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Changing Media Landscape –Presentation to Media & Convergence Group , SNR Denton

Julian McGougan, Group Strategy, 3 March 2011

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Disclaimer

Opinions expressed are personal and may not be those of Arqiva.

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The Changing Media Landscape

You can’t consider the future of TV without considering the future of broadband.

You can’t consider the future of broadband without considering the future of mobile.

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Television – Reasons to be cheerful

Not dead yet – live TV still accounts for 92% of all UK viewing (BARB).And health improving, ITV’s results show ad bounceback in full swing.

But is this a blip in the shift in spend from TV to online display & search?Will economic recovery stall in 2011? – after all, the cuts haven’t arrived yet.

Fixed & mobile VOD increasing, but held back by:Penetration of fast, reliable broadbandMobile data capsRights – segmentation by geography/technology/payment method, plus windowing (Studios’ desire to protect theatrical and DVD).

PVR/DVR penetration in the US and UK should cross 50% in 2011-2012. But despite their ability to skip ads, most of their owners likely to continue watching the vast majority of their TV live – and PVR households watch more TV.Studies show that even ads viewed at 12x speed are still retained by viewers.'Speed-watched' ads are c65% as effective as normal speed (Source: Duckfoot)

But in the UK cost reduction is the order of the day – and the Coalition government has made sure the BBC isn’t exempt.

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HD

Freeview HD now has over 50% population coverage.

Tesco now selling refurbished HD STBs for under £40.

2 million more homes to be able to receive Freeview HD between now and the Royal Wedding.

But Sky & Virgin is where real HD enthusiasts head for.

Freeview has no room for more HD until Ofcom releases more spectrum.

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3D

Theatrical success (films, rugby, now live opera) linked to roll out of digital cinema (where Arqiva provides the connectivity)

And for 3D TV:3D undoubtedly works for certain content:Sports (some of them, with camera angles to enhance the depth perception)Adult (Penthouse about to launch first 3D adult channel).

Arqiva intends to trial Freeview 3D later this year.And the BBC hopes to broadcast some 3D content as part of BBC HD.But Sky is the market leader, being in half of the 140,000 households that have a 3DTV installed.

Still early days, hampered by a lack of compelling, native 3D content.By 2014, just 10% of all UK TV sets will be 3D-capable (Source: Screen Digest).

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VOD

Enders Analysis expects IPTV to erode linear broadcast TV at c0.5-1.0% p.a.1m of 1.2m Freeview HD receivers are displays – with no storage; Freesat similar.

The shift of FTA away from STBs, combined with increasing internet connectivity of displays, creates a market for VOD content in the cloud.

iPlayer goes from strength to strength: 35% annual growth in requests to January 2011.

Mobile is 5% of iPlayer streaming – and climbing fast. In the 24 hours after release of new iPad and Android apps: iPad streaming + 111%, Android phones + 228%.Reliance on WiFi will constrain this, but trend is unmistakable.

But will VOD be a 3rd choice for content, after linear and storage?70% of DVR owners in the UK always checked to see what was on broadcast first (Source: Deloitte LLP UK, July 2010).

Who will ensure that stand-alone connected displays are connected up?Sony has hundreds of millions of devices worldwide which have been connected – how many other AV content producers/aggregators can say that?

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YouView – taking VOD to the next level?

With iPlayer, Sky Player et al, VOD is already here if consumers want it (and have a fast and reliable enough connection).And iPlayer deep linking to commercial rivals increases VOD’s appeal (and iPlayer as the VOD destination).

But YouView should democratise VOD, making it a majority pursuit.YouView – open platform, easy UI, likely considerable cross-promotion from BBC, ITV, BT and Talk Talk.Full consumer launch pushed back to 2012Q1 not fatal – still early days for VOD (especially for FTA audience, which tends to adopt new technology more slowly than pay-TV subscribers). After all, iPlayer was also delayed.Sky & Virgin Media have done their best to delay YouView, but they’re largely different target audiences.

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Medium-term trends in the television market

The proportion of internet traffic which is video will continue to increase, as will the proportion of video served wirelessly.However, as now, that demand will be unevenly spread throughout society as an increasing Digital Divide opens up clear blue water between:

Consumers who -are always connected (both personal and work)are comfortable accessing services on a range of devices (all with storage)are familiar (from photos & music) with managing content librariesexpect their choice of AV content to be available when they want itunderstand that personalised and context-specific services require giving up some privacyare attractive to a wide range of advertisers.

The many (millions?) of consumers who -are largely unconnectedare unfamiliar with, or uninterested in, onlineprefer to watch and listen liveother than niches, hold little appeal for advertisersare the key market failure for the BBC to be forced to address going forwards?

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Medium-term trends in the television market

Access to AV, by the consumers with most commercial appeal, will be increasingly split between static and mobile/nomadic consumption (which largely supplement each other), in a continuation of today’s trend.Home servers and networks will be increasingly available, affordable and easy to operate, automatically connecting wirelessly to each new electronic device as it is introduced into the home (“TV anywhere”). Increasing access to storage has two network implications:

As a substitute source for linear broadcast (but with advertising played from storage worth less?)Offering the option of caching content as a means of managing peak network demand.

But as PVR/DVR adoption has shown, storage also tends to increase the total amount of content viewed (and consumer satisfaction). Home networks should do, too.

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Medium-term trends in the television market

Device and applications platform fragmentation will make it harder and harder to get noticed.

Even more use of celebrity names in programme titles.Even more programme brand extensions (no matter how tenuous).

So how do independent producers get noticed outside of broadcasters’ aggregations? YouView may offer an independent route to market, but quite high barriers to entry may render an exclusive VOD portal impractical for smaller indies.That and the “first page advantage” implies that on YouView many content providers will gravitate towards major aggregators rather than go it alone and hope consumers find them.Also unclear how the search algorithm will work:

will a search for Midsomer Murders first offer ITV Player or an All3media service?

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Radio

Radio reach hits a 10-year high (90.5% tuning in each week – Source: RAJAR).But commercial radio is having a bad recession. Despite:

3 consecutive quarters of YOY revenue growth to 2010Q3Increase in share of listening to 42.4% in 2010Q4

There remains an oversupply of inventory negatively impacting ad rates.Young, advertiser-friendly audiences continue to desert radio for sources over which they exercise greater control (although radio still plays a music discovery role for them).Reduced public sector advertising.“Simulcasting” analogue and DAB distribution adds little to listening. Does satellite? Or even chasing advertiser-friendly demographics online?Cost-cutting

Folding local stations into national brands (Heart etc)Reduced distribution costs resulting from Arqiva take-over of NGW in 2008.

Expect renewed lobbying of the Coalition government by commercial radio for BBC to withdraw from competing directly.Expect renewed effort to end simulcasting – but that needn’t automatically mean FM switched off in favour of DAB.

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What future for DAB digital radio?

DAB has spent 15 years being ignored by most listeners.16% of listening is hardly impressive.Almost all DAB listening is to simulcasts of FM – with little obvious advantage.Crucially, with in-car now almost a fifth of listening, only 1% of cars have DAB.Yet weekday commuting listening contributes almost all commercial radio profits. In addition, local DAB multiplex coverage areas don’t necessarily align with existing FM coverage of potential tenant stations.

DAB radios will continue to get cheaper, as the IP expires, but is it enough?Commercial radio doesn’t have the funds for major coverage expansions, and probably not for many new digital-only stations either.Does the BBC have enough funds – and the willingness – to match DAB coverage with FM’s?

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So will there be a radio switch over?

As with legalising drugs, there are no votes in mandating a switch over to DAB. So don’t expect a Ministerial decision this side of 2015 Election.In fact, a decision to junk 100 million analogue radios may prove so controversial that it may only be politically thinkable in the first 2 years following a General Election – and then only with a workable majority.That implies that the conditions for radio switch over –

50% of all listening is digital“national” DAB coverage is comparable to FM“local” DAB covers 90% pop.

… would have to be met by 2015 – 2017.I don’t see the market hitting that policy window. Could it wait another 5 years?If commercial radio’s woes demand an end to simulcasting – would you switch off analogue or DAB?Or do something more radical – without regulatory requirements, if you were launching a station now wouldn’t you focus all your investment in the weekday breakfast & drivetime shows, recycling non time-sensitive content from those shows into airtime between those shows and as downloads?

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Broadband

UK broadband take-up only 71% in 2010Q1 – so hardly a utility yet (with implications for the “net neutrality” debate).Last government (Digital Britain) identified market failure & promised public subsidy to achieve universal broadband of >2 Mbit/s.Coalition also supports universal broadband – but is much more in love with “superfast” (no clear definition, but generally >20 MBit/s downlink).Resulting tension between superfast & universal.c£490m identified from TV licence to secure universal broadband (maximising superfast as part of that) by 2015.Lots of progress by the market already on superfast:

BT looks likely to be able to offer 40 Mbit/s to 66% of UK pop by 2015Virgin Media has launched 50 Mbit/s, and is ramping up to 100 Mbit/s.

So where would you invest:Service layer – rapid change, low barriers to entryActive infrastructure (electronics) – return within 5 years (then replace)Passive infrastructure – return over 20 years?

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Will universal broadband be achieved?

PwC forecasts that by 2014 UK broadband penetration will be 95%.But will universality ever be achieved?Big risk that the public subsidy is used to superserve those who already have broadband – leaving 2 million homes still with no broadband at all.

Yet the greatest economic benefit is with universality - a 10% increase in broadband penetration increases GDP by 1% according to McKinsey, Allen, OECD and the World Bank. As yet there are no studies which can be referenced as to the impact of superfast.

If universal broadband is achieved, wireless and satellite will have to complete the job – fibre becomes just too expensive beyond c94%.And that may usher in greater infrastructure & spectrum sharing, where competition is at the service layer –

in uncommercial areas, why subsidise competing networks?

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What impact might near-universal superfast broadband have?

What might consumers do with 20, 50, 100 MBit/s? Would South Korean–style online gaming be worth re-directing all that money away from the BBC? Or just much more video?

In 2009, one third of all internet traffic was video, projected to be 91% by 2014 (Source: Cisco).Then again, for popular content, broadcast will be a cheaper way to get it to them.

Probably a mix of things rather than a popular “killer app”:4 or 5 simultaneous, demanding uses would push copper to its limitIncreasing home working may be one of these.

But if could live anywhere, what are the infrastructure & political implications of that?

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And then there’s mobile…

UK mobile-only households increased from 8% to 15% in 5 years to 2010 (so they’re not interested in the fibre BT is laying!).35% annual worldwide 3G subs growth to 2010Q3 (Source: Informa)In 2009 there were 10 million UK mobile internet subscribers, but by 2014 there are forecast to be 24.5 million (Source: PwC).

Consumers can be reached anywhere & all the time with personalised, context-specific services (and with NFC coming to phones, too). Social element very strong.Mobile operators increasingly interested in advertising - connecting location-based advertising with the means to pay (carrier billing)?And iAd campaigns just got cheaper as Apple halves the minimum spend.Will 2011 finally be the year of mobile advertising?

NFC enables mobile payment at checkout. And the mobile becomes the loyalty card, too?

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The Smartphone is the new PC

And those phones are getting smarter (dual core processors now here) with bigger, better screens and more storage (but battery life becomes more challenging) – and the wireless connections are getting ever faster.By 2015, Enders Analysis expects:

UK Smartphone penetration to reach 75%Mobile internet use to reach 28% of total time spent onlineMobile advertising spend in the UK will rise to £420m, equivalent to 10% of desktop spend.

Annual Smartphone shipments +89% (Android + 615%) to 2010Q4 (source: Canalys).Smartphone density in world’s largest 400 cities forecast to rise from 400/km in 2010 to almost 13000/km (source: Alcatel-Lucent).Smartphone + tablet shipments > PC shipments since 2010Q4 (source: KPCB) - only three years after the iPhone launched.

Is this a fundamental shift in computing akin to the move from mini-computers to PCs?

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The Smartphone is the new PC

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Technology drives changes in consumption patterns

Demand for wireless data is set to grow exponentially, driven by:Increasing smartphone and tablet adoption;Video as “TV on the move”, supplemented by a general proliferation of video-rich content including increasing video in online advertising;The “cloud” substituting for storage (many current apps are thin clients which continually download from the web, video and services may be “bookmarked” for continuation on another device);Ericsson prediction that, by 2020, there will be 50 billion devices connected to wireless networks worldwide in Machine-to-Machine (M2M) communications - the “internet of things” – most likely connected to GPRS – such as:

40 million smart meters by 2020, then smart grid traffic too;Smart transport (Intelligent Transport Systems, predicting the time and place of traffic jams, cars booking parking spaces, potentially more road pricing);Tablets/ebook readers updating papers & magazines to subscribers;Wireless healthcare (focus on prevention rather than cure, on health rather than illness, means wearable devices, or self measurement);Telematics, environmental information generated by sensors.

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Tablets – just Smartphones on steroids?

iPads have already grabbed more than 7% of the global PC market.Morgan Stanley thinks tablet shipments will increase from 16 million in 2010 to 100 million in 2012.Whatever consumers buy them for, tablets are (updated) newspapers/magazines/catalogues and portable “TVs” (though the screen may render them suboptimal as ebook readers).What does that do for media companies?

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…or is the tablet another Apple game changer?

Tablets also spur publishers to try various models to finally monetise online:News Corp’s “The Daily” - 99 cents weekly subscription, nothing free.The Telegraph’s “metering system” – free to begin withFocus Online, Germany's third most-read news site, trials micropayments using Google One Pass to test willingness to pay for articles other than breaking news (which is always available free elsewhere).

Google One Pass – it’s 10% commission vs. Apple’s 30% provides leverage over Apple for publishers.

Tablets are already a major AV consumption device.Will willingness to pay be sufficient for newspapers/magazines to make the most of what tablets offer (not just PDFs)?

e.g. car mags – videos, 360 degree views of new cars, reports from car shows, racing/rallying footage and stats with drill down and links etc. – but is this a separate product for ABCs and hence ad rate card?

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This is a revolution

400 million Smartphones worldwide use more bandwidth than the 6 billion standard cellular phones in use (source: Orange Business Services).>40% of total global mobile data traffic in 2010 was video (source: Bytemobile) – but much of that will be dongles feeding laptops.60% of time spent on Smartphones is new activity (maps, games, social etc) for mobile users (source: AppsFire).

The Angry Birds phenomenon: > 50 million downloads, 80% of users keeping the app installed, 200 million minutes played per day worldwide (Source: Rovio).

Cisco expects global mobile data traffic to grow 26x over next 5 years, Alcatel-Lucent say 30x.Who cares which is right – what does that do for the networks?Are the mobile operators locked into major capex to retain subs who want ever more for less money?

A new way to shop – Smartphones will be aware of your interests, tastes, past purchases, and can alert you accordingly.Groupon/Facebook Deals - location-specific engagement with high propensity to move to transaction.eBay has nearly tripled mobile Gross Merchandise Value in year to 2010Q4.

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Network implications

Fixed is the future of wireless:Operators need to pass data to nearby fibre ASAP (“deep fibre”)Wherever in range, encourage consumers to use WiFi.

Where it has to be wireless, technology refreshes help.As does more efficient use of existing spectrum - “in-filling” macro cells with picocells and femtocells, creating a two tier network topology.But mobile operators also need more spectrum – lots of it.

Fortunately there’s plenty of spectrum to come, the most valuable being the “800 MHz” which TV is being cleared from as analogue is switched off.But will operators have to reconsider “Swiss cheese” data coverage?

Source: Value Partners, 2009Q4 –Situation now probably even worse as spectrum release delayed.

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Will mobile spectrum demand drive another Digital Switch Over?

Channel 21 22 23 24 25 26 27 28 29 30 31 32Frequency (MHz) 470-478 478-486 486-494 494-502 502-510 510-518 518-526 526-534 534-542 542-550 550-558 558-566

33 34 35 36 37 38 39 40 41 42 43 44566-574 574-582 582-590 590-598 598-606 606-614 614-622 622-630 630-638 638-646 646-654 654-662

45 46 47 48 49 50 51 52 53 54 55 56662-670 670-678 678-686 686-694 694-702 702-710 710-718 718-726 726-734 734-742 742-750 750-758

57 58 59 60 61 62 63 64 65 66 67 68758-766 766-774 774-782 782-790 790-798 798-806 806-814 814-822 822-830 830-838 838-846 846-854

69854-862

High power DTT/interleaved Spectrum Currently airport radar - to be included in cleared award

Cleared spectrum Spectrum reserved for PMSE

Harmonised upper block for LTE

“700 MHz” – growing lobbyingfrom MNOs (GSMA) & equipment vendorsto kick TV out of these frequencies.

“800 MHz”

Will TV be kicked out of “600 MHz”, too, in 2026 (when licences expire)?What (if anything) will be left of Freeview by then?

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Want an app – find a developer

Developers pick their operating systems: Apple first, then Android. iOS & Android skew younger (read: more advertiser-friendly, early adopter) than RIM (BlackBerry) or Microsoft.

Ever seen a Windows Phone 7 handset? No, me neither.iOS highest willingness to pay.Easy billing (iTunes or carrier) + in-app commerce = key to monetisation.

Why shouldn’t a popular or cult content brand (say, Midsomer Murders) have an app?But whose service fulfils:

ITVAll3mediaBoth?Or could SeeSaw get there first?

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Will privacy concerns derail the mobile future?

Last year’s Google Street View/WiFi PR disaster should be a wake-up call.Politicians don’t really understand converging markets, but they understand The Daily Mail.There is a risk if the industry doesn’t proactively allay privacy concerns that regulators will be charged with “doing something about it”.Studies like this don’t help:

In 2010Q4, The Wall Street Journal looked at 101 iPhone and Android apps and found that:

56 apps submitted Smartphone’s unique device ID to other companies without the user knowing or agreeing to exchange.47 apps sent the location of the phones to third parties.5 apps sent age, sex and personal data to strangers.

Then again, how many users change their minds about downloading an app when they’re asked to give permission for the app to share information?

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Summary

Consumption of AV content is transitioning to a more mobile, personalised, searchable, bookmarked IP futureBut that process will take many years – even for the most commercially attractive consumers – so decline of linear television will be managed for a long time.Total viewing can only go up, but as with music increased consumption may be hard to monetise.Medium-term future likely to meet that demand from a mix of linear, storage & cloud.Radio may outlast TV.Never easier to reach consumers - & to sell the right eye balls in the right location at the right time to advertisers - but harder to get new stuff noticed by consumers.

TV programming becomes more like magazines (which become web sites)Internet becomes TV (which the tablet is ideal for).Mobile becomes ever more fixed

..and change won’t slow down, with implications for companies (and their shareholders, who don’t know what they’ve bought into), politicians, regulators.