Summary: 'Hollywood' and Telecoms are eyeing the prospects of making (more) money from online video distribution. But how should they develop their strategies, and can they collaborate for greater mutual benefit? An initial report below from the 1st Hollywood-Telco International Executive Brainstorm held in Los Angeles on 5th May 2010.
Organised by the Telco 2.0 Initiative, the 1st Hollywood-Telco International Executive Brainstorm held in Santa Monica brought together 75 specially-invited senior executives from the film, TV, gaming, advertising, technology and telecoms industries to try to start a constructive dialogue around new, strategic commercial models for collaboration.
The focus was 'new telecoms-enabled business models for film, tv and games in a multi-screen, 3D/HD, mobile world'.
The discussions were based on each party's respective objectives, which from the content owner side focused particularly on the protection of intellectual property, engaging directly with consumers via the mobile channel and monetizing Film, TV and Gaming content in new ways across the global mobile footprint. For telcos, the emphasis was on developing new sources of revenue from online content, creating new mobile experiences for their subscribers and leveraging their number one asset - the telco customer base and the data they hold about them.
Both parties shared home truths, recognizing that as things stand each only represents a tiny proportion of the other's revenue. For example, for Hollywood 'online' accounted for a mere 1% of the $28.8bn US home entertainment market in 2009 and for Deutsche Telekom, in its recent corporate strategy announcement, 'media' is just one of four industrial sectors that together could deliver €1billion of incremental revenue growth by 2015, compared to DT's total group revenue target of €502bn.
Despite this, each side has real and urgent pressures that are forcing them together to investigate opportunities to collaborate on new strategies and business models to monetize the online opportunity.
For telcos video has become a key driver of their core strategy, less so as a new revenue stream, but more because video internet and mobile traffic are dominating network planning and management issues with 4000-6000% increases in traffic forecast over the next five years. Furthermore, a shift towards two-sided business models in which telcos act as enablers to other 'upstream' providers of services, means that an increasing number of telcos are looking at entertainment as a possible opportunity to sell their assets as well as access. (See our previous Analyst Note, ‘How to Out-Apple Apple,' for more on telco two-sided business models in the entertainment industry).
For studios, piracy as well as low cost legitimate online distribution such as Netflix (See: The Impact of NetFlix; Can Telcos Help Hollywood) are eating away at profit margins. Therefore both industries are being driven to find new methods to monetize online video and serious potential lies for both in working together, particularly across mobile, Internet and TV channels (or the '3 screens').
We are currently producing an in-depth analysis covering 10 core areas of potential collaborative development for content owners and telcos, to help define a ‘new world' strategy for online entertainment. These focus around the theme that telcos offer much more than just a distribution channel and could be one of the partners that studios need for the monetisation and effective distribution of online content.
It will examine the alternative business models and approaches required and establish the compelling reasons that content owners and telcos have to collaborate, not least of which is to avoid the mistakes of the music record labels. Amongst the specifics it will cover are:
In the meantime, in this analyst note, we will concentrate on a subsection of these in the form of four areas in which using telco capabilities for entertainment services might be both desirable and possible.
Using telco as a channel through IPTV began as top of the collective mind. However, as proceedings continued, the limitations of IPTV were clarified and the value of other telco assets and capabilities to content owners became better understood.
There are issues with the scale that telcos can offer content owners with IPTV, as we laid out in our previous report, Digital Hollywood: How to Out-Apple Apple. Without that scale, telcos are little more than a side show and even with it they compete with more established channels, such as cable and satellite and increasingly Apple and Netflix, which studios are more used to dealing with. Thus, making the most of the interactive elements of IPTV is essential as a differentiator if telcos are to stand out from the crowd.
Furthermore, the requirement for ‘minimers' (minimum payments from telcos to studios ) per territory were highlighted by Yotam Ben-Ami, Director Strategic Partnerships from Telefonica, who is responsible for all relationships with content and Internet players and Albert Cheng, EVP Digital Media, Disney/ABC Television Group, as a major and unnecessary stumbling block in negotiations. This type of payment is more usually associated with start ups as an insurance against the start up's failure but is part of the standard contract and as such represents an institutional barrier for the two sides to overcome.
In an unscheduled session, Ben-Ami and Cheng agreed to work to find a common way round this to create a deal that would enable Disney ABC content to be delivered across Telefonica territories, providing an insight into the negotiations that take place between the two sides. Perhaps more interestingly in terms of strategic change, they also raised the concept of the 5% experimental budget.
5%, or a similar low percentage of the budget, is what they have within their control as owners of the particular business segment. Therefore by using this to experiment, they can test out new content distribution methods, packages and opportunities to see what works and doesn't before having to take on the conservative, risk adverse establishments within their own companies.
Such budgets could and we would suggest should, be used to begin investigating the value of telco-asset based services and overcome the chicken and egg issue that continually raised its head through discussions.
In a vote (1-5, where 5 was ‘very valuable’ and 1 was 'no value'), delegates identified telco billing, Quality of Service/Experience, customer data and three screen content delivery as the most valuable potential telco capabilities beyond pure content delivery. However, content owners in the audience were unable to articulate how they might use these capabilities in practice.
Content owners were naturally more inclined towards a model in which telcos would develop solutions based on these assets which they would then judge for value. A clear theme here was that they wanted solutions relevant to their businesses and not raw data and access to APIs, a message that also came through loud and clear at the 9th Telco 2.0 Executive Brainstorm held in London the previous week. (See 7 Top Themes of Telco 2.0, Spring 2010). (More on the strategies for monetising customer data can be found in our Can Telcos Unlock the Value of Their Customer Data Strategy Report).
In turn the telco representatives were at pains to explain they have already invested heavily in fibre and next generation infrastructures and needed some sense of certainty before creating new asset-based solutions.
Further clarity is required on what is wanted by whom and it is vitally important for both telcos and studios to move forward. This requires studios and other content owners to accept that online video is challenging their revenues and for telcos to talk the language of Hollywood - receipts and ratings.
The objectives of studios as articulated by Disney ABC's Cheng, are straightforward and summed up by the following:
Simple in theory but online video means that distribution to the masses is fragmented, the flow of money back to content creators unsure and complicated and, while building closer relationships between content creators and consumers is most definitely more possible online, it has not been a capability that studios have really exploited as yet.
Instead studios have concentrated on defending their traditional revenue streams and were almost desperate in their protestations that TV in its traditional form was alive and very much kicking. Certainly it still brings in the bulk of the revenues but the proliferation of access technologies - cable, satellite, online TV, IPTV - is fragmenting distribution, while the emergence of time and place shifting challenging traditional advertising models.
However, telcos have access to customer data that helps across all three of these objectives. It can help target the right customers to get the greatest audience, link with identity and DRM to ensure studios get paid and provide the customised experience that will keep consumers coming back for more.
Cross platform advertising measurement and metrics are not yet in place and without these advertisers are prone to default to standard 30 second TV ad options. Lori Schwartz, VP at ad agency Interpublic Group bemoaned the lack of standards for the new platforms but suggested that if user behaviour could be used as the base of solutions for the newer platforms - IPTV, online TV, mobile - it would be a win-win for all.
Getting that data in a usable form is where things get difficult but, according to Roberto Saracco, Director Future Center, Telecom Italia, creating an affinity and relevance engine using augmented reality, is where telcos should be playing. Augmented reality may sound like a complicated concept but it simply means using the data telcos have about time, location, behaviour etc to add to the experience of the service being delivered; a kind of telco-enabled mash up.
He suggested that most telcos can't use IPTV to compete with free OTT providers and should instead be concentrating on a business of intermediation, providing a platform that enables others to create. This is a perfect example of an upstream opportunity under the Telco 2.0 two-sided business model and, he said, was a strategic play not simply a tactical move based on getting content that would attract subscribers.
Saracco further highlighted that telcos were used to delivering 1 to 1 services, whereas media companies are about 1 to many services and creating that individual relationship that brings consumers back time and again is also vital in creating personal DRM relationships.
Up to now DRM has been all about control; about stopping users from accessing content they hadn't paid for. That view is now changing and DRM is being seen as an opportunity to enable customers to reach their content and not the other way round. The most advanced manifestation of this change in attitudes is DECE, a digital entertainment ecosystem being built on a standards based DRM system. Being led by Sony, DECE is a cross entertainment industry initiative that will create a cloud-based rights locker, in which users log rights tokens that identify their right to access certain content. It builds into a rights library for each user and could be used as a base for content owners to up sell, cross sell and build lasting relationships with their customers.
Mitch Singer CTO, Sony Pictures Entertainment & President the DECE, stated that it was currently in Beta testing and would be live by the end of the year. He further explained how this could be linked with credit cards, store cards etc to build a complete ecosystem but surprisingly there was no mention of integration with mobile systems. He claimed that telcos had been a tough nut to crack and so far there were no telco members amongst the 50+ DECE membership. Telco 2.0 will be working to close this obvious gap over the coming months.
The gap between the telco and entertainment industries is not trivial and changes in approach, language and expectation need to be made. However, in a single day at the 1st International 'Digital Entertainment 2.0' Executive Brainstorm mindsets began to shift and there is clear evidence that if packaged correctly and targeted effectively, telco assets can help content owners maximise the online video opportunity. While responsibility for making this happen lies on both sides, the onus is on telcos to make their platform capabilities clearer to the studios.
To aid this we will be releasing a more in-depth report on these issues and potential ‘use cases' later this month. In addition Telco 2.0 is planning a programme of research, project work, meetings and workshops with key groups to build on the momentum achieved at the event and to help foster more constructive dialogue between the parties. We will disseminate some of this analysis at our virtual event Telco 2.0 Best Practice Live at the end of June, and will run a second Hollywood-Telco event in October in LA, as well as hold a European version of it in London or Berlin in early November. (More info: firstname.lastname@example.org).