How consumers get online video to the tv

Making Leaders Successful Every Day

June 8, 2009

How Consumers Get Online Video To The TVby James L. McQuiveyfor Consumer Product Strategy Professionals

www.forrester.com

© 2009, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester®, Technographics®, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. To purchase reprints of this document, please email [email protected]. For additional information, go to www.forrester.com.

For Consumer Product Strategy ProfessionalsIncludes data from Consumer Technographics®, Client Choice topic

ExEcutivE SummaryOnline video has finally come to the living room. Forrester estimates that nearly 9 million homes in the US watch at least some online video on a TV set in a typical month. Why they do so is obvious: They get more control over when they watch their favorite shows on their favorite screens. But how they do so shows that consumers are still doing the heavy lifting, despite the many set-top boxes and other fancy technical solutions offered. Forrester’s Convenience Quotient methodology reveals why simply connecting the PC to the TV will be the most successful conduit for online video to reach the living room for the short term, followed by videogame consoles. New entrants like connected TVs will see surprising growth, yet they still have a long road ahead before they gain market influence.

tablE of contEntSGetting online video to the tv today requires Patience and ingenuity

the convenience Quotient methodology tells us Which Solution Will Win

WHaT iT MeanS

the market Will nearly Double in 2009

ReCOMMendaTiOnS

feed this unformed opportunity While it’s Still open to industry influence

nOTeS & ReSOURCeSForrester surveyed 5,464 US online adults in its north american Technographics digital Home and Wireless Online Survey, Q3 2008.

related research Documents“Preparing For The Coming Online TV Backlash”March 13, 2009

“Cracking The Convenience Code”February 6, 2009

June 8, 2009

How Consumers Get Online Video To The TVThe Convenience Quotient Reveals The TV-Connected PC is The One To WatchThis is the fifth document in the “Convenience Quotient” series.

by James l. mcQuiveywith Mark Mulligan and erik Hood

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mailto:[email protected]

www.forrester.com

www.forrester.com

http://www.forrester.com/go?docid=54088&src=44204pdf


© 2009, Forrester Research, inc. Reproduction ProhibitedJune 8, 2009

How Consumers Get Online Video To The TV For Consumer Product Strategy Professionals

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GEttinG onlinE viDEo to thE tv toDay rEQuirES PatiEncE anD inGEnuity

It’s the next big wave of change for the video market in the US. Now that millions of people are hooked on online video, they’re going to want to see their favorite videos on their favorite screen — the TV. This delivery of online video to the TV without the help of traditional cable, satellite, and telco TV providers is called “over the top” because it goes over the top of their carefully guarded walls to bring video content to consumers, whether free or paid.1 The urge to go over the top is inevitable; let’s start from the beginning to make sure we all understand why.

People love online video; Got that yet?

In case you’ve been on an extended vacation, you might not yet have heard that the rise of online video is one of the most significant media trends of the past decade. As of early 2009, 78% of US Internet users watched online video in a typical month, putting online video clearly in the list of top five online activities with online heavyweights like email and search.2 It gets more interesting than that. Consider this:

· Computers have become the second most common way to watch video. More Internet users watch video on a computer screen — be it laptop or desktop — than watch any video on a large-screen TV in a typical week (see Figure 1). This makes the computer the second most watched video platform behind the plain old TV set.

· Every single category of online video has grown. Some people mistakenly think that when we talk about online video, we mean YouTube. Not true. Online video provides a complete range of video experiences to satisfy viewers. All forms of online video grew between 2007 and 2008, including news, sports clips, and even commercials and promotional videos (see Figure 2).

· Online TV shows — led by Hulu — are drawing millions of new viewers each month. The undisputed leader here is Hulu: By March 2009, it boasted more than 360 million monthly views by 41.6 million viewers, nearly twice the audience it attracted in October 2008.3 In fact, because of its long-form content, Hulu keeps viewers on its site and its syndication partners’ sites longer than its peers, accounting for 6% of all video viewing time.

© 2009, Forrester Research, inc. Reproduction Prohibited June 8, 2009


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figure 1 Viewers Watch Video On PCs More Than On Big TVs

the old obstacles that Prevented taking online video to the tv continue to fall

In early 2007, we examined the potential of over-the-top video delivery to the TV and concluded it was still years away.4 We gave four specific reasons for our doubts, all of which have weakened considerably since then:

1. Lack of business models. It’s hard to believe that just two years ago, very little meaningful video content was available over IP. In 2007, conventional wisdom held that content owners would only support a download-to-own model that consumers had little interest in.5 However, since then, TV networks and even some movie studios have committed to supporting and building an ad-supported model in addition to experimenting with subscription services like Netflix as well as digital rental through players like Apple’s iTunes store.

2. Not enough bandwidth. Two things have happened here. First, consumers have upped their spending on broadband. Coming into 2009, Forrester estimates that 61% of US households have broadband access to the Net.6 The speeds of those connections are rising, too, thanks to competition between major ISPs that now offer speeds as high as 25 Mbps. Second, the codecs needed to compress and decompress online video have improved, so that even as quality has risen to HD-like resolution, the bandwidth needed to watch it has not risen appreciably.

Source: Forrester Research, Inc. 44204

84% 77%

35% 47%

32% 47%

19% 33%

11% 14%

11% 11%

2007 2008

Source: North American Technographics® Consumer Technology Online Survey, Q4 2007 and North AmericanTechnographics Digital Home And Wireless Online Survey, Q3 2008

An astonishing 59% of Internet-using viewers watch video on either a desktop or laptop computer in a typical week.

< 40-inch TV

> 40-inch TV

Desktop computer

Laptop computer

Portable MP3/video player

Mobile phone

Base: US online consumers who watch TV in a typical week

The percent of viewers who watched any video on the following:



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3. Internet-connected devices missing. Just two short years ago, we could count the number of meaningful IP-connected devices in the living room on fewer than five fingers. Now we have a whole host of options ranging from proprietary set-top boxes to wired Blu-ray players. All of these devices benefit from the rise of home networking — 36% of online households in the US now have some kind of wired or wireless way to connect these new devices.7

4. TV interfaces not appropriate for thousands of choices. Frankly, this is still a problem for most solutions we see coming off the shelf. The up-down-left-right remote-control paradigm just can’t help you navigate the many professional titles or user-generated videos you might be interested in and that the Internet is so uniquely capable of delivering. However, many newer solutions work around this problem by allowing Web-based bookmarking or playlist creation. Some tap into your social networks to deliver relevant recommendations, while others give you finer control with the help of an iPhone app for precise content control directly from the couch.

figure 2 Online Video Growth Spans all Categories


64% 43%

39% 56%

32% 42%

32% 44%

30% 36%

24% 32%

2007 2008

Base: US online consumers who watch TV in a typical week (multiple responses accepted)

Forty-two percent of 18- to 24- year-old online viewers watch full-length TV shows online.

Sports news/highlights

Full-length movies

Commercials/promos

Adult entertainment

Sports events

Classic TV clips

23% 29%

17% 24%

13% 19%

13% 16%

12% 14%

10% 11%

User-generated video

National news

Movie clips or trailers

Local news

TV show clips

Full-length TV shows

“What types of online video have you viewed in the past month?”

Source: North American Technographics® Consumer Technology Online Survey, Q4 2007 and North AmericanTechnographics Digital Home And Wireless Online Survey, Q3 2008



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the result: 8.8 million homes Watch online video on the tv today

Between what we can measure and what we can estimate from industry releases, we believe that 8.8 million consumer homes have connected the dots between the Internet and the TV already.8 This is remarkable considering just how difficult, awkward, or expensive it still is to make it happen. That’s precisely why it is important to track this now: If people will attempt it in such numbers when there is no clear way for them to do it, imagine how big this market will get once it’s simple to do. We have our eye on today’s leading solutions, which include:9

· Connecting the PC directly to the TV. Back in the day, computers could only output VGA signals and TVs only accepted composite analog signals. This is no longer true, thanks to the millions of new LCD and plasma screens everyone bought over the past three years that came with VGA inputs. At the same time, more and more computers — especially laptops — have come with S-video analog outputs. Either way, never before have so many consumers been able to hook up so many PCs to so many TVs to watch so much video. In 2008, our survey found that 19.9 million households connected a PC to the TV at least occasionally — and 4.5 million of them reported watching online video with that connection in the past month.

· Piggybacking on a game console. The leading solution here is the Xbox 360, which has been offering free and paid video since 2007. More recently, the Xbox 360 added Netflix streaming for Xbox 360 LIVE Gold members. To estimate how many people this offer has attracted, we started with 9.8 million US Xbox 360 owners at the end of 2008. Our survey shows that 37% of them have watched video on their consoles, yielding 3.6 million Xbox 360 owners who are watching online video on the TV. Removing the 45% who already connect a PC to the TV for video adds a unique 2 million. Because the PlayStation 3 (PS3) didn’t add video to its PlayStation Network until July of last year, our 2008 survey data does not reflect the growth of the service since its launch. Given the PS3’s slower sales and considering that 40% of PS3 owners also have an Xbox 360, we expect that the PS3 can, at most, increase the over-the-top viewing population by no more than a million, bringing the total gaming number to 3 million.

· Spending money on a proprietary over-the-top set-top box. As we reported in 2008, this category is small and destined to stay small.10 Between the various solutions available from Apple, Roku, TiVo, VUDU, and others, this category accounts for no more than 1.6 million households. But, hold on: Before we can add them to the pile, we have to account for the fact that 48% already watch online video on the TV thanks to a PC or a game console. That leaves a unique 0.8 million to add to our total number.

· Using retail digital video recorders (DVRs). We estimate the total number of high-end retail DVRs that have over-the-top video capability at less than 1.5 million. Of those, we assume about two-thirds are used for either free or paid online-delivered video, such as that provided by Amazon.com’s Unbox service or TiVocasting. Here again, it is likely that approximately half of these people already watch online video on the TV through some other means, so we only add an extra 0.5 million.



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Because the market is likely to grow so much, a number of smaller contenders have rising ambitions in 2009 and beyond, including:

· Connected TVs. Prior to the 2009 model year, connected TVs in the US were of such little importance that they didn’t even show up in our surveys of thousands of consumers. That is still the case for now, but given the promises that were made at CES in January 2009 about the new models’ capabilities and their aggressive timetable, connected TVs could be in as many as a million households by the end of the year.11

· Connected Blu-ray players. While it’s true that 4% of households tell us they have a Blu-ray player, most of them can’t connect to the Internet for video or anything else.12 And those that can connect don’t provide access to Hulu, YouTube, or other general online video. More ambitious connected players started rolling out in earnest in the last half of 2008, including models from LG and Samsung that also stream Netflix Watch Instantly content. Uptake of these models is small for now, but depending on how effectively the industry markets the BD-Live connectivity of the current generation of Blu-ray players, we see this platform as worth watching.13

· Open set-top boxes. This category exists thanks solely to Boxee, the uppity open-source video player that was ported to the Apple TV earlier this year. The move prompted a takedown request from a Hulu eager to protect itself from the bad politics of competing directly with broadcast ratings and cable subscriber fees.14 Boxee estimates that the number of people using this solution is in the low hundreds of thousands; without survey data, we can’t reliably say that they’re all also likely users of at least one other method for getting online video to the TV, but it’s a bet we’re willing to make. Even though it adds no one to our count, we still bring it up in this analysis because it raises a question: Could open-architecture set-top boxes that bring PC-like video to the TV but without the fan noise and keyboard succeed?

thE convEniEncE QuotiEnt mEthoDoloGy tEllS uS Which Solution Will Win

There’s a lot riding on which one of these solutions will emerge the victor. Will a few players control the dominant solution or will it provide an open platform for robust development? Will devices new to the living room take over or will established living room equipment — enhanced by a Web connection — maintain their hold over the consumer’s video setup? How these questions are answered will shape the opportunities for content providers, cable and other video service providers, and device makers alike. Enter Forrester’s Convenience Quotient (CQ) methodology.15 The Convenience Quotient is a measure of how conveniently a product or service provides the benefits that consumers want, while accounting for the barriers that would otherwise inhibit adoption and use. We perform this analysis in four steps.



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Step 1: identifying the consumer benefits the Solution must bring to the living room

To succeed, any solution for bringing Internet video to the TV set must deliver all the possible content that video-dependent consumers care about. This includes the top TV shows and movies that are available online for free as well as the option to get other content for a fee or through a subscription. We populate our scorecard with basic usability features that will sweeten the deal for interested viewers. Our scorecard then adds them. Note that our list of benefits focuses on watching favorite videos, not discovering new video, which we don’t consider a benefit that changes people’s living rooms yet. Our final list includes five categories of consumer benefits:

· Content. Rather than measure a device or solution solely on its ability to bring Hulu or YouTube into the living room, we recognize that video habits are much bigger than that. The whole point of bringing online video to the TV is to enjoy it alongside other types of content that viewers prefer. That’s why our content category recognizes up to 11 different types of content — some branded, some a function of physical media. The more content a solution can provide, the more likely it is to meet the needs of large numbers of consumers.

· Control. Simply delivering content provides value, but putting the viewer in control of content amplifies that value. The success of the DVR bears this consumer need out. A quick install gets the viewer to value faster. Being able to control where and when you watch — with an interface that is easy to navigate — brings that value back many times. The ability to conveniently direct a solution from a variety of mobile or Web-based access points further intensifies the viewer’s control.

· Convergence. In this context as in many others, convergence comes in two flavors: It can combine more than one service into a single experience or combine more than one device into a single solution, thus reducing the hardware required in the home. A few solutions can do both.

· Continuity. It may seem a small thing, but when trying to persuade consumers to adopt a new solution, it is helpful to present it as an extension of an existing popular device or service. Thus, an experience that is explicitly built on a consumer’s existing subscription relationships or that extends the functionality of a device that a viewer already enjoys will please more than one that does neither.

· Community. Because we originally identified how poorly suited a TV interface is to helping viewers navigate thousands of options, we recognize the need for providers to draw on the community to make recommendations, whether automated or based on a friend’s favorites.

Step 2: Pinpointing the barriers these Devices must overcome

The Convenience Quotient methodology works so well because it doesn’t just examine product features or even the benefits they intend to provide. Instead, it accounts for the many impediments that can limit consumer adoption and device success. For this, we track six distinct, single-measure barriers:



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· Technology limitations. Not all new technologies are ready for prime time. Some rely on weak wireless networking adapters, others require the consumer to figure out which cables go where, while others have software issues that can’t be resolved for a few more versions hence. These problems not only make the product harder to use but also undermine the user’s confidence in the technology’s maturity, slowing uptake and cutting off positive word of mouth before it can start.

· Poor distribution. Where are the devices sold? Can consumers find and test them in the store or even at a friend’s house or are they only available through online sales channels that provide limited product demos? Not only does wide distribution make it easy to see and buy the product, but it also inspires confidence; consumers will conclude that if Best Buy carries it, it must be reliable.

· Unknown brand. When drawing consumers into an emerging media experience like this, a well-known, reliable brand can carry a consumer past many initial doubts — especially when it’s clear that the product is an early version. Consumers want to believe that the product will be supported and perhaps even enhanced remotely after purchase. Established brands are more likely to have the resources and the brand obligation to do this than new brands.

· Pricing burden. New product category entrants have to persuade people to try something new while also compensating themselves for the cost of engineering a new product experience. If they keep retail prices too high, the consumer’s urge to indulge will never be satiated, leaving the market underdeveloped. Products that embed online video capabilities into other devices like TVs have an advantage here with those consumers already in the market for the device.

· Market education burden. Every product in a new device segment faces the problem of communicating to the market exactly what this new widget does. If users can’t describe the product’s benefits to their friends at a cocktail party, it means the product will permanently suffer from a market education barrier. A unique challenge that many of these players face is that they offer so many different kinds of content experiences in one gadget that they are, ironically, left with the problem of explaining them all.

· Complexity burden. Beyond understanding the product’s features, the complexity burden refers to the additional weight that a device carries when someone actually decides to bring it home or install it. How much information do they need to know before the purchase? Are all connection accessories included? If not, how easy is it to find them at a reasonable price? If consumers don’t know the list of relevant questions to ask — and if they can’t figure out the answers to the questions once they have them — the product will suffer from a complexity burden that will get passed on to friends as negative word of mouth.



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Step 3: Scoring the competition

The goal of the Convenience Quotient methodology is to identify which solution can establish itself as a market maker in the way that the iPod did for MP3 players and the Kindle is doing for eBook readers. We scored each device or solution with an empty, half-full, or full circle for each criterion (see Figure 3). We averaged the scores — 0 points for an empty, 0.5 for a half-full, and 1 point for a full circle — to produce a numeric ranking for each device’s ability to provide consumer benefits. We applied the same process for barriers, although with negative numbers, because they detract from the overall product convenience.

Step 4: making Sense of the cQ output

When we plot the final scores on our Convenience Quotient needle, we can identify a very clear ranking (see Figure 4). To further illustrate why some players are clear winners and others struggle, we plot each experience in a graph representing benefits on the horizontal axis and barriers on the vertical axis (see Figure 5). These two views of the Convenience Quotient scores tell us who will succeed. We found that:

· The PC + TV connection is an experience with mainstream potential. Our Convenience Quotient work thus far has shown us that devices or solutions that can cross the 0.5 threshold have the potential to satisfy a mainstream consumer. This is despite the extra manual connection necessary and the odd fact that the couch is too far away from the TV to make directing the PC at that distance simple — you either have to move up to the PC to “change the channel” or you have to have long cables that bring your laptop or keyboard to the couch. Yet millions want to do this, mostly because the benefits are nearly a third greater than the nearest competitor while the barriers are manageable.

· A second tier of devices will satisfy some for now. Game consoles and connected TVs come in a clear second place, scoring 0.30 and 0.26, respectively. These scores fail to inspire long-term confidence in the ability of these devices to dominate the over-the-top video opportunity. It’s largely the lack of robust content that will slow these devices down. Plus, the political interests of those developing content or widgets for these devices will mean that they hesitate to push the content benefit envelope so that they don’t fall foul of the content owners’ interests. This means that we see these devices only playing a secondary role in bringing online video to the TV.

· There are devices of modest or niche interest. On the third rung down the ladder rest connected Blu-ray devices and a Boxee-enabled (hacked) Apple TV, with scores of 0.20 and 0.08, respectively. We’ve learned from past Convenience Quotient analysis that this range of scores usually means a device is not a good fit for consumer needs. Products that find themselves here still have the chance to innovate, and these two are no different. For now, Blu-ray makers have focused on using connectivity to enhance the Blu-ray disc experience. However, to really make Blu-ray connectivity relevant, CE makers should push the envelope, making these BD-Live players at least as interactive as the connected TVs coming out this year. Putting Yahoo! TV Widgets in the box is a good first step.



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· We expect to see one solution dwindle. Retail DVRs from Digeo and TiVo are some of the most elegant consumer electronics devices out there. They’re also a really hard sell, as consumers find it simpler to lease an inferior box from their cable or satellite providers. With so many barriers in the way, we don’t expect this device to drive more consumption of online video to the TV. Instead, the customers who choose to go this route will find themselves pleased to have some additional online video available to them, but that content won’t become a driver of the time they spend in front of the TV.



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figure 3 The Convenience Quotient Scorecard Quantifies Product Benefits and Barriers


Overall scoreBene�ts score

ContentLinear TV content (TV tuner)Proprietary VOD moviesProprietary VOD TV showsUser-generated contentNet�ixAmazon or Blockbuster VODiTunesOnline TV shows (Hulu, etc.)Third-party content widgets

ControlLocationTimeInterface

Combines separatedevicesCombines separatecontent types

ContinuityExisting relationshipSimilar technology

CommunityAutomated recommendationsFriend favorites

Web or mobile controlInstall

Convergence

Bene�ts scorecard3-1

HackedAppleTV

0.080.66

ConnectedBlu-ray players

0.200.36

RetailDVRs-0.120.55

Gameconsole

0.300.55

ConnectedTVs

PC to TVconnections

0.460.260.800.59

Physical media (DVD, Blu-ray)

Media �les from anetworked PC

Scoring Key* = 0.00 = 0.50 = 1.00

*Note: Scores for Bene�ts represent positive numbers, while scores for Barriers are negative.



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figure 3 The Convenience Quotient Scorecard Quantifies Product Benefits and Barriers (Cont.)

figure 4 a PC-Connected TV Ranks at The Top Of The List


Barriers score Barriers to overcome

Barriers scorecard 3-2

Technology challenges Poor distribution Unknown brand Pricing burden Market education burden Complexity burden

Hacked AppleTV

-0.58

Connected Blu-ray players

-0.17

Retail DVRs

-0.67

Game console

-0.25

Connected TVs

PC to TV connections

-0.33 -0.33

Scoring Key* = 0.00 = 0.50 = 1.00

*Note: Scores for Bene�ts represent positive numbers, while scores for Barriers are negative.


0

1 -1

Hacked AppleTV

0.08

Retail DVRs

-0.12

Connected Blu-ray player

0.20

Game console

0.30

Connected TVs 0.26


0.46

Retail DVRs

Hacked AppleTV Connected Blu-ray player Connected TVs Game console PC to TV connections



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figure 5 a Benefits Versus Barriers analysis Shows Why Winners Lead

figure 6 an estimated 15.8 Million Will Go Over The Top By Year-end 2009


Benefits score

Barriers score

0.0 0.5

1.0

1.0

-0.5


Game console Connected

Blu-ray player

Retail DVRs

Quadrant I Quadrant II

Quadrant IV Quadrant III

Connected TVs

Hacked AppleTV


15.8

End of 2008estimates

Estimated 2009 increase

9.4

8.1

2.0

1.2

1.0

0.4

Total unduplicated viewers

PCs connected to TVs

Videogame consoles

Over-the-top set-top boxes

Retail DVRs*

Connected TVs*

Blu-ray players*

*These include only those devices that can deliver online video streams.

US homes accessing online video through each solution (millions)



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W H a T i T M e a n S

thE markEt Will nEarly DoublE in 2009

Before consumers can respond to these convenient solutions, they have to become aware of them. That’s a challenge because there is no one device that your friends will talk about at work, no single section of Best Buy that can deliver this experience, and certainly no industry trade group sponsoring ads to educate the public. despite the lack of a coherent consumer message, these benefits are significant enough that consumers will amplify what little is being said by console makers, TV makers, and others to spread the word virally. We believe that the end of 2009 will bring another 7 million households into the club, pushing the total number of homes where online video is watched on the TV to nearly 16 million (see Figure 6). That growth will come from the winners of our Convenience Quotient analysis, especially as those backing them turn up the heat.

· media center Pcs will finally get the respect they deserve. There are tens of millions of these PCs out there, though most of them are never used as media centers. if Microsoft can incorporate more online content directly into the 10-foot, remote-controlled Media Center interface, not only will it make watching online video on a PC connected to a TV more satisfying, it will lead people to tell their friends they could do the same. Microsoft took a first step in this direction recently, letting netflix subscribers with Vista Media Center PCs access their Watch instantly queues through the Media Center interface rather than having to jump out to a browser. That’s a good step but not sufficient: To really rock this house, Microsoft will have to persuade Hulu that a Media Center interface for its content would satisfy consumers more than it will upset cable companies. We won’t hold our breath, but it’s likely that this impasse can be cleared this year.

· Game consoles will unveil the first subscription-based access to premium online video. While netflix’s subscription model is off to a great start, what people really want to see on their TVs is newer TV shows and movies. While the PS3 and Xbox 360 both offer paid movie downloads and rentals, we expect a console maker to announce a video subscription offering within the next year that brings premium content to viewers without nickel-and-diming them over every show. This subscription offering will fail unless it is powered by an existing video subscription brand that has clout with consumers — think HBO or Showtime. Would such a move by a premium cable network cause channel conflict? as long as prices are similar to what they would be on cable, having the choice to buy HBO through the PS3 rather than from Cox is no different than having the option to subscribe to it from a satellite or telco TV provider.

· connected tvs will capture the imagination of content owners. don’t underestimate the power of a TV that has an online streaming capability built into it. This has such paradigm-altering power that, even at modest levels of adoption, it has the potential to change the way content providers think about how they connect with and engage viewers. Cable networks like Comedy Central and TnT will take a particular interest in reaching TV viewers directly



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through the device that captivates them for more than 4 hours a day. Broadcasters like nBC will deliver companion content for its hit shows that adds new ad revenue opportunities while reinforcing the broadcast ad buys that the network depends on. The rule here is simple: The solution that the content owners support has an unfair advantage in the long run.

· blu-ray players will fail to have a significant impact here. even though more connected Blu-ray players capable of streaming online video will be sold this year, the fact is that most of the people who want to use their Blu-ray devices to watch Web video on the TV will already do so on at least one other device. as a result, Blu-ray will play a supporting — not a defining — role in how this market shapes up.

R e C O M M e n d a T i O n S

fEED thiS unformED oPPortunity WhilE it’S Still oPEn to inDuStry influEncE

The rising phenomenon of watching online video on the TV is unusual precisely because it hasn’t been orchestrated by any single device maker. indeed, the list of companies trying to influence the outcome of this market reads like a who’s who of consumer media technology — from intel and Microsoft to HP and Yahoo! to apple and Sony. all of them see the same disruptive potential of bringing iP-delivered video to the TV, yet none has been able to establish a dominant role in this emerging market. Why? Because none of them control what consumers ultimately want from these devices: content. as a result, consumers have had to take the lead, doing (legal) things to bring content to the TV by connecting a variety of devices to the TV.

With content-focused consumers squarely in control, this game will likely tilt toward piracy. That’s a market where nobody wins in the long run, including viewers, who will find less high-quality video media to choose from.16 We recommend that the industry increase legal access to satisfying content as soon as possible — and thereby feed this wild animal while it’s still open to domestication. and by industry, we mean two specific types of players that can have a role in how this emerges if they choose to accept it.

· cable providers: now is the time to offer premium online content. Under this heading, we include aT&T and Verizon’s cable-like video services. These providers are the reason most are nervous about making it easier for consumers to get video over the top. Sure, nBC could offer all its content direct to consumers and claim immunity from channel conflict because nBC content is currently broadcast over the air nationwide. However, nBC Universal, nBC’s parent, is likely to catch flack from cable providers in the form of the tougher renegotiation of Bravo, Telemundo, and USa cable distribution deals. Recently, cable MSOs like Comcast and Time Warner have hinted that they plan to deliver their own over-the-top online video services to their premium cable and broadband subscribers’ PCs.

We say that this can’t come soon enough. Cable’s value here is clear; its relationships with



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cable and broadcast networks position it to secure content not available online today, whether it’s Showtime’s dexter or the first (and, i would argue, best) season of Heroes. But delivering this content solely to the PC misses the point. Millions of consumers already want to see that content on the TV. That’s why we recommend that cable take the next step by making it easy to watch these iP streams on the TV. This doesn’t require swapping out millions of set-top boxes to deliver iP video direct to the set top, either. We’ll give the

“innovative Cableco of the Year” designation to whichever one ports its premium video experience to the Roku, Xbox 360 console, or Yahoo!’s TV Widget engine first.

· content providers: Give in sooner rather than later. For cable to deliver on the above promise, content owners need to go along for the ride. The mix varies, but all these players make their money from advertising, syndication licensing, cable distribution, video on demand (including online), and dVd sales. While most content providers like aBC and FOX have been willing to experiment with online, ad-supported video, it’s becoming increasingly clear that as soon as the online channel starts to cannibalize broadcast audiences, it will erode broadcast and cable profit margins.17 eager to avoid this, content owners should be willing to support cable providers with loads of content not currently available online.

This gives consumers what they want, namely content. it also preserves what content owners want, namely revenues. ad revenues increase thanks to more views of more content behind cable’s authentication walls, whether on the PC or the TV — revenues that advertisers are happy to contribute, by the way, as viewers can’t skip those ads. Cable-contributed revenues are maintained and possibly even increased because cable can positively price the service if it really contains content not available elsewhere and delivers that content to more than just the PC. Plus, it establishes the business model that Forrester sees as key to future video content distribution: a comprehensive video services subscription. Once cable has it well in hand, content owners can justify working with other potential providers of the same experience, such as media retailers like Best Buy and Wal-Mart.

EnDnotES1 Although this report focuses on the US market, over-the-top video is also rising in Europe, albeit at a slower

rate because the devices and services discussed in this report are either not available or are only more recently available in Europe.

2 Source: “Hulu Continues Ascent in U.S. Online Video Market, Breaking Into Top 3 Properties by Videos Viewed for First Time in March,” comScore press release, April 28, 2009 (http://www.comscore.com/Press_Events/Press_Releases/2009/4/Hulu_Breaks_Into_Top_3_Video_Properties).

3 “Hulu Continues Ascent in U.S. Online Video Market, Breaking Into Top 3 Properties by Videos Viewed for First Time in March,” comScore press release, April 28, 2009 (http://www.comscore.com/Press_Events/Press_Releases/2009/4/Hulu_Breaks_Into_Top_3_Video_Properties).

4 Now that so much video is available online, television executives are asking if future TV programming will be delivered over the Internet, bypassing today’s traditional cable and satellite providers. This idea, known as “over-the-top TV,” faces four obstacles: lack of Internet connections to TV sets, bandwidth-limited video



17

quality, lack of business models, and the challenge of navigating through thousands of video programs. All of these are on the way to being solved, but, even so, it will take at least five years before over-the-top TV can compete at all with cable or satellite. See the January 3, 2007, “Over The Top: The Path To Internet-Delivered TV” report.

5 We called it back then, writing in early 2007 that the download-to-own business would prove to be a bomb, despite the big investments at the time from Apple, HP, and Wal-Mart. See the May 11, 2007, “Paid Video Downloads Give Way To Ad Models” report.

6 This 61% is from our forecast for end-of-year broadband penetration. See the July 25, 2008, “Benchmark 2008: Forecast Growth Of Devices And Access In The US” report.

7 For the latest home networking information, including data about people who use home networking to share media in the home, see the March 10, 2009, “Consumers Are Ready For Home Remote Control” report.

8 Although an estimated 8.8 million homes do this today, we expect that the behavior varies dramatically within the home, such that the demographics of who is doing this probably point to the younger members of the household and likely skew male in the case of game console homes that watch video.

9 All data in this section, unless otherwise indicated, is from Forrester’s North American Technographics Digital Home And Wireless Online Survey, Q3 2008.

10 By applying the Convenience Quotient methodology, we determined that the benefits of over-the-top set-top boxes are only marginally greater than the barriers to their use. See the July 17, 2008, “Competitive Product Ranking: Picking A Winning Set-Top Box” report.

11 Major TV makers like LG, Samsung, Sony, and Vizio announced significantly improved connected TVs at CES 2009, causing us to finally consider this a market ready to grow. See the March 9, 2009, “The Year Of The Connected TV” report.

12 Source: North American Technographics Media, Marketing, Consumer Technology, Healthcare, And Automotive Benchmark Survey, Q3 2008.

13 Don’t get us wrong, we still think Blu-ray’s victory over HD-DVD is a pyrrhic one. So while Blu-ray players will continue to arrive in consumers’ homes as replacement DVD players, it will happen at such low prices and with such low demand for Blu-ray discs other than blockbuster releases like Batman Returns that the industry will get no financial boost from the transition to HD physical media. See the April 9, 2008, “The Hard Road Ahead Of Blu-ray” report.

14 The issue was resolved quietly and, as of writing this report, Hulu content is available through Boxee-enriched Apple TVs as an RSS feed, but that may change.

15 We introduced the Convenience Quotient methodology earlier this year. See the February 6, 2009, “Cracking The Convenience Code” report.

16 This isn’t like music, folks; even if you stop paying Tom Cruise $20 million a picture, you still can’t make blockbuster movies on a shoestring budget in a basement. I, for one, still want to see such movies made.

17 This realization has seeded resentment among media executives, setting the stage for a backlash against online TV shows. See the March 13, 2009, “Preparing For The Coming Online TV Backlash” report.
















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