paid tv's uncertain future

© Copyright 2010. Yankee Group Research, Inc. All rights reserved. August 2010Pay TV’s Uncertain Future

Pay TV’s Uncertain FutureVince VittoreDmitriy Molchanov

August 31, 2010


Agenda

Business and Strategic Issues

Radical Redesign of the Home and Services

Key Takeaways and Q&A


• Analog cable rapidly falling and almost being replaced by digital

• IPTV growing at a rapid clip

• Satellite holding steady but some downward signs

Pay TV Market Moving Rapidly to Digital

U.S. Pay TV Landscape

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2005 2006 2007 2008 2009

Subscribers (in Thousands)

Analog Cable

Digi ta l Cable

Satel l i te

IPTV


The Wallet Still Rules Decision-Making

Base: 562

What could convince you to switch from your primary pay TV provider in the next year?

4%

5%

7%

7%

8%

12%

13%

16%

23%

25%

73%

1%

9%

9%

5%

5%

13%

6%

13%

24%

24%

67%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Do not know because it's not my decision

Other

Better VoD offerings

Remote programming of a DVR from the Internet orphone

Higher capacity DVRs

Better customer service

Whole-home DVR solutions

More HD offerings

Better basic channel offerings

Availability of bundling options

Lower prices

2009

2010


Competition Coming from All Sides

Content Owners

Hulu, NFL, MLB, NBA, NHL

Alternatives

PlayStation Network, Xbox, Google TV, Retail STBs, iPad

Traditional Competition

MSO, IPTV, DBS

Cloud-Based Content

Netflix, CinemaNow

Pay TV Operator


Cord-Cutting: Myth or Reality?

It’s a Myth

• Pay TV revenue continues to increase

• Consumers are watching more TV than ever before

• Cable programming has crossed the chasm in terms of quality and now dominates key awards

• People love bundles, and nothing bundles programming as well as 200+ channels of content

It’s Reality

• Consumers are dedicating more time to the Internet

• Economics dictate that increasing programming costs will lead consumers to re-evaluate bills

• Competitors’ ability to target economic niches is very high

• Proliferation of devices is driving consumers to seek other options


Poll – Cord-Cutting: Myth or Reality?

Which of the following statements best represents your belief about cord cutting?

• Cord cutting is already happening in full force

• Cord cutting is just beginning and will continue to gain momentum

• We are still years from cord-cutting realization, and it will remain a niche market

• It’s completely myth—cord cutting will never happen


Cord-Cutting Attitudes

Bases: 5,306 in 2009; 1,069 in 2010

How does the availability of Internet video affect your attitude toward your cable, satellite or other subscription TV service? (N=1,069)

49%

17%13%

11%8%

2%

47%

21%

13%

7%10%

2%

0%

10%

20%

30%

40%

50%

60%

Haven't thoughtabout it

Will never cancel Didn't know itwas an option,

but wouldconsider

Consideringcanceling, but

haven't yet

Don't know Already cancelledmy subscription

TV service

2010

2009


Economics Will Be the Biggest Factor in Cord-Cutting

• Average monthly pay TV bill is around $65 and is increasing at least 5% annually

Subscription TV Service (n=1886)

3%

22%

66%

2% 7%

I plan to cancel serviceI plan to spend lessI plan to spend the sameI plan to spend moreUnsure/don't know


Pay TV

• As the relationship between programmers and pay TV operators strains, there appears to be no end in sight to programming cost increases

How do you expect to reduce the cost of your subscription TV service? (Please select all that apply.) (n=206)

4%

6%

9%

10%

14%

18%

35%

36%

5%

10%

10%

10%

15%

19%

30%

43%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Other

Canceling digital cable

Canceling HD service

Canceling DVR service

Renting fewer movies on VoD

Bundling with other services

Switching service providers to acheaper plan

Canceling premium channels(i.e., HBO)

20092010


Video Game Consoles Challenge the STB

Applications

Interactive Video

Social Networking

Information

Streaming Multimedia

Exclusive Content

Sony has led the pack in bringing exclusive content to the game console world with its own reality show, “The Tester,” which airs this winter, and with exclusive content from Marvel for comic book fans.

Targeted Advertising

Microsoft’s Advertising Business Group has partnered with Nielsen to begin researching ad placement through Xbox LIVE. Honda and Sprint have invested $1 million in advertising opportunities.

3-Screen

Both Microsoft and Sony are leveraging their consoles’ well-developed online communities to bring their content outside the living room with PSN and Zune Video.

Cloud


Regulatory Concerns

• Impact of Comcast/NBCU• Likely to pass but with significant restrictions

• Exclusivity on the endangered list• A la carte looming?

• How deeply will Congress get involved in disputes between programmers and operators?


Agenda





Proliferation of Household Devices

n=5,804

Percentage of households with at least one of the following devices:

69%

64%

63%

57%

46%

40%

38%

26%

18%

7%

83%

5%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Desktop

Laptop

HDTV

Console

STB without DVR

DVR

External Hard Drive

Digital Camcorder

Digital Photo Frame

Blu-Ray Player

DMA

Place-Shifting Device


Watching Video Frequency

Base: People who own the device (Asked in Wave 1)

How often do you watch video on your… (by video, we mean anything from TV, films, YouTube clips, etc.)?

4% 9% 3%18%

35%44% 43%

63%77%74%

41%

20%

31%16%

15% 12%

14%5%12%

34%

37%

24% 20%18% 18%

9% 7%

0%10%20%30%40%50%60%70%80%90%

100%

Live TVn=1,223

TVprogramsrecordedon DVRn=599

TV/VoDn=369

PC/laptopn=1,235

Videogame

consolen=793

Digitalaudio

player orMP3

playern=586

Handheldgame

consolen=465

Mobilephonen=986

-Retail settop boxn=757

At least once a weekAt least once a dayNever/I can't do this


These Trends Mean Three Things

• Consumers demand a seamless experience across devices• Consumers expect their content to “thread” across devices

—Amazon’s Kindle pioneered dropping a book on one device and picking up where you left off on another

• Home networking will expand drastically• But consumers need help getting their devices connected. • New standards like G.hn that extend across coax, phone and

powerline will help; so will diagnostic tools from operators like Verizon

• Opportunities for operators to act as intermediaries• Operators can leverage strong marketing and brand spend, billing

tools and consumer data to fight back against cord-cutting and deliver premium services


Familiarity and Convenience Are Highly Desired

On a scale of 1 to 10, how interested are you in the following services from your subscription TV service provider? (n=1,031)

17%

18%

19%

32%

35%

45%

37%

26%

50%

16%

17%

18%

23%

19%

19%

23%

19%

21%

17%

18%

20%

15%

18%

14%

17%

18%

12%

50%

47%

43%

30%

28%

22%

24%

37%

17%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Chat with friends through the TV

Connect to social networks through the TV

Make and receive phone calls through the TV

Internet browsing on the TV

Internet video on the TV

Whole-home DVR

Network DVR

Place-shifting

Start-over TV

High (10,9,8)High-Medium (7,6)Low-Medium (5,4)Low (3,2,1)


TV Takes on More Responsibility

Applications

Interactive Video

Social Networking

Information

Targeted Advertising

Home Monitoring

Videoconferencing

Streaming Multimedia Distance Learning

Network Management

Home Health Care

2010 2015

ServicesApplications


Smartphones Get Even Smarter

Mobile Devices Will Interact with Home Networks

Home Network

2010

Remote DVR

Place-shifting

2015+

Home Network

Media Sharing

In-Home Input Devices

Remote Home Monitoring

Remote Elderly Care

Both AT&T and Verizon are leveraging smartphones and tablets to control home devices

Alcatel-Lucent TeleHealth Manager has been cleared by FDA

QCOM’s Skifta application allows users to share their media through their phone when on a friend’s LAN

FrontPoint security and Alarm.com applications monitor home security systems


Devices Move Into the Cloud

Gaming

OnLive and Playcast experiment with Cloud Gaming: 1 Mbps for 640 x 480 resolution.

Personal Media

Ultraviolet creates new open standard for digital lockers backed by Warner and Microsoft. Disney also pushing “KeyChest.”

Streaming Multimedia

Brick-and-mortar retailers entering digital distribution: Walmart acquires VUDU, Barnes and Noble invests $140 million in e-book distribution.

Cloud


Applications Moving from Passive to Interactive

Cu

sto

mer

Att

ract

iven

ess

Interactivity

HIGH

LOW HIGH

Standard Def

VoD

UGC on TV

Social Networks

Webon TV

Catch-UpTV

InteractiveTV Content

DVR

AdvancedEPGs

ExclusiveContent

3-D TV

ApplicationStores

NPVR

T-Commerce

High Def


App Store for the TV?

Consumer pays for app via iTunes

Apple takes 30% of the revenue

Apple sends 70%to developer

on a monthly basis

In the iPhone world In the video world

Consumer

ContentOwner

Rights Holder

App Developer

Operator

Consumer

Talent

Sports Leagues


3-D TV Wheel Has Begun Turning

• Television Channels: ESPN, Discovery, Sony and Imax all working on 3-D channels

• Recording Equipment: Panasonic pushing AG3DA1 line of inexpensive 3-D cameras

TV Sales 3-D Content

Peripheral Hardware Sales

Consumer Demand

• Price: Panasonic 3-D sets priced at nearly a $500 premium over similar HD sets; price decreases as TVs scale

• Glasses: Active shutter glasses currently $100; manufacturers developing auto-stereoscopic displays

• Blu-Ray: Panasonic bundling 3-D Blu-Ray player with 3-D TV for roughly $3,000

• Game Consoles: PlayStation 3 introduced 3-D through firmware upgrade; Nintendo 3DS demoed

• Apps: Motorola ensuring that STB applications are visible in 3-D

• Consumer Survey: 34% of consumers think 3-D is “highly important” to their next TV purchase decision


How HDTV Content Is Viewed

Base: People with an HDTV set at home; asked in Wave 4

How do you view HD content on your TV? Select all that apply.

13%

2%

13%

13%

16%

27%

53%

15%

6%

7%

15%

16%

17%

53%

0% 10% 20% 30% 40% 50% 60%

Don't know (n=810)

Other (n=810)

Download or stream HD content from the Internet andwatch it on this TV (n=810)

Access free HD over the air through an antenna (n=810)

Never used HDTV set to watch anything in high definition(n=810)

Watch Blu-ray discs (n=810)

Subscribe to HD channels (and pay extra) (n=749)

2009

2010


Agenda





Key Take-Aways

• The pay TV market is on the cusp of radical change as new forms of competition put pressure on traditional business models

• Cord cutting already is appealing to a small niche audience and will grow with consumer recognition of alternatives

• The TV will be the most important screen in the household and will take on new roles

• Gaming consoles and the associated networks represent the greatest threat to traditional pay TV


Q&A

Vince Vittore, Principal AnalystService Delivery Architecture, Broadband, RegulationBlog: http://blogs.yankeegroup.com/author/vvittore/Twitter: @vvittoreRecent research: “A Tale of Two IPTV Telcos, Revisited” & “Service Providers Put Interactive TV Advertising to the Test”

Dmitriy Molchanov, AnalystAccess Devices, Converged Consumer Applications Blog: http://blogs.yankeegroup.com/author/dmolchanov/Recent research: “Mobile Broadband's Next Big Push” & “2010 Anywhere Device Index: Identifying the Next Game-Changer”

© Copyright 2010. Yankee Group Research, Inc. All rights reserved. August 2010Pay TV’s Uncertain Futurewww.yankeegroup.com

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