DTV: Implications for commercial and public

service broadcasters

DTV: innovation in contents, uses and business models

Lisbon, November 27th 2009

COST - European COoperation in the field of Scientific and Technical research

COST 298 (Participation in the Broadband Society) Training School
Organized by COST298 and OberCom - Hosted by ISCTE

Antonio Schuh
A note about me

„ Adjunct Professor at IE Business School – currently teaching Telco/Media

Convergence to iMBA
„ Director of Partnership Development at Telefónica. Previously, Business
Development at Telefónica Latin America (TV launch) and Bus. Development for
Content at Corporate
„ Former strategy consultant in the “TIME” industries (Telecom, Media, Information
& Entertainment)
„ Education
— PhD drop-out: Innovation Management, University of Manchester
— Master in Management of Communication Firms, Annenberg School -
University of Southern California. Masters in Institutional Economics and
Management at PUCRS and UFRGS
— BA, Advertising & Mass Communication (Federal University, Rio Grande do Sul,
Brazil)
— BSc, Computer Science (Catholic University, Rio Grande do Sul)

1
A. Schuh
TV Industry is changing

2
A. Schuh
We are going to talk about an industry…

Was Is

•Evolving •Disruptive
steadily Technology

•Vertically •Fragmented/
integrated Value chain horizontal

•High •Low
Concentration

•Systems •One critical

Control points component

•Low •High
Externalities

3
A. Schuh
Hold on – wrong industry: that was the computer industry in
the 80s-90s
Was Is

•Evolving •Disruptive •Micro-

steadily Technology computers

•Vertically •Fragmented/ •From IBM to

integrated Value chain horizontal horizontal
specialists

•High •Low •Plenty of

Concentration manufacturers

•Systems •One critical •OS

Control points component

•Low •High •Network effects

Externalities

4
A. Schuh
Now, really. We are going to talk about an industry…

Was Is

•Evolving •Disruptive
steadily Technology

•Limited •Plenty
Substitutes

•Simple, stable •Experimenting,

– one Bus Model plenty of
revenue revenue
source sources

•Friendly •Muddled
Regulation relationship

5
A. Schuh
Oops, did it again: that was telecoms in late 90s to now

Was Is

•Evolving •Disruptive •Mobile, HSPA,

steadily Technology LTE

•No •Plenty •From fixed to

Substitutes mobile, VoIP…

•Simple, stable •Experimenting, •From

– one revenue Bus Model plenty of subscription to
source revenue sources Blynk, app
stores…

•Friendly •Muddled •Divergent

Regulation relationship objectives

6
A. Schuh
Main messages

„ Change in the Digital TV industry is not entirely unique – yet

another case of industry evolution

„ The specific mode of industry evolution in Digital TV is

affecting core assets but not necessarily industry’s core skills

„ Understanding industry evolution and aligning strategy

accordingly will impact future profitability and survival

„ Current stage of development suggest that industry is

converging towards a new dominant design, position in the
value chain, underlying technology and monetization

7
A. Schuh
Which “Digital TV”?

Technology? DTT
(several flavours),
Cable, IPTV, DVB-S

Business model? End device: TV,

FTA, pay PC/Web TV
Digital TV

Platform? Who pays?

Fixed/mobile Private, PSB

„ Concepts do overlap and boundaries are blurring

„ Our focus: reaction of Free-to-Air broadcasters to technological
innovation
8
A. Schuh
 Theory: “How industries evolve” (McGahan, 2004)

„ To each type, a
Radical Creative
trajectory
Threatened „ Perceptions on
existence, speed
Core and type of
assets industry
Intermediating Progressive evolution affect
response
Not
Threatened „ Need to align
strategy to actual
industry
evolution type
Threatened Not Threatened
and stage of
Core skills evolution

9
A. Schuh
Why type of industry evolution is important?

„ Analogy: rules of industry change and barriers on a highway.

— “The barriers on the sides of the highway establish only the direction of
change: they don't say anything about how fast you go or which lane you're
in or even which road you travel. It's just that if you are going to be on this
road, you have to play by these rules.
— What I'm fundamentally saying is that not all strategies for innovating will
work in every situation, so the goal is to pursue innovation that is consistent
with the direction of change in the industry so that you can profit from it”
„ “Lots of organizations have spent money to capitalize on breakthrough ideas
yet find that those investments never pay off, because they're ahead of their
time or behind their time”
„ “The process of industry change generally takes decades, and that the
opportunity for many executives is to understand the long course of change in
their industries and capitalize on it.”

McGahan, 2004

10
A. Schuh
TV industry
„ Key features
— Tech for distribution 1-to-many
— Generalist offer – news, fiction, non-fiction; audiences (children, stay-at-home
moms, adults, youngsters)
— Dominant design: vertical + horizontal grid
— Processes in place for audience research, ad sales, programme acquisition
— Foundation: economics of scarcity
— Push medium - asymmetric power relationship to audience (passive receiver)
and to some extent with advertisers

„ Economic organization
— Vertically integrated
– Content producer: Own productions, commissioning…
– Aggregation: (especially US-generated content)
– Distribution: Control over broadcasting infrastructure (even if outsourced)
— Diversified. Radio, Newspapers…
— Monetization. Ad-funded.
— Regulated: (1) Constraints to unsuitable content, “public interest” content
(eg. Free Football/Bread & Circus. ). “Fairness doctrine” (2) Free spectrum in
exchange for reach, diversity and public service targets
11
A. Schuh
TV industry – core assets and core skills

Elements
„ Spectrum
„ Studios
Core assets „ Brand/Reputation

„ Understanding mass
audiences
Core skills „ Acquiring programming
„ Producing
„ Selling ads

12
A. Schuh
Special case: Public Service Broadcasters

„ Need
— TV is a public good: non- rivalrous, non-excludable consumption
— Positive externalities of “quality” TV – better informed society
— Need to address industry structure concerns: concentration likely
due to entry barriers (limited spectrum) high fixed costs and low
marginal ones
— Good TV is an experience good – market failure since customers
cannot be fully informed ex-ante on quality of options available
„ Funding: license fee, tax, mandatory contributions…

„ Core assets: same

„ Core skills: Typically lacks advertising skills/relationships

13
A. Schuh
Importance

„ About 38% of media market Per capita spending in TV (selected countries)

in EU-15 (PwC) €/year
0 100 200 300 400

„ By far the most important USA 151 157 2

destination of leisure time
(over 60% media UK 86 98 76
consumption time in Spain)
Japan 117 52 39

„ Huge cultural impact. Ex: Live

Germany 46 56 87
events
Sweden 48 92 48
„ Leading position in the media
ecosystem Italy 83 35 27
— Outlet to other content
players: e.g., film France 54 60 26
— Central to local content
production Pay TV Advertising Licence fee

Source: Screendigest 2006; apud Faibairn (2008)

14
A. Schuh
 Changes in TV industry

Impact

Internetization

Digital Terrestrial TV

Analogue/early
digital expansion

Time

–UHF –Expansion of –PVRs/time shifting

–FTA Satellite TV channel line-up or –VoD over cable or
HDTV IPTV
–Pay TV
–OTT – YouTube-like
–OTT w/ box: VUDU,
NetFlix…

15
A. Schuh
Impact

„ Fragmentation –related to stage of market development

— US example: audience share with top 3 broadcasting networks: from 90%
(60s) to ~30%
— Europe (main countries) no leader with over 23%
— LatAm: leader with over 50%
„ Pricing pressure/willingness to pay
„ Changing in core demographics

Consequence: decreasing
shareholder return

Source: Accenture (2008)

16
A. Schuh
 Impact in context

Pyrrhic winners? Market growth Legend

but competition/substitutes
Revenues 30 grows faster
2007
Losers
(selected 2010 forecast
markets - € 25 — Online
replaces
bi) aggregators FTA TV
Newspaper

20
Winners

Pay TV — Market
15 expansion due
to new
Magazines
devices
10 — Undeserved
Film
demand
Música Radio
5 Music Internet (publ)
Games

0
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Profitability (typical EBITDA %)

17
A. Schuh
What TV players are doing

By and large, all trying to

extend market present into …however, offering programming on
the Internet… the web is no guarantee of success
Web relative share
„ “Catch-up TV” 40%

35%
TVE
„ Archive material 30%
Telecinco
25%
„ Extras 20%

15%
LaSexta Antena3
10%

5%
TV3
Cuatro
0%
0% 10% 20% 30% 40%

Source: TNS; Compete.com (Oct 09) TV relative share

¿Is the industry implicitly understanding its evolution as being a

progressive type?

18
A. Schuh
What type of industry evolution is happening for broadcasters?

Type Example Implications

Radical? „ Overnight „ Critical for incumbents:

parcel delivery assessing timing of
(Fedex) change
„ New economic model
(cost structure)

Intermediating? „ Online „ Exploit transaction

investment management
brokerage „ Need of redeploy assets
(E*trade)

Creative? „ Pharma „ Beware for evolution:

(Biotech/ experimentation-
genetic fragmentation; shakeout;
engineering maturity
„ Rapid change in resources
required to survive
19
A. Schuh
Type of industry evolution (2)

Change
Elements Impact Threatened

„ Spectrum New „ Assets in many

technologies cases are less
„ Studios
Core for important
„ Brand/ audiovisual
assets Reputation distribution –
anytime,
anywhere

„ Understanding New „ Not necessarily

mass technologies less valuable
audiences enabling „ Sought after by
Core
„ Acquiring personalization new entrants
skills programming (on demand (e.g., Joost, ad
„ Producing content and networks)
„ Selling ads advertising) „ Need to adapt

20
A. Schuh
 Type of industry evolution in TV business

Radical Creative “Rules of change include:

Threatened •Committing resources to
high potential projects in
spite of lack of reliable
Core
market information
assets Intermediating Progressive •Developing a system to
bring commercial projects
Not
to market
Threatened
Opportunities
•Create breakthrough
Not asset-development
Threatened
Threatened projects
•Developing efficient and
Core skills effective systems for
delivering projects”

21
A. Schuh
A foresight exercise: TV under a diagnosis of “creative” industry
evolution

Value chain reconfiguration New dominant design and product

features

Actions under “Creative”

industry evolution scenario

Monetization New underlying distribution

technologies: hybrids

„ Exploit core skills, especially in content production/commissioning

„ Avoid burden of core assets are risk of obsolescence

22
A. Schuh
 Value migration and fragmentation of the value chain
Delivery
Creation Aggregation Distribution End User
Interface & Device
Enablers
• Digitalization of media • Aggregation importance as • Transport: entrance of OTT • Devices & Interfaces:
with major cost a stand-alone, value- added players that are network increase share of value
reductions in production activity decreases due to agnostic (vertical integration captured due to the
and distribution searchable databases and is no longer required) increased flexibility
• Consumer more involved content unbundling • Commoditization of the these tools provide to
Key with their media • New entrants to the market: value of the network digital media.
• New premium content Nokia, Apple; Telcos; • Proliferation of broadband
changes owners strategies: greenfield firms (ex, Joost). and increase quality of
exploitation of new Plenty of innovation, bandwidth
release windows especially leveraging new • Increase in number of
• Long Tail aggregation/interface platforms (IPTV, Cable,
mechanisms Mobile, Internet)

Rights’ Commercia- Delivery

Creation Aggregation Transport Device End User
acquisition lization Interface
Enablers

Example:
Apple

Value migration

+ •Still room to - •Transport an + •Devices

create unique independent layer controlling user
content •Open aggregation experience

23
A. Schuh
Broadcasters and reconfiguration of value chain

IBM DEC Other

The computer
industry Microprocessors Intel AMD
experimented OSs MSFT Linux
a move from
Peripherals WMD X Y
vertical
integration to Assembled HW IBM HP Dell
horizontal App software SAP Oracle MSFT
specialization
Source: Grove, A. (1995). Only the paranoid survive.

Antena 3 T5 La Sexta
In the TV Production xx xx
industry, this
Acquisition xx xx
would imply
focusing on Programming xx X Y
selected stages Ad sales xx xx xx
Signal transport xx xx xx

24
A. Schuh
Traditional content consumption cycle

Feedback

Content Amplification
Content discovery
consumption and feedback

• Identification of • Use of the content • Shared social

possibilities of experience: interaction
consumption of encouraged by content
Description content • Criticism and derived
Prioritisation production
• Planning

• Consulting • …sit down in the

tonight’s TV • …comment with the
couch and watch work colleagues in
Example in programming in the show …
traditional the newspaper … the coffee break
mediums • (by sampling):
Nielsen/Ibope

25 25
A. Schuh
New dominant design exploiting potential of newer
technologies
Feedback: permanent and transparent

Supple-
Content Amplification mentary
Content discovery
consumption and feedback Consum-
ption
• Decreased entry • Increase in platforms • Rating • Content
barriers in • Increase in devices, systems and associated to
Change production of and especially portable commentary the original
introduced by distribution entailing devices • Prosumer consumption
technology an enormous
amount of content
offered

•Need of search •Possibility of •Opportunity for

support given consumption the possibility of
variety of choice “anytime” and interaction and
Consequence
•Personalisation “anywhere” participation

More integrated and fluid

experience
26 26
A. Schuh
 Examples

BBC iPlayer –
“Find, Play,
Share”

YouTube Search
• 1 Bi visits/day
• ~15% of all Social
features
Internet traffic
Supplementary
consumption
Recommendations

27
A. Schuh
Monetization
„ Ad Formats
— Current leaders: Web – AdWords/PPC, banners; Web Video: pre-rolls
— Overlays
— Repurposing vs custom made

„ Servicing
— Selling ad to advertisers – dynamic pricing?
— Delivering ad to viewers

„ Future:
— Dynamic advertising insertion?
— Non-ad funded:
– Subscription; Micropayments/unbundling
– Revenue share from bundled offers (eg, PixBox-like, TDC…)

„ Concern: YouTube economics; CDN costs

„ Specific concerns of PSBs: justifiable?

— Lower entry barriers
— No use of public resources
— License fee evasion and new funding schemes (utilities, telecoms)

28
A. Schuh
Hybrid TV
„ Need to combine “best of both worlds”
— Broadcasting is and still will be useful as a distribution technology: cheap
high simultaneous usage and lower density areas
— TV as a social experience
— Complementarity broadcasting/web
— Usability issues for laid back experience

„ Options
— Experiments over Pay TV networks (broadcaster “store”)

— Standards
– Canvas: BBC+iTV
– Hybrid Broadband TV: TF1+ Institut für Rundfunktechnik
– Microsoft Mediaroom?

— Proprietary
– “Boxed”: VUDU, ROKU, XBOX...
– “Unboxed”: Hulu, Youtube/VeVo
– Connected TV: Yahoo Widgets Platforms; NetFlix

— “TV Everywhere” – Warner, Verizon & Comcast

29
A. Schuh
To sum it up

„ Main messages recap

— Industry evolution theories can help understand change in the
Digital TV industry

— While Digital TV core assets (spectrum) may be less valuable in a

fully Internetized TV scenario, the industry’s core skills of
programme development and production will hold

— Trends point toward a a new dominant design, value chain with

more horizontal specialization, hybrids and monetization
concerns

„ It is not the end – not even beginning of the end, just the end of the
beginning…

„ Opportunity to shape the future of the industry

30
A. Schuh
To continue the discussion

- This is a very early draft. Please do no

distribute/quote.

- Feedback is very much welcome:

Antonio.Schuh@gmail.com
(+34) 91 482 3096

31
A. Schuh