Fragile model of video on demand

When the BBC Trust last week provisionally approved Project Canvas, the BBC’s internet-TV joint venture, the prospects of video-on-demand technology received a substantial boost.

The coming year is expected to see an increase in the number of ways that consumers can access VOD services – such as the BBC iPlayer, ITVPlayer and Channel 4’s 4oD – through a regular television set.

But as free-to-air broadcasters face higher charges for internet delivery, the TV industry is pondering how profitable free catch-up services will be as they move into the living room.

Serving up more programmes to larger audiences on bigger screens will come at a cost to the broadcasters – an outlay for internet delivery that analysts predict will rise along with the popularity of VOD services. By some estimates, the main terrestrial broadcasters are paying tens of millions of pounds a year to ensure the quality of PC-based catch-up TV services.

But technical advances – and consumers’ expectations, set by YouTube and the iPlayer – are forging ahead before the economics of delivering these services are clear.

“In the past six months, it’s all leapt ahead,” says Nigel Walley, managing director of Decipher, a media consultancy. “Some of the internet capabilities are coming to TV faster than we thought.”

Futuresource Consulting forecasts that one in five flat-panel TVs shipped in Europe next year will be ready to connect to the internet straight out of the box. By Christmas 2010, the first TV equipment based on Project Canvas should be available.

With iPlayer already available on several set-top boxes and games consoles, soon millions more households will be watching VOD on the screen for which it was originally intended – but delivered over the internet, not an aerial.

“Once people discover [iPlayer] on TV they use it frequently and regularly,” says Rahul Chakkara, controller of TV platforms in the BBC’s Future Media and Technology unit. “We know most people will use [iPlayer] on TV – the question is when rather than if.”

The speed of technological change could catch some broadcasters out, says Michael Cormish, chief executive of Blinkbox, an independent VOD service.

“Broadcasters have never had to manage distribution [themselves] before,” he says. “VOD is an attempt by the broadcasters to self- distribute and that’s the reason why they’ll find it tough. It’s not a skillset they have required . . . Most will end up spending a multiple of their initial budgets to try to compete, or simply exit.”

Jon Gisby, Channel 4’s director of new media and technology, says VOD “means a different set of economics than we have in linear and broadcast, particularly in distribution costs.

“We need to think through carefully how our video quality evolves based on bandwidth costs, and the money we can bring in off the back of it,” he says.

The BBC is also looking at its distribution costs as part of the current review into the scale and scope of its operations.

Some analysts question whether VOD can be as profitable as broadcast TV. The dual costs of piping internet video into the home and licensing content from producers – both paid out on a per-view basis – “may call into question the level of profits that can be made in the long term” from VOD, says David Cockram of Oliver & Ohlbaum, a media consultancy. “More people are taking more of the pie.”

Broadcasters already have to pay companies providing “content delivery networks” to ensure their on-demand programming reaches viewers in good quality and without loading-time delays mid-video. Every time a programme is viewed online through their VOD services, the BBC, ITV, Channel 4 and other broadcasters pay a CDN provider such as Akamai, Level 3 or, soon, BT.

“It’s different to traditional broadcast because as you get more users, the costs go up,” says Darren Waterman, a director at PwC’s media strategy unit.

Today, a half-hour programme costs between 2p and 5p to stream through a CDN every time it is viewed. That may not sound much, but with the iPlayer serving up almost 60m TV shows in November, a broadcaster’s CDN costs could already exceed £1m a month.

“The costs scale horribly,” says Mr Cockram. “The big open question is whether individual content aggregators such as the broadcasters will be able to cap those total [delivery] costs in future. That is completely uncertain.”

But Ben McOwen Wilson, director of online and interactive at ITV, says costs are already on the way down. “The market is beginning to deliver and costs are dropping,” he says.

Broadcasters and network owners are working more closely together, he says, with the most popular content to be stored close to major cities, rather than sent out nationally from a single London data centre.

The advertising recession has not hit internet video as hard as broadcast, with each online spot costing several times as much as a TV ad. But there are fewer ads in each online show, because broadcasters believe audiences will not put up with as many interruptions as on regular TV.

So the broadcasters may soon have to start charging for video services, says Mr Waterman. “The difficulty is that the BBC is giving catch-up away for free. That makes it harder for everyone to charge,” he says.

Although the economics of VOD are tricky for broadcasters to navigate, internet video is likely to account for just 5 to 10 per cent of total TV viewing by 2020, according to Enders Analysis – meaning they are unlikely to threaten traditional sources of revenues.

Nonetheless, Mr Gisby says 4oD is expected to turn a “modest profit” in 2009 for the first time since launching in 2006. “We believe there is a viable commercial business model for VOD,” says Mr Gisby, “but it’s still quite fragile and has a lot of risk associated with it.”

http://www.ft.com/cms/s/0/4d430148-f4e2-11de-9cba-00144feab49a.html

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