if connected

VirginMedia has secured iPlayer content for its VOD service. This is an approach I advised Internet video suppliers to take in this report. It’s great to see that traditional TV industry players like VirginMedia better understand the potential for free Internet VOD than do two out of the three leading games console makers, despite those games console makers’ video strategies.
There are two reasons offering iPlayer on the normal TV VOD platform makes sense for VirginMedia:
1. Offers VirginMedia’s users better picture quality than the PC Internet version of iPlayer and displays the programmes on the TV through the normal cable set-top box. This increases the value of VirginMedia’s TV offering to consumers and should help customer retention.
2. Reduces the pressure on VirginMedia’s overstretched broadband system. More here, under fig 3, especially.

This is a follow-up to yesterday’s post on understanding the game console makers’ strategies.
The console owners approach to video on demand (VOD) and TV also highlights their divergent marketing:
PS3 and Sony – See the PS3 as a TV and video hub, with content available for remote access using a PSP. They will launch a digital TV tuner later this year that will enable consumers to record TV onto the console’s hard drive (but the availability date has slipped), and will help expose the PS3′s video abilities to consumers. On demand is also a key focus, as is securing pay TV operator partnerships. But, Sony are uninterested, so they say, in securing BBC iPlayer content.
Microsoft Xbox 360 – Have an on demand platform live in the US and UK with pay per view movies and TV. Separately, they’ve also struck a VOD deal with BT so Xbox can act as a player for BT’s video on demand content. Microsoft have little free, or no, on demand TV content with which to grow the consoles video audience. They are trying to monetise a nascent activity — video consumption on consoles — before developing a video-watching console audience. Like Sony, Microsoft appear ambivalent to building Xbox360 iPlayer support.
Nintendo Wii – Say video and TV is not a core focus, and the Wii is all about games and expanding the games market. However, together with the BBC, Nintendo have enabled BBC iPlayer support, which Nintendo plan to draw consumers to use their Wii’s more. In particular, like the Wii news or weather channel, iPlayer will encourage members of Wii-owning households who do not use the Wii for games, to try it, thus securing more games revenues…
With >1 million weekly users of the PC version of iPlayer, just months after launch, I know which of the above strategies makes more sense.
Unfortunately for ISPs, all of the above will increase their broadband cost base… as consumers watch more high quality Internet-delivered video… which hits ISP networks and for which ISPs currently have no revenue-driving value chain position. More on this point later.

The debate raging between ISPs and the BBC over the iPlayer catch-up TV service highlights the strain that ISP business models are under.
In essence, a combination of fierce inter-ISP competition and the confusing marketing of broadband packages, has led to a tailspin of residential broadband pricing as consumers choose the cheapest offer. ISPs are simply receiving less and less (broadband Internet) revenue from each consumer, so they are seeking revenues from other sources such as content providers ie the net neutrality debate (read this net neutrality report), or through behavioural advertising models (e.g. Phorm and soon others), or through multiplay bundles (read this report on multiplay).
Alongside this declining per user revenue, Internet traffic is increasing due especially to the rise of video services such as iPlayer (UK), Hulu (US), 4oD (UK), Sky Anytime (UK), Joost, Babelgum, Youtube, Flickr, etc. etc. as well as the pirating of tv programmes and movies using peer to peer networks. So, ISPs’ bandwidth costs are rising.
ISPs are attempting to control these traffic costs. Some ISPs have opted to impose explicit data volume usage limits on broadband users. Others have increased the degree of traffic management they deploy so reducing broadband speeds for consumers that exceed (sometimes secret) preset thresholds, or lowering speeds for certain applications (e.g. p2p) . Some of the ISPs that used the above tactics, have continued to market their broadband as ‘unlimited’, or in a couple of cases as fibre optic. Both of these tactics are misleading and encourage consumers to pick the cheapest broadband product available.
So, it’s not a surprise that Tiscali are complaining about iPlayer and are looking to achieve revenues from content providers rather than consumers. As a service, iPlayer has gone from having zero users to a reported more than a million weekly users in just nine months.
Unless either: (1) ISPs can agree on a way to market broadband clearly, so consumers can differentiate between them, and understand the benefits of more expensive packages; or (2) charge content providers for priority carriage, then ISPs will continue to struggle to make any money out of broadband directly and will have to reply on other parts of a bundle to drive profitability.
iPlayer could be the final nail in the coffin for pure-play ISPs. I don’t see blocking or degrading iPlayer as being a viable option for any ISP as it is a BBC service. So, iPlayer could drive further ISP consolidation and lead to less consumer choice.
Most pure play ISPs are small operations, Tiscali are alone among the UK’s main ISPs in being mainly a broadband play: Carphone Warehouse have a stated strategy to use broadband to drive profits from the bundled telephone service with broadband serving as an acqusition carrot; likewise VirginMedia see broadband as an acquisition tool for the other parts of their quad play; Sky plan to use broadband to deliver on demand TV; BT likewise, see broadband as a strategic plank of their business and central to retaining retail customers; Orange and O2 seek to do fixed-mobile bundles and will in time attempt to offload mobile traffic onto consumer DSL connections.
Only Tiscali is a classic ISP business and tellingly they are almost certainly up for sale.

Moving on from the crazy UK situation on fibre, Orange in France offers real fibre broadband at 100Mbps (download speed), complete with a full IPTV service, and VoIP telephony.
Unlike fibre wannabe’s, Orange’s upload speed is also staggeringly fast at 10Mbps, which makes the service ideal for uploading high quality videos to websites.
This is a commercial service that is already available to 147,000 homes. Full details are published in Orange’s annual results. France has become one of the most interesting broadband markets in Europe and continues to far outpace the UK.

Ashley Highfield speculates about new distribution models for BBC TV programmes via Apple’s platform. The main consumer advantage I see with offering BBC catch-up TV via iTunes is that such programmes would be transferable to iPods, iPhones, Macs, PCs i.e. multiple devices, rather than remaining tied to one PC as now.
However, there is an implementation challenge, despite the similarities between protecting rentals and catch-up content viewing windows. BBC iPlayer, 4oD and other catch-up services use IP address screening to prevent non-country residents from watching TV to which they’re not entitled. Apple use the billing address of the iTunes account holder instead. These approaches aren’t easily compatible. So, there is still work to be done before iPods work with BBC, 4oD and other broadcasters TV.
Regardless of the work needed, adding free catch-up TV to iTunes should be a no brainer for Apple (at least it would be if Apple’s headquarters was not thousands of miles distant from White City).
Apple’s profits continue to be driven by device sales, and not from content, rental or otherwise. Adding lots of high quality free professional TV content to iTunes would at a stroke tremendously increase the value to consumers of the iPod Touch and iPhone and so boost sales.
If Apple wishes to sell high end video-focused devices, it needs to have better video content (ideally free) to make the proposition work. I doubt movie rentals alone will be sufficient. Apple needs to add catch-up TV to the mix.

Ms Turner [CEO, Tiscali UK] said that unless they could agree a strategy with the BBC to share network costs, Tiscali would have to restrict users’ access to the iPlayer.
A senior insider at BT added: “It is certainly a live debate between ISPs [internet service providers] and the BBC. If the BBC gets the numbers it wants for iPlayer then network capacity could become an issue.”

I don’t usually do this, but I told you.
(and more background: iPlayer and ISPs, Broadband as a Trojan Horse for ISPs, or broadband quality and net neutrality, more here on ISP broadband revenues).

What iPlayer, 4oD, Joost, Babelgum and a number of other peer to peer content distribution networks are doing in essence is: they are lowering the cost of online video distribution by transferring a large part of that cost from the publisher onto the ISP (or on to the consumer if the consumer is on a metered broadband package).

If ISPs had healthy margins for broadband, this wouldn’t matter anything like as much. But European consumers are highly price sensitive on broadband access, so ISP margins are poor. ISPs have done an atrocious job of explaining why a consumer should pay more for a higher quality broadband service.

Plus, most large ISPs now have their own TV services. So, these Internet delivered TV offers both push up ISPs’ bandwidth and network costs, and they potentially undermine the ISPs’ own TV services. So ISPs vocally use the issue of higher costs, while ISPs are also concerned about revenue protection for their TV services.

Media coverage on the views of BT, Carphone Warehouse and Tiscali (three of the UK’s largest ISPs):
- FT:- ISPs warn BBC over new iPlayer service.
- Mail on Sunday:- Pay up if you jam the web, BBC warned.
- Independent on Sunday:- Internet groups warn BBC over iPlayer plans

The full impacts of all of this are still evolving. Clients must read our Net Neutrality in Europe report now, especially content owners, rich media/video aggregators, advertisers seeking to profit from this move to Internet TV distribution, and ISPs.

I’m fascinated by the name of the new initiative by the BBC, ITV, Channel 4 etc. to distribute TV programmes across the Internet using a common platform (there are existing separate approaches by Channel 4, Sky and ITV as well as a long-heralded launch due from the BBC).

Was the name ‘Project Kangaroo’ chosen because it’s all about ‘over the top’ business models?

On the cost side: I’m curious about the impact on ISPs. Large-scale Internet TV distribution has to threaten to increase their cost base as consumer bandwidth consumption increases substantially. I can’t imagine any ISP being able to overtly block mainstream TV organisations such as the BBC, ITV etc. without widespread public outcry.

However, ISPs may deploy more subtle quality of service management to minimise load on ISP networks at peak times. To some extent this is already happening. Or, ISPs, may simply increase the number of package tiers with data volume limits.

Even more interesting are the competitive issues. I’ve written about broadband threatening to become a Trojan horse for operators before. Project Kangaroo is yet another example of such a threat.

If ISPs use cost as an excuse to reduce the quality of service for Project Kanagaroo, which worsens the customer experience, will Ofcom of others act? It seems to depend on whether the ISP has significant market power. However, the UK ISP market is consolidating, so defining a clear test of which ISP’s have such power will become more challenging and more important for both the industry and for consumers.

For example on the competitive side: most of the major UK ISPs have TV offerings. Most have been focusing on improving the on demand parts of their TV services too:

• Virgin Media - Cable TV company. Differentiates its TV service with a free video on demand channel. Over the top catch-up TV diminishes this differentiator if it’s available to any UK broadband subscriber.
• BT - Launched an on demand IPTV service last December, BT Vision.
• Tiscali - bought IPTV company Homechoice that offer a TV set-focused service, now re-branded to use the Tiscali name. Tiscali also offer PC-based on demand movie downloads in conjunction with Arts Alliance Media.
• Orange - offer IPTV in France and elsewhere in Europe. Have plans for a UK launch.
• Sky – the leading UK pay TV operator with over 8 million DTH satellite homes, plus operate a fast growing DSL ISP using an LLU network. Plan VOD. Already offer a triple play of TV, DSL and telephony with the tagline: “See, Speak, Surf”.
• TalkTalk/Carphone Warehouse – alone of the major ISPs in lacking a clear TV strategy. Perhaps therefore they are best placed to benefit from Project Kangaroo.