Smart Pipes & Smart Devices

IBM Global Business Services

Smart Pipes and Smart Devices

Berlin
December, 2007 deeper

© Copyright IBM Corporation 2007

IBM Global Business Services Strategy & Change Consulting

The 30 second summary so you can start reading your
Blackberry for the rest of the presentation

• The different of television and advertising
business models is going to be very
different that we know today.

• The IPTV landscape will be quite
different from the PC and TV landscape.

• Much of the conventional wisdom about
how this market will evolve is wrong.

• Winners and losers in the market will
change as the user experience evolves
and some be better at adapting than
others.

2 © Copyright IBM Corporation 2007


Television will not be the same. Our children won’t even think of it
as television

Consumers looking for media
control and access:
Convenience viewing
Interactive and social viewing
Higher quality content

Content looking for viewers:
Multi-channel distribution
Digital media business models

Technology has evolved:
Widely available broadband
Efficient compression technologies
Hi speed, in-home wireless


The End of TV: The next five years

In The End of Television as We Know It, we posit that disruption to the media
value chain is inevitable long-term
Past Future

Central programming Self programming

Content networks’ oligopoly Internet and mobile aggregators
Broad-reaching advertising with Tailored interactive advertising
CPMs
Single device for content delivery “Anywhere” content portability

Primarily ad-supported models Subscriptions, PPV ad revenues

Platform-based release windowing Time-based release windowing

“One size fits all” content / channels Tailored content / channel bundles
Silo’d monopoly/oligopolies for Blurred access from telcos,
content access Internet, traditional players, others
“Your grandchildren won’t know what a TV is” – Saul Berman



The stakes are significant. The global TV market is worth over $400
billion annually, the majority of which still comes from advertising

WW Television Revenues
2001—2010
Other
600 $535B

500
$410B Basic and
USD Billions

Premium TV
400
$315B Subscriptions
300 Licensing Fees
200

100 Advertising
Revenue
0
2002

E2006

E2010

Source: PricewaterhouseCoopers, Entertainment and Media Outlook 2006—2010, IBM Analysis



The world of yesteryear will give way to a new form of advertising
addressability, personalization and contextual integration
Past Evolving Future

Interruption advertising Contextual marketing

Broadcast, one-to-many messages Follow me messages x-channels

Fight for placement Fight for interaction

Media networks as advertising conduit More marketing portals, platforms

Agency-created advertising User tribes, content owners, others
producing creative campaigns
Anonymous household data Granular individual data

Impression-based/CPM metrics Action-based tracking, currency

Marginalized digital specialists Integrated agencies, providers

Upfront and tight-knit ad inventories Open, third-party online platforms

Source: IBM Institute for Business Value (IBV)



While much of the innovation has been happening on the PC
screen, the real battle will be for the consumer engagement

Almost non-existent “Traditional IPTV”
Technology perspective

Examples: KT MegaTV,
network
Private

AT&T, U-verse, Imagenio
by Telefonica, T-Home by Consumers
T-Com
don’t care
“Internet TV" “OTT IPTV”
where there
network

Examples: Joost, GyAo, Examples: Apple TV, content
Public

YouTube, etc. Sony IVL, Akimbo, Amino
comes from

PC screen Video screen

Customer usage perspective



Two different evolutionary paths are now clashing in the battle for
dominance in the new world of video and advertising

Smart Devices – PC Evolution Smart Pipes – TV Evolution

Satellite MSO Telco

The internet is the dumb pipe that High quality networks deliver &
delivers all content. manage value added services
Consumers pick based on user Superior content, service, and long-
experience and functionality term user contracts lock in users



The conventional wisdom about how this clash will resolve seems
to depend on three key assumptions that may turn out to be wrong

•Over the top service providers cannot
Network
Neutrality access the market without a regulator-
driven guarantee of network neutrality

•Access to unique and exclusive
Distinctive
Content
content will provide a competitive
advantage to incumbents

•Subsidized set top boxes will lure
Free Set Top
Boxes customers and enable lock-in through
long-term usage contracts



Myth #1: Regulators will be needed to enforce network neutrality.
Reality: the market will do it
US Market example:

TODAY IN MARKET BY 2010

Network Telco Cable MSO WiMax 700 Mhz Television
Operator
“Auction 73” White Space
Type

Open Access
/ Neutrality
Stance
• Unfavorable but • Unfavorable but • Neutral • Positive • Very Positive
limited by fear limited by fear • New player • Google lobbied • Concept
of angering of angering wants to for Open designed by CE
users users distinguish from Access companies
incumbents



Internet access is a paid experience by consumers and consumers
hate unnecessary restrictions
Threats on Net Neutrality Results

NextGenTel in Norway restricted Limit removed after customer
the transfer capacity from NRK.no1 backlash and bad publicity

Comcast prevented content Claims refuted and content
uploading to P2P networks flowing 2 days later
including BitTorrent

AT&T bleeped anti-Bush Promise to not do it again and
comments in a Webcast concert explained that it was done by an
overzealous contractor who
stepped out of bounds

IBM reviewed 69 ISPS and 24 countries and found only a few that made
any significant effort to restrict BitTorrent traffic

11
Note (1): Norwegian Broadcasting Corporation © Copyright IBM Corporation 2007
Source: NRK.no, ZDnet.com


Myth #2: Exclusive content will be a differentiating advantage
Reality: Free To Air broadcasters will dominate the mass market
Audience Share for Free To Air TV:
UK Viewership Statistics

UK 67% Channel Average Daily Reach

000s %

TOTAL BBC1/BBC2 27,528 56.8
ITALY 48%
TOTAL/ANY COMM.
TERR. TV 27,254 56.2

Total Terrestrial 33,312 68.7
France 46%
Total Sky 9,936 20.5

Germany 44% Once you leave the terrestrial broadcast
space, total share of any individual channel is
quite small. The UK has over 200 channel
USA 25% with a reach of under 3%.

Note: Excluding ad-supported commercial chanels
Sources: Broadcasters Audience Research Board, European Audiovisual Observatory, Cable television advertising bureau



Content providers don’t want a repeat of iTunes, so they will make
content broadly available

Digital Music Digital Video from content owners perspectives

Apple was first in the
“The money is rarely on the table for exclusivity
market and now has to make sense”
leverage VP of digital media at Twentieth Century Fox

“It really doesn’t make sense, with the
advertising and distribution model for TV
content.”
Disney and ESPN Media Networks

"In the UK we felt worried about what happened
Video content to the music industry. iTunes is a disaster for
providers are rights holders”
determined to not let
BBC Worldwide executive
this happen



Myth #3: Consumers will always choose the free set top box
Reality: Network operators have a poor history as CE companies

Comcast HD DVR TiVo Series 3 HD
Subsidized set top box for $5 to $500-$800 up front + $5-10
$15 monthly fee, no up front monthly fee for the TiVo service
cost on top of your cable bill
Installed by network operator No support from the cable
with supporting customer VS company
service

“Just awful” “I like it a lot”

“If cable boxes were sold at retail…the Comcast
DVR would get creamed.”

14 Source: WSJ, Personal Technology by Walter Mossberg “The HDTV Dilemma: © Copyright IBM Corporation 2007
Pay for TiVo's Recorder Or Settle for Cable's? December 28, 2006


The cost of advanced set top boxes is rapidly approaching a price
level where they can be sold at retail for under $200

$400 Advanced Set Top Box Cost Forecast – 1 TB HDD / Cell

Under $200
$300 Under $100

$200

Other Non Chips
$100 Other Chips
Cell Processor
1 TB HDD

$0
2008 2009 2010 2011 2012

Readiness to buy a STB rises Comparable phenomenon is
markedly at the $200 and $100 happening with HD-DVD and
price points BluRay players <$100

15 Source: WSJ article on holiday sales, IBM research © Copyright IBM Corporation 2007


So, how might this market transformation actually play out?

... We’ve demolished some assumptions… …we’ve also got three
predictions…

Network Not The
Neutrality necessary… Experience

Distinctive Not The
Content available… Timing

Free Set Top Not a The
Boxes differentiator Impact



The Experience: winners will create value by offering competitive
content, a better user experience, and targeted ads

Popular Content
Case Example: Silicon
Valley start-up Building B Delivered through Free To Air
stations and stored on a local HDD

Niche Content
Delivered through data-casting or
over the top
Most popular material is pre-
loaded for immediate viewing

Targeted Advertising
Ads targeted at customer
demographic for better results

Building B could deliver an experience competitive to any cable or satellite
provider without investing in any of costly infrastructure



The timing: the bandwidth and the technology is here today.
2008 will see the first disruptive devices on the market
Required Bandwidth By Content Type vs Average Bandwidth by Country
SD streaming without QoS
VUDU Movies On
HD streaming Demand
USA 4.8
without QoS
Movies On Demand
UK 2.6 in near HD quality
Buffer enough
Germany 17.6
material to handle
network
France 6.0 interruptions and
start movie instantly
Sweden 18.2
Speed equals
MSO, user
experience is far
superior
Speed required to deliver
buffered near HD without QoS

18 Source: ITU global bandwidth survey, IBM research © Copyright IBM Corporation 2007


The Impact: Traditional cable and MSOs will keep the majority of the
market share for now, but their economics will change dramatically

Flat fee,
Per minute Most calls are still run
Telephony unlimited
pricing on the PSTN…
use
Most music is still sold
on CD…
But the industry
Bundled Per track economics have
Music changed forever…
CD pricing

Monthly ? Ad “Same Same but
Video
MSO fee supported Different…”



Recap: (Or what you missed you while you were reading your
Blackberry)

• This business is changing – and sooner
perhaps than many were expecting.

• A new user experience is upon us, and it
is the user experience that will be the
key differentiator for players.

• Players should not count on keeping
closed networks, exclusive content, or
contract-locked subscribers in the future.

• Existing service providers will probably
keep their volume leadership, but
industry economics will shift dramatically.


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