Presenter name Company name The Future of On-line Video Distribution Alan Patrick, Senior Associate Analyst, STL Partners [email_address]

Summary Points On-line video growth exacerbates the ‘broadband incentive problem’ 3 generic future scenarios (from new STL research): Old Order Pirate World New Order ISPs and Telcos can affect future outcome and build valuable position

On-line video growth exacerbates the ‘broadband incentive problem’

3 generic future scenarios (from new STL research):

Old Order

Pirate World

New Order

ISPs and Telcos can affect future outcome and build valuable position

‘ On-line Video Distribution’ – our research definition ‘ On-line Video Distribution’ Any video material (movies, TV, infotainment, sports, UCG) distributed via internet technologies (IPTV, web streaming or P2P downloading) over any bearer (fixed or mobile broadband networks) to any device (PC, TV, handheld). We exclude traditional broadcasting and physical means of distribution, although the consequences of internet video distribution for these sectors are considered in our research. http://www.stlpartners.com/research/future-content-distribution.php

‘ On-line Video Distribution’

Any video material (movies, TV, infotainment, sports, UCG) distributed via internet technologies (IPTV, web streaming or P2P downloading) over any bearer (fixed or mobile broadband networks) to any device (PC, TV, handheld).

We exclude traditional broadcasting and physical means of distribution, although the consequences of internet video distribution for these sectors are considered in our research.

http://www.stlpartners.com/research/future-content-distribution.php

Shifting Sands in the Video Value Chain Consumer Aggregation Devices Content Creation Distribution

Online Video – Current revenue forecasts are uncertain Current Forecasts of Global Video & TV Market $ billion Source: The Diffusion Group, Informa, STL Partners Analysis Total Online Video market c $2bn in 2008 c $18bn in 2012???

Emerging industry shape Creation Aggregation Curated Content Professional Content Pure Aggregation User-Generated Content Joost YouTube Phreadz Source: Revision 3, STL Partners analysis

3 possible scenarios for the future Old Order Re-establish content rights Maintain control on sources of funding (Ads, Subscription) Pirate World No control of rights, Free wins Offset-based funding New Order New copyright model allows pricing control by new aggregators / creators Migrate control on sources of funding (Ads, Subscription)

Re-establish content rights

Maintain control on sources of funding (Ads, Subscription)

No control of rights, Free wins

Offset-based funding

New copyright model allows pricing control by new aggregators / creators

Migrate control on sources of funding (Ads, Subscription)

3 Possible Scenarios (more detail) Source: STL Partners Telco 2.0 Internet Video Distribution Report, to be published December 2008 Content Creation Aggregation Distribution Customer Environment Old Order Re-establish rights management over YouTube etc means Old Order: pay creators control archives MSM re-establishes control, maybe by: controlling access to pipes controlling rights adapting own models plus defending old plays Distributors establish control of pipes, regulate access - motivates Telcos to invest in transport capacity Two sided market to capture upstream value All but the minority of users return to the “Back to the Future”Scenario – old players, old content, new devices Continual threat from radical new service developments Pirate World Cannot control rights, “Free” wins Mass copy of archives Huge amount of Free UGC Algorithm Aggregators rule, the lowest cost market forces all other cost models to the wall Telcos do not invest as they cannot justify investment Throttle / QoS options Continual Net Neutrality debates Users consume Free services, pay only for bandwidth and consumer devices CPE market attractive as one of the few where value can be captured New Order A “New Order” for copyright allows some form of control over pricing by creators This allows quality to re-enter market, low value UGC is driven out as a major driver Old Pirates become new players, Old Order have new plays A “normal” market re-establishes itself – low priced UGC, high priced quality long form content Platform design required to capture added value services Mobile Companies have to open pipes to a more telco like model Acceptable level of piracy (new IP rules?) allows new business models to emerge Mix of services over new devices – dispered markets

Re-establish rights management over YouTube etc means Old Order:

pay creators

control archives

MSM re-establishes control, maybe by:

controlling access to pipes

controlling rights

adapting own models plus defending old plays

Distributors establish control of pipes, regulate access - motivates Telcos to invest in transport capacity

Two sided market to capture upstream value

All but the minority of users return to the “Back to the Future”Scenario – old players, old content, new devices

Continual threat from radical new service developments

Cannot control rights, “Free” wins

Mass copy of archives

Huge amount of Free UGC

Algorithm Aggregators rule, the lowest cost market forces all other cost models to the wall

Telcos do not invest as they cannot justify investment

Throttle / QoS options

Continual Net Neutrality debates

Users consume Free services, pay only for bandwidth and consumer devices

CPE market attractive as one of the few where value can be captured

A “New Order” for copyright allows some form of control over pricing by creators

This allows quality to re-enter market, low value UGC is driven out as a major driver

Old Pirates become new players, Old Order have new plays

A “normal” market re-establishes itself – low priced UGC, high priced quality long form content

Platform design required to capture added value services

Mobile Companies have to open pipes to a more telco like model

Acceptable level of piracy (new IP rules?) allows new business models to emerge

Mix of services over new devices – dispered markets

… .and how they play out over time Old Order Pirate World New Order 2 - 3 years c 5 years Market Share

User-Generated Video creates traffic, but Long Form creates value Source: The Diffusion Group Online Video Traffic ... ...and Advertising Revenues 2013

The wisdom of surveys: Telcos/ISPs lose out Big Winner Big Loser Source: STL Partners Telco 2.0 Internet Video Distribution, Experts Survey, October 2008; n=176

The wisdom of surveys: IPTV does not save the day Most Popular Least Popular Source: STL Partners Telco 2.0 Internet Video Distribution , Experts Survey, October 2008; n=176

Telco/ISP response: Restore market rationality fast Old Order Pirate World New Order Now c 5 years Source: STL Partners Telco 2.0 Internet Video Distribution Report, to be published December 2008 Control of CPE in the home Policing content rights 2-sided business model & customer data mining fully established Eco-system of partners Flat Rate User Subsidy User VAS & Bundles Additional upstream services Upstream VAS Platform CDN & QoS Upstream service

Summary of Playout Assumptions in model Source: STL Partners Telco 2.0 Internet Video Distribution Report, to be published December 2008 Now 2 – 5 Years 5 Years 10 Years Old Order Old order has market power but Pirate World is crushing its economics with free services Some examples emerging of Old Order building NewOrder businesses (iPlayer, Hulu) Old Order continues to fight decline by existing legal methods but start to change – exit some areas, change proposition where they have USP More launch (acquire?) New Order type businesses Old Order models that don’t work are killed off, new (working) models survive – smaller but more appropriate industry emerges More rational copyright emerges Rationalisation of older businesses into New Order- combined plays Mainly STB based Pirate World Pirate World is copying and distributing copyrighted archive material “ FreeConomic” model (ie VC funding, offset economics) is funding a lot of Pirate World Money is made by Pirate Aggregators when they are bought for traffic by New Order Players “ More of the Same” – but they start to face some issues: Crunch means even they start to run out of funding Digital Sharecropping – quality UGC providers, then customers, exit New Order aggregators start to withdraw support due to legal battles Pirate World starts to lose velocity as: Most people can get content they want at “good enough” price They prefer this to the hassle of legal pursuit There is no longer any appetite to fund these plays Pirate World limited to high time / low income people – Advertisers want to chase the youth, but know they will be prosecuted Emergence of compulsory payment on CPE/Distribution equipment taxes most Pirate World consumers anyway, removes sting New Order Some New Order players are using Pirate World for own ends Others are trying to build Old Order businesses with New Order aggregation / CPE technology (eg Joost) Also have lower cost base and/or are subsidising from revenue elsewhere New Order players face increasing legal pressure for supporting Pirate World Crunch means parents / subsidisers start to insist on business models Likewise customers indicate wish to pay premiums for quality New Order enter period of major growth, “Normal” market emerges as pricing, customers and quality are matched New Order is actually a mix of converted Old Order and real New Order businesses Rationalisation of New Order businesses as sector matures – large players plus diverse economy of small specialists Mainly Web TV based

Old order has market power but Pirate World is crushing its economics with free services

Some examples emerging of Old Order building NewOrder businesses (iPlayer, Hulu)

Old Order continues to fight decline by existing legal methods but start to change – exit some areas, change proposition where they have USP

More launch (acquire?) New Order type businesses

Old Order models that don’t work are killed off, new (working) models survive – smaller but more appropriate industry emerges

More rational copyright emerges

Rationalisation of older businesses into New Order- combined plays

Mainly STB based

Pirate World is copying and distributing copyrighted archive material

“ FreeConomic” model (ie VC funding, offset economics) is funding a lot of Pirate World

Money is made by Pirate Aggregators when they are bought for traffic by New Order Players

“ More of the Same” – but they start to face some issues:

Crunch means even they start to run out of funding

Digital Sharecropping – quality UGC providers, then customers, exit

New Order aggregators start to withdraw support due to legal battles

Pirate World starts to lose velocity as:

Most people can get content they want at “good enough” price

They prefer this to the hassle of legal pursuit

There is no longer any appetite to fund these plays

Pirate World limited to high time / low income people – Advertisers want to chase the youth, but know they will be prosecuted

Emergence of compulsory payment on CPE/Distribution equipment taxes most Pirate World consumers anyway, removes sting

Some New Order players are using Pirate World for own ends

Others are trying to build Old Order businesses with New Order aggregation / CPE technology (eg Joost)

Also have lower cost base and/or are subsidising from revenue elsewhere

New Order players face increasing legal pressure for supporting Pirate World

Crunch means parents / subsidisers start to insist on business models

Likewise customers indicate wish to pay premiums for quality

New Order enter period of major growth, “Normal” market emerges as pricing, customers and quality are matched

New Order is actually a mix of converted Old Order and real New Order businesses

Rationalisation of New Order businesses as sector matures – large players plus diverse economy of small specialists

Mainly Web TV based

Today’s Questions Do you think our view that a new order will emerge within 3-5 years is: Optimistic Realistic Pessimistic Why? What do you think of our potential options for Distributors (telcos) to compete: Optimistic Realistic Pessimistic Why?

Do you think our view that a new order will emerge within 3-5 years is:

Optimistic

Realistic

Pessimistic

Why?

What do you think of our potential options for Distributors (telcos) to compete:

Optimistic

Realistic

Pessimistic

Why?