concept becomes more convincing, when larger players are convinced this market is for real and this technology trend away from physical to virtual is reall, they are willing to invest big money into it - $100 million at a time. When they step in, by their very presence, they legitimize the entire market place. They have the brand capable of bringing tens of millions of consumers to them and an established customer base that can be exploited. They will, by their very definition, end up owning a large share of this market.

CABLEVISION INNOVATES ONLINE

On how Cablevision is differentiating: Cablevision just announced they are trialing a PC-to-TV media relay in 2010. This is very different from some other models looking to move online content directly to the STB via a direct connection with the home network. This uses the PC as an intermediate hardware device. Instead of porting to the set-top box, it ports to the PC and they download the software on their PC then they can access all their PC stored content and all Web-based content, even Hulu.

On why Cablevision is destined for the courtroom (again): Here you have Cablevision saying that any content that’s accessible on the PC to TV is covered under the fair-use provisions on the copyright code. That’s a direct contradiction. They aren’t literally saying they can get Hulu on the TV; they are overtly saying this. Hulu will have a heyday with this.

On how Cablevision will the litmus test for the OTT industry: This will end up in court. If it does end up in court, this will become the test for over-the-top video delivery. This will become a legal test for solutions that take content intended for a PC and retransmit it to the TV for viewing. One would think there shouldn’t be any legal reason they shouldn’t be able to do that, but Hulu and others are trying to limit to the PC, because when it hits the TV, it becomes competitive with the same content.

QWEST INVESTS MILLIONS IN ZILLION

On why Zillion makes sense for Qwest and vice versa: Qwest could use someone like Zillion. I suspect they designed their relationship in such a way that it allows Qwest to add some features and services to its organic TV offering as opposed to what it’s selling with DirecTV. There’s a lot of uncertainty around Zillion. They had layoffs, saw their CEO step down into a fundraising role. The leak of the Qwest relationship is reassuring. They’ve been saying for some time that they have landed some operators, but wouldn’t say which ones publically. Qwest is doing better than it was five years ago. They are beginning to be more aggressive with fiber deployments and new media efforts. They were behind the gun with all their court problems and legal problems; they were unable to think about the future in an aggressive way.

On Zillion’s best bets: I would think that having a major operator like that with some skin in the game; that’s encouraging for the start. They could [go after] smaller tier two and three telcos. I think that’s what we’ll see. Verizon and AT&T already have PC based services; they have their own fiber; they don’t need a company like Zillion. The tier-twos and threes that don’t offer IPTV and are looking for video provisioning to the TV.