The Future of Online Video – new hypothesis

One of Telco 2.0’s key associates in the ‘Content Distribution’ space is Alan Patrick from Broadsight (see his excellent blog). He’s been working with us on a new report on Future Business Models for Online Video Distribution, which will be published later this month. Alan presented some of this analysis at the Telco 2.0 event last week. We asked him to sum up his thoughts:

Over the last two months we’ve created a hypothesis on how the online video market may evolve – based on desk research, interviews, online questionnaires, a workshop with the avant garde new media users at the Tuttle Club and a “Wisdom of Crowds” session at the Telco 2.0 Brainstorm last week.

To understand the industry evolution, its worth outlining the background to the online media world. What we can see is that there is massive and disruptive change across the video media supply chain:

Content Creation – There have been 2 major shifts in the last 5 years:

(i) Falling costs of content recording and production equipment (hardware and software) has reduced costs of capture and creation, and the resulting emergence of User Generated Content (UGC) has reduced content prices for media where amateur and professional differentiation is low (photography for example) as well as driven a huge (volume wise) new market in video production, mainly in short form content (a few minutes).

(ii) The digitisation of large amounts of video libraries, both by the owners and increasingly amateurs with low cost copying equipment, has made a huge back catalogue of video available online. This has aided not only the original media operators, but also the market in “User Copied Content” (also known as piracy in some quarters)

Aggregation – The traditional media aggregation functions of publication – content finding, content editing, and content marketing – have been replaced by algorithm based online systems. The finding content function was invaded by Search Engines (eg Google) and now increasingly Social Media, where networks of friends discover new content. These social networks have also taken over much of the editing functions of rating and recommending content. Marketing costs have also reduced in a networked world, to the extent where the transaction costs of some items makes it cheaper to give them away rather than to actually charge for them

Distribution – Moore’s Law, Open Source software, usable “de facto” webservice standards and a glut of bandwidth and hardware buildout from the dotcom failures has meant the cost per megabyte, teraflop and kilobaud has plummeted since 2000.

Over the last few years, Distributors have engaged in vicious price cutting to fill their huge empty pipes.

Customer Environment – The inexorable march of Moore’s Law, and increasing adherence to open architectures, plus increasing device interchangeability and application flexibility, has led to the total cost of ownership falling for hardware, software and services
Predicting the impact of all these axes of change is quite hard – we found that it was easier to group these axes into a number

of scenarios. After some winnowing, 3 main ones emerged:
Old Order (eg BBC, Hollywood Movie Studios). They win if they can:

• Re-establish content rights
• Maintain control on sources of funding (Ads, Subscription)

Pirate World (YouTube et al)* win if there is

• No control of rights, Free wins
• Offset-based funding is sufficient to kep the costs of these businesses paid

New Order Players win if:

• New copyright models allow some form of pricing control by these new aggregators / creators
• Migrate control on sources of funding (Ads, Subscription) from Old Order

Interestingly enough, technology shifts cease to make strategic differences once you look at the “big picture” outcomes above. By and large the technology drives the opportunity, but the prediction of industry evolution resolves itself around the economics and sociopolitical reactions. In this space, the most material factor is the ability to manage – and monetise – the copyrights.

Also, when we started looking at these scenarios, we realised that the likely evolution was not either/or, but more likely to be an evolution of the market from the Old Order, through a disrupted, disaggregated “Pirate World” and then a New Order will emerge, as shown in the chart on page 9 of the slide deck above (in the chart, the X axis shows time, the Y axis shows relative market share.)

Why evolution?

It is fairly clear that the Old World structures have costs that are being attacked already (and have also been in similarly structured but lower bandwidth media – print and music – to devastating effect). But our view is that although “Pirate World” is disruptive and will disaggregate much of the existing structures, it is not sustainable itself in the longer term, because:

– Firstly, there is just not enough advertising money, nor enough offset funding money from all the Web behemoths, to indefinitely fund the growth of an industry as large as the video media industry. TV and Cinema is a c $0.5 trillion industry worldwide, that’s the size of the total global Ad industry – the current online Ad industry is c $50bn. This was true pre crunch, it is even more true now.
– Secondly, all the evidence is that advertisers and funders want to fund high quality, longer form content, not the vast tranches of User Generated Content which is the main output of the current online video media industry
– Thirdly, we judge it is difficult to believe – given the size of market at stake – that counterplays to increase the difficulty of piracy for the average person will not occur.

In other words, we imagine a scenario of creative destruction. What is then interesting is to think about how the New Order could emerge. In our workshops and questionnaires, 4 likely approaches came out as the strongest:

(i) The “iTunes Play” – someone like Apple creates an end to end, owned but beautifully designed supply chain and starts to charge a reasonable amount – most people prefer to pay that than risk copyright infringement.
(ii) The Trusted Network – New Media networks emerge that people trust as the best pointers to desirable content. They could be social media based or algorithm based (Think or Pandora, but for Video).
(iii) Existing “Pirate Players” go mainstream, typically due to legal and financial pressure – this weeks’ announcement that YouTube is to start showing Ad funded, legal, long form content is thus very interesting.
(iv) Old Media players make the decision to eat their own lunch and transition – think Hulu or BBC iPlayer here.

As to timings, these are the hardest to estimate – you can draw all sorts of adoption curves from past evidence and build simulation models – but Bill Gates’s maxim that things change less in 2 years than you think, and ditto more in 10, seems to hold good for the last 10 years of media so why not here?
At the Telco 2.0 event, we tested two main assertions of this model:

– Was our assumption that Pirate World was not sustainable valid?
– Would the current media distributors (ISPs, Broadcasters and Telcos) be able to transition? (we held that some would, but – as can be seen from the chart – value destruction would be significant over 5 – 10 years)

We asked people to vote and comment on whether we were too pessimistic or optimistic, or about right.

For the timings, c 33% of people felt we were optimistic – ie Pirate World would come sooner and/or last longer. 50% of people felt it was about right, 17% felt we were too pessimistic.

For the Old Order to transition, about 25% thought we were optimistic (ie there would be more value destruction), 60% thought it was “about right” and about 15% thought we were pessimistic.

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