IP promises video-to-go as next big media wave

By Diane Mermigas
CHICAGO -- While cable, satellite and telephone rivals attempt to outdo one another's bundled services and broadcast and cable networks duke it out in primetime, Internet Protocol video providers and content aggregators are about to deal them all a major competitive blow.

The long-anticipated unveiling of powerful, portable IP video devices like Apple's video iPod, expected this week, and Sony's PlayStation 3 in the spring will significantly advance the steady assault on old-line media business models begun by Internet content managers America Online, Yahoo! and Google.

Consider these devices the Trojan horses of new media. They will take the Internet bypass to the critical next level by making video-to-go as affordable, accessible and ubiquitous as audio and data. They will move video from a tangible purchased or rented product to a downloaded virtual product, whose minimal production costs will mean higher margins for content providers.

Simply put, Apple and Sony are in a position to build differentiated IP video models by being first out with branded portable video players supported by related virtual video software and stores that deter piracy, in much the way iTunes supports Apple's wildly popular iPod.

The implications of Google, Yahoo! and a revitalized AOL morphing into the next generation of video aggregators on their massive user base and nimble infrastructure also cannot be overstated. There is a widespread perception on Wall Street that Google and Yahoo! especially are on track to become cornerstone, innovative video aggregation, search and management services akin to what has been cable's more narrowly cast service function, supported by advertising and subscription fees.

However and wherever it comes, rapid consumer adoption of IP video anywhere, any way, will further erode media, entertainment and telecommunications company stock prices as well as their core revenue, profits and all-important free cash flow.

Not only are major media conglomerates at risk but also cable, satellite and telephone providers who have been furiously battling one another with faster high-speed Internet access, products and services that barely acknowledge the threat of wireless, universal IP video from sources other than themselves.

Ready or not, dominant gatekeepers -- from cable and satellite operators to telephone companies and television networks -- are about to confront a new competitor: open-sourced, real-time, stored digital video on handy Internet-connected devices that play by a different set of rules.

The ensuing transformation of the video value chain will be driven by how rather than what content is consumed. As new video outlets proliferate and existing distributors are squeezed, content owners and aggregators increasingly will resort to ways of more directly connecting with subscribers, users and advertisers. Recent direct-to-consumer online initiatives by Hollywood film studios, television news and sports organizations and entertainment TV networks will soon intensify.

As a result, the media landscape will be decidedly different by decade's end, bringing prosperity to flexible, innovative players.

However, based on current trends, few of the existing gatekeepers, who have monopolized the distribution of content and communications for decades, are prepared to aggressively or constructively respond to this little-understood video value chain "disruption," according to a bold report released last week by investment banking firm Friedman, Billings, Ramsey & Co.

The report, which provides some clarity to a chaotic media marketplace, cites Apple, Skype and Vonage as companies that have built "strong business models based on Internet protocol technology, 'riding over the top' of networks built and managed by cable and telecom service providers."

As bandwidth rates increase, compression technology improves and storage becomes less expensive, the barriers insulating video services from this phenomenon will collapse. IP-based video services -- or open systems that send video directly to consumers using the public Internet -- is the last big step to achieve an everything-on-demand marketplace.

"While many cable investors fear the telecom service provider entry into video services, we believe that the real long-term threat will come from Internet-based content aggregators," analysts Alan Bezoza and Brian Coyne say. "We anticipate a drastic change over the coming years in the way that video-based media is created, aggregated, distributed and consumed."

How drastic? Cable systems could be rendered "dumb pipes," better at providing high-speed bits rather than video applications unless they become effective IP video aggregators (such as the nation's two largest cable operators, Comcast Corp. and Time Warner, are aiming to do). IP video has the ability to "gut" network programrs' lineups, threatening traditional television's core advertising revenue.

By some measures, consumers already are there. The analysts point to on-demand services MovieLink, StarzTicket, CinemaNow, Viacom's CBS News and CBS SportsLine and regular IP video initiatives by Web giants Google, AOL and Yahoo! As such services multiply, "a significant amount of video subscription revenues will migrate away from cable operators' closed networks toward on-demand-based Internet delivery," they say.

If cable and telecom providers fail to adopt Internet-based video applications and business models similar to those of Google, Yahoo! and AOL, "their place within the new value chain will become limited to data transport."

"With new video distribution businesses, consumers may begin to drop their existing cable and satellite services (in favor of) a completely online service, in the same way many have already dropped their land-line phones from traditional telecom service providers in favor of voice-over IP or wireless voice services," analysts Bezoza and Coyne wrote.

That could happen sooner than you think. Don't forget that even the world's largest, most prestigious newspapers feel helpless to halt what they perceive as their industry's freefall into digital-age obscurity during the same few years Apple's iPod has revolutionized how music is sold and consumed.

What is stunning about all of this is the scarce mention that the emerging transformation of the video value chain is getting anywhere: neither from industry executives nor analysts and press.

But as Bezoza and Coyne adeptly point out, the open IP video networks unfolding and devices such as the video iPod (and PS3) have the capacity to rapidly erode the competitive "moats" that have protected traditional media's food chain supply. One such moat is the closed-end networks cable and satellite operators have to thwart digital piracy while protecting intellectual property rights and content value. Another is the broad content distribution that supports conventional advertising models that have made broadcasters, cable and satellite the premiere video gatekeepers. Even as their own IPTV services evolve, these traditional gatekeepers already are caught "in the crosshairs of new video distribution models based on open IP-based video delivery" in a more freewheeling, unfamiliar competitive arena.

It's the Internet's power to deliver such on-demand personalization and customization that traditional media distributors are trying to figure out how to emulate. Once a universally employable digital-rights management technology as a driver, the video content value chain will move from a "push everything" business model to one where consumers "pull selectively," and that has significant implications for all media and entertainment players -- most especially those in television, the analysts say.

Certainly, it isn't too soon for the fiscal budgets being prepared for 2006 to begin reflecting some kind of proactive response to the changes afoot. If nothing else, forward-looking executives in the traditional media businesses should be focused on mandating the creation of new IP video operating systems, business models and Stage 1 efforts right beside much of the historical and much of what is soon to become obsolete.

Diane Mermigas can be reached at dmermigas@hollywoodreporter.com.