Here’s a term you’re going to be hearing more and more in 2010 — the Virtual MSO.

Web video and traditional TV have been on a collision course for a while. For most of that time, the discussion has been Web-centric, with the media and analysts asking whether Web-based video services–YouTube, Hulu and others like them–which have garnered huge, loyal audiences and have become part of our culture, lexicon and experience in a very short time, will pose a serious threat to traditional TV distributors. Will consumers, they ask, cut the cable cord and rely instead on free, ad-supported Web video rather than paying Comcast (or some other cable, telco or satellite TV provider) $150 per month for a cable package? Maybe, someday, but not anytime soon.

On the other hand, they might just cut the cord in favor of the Virtual MSO.

Apple’s planned subscription service (see today’s WSJ), Netflix’ streaming service, maybe even Comcast’s new Xfinity are early examples of the Virtual MSO. Its attributes – premium content, multi-business model (subscription, advertising, transactional), linear and on-demand consumption, user and multi-device entitlement – come from both Web video and pay TV. Also, with the Virtual MSO, the big screen is primary, maybe an Apple iMac with a 52” screen built for the living room or a Web-connected TV from Vizio, LG, Sony or Samsung.

Expect the discussion to shift to a more TV-centric view of the broadband video landscape. The VMSO will offer consumers something between free (ad supported Web-video) and $150 per month (Comcast). What if someone offered you a service for, say, $69.99 per month that integrated Web video and pay TV — allowed you to get any Web video (like free broadcast network TV from Hulu), along with a handful of linear channels you select (we really only need linear for sports and breaking news) plus a rich VOD library of premium TV content and movies? And you could access it from anywhere at any time from any device – TV, PC, netbook, smart phone. Streaming or download. No special set top box (Web connected TV’s and open set top devices and will leapfrog service-specific boxes), no truck roll, not restricted by geographic footprint or multi-billion dollar infrastructure build outs – because it’s an IP based, broadband distributed, managed service. OK, so maybe this TV-nirvana service is a ways away, but we will see VMSO services in 2010 that begin to set the stage.

We’re hitting a ceiling on free-ad supported premium content on the Web. Content owners and TV distributors are trying to stop the bleeding. Efforts like the cable-industry’s “TV Everywhere” – under which cable programming is made available online only after a consumer “authenticates” that he/she is a cable TV subscriber – are proof that the incumbents plan to preserve the status-quo business model for television and keep premium content under their lock and key as long as possible. They have a massive business to protect and will, no doubt, fight to protect it. So the new VMSO’s will have to adopt the existing pay TV business model and pay big bucks to content owners. The costs of entry will be great, but also the potential rewards. But even these cable incumbents, namely Comcast, may be forced by the new VMSO operators – Apple, Google, Amazon? — to offer their own national footprint VMSO services. Several have speculated that “TV Everywhere” might be considered a “dry run” for a cable VMSO service. Operators could flip the business model switch and offer their TV Everywhere services as out-of-footprint national subscription-based VMSO services if new competitors force their hands.

Who will succeed in bringing us the Virtual MSO? Apple (best bet so far), Google, Amazon, Microsoft? Vizio, LG, Sony, Samsung? Comcast, Verizon, AT&T? Should be interesting…

That cracking sound you hear is the walls of the clubby world of cable beginning to crumble. Everything in the media world — ­ especially the world of media distribution –has changed as a result of Comcast taking control of GE’s NBCUniversal.

Many people think this is a deal to preserve the status quo — that it is no different from News Corp controlling DirecTV or Time Warner’s ownership of Time Warner Cable.

As we all know, both of those deals failed to provide the heavily promised synergies between programming and distribution and have been since unwound. That being said, I believe there is a lot more to this story.
Comcast is among the major distributors with a clear long-term world view and digital savvy. It sees that its core business faces a big challenge in the form of broadband-distributed premium content to the TV–so-called “over-the-top” video; it also understands that over-the-top video is inevitable and full-fledged deployments are on the horizon.

And while plenty of analysts believe consumers won’t cut off their cable services — they like the convenience and the linear programming — even cable bulls recognize that a new generation of consumers may bypass cable subscriptions altogether in favor of an over-the-top approach. And so even though Comcast looks like it is trying to preserve its cable distribution primacy by acquiring NBCUs trove of content, the cable operator quietly is making moves that suggest to me that it plans to launch a national “over the top” services in the not-too-distant future.

Going national?

In 2006 Comcast bought the software infrastructure (thePlatform), and then they launched an aggressive IP network infrastructure initiative (Project Excalibur).

Now with the NBCU acquisition, they control a sufficient wealth of premium content that, when combined with web content, will be enough to launch a meaningful “over the top” consumer offering.

When they can’t grow their traditional business (already the case — telephone services have been powering their meager growth for the last few
years) they will have the all the ingredients to distribute video over broadband – in and outside Comcast’s cable footprint – and it won’t need anyone’s permission.

The new growth driver will be a broadband distributed service to new geographic markets at a lower price point. At the outset it wouldn’t have all the programming customers desire — shows from ABC or CBS, for example — but it would have enough content to drive eyeballs and attention away from subscription cable services.

Time Warner Cable, Cox, Cablevision, Charter: watch your backs and your precious subscriber bases. It’s a risky, potentially cannibalistic move for Comcast, but the alternative is that someone else (Apple, AT&T, Microsoft or Google) gets there first. Even so, it seems a sure bet that Comcast would be ready to be ready to respond very quickly and in a powerful way. In fact, think about Comcast’s “On Demand Online” as a dry run for a national “over-the-top” offering.

Operators will unlock cable content for digital distribution, build out the distribution infrastructure, and condition users to access content on multiple devices. All that will be left to do will be to throw the business model switch to out-of-footprint subscription and build out a TV interface (the digital home problem will be solved in parallel via web-connected TVs, special-purpose low cost set-top boxes, etc.)

It’s not just about responding to free ad-supported Web offerings like Hulu and Google’s (GOOG) YouTube, but also to services that look more like pay TV, like iTunes, Netflix (NFLX), and Amazon (AMZN). These new video services may have business models that are familiar — subscription, VOD, etc. — but they are unencumbered by geographic footprint.

Comcast’s out-of-footprint over-the-top service is inevitability. The media world will be forever changed and the cozy club of non-competing cable operators will be a thing of the past.

Needless to say, it is exciting (and to some, scary) times for the entertainment industry and we are on the cusp of a fundamental shift in who distributes digital content, how people consume it, and how the various industry players make money. The shift is arguably even more dramatic than the emergence of cable TV operators that ended the hegemony of the big three broadcast networks. This shift, of course, is the continued explosion of digital content - espcially video - over IP networks.

With monthly online video streams consumed passing 10 billion according to Nielsen, there is no argument about consumer appetite for this shift. What is less clear, is what happens next. One of the industry’s answers to this fluid situation is a concept labeled ‘TV Everywhere”. In short, it is the ability to access your favorite cable programming online and ultimately across a range of devices. So far, most cable content has been held hostage to the revenue stream of carriage fees, but a variety of proposals led by Comcast, Time Warner and others, promises to unlock a bunch of it. The first technical challenge is to figure out how to identify and authenticate users to make sure they have a cable subscription that “entitles” them to see the content online. Then the fun begins.

Earlier this week we announced OpenCASE Publisher, a new product that helps tackle the myriad of challenges, beyond authentication, that building and deploying a “TV Everywhere”-type service can uncover. In Tom’s quote in our press release, he asked a number of rhetorical questions about the variety of other challenges a successful “TV Everywhere service must address. I’ll attempt to flesh out the Q&A here:

How does a provider manage a scalable broadband service fed by dozens or even hundreds of cable networks?

• Scalable Content Management - Never before has this much premium content been made newly available at one time. OpenCASE Publisher provides a tool that can easily manage and automate the ingest of hundreds of simultaneous content sources. This eliminates the need for operators to custom build software and processes to manage aggregated content.

How does it make sure the right channel lineup is delivered to each consumer?

• Service Management and Provisioning - Once a user is authenticated, they need to be mapped to the services they have rights to. In the simplest case this could mean giving a user access to the same “bundles” they have available in their cable service. OpenCASE Publisher expands on this by allowing the service operator to create any number of unique bundles, channels and playlists using a drag and drop UI or via rules based automation capabilities.

How does it manage entitlement across devices?

• Multi-screen, Multi-device - Basic authentication can identify a user and what cable services he has subscribed to, but successful services will need to support other devices besides the PC including portable media players, mobile phones, game consoles and more. OpenCASE Publisher can simultaneously publish its aggregated content to any number of portal, players and devices. Furthermore, the OpenCASE platform provides the registration and device profile infrastructure that allow users to link devices with their accounts—and where necessary appropriate licensing and DRM rules.

How does it provide transactional capabilities for up-sell, cross-sell or a la carte content consumption?

• Cross-sell, Up-sell - Over-the-top entitled video services must leverage the inherent flexibility of a web-based offering when it comes to monetization. OpenCASE Publisher in conjunction with other OpenCASE products provides a full range of monetization options including advertising, rental, subscriptions PPV and download to own. The platform allows the service operator to mix and match monetization models with product bundles – perhaps ones unique to the web-based offering. This is a real opportunity to drive additional revenue – even for the core cable service packages.

How does it avoid the advertising and reporting issues that have hindered TV VOD?

• Advertising and Reporting - OpenCASE Publisher is integrated with most of the leading ad servers including DoubleClick, LightningCast, Adtech and any other VAST-compliant ad server/network. This means that from day one, a service operator leveraging OpenCASE Publisher has the same advertising functionality as leading sites that leverage the best-in-class ad networks. These capabilities are combined with a robust, video-service specific reporting and analytics capabilities that can measure monetization, video consumption behavior, title virality, category (channel) popularity and more.

We’re pretty excited about this next “wave” of development in the video industry and are looking forward to helping our customers deliver industry leading services to their customers and revenue to their bottom line. Check back for more updates and announcements as our current deployments bear fruit throughout this year.

By way of introduction, I’m Andrew Parker, the newest member of the team at ExtendMedia with responsibility for Technology & Strategy in Europe. I have spent the last 15 years working in the Internet and digital media industry and will be a regular contributor to this blog.

So, on with my first article.  I recently came across the Comscore figures for online video consumption in December 2008 which make for interesting reading

For Dec 2008: Source

• 150 million people (78.5% of total US Internet audience) watched 14.3 billion online videos, with the average viewer watching 309 minutes (or 5 hrs)
• The average duration of these videos was 3.2 minutes

To put all of this in context, if we look at the year before:

For Dec 2007: Source

• 141 million people watched 10 billion online videos with the average viewer watching 203 minutes (3.4 hrs)

So the volume of video being consumed is continuing to grow rapidly, and Google still accounts for nearly 60% of the video market–predominantly based upon YouTube. Unfortunately for Google and many others, the growth in consumption of these ad-supported solutions hasn’t been reflected in the advertising revenues:

From reviewing the IAB’s Internet Advertising Report here, we can see a total growth in the Internet advertising market from $5.9 Billion in 2007 to $6.1 Billion in 2008 but with Digital Video only accounting for a 1% growth (from 2% to 3%).

So despite the increasing uptake in online video, the success of advertising isn’t following in the same fashion. I find this quite strange as Internet video advertising certainly has all of the technical underpinnings to create highly targeted adverts based upon the content itself, the location of the viewer, and a variety of other metrics that are readily available. It should stand to reason that the more targeted the ad, the higher the likelihood of success, and therefore the more valuable the medium - clearly, there is a lot of upside to come.

It has been a busy several weeks here at ExtendMedia. Some of you may have seen noticed that we recently appointed Tom MacIsaac as our new CEO. Tom has already hit the ground running and the team here is pretty excited to have him on board. Perhaps most importantly, Tom brings really deep expertise in our industry having run LightningCast, a leader in video advertising and as SVP Strategy and Corporate Development at AOL after AOL acquired the company. Welcome, Tom!

Extend also announced a recent customer win with Thales that is important to the company for a number of reasons. For one, it is our first foray into yet another “screen” for the distrbution of digital video — in-flight entertainment. IFE faces many of the same challenges that one see in broadband video distribution including managing costs, a desire to support numerous business models and managing the ingest of content from numerous providers. Since Thales is a European customer, this project also represents even more momentum for us as we continue to expand globally. We’re really looking forward to bringing some of the best-practices we have developed to this segment of the industry.

The folks over at Nielsen have released a Q4 report on video viewing across all three screens - TV, Internet and mobile. There is plenty of good news in here for our industry with consistent growth year to year in every category. There were a few things, however, I found particularly intriguing. First, is that mobile video consumption is alive and kicking, despite a substandard experience with a lot of devices and networks. Quarter-to-quarter, mobile video users increased 9% in Q4 of last year. Even more interesting, is that these users spent more time per month watching video on their phones than people did watching video on the PC–28% more. Really??

Now keep in mind that the mobile measurements are for mobile video in general, while the Internet and TV measurements are for commercial TV. That said, people are clearly willing to consume significant amounts of content on the littlest of screens. When you combine this with the robust growth data on the usage of DVRs, it couldn’t be clearer that today’s video consumer wants to view their content, when, where and how they choose. This is in spite of the fact, that DVRs, mobile-capable phones and data plans cost money.

Extrapolate these finding into a more robust economy, add in faster network speeds with the transition to 4G, and some sort of consensus on cross-platform DRM and we’ll really be cooking!

Chris Gardner

It was nice to see that Hulu saw fit to tap their cache of subsidized advertising with parent NBC for the Superbowl. I thought the spot itself was pretty funny, actually. One of the better ones this year.  Check it out here. Silicon Alley Insider claims Hulu may have as much as $50M in advertising credits to spend with parent NBC, so expect to see a more aggressive front from the company in the months to come.

As one of the most successful over the top Internet video sites, Hulu has a lot to gain and a lot at stake in this evolving space and clearly they are going to continue to go hard at it along with Netflix, content owners and yes, the big service operators too. Mark Cuban’s recent manifesto on the The Great Internet Video Lie nothwithstanding, Internet Video is charging forward–warts and all. As usual, Cuban makes plenty of good points, including the fact that the economics of bandwidth mean that live Internet streaming is not competitive to traditional cable delivery. He’s right. That said, lumping all of Internet video into that bucket makes for awesome blog theater, but isn’t the whole story.

Internet video is as much about a change in user behavior as it is about technology, distribution and business models. Consumers are choosing to consume video at these sites in spite of an experience not yet on par with traditional delivery models. It is an evolution of the time-shifting that DVR’s introduced, into a fully on-demand world. Consumers get to watch content whenever they want and increasingly on whatever device they want. On-demand delivery suffers fewer problems around peak-time bandwidth that Cuban highlights and the consumers are accepting convenience in exchange for a smaller screen experience. Clearly, Internet video business models are in their infancy, but we’re only in the first few chapters of this story.

Chris Gardner

I am surprised that there is still any debate on the subject, but Fierce Online Video had a piece today on the future of Blu-ray. I commented on the original piece, but thought I would expand upon my thoughts a bit.

I certainly think that the future of video distribution will eventually be entirely online. Technologies like the Blu-ray disc are transitional and will ultimately become obsolete in favor of “soft” distribution models. That said, it will be quite some time before disk-based video distribution goes the way of the LP–three to five years and potentially much longer.

Why? First, a Blu-ray movie is huge. 40-50GB huge with all the trimmings. Even with the fastest broadband connection, there is a good bit of overhead for downloading these files and with broadband caps becoming more prevalent (250GB monthly at Comcast last I checked) a real limit to how much you can affordably consume. Second, even the best online HD streams don’t hold a quality candle to full bit-rate Blu-ray. It is true some folks can’t tell the difference, but with HD TV sales exploding, more and more folks will notice and care. Finally, disks are PORTABLE.  You can play it on a laptop and bring it over to your friends house. There really isn’t another convenient option of you want to preserve the quality of the original content. Portability is a topic I will likely wax poetic on repeatedly in this forum.

So how does Hollywood extend the tail of a hard goods distribution model? Blu-ray hardware Profile 2.0, otherwise known as BD-Live is one way. In short, this gives users of the latest Blu-ray hardware an ethernet connection and local storage. While I am a little lukewarm to this concept, it could certainly help bridge the interactivity and online gap. Another more promising alternative is for the Studios to bundle portable versions of the content with the disc itself. Studios are beginning to nibble at this notion, but comprehensive portability is still a ways off. People want to consume content they have purchased when, where, and on whatever device they like. Many will pay a premium for true portability, but this would represent a pretty fundamental shift in thinking for the video content owners. The music industry finally gets it, but it may be too late already for them.

Chris Gardner

Hey folks, welcome to our blog. We’ve been awfully busy lately between supporting customers like BellCanada and AT&T, expanding into Europe and AsiaPac, and raising another round of investment. That said, we’re long overdue for getting our blog going, so here you go.

You won’t find a whole lot of shameless self-promotion (well not too much) in this space, but hopefully you will find some useful insight into the digital video distribution industry from the perspective of a company in the thick of it. You will hear from me and over time a bunch of other folks here at Extend, so check back often.

Welcome!

Chris Gardner, CMO
ExtendMedia