smart pipes & smart devices

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IBM Global Business Services

© Copyright IBM Corporation 2007

Smart Pipes and Smart Devices

Berlin December, 2007

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Strategy & Change Consulting

The 30 second summary so you can start reading your Blackberry for the rest of the presentation

• The different of television and advertising business models is going to be very different that we know today.

• The IPTV landscape will be quite different from the PC and TV landscape.

• Winners and losers in the market will change as the user experience evolves and some be better at adapting than others.

• Much of the conventional wisdom about how this market will evolve is wrong.

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Television will not be the same. Our children won’ t even think of it as television

Consumers looking for media control and access:

Convenience viewingInteractive and social viewing

Higher quality content

Technology has evolved:Widely available broadband

Efficient compression technologiesHi speed, in-home wireless

Content looking for viewers:Multi-channel distribution

Digital media business models

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In The End of Television as We Know It , we posit that disruption to the media value chain is inevitable long-term

Past Future

Central programming Self programming

“One size fits all” content / channels

Time-based release windowing

Broad-reaching advertising with CPMs Tailored interactive advertising

Content networks’ oligopoly Internet and mobile aggregators

Silo’d monopoly/oligopolies for content access

Blurred access from telcos, Internet, traditional players, others

Primarily ad-supported models

“Anywhere” content portability

Platform-based release windowing

Subscriptions, PPV ad revenues

Single device for content delivery

Tailored content / channel bundles

“Your grandchildren won’t know what a TV is” – Saul B erman

The End of TV: The next five years

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The stakes are significant. The global TV market i s worth over $400 billion annually, the majority of which still comes from advertising

0

100

200

300

400

500

600

2002

E20

06

E20

10

Other

Basic andPremium TVSubscriptions

Licensing Fees

AdvertisingRevenue

WW Television Revenues 2001—2010

Source: PricewaterhouseCoopers, Entertainment and Media Outlook 2006—2010, IBM Analysis

US

D B

illio

ns

$315B

$410B

$535B

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The world of yesteryear will give way to a new form of advertising addressability, personalization and contextual inte gration

Past Evolving Future

Media networks as advertising conduit More marketing portals, platforms

Fight for placement

Follow me messages x-channels

Agency-created advertising User tribes, content owners, others producing creative campaigns

Upfront and tight-knit ad inventories Open, third-party online platforms

Marginalized digital specialists Integrated agencies, providers

Interruption advertising

Broadcast, one-to-many messages

Contextual marketing

Fight for interaction

Anonymous household data Granular individual data

Source: IBM Institute for Business Value (IBV)

Impression-based/CPM metrics Action-based tracking, currency

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Customer usage perspective

PC screen Video screen

Tec

hnol

ogy

pers

pect

ive

Priv

ate

netw

ork

“Traditional IPTV”Examples: KT MegaTV, AT&T, U-verse, Imagenio by Telefonica, T-Home by T-Com

Almost non-existent

Pub

lic

netw

ork “Internet TV"

Examples: Joost, GyAo, YouTube, etc.

“OTT IPTV”Examples: Apple TV, Sony IVL, Akimbo, Amino

While much of the innovation has been happening on the PC screen, the real battle will be for the consumer en gagement

Consumers don’t care

where there content

comes from

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Telco

Two different evolutionary paths are now clashing i n the battle for dominance in the new world of video and advertising

Satellite MSO

Smart Devices – PC Evolution Smart Pipes – TV Evolution

�The internet is the dumb pipe that delivers all content.

�Consumers pick based on user experience and functionality

�High quality networks deliver & manage value added services

�Superior content, service, and long-term user contracts lock in users

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The conventional wisdom about how this clash will r esolve seems to depend on three key assumptions that may turn ou t to be wrong

Network Neutrality

•Over the top service providers cannot access the market without a regulator-driven guarantee of network neutrality

Distinctive Content

•Access to unique and exclusive content will provide a competitive advantage to incumbents

Free Set Top Boxes

•Subsidized set top boxes will lure customers and enable lock-in through long-term usage contracts

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Myth #1: Regulators will be needed to enforce netwo rk neutrality. Reality: the market will do it

Network Operator Type

Open Access / Neutrality Stance

Telco Cable MSO

• Unfavorable but limited by fear of angering users

• Unfavorable but limited by fear of angering users

TODAY

WiMax 700 Mhz“Auction 73”

Television White Space

• Neutral• New player

wants to distinguish from incumbents

• Positive• Google lobbied

for Open Access

• Very Positive• Concept

designed by CE companies

IN MARKET BY 2010

US Market example:

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Internet access is a paid experience by consumers a nd consumers hate unnecessary restrictions

� NextGenTel in Norway restricted the transfer capacity from NRK.no1

Limit removed after customer backlash and bad publicity

Note (1): Norwegian Broadcasting CorporationSource: NRK.no, ZDnet.com

Claims refuted and content flowing 2 days later

Promise to not do it again and explained that it was done by an overzealous contractor who stepped out of bounds

ResultsThreats on Net Neutrality

� Comcast prevented content uploading to P2P networks including BitTorrent

� AT&T bleeped anti-Bush comments in a Webcast concert

�� IBM reviewed 69 ISPS and 24 countries and found only a few that made any significant effort to restrict BitTorrent traffi c

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Myth #2: Exclusive content will be a differentiatin g advantageReality: Free To Air broadcasters will dominate the mass market

Note: Excluding ad-supported commercial chanelsSources: Broadcasters Audience Research Board, European Audiovisual Observatory, Cable television advertising bureau

UK Viewership Statistics

20.59,936Total Sky

68.733,312Total Terrestrial

56.227,254TOTAL/ANY COMM. TERR. TV

56.827,528TOTAL BBC1/BBC2

%000s

Average Daily ReachChannel

Audience Share for Free To Air TV:

ITALY

Germany

France

UK

USA

67%

48%

46%

44%

25%

Once you leave the terrestrial broadcast space, total share of any individual channel is quite small. The UK has over 200 channel with a reach of under 3%.

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Content providers don’t want a repeat of iTunes, so they will make content broadly available

Apple was first in the market and now has leverage

Video content providers are determined to not let this happen

“The money is rarely on the table for exclusivity to make sense”VP of digital media at Twentieth Century Fox

“It really doesn’t make sense, with the advertising and distribution model for TV content.”Disney and ESPN Media Networks

"In the UK we felt worried about what happened to the music industry. iTunes is a disaster for rights holders”BBC Worldwide executive

Digital Music Digital Video from content owners per spectives

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Myth #3: Consumers will always choose the free set top boxReality: Network operators have a poor history as C E companies

VS

“If cable boxes were sold at retail…the Comcast DVR would get creamed.”

Comcast HD DVR TiVo Series 3 HD�Subsidized set top box for $5 to $15 monthly fee, no up front cost

� Installed by network operator with supporting customer service

�$500-$800 up front + $5-10 monthly fee for the TiVo service on top of your cable bill

�No support from the cable company

“Just awful” “I like it a lot”

Source: WSJ, Personal Technology by Walter Mossberg “The HDTV Dilemma: Pay for TiVo's Recorder Or Settle for Cable's? December 28, 2006

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The cost of advanced set top boxes is rapidly appro aching a price level where they can be sold at retail for under $2 00

$0

$100

$200

$300

$400

2008 2009 2010 2011 2012

Other Non Chips

Other Chips

Cell Processor

1 TB HDD

Under $200Under $100

Advanced Set Top Box Cost Forecast – 1 TB HDD / Cell

Readiness to buy a STB rises markedly at the $200 and $100 price points

Comparable phenomenon is happening with HD-DVD and BluRay players <$100

Source: WSJ article on holiday sales, IBM research

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So, how might this market transformation actually p lay out?

Network Neutrality

Distinctive Content

Free Set Top Boxes

The Experience

TheTiming

TheImpact

Not necessary…

Not available…

Not a differentiator

... We’ve demolished some assumptions… …we’ve also g ot three predictions…

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The Experience: winners will create value by offeri ng competitive content, a better user experience, and targeted ads

�� Building B could deliver an experience competitive to any cable or satellite provider without investing in any of costly infrast ructure

Popular Content

Niche Content

Targeted Advertising

�Delivered through Free To Air stations and stored on a local HDD

�Delivered through data-casting or over the top

�Most popular material is pre-loaded for immediate viewing

�Ads targeted at customer demographic for better results

Case Example: Silicon Valley start-up Building B

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The timing: the bandwidth and the technology is her e today. 2008 will see the first disruptive devices on the m arket

Required Bandwidth By Content Type vs Average Bandwi dth by Country

USA

UK

Germany

France

Sweden

4.8

2.6

17.6

6.0

18.2

Speed required to deliver buffered near HD without QoS

HD streaming without QoS

SD streaming without QoSVUDU Movies On

Demand

�Movies On Demand in near HD quality

�Buffer enough material to handle network interruptions and start movie instantly

�Speed equals MSO, user experience is far superior

Source: ITU global bandwidth survey, IBM research

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The Impact: Traditional cable and MSOs will keep the majority of the market share for now, but their economics will chan ge dramatically

Telephony

Music

Video

�Per minute pricing

�Flat fee, unlimited use

�Bundled CD

�Per track pricing

�Monthly MSO fee

�? Ad supported

�Most calls are still run on the PSTN…

�Most music is still sold on CD…

But the industry economics have changed forever…

� “Same Same but Different…”

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Recap: (Or what you missed you while you were readi ng your Blackberry)

• This business is changing – and sooner perhaps than many were expecting.

• A new user experience is upon us, and it is the user experience that will be the key differentiator for players.

• Existing service providers will probably keep their volume leadership, but industry economics will shift dramatically.

• Players should not count on keeping closed networks, exclusive content, or contract-locked subscribers in the future.

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Thank You