Pay-TV looks over the top

“The bulwark that pay-TV operators have is content packaging and pricing expertise and a relationship with their customers. However, these are not impenetrable.”

A collective fit of jealousy is permeating in the TV broadcasting business and where it is going to end is anybody’s guess.
Free-to-air broadcasters are looking with envy at pay-TV operators’ revenue models; these are holding up better in the recession than their own advertising-challenged ones. Meanwhile, device makers, and specifically TV manufacturers, are coveting the recurring revenue models of broadcasters and pay-TV operators, whether from advertising or subscriptions, or both. These giants, led by Sony and LG, are trying to add value at a difficult time. The sale of flat-screen TVs has been good but wouldn’t it be nice to add an ongoing revenue stream to the one-time buy?
As the recession bites, the biggest CE manufacturers are realising that the internet and the growing penetration of broadband is giving them an opportunity. By putting Ethernet (or wireless) connections directly into the TV, they can offer viewers over-the-top IP-based content. The move is a clear threat to the traditional way the industry has operated.
The assault was on show at the recent IBC exhibition in Amsterdam where many manufacturers of screens and other devices were showing next-generation products with broadband connections. Sony was not exhibiting in Amsterdam, but its new Bravia TV sets and Blu-ray players have internet connectivity and the consumer electronics giant is already testing delivering content direct to its TVs and Blu-ray players. This past summer the Sony film Hancock was offered to the 500,000 or so new Bravia TV set owners in the US a few days after the cinema launch and before the DVD went on sale. The film was offered for US$9.99 (€6.77) for a 24-hour viewing period – and consumers were paying for the film in their own homes on their TV sets long before their pay-TV operator had it to sell.

Clearly Sony and others are taking a leaf out of Apple’s playbook: sell a device (the iPod) and launch a service that keeps people coming back (iTunes). Something similar is happening in the games market. Just this month Nintendo ramped up its downloading business with a wide range of new games to download from its WiiWare site. And Nokia is trying a similar thing in the mobile phone industry with its Ovi content service: consumers can buy content direct from Ovi, effectively bypassing the walled gardens of content created by mobile phone operators.
Many are worried. Neil Gaydon, CEO of set-top maker Pace, says he thinks what is happening  is ominous. He is concerned that people who are offering OTT services could potentially bypass the pay-TV business. However, others are more sceptical. Graham Kill, CEO of Irdeto, the encryption specialist, says that there is still a question mark over the customer experience with OTT. “Initially people will be disappointed by the services they get but over time they could evolve into an ecosystem like the iPhone that keeps people interested and that’s the aspiration of the likes of Sony,” says Kill. Pay-TV operators are not ignoring the potential threat. Sky in the UK is already offering the Sky Anytime VOD and catch-up TV product and plans to turn on the broadband connection to its set-top boxes next year to offer even more content and services. Sky argues that offering attractive content and services is an area where expertise counts and pay-TV operators won’t be easily displaced. Gerry O’Sullivan, director of strategic product development, points out that it is not clear what content the TV set manufacturers are offering. People, says O’Sullivan, are not going to pay for user-generated content: “The manufacturers have seen an opportunity to put in a piece of technology connected to [the internet] but I haven’t seen that thing that is really going to change a Sky customer’s home.” There is also cost: Abe Peled, CEO of NDS, the smartcard supplier, argues that delivering over-the-top IP is expensive. Delivering VOD has a clear incremental cost but no clear incremental revenue.
And the head of Disney Online for EMEA, Myles MacBean, has an interesting take on OTT content direct to the TV sets. He questions what makes Sony better than any other aggregator of content. “I’m struggling to see the vertical integration value,” he says.
So Disney – another rather vertically-integrated company – is “struggling” to see the rationale of leveraging different bits of the business to grow the whole? I am not convinced. The bulwark that pay-TV operators have is content packaging and pricing expertise and a relationship with their customers. However, these are not impenetrable and new offers from other big brand names based on price and flexibility could prove compelling to consumers. The likes of Sony has got it wrong in the past; remember the ill-fated launch of an online Sony music store, only stocked with Sony artists? But Sony has learned some lessons from that and it is already signing up the likes of NetFlix, Amazon and broadcasters including Five in the UK to offer content on its new Sony Bravia internet TV platform. Watch this space.

Kate Bulkley is a broadcaster and writer specialising in media and telecommunications. [email protected].