Evolution of Hybrid TV and Over The Top (OTT or internet) TV

ALAN QUAYLE BUSINESS AND SERVICE DEVELOPMENT TV D EL I V E RY E VO LU TI O N: H Y BR I D TV A ND OV ER TH E TO P (I N TER N E T) T V S TATU S R E PO RT REVIEW OF THE TECHNOLOGIES, ECOSYSTEMS AND INDUSTRY‘S ACHIEVEMENTS IN HYBRID TV AND OVER THE TOP (INTERNET) TV.

CONTENTS FORWARD .................................................................................................................................... 6 EXECUTIVE SUMMARY ........................................................................................................... 7 BRIEF HYBRID TV GEOGRAPHIC MARKET REVIEW ................................................................... 8 EMEA.............................................................................................................................................. 8 AMERICAS........................................................................................................................................ 9 ASIA PACIFIC ................................................................................................................................... 9 KEY LEARNING FROM HYBRID TV DEPLOYMENTS .................................................................... 9 TELCO CHALLENGES IN THE TV ECOSYSTEM ........................................................................... 10 IMPACT OF TECHNOLOGY ACROSS THE TV ECOSYSTEM ......................................................... 11 FUTURE SCENARIOS ..................................................................................................................... 12 OTT AND INTERNET TV .............................................................................................................. 13 RECOMMENDATIONS FOR PAYTV PROVIDERS ......................................................................... 14 RECOMMENDATIONS FOR IPTV / HYBRID TV SUPPLIERS ....................................................... 15 RECOMMENDATION FOR STB APPLICATION DEVELOPERS...................................................... 15 RECOMMENDATIONS FOR INVESTORS ........................................................................................ 16 INTRODUCTION AND BACKGROUND ............................................................................... 17 INTRODUCTION............................................................................................................................. 17 DEFINITIONS ................................................................................................................................ 18 WHY HYBRID TV IS EXCITING FROM A SUPPLIER’S PERSPECTIVE ......................................... 20 HYBRID TV STANDARDIZATION ACTIVITIES ............................................................................. 21 THE HYBRID STB ......................................................................................................................... 22 BRIEF HYBRID TV GEOGRAPHIC MARKET REVIEW ................................................................. 25 EMEA............................................................................................................................................ 25 AMERICAS...................................................................................................................................... 25 ASIA PACIFIC ................................................................................................................................. 26 UNDERSTANDING THE TV ECOSYSTEM .......................................................................... 27 PRODUCERS / DISTRIBUTORS AND STUDIOS ............................................................................... 28 BROADCASTERS............................................................................................................................ 29 CABLE NETWORKS....................................................................................................................... 30 ADVERTISERS ............................................................................................................................... 31 CANOE VENTURES ......................................................................................................................... 32 ADVERTISERS AND THE NETWORK PVR ....................................................................................... 33 PAYTV PROVIDERS ...................................................................................................................... 34 DEAL STRUCTURES ...................................................................................................................... 35 2 OF 93

IMPERFECT COMPETITION AND THE BATTLE BETWEEN NETWORKS AND PAYTV ................ 36 TELCO CHALLENGES ................................................................................................................... 37 IMPACT OF TECHNOLOGY ACROSS THE ECOSYSTEM................................................................ 37 FUTURE SCENARIOS ..................................................................................................................... 38 HYBRID TV AND OTT TV DEPLOYMENTS: TELCO / SATELLITE / CABLE ............ 40 AT&T HOMEZONE ...................................................................................................................... 40 VERIZON FIOS ............................................................................................................................. 41 BT VISION ..................................................................................................................................... 43 ORANGE TV .................................................................................................................................. 44 CANAL+ LE CUBE ........................................................................................................................ 46 DETSCHE TELEKOM T-ENTERTAIN ............................................................................................ 47 TELECOM PORTUGAL MEO ......................................................................................................... 48 TELEFONICA O2 CZECH REPUBLIC O2TV ................................................................................ 49 HANSENET ALICETV (NOW TELEFONICA O2) .......................................................................... 50 FASTWEB, TELECOM ITALIA, JAZZTEL AND TELEFONICA ...................................................... 50 COMHEM ...................................................................................................................................... 50 TELECOM NEW ZEALAND AND TIVO ......................................................................................... 51 TELECOM ITALIA OTT TV CUBOVISION................................................................................... 51 LEARNING FROM HYBRID TV DEPLOYMENTS ........................................................................... 52 HYBRID TV AND OTT TV BUSINESS MODELS ................................................................ 54 DRIVERS FOR HYBRIDTV ............................................................................................................ 54 BROADCASTER PARTNERSHIP? ................................................................................................... 54 BUSINESS MODEL ......................................................................................................................... 55 OPERATOR HYBRID TV SURVEY ................................................................................................ 55 INTERACTIVE SERVICES AND STB APPLICATIONS / WIDGETS .............................. 59 EBIF AND TRU2WAY.................................................................................................................... 59 EBIF .............................................................................................................................................. 59 TRU2WAY ...................................................................................................................................... 60 DVB-MHP (MULTIMEDIA HOME PLATFORM) AND GEM........................................................ 60 WTVML ....................................................................................................................................... 61 CE-HTML .................................................................................................................................... 62 OTHER STB APIS ......................................................................................................................... 63 VERIZON CASE STUDY ................................................................................................................. 63 SKY UK CASE STUDY ................................................................................................................... 65 INTERACTIVE SERVICE AND APPLICATION / WIDGET ROADMAP ............................................ 66 OVER THE TOP PROVIDERS ................................................................................................ 67 OVER THE TOP TV OPTIONS ...................................................................................................... 67 TRADITIONAL TV GOES ONLINE ................................................................................................. 70 3 OF 93

COMPARING UK OTT PROVIDERS ............................................................................................. 71 BBC IPLAYER ................................................................................................................................ 71 SKY PLAYER .................................................................................................................................. 72 ITV PLAYER .................................................................................................................................. 72 4OD (CHANNEL 4 ON DEMAND) .................................................................................................... 72 DEMAND FIVE................................................................................................................................ 72 PROJECT CANVAS ........................................................................................................................ 72 CONSUMER ELECTRONICS MANUFACTURERS ........................................................................... 74 SHARP ............................................................................................................................................ 74 TOSHIBA ........................................................................................................................................ 74 PANASONIC .................................................................................................................................... 74 LG.................................................................................................................................................. 74 WINDOWS MEDIA EXTENDER ....................................................................................................... 74 PHILIPS ELECTRONICS ................................................................................................................... 75 SAMSUNG....................................................................................................................................... 75 SONY .............................................................................................................................................. 75 INTERNET TV AND BRINGING IT BACK TO THE TV.................................................................... 75 MINIWEB........................................................................................................................................ 76 BOXEE............................................................................................................................................ 77 TIVO .............................................................................................................................................. 77 WALMART / VUDU ......................................................................................................................... 78 APPLETV ....................................................................................................................................... 79 AMAZON ON DEMAND .................................................................................................................. 79 CUSTOMERS’ CRITICAL MATH ...................................................................................................... 80 NETFLIX ......................................................................................................................................... 80 GOOGLETV.................................................................................................................................... 81 MAPPING THE LANDSCAPE .......................................................................................................... 82 SOCIAL NETWORKS AND TV ....................................................................................................... 84 SOCIAL TV .................................................................................................................................... 84 ONLINE TV NETWORKS............................................................................................................... 86 HULU ............................................................................................................................................. 86 ALSO RANS ................................................................................................................................... 87 CONCLUSIONS .............................................................................................................................. 87 FUTURE OF HYBRID TV & RECOMMENDATIONS ........................................................ 89 MARKET FORECASTS ................................................................................................................... 89 SERVICE ROADMAPS .................................................................................................................... 90 RECOMMENDATIONS ................................................................................................................... 91 RECOMMENDATIONS FOR PAYTV PROVIDERS ............................................................................. 91 RECOMMENDATIONS FOR IPTV / HYBRID TV SUPPLIERS ............................................................ 92 RECOMMENDATION FOR STB APPLICATION DEVELOPERS ........................................................... 92 RECOMMENDATIONS FOR INVESTORS ........................................................................................... 93 4 OF 93

TA BLE O F FI GU RE S Figure 1. STB Breakdown by Revenue ........................................................................................................... 8 Figure 2. Example Hybrid TV Deployments: Europe ..................................................................................... 8 Figure 3. Rating Technology Impact on TV Ecosystem Members .................................................................12 Figure 4. Review of Future Scenarios, based on industry interviews ............................................................13 Figure 5. Battle Across the TV Landscape ...................................................................................................14 Figure 6. Mapping the Hybrid TV Landscape ...............................................................................................19 Figure 7. Total Pay TV Market Size (also includes Free Sat and Free Cable) .............................................20 Figure 8. Split between Pure and Hybrid TV Subscribers.............................................................................20 Figure 9. STB Breakdown by Revenue ..........................................................................................................23 Figure 10. Example Hybrid STBs (Picture sources: ADB, Amino, Pace, Pirelli, Motorola, Netbox, Thomson, Yuxing, Sagem, Entone, Telsey) ....................................................................................................24 Figure 11. Example Hybrid TV Deployments: Europe ..................................................................................25 Figure 12. TV Ecosystem ...............................................................................................................................28 Figure 13. Change in Ad Spending in US (source Nielsen) ..........................................................................30 Figure 14. Advertising Value Chain ..............................................................................................................31 Figure 15. Trend in PayTV Subscription and Advertising Revenues ............................................................32 Figure 16. Global Growth in PayTV .............................................................................................................35 Figure 17. Examples of Deal Structures in the Value Chain .........................................................................35 Figure 18. Rating Technology Impact on TV Ecosystem Members ...............................................................38 Figure 19. Review of Future Scenarios, based on industry interviews..........................................................39 Figure 20. Verizon FiOS Architecture and Migration Plan (source Verizon) ..............................................42 Figure 21. Verizon FiOS Customer Numbers (source Verizon) ....................................................................42 Figure 22. How OrangeTV Delivers on Service Ubiquity (source Orange).................................................44 Figure 23. Simplifying the Purchase decision – Regardless the customer will get OrangeTV (source Orange) .........................................................................................................................................................45 Figure 24. Orange TV Subscribers (source France Telecom) ......................................................................46 Figure 25. CanalSat Proposition (source CanalSat) ....................................................................................47 Figure 26. What are your drivers for Hybrid TV? ........................................................................................56 Figure 27. What are the Barriers to hybrid TV? ...........................................................................................58 Figure 28. Applicability of Hybrid TV...........................................................................................................58 Figure 29. Simplified EBIF Architecture .......................................................................................................59 Figure 30. Verizon’s STB interactive Technologies ......................................................................................63 Figure 31. Verizon Architecture ....................................................................................................................64 Figure 32. Verizon Widget Bazaar and Twitter Widget (source Verizon) .....................................................64 Figure 33. Example of WTVML Page............................................................................................................65 Figure 34. SkyNet Overview ..........................................................................................................................65 Figure 35. Plurality of OTT Options .............................................................................................................68 Figure 36. Trends in the Evolution of TV ......................................................................................................68 Figure 37. TV Landscape ..............................................................................................................................70 Figure 38. BBC iPlayer Demographics (source BBC) ..................................................................................71 Figure 39. Internet TV’s short History ..........................................................................................................76 Figure 40. Mapping the InternetTV on the TV Landscape ............................................................................83 Figure 41. TNO Field Trial (Source TNO) ....................................................................................................84 Figure 42. TNO Results (source TNO) ..........................................................................................................85 Figure 43. Commercial Opportunities Enabled by Social TV (Source TNO)................................................85 Figure 44. Battle Across the TV Landscape .................................................................................................88 Figure 45. Market Estimate of TV Subscriber Growth between pure-play and Hybrid Subscribers ............89 Figure 46. Data Table for TV Subscriber Growth ........................................................................................89 5 OF 93

F O R WA R D Hybrid TV is not new; it‘s been within the industry‘s lexicon for many years. Back in 2004 hybrid TV was shown in many presentations as part of the industry‘s roadmap. So the transition should not be a surprise, however, for many executives the shift to hybrid TV has been a quiet revolution. Especially given two of the telco industry‘s most successful TV deployments, Verizon FiOS (2.9M customers in Q4 2009) and Orange TV (2.1M customers in 2009), are both hybrid TV, more specifically Hybrid Broadcast Broadband (HBB) TV. The whole of the payTV industry is now taking notice of what this means. The report will spend time on definitions, but for the purposes of this section; a payTV operator covers IPTV (Telco TV), Cable TV, Satellite TV and Terrestrial TV. This report also examines the state of Over The Top (OTT) TV (also known as Internet TV), and the launch of Hybrid Broadcast Internet (HBI) services, such as Canal+ Le Cube and Telecom Italia‘s CuboVision. Which rather than using a managed IP network use the internet. These developments are opening up new battle fronts in the payTV landscape. This segment is evolving rapidly so the report can only capture a snapshot. The Telco TV (IPTV) market, though growing, remains less than 10% of the total payTV market through to 2013. However, as cable, terrestrial and satellite providers examine interactive TV options, they will likely go hybrid. A hybrid TV solution opens up a far broader market opportunity that just Telco TV. That is part of the reason behind Ericsson buying Tandberg, Cisco buying Scientific Atlanta and Technicolor‘s (previously called Thomson SA) growth across the payTV industry. The payTV market is predicted to reach 575M subscribers in 2012, compared to telco IPTV of 45M subs. The hybrid TV market is much bigger than just Telco TV, hence why it needs to be on the agenda of all telco / TV suppliers. This report also examines the suppliers of both hybrid TV solutions and hybrid STBs (Set Top Box). An important section for all readers from the telco industry is the one that explains the TV ecosystem and its terminology, which does cause some confusion with the telco lexicon. Neither IPTV nor hybrid TV can be treated as an isolated industry; they‘re the delivery pipes for the much larger, complex and well established TV industry. Hence understanding the TV ecosystem is critical to appreciating the importance of hybrid TV, what created its success, and the attributes it brings in helping payTV operators maintain their role in the evolving TV ecosystem. This report brings together work performed on hybrid TV over the past year through over 200 operator and supplier interviews and online questionnaires, gathering information on deployment experiences, market requirements, competitive landscape, and technology trends. 6 OF 93

E X E C U T I V E S U M M A RY Hybrid TV is the delivery of a TV service through both broadcast and IP, for example many European telcos use both the free to air digital terrestrial TV (DTT) for broadcast services complemented by a network-centric IPTV service over a managed IP network (e.g. BT Vision) or a network-agnostic service over the internet / unmanaged IP network (e.g. Telecom Italia‘s Cubovision.) BT Vision and Telecom Italia‘s CuboVision demonstrate the two main categories of hybrid TV:  HBB TV (Hybrid Broadcast Broadband) is defined by the presence of a hybrid STB that is part IPTV, using a managed IP network; and part broadcast, receiving the broadcast digital content from a non-IP service such as Digital Terrestrial, Digital Cable, or Digital Satellite.  HBI TV (Hybrid Broadcast Internet) is defined by the presence of a hybrid STB that is part IPTV, using the internet (unmanaged IP network); and part broadcast, receiving the broadcast digital content from a non-IP service like Digital Terrestrial, Digital Cable, or Digital Satellite. This is also referred to as Telco OTT (Over The Top) TV. Related TV delivery categories include:  Telco TV or pure IPTV is defined by a STB that only receives and displays video over a ‗managed IP‘ network, also called network-centric TV.  Internet TV or Over-The-Top (OTT) TV only uses the open Internet to transport video. Examples include Hulu and Amazon ondemand video service on TiVo, also termed network-agnostic TV. Hybrid TV is at the confluence of Broadcast TV, Network-centric TV (Telco TV) and Network- agnostic TV (Internet TV). It is now table-stakes for any IPTV-based service. Hybrid TV is widely deployed with a total of about 25M customers globally at the end of 2009. Hybrid TV also expands the IPTV market for suppliers beyond pure-play Telco IPTV deployments into the Satellite, Cable and Digital Terrestrial TV markets. This greatly expands the revenue opportunity beyond the 46M subs of the Telco IPTV market by 2012, into the 575M subs of the Satellite, Cable and Terrestrial markets by 2012. Two of the most successful TelcoTV deployments are Verizon FiOS and Orange TV (France Telecom), with 2.9M and 2.1M subscribers respectively as of the end of 2009. What they have in common is they‘re both hybrid TV deployments. And in both those countries the satellite TV providers are also adding hybrid TV capabilities to compete. A recent trend and one likely to be explored through 2010 and 2011 is Telcos launching HBI (Hybrid Broadband Internet) services. Telecom Italia is launching a HBI TV service called CuboVision, presenting a new battle front in the payTV landscape. Examining the split in sales (revenue) of STBs, shown in Figure 1, there appears to be a significant shift in the market to hybrid STBs, whether they are HBB or HBI. The bulk of the growth comes from Satellite TV providers adding interactive capabilities, though in the model it 7 OF 93

assumes many cable operators follow Verizon‘s lead with a Hybrid Cable strategy. North American cable operators remain the most significant uncertainty if they will maintain their current strategy or follow Verizon with a hybrid approach. Regardless, IPTV is in their strategy, it‘s just not yet clear if they‘ll use hybrid TV as a stepping stone. OTT TV is expected to grow, but remain niche; generally OTT services will be provided through consumer electronics such as TVs and DVRs, with service platforms embedded into those devices, e.g. Vudu‘s (now Wal-Mart) plan to embed their technology in consumer electronics. Figure 1. STB Breakdown by Revenue STB Split (sales) 2009 2013 Pure IPTV/Cable/Satellite 93% 73% Hybrid 6% 25% OTT <1% 2% BRIEF HYBRID TV GEOGRAPHIC MARKET REVIEW EMEA Figure 2 provides a sample of European hybrid TV deployments, not all operators have published their IPTV customer numbers so in some cases an estimate is made based upon earlier quarter results and comparable market conditions. While Orange has shown reasonable growth through 2009 of 650k customers Telecom Italia, Fastweb and BT have barely reached one tenth of that growth. It is not just technology choice that impacts a Telco‘s success; the local market conditions have an even greater impact. Figure 2. Example Hybrid TV Deployments: Europe Subs STB per Country Operator 2009 (Est) sub Total STB Notes Czech Republic Telefonica 175,000 1.1 192,500 Moto and ADB STB including DTT Denmark Telia Stofa 25,000 1.1 27,500 Cable and IPTV - Moto VIP1920-9C & VIP1970-9C France Canal+ (Le Cube) 100,000 1 100,000 Satellite/IP hybrid set-top box from Pace France France Telecom 1,200,000 1.1 1,320,000 IPTV & DTT (Thomson) - but not all STBs are hybrid France France Telecom 900,000 1.1 990,000 Orange Satellite and broadband service Kudelski-owned Nagravision - widget and SDV France Numericable 20,000 1 20,000 solution - annouced late 2009 Germany Sky 40,000 1.2 48,000 Satellite and IP (really OTT video) Germany O2 32,000 1.2 38,400 IPTV & DTT (ADB-3800TW) Germay Duetsche Telekom 800,000 1.2 960,000 Motorola VIP1616E Greece On Telecom 50,000 1.1 55,000 IPTV & DTT (Sagem) Italy Fastweb 390,000 1.1 429,000 IPTV & DTT, Telsey hybrid STB Italy Telecom Italia 415,000 1.1 456,500 IPTV & DTT, Telsey Hybrid STB Jordan Orange Satellite and IPTV - Netgen STB Cable based solution using Netgem STB - launched Monaco Monaco Telecom end of 2009 Norway Get Cable Cable Hybrid Spain JazzTel 37,477 1.1 41,225 IPTV & DTT (ADB STB) Spain Telefonica 589,551 1.1 648,506 Moto and ADB STB including DTT Sweden ComHem 25,000 1.5 37,500 U.K. BT 450,000 1.7 765,000 IPTV & DTT - Pace hybrid STB Total EU 5,249,028 6,129,131 8 OF 93

AMERICAS Verizon dominates hybrid TV deployments with 2.9M FiOS TV customers at the end of 2009. It uses a Hybrid Cable solution. It is unclear whether the US Cable operators will also follow Verizon. AT&T‘s hybrid TV deployment with DISH failed and the numbers of customers subscribing as reported by some analysts attributed all of the DISH subscribers to the hybrid TV service when over 86% of customers were only taking satellite, not the hybrid TV service. US Satellite operators DirecTV and DISH are launching HBI (Hybrid Broadband Internet) TV services. LATAM is currently planning hybrid TV deployments. ASIA PACIFIC Dasan Networks is the main hybrid STB supplier to South Korea's two main hybrid Telco providers, KT and SK Broadband, which both use a Hybrid Telco solution, and are at 1M and 850k hybrid TV subscribers at the end of 2009 respectively. Also in Korea, DBS (Digital Broadcast Satellite) operator SkyLife announced that it will launch Satellite and IPTV combined services in July 2009. KEY LEARNING FROM HYBRID TV DEPLOYMENTS Most IPTV operators have either deployed or are planning / evaluating hybrid TV. Hybrid TV is becoming the dominant delivery mechanism for TelcoTV. Only those operators with fiber to the home or VDSL (Very High speed Digital Subscriber Line) can consider a pure IPTV solution, e.g. NTT and AT&T U-Verse. Verizon chose a hybrid approach for its FTTH (Fiber To The Home) solution, to avoid technology risk, meet customers‘ base expectations, and enable a smooth migration to all-IP when customer demand and economics dictate. Operators are not partnering with broadcasters to deliver hybrid TV, because of the difficulty in partnering with a payTV competitor, AT&T‘s HomeZone service demonstrated the problems of such a partnership. Cable operators in Europe are adding IPTV via MoCA (Multimedia over Cable); its not clear US cable operators will follow such an approach. Satellite TV operators in Europe and the US are adding OTT interactive video services with progressive download (HBI). A few Telcos (e.g. Orange TV and Portugal Telecom) have acquired Satellite capacity to deliver a comprehensive TV service across their country. However, most Telcos have taken advantage of the free to air DTT service to complement their IPTV offer. Telecom New Zealand provides an example of a hybrid service where they have partnered with TiVo. TiVo provides the STB and interactive services, while broadcast TV is provided by DTT. Such TiVo-partnering is becoming more common with Virgin Media and RCN also following this route. It will be interesting to see if other small operators follow this strategy to market, rather than making the investment in a managed IP network and the difficulty in making the necessary content deals with a small customer base. Most operators remain disappointed in the lack of customer take-up for interactive services, i.e. VoD (Video on Demand). Penetration remains <10% penetration for most operators. Most operators are examining ways to improve consumption. 9 OF 93

Operators in the strongest position are telcos with a Satellite and IPTV solution (e.g. Orange/Telecom Portugal); and Hybrid Cable operators (e.g. Verizon, Com Hem). As they address the key issues of simplicity in:  purchase, one click  installation, one box  customer service, one number They do not disappoint customers with limited geographic availability. They do not have any partnership risks. They can deliver the full package of SD/HD (Standard Definition / High Definition) channels customers expect with control over the access to avoid potential additional charges. Second tier hybrid solutions are:  Satellite and OTT (e.g. Canal+) has no control over the broadband connection, hence requires progressive download and could incur additional charges for broadband data use. Content delivery network dimensioning is key for service quality with OTT services  IPTV and DTT (e.g. BT Vision) has limited channel line-up compared to Cable and Satellite, requires customers to ‗purchase‘ shows (this requires a change in behavior), limited HD capability, and limited geographic coverage which leads to customer disappointment.  DTT and OTT partnership (e.g. Telecom New Zealand.) TNZ is simply a pipe provider; in a more competitive market TiVo would likely go OTT as in the US. Content delivery network dimensioning is key for service quality with OTT services. All operators interviewed plan to continue their hybrid TV strategy into the medium term (next 5 years) at least. All are evaluating the role of video delivery to the PC and mobile within their existing customer base. Note payTV providers are constrained by the limitations imposed by the content owners on how their content is distributed. Hulu and BBC iPlayer have much greater freedom of operation as they are run by the content owners. This limits the payTV provider‘s ability to delivery OTT TV to any internet connected customer, without significant charges. However, CuboVision from Telecom Italia provides an example an operator exploring this model. TELCO CHALLENGES IN THE TV ECOSYSTEM Licensing of TV programming is relatively complex compared to most telecom negotiations. Multiple parties must approve a content deal. Recurring payments are required for a variety of players, including studios, unions, actors, etc. There are few ‗fixed‘ prices most items are negotiated where audience reach, its relevance to the prgramming, demographics and bargaining power all impact the charges. A variety of business models are used including shares, splits, rates and commissions which are usually negotiated annually. 10 OF 93

In most regions cable and satellite own the vast majority of payTV homes; thus have a stronger bargaining position than telcos. In the UK much popular programming and distribution is owned by Sky/Fox. OFCOM (UK regulator) is attempting to force a wholesale pricing model to break their monopoly of control over popular content. But this is an exception in the market, and highlights the critical issue of a country‘s specific situation with respect to TV in determining a telco‘s success. Telecom Italia suffers the same problems as BT in payTV competitors owning content rights as well; however, France Telecom has been able to build a strong position in payTV thanks to a more even competitive environment. There is also a fundamental shift taking place, content owners are looking to the internet as a way of removing the middleman of payTV providers: cable, satellite or telco. Telcos are trying to break into a rather insular TV ecosystem, with a weak bargaining position (few customers). Hence channels are weakening while the content owners are strengthening. This will continue to squeeze margins for Telcos in payTV, and makes scale critical to success as that enables being able to buy exclusive rights to popular local content (generally local sports rights.) IMPACT OF TECHNOLOGY ACROSS THE TV ECOSYSTEM There are a number of technologies impacting the ecosystem, as shown in Figure 3. Examining each in turn:  Internet video allows direct customer access; Studios (e.g. Disney, Time Warner) are actively exploring this, e.g. Hulu which will be discussed in the OTT TV section. This allows the content owners to have a direct relationship with the customer; note Disney has done this for many decades.  DVR (Digital Video Recorder) is increasingly popular across all IPTV offers; however it reduces advertising viewers / effectiveness. As will be discussed in the nPVR (network-based Personal Video Recorder) section it can empower the payTV provider to take over some of the advertising revenue. For the producers is reduces report fees and allows customers to ‗own‘ content rather than buy. For TV Networks (creators of TV Channels, e.g. Discovery channel) is reduces effectiveness of ad revenue which is a core component of their revenue.  Consumer electronics such as TVs, DVRs, Apple TV, TiVo, PS3, Wii, and Xbox enable consumption of video outside the existing value chain direct from the Producers, e.g. Sony Store through the PS3. The on-device stores promote direct consumption of content (e.g. Amazon onDemand or iTunes). These stores understand the scale game and provide an efficient channel for content owners to deliver directly to the consumer.  Place shifting remains niche because of the technology involved. The main beneficiary is the payTV operator which can offer as a service.  IPTV: Weakens payTV providers bargaining position, as there are more competitors negotiating over content. 11 OF 93

Overall content owners (Studios) are strengthening their position thanks to technology. Operator must focus on how to make nPVRs and place shifting (TV Everywhere) more attractive to maximize their position in the value chain. Taking Sky UK as an example, they have 62% penetration of Sky+ DVR service (5.9 million homes, as of Q3 ‘09). The user experience is excellent, press record once for the program, twice for the season pass. Season pass records all showings of a program. So there are ways for payTV providers to focus on their core strength in the value chain, which is the hours their customers spend watching TV. Figure 3. Rating Technology Impact on TV Ecosystem Members FUTURE SCENARIOS During a series of industry interviews completed from Sept ‘09 through Feb ‘10 a number of future scenarios were discussed with operators where they were asked to rate the probability, likely timeline and discuss the reasons for their prediction. The results of which are shown in Figure 4. There was general consistency in the responses across payTV operators and geographies. Fragmentation is the most likely scenario in the near term with multiple channels weakening the payTV providers‘ positions; content owners will use all available channels to explore their effectiveness and return. PayTV margins will continue to erode as TV Networks continue to raise carriage fees and customers remain unwilling to accept subscription fee increased on the basic packages, as well as bundling with data and voice services further discounting the TV service. The scenarios considered of medium probability include internet video going mainstream, but this was seen as a long term trend and not winning out-right, rather becoming a preferred delivery mechanism for some customers; especially those that prefer programmatic selection than channel selection. Consumer Electronics becomes a service platform was considered medium probability but remaining niche, e.g. Sony Store on PS3 will be used by PS3 gamers, but will not be a consumption model for the masses. The web retailers were seen as the most significant uncertainty, some viewed them as the most significant threat, and others saw it only for VoD for those customers with a ‗service platform‘ in their home, e.g. PS3, TiVo, DVR, Internet capable TV. ‗Business as usual‘ and ‗telecom operators dominating‘ were seen as unlikely scenarios. 12 OF 93

Figure 4. Review of Future Scenarios, based on industry interviews Scenarios Description Probability Reason Content owners will act as arms suppliers - use all Multiple channels, channels and use the bargaining weakness of so many Fragmentation content owners channels to increase its margins as well as bypass them dominate, confusion High over the web. Sony is in a unique situation with the PS3, it can deliver Consumer Customers move to VoD and 'download to own' from its extensive content Electronics consumption of video library. Devices are more likely to be co-opted by the Dominates from their PS3, Wii, Medium - content owners, e.g. BBC iPlayer on the Wii, or by web- TiVo and Apple TV niche retailers. Deals cut are at the sufferance of the content owners - if Likes of Amazon on current deals impacted their other revenue lines, they Web Retailers Demand become Medium - would react. But as Amazon understands web retailing Dominate customers preferred medium they can not ignore and if customers express a preference site. term they will follow the money. Internet gets to the TV, Internet Video and consumers People's habits change very slowly, internet video will be a Dominates change their viewing Medium - part of customer's viewing habit. For some it will replace habits long term MSO / DBS, >10 years before early majority are impacted. Business as Usual Existing ecosystem Value chain is already changing, MSOs and Broadcasters continues Low are working on adapting their business models Telcos are in a weak position, and it will be weakened Telcos Dominate Customers adopt the even as their customer numbers grow due to bundle Low strengthening of the content owners position. OTT AND INTERNET TV In the battle across the TV landscape, see Figure 5, its clear content power is critical. Essentially online TV networks can only be successfully run by the content owners. The wildcard in this landscape is the customer, will they change their TV consumption behavior, and if so how fast. It‘s clear some customers are moving towards programmatic consumption, but will it remain anything more than a niche? For most content owners the current lucrative business model is likely to be tough to move away from, as witnessed by the excessive salaries earned by ‗stars‘ compared to the average citizen‘s wage. Can the other Consumer Electronics manufacturers copy Apple in getting the user experience right and building a store? Or will they focus on being a service platform for other web-based stores, e.g. GoogleTV, Amazon on Demand, Netflix, Nokia Ovi and Microsoft. Its likely Apple will remain the exception rather than the rule; hence Device Power and Computing Power may join forces to put payTV providers under increased competitive pressure. PayTV providers‘ strength today comes from their network, the hours customers spend watching TV over their networks, and an established and sophisticated business model. So the skill comes in ensuring they remain the content owner‘s best path to cash from the customer. Hence ensuring continued high levels of consumption (viewing times), and leveraging their network-related assets and services to maintain an edge, this is discussed further in the payTV provider recommendations. 13 OF 93

Figure 5. Battle Across the TV Landscape Content Power Studios Broadcast / YouTube, Cable Networks Facebook Hulu Google, Network Telcos & Amazon, Computing Power MSOs Customers Power Microsoft TiVo Consumer Electronics Manufacturers Device Power RECOMMENDATIONS FOR PAYTV PROVIDERS Regardless of access technology hybrid TV must be a core part of all payTV providers‘ strategies. PayTV providers‘ strength today comes from their network, the hours customers spend watching TV over their networks, and an established and sophisticated business model. So the skill comes in ensuring they remain the content owner‘s best path to cash from the customer. Hence ensuring continued high levels of consumption (viewing times), and leveraging their network-related assets and services to maintain an edge. In reviewing the principles of greater consumption and how the PayTV providers can differentiate:  Recommendations  From sophisticated algorithms, to simple things such as top rated, ―last night‘s TV,‖ or ―what‘s new‖ – given the bounded problem PayTV operators should be able to match Amazon‘s engine.  Package up-sell, essential it‘s related to viewing habits. Local content matters, payTV operators have the edge of their subscription-based business model (e.g. Sky UK winning the Premier League rights.) 14 OF 93

 Community (Social TV)  The ability to communicate and share with friends on STB, PC or mobile (TV Everywhere) both real-time and off-line. Social communications is key, deliver in a user friendly way across multiple platforms. Telcos should be solving this as a general communications problem, so should be well placed to leverage their solutions.  Search integrated into the EPG and available across PC, mobile and STB  PC remains the best search tool for programmatic content, discover on the PC and view wherever (TV Everywhere.) Telcos have potentially an edge in the payTV business as they understand all three channels and how to create a good experience.  Integrated security and content protection across the network and devices to keep customers safe as their service becomes interactive. For the payTV provider focusing upon the user is going to be critical to remain relevant in the emerging TV landscape – as in the limit it‘s the customer that‘s going to decide. RECOMMENDATIONS FOR IPTV / HYBRID TV SUPPLIERS Hybrid support should be a core capability of all IPTV solutions, across the backend systems, STBs and middleware. Solution providers should look to the broadcast industry as potential customers especially Satellite TV providers. Standardization in solutions is critical. Hybrid TV should be treated as an opportunity to harmonize solutions across the payTV and possible the consumer electronics space. Integrated security and content protection across the network and devices to protect customers as their devices come online. Suppliers must aim to be the strategic partners of the payTV providers, supporting them with new services and user experience innovations, enabling them to remain relevant to their customers. Else there is a long-term risk of Internet TV / CE and Internet Stores taking a significant role and reducing margins across the industry. RECOMMENDATION FOR STB APPLICATION DEVELOPERS Currently HbbTV has the industry‘s attention. Its supporters claim DVB MHP/GEM had its chance; technology and customers‘ expectations have moved on. Operators appear more circumspect, given the operational headaches in deploying the latest technology. We‘re likely to see the CE manufacturer‘s take the lead on the implementation of CE-TML, if it works reliably at scale, and customers enjoy the experience operators will likely follow. Developers should look to CE developer ecosystems in building CE-HTML applications, while operator developer ecosystems will likely be initially MHP/GEM focused, so developers should look to build across both platforms as it will likely take 3/5 years before there is clarity on which platform wins in the market. 15 OF 93

RECOMMENDATIONS FOR INVESTORS Look for companies that have hybrid solutions applicable across a broad segment of payTV operators. As the pendulum swings to hybrid solutions there will likely be opportunities for trade sales into NEPs in middleware, STBs, recommendation engines, security and content protection across the network and devices, social TV, STB app stores, and anything that improves the customer‘s experience. 16 OF 93

I N T RO D U C T I ON A N D BA C KG RO U N D INTRODUCTION Hybrid TV is the use of a broadcast and IP connection for the delivery of a TV service. Hybrid TV is not new; in 2008 the majority of IPTV STBs (Set Top Box) shipping in Europe had digital terrestrial TV (DTT) tuners in addition to an IP connection. In 2004 hybrid TV was shown in many presentations as part of the industry‘s roadmap, so the transition should not be a surprise, however, for many the shift to hybrid TV has been a quiet revolution. The purpose of this report is to present the currently state of play in the increasingly complex payTV landscape with respect to hybrid TV; understanding the reasons behind the slow adoption of Telco‘s payTV service. And given the complex TV ecosystem and rapidly developing technologies what the future holds for hybrid TV not only within the Telco TV industry, but to the broader broadcast industry and the emerging Internet TV (Over The Top TV, OTT TV) technology. Pure-IPTV (also known as TelcoTV) has generally not proven attractive to customers; their expectations are set by the broadcast TV service they receive on Satellite, Cable or over the air. Those expectations include channel line-up, picture quality and geographic availability. Hence most successful Telco TV deployments have used hybrid TV (using both broadcast TV and IPTV) to meet customers‘ requirements. Hybrid TV is at the confluence of Broadcast TV, Network-centric TV (Telco TV) and Network- agnostic TV (Internet TV). It is now table-stakes for any IPTV-based service. Hybrid TV is widely deployed with a total of about 25M customers globally at the end of 2009. Hybrid TV also expands the IPTV market for suppliers beyond pure-play Telco IPTV deployments into the Satellite, Cable and Digital Terrestrial TV markets. This greatly expands the revenue opportunity beyond the 45M subs of the Telco IPTV market by 2012, into the 575M subs of the total payTV market by 2012. The STB vendors and STB middleware vendors have primarily supported hybrid TV solutions; though we are now seeing the solution providers such as Ericsson, Huawei, ALU (Alcatel Lucent) and Thomson focus on delivering pre-integrated hybrid TV solutions across TelcoTV, Cable and Satellite. Currently there is a standardization ―battle‖ between industry groups such as HbbTV, DVB, EBU, the open IPTV forum, and Project Canvas. The current bespoke approaches will limit the market, it is important that the industry focus on achieving commonality across all delivery methods as through the coming decade the payTV industry will be squeezed on margins between the content owners raising prices and the customers unwilling to pay more for their subscription. Two of the most successful TelcoTV deployments are Verizon FiOS and Orange TV, with 2.9M and 2.1M subscribers respectively as of the end of 2009. What they have in common is they‘re both hybrid TV deployments. And in both those countries the satellite TV provider is also adding hybrid TV capabilities to compete. A recent trend and one likely to be explored through 2010 and 2011 is Telcos launching OTT TV services. Telecom Italia is launching an HBI (Hybrid Broadcast Internet) service called CuboVision, presenting a new battle front in the payTV landscape. 17 OF 93

DEFINITIONS At first sight there would appear to be little cause for confusion on what hybrid TV means, it‘s simply the combination of broadcast TV and IPTV for the delivery of a TV service. However, there are many mis-understandings given the variety of broadcast technologies and the variety of ways TV can be supported over IP. My objective in this section is to make clear the terms used in this report, to better help the reader segment the quite fragmented hybrid TV landscape. Hybrid TV is the delivery of a TV service through both broadcast and IP, for example many European telcos use both the free to air digital terrestrial TV (DTT) for broadcast services complemented by a network-centric IPTV services over a managed IP network (e.g. BT Vision) or a network-agnostic service over the internet / unmanaged IP network (e.g. Telecom Italia‘s Cubovision.) BT Vision and Telecom Italia‘s CuboVision demonstrate the two main categories of hybrid TV:  HBB TV (Hybrid Broadcast Broadband) is defined by the presence of a hybrid STB that is part IPTV, using a managed IP network; and part broadcast, receiving the broadcast digital content from a non-IP service like Digital Terrestrial, Digital Cable, or Digital Satellite.  HBI TV (Hybrid Broadcast Internet) is defined by the presence of a hybrid STB that is part IPTV, using the internet (unmanaged IP network); and part broadcast, receiving the broadcast digital content from a non-IP service like Digital Terrestrial, Digital Cable, or Digital Satellite. This is also referred to as Telco OTT (Over The Top) TV, though the rest of this report I will use the term HBI TV for consistency. Related TV delivery categories include:  Telco TV or pure IPTV is defined by a STB that only receives and displays video over a ‗managed IP‘ network, also called network-centric TV.  Internet TV or Over-The-Top (OTT) TV only uses the open Internet to transport video. Examples include Hulu and Amazon on demand video service on TiVo, also termed network-agnostic TV. A focus of many payTV networks is TV Everywhere, enabling a subscriber to receive their service on a PC and mobile phone, in addition to the STB. To the PC and mobile phone the service is generally delivered via unicast IP, not a broadcast multiplex. A broadcast TV provider can deliver a video service to the customer‘s PC over the internet; this is not considered hybrid TV. The hybrid TV definition focuses upon the core TV service the customers buy and view on their TVs in the home, not ancillary service such as TV Everywhere. There is an increasingly unclear need for managed IP for TV delivery because of: broadband capacities increasing; compression technologies allow HD quality video within 4 Mbit/s; and content delivery innovations such as INUK‘s simulcoding for rate adaptive delivery enable streaming TV over unmanaged IP. As an example, Telecom New Zealand partners with TiVo for their TV service delivery and does not use a managed IP network. This explains the growth in the use of HBI TV from satellite, and why some telcos are also adopting this approach, e.g. Telecom Italia‘s CuboVision. 18 OF 93

With the basic HBB and HBI definitions, let‘s now go a little deeper, Figure 6 shows the hybrid TV landscape, it sits at the intersections between Broadcast TV, Network-Centric TV and Network- Agnostic TV:  Broadcast is the traditional delivery mechanisms of Satellite, Cable and Terrestrial (over the air);  Network centric is Telco IPTV; and  Network agnostic is OTT or Internet TV. At the intersections of these delivery mechanisms resides hybrid TV. At the intersection of Broadcast and Network Centric (termed HBB, Hybrid Broadcast Broadband) lies:  Hybrid Telco is the combination of Digital Terrestrial TV and IPTV, e.g. BT Vision;  Hybrid Cable is the combination of Cable TV and IPTV, e.g. Verizon FiOS; and  Hybrid Satellite is the combination of Satellite and IPTV, e.g. Orange TV. At the intersection between Broadcast and Network-Agnostic is the HBI TV category: Terrestrial / Satellite + OTT. Examples include Canal+ Le Cube, INUK, and TI‘s CuboVision. The final intersection is between network-centric and network-agnostic, which though technically feasible is not yet a focus of any business model. Figure 6. Mapping the Hybrid TV Landscape Broadcast Network-Centric One way Cable Hybrid Telco Terrestrial TV (Terrestrial + IPTV) Telco IPTV Hybrid Cable Satellite TV (Cable + IPTV) Hybrid Satellite (Satellite + IPTV) Terrestrial / Satellite + Telco / Cable OTT + OTT Over The Top (OTT) TV (Internet TV) Network-Agnostic 19 OF 93

WHY HYBRID TV IS EXCITING FROM A SUPPLIER’S PERSPECTIVE The Telco TV (IPTV) market, though growing, remains less than 10% of the total payTV market through to 2013, shown in Figure 7. However, as cable, terrestrial and satellite providers examine interactive TV options, they will likely go hybrid, and hence a hybrid TV solution opens up a far broader market opportunity, see Figure 8, were there are about 25M hybrid TV subs today, growing to 150M sub by 2013. That‘s why we‘ve seen the consolidation of Ericsson and Tandberg, Cisco and Scientific Atlanta and Technicolor‘s (previously called Thomson SA) growth across the payTV industry. The payTV market is predicted to reach 575M subs in 2012, compared to telco IPTV of 45M subs, so the addressable market for hybrid TV is potentially vast. We‘ll explore market sizes and addressable revenue later. My point here is simply to highlight that the hybrid TV market is much bigger than just Telco TV, hence why it needs to be on the agenda of all telco / TV suppliers. Figure 7. Total Pay TV Market Size (also includes Free Sat and Free Cable) 700 600 500 Subscribers (M) Satellite 400 DTT 300 Cable IPTV 200 100 0 2008 2009 2010 2011 2012 2013 Figure 8. Split between Pure and Hybrid TV Subscribers 700 600 HybridSatellite 500 Hybrid DTT Subscribers (M) Hybrid Cable 400 HybridIPTV 300 PureSatellite PureDTT 200 Pure Cable Pure IPTV 100 0 2008 2009 2010 2011 2012 2013 20 OF 93

HYBRID TV STANDARDIZATION ACTIVITIES There are many bodies working on the standardization, interoperability, and harmonization of hybrid TV including:  Open IPTV Forum, http://www.openiptvforum.org/  ETSI MCD (Media Content Distribution), http://www.etsi.org/  EBU (European Broadcast Union), http://www.ebu.org/  HbbTV industry partnership, http://www.hbbtv.org/  ATIS IIF (IPTV Interoperability Forum) http://www.atis.org/IIF/  Broadband Forum http://www.broadband-forum.org/  DVB MHP / GEM (Multimedia Home Platform / Globally Executable MHP) are two related sets of Java based open middleware specifications  Project Canvas, http://www.projectcanvas.info/ Hybrid Broadcast Broadband TV or ―HbbTV‖, is a pan-European industry-led initiative aimed at harmonizing the broadcast and broadband delivery of entertainment to the end consumer through connected TVs and set-top boxes. Founding members include Astra, IRT (Institut für RundfunkTechnik), ANT, Philips, OpenTV and French HD Forum; today the membership is much broader, www.hbbtv.org has the full list. The HbbTV specification is based on elements of existing standards and web technologies including OIPF (Open IPTV Forum), CEA, DVB and W3C (CE- HTML). HbbTV represents one solution but it is not the only one. Its specification was submitted to the ETSI standardization process at the end of 2009. The EBU members have been able to comment on the draft specification and a large majority of their comments have been taken into account. EBU have indicated the wish for a smooth standardization process and quick adoption of the HbbTV standard. HbbTV largely satisfies the service and system EBU‘s requirements. EBU consider that HbbTV has adopted a simple, pragmatic evolutionary (step-by-step) approach and does not seek over-complex solutions from the very beginning. The essence of the HbbTV specification, published by ETSI is:  CE HTML is a language for creating user interface pages for Consumer Electronics (CE) devices such as televisions. These CE-HTML pages are typically placed online and are based on a 10-foot user interface for easy control from a distance. It is profiled on XHTML and associated standards with special CE-HTML extensions.  OIPF (Open IPTV Forum) Java Script Extensions for TV  DVB Broadcast IP signaling. 21 OF 93

Currently HbbTV has the industry‘s attention. Its supporters claim DVB MHP/GEM had its chance; technology and customers‘ expectations have moved on. Operators appear more circumspect, given the operational headaches in deploying the latest technology. We‘re likely to see the CE manufacturer‘s take the lead, if it works reliably at scale, and customers enjoy the experience operators will likely follow. Within the DVB MHP/GEM group there is some consternation that the wheel is being re- invented given the coverage of their standard across most of the hybrid TV space; there is also a degree of concern on the maturity of CE HTML/Flash based solutions compared to DVB MHP/GEM. The purpose of this report is not to get into a technical discussion, rather simply report on the current standard of standardizations, that simply operators have choices in standards based hybrid TV, and it‘s really up to them to decide which is more appropriate. The BBC noted back in 2008 that it must support 14 different video formats and four different Digital Rights Management or DRM formats to ensure that its online ‗catch-up TV‘ service, the iPlayer, will work across different internet and mobile platforms. This fragmentation was part of the BBC‘s motivation for a single specification to access its content. Project Canvas appears to be stuck is some political wrangling, while HbbTV has maintained its momentum and is now published through ETSI. THE HYBRID STB The key component of a hybrid TV deployment is a hybrid STB. Worldwide spending on IP set-top boxes (STBs) is expected to grow from $2.4B in 2009 to roughly $3.5B in 2013. These figures take into consideration the growth of over-the-top TV and the integration of virtual STBs directly into TV sets. Though STBs will remain the de facto device for video presentation in the home, and for most IPTV deployments the STB accounts for between 50-60% of network capex (capital expenditure) There are currently about 5-7 manufacturers with a worldwide presence, with another 10-15 manufacturers strong in their respective regions and/or among domestic customers. Across all payTV STBs, Motorola and Cisco are the leaders in the market, with Thomson in third place. Specifically for IPTV STBs the top four suppliers are Motorola, Cisco, Huawei, and Amino. Motorola has historically been the leader in supplying STBs to the cable industry and has been able to transfer this experience in developing STB to the telco IPTV market. Motorola acquired Swedish STB developer Kreatel back in 2006. Kreatel, like Amino, was an early developer of IPTV STBs for the telco market and has customers throughout Western Europe. Motorola took the Linux- based Kreatel software and ported it onto its own hardware, allowing Motorola STBs to interact with a wide range of IPTV middleware offerings. Motorola main IPTV customers include AT&T, Verizon, TeliaSonera, and KPN. Following Motorola are Huawei, Cisco, and Amino. Huawei's STB deployments are in China, with significant volumes in China Telecom and China Unicom. Cisco, like Motorola, is consistently one of the world's leading STB suppliers to cable operators (thanks to the acquisition of Scientific Atlanta). Cisco‘s customers include Belgacom, TELUS, Deutsche Telekom, Croatia's T-Com, and SES Americom. 22 OF 93

Typical STB pricing for TelcoTV range between $100-160:  Europe being at about $130;  North America at $160; and  APAC/CALA (Asia Pacific / Central and Latin America) at $100 due primarily to the lower HD and DVR demand in those regions. Hybrid TV STBs tend to have two price bands, the Hybrid Telco and Satellite being $100-140, and the Hybrid Cable being $140-200. OTT STBs have a large variation in price between $150 and $300 depending on memory, functionality and volume. The figures are based on operator and STB supplier interviews undertaken in Q3 and Q4 of 2009. Examining the split in sales (revenue) of STBs is shown in Figure 9. There appears to be a significant shift in the market to Hybrid STBs, whether they are HBB or HBI, the bulk comes from Satellite TV adding interactive capabilities, though in the model it assumes many cable operators follow ComHem with a Hybrid Cable strategy. North American cable operators remain the most significant uncertainty if they will maintain their current strategy or follow Verizon to a Hybrid approach. Regardless IPTV is in the strategy, it‘s just not yet clear if they‘ll use hybrid TV as a stepping stone. OTT is expected to grow, but remain niche; generally OTT services will be provided through the consumer electronics such as TVs and DVRs. Figure 9. STB Breakdown by Revenue STB Split (sales) 2009 2013 Pure IPTV/Cable/Satellite 93% 73% Hybrid 6% 25% OTT <1% 2% Some telcos are starting to find their early momentum in signing up new subscribers waning. Verizon, AT&T, PCCW, Fastweb, and others all have shown signs of slowing subscriber growth, which has reduced their demand for new STBs. Some of the slow down is likely due to economic conditions which are slowly improving, but cable and satellite competitors have also responded with updated services and pricing. Worldwide hybrid telco STB revenue reached about $700M in 2009, with EMEA and APAC dominating. Typical STB pricing was $110-120, though it‘s expected to drop through the next 2/3 years at a rate of 3-5%. ADB leads telco hybrid STB market with 30% of revenue; Dasan Networks is in second place for revenue at 16%. ADB is EMEA's primary provider of hybrid STBs, with contracts at Telefonica and BT; Dasan Networks is the primary supplier to South Korea's two main hybrid IPTV providers, KT and SK Broadband. Worldwide hybrid cable STB revenue reached about $400M in 3Q09, with Verizon, the world's largest deployment dominating that figure; and its main supplier, Motorola, with near 100% market share. Typical STB pricing was $120-$140. Hybrid TV has been around for many years, and especially in the STB domain there are many choices. Figure 10 shows some of the available STBs, simply to demonstrate the breadth of Hybrid STBs available on the market. 23 OF 93

Figure 10. Example Hybrid STBs (Picture sources: ADB, Amino, Pace, Pirelli, Motorola, Netbox, Thomson, Yuxing, Sagem, Entone, Telsey) Hybrid Telco ADB-3800/10TW Advanced HD STB Amino Mood 400-020 Series HD STBs Pace DiT5750 / DiT7421 HD Hybrid IP STB Pirelli DVR100 STB Motorola VIP1616T HD DVB-T/IP Dual DTT Tuner NETBOX N8000 SERIES Thomson DBI2210E / DBI8500E Yuxing YX-5912T - Hybrid HD STB Sagem ITAD81 HD Hybrid Cable (DVB-T) Motorola VIP1920-9C & VIP1970-9C Netgem NETBOX N7000 SERIES Motorola VIP1920-9C & VIP1970-9C (Telia Stofa) Hybrid Cable (QAM) Motorola Hybrid QAM/IP HD Set-Top (Verizon) Entone Amulet IPTV Receiver Hybrid Satellite Pace DS830 (Sky Germany) Pace Canal+ Le Cube Hybrid Internet Telsey blobBox (Inuk) Hybrid Telco Gateway Entone Hydra IP Video Gateway Entone Janus IP Media Hub 24 OF 93

BRIEF HYBRID TV GEOGRAPHIC MARKET REVIEW EMEA Figure 11 provides a sample of European hybrid TV deployments, not all operators have published their IPTV customer numbers so in some cases an estimate is made based upon earlier quarter results and comparable market conditions. While Orange has shown reasonable growth through 2009 of 650k customers Telecom Italia, Fastweb and BT have barely reached one tenth of that growth. It is not just technology choice that impacts a Telco‘s success; the local market conditions have an even greater impact. Figure 11. Example Hybrid TV Deployments: Europe Subs STB per Country Operator 2009 (Est) sub Total STB Notes Czech Republic Telefonica 175,000 1.1 192,500 Moto and ADB STB including DTT Denmark Telia Stofa 25,000 1.1 27,500 Cable and IPTV - Moto VIP1920-9C & VIP1970-9C France Canal+ (Le Cube) 100,000 1 100,000 Satellite/IP hybrid set-top box from Pace France France Telecom 1,200,000 1.1 1,320,000 IPTV & DTT (Thomson) - but not all STBs are hybrid France France Telecom 900,000 1.1 990,000 Orange Satellite and broadband service Kudelski-owned Nagravision - widget and SDV France Numericable 20,000 1 20,000 solution - annouced late 2009 Germany Sky 40,000 1.2 48,000 Satellite and IP (really OTT video) Germany O2 32,000 1.2 38,400 IPTV & DTT (ADB-3800TW) Germay Duetsche Telekom 800,000 1.2 960,000 Motorola VIP1616E Greece On Telecom 50,000 1.1 55,000 IPTV & DTT (Sagem) Italy Fastweb 390,000 1.1 429,000 IPTV & DTT, Telsey hybrid STB Italy Telecom Italia 415,000 1.1 456,500 IPTV & DTT, Telsey Hybrid STB Jordan Orange Satellite and IPTV - Netgen STB Cable based solution using Netgem STB - launched Monaco Monaco Telecom end of 2009 Norway Get Cable Cable Hybrid Spain JazzTel 37,477 1.1 41,225 IPTV & DTT (ADB STB) Spain Telefonica 589,551 1.1 648,506 Moto and ADB STB including DTT Sweden ComHem 25,000 1.5 37,500 U.K. BT 450,000 1.7 765,000 IPTV & DTT - Pace hybrid STB Total EU 5,249,028 6,129,131 AMERICAS Verizon dominates hybrid TV deployments with 2.9M FiOS TV customers at the end of 2009. It uses a Hybrid Cable solution. It is unclear whether the US Cable operators will also follow Verizon. AT&T‘s hybrid TV deployment with DISH failed and the numbers of customers subscribing as reported by some analysts attributed all of the DISH subscribers to the Hybrid service when over 86% were only taking satellite, not the Hybrid service. US Satellite operators DirecTV and DISH are also launching HBI (Hybrid Broadband Internet). Within LATAM (Latin America) several operators are planning hybrid TV deployments. 25 OF 93

ASIA PACIFIC Dasan Networks is the main Hybrid STB supplier to South Korea's two main hybrid Telco providers, KT and SK Broadband, which both use a Hybrid Telco solution, and are at 1M and 850k hybrid TV subscribers at the end of 2009 respectively. Also in Korea, DBS (Digital Broadcast Satellite) operator SkyLife announced today that it will launch Satellite and IPTV combined services in July 2009. 26 OF 93

U N D E R S TA N D I N G T H E T V E C OS Y S T E M A root problem for operators in launching TV services has been their lack in understanding of the TV ecosystem. This section reviews the ecosystem and the challenges it presents to operators which has in part driven their focus to hybrid TV. The TV ecosystem is mature, with well established relationships and its own nomenclature. It is quite different to the equally self-contained telecoms ecosystem. A key difference is in telecom pricing is clear, published and comes with standard contracts. In the TV ecosystem everything is negotiated, scale matters, everyone in the chain takes a cut, and advertising funds about half the industry. Figure 12 shows a high level view of the TV Ecosystem. A common problem telcos have with the nomenclature is how the term network is used. Basic networks or premium networks, also know as cable networks create TV channels such as Discovery or the History Channel by commissioning Studios and Producers to create TV shows. Cable Network TV channels are only available through payTV providers (not available over the air). The name was created before today‘s myriad of payTV providers with their ‗networks.‘ These basic and premium networks do not own an access network, rather distribute their TV channels to the headend of the payTV operators: MSOs (Cable), Telcos (IPTV), and Satellite TV. Broadcast networks and broadcast stations, also know as broadcasters, create TV channels, such as ABC, BBC, and CBS; that are available over the air. That is any TV with an aerial can receive the channels, it does not require a payTV provider. The broadcasters commission Studios and Producers to create TV shows. They own Broadcast Stations that transmit the ‗over the air‘ signals. Broadcast Networks also provide their TV channels to payTV operators. Generally payTV operators are required by their license to carry these Broadcast channels. The payTV operators own what telco-people consider to be the network. They include cable TV operators, also called Multi Service Operators (MSOs); telcos, IPTV operators; and Satellite TV operators, also called Direct Broadcast Satellite (DBS). Underlying this industry are the advertisers, which funds the industry as about $160B annually. The structure shown in Figure 12 is essentially the same in all countries, only scale is different and some functions are under the same organization, e.g. the role BBC plays across studio, producer, network and broadcaster. America dominates the media industry, with only China and India coming close in achieving critical mass for international media industries Bundling of TV channels, content and rights creates many custom deals across the ecosystem. There is no standard contract, virtually everything is negotiated. This is also an ecosystem that is slow to change, where long established personal relationships matter. Telcos have struggled, and continue to struggle to break into this established ecosystem. Also this ecosystem is slow to respond to technology innovation; as content owners become more confident in a direct to consumer model over the internet; and service platforms such as TVs and DVRs open up, such invariance to change could be their downfall. 27 OF 93

Figure 12. TV Ecosystem Advertisers Agencies, Media Buyers and Brands Producers / Basic Networks A&E, Discovery, TNT, Distributors UK Gold, Sky1 Satellite Sony Pictures TV, DirectTV, Sky King World, Warner Premium Networks Bros TV, BBC HBO, Showtime Cable Comcast, Cox, Studios VoD Aggregators Rogers, Virgin media Disney, NBC, iN Demand, TVN Universal, 20th Telcos Century Fox, Warner Broadcasters Verizon, AT&T, BT, Bros, BBC ABC, BBC, CBS, France Telecom NBC, Fox, ITV PRODUCERS / DISTRIBUTORS AND STUDIOS Examples in this category include Viacom, Sony Pictures, and Disney. Producers / production companies pitch their ideas to the network executives (Cable Network or Broadcast Network) for initial selection. Then through initial rolls, pilot episodes and audience testing successful shows are commission for a season, usually a run of 10-12 episodes. Alternatively the Broadcast or Cable Network can identify a gap in the programming and then commission a production house. This tends to occur less often. An oft quoted example is when Fox commissioned David E. Kelley to produce a show that would appeal to young, urban women at a slot where they lost share (mainly men) to sports – he created Ally McBeal. Generally the Cable or Broadcast Network will invest in development costs. A one hour primetime drama costs $3m-8m per episode to produce; one hour comedy costs $1m-2m; while a one hour reality TV show costs $250k-400k, hence why such cheap programming plagues so many TV channels. US has well established ecosystem with both national and world-wide syndication business that creates a significant barrier to entry for other countries, only China and India can generate a similar scale. The BBC is able to produce a few shows based on its national license fee, but it lacks scale to compete with the US Syndication is where Broadcast / Cable Networks shows repeats of shows shown on other TV Channel. Syndication allows the show to be repeated on other Networks in the same country or in 28 OF 93

other countries. Payment can be by cash or advertising slots which the show‘s producer sells. Residuals are payments made to the producer (80%) and actors (20%) for any repeat showing – hence shows must be tracked. Free to air broadcasts use audience estimates. Also audience size can impact charges; that is lower audience figures results in higher per viewer charges, i.e. the content owner ensures a minimum. Given the payTV operator‘s revenue is directly proportional to audience this has cause many Telco TV services to struggle with profitability as customer numbers come below target. Networks like ITV in the UK create TV channels such as ITV3 and ITV4 to repeat the syndicated shows to improve viewership and hence improve advertising revenues. Separately negotiated are rights for DVD rentals / sales, NVOD, VOD for cable, VOD for internet, and other merchandizing. Hence the cost basis for a payTV‘s content can be quite difficult to calculate. BROADCASTERS Broadcasters are granted a license to broadcast TV over the air. In the US there is a network of affiliates (over 1500), that is broadcasters who carry other networks signals in addition to their own because of how licenses were granted. History has a big impact on this industry that has been in continuous operations since the 1940s. My purpose is to help provide some insight into the industry as an outsider looking in. Network affiliate (or affiliated station) is a local broadcaster which carries some or all of the program line-up of a television or radio network, but is owned by a company other than the owner of the network. This distinguishes such a station from an owned-and-operated station (O&O), which is owned by its parent network. Because over the air audience is small (1500 stations), carriage fees have been falling for Stations, that is the money paid to them by Broadcast Networks. Instead Broadcast Networks have been increasing fees to cable and satellite operators. Broadcast licenses are granted nationally or regional, a national license will have regional content requirements In many countries the Broadcast Network owns the Broadcast Stations. In the US it is a collection of owned and affiliate stations, each operating in a ‗designated market area,‘ which approximates to major urban areas, e.g. NYC, LA, Cincinnati, Chicago. Advertising is sold both nationally by the broadcast network and locally by the broadcast stations Broadcasters are quite profitable with >40% margins, in the US they generate roughly $30B in revenue. The Broadcast Network produces prime-time content, and the stations fill up the schedule outside prime time with local news, sports and syndicated shows (repeats). A national 30 sec ad slot can cost up to $1M during a show like America Idol, while typically it‘s in the range of $300-600k In the US, Broadcast Networks are considering whether to cut the broadcast stations (audience is diminishing) and just use cable, satellite and the internet. However, in most Western European countries there is a strong over the air service, where the focus is on using the internet to complement their broadcast service, e.g. the BBC iPlayer. 29 OF 93

CABLE NETWORKS There are approximately 300 cable networks in the US. These are not MSOs, rather TV channels that are available over payTV networks. Approximately 85% of US homes subscribe to payTV. Cable now accounts for over 60% of prime-time viewers, the other 40% being across broadcast and satellite. Advertisers have recognized this shift as Cable Networks advertising spend over the first half of 2009 increased spending while the rest of the market fell by 15%, see Figure 13. US Cable Networks generate $21B in ad revenue (2008), compare to the $18B (2008) broadcasters earn for a much smaller audience. This is an example of bargaining power, broadcasters negotiate as 5 networks, while there are hundreds of cable networks which weakens their position. With the growth in IPTV providers, network bargaining power will further weaken. Cable Advertising is sold nationally; cable networks leave some slots available to local networks, which is a source of revenue that provides an incentive to carry the channel. For viewers of US TV, those are the lower quality adverts that tend to insert themselves part-way through national advert and be for a local car dealership. Cable Networks are also paid on a per-sub per-month basis for the right to carry a channel by the MSOs and Telcos. Agreements span 5-7 years, can be quite difficult to negotiate, there have been many public arguments. MSOs typically pay $20 per sub per month for programming. Cost of programming is the major driver for the rise in CableTV pricing over the past decade. Premium Networks charge an additional fee (direct to subscriber) and focus on movies/sports and are usually advertising free. Premium channel either operate a revenue share, fixed fee per sub, or fixed fee per network with the payTV provider. Again there are many custom deals. Last year was tough for ad spending, but cable bucked that trend as shown in Nielsen‘s figures in Figure 13. Figure 13. Change in Ad Spending in US (source Nielsen) 30 OF 93

ADVERTISERS Advertisers underpin the whole of the TV value chain, Figure 15 shows the trend between advertising spend and subscription fees. In North America subscription feed exceeded advertising revenue in 2006, this happening in Europe in 2009. However, this combination of subscription and advertising enables the creation of quality content, and as a business model is tough to break into. Advertisers (Brands) hire agencies to create campaigns as well as create the ads. Advertisers generally work on commission basis on a % of campaign spend, though latterly the model is moving to a retainer or ROI (Return on Investment) as brands become much more focused on results than simply how much is spent. Advertisers are quite traditional, it‘s an old industry, and this provides a major impediment to new technologies / business models being adopted in the industry. Advertisers focus is the 30 sec ad on a given TV channel reaching a specific geo-demographic. The Cable industry has created Canoe Ventures which is the cable industry‘s attempt to provide a common way for the advertisers to better target their ads and also enable interactive advertising. This is discussed in the following weblog article, http://www.alanquayle.com/blog/2009/03/why- the-mobile-industry-needs.html. Examining the mobile industry, to date advertising has failed because the industry does not understand the advertisers and their needs, hence if Canoe Ventures can succeed it will be a template for other industries. Media planning and buying is the most relevant part of the Advertising industry to the TV value- chain, this is performed by specialist ―media-buyers.‖ They aggregate inventory (advertising slots) across multiple campaigns to lower costs. About 10 years ago most media buyers were spun-out of agencies, now they‘re being bought back into the large agencies to create full-service agencies. Figure 14. Advertising Value Chain Advertisers (Brands) Agencies Producers Media Buyers Cable Broadcast Cash Flow Networks Networks Content Flow MSO, DBS Stations 31 OF 93

Full-service agencies tend to work on a combination of fee-based and commission based compensation. The fee is paid by the entity for which the marketing is being done. The commission is a payment from the network or payTV provider to the agency and is usually about 15% of the cost of the advertisement. Full-service, or media-neutral advertising agencies produce work for many types of media, creating integrated marketing communications, also termed through-the-line (TTL) advertising. The "line", is the traditional marker between the media that pay a commission to the agency and the media that do not. Full-service agencies are also known as traditional advertising agencies for the client, wherein the client satisfies almost all their advertising or promotional needs with the same organization. This type of agency provides advertising services such as strategic planning, creative development, production, media planning, media buying, and other related services such as sales promotional activities, direct selling, design, and branding, etc. As mentioned at the start of this section the trend is for subscription revenues to exceed advertising revenue, as show in Figure 15, where in 2006 in the US subscriptions exceeded advertising revenue, and similarly last year (2009) in Western Europe similar inversion. It‘s clear the subscription/advertising model is not going away, but subscribers are becoming an important aspect of the value chain, and hence their decisions/preferences will impact the value chain more greatly. Figure 15. Trend in PayTV Subscription and Advertising Revenues 140 120 100 Industry Rev $B USA PayTV 80 US Ad Rev 60 EU PayTV Rev EU Ad Rev 40 20 0 2006 2007 2008 2009 2010 2011 2012 CANOE VENTURES Canoe Ventures is backed by most of the US cable companies, including Comcast, Cox, Cablevision, Charter, Bright House, and Time Warner. Its purpose is to make cable's advanced advertising applications easier to buy and use, and on making the results easier to measure. This is quite a customer focused mission; not one mention of technology or esoteric audience qualifiers. The head of Canoe Ventures is David Verklin, the former CEO of Aegis Media Americas. Critically they‘ve brought in an ad-man, so the organization understands what the customer (advertising industry) needs. 32 OF 93

Canoe can work among disparate MSOs and cable systems, its platform uses Enhanced TV Binary Interchange Format (EBIF) and defines a common way to collect and report audience data. Focusing on CableLabs's EBIF enables coverage of most set-tops in the market today, including those used by Verizon FiOS. Canoe is initially focused on a product called 'Creative Versioning,' which will use the cable industry's architecture and ad zones in an effort to make targeted ads more relevant to their viewers. They've defined two templates, based on EBIF: One for voting and polling, and one for "request for information" applications. Imagine these scenarios, you're watching the game show and as the presenter asks you to vote and some cute buttons appear at the bottom of the screen, and from the remote you place your vote. Or an advert for a national pizza chain comes on, at the bottom of the screen appears a button with 'place your order with your local pizza place now' which again is activated with the remote. All designed for easy viewing on the 10 ft viewing experience. But most importantly on the back-end; the system makes it easy to target and measure within how advertisers do business today. Canoe is focused squarely on serving the cable industry at this point. But EBIF is relevant to both the satellite TV and telco TV service providers. In fact, Verizon is a leader in EBIF, recently announcing its Verizon FiOS Widget Bazaar based on EBIF. The critical characteristics in Canoe are:  Industry acts in co-ordination, not multiple independent operator activities.  They create a JV, so competitive issues between operators are removed  It's led by someone from the customer's industry, so its focuses on what matters to the customer (advertisers).  Its starts small, with incremental improvements that are easy to understand, and then quietly quantifies and tests them out before bringing them to market. ADVERTISERS AND THE NETWORK PVR As customers become more powerful in the ecosystem, and technology allows them to watch TV on their terms, the actual viewers of advertising slots is being called into question. MSOs have taken a carrot and stick approach to why advertisers should work with the nPVR (Network-based Personal Video Recorder). The carrot is:  Targeted advertising increases revenues;  Opportunity to create Cable advertising market; and  Cable is the facilitator; content providers create the new market. The Stick:  Advertising is moving away from linear TV; 33 OF 93

 nPVR is a safe haven from PVR;  Content Providers have carriage agreements with Cable companies;  Targeted advertising helps everyone in the value chain; and  Targeted advertising in nPVR gives the volume that advertisers require. So in the limit the MSOs are hoping to use the nPVR to develop direct relationships with the agencies, going around the existing TV channels. This in part reflects the battle we‘re seeing between the channels and payTV providers over carriage fees, I‘ll discuss this in a later section. PAYTV PROVIDERS Cable and Satellite make up the bulk of the market in the US, roughly 67% Cable, 28% Satellite, of the 100 million payTV households. Verizon and AT&T have a combined 5%. 15% of households either receive broadcast only, or have no TV. The typical revenues in North America are:  Basic plan ARPH (Average Revenue Per Household) is $35-45; and  Average payTV ARPH is $55. PayTV penetration varies widely across the world:  50% in Western Europe;  20% in Eastern Europe;  <10% in India and China; and  Japan is about 20%. Figure 16 shows the global growth in payTV, which is no surprise given the relatively low penetration of payTV in some countries. Though in Western Europe the availability of relatively good quality free to air content, especially where the government supports those providers, will place a cap on the maximum payTV penetration a country can achieve. 34 OF 93

Figure 16. Global Growth in PayTV 700 600 500 Subscribers (M) Satellite 400 DTT 300 Cable IPTV 200 100 0 2008 2009 2010 2011 2012 2013 DEAL STRUCTURES As mentioned in the previous sections of this chapter operators have struggled with the bespoke nature of deals in the TV industry. Some operators have found themselves in a situation where their programming costs doubling initial estimates as customer numbers did not meet expectations, as the content deals ensured minimum revenue commitments. There is no magic formula, simply IPTV providers are in a weak negotiating position due to low customer numbers, the only option would be to act as a consortium in buying content. Which operators such as Orange have achieved to some degree, but it really needs all operators, which given they‘re competitive makes such co-ordination unlikely. The best an IPTV operator can do is employ people experienced in such negotiations from established payTV providers to at least cut the best deal for their current situation. Figure 17. Examples of Deal Structures in the Value Chain Per 10-90 sec commercial. Show sponsorship. Product Retailers Purchase / rental revenues Advertisers / Media Buyers Studios placements. Multichannel bundled purchases Rental Aggregators Customers Rev Split Broadcasters Satellite (Networks & Cable Must-carry Stations) requirement Monthly subscription Telcos PPV revenues Cable Carriage fees Example of Rev split or flat Networks fee for premium deals across channels ecosystem 35 OF 93

IMPERFECT COMPETITION AND THE BATTLE BETWEEN NETWORKS AND PAYTV TV content is essentially controlled by 6 conglomerates  Disney owns ABC, ESPN, Marvel Comics;  NBC Universal owns NBC, Bravo, SciFi, IV1 (Australia), History Channel;  News Corporation owns BSkyB and hence has monopoly control over most US content, also owns DirecTV, FoxTel and SkyItalia;  Sony (mainly production);  Time Warner own Time Warner Cable, CNN; and  Viacom own Paramount Pictures, CBS, MTV, and Comedy Central. These conglomerates own multiple Broadcast and Cable Networks, as well as Studios and in some cases payTV operators. As a result ‗carriage‘ (the fee payTV providers pay for carrying TV channels) is negotiated across the Media Conglomerate‘s entire network inventory so payTV providers frequently carry channels forced on them. Conglomerates insist on inclusion in the payTV provider‘s basic package as this drives up viewers, but it also drives up a payTV provider‘s costs. Outside the US bargaining power of the Media Conglomerates is reduced, though there are country exceptions. As an example from the UK, Virgin Media refused to pay Sky‘s additional charges to carry their channels so dropped Sky channels. The next day Sky started a campaign targeting Virgin‘s customers with the message ―Don‘t loose Lost,‖ a popular TV program. We‘ve seen similar battles in the US between Time Warner Cable and Fox. In the UK OFCOM (UK Regulator) is trying to force Sky to provide content at fair wholesale rates Over the passed two decades Cable TV has gained popularity and customers accepted price increases for a greater variety of content, e.g. MTV, nature channels, and dedicated sports channels, etc. However, Cable TV penetration is now flat, and for many incumbent MSOs they‘re experiencing a loss of customers due to competition from telcos. Pressure for carriage increase rates has resulted in a battle between Networks and MSOs. But that‘s not where source of rate rise originates. Agents for stars of TV shows are demanding $1-3m per episode, sports stars are demanding $100m per season. We‘re currently in a spiral of costs; the underlying belief is that stars draw viewers.. At the moment content owners are passing their costs down the value chain and at some point the networks and MSOs will no longer have margin to squeeze or a willing customer base to pay higher prices. Last year Setanta UK (sports channel) went into receivership, as the costs of purchasing sporting events proved too great for its audience size. ESPN picked up Setanta games rights. SkySports dominates sports programming in the UK, this dominance stems from a 300M GBP bet they made in 1992 for the Premier League (football) rights that transformed the price points, which was in part enabled by SkySports subscription model. 36 OF 93

TELCO CHALLENGES Licensing of TV programming is relatively complex compared to most telecom negotiations. Multiple parties must approve a content deal. Recurring payments are required for a variety of players, including studios, unions, actors, etc. There are few ‗fixed‘ prices most items are negotiated where audience reach, its appeal, demographics and bargaining power all impact the charges. Variety of business models including shares, splits, rates and commissions which are usually negotiated annually. In most regions cable and satellite own the vast majority of payTV homes; thus have a stronger bargaining position than Telcos. In the UK much popular programming and distribution is owned by Sky/Fox. OFCOM is attempting to force a wholesale pricing model to break their monopoly of control over popular content. But this is very much an exception in the market. And highlights the different country specific situations, while Telecom Italia suffers the same problems as BT in competitors owning content rights as well; France Telecom has been able to build a strong position in payTV. There is also a fundamental shift taking place, content owners are looking to the internet as a way of removing the middleman of payTV providers: cable, satellite or telco. Telcos are trying to break into a rather insular ecosystem, with a weak bargaining position (few customers). Hence channels are weakening while the content owners are strengthening. This will continue to squeeze margins for Telcos, and making scale critical to success as that enables being able to buy exclusive rights to popular local content (generally sports.) IMPACT OF TECHNOLOGY ACROSS THE ECOSYSTEM There are a number of technologies impacting the ecosystem, as shown in Figure 18. Examining each in turn:  Internet video allows direct customer access; studios are actively exploring this, e.g. Hulu which will be discussed in the OTT TV section. This allows the content owners to have a direct relationship with the customer; note Disney has done this for many decades.  DVR is increasingly popular across all IPTV offers; it reduces ad viewers / effectiveness. As discussed in the nPVR section it can empower the payTV provider to take over some of the advertising revenue. For the producers is reduces report fees and allows customers to ‗own‘ content rather than buy. For Networks is reduces effectiveness of ad revenue which is a core component of their revenue.  Consumer electronics such as TVs, DVRs, Apple TV, TiVo, PS3, Wii, and Xbox enable consumption of video outside existing value chain direct from the Producers, e.g. Sony Store through the PS3. The on-device stores promote direct consumption of content (e.g. Amazon on Demand or iTunes). These stores they understand the scale game and provide an efficient channel for content owners to deliver directly to the consumer. 37 OF 93

 Place shifting remains niche because of the technology involved. The main beneficiary is the payTV operator which can offer as a service.  IPTV: Weakens payTV providers bargaining position, as there are more competitors negotiating over content. Overall content owners (Studios) are strengthening their position thanks to Technology. Operator must focus on how to make DVRs and place shifting more attractive to maximize their position in the value chain. Taking Sky UK as an example, they have 62% penetration of Sky+ DVR service (5.9 million homes, as of Q3 ‘09). The user experience is excellent, press record once for the program, twice for the season pass. Season pass recording all showings of a program. So there are ways for payTV providers to focus on their core strength in the value chain, which are the hours their customers spend watching TV. Figure 18. Rating Technology Impact on TV Ecosystem Members FUTURE SCENARIOS During a series of industry interviews completed from Dec ‘09 through Feb ‘10 a number of future scenarios were discussed with operators where they were asked to rate the probability, likely timeline and discuss the reasons for their prediction. The results of which are shown in Figure 19. There was general consistency in the responses across payTV operators and geographies. Fragmentation is the most likely scenario in the near term with multiple channels weakening the payTV providers‘ positions; content owners will use all available channels to explore their effectiveness and return. PayTV margins will continue to erode as TV Networks continue to raise carriage fees and customers remain unwilling to accept subscription fee increased on the basic packages, as well as bundling with data and voice services further discounting the TV service. The scenarios considered of medium probability include internet video going mainstream, but this was seen as a long term trend and not winning out-right, rather becoming a preferred delivery mechanism for some customers; especially those that prefer programmatic selection than channel selection. Consumer Electronics becomes a service platform was considered medium probability but remaining niche, e.g. Sony Store on PS3 will be used by PS3 gamers, but will not be a consumption model for the masses. The web retailers were seen as the most significant uncertainty, some viewed them as the most significant threat, and others saw it only for VoD for those customers with a ‗service platform‘ in their home, e.g. PS3, TiVo, DVR, Internet capable TV. 38 OF 93

Business as usual and telecom operators dominating were seen as unlikely scenarios. Figure 19. Review of Future Scenarios, based on industry interviews Scenarios Description Probability Reason Content owners will act as arms suppliers - use all Multiple channels, channels and use the bargaining weakness of so many Fragmentation content owners channels to increase its margins as well as bypass them dominate, confusion High over the web. Sony is in a unique situation with the PS3, it can deliver Consumer Customers move to VoD and 'download to own' from its extensive content Electronics consumption of video library. Devices are more likely to be co-opted by the Dominates from their PS3, Wii, Medium - content owners, e.g. BBC iPlayer on the Wii, or by web- TiVo and Apple TV niche retailers. Deals cut are at the sufferance of the content owners - if Likes of Amazon on current deals impacted their other revenue lines, they Web Retailers Demand become Medium - would react. But as Amazon understands web retailing Dominate customers preferred medium they can not ignore and if customers express a preference site. term they will follow the money. Internet gets to the TV, Internet Video and consumers People's habits change very slowly, internet video will be a Dominates change their viewing Medium - part of customer's viewing habit. For some it will replace habits long term MSO / DBS, >10 years before early majority are impacted. Business as Usual Existing ecosystem Value chain is already changing, MSOs and Broadcasters continues Low are working on adapting their business models Telcos are in a weak position, and it will be weakened Telcos Dominate Customers adopt the even as their customer numbers grow due to bundle Low strengthening of the content owners position. 39 OF 93

H Y B R I D T V A N D OT T T V D E P L OY M E N T S : T E L C O / S A T E L L I T E / C A B L E This section will review some of the hybrid TV roll-outs around the world. The purpose is to provide some insight into their failures and successes, to help operators build a successful business and suppliers provide the best hybrid TV solutions. AT&T HOMEZONE AT&T HomeZone was an integration of AT&T Yahoo! High Speed Internet, DISH satellite TV and AT&T Home Networking services via a single device. 2Wire was the STB supplier. It featured a 250GB drive for storage of DISH, MovieLink, and Akimbo programming. The cost of HomeZone service was $10, in addition to DISH and broadband internet charges. Movies cost generally $4.99 to rent. Note the DISH TV service was available stand alone, so the often quoted 2.1M quoted AT&T Homezone customers were not all HomeZone customers, in fact most were not. AT&T never published the number of HomeZone customers. It is estimated that HomeZone customers are currently <50k. The DISH partnership has been withdrawn as a service, as has the HomeZone service. AT&T now partners with DirecTV which has its own Hybrid Satellite service ―DirecTV on Demand.‖ The factors leading to HomeZone‘s failure include:  The DISH / AT&T partnership was difficult as they are competing payTV suppliers. The partnership was based on expediency from both sides for geographic areas were AT&T could not provide UVerse.  They did not integrate customer data so there were many customer relationship problems, poor customer service resulted in high costs.  The product was not bundled, customers had to buy the DISH service, then Yahoo! Broadband, then HomeZone it required multiple service selections and installs by the customers.  Pricing was too high, at $4.99 per movie it is 5 times the price of Redbox (popular automated kiosk rental service in the US), plus a monthly $9.99 makes it uncompetitive with services such as Netflix and the MSO (Multi Service operator / Cable TV operator). Critical learning from the AT&T DISH experience is:  Simplicity in:  purchase, one click;  installation, one box; and  customer service, one number. 40 OF 93

 Market will not accept a subscription fee for VoD when movies are charge for in addition.  Cable offers most of the interactive TV content for free, with purchase of premium movies.  Interactive TV is a secondary concern to customers. More important issues are available TV channels, multi-room, HD, DVR, and picture quality. AT&T has now focused on a 2 tier strategy:  U-Verse where available, fully integrated triple/quad play offer; and  DirecTV where U-Verse is not available – only value-add is integrated billing. But still there are issues in customer management, two separate databases so offers sometimes do not get applied, or problems are not closed especially when cases are transferred between AT&T and DirecTV. AT&T is one of the few examples of where two payTV providers attempted to work together in delivering a hybrid TV service. The long term commercial pressures and the difficulty in carving out enough revenue to justify the interactive services proved too great. A conclusion is hybrid only works when the broadcast partner is free to air programming, e.g. BT and Telefonica, or a single payTV provider owns both the broadcast and interactive streams, e.g. Verizon, Orange or ComHem. VERIZON FIOS Verizon FiOS is consider a hybrid TV service because it uses the traditional cable TV digital multiplex for delivering broadcast services, and IPTV over MoCA (Multimedia over Cable) for interactive services such as VoD and widgets. Verizon chose a hybrid approach purely to avoid technology risk, the plan is to move to full IP with all services delivered over MoCA by 2012-2015. FiOS TV customers are currently at 2.9M (Q4 2009) see Figure 21, FiOS internet at 3.4M. The hybrid STB is the Motorola‘s series of Hybrid QAM/IP SD/HD Set-Top (with optional DVR). Hybrid TV is an interim solution, VZ see the move to all IP between 2012-2015. However existing deployments are unlikely to be transitioned out, hence Verizon will likely run a heterogeneous network for the foreseeable future. Verizon‘s solution addresses the simplicity issues raised in AT&T‘s deployment with one STB connection, one purchase, and one customer support number. Interactive services are available at no charge, and premium movies can be rented at the same price as the cable providers. This makes it easy for customers to understand and use the service. Verizon is one of the most successful TelcoTV deployments in the world, its hybrid architecture is critical to its success, as the service is comparable to existing offers, just better. An interesting question is whether the North American MSOs will follow Verizon‘s lead in the move to hybrid TV. MSOs have stated the plan to move to IPTV, but an interim hybrid solution is unclear. Currently it does not appear the case, but if Verizon is able to achieve service differentiation 41 OF 93

that impacts customers‘ purchase decisions either in churning to Verizon, or within Verizon in achieving a higher than average ARPH (Average Revenue Per Household), then they will likely react. Figure 20. Verizon FiOS Architecture and Migration Plan (source Verizon) Figure 21. Verizon FiOS Customer Numbers (source Verizon) Verizon FiOS TV Customer Numbers 3500 3000 Subscribers (k) 2500 2000 1500 1000 500 0 2007 H1 2007 H2 2008 H1 2008 H2 2009 H1 2009 H2 42 OF 93

BT VISION BT Vision was launched on 4 December 2006. The number of customers is currently at about 450k (Q4 2009), well below the target 2-3M predicted at launch. Revenues are also below target as the base tier package is only 15 GBP (Great British Pounds) per month. The UK is a highly competitive market, and Sky UK offers a more traditional base package for 17.50 GBP (currently it has 10M customers.) A challenge has been for customers to compare the offers. BT offers programs, while Sky offers channels, which most customers find easier to understand. That is a channel like Sky One means first UK broadcast of shows like the Simpsons and Lost. Also Sky has the rights to the premier football league, so BT lacks a critical sports package to attract many viewers. In addition, BT Vision can only support one TV. BT Vision provides digital TV channels using a Freeview decoder. The STB supports 80 hours television programs to be recorded, and films, TV program and sports events can be viewed on demand via broadband. The service is described as providing a range of on demand content without compulsory subscriptions. However, a BT broadband connection with a guaranteed line speed is required, this significantly limits the addressable market. And this is a cause of customer frustration as the service is not available throughout the UK, the customer has to be interested, and then have that interest quashed when their DSL line is not fast enough. The BT Vision+ set top box was originally the Philips DIT9719 operating Microsoft Mediaroom software. Motorola will supply the next generation of BT Vision+ box. BT‘s broadband access strategy remains confused, it has claimed both VDSL and FTTH plan and changed the targets several times. Lack of success with BT Vision means it will likely not follow Verizon in an aggressive fiber deployment. Hence the hybrid telco STB approach will remain in place for the foreseeable future as the cost of upgrading to VDSL or FTTH remain high given the relatively low penetration of the TV service. BT Vision has suffered from the problem that customers still watch TV channels, and in their comparison between offers channel line-up not specific programs is how customers decide. Consumers‘ behavior has not yet changed so that most customers are willing to build their own schedule – programmatic purchase. Hybrid STB has proven essential for BT Vision to provide a base-level broadcast quality service. But that base tier of service is available from all TV providers, including Sky. Purchase of BT Vision requires customer to also have a BT phone line, BT broadband (with enough capacity) and an existing terrestrial aerial. This is much more complex purchase than Sky (Satellite) or Virgin Media (Cable provider). And Sky‘s control over both sports and popular US content puts BT Vision at a significant disadvantage in attracting the majority of UK viewers BT will remain niche, focused on early adopter customers that want to build their own schedule, do not have a significant interest in premier league football, and only require payTV services on one TV. This raises a significant issue about whether telco based IPTV providers will be competitive in the long-term, especially as HD and multi-room payTV becomes important. The hybrid telco TV market may be limited in some markets, not by the technology, but by the ability of the telcos to create an attractive package for the majority of customers. 43 OF 93

ORANGE TV France Telecom's IPTV service requires 5 Mbps of sustained bandwidth, which, according to the company's data, means that around half of all broadband subscribers in France can't receive IPTV over DSL. This is a common problem for many operators IPTV service, their advertising leads to customer disappointment when they can not receive the service, which is worse than not being aware of the service, because the operator has disappointed the customer. Having invested in premium football and movie rights, France Telecom needed to increase the reach of its TV services, so, in July 2008, it launched a hybrid service combining satellite and broadband delivery to achieve 98% coverage, see Figure 22. This aggressive move has resulted in OrangeTV being the most successful TelcoTV service in Europe. This provides access to broadcast channels via satellite, and to VOD via the Internet. In fact, the STB contains direct-to-home (DTH) and DTT tuners, so if subscribers are in an area where they can't receive satellite service, they can still get access to a more-restricted range of broadcast channels via terrestrial TV. Figure 23 shows the decision tree for a customer interested in OrangeTV, the critical advantage Orange has compared to only DSL based solutions is the customer will be able to receive Orange TV, so disappointment is avoided. Figure 22. How OrangeTV Delivers on Service Ubiquity (source Orange) Eutelsat is supplying the capacity on its satellites, while France Telecom subsidiary Globecast deals with encoding, encryption, and channel transmission. Although Samsung has been chosen as a set-top box supplier, the offer was launched with lower specification OpenTech set-top boxes (Korean supplier not Hybrid). However, Thomson is now the prime STB supplier. In 2008 France Telecom's Orange TV division saw its subs numbers swell by 72% compared to 2007 (1.7M versus 1M). Orange TV is the leading European hybrid TV success case. France Telecom's hybrid satellite service had more than 300,000 subscribers at the end of March 2009. Total Orange TV subscription base of 2.1M, see Figure 24. The OTT VOD service provides downloads rather than streaming, and requires a minimum bandwidth of 500 Kbps. With a 2 Mbps connection, subscribers have to wait about 10 minutes for a movie to start; alternatively, they can preorder the movie via PC, and then it's downloaded in advance. Clearly, this doesn't provide the same quality of experience as the full IPTV service, but it 44 OF 93

doubles the number of households that are able to receive the VOD component of the Orange TV service. Figure 23. Simplifying the Purchase decision – Regardless the customer will get OrangeTV (source Orange) Control was critical to Orange for its Satellite service, and partnership with Canalsat was not an option because they are a competitive, it needed to own the Satellite service not partner. Hence through owning both DSL and Satellite delivery enabled an integrated experience and avoids commercial risks. FT considered it the only way to achieve near 100% penetration. Note France has a more competitive market than the UK, where Sky dominates. Currently in the French market FT is executing a payTV land grab against CanalSat and cable. FT is focused on achieving a dominant position in the payTV market, as without scale it can not buy the necessary content such as local sports events, hence its TV service will not be competitive. FT‘s satellite investment is significant, few telcos could afford such as investment. Dominating payTV is one of the top 3 domestic consumer objectives for FT, hence their willingness to make 45 OF 93

such as investment. HD can be supported over Satellite, IPTV and DTT. This hybrid approach maximizes lifetime of their DSL investment, before fiber to the home is required. Hybrid TV will remain FT‘s core TV strategy, that is IPTV / DTT and Satellite / IPTV. Orange TV has clearly demonstrated taking a hybrid TV approach across DSL and Satellite can be success for a Telco enabling near 100% coverage, hence avoiding customer disappointment, and delivering on a customers‘ core service expectations. Figure 24. Orange TV Subscribers (source France Telecom) Orange TV Subscribers 2500 2000 (k) Customers 1500 1000 500 0 2005 2006 2006 2007 2007 2008 2008 2009 H2 H1 H2 H1 H2 H1 H2 H1 CANAL+ LE CUBE Canal+ Le Cube is the hybrid satellite STB, supplied by Pace. Design is by FuseProject, the designers of Jawbone Bluetooth headset. Le Cube is an award winning integrated design across STB, remote and UI. Hybrid satellite STB enables services such as:  Catch-up TV;  DVR through a 320 GB hard disk drive providing the ability to record up to 100 hours of HD;  Access to the latest imported series, in high definition, less than one week after they have been shown to American audiences;  Recommendations for viewers; and  IP connection allows progressive download of VOD (CANAL+ and CANALSAT on demand) whereby content is buffered onto the HDD. 46 OF 93

Canal Group is the leading pay-TV operator in France with over 10 million subscribers, 5.3M to Canal+ (premium channels). Figure 25 shows the customer proposition.. Launched on 4th Nov 2008, rental price of the Le Cube STB is 18 Euro per month, 10 Euro more than the standard HD STB. It is claimed hundreds of thousands of users of Le Cube. It will be interesting to see when the customer numbers are made available as 10 Euro is significant premium for being able to access interactive services, will that premium limits customer take-up like AT&T HomeZone. Figure 25. CanalSat Proposition (source CanalSat) France presents the leading hybrid TV case study. Both telco and satellite TV providers are going head to head with hybrid TV solutions. FT leveraging HBB across DSL and Satellite, and CanalSat leveraging HBI across satellite. A key feature of the French market compared to the UK is the more even competition, the UK is dominated by Sky UK, and more open access to popular content. France Telecom made a firm commitment to TV in its home market, addressing the geographic availability concern. It is early days for Le Cube but it premium of 10 Euro per month could be a restraining factor on customer up-take. DETSCHE TELEKOM T-ENTERTAIN Deutsche Telekom's IPTV service, T-Entertain, had about 800,000 subscribers in Germany at the end of 2009. Its target was to reach one million subscribers by the end of 2009. Germany is a notoriously difficult market for pay-TV operators, because there's good-quality free-to-air (FTA) programming on cable, satellite TV, and over the air; including a wide range of movies and national sports. 47 OF 93

Deutsche Telekom believes that the critical success factors for IPTV in Germany are:  Content: The service must have a wide selection of premium content, and, in particular, the VOD service must have the same day-and-date release as DVDs.  Only T-Entertain has the entire national football league (Bundesliga) live and on- demand in HD quality. Deutsche Telekom, like France Telecom, has made a significant investment in the necessary poplar content.  Multiscreen: The service mustn't be purely for the TV, but must also deliver video content to PCs and mobile devices.  Interactivity and personalization: IPTV must offer a completely new level of customer experience compared with cable and satellite; in particular, it must include personalized recommendations within the electronic program guide (EPG).  Third-party access: IPTV services mustn't be restricted, walled-garden services, but rather must provide open application programming interfaces, giving access to OTT-TV and user-generated content (UGC) on the public Internet. This is to be determined, but DT are in discussions with several providers of WebTV service compatible with their current Moto STBs. T-Entertain‘s STB is the HD-ready Motorola VIP1616E (European version of the Hybrid STB VIP1616T) set-top with DVR. It supports broadcast television, time-shifted television, multicast and video on demand, and is fully compliant with Microsoft Mediaroom. The plan is to continue with the current hybrid TV strategy for the foreseeable future as it must offer the basic free-to-air package its customers value most with the necessary quality and geographic ubiquity. TELECOM PORTUGAL MEO Telecom Portugal‘s Meo is often cited as an example of a hybrid TV service, however the STBs and delivery are not yet hybrid, only the back-end systems. There is Meo Sat, a Satellite TV package; and Meo IPTV, a DSL-based IPTV offer in the main urban areas. Satellite is provided where the IPTV service is not available. So Telecom Portugal‘s approach is similar to France Telecom in using both DSL and Satellite to deliver geographic ubiquity. Later in 2010 there will be Meo DT (Digital terrestrial offer). Meo subscribers passed 500k in Q2 ‘09 and are likely around 650k at Q4 2009. The Kudelski Group provides its Nagravision conditional access system and end to end integration. Meo uses OpenTV Core 2.0 and OpenTV PVR2 as well as OpenTV‘s HTML execution environment. Quative provides the next-generation Service Delivery Platform (SDP). So the backend system is common across the different access methods, it‘s just the delivery is not yet hybrid. In mid-2009 Telecom Portugal launched a mobile TV service based on Meo content and part of the Meo bundle, using the Lysis Content Management System (CMS). There is currently no hybrid STB. Meo Satellite is the Phillips DSR 7131/24 (SD/HD). HD was critical for the rapid growth in Meo (most of the subscribers are Meo Sat). Preferred IPTV STB 48 OF 93

supplier is Motorola VIP1200E and VIP1216E models. There is discussion on a hybrid STB across Satellite, DTT and IPTV, but no decision has yet been made. Over the summer of 2009 Telecom Portugal added a number of interactive services to Meo IPTV. A Minha Conta ("My Account"), which is accessed through a new category in the Meo main menu, called "My Meo" ("O Meu Meo"), where Portugal Telecom plans to showcase Meo's personalization features. The service allows customers to review the channel and programming packages to which they are subscribed, as well as the VOD movies they have rented during the current month. A great example of how Telecom Portugal is focusing upon the customer is the launch of Meo Magazine, an interactive magazine (also accessed through "My Meo") that showcases Meo's programming offerings, and provides programming and VOD movie recommendations. Its content is organized into Entertainment, Sports, Videoclube (Meo's VOD platform, which currently offers around >3000 titles), Culture and Lifestyle categories. The service also allows customers to schedule recordings and to purchase or subscribe to the programs and channels that it features. Jugos ("Games"), a free interactive TV games service that organizes its offerings into three categories: Kids ("Moggles" and "Sudoku Jr."), Strategy and Puzzle ("Sudoku," "Cosmox," and "Patience") and Board and Arcade ("Drop Duel," "Kaboom" "Rockswap Adventures," and "Chess Challenge"). Key features of Meo are Telecom Portugal made the investment in its own Satellite TV like France Telecom. It thought a partnership with competitive Satellite provider could not work, and would put them at a competitive disadvantage. The HD offer with Meo Sat has been critical to rapid take-up of service since its launch in 2008. Meo Sat is the dominant service, with about 30% of subscribers taking Meo IPTV. Backend is integrated across all delivery channels, so Telecom Portugal has taken a structured approach to market development. Currently they have an un-integrated STB offer, however this is likely to change once Meo DT is launched in mid-2010. Motorola, ADB and Amino appear to be the front runners to become the preferred hybrid STB supplier. TELEFONICA O2 CZECH REPUBLIC O2TV Telefónica O2 Czech Republic (previously Cesky Telecom) (www.telecom.cz) deploys the hybrid STB ADB-3800TW, high definition (HD) ready, IPTV/DTT. It has just over 175k O2TV subscribers as of Q4 2009. DTT provides the base package of services, with IPTV delivering premium channels. The data rate required to support IPTV does limit service availability, generally to urban areas. Availability of HD content has been an important driver of the service. O2TV focuses on Czech content and premium international channels to differentiate from Satellite. There are no plans for a hybrid satellite offer, focus is on improving the access network in increase DSL penetration. O2TV will maintain a hybrid TV approach for the foreseeable future, as investments in Satellite or FTTx are too large to be justified by the IPTV margins. 49 OF 93

HANSENET ALICETV (NOW TELEFONICA O2) HanseNet is a small German ISP previously owned by Telecom Italia, now owned by Telefonica O2. It has 2 Million subscribers across phone, internet and IPTV. It launched an IPTV/DTT service using the ADB ADB-3800TW High Definition-ready H.264 hybrid set-top box in 2008. Currently it has bout 32k IPTV customers. Its focus is price competition in the German market. But it lacks scale so IPTV margins are slim, and it cannot differentiate meaningfully from a customer‘s perspective. There has been high churn in IPTV customer base. The focus remains a hybrid DTT/IPTV strategy, no Satellite or cable partnerships are considered commercially viable. They would prefer a Satellite/IPTV offer as it has better experience and HDTV capability, but this is not possible as Sky Germany will not partner as they consider HanseNet‘s AliceTV competitive. FASTWEB, TELECOM ITALIA, JAZZTEL AND TELEFONICA FastWeb and Telecom Italia both have roughly 400k+ customers, both use the Telsey hybrid STB (TelseyWaves IP STB FS6). Domination of Satellite TV in Italy over both delivery and content makes IPTV a secondary service. VoD profitability remains a critical issue as most deals require a minimum revenue commitment. Focus is on how to improve both customer awareness and usage of VoD. It is anticipated the hybrid approach will continue into the medium / long term. However, Telecom Italia is migrating their HBB service to a HBI service called CuboVision which was announced in January 2010 JazzTel and Telefonica both use the ADB Hybrid STB. Telefonica dominates the Spanish IPTV market with >750k IPTV subscribers to JazzTel‘s 35k (out of approximately 500k JazzTel ADSL customers). Sogecable (Satellite provider) dominates payTV in Spain, it controls the rights to the football games. It has approximately 2M subscribers, which is roughly 50% of the payTV market. It partners with both Telefonica and Orange to deliver a triple play bundle. As JazzTel does not have access to this content its offer has been poorly received. Sogecable is not focused on interactive services, rather licensing content through the other providers. Current Hybrid strategy will continue in the near future. If Telefonica where to buy Sogecable, then the strategy may change to a Satellite/DTT/IPTV STB – but Hybrid will remain the core of their strategy. COMHEM ComHem is a Swedish cable operator offering triple play services. As of 2009 it has 1.8 million- subscribers, 525k broadband subscribers, 340k telephony customers and 220k taking the triple play package. It is deploying a hybrid system similar to Verizon FiOS, which is using MoCA to deliver the interactive TV services, with currently 25k customers. Ericsson is the prime contractor; Espial supplies the hybrid TV middleware and VoD platform. The STB is supplied by Motorola, European version of Verizon FiOS STB. The plan is to expand IP delivery of interactive video services including Web TV. While keeping broadcast services on the existing digital multiplex. This approach enables a smooth migration over the coming years to an all 50 OF 93

IPTV solution, when appropriate for the market. The hybrid strategy is likely to remain in place for the next 5 years. Driver for the approach was cost and flexibility offered by IPTV delivery for interactive services. Their view is for most cable operators this is the best approach for delivering interactive services. TELECOM NEW ZEALAND AND TIVO Launched in November 2009 Telecom New Zealand‘s hybrid TV service is HBI, that is a hybrid DTT / OTT STB supplied by TiVo (cost $700 USD,) the monthly TiVo service charges is included in the price. For on-demand services without a managed IP connection progressive download is used which means the customer must allow 3 to 5 minutes preload then movie will play. The deal is between Telecom New Zealand and Hybrid Television Services (the licensee of TiVo products in Australia and New Zealand). This provides Telecom NZ broadband customers with the ability to download movies and shows to their TV with no impact to their monthly broadband data allowance as well as access to all of the Freeview HD channels. TNZ evaluated the cost of building their own managed IP network to support IPTV, and the likely margins such as limited market would return. They decided it would be easier to partner and take a revenue share of an OTT service than build out a dedicated network and cut content deals. This is an interesting approach by a small regional operator, a question is whether other small operators will follow this approach for delivering interactive services. On Demand content is provided by Hybrid Television Services (ANZ) Pty Limited. Hybrid TV is the exclusive licensee of TiVo products in Australia and New Zealand. Hybrid TV is owned by New Zealand broadcaster TVNZ (33%) and Australian Seven Media Group (67%) essentially it is the local broadcasters. As of January 2010 content is limited: only about 10-15 shows across drama, comedy, documentary and Kids; and about 150 movies. It‘s unclear why content is so limited given distribution rights are owned by hybrid TV company. Hybrid TV is using TANDBERG Television‘s WatchPoint Content Management System (CMS), OpenStream Digital Services Platform on-demand back-office solution, AdPoint Advanced Advertising Platform and Xport Producer storage encoding solution. This provides a good example of how Ericsson is able to leverage its broadcast expertise and presence from the Tandberg acquisition into hybrid TV. Essentially TNZ has cut a deal with Hybrid TV ANZ. Details are not public, but it is thought TNZ takes a carriage fee for each piece of premium content, and a share of the purchase price of the STB. TELECOM ITALIA OTT TV CUBOVISION Telecom Italia launched in December 2009 an all-in-one broadband TV device called 'CuboVision', offering access to DTT channels, interactive Web TV and on-demand pay-per-view video, including high-definition content. It is a HBI solution as it does not require a managed IP connection, this removes the geographic availability issues, as well as allowing TI to deliver services over competitor‘s broadband networks. 51 OF 93

CuboVision connects to the TV aerial and any ADSL broadband connection to provide DTT content blended with IP-delivered services such as on-demand TV. Hence Telecom Italia is providing a HBI (Hybrid Broadcast Internet) also known as OTT TV. The customer proposition focuses on enabling access their personal content such as photos, videos and music on their television, as well as widgets for access to weather forecasts, and general and business news. The STB uses the Intel Sodaville chipset, MeeGo OS and SDK for the app store, is manufactured by Amino and includes a 500 GB hard drive for storing multimedia files, which can be transferred via USB drive, SD card, WiFi or DLNA. A dynamic scrolling news bar offers access to a variety of widgets from Telecom Italia's Virgilio Portal, including real-time weather in a selected city, general and business news updates, daily horoscopes, and access to the main types of service. These applications will be expanded over time. CuboVision is an innovative response to the needs of ever more well-informed broadband consumers," said Franco Bernabè, CEO of Telecom Italia. "This new package is, to begin with, focusing on heavy internet users. We want to involve them in a new experience, a new paradigm for accessing news and entertainment content by channeling content from the web, broadcasters and viewers themselves - more than ever responsible for creating their own programming – via home TVs. After the launch of LA7.tv, which allows viewers to watch the channel‘s programs from their own PCs, CuboVision is the next step in Telecom Italia‘s ongoing quest to find groundbreaking ways of accessing content. Critical in the service‘s design is CDN (Content Delivery Network) dimensioning. LEARNING FROM HYBRID TV DEPLOYMENTS Most IPTV operators have either deployed or are planning / evaluating hybrid TV. Hybrid TV is becoming the dominant delivery mechanism for TelcoTV. Only those operators with fiber to the home or VDSL (Very High speed Digital Subscriber Line) can consider a pure IPTV solution, e.g. NTT or AT&T U-Verse. And Verizon chose a hybrid approach for its FTTH (Fiber To The Home) solution, to avoid technology risk, meet customers‘ base expectations, and enable a smooth migration to all-IP when customer demand and economics dictate. Operators are not partnering with broadcasters to deliver hybrid TV, because of the difficulty in partnering with a payTV competitor (Satellite / Cable / IPTV provider), AT&T‘s HomeZone service demonstrated the problems of such a partnership. Cable operators in Europe are adding IPTV via MoCA; its not clear US cable operators will follow such an approach. Satellite TV operators in Europe and the US are adding OTT video services with progressive download (HBI). A few Telcos (e.g. Orange TV and Portugal Telecom) have acquired Satellite capacity to deliver a comprehensive TV service across their country. However, most Telcos have taken advantage of the free to air DTT service to complement their IPTV offer. Telecom New Zealand provides an example of a hybrid service where they have partnered with TiVo. TiVo provides the STB and interactive services, while broadcast TV is provided by DTT. Such TiVo partnering is becoming more common with Virgin Media and RCN also following this route. It will be interesting to see if other small operators follow this strategy to market, rather than 52 OF 93

making the investment in a managed IP network and the difficulty in making the necessary content deals with a small customer base. Most operators remain disappointed in the lack of customer take-up for interactive services, i.e. VoD. Penetration remains <10% penetration for most operators. Most operators are examining ways to improve consumption. Operators in the strongest position are telcos with a Satellite and IPTV solution (e.g. Orange/Telecom Portugal); and Hybrid Cable operators (e.g. Verizon, Com Hem). As they address the key issues of simplicity in:  purchase, one click  installation, one box  customer service, one number They do not disappoint customers with limited geographic availability. They do not have any partnership risks. They can deliver the full package of SD/HD channels customers expect with control over the access to avoid potential additional charges. Second tier hybrid solutions are:  Satellite and OTT (e.g. Canal+) has no control over the broadband connection, hence requires progressive download and could incur additional charges for broadband data use. Content delivery network dimensioning is key for service quality with OTT services.  IPTV and DTT (e.g. BT Vision) has limited channel line-up compared to Cable and Satellite, requires customers to ‗purchase‘ shows (this requires a change in behavior), limited HD capability, and limited geographic coverage.  DTT and OTT partnership (e.g. Telecom New Zealand.) TNZ is simply a pipe provider; in a more competitive market TiVo would likely go OTT as in the US. Content delivery network dimensioning is key for service quality with OTT services. All operators interviewed plan to continue their hybrid TV strategy into the medium term (next 5 years) at least. All are evaluating the role of video delivery to the PC and mobile within their existing customer base. Note payTV providers are constrained by the limitations imposed by the content owners on how their content is distributed. Hulu and BBC iPlayer have much greater freedom of operation as they are run by the content owners. This limits the payTV provider‘s ability to delivery OTT TV to any internet connected customer. However, CuboVision from Telecom Italia provides an example an operator exploring this model. Underlying all the unmanaged IP TV services is a content delivery network (CDN), who‘s dimensioning is critical to service performance. 53 OF 93

H Y B R I D T V A N D OT T T V BU S I N E S S M OD E L S DRIVERS FOR HYBRIDTV Early IPTV deployments showed customers expect firstly a broadcast experience; on-demand is not the primary requirement. The channel bouquet must include the ‗standard‘ broadcast package of channels, as today customers compare offers by channel line-up. Technical drivers for hybrid TV:  Overcome network constraints;  Access – limited capacity due to poor network condition;  Aggregation – improve contention ratios of available capacity and avoid multicast;  Core – avoid multicast; and  Simplicity in delivery of the core product (broadcast bouquet) – less things to go wrong. Commercial drivers for hybrid TV:  Difficulty in cutting content deals for start-up IPTV providers;  Provide ‗base-level‘ service expectation: access a bouquet of free to air channels;  HDTV gap filler while IP connection lacks the capacity to support HD (assumes operator is planning on network investment);  Time to market;  Lower network costs; and  ―Free‖ entry then up sell customers to premium services. Regulatory drivers for hybrid TV:  Constraints in supporting national free to air broadcast services could impose significant costs / delays. So leveraging a network that has already solved the problem avoided regulatory issues. BROADCASTER PARTNERSHIP? Hybrid TV does not mean a partnership between a broadcast and IPTV provider:  In Europe no IPTV operator has of yet struck a deal with a satellite or cable provider, rather they‘ve used the DTT service, e.g. Freeview in the UK, then complemented that offer with additional channels and interactive TV. 54 OF 93

 Satellite providers Canal+ and Sky Germany have launched HBI boxes that use an unmanaged internet connection, i.e. progressive download of content. This enables them to provide interactive services in additional to the broadcast multiplex. Generally satellite TV providers are not interested in a partnership with an IPTV service provider as they are both payTV competitors.  Telia Stofa in Denmark sends IPTV through its cable modem (no partnership required). In the US Verizon used MoCA for IPTV, no partnership is required, its purely a technology decision  AT&T has stopped its DISH partnership; its DirecTV partnership (reseller agreement) does not include a hybrid STB. The hybrid customer numbers were misreported; most DISH customers did not use the VoD capability. BUSINESS MODEL The overriding reason given for the investment in IPTV / hybrid TV is churn reduction from bundling services. Simply, a subscriber of a voice, data and TV bundle is much less likely to churn that a subscriber to just voice, or data, or TV. Churn can be reduced by up to 33% with triple play bundling. This was true across most telcos regardless of size. There are some differences in the details / focus on the churn reduction strategy:  Defensive move in reaction to increasing churn, e.g. BT;  Pre-emption in anticipation of increased churn or changes in TV market structure, e.g. O2TV in Czech Republic;  Land-grab for payTV customers, e.g. in France; and  Simply increase ARPU (note margin per user tends not to be discussed.) Service pricing is subscription based, to cover the STB cost and access to a bouquet of content necessary to be competitive with the current payTV operators (satellite and cable) operating in that country. Pricing levels are generally set by the base service package of the incumbent payTV operator. Generally on-demand pricing is set by the content owners. Advertising revenues are currently near zero as most IPTV operators‘ subscriber numbers are too small to interest advertisers, hence the channel‘s advertising is used. STB applications are generally are free, but most operators do anticipate having a premium applications at some point. OPERATOR HYBRID TV SURVEY During September and October 2009 a survey of 82 hybrid TV operators was undertaken. The focus of the survey was to gather information around their perception of the drivers; barriers and applicability of hybrid TV. The questions were posed with free form answers, hence why there is a relatively long list of responses. Figure 26 shows the range of answers to what operator through were the drivers for hybrid TV. 55 OF 93

Figure 26. What are your drivers for Hybrid TV? 3.5 3 2.5 2 1.5 1 0.5 0 k TV r ns or TV t n ts te rs ts ue s io D tw in io te st as in et uq at H tra at ne co as tra rn tf ct g ct bo ns ke dc pe te ns in k e pe or th In er co st oa ar ex co ex tw l iv a n ss m br k dc ce ti k ne or de y ne or to as th li t oa vi tw tw er ua ar in et wi ti c er br ne w ne H G tq ls p ul g Lo re ga tin m n ve ss ee co io ti a ll le IP ce at M Fi e go e- eg ac g th as ti n ne gr of e tb en om ag d y oi ee em er e rc Av li v om M ve pl de im O rc ve ify d oi pl O Av m Si The top drivers for hybrid TV are:  Avoid negotiations with broadcasters, through using the free to air service as a complement to their interactive services and additional channels. Many operators are finding this difficult as they‘re new to the business and have few customers so are in a relatively weak negotiating position.  Meet base level service expectations. That is, provide the most popular content in a channelized (not individual program based) format. As well as geographic availability of the service.  Meet quality expectations. Capacity constraints on DSL limit picture quality compared to free to air or Satellite. Interestingly the above drivers are commercial / customer experience focused; not technology focused. This reflects the maturity of TelcoTV that technology in no longer their prime focus. Next most important drivers are the simplification of broadcast delivery and mitigate access constraints. Surprisingly avoiding multicast and lowering network cost are considered of least importance. This reflects a Telcos two biggest cost items: Content and STB. Some of the constraint to hybrid TV mentioned by operators during the interviews for this report includes:  STB cost. Though additional DVB-T/C tuner should only add 10% to STB cost, STB accounts for between 45-55% of the total network cost (at target roll-out.)  In-house wiring complexity. At first this may not appear an issue, but wiring the unit twice could be too complex for self-install. The most common installation 56 OF 93

problem is customer thinks they‘re buying a telco service so connect to the DSL unit, without connecting to the aerial for the DTT service.  Broadcast and IPTV management could be different, or broadcast component could be out of SP‘s control. Generally the Telco will insert their own EPG – as this is a critical customer relationship interface.  Wholly dependent on broadcast partner and deal they allow, hence why most hybrid solutions are for the free-to-air broadcast channels only.  EPG lacks features delivered on the broadcast channel. Channel line up may be what customers‘ expect, usability could be impaired. IPTV middleware must be hybrid aware.  Subscriber management integration / complexity between IPTV service and partners broadcast service. Back to a single content and management point from the learning from AT&T‘s failure. Figure 27 shows the results of the September / October 2009 a survey of 82 hybrid TV operators, to the question, ‗What are the barriers to hybrid TV?‖  Subscriber management complexity was considered most important  Difficulty in managing two separate systems  With DTT this is mitigated as the service if free to air, so no provisioning is require  Middleware is important in masking complexity from customer, and in providing an enhanced free to air experience through using on-line channel  Conflict with the broadcast channel was next, which is why most hybrid TV solutions do not partner with another payTV provider  Next Deployment Complexity, Customer Confusion and STB Management  Simple step by step instructions (Maximum of 3 steps) or an installation service are required  Service management platform must be Hybrid aware Figure 28 shows the responses to the question on the applicability of hybrid TV to operators:  Interestingly hybrid TV is considered most important to LATAM and APAC Telcos IPTV plans, with EMEA following slightly behind  North America Telco was considered less important as they are deploying FTTH / VDSL  Generally Satellite and Cable operator are considered secondary 57 OF 93

 Eu ro Eu pe 0.5 1.5 2.5 3.5 0 1 2 3 ro T Critical Important pe elc 0 0.5 1 1.5 2 2.5 3 S o Eu a te r lli Deployment No rth o pe te complexity managed network No Am Ca rth er b Am ica le Customer Te No er ic lc confusion rth a Sa o Am te Program La er lli tin ica te guide is not La Am C integrated tin e r ab le Am ica Subscriber management 58 OF 93 er Te La ica lc complexity tin Sa o Am te lli er cia te STB cost C AP ab Figure 28. Applicability of Hybrid TV A C le STB Figure 27. What are the Barriers to hybrid TV? AP management AC Telc complexity Sa o Broadcaster partner AP tell conflict AC ite Ca However, in my discussions with a number of cable and satellite providers; Hybrid bl is equally important; though it is through HBI, not HBB delivered through a e Ease of Use

I N T E R A C T I V E S E RV I C E S A N D S T B A P P L I C A T I ON S / W I D G E T S EBIF AND TRU2WAY EBIF EBIF (Enhanced TV Binary Interchange Format) is designed for older / cheaper STBs with limited processing power and memory, such as the Motorola DCT-2000 set top. While Tru2way uses a Java VM (Virtual Machine), EBIF specifies a UA (User Agent) on the STB. An ETV (Enhanced TV) user agent is downloaded to the STB, each manufacturer has its own UA, which leads to some operational discrepancies. The ETV app can be inserted into the digital TV bit stream (MPEG-2 transport stream) of the channel being watched (bounded application), when the user agent receives the ETV application it decodes and display the clickable object on the TV screen. It enables polling, instant weather and traffic, and other simple point-and-click features. The EBIF applications can also be unbound, such as Verizon‘s FiOS service where users can experience this using the widget button on their remote to see local traffic and weather. Figure 29. Simplified EBIF Architecture Bound & Unbound EBIF Apps ETV STB Mux EBIF App Access Network EBIF UA App Server Request / Response over HTTP/TCP The EBIF content format represents a widget and byte code specification that defines one or more multimedia pages for use within an enhanced television or interactive television system. An EBIF resource file is a sequence of bytes that conforms to the EBIF content format, and is the primary information contained in an ETV Application (also call widget, but it is not a W3C compliant). An ETV User Agent in the STB decodes, presents, and executes actions contained in an EBIF resource to present a multimedia page. Applications include: • Voting/Polling: Subscribers can post their opinion about reality show contestants or politicians in a debate from their remote and see the results from their TV; • Request for Information (RFI): A user is prompted that there is more information available through mail or e-mail regarding a product or service advertised. The viewer clicks ―OK‖ on the remote and materials such as brochures or coupons are delivered to the subscriber. 59 OF 93

• Telescoping: Within an ETV application the viewer can opt to leave the current programming and jump to an on-demand video (or perhaps a microsite, see next application). • Microsites: In order to aggregate content, a dedicated channel or VOD stream can include an enhanced ―microsite‖ where a viewer can take time to browse through content, launch video on- demand or request information from an advertiser. • T-Commerce: Broadcasters can present products for sale through ETV applications. By connecting with backend order-processing systems, a viewer can submit account login information through the remote and submit an order through the television interface. Using Comcast as an example, only 15% of their STBs will be able to support tru2way by the end of 2009; while over 90% of STBs will be able to support EBIF. So the focus today is on EBIF applications. TRU2WAY Tru2way, formerly known as the OpenCable Application Platform (OCAP), has a number of capabilities including allowing digital TVs to connect to cable without requiring a set-top box, just like those old unsuccessful cableCARDs. But of relevance for interactive services is it provides a Java platform on the STB (Set Top Box) to run applications. Most of the Tru2way STBs deployed today use Java 1.1. Tru2way includes a middleware technology that may be built into televisions, set-top boxes, digital video recorders and other devices. Because the middleware is based on Java technology, it enables cable companies and other interactive application developers to ―write‖ applications once and see them run successfully on any device that supports the tru2way architecture. With Tru2way technology, consumers can access interactive digital cable programming, including video-on-demand and pay-per-view content, without the need for a cable operator-supplied set-top box. Currently within the industry there is some controversy on whether Tru2way will be implemented by most MSOs, this is in part linked to the open nature of the spec that allows any piece of CE to connect and work without a STB, and also in part to the HbbTV / DVB-MHP debate. Currently HbbTV has the industry‘s attention. Its supporters claim DVB MHP/GEM had its chance; technology and customers‘ expectations have moved on. Operators appear more circumspect, given the operational headaches in deploying the latest technology. We‘re likely to see the CE manufacturer‘s take the lead, if it works reliably at scale, and customers enjoy the experience operators will likely follow. DVB-MHP (MULTIMEDIA HOME PLATFORM) AND GEM Multimedia Home Platform (DVB-MHP) is an open middleware system standard designed by the DVB project for interactive digital television. The MHP enables the reception and execution of interactive, Java-based applications on a TV-set. Interactive TV applications can be delivered over the broadcast channel, together with audio and video streams. These applications can be for example information services, games, interactive voting, e-mail, SMS or shopping. For all interactive applications an additional return channel is needed. 60 OF 93

The MHP specifies an extensive application execution environment for digital interactive TV, independent of the underlying, vendor-specific, hardware and software. This execution environment is based on the use of a Java virtual machine and the definition of generic APIs that provide access to the interactive digital TV terminal's typical resources and facilities. The interoperable MHP applications are running on top of these APIs. A so-called Navigator-application, which is part of the terminal software, allows the user the access to all MHP applications and other DVB services (like TV and radio). The MHP is just a part of a family of specifications, which all base on the Globally Executable MHP (GEM)-Standard, which was defined to allow the worldwide adoption of MHP. Within the DVB MHP/GEM group there is some consternation that the wheel is being re- invented given the coverage of their standard across most of the hybrid TV space; there is also a degree of concern on the maturity of CE HTML/Flash based solutions compared to DVB MHP/GEM. The purpose of this report is not to get into a technical discussion, rather simply report on the current standard of standardizations, that simply operators have a number of interactive TV choices. WTVML WTVML (Worldwide TV Mark-up Language) is a content format for the delivery of Interactive TV applications using Internet Servers. The system is an Interactive television technology platform comprising a microbrowser, a markup language. It is predominately used by the Sky Interactive Developers' Programme, it did not achieve significant adoption across the broadcast industry. The microbrowser and markup language are both based upon the Open Mobile Alliance WML 1.3 specification. The WTVML microbrowser is currently available as an OpenTV application, although an MHP version of the browser has been built for demonstration and proof of concept. The WTVML markup language is a heavily extended superset of the WAP Forum WML 1.3 specification. WML content originally designed for wireless delivery to mobile phone handsets will work without modification on the WTVML platform. The microbrowser and the WTVML markup language were originally developed by Ian Valentine, Patrick Sansom and Andy Hynes who founded WAPTV Ltd. The company and its technology was partly acquired by British Sky Broadcasting in 2001. Platform development has continued within BSkyB, and version 7 of the microbrowser and WTVML markup language was released in Q3 2004. The microbrowser and WTVML markup then became the cornerstone of British Sky Broadcasting's interactive platform strategy. The platform brings internet-style content and interactivity to the Sky Digital platform by deploying a purpose-built WML microbrowser to the Sky Digital set-top-box over the satellite broadcast stream. Web site owners simply have to serve well formatted WTVML from their web servers to allow Sky set-top boxes and consumers to fully interact with their web services. In March 2007, Sky together with some of the Waptv founders "spun-off" the technology into a new Company Miniweb Technologies Ltd, with the goals of furthering the work on WTVML in a global forum, and enabling the deployment of the system in other networks and devices. One of the goals in the foundation of Miniweb was to facilitate the interoperability of Interactive TV content and Services across multiple types of TV network and devices, as it was considered that a lack of TV Centric internet standards has inhibited the ubiquitous deployment of Internet services to TVs. 61 OF 93

New IPTV networks have the need for a TV Browser in their set-top boxes and various solutions exist, however as of 2007, the WTVML microbrowser is probably the widest deployed TV Browser and has a growing community of compatible Interactive TV Sites. TV Sites for the OpenTV based Microbrowser are therefore web sites with a WTVML skin, and are often given a "wtv." sub-domain rather than a "www." sub-domain. Until the introduction of Sky HD in 2006, most Sky set-top boxes uses a standard 28.8 kbit/s modem to pull content across the online link. Because WTVML content is compiled into an encoded format by an online gateway before transmission, it must be decoded on the set-top-box before it can be drawn to the screen. For optimal performance it is recommended that WTVML files (decks) for download are no more than 70 K in size, with individual cards within each deck no more than 5 K in size. When fully loaded, the browser comprises three separate virtual layers, devoted to MPEG-4 & JPEG still image presentation, MPEG video presentation and OnScreen Display (OSD) presentation respectively. Developers can combine modes to produce very rich and diverse interactive TV interfaces. Multiple modes can be defined as a modeset. Different modes in the modeset can be referenced from the WML cards and associated with service domains, allowing the browser to change its style as the user navigates from one service to another. A modeset is a collection of one or more modes defined in a standalone XML file. A modeset is referenced at deck level from the mode attribute of the wml element. A developer can define multiple modes within a single modeset, and can initiate changes between Modes within that Modeset at card level. The microbrowser can access Broadcast Resources as well as online resources delivered from a WTVML enabled web server. Broadcast Resources are content elements that are delivered in the satellite broadcast stream. Sky UK is the leader in WTVML implementation, but WTVML had not achieved significant market interest from other payTV operators. CE-HTML CE-HTML (Consumer Electronics Hyper Text Mark-up Language) is a language for creating web pages for Consumer Electronics (CE) devices such as televisions. CE-HTML is optimized for the 10-foot user interface (TV) for easy control from a distance. It is profiled on XHTML and associated standards with special CE-HTML extensions. CE-HTML was developed within the Consumer Electronics Association R7WG9 working group (mainly TV manufacturer) to solve the problem of displaying HTML on a TV. TVs have problems displaying regular web pages because:  Small fonts and images that are not readable from a distance;  Only mouse or keyboard based navigation, not navigable using the remote control;  No highlight on the navigable elements so a user cannot easily see the element they can navigate; and  No standard audio/video object implementation. 62 OF 93

CE-HTML has been adopted in standards such as the Open IPTV Forum, the Digital Living Network Alliance and HbbTV. There are currently a number of browser vendors that have CE- HTML capable browsers, e.g. Espial, which is based on Webkit. Philips released the first televisions that support CE-HTML through the Net TV feature in Europe in April 2009. OTHER STB APIS The middleware of the STB defines the APIs applications use. For broadcasters they have a range of options including: MHEG5, DVB-MHP, ATSC-DASE, CE-HTML and ARIB-BML. Telco TV middleware suppliers have tended to build their own APIs / SDKs middleware suppliers include: Microsoft, Thomson, DreamPark, Minerva, Orca (acquired by France Tel), NDS, OpenTV, UIEvolution, Ant, Access, NSN, Huawei, Ericsson, UTStarcom, Seachange, and Cisco. Though in many cases TelcoTV middleware supports standards, e.g. Espial supports DVB MHP and CE- HTML. VERIZON CASE STUDY Verizon uses three interactive technologies, as shown in Figure 30; the DVD VM (Virtual Machine) enables customers to view the DVD extras available on purchased DVDs, rather than just being able to watch the movie, for top titles this can be charged for, while for back-catalog it provides differentiation from other VoD providers. EBIF is used for bounded applications, for example during the Winter Olympics; additional information was available through EBIF. Then for its interactive applications Verizon is using a scripting language called LUA. The architecture is shown in Figure 31, the Lua virtual machine enables web service calls, which allows the STB widget to mash-up data / services; for example network APIs or web services such as a Twitter feed. Figure 32 shows the user interface for widget discovery (store) and the Twitter widget. Lua is a lightweight programming language, designed as a scripting language with extensible semantics. Lua has a relatively simple C API compared to other scripting languages. Because both Lua and JavaScript use prototype-based objects and were influenced by Scheme, they feature many common semantics, despite the great differences in syntax. Lua has been used in many applications, and especially in the video game industry. Figure 30. Verizon‘s STB interactive Technologies LUA Focus of Widget Bazaar In-channel interactivity, e.g. EBIF Winter Olympics on NBC DVD Extras, e.g. when rent a DVD movie 63 OF 93

Figure 31. Verizon Architecture ….. Web Widget Widget service call Lua Virtual Machine FiOS TV Widget App Framework & Store FiOS TV APIs STB Middleware STB Core Figure 32. Verizon Widget Bazaar and Twitter Widget (source Verizon) 64 OF 93

SKY UK CASE STUDY Sky UK is the leader in interactive TV with 62% penetration of Sky+ DVR service (5.9 million homes, as of Q3 ‘09) and a long track record in interactive TV. SkyNet was the first open 3rd party app model for TV launched in 2005. The only one that offered an automated test and deploy workflow for the 3rd parties – still not replaced. Scale is the problem for advertisers, available inventory is negligible compared to linear programming. Sky‘s current focus is a new interactive EPG (across STB, mobile and PC) to make Sky‘s service stickier (reduce churn to digital TV competitors) and drive greater TV consumption. Figure 33. Example of WTVML Page Figure 34. SkyNet Overview SiteControl SKY’S DIAL UP or IP NETWORK GATEWAY TV access “wtv” sites PC access “www” sites THE INTERNET www server wtv server Your web content 65 OF 93

INTERACTIVE SERVICE AND APPLICATION / WIDGET ROADMAP Some of the categories being created by operators include:  Web service access: Twitter, YouTube, Facebook, Google, Flickr, Yahoo!, News, etc But linked to the STB context, for example Twitter could be about the current show, not just the customer‘s Twitter feed. Facebook could link to a STB Facebook App where customers can share with their friends what they‘re watching. Also FB provides a simple way for people to see which of their friends are also using the same TV service provider.  Microsites: could be campaigns for products offering more information than can be contained in the 30 sec commercial, more information from a program, or more in- depth coverage of the news.  Converged Communication Services: from the basics of being able to send an SMS from the TV (useful when the prepaid balance has run out, and pocket money is still a couple of days away), through to more sophisticated applications that allow customers to see the status of friends and message from the STB (usually canned – e.g. R U there?) to calling (possibly video).  Network enabled applications: Social TV, enabling customers to share and chat with their friends on other STBs, mobile and PC.  Standalone Games: where high scored can be published to a leader board.  Social Games: play online with friends or others customers.  Customer Service: store front for operator to present all the services it offers across TV, broadband and mobile; as well as a way for customers to see their bill or make changes. This should be part of an integrated CRM plan across the web, physical store, mobile and STB.  Betting / shopping  Local search: e.g. local pizza with a microsite for the menu and ordering.  Local / regional / national e-Government and e-Health 66 OF 93

OV E R T H E TOP P R OV I D E R S OVER THE TOP TV OPTIONS Over The Top TV covers a broad range of players, from the traditional broadcasters and content owners, through social networks and struggling online TV networks, to brands and internet TV-led programming, as shown in Figure 35. The plurality of models reflects the storming phase of market development enabled by the internet supporting adequate video content delivery. The content owners / broadcasters have had significant customer engagement, e.g. the BBC iPlayer had 120M requests in January, and because of the capacity required to support streaming video have significant impacted ISP‘s networks. YouTube was only founded in 2005, yet remains the dominant OTT site, though we‘re seeing Hulu and BBC iPlayer catch up. Simply, quality counts, YouTube provides a fun snack, while Broadcasters provide a ‗full meal‘ of content. Increasingly social networks have adopted video capabilities, enabling people to share their videos, or share amusing or interesting videos from other websites amongst their friends. Those old enough will remember the days in the ‗90s when people would clog-up inboxes by sending amusing videos by email. The flatness of the internet enables some producers to publish directly on the internet, avoiding the challenges vagaries of pitching to network executives, instead letting the customer decide directly. Also brands have started to use OTT TV for the direct delivery of video content to customers, for example the car manufacturers. I remember in many early IPTV discussions attempting to develop the interactive advertising concept for adverts to break-out into an on-demand video of the car being advertised. Instead the car brands have gone direct. This was always a tough model to for the TV; it highlights the fundamental nature of the lean-back and lean-forward experience of the TV versus the PC. When shopping for a new car, or admiring your favorite car, its more lean forward than lean-back. Hence the fit to the TV was never strong. Figure 36 shows some of the key trends we‘ve seen in TV consumption to arrive of the rich set of OTT models. The evolution is broken into 3 phases, though not technically correct, for example time shift TV can be shown using analog TV with NVOD (Near Video On Demand), its purpose is to highlight some of the main trends, in consumption from a live consumption model on one TV set in the living room, to multiple channels with time-shifted TV across multiple TVs within the home, to consumption anytime, anywhere on any device. Examining the trends in power bases in Figure 36, payTV networks have created a rich programming environment and enabled a subscription revenue model, which has overtaken advertising as the main revenue source for the industry. But the content owners now have the opportunity re-establish a direct relationship with customers. This will depend in customers, will they remain consumers of a bundle of channels, or will they want to watch what they want when the want and only expect to pay for that consumption. Of course when it comes to the mass market nothing is entirely replaced, we‘ll see a spectrum of consumptions models, from the retired couple that‘s happy with their broadcast channels, through to the time poor professional couple that have a few specific programs they watch. So subscription will likely not go away, but programmatic content purchase will grow, e.g. rather than purchasing $50 per month of 500 channels most of which they never watch, some customers may buy $30 per month of season passes to specific shows and channels. 67 OF 93

Figure 35. Plurality of OTT Options Traditional TV Social Networks Online TV Internet TV-Led Brand-Owned Goes Online AS TV Networks Programming Online TV Figure 36. Trends in the Evolution of TV Evolution of TV Phase 1: Analog TV Phase 2: Digital TV Phase 3: Internet TV Consumption Live, on the TV set Themed channels, Anytime, anywhere, time shifted TV any device, Broadcast Network PayTV Networks PayTV network bypassed, Access direct channel/content TV channel gatekeeper Multichannel providers owner relationship Multi-channel TV, time Personal TV, Service Broadcast TV shifted TV / VoD Social TV Program purchase, Funding Public, Advertising Subscription, Advertising Advertising Content owners, Broadcast Content owners, Device Content owners, Broadcast / Cable Channels, PayTV manufacturers, Search Power bases channels networks engines, Social networks 68 OF 93

On the trend in services shown in Figure 36, broadcast TV started it all, Digital TV added multi- channel and time shifted TV, and the Internet TV age has added Social TV and Personal TV. Broadcast, multi-channel and time-shifted TV still exists; we‘ve just added new services that will engage specific audiences. This remains the biggest uncertainty in this emerging internet TV age; the speed at which specific segments of the customer base will adopt the new consumption models and which segments will shift their behaviors from today‘s multi-channel model. Underlying the TV landscape are four power bases fighting it out, as shown in Figure 37. There‘s network power, the telcos and MSOs; there‘s device power, the consumer electronics manufacturers such as Samsung and Apple; there‘s computing power of their data centers which have redesigned the internet from Google, Amazon and Microsoft; and finally but most importantly there‘s content power of the seven major studios which owns the content people want to watch. I show between content and computing power YouTube and Facebook, as they harness UGC (User Generated Content – snack TV) and simply provide a way to either search for content or find recommendations. At the center of this landscape is the Customer, which has relationships with all, though with the studios it is generally through a payTV provider and Broadcast / Cable Network. Disney is an exception which builds a strong direct relationship. I highlight Hulu and TiVo as examples of two services that are impacting how customers consume TV, currently Hulu is on the PC, or in many cases on a laptop somewhere in the house. TiVo separates the customer from the payTV provider, and acts as a service platform for such things as Amazon-on-demand, and possibly in time Hulu. In the limit the customer will decide, and their decisions are likely to be based on their specific personal needs (e.g. professional time-poor family wanting to control specifically what programmatic content their children watch; through to a more traditional family that is happy flicking through lots of familiar channels), so the market is unlikely to move in one direction. However, Figure 37 shows there are some large organizations vying for customer attention. Briefly examining the trajectory of the power bases:  Network power will focus on bundling of communication services. Need to focus on social TV, protecting the customer data, maintain viewing times which remains attractive for both content owners and advertisers alike – creates a business model that will be tough to break without customers making a definitive move in how they consume content.  Content power will use all channels to ensure they‘re in a strong bargaining position, and determine if they can make more money through customers choosing programmatic content directly, or if the old multi-channel model is still best.  Device power will focus on selling their equipment, not interested in selling services, so will act as a service platform for content owners and web service providers alike.  Computing power will innovate in business models, social networks, consumption models, and customer experience. For example Amazon-on-demand providing recommendations on content, with just one click from the PC content is made available on the TV, TiVo or DVR.. 69 OF 93

Through the coming decade customers are in for both an exhilarating and confusing ride as they will have multiple options for consumption, with multiple qualities of service and experience, with multiple price points making it very difficult to compare what is being offered. Just like the old days of mobile telephony in the US where the price plans were so complex even the people selling the service did not know. Figure 37. TV Landscape Content Power Studios Broadcast / YouTube, Cable Networks Facebook Hulu Google, Network Telcos & Amazon, Computing Power MSOs Customers Power Microsoft TiVo Consumer Electronics Manufacturers Device Power TRADITIONAL TV GOES ONLINE The UK provides a great example of how traditional broadcasters have successfully taken their content online. And have played a major role in helping the mass market adapt to the idea of watching TV online. Their critical advantages include quality of existing content, user recognition, and existing ‗trust.‘ During the month of January 2010, requests for the BBC iPlayer across all devices including Virgin TV, topped 120 million, driven by on demand viewing. While iPlayer is used for TV at roughly the same time of day as linear TV viewing, on demand makes up the great majority of TV program requests with only 8 per cent of requests were for live simulcast streams, although two thirds of requests for radio streams are for live programs. PCs remained the firm favorite for viewing iPlayer content, accounting for around 87 per cent of all traffic, with mobile devices delivering only a thin sliver of requests. The stats do show just what other kinds of devices will contribute to the bandwidth crunch, with the Sony PlayStation 3 and the Nintendo Wii accounting for eight per cent and four per cent of requests respectively. 70 OF 93

Some historical data for the BBC iPlayer in December 08 alone saw 41m requests for programs, that‘s 300% growth in just over one year. BBC iPlayer total requests in 2008 were 271m. Advertising model for online content has the advertisers on online TV pay a premium compared to broadcast TV. This is justified via demographics, and the value of exclusivity & click-ability, i.e. click-ability can send viewers directly to main/central brand websites. COMPARING UK OTT PROVIDERS BBC IPLAYER The BBC iPlayer provides free services to UK residents (through UK based IP addresses). It has achieved in just a few years significant engagement across the UK, with 120m requests in January 2010, and a demographic shown in Figure 38 that is relatively broad-based across age ranges compared to the youth dominated viewership of YouTube. Figure 38. BBC iPlayer Demographics (source BBC) Average UK Pop 33%* 55+ Average UK Pop 30%* 21% 15-34 42% 35-54 37% * % of UK national population excluding Average UK Pop 37%* under 15s Source: BBC 2009 The content provided by the BBC iPlayer is all BBC broadcast and radio programs, plus imported and overseas programs. Catch up period is 7 days, 30 days for downloads. To receive the service the iPlayer download manager is required which runs on the following platforms:  PC/Linux/Mac  Game consoles (Wii, PS3, Xbox)  Home Media Hubs  Mobiles (iPhone)  Portable Media Players (PMP) 71 OF 93

SKY PLAYER Sky Player offers a wide variety of programs including Live TV and Sky Movies as part of an existing TV package, i.e. the user must already be an existing Sky customer. However, access via different platforms is limited. Content includes 500+ films, 1000+ episodes from 25 channels, with highlights from Sky Sports. Catch up period is 30 days, with 48 hrs for rentals, and 7 days for downloads Platform availability is currently PC/Mac for the Sky Player Software. Ads run during live streaming only. On-demand pricing: Free for customers with packages ranging from £7.50 - £30 per month, £1 per program and £2 per film download. ITV PLAYER ITV Player streams all popular ITV shows plus high demand programs, such as FA Cup highlights for free, all without the need for registration. . This is supported through adverts. Content includes all ITV programs plus highlights from ITV Sports. Catch up period is 30 day, 48 hours for downloads. Platform availability: PC/Mac, Software requirement: Microsoft Silverlight. Advertising: Ad breaks every 15 min. On-demand pricing: Free 4OD (CHANNEL 4 ON DEMAND) 4oD provides users with multiple options for high quality content available on pre-booking and catch up service, and requires very little technical skills from users. Content: 1000+ programs and films across all C4 channels as part of the 40 Freeview channel package. Catch up period: 30 days, 48 hours for downloads. Platform availability: PC. Software requirement: 4oD. Advertising: Built-in adverts. On-demand pricing: Free for streaming, archives and US dramas, £0.99 per rent, and £1.99 per download. DEMAND FIVE Demand Five offers a mixture of free and paid for programs. It has a great choice of programs including a number or popular entertainment shows and overseas films, however it can cost more than you bargained for. Content: All programs across Five channel, plus high profile entertainment programs. Catch up period: 30 days, 48 hrs for downloads. Platform availability: PC, PMPs and TVs with VGA or S-video cable. Software requirement: My Five Player. Advertising: Ads before programs. On-demand pricing: Free, £0.99-£1.99 for rentals PROJECT CANVAS Project Canvas is a proposal for a hybrid TV platform that would combine broadcast TV, via digital terrestrial (Freeview) or digital satellite (Freesat), with OTT catch-up TV services, such as the BBC iPlayer, ITV Player, 4oD, and Demand Five. The platform would also give access to public services and e-government web sites, such as www.bbc.co.uk , www.direct.gov.uk , and www.nhsdirect.nhs.uk (National Health Service), as well as UGC sites such as YouTube and Flickr. 72 OF 93

If the proposal is approved, then compliant STBs are expected to be available in U.K. retail outlets in 2010 (in March 2010 Project Canvas announced the selected STB suppliers), and cost from £100 to £200 ($150 to $300). Devices will support HDTV, and many will include DVRs. Project Canvas is positioned to extend Freeview and Freesat into the hybrid world, and is designed to prevent such viewers from being technologically disadvantaged relative to digital cable, IPTV, and satellite subscribers, who will all have access to a wide range of on-demand content. The proposal is for a set of specifications (effectively, a set of common standards for OTT-TV) and a marketing consortium that would promote the platform and license it to consumer electronics manufacturers. It was developed by a consortium including the BBC, ITV, and BT. The BBC has submitted it to the BBC Trust for approval. The U.K. has experienced one of the most-successful DTT rollouts in the world, and this is largely due to the marketing power of the BBC. If Project Canvas is approved, then the rollout of hybrid DTT-OTT services in the U.K. is likely to be successful, especially given the widespread awareness of the BBC iPlayer service. Consumers will be able to buy a STB in a retail outlet and then receive catch-up TV services, such as the BBC iPlayer, on their TV sets with guaranteed QoS. The consumer value proposition will be so strong that any ISP that doesn't support Canvas is likely to lose subscribers to ISPs that do. Similarly, any content provider that doesn't support Canvas is likely to lose audience to those that do. Currently Project Canvas is undergoing a series of reviews, essentially political delays due to poor economy limiting political will to invest, it‘s currently unclear if Project Canvas will reach deployment given the publishing of the HbbTV specification, which will likely impact the path Project Canvas takes to avoid a UK-specific specification. Although the core Canvas proposition is Free To Air (FTA), the platform is likely to include optional pay-TV services. For example, BT's IPTV service, BT Vision, is planning to market its pay- TV content through Canvas. As an IPTV service, BT Vision has to maintain an expensive infrastructure, and can only market its services to BT's consumer broadband subscribers. As part of Canvas, BT Vision will just pay carriage fees, and can then market its content to any compliant ISPs' subscribers. This highlights that Canvas defines a new value chain that lies between traditional OTT services (where Internet access is a commodity, but there's no guaranteed QoS) and traditional IPTV services, where there's guaranteed QoS through vertical integration. This, in turn, leads to the issue of net neutrality. The traditional net-neutrality debate poses a dichotomy:  With net neutrality, all traffic must be treated equally and move at the same speed over an ISP's network. This prevents ISPs from holding content providers to ransom, but turns access into a commodity and provides no QoS guarantees for consumers or content providers.  Without net neutrality, ISPs are free to create tiers of video service and charge accordingly, either bundled or a la carte. In principle, this allows consumers to choose to pay for the quality of video they prefer. In practice, ISPs would have the ability to treat different content providers differently, which could be anti- competitive. 73 OF 93

Project Canvas points to a possible third way between these two poles. Under a Canvas system, the platform would be open, which would remove the ISP's power to control access to content. However, there would be guaranteed QoS, which would be better for consumers and content providers than the current unpredictability of the public Internet, and in some cases capping of traffic by ISPs. CONSUMER ELECTRONICS MANUFACTURERS SHARP Along with new screen technology, Sharp Internet enabled televisions will have access to the ―Sharp Aquos Network portal‖ that will included widgets that includes a Navteq traffic report map. The Aquos Network doesn‘t include web video yet, but there‘s a reason, the new line of TV‘s includes built in Blu ray players. TOSHIBA The new internet enabled televisions from Toshiba include the cell processor best known for being the power behind the PlayStation 3. Primarily the chip will deliver ultra-high definition viewing, but it also opens the TV up to a number of other features. According to specs, as well as offering DVR functionality built in, the televisions will support the Intel / Yahoo Widgets platform. The platform isn‘t as open as say a web browser, but does allow developers to build on it, and when first launched last year included promised on video on demand. The down size is costs, with the new sets to be offered in the $5-10,000 price range. PANASONIC The lineup for 2009 expanded three series; the Z1 series, the V10 series and the G10 series. Panasonic offers its own internet platform under the VEIRACAST brand. Content includes YouTube, Picasa Web Albums, Bloomberg and weather service; and newly announced HD movie rental via Amazon Video-on-Demand. LG LG made the announcement of an internet enabled TV. The sets will offer the Intel / Yahoo Widget engine and content from YouTube and Netflix. WINDOWS MEDIA EXTENDER Samsung and Toshiba have pledged support for Windows Media Extender, although it‘s not clear if this will be available immediately. This will open up both to extra content. 74 OF 93

PHILIPS ELECTRONICS Philips Electronics joined forces with IP software specialist, Global Digital Broadcast (GDBTV), to launch the first television set with a fully-integrated IPTV service, creating a platform which is seven times the size of Sky. In the converging media landscape, with numerous service and software providers competing for pieces of the broadcasting pie, many were so busy extolling the virtues of their all-singing, all-dancing "solutions", they forgot to listen to the voice of the consumer. Now, with the partnership between 'the people's' electronics company and GDBTV, that voice has been heard and the demand for a simplified, unified internet protocol television service has been met. SAMSUNG Samsung has pledged to bring the internet to the living room with the launch of a new service that enables viewers to access the web on their TVs. The Internet@TV service, developed in partnership with Yahoo!, means that owners of some of Samsung's newest televisions will be able to check the news headlines, the week's weather forecast and even sports results from their sofa using their remote control. It's all thanks to a series of customizable "widgets" – small software applications that can be run on the television, and called up at the press of a button. It means viewers could be watching a film at the same time as monitoring an eBay auction, or viewing photos on Flickr. SONY Sony has joined the Netflix stable of device suppliers who will offer consumers a direct TV to Internet viewing experience. In this case, it‘s the Netflix lineup of more than 12k movies available for subscribers at $8.99/month. INTERNET TV AND BRINGING IT BACK TO THE TV InternetTV has had a short history, as shown in Figure 39. By the end of 2009 YouTube received 90M visitors in Dec, compared to Hulu‘s 9M. Given program lengths are about 10 times as long in Hulu, viewership could be considered equal (eyeball*time). Keep in mind Hulu is just focused on the US market but will be expanding internationally, while YouTube in global and is adding premium content services. Though Hulu is loosing some popular content from Viacom (John Stewart‘s Daily and the Colbert Report) so it will be interesting to see what 2010 holds, will either reach profitability this year? But its clear customers like to watch on-demand content, especially when it‘s ‗free.‘ Given the vast array of content available on the internet, a number of companies have started to bring that content back onto the TV, as listed below. 75 OF 93

Figure 39. Internet TV‘s short History YouTube YouTube YouTube bought by 90M Hulu or Launched Google visits in YouTube, Dec which one Viacom lawsuit becomes Fox and ABC Hulu 9M proftiable? NBC launch joins visits in Hulu Hulu Dec BBC iPlayer BBC iPlayer reaches 120M launched requests in Jan 2005 2006 2007 2008 2009 2010 MINIWEB Miniweb addresses a number of problems in the convergence of the broadcast and broadband experience:  Internet video has, to date, only worked on PCs: With the wide range of internet content that can only be displayed on PCs, viewers have not been able to enjoy a seamless and personalized entertainment experience based around the TV. Miniweb solves the problem of getting internet video onto the TV.  No interoperable, global, commercial, neutral broadband TV platform: Miniweb is device and network neutral allowing content owners to reach wide, connected-TV audiences and viewers to discover and consume a wide range of internet video content through their TV.  Web sites don‘t work on TV: viewers don't interact with content on the TV in the same way as they do with their PC. Content viewed on a TV needs to be easily navigable using a remote control and presented in a TV friendly way. Miniweb is the creator of WTVML.  TV advertising is not measurable or targeted: advertising spend is moving from the TV to the web as advertisers look for ways to measure and increase their ROI. Miniweb provides relevant advertising capability based on viewer preferences to combine the trackability and targeting of the web with the mass reach of the TV.  No standards for interactive content authoring: any companies have developed their own 'walled-garden' solutions, but there needs to be a shared, open standard 76 OF 93

enabling content owners and businesses to be able to build their interactive services once, then be able to deploy them across multiple networks.  No web-style business models yet on TV: content owners, advertisers and network operators need to find a way to monetize interactivity on TV by adapting successful web business models. Miniweb provides a suite of services through its managed platform making it quick and easy for any organization to deliver and benefit from services delivered to internet connected TVs. Miniweb‘s proposition is broader than just getting InternetTV onto the TV, it is in some ways closer to the interactive components of TiVo, see below. BOXEE Boxee is a cross-platform freeware home theater PC program designed for the living-room TV. Marketed as the first ever "Social Media Center", Boxee enables its users to view, rate and recommend content to their friends through many social network services and interactive media related features. Boxee is still in its early development stages and is currently only available as beta version releases for Mac OS X, Windows, and Linux, as well as Apple TV, for computers with x86 architecture processors. The first public alpha of Boxee was made available on the 16 June 2008, and the first public beta version was officially released for all previously supported platforms on 7 January 2010. The developers of Boxee have stated that their goal is to have Boxee media center software run on as many third-party hardware platforms and operating systems as possible, and they recently released a dedicated set-top box (hardware) called "Boxee Box" in cooperation with D-Link which is the first "Powered by Boxee" branded device to be announced. Boxee supported NBC Universal's Hulu quite early on, but in February 2009, was asked by Hulu to remove the service at the request of Hulu's content partners. Boxee later reinstated the feature using Hulu's RSS feeds, but Hulu once again blocked access. Boxee recently introduced a new plugin architecture based on the Mozilla corebase architecture for plugins, since this is the same core architecture that Firefox uses Hulu will see Boxee as any other Mozilla browser so Hulu doesn't block the app. Hulu's latest attempt to thwart Boxee involves JavaScript scrambling. TIVO TiVo is digital video recorder (DVR) with a service fee. TiVo was introduced in the United States and is now available in New Zealand, Canada, Mexico, Australia, Taiwan, and the UK. TiVo DVRs provide an electronic television programming schedule and features such as Season Pass recordings which records every episode of a series; and WishList searches which allow the user to find and record shows that match their interests by title, actor, director, category, or keyword. TiVo also provide a range of features when the TiVo DVR is connected to a home network, including film and TV show downloads, advanced search, personal photo viewing, music offerings, and online scheduling. TiVo has added a number of broadband features, including integration with Amazon Video on Demand, YouTube, Jaman.com and Netflix Watch Instantly, offering users access to tens of thousands of movie titles & TV shows right from the comfort of their couch. Additionally, 77 OF 93

broadband connected to TiVo boxes can access digital photos from Picasa Web Albums or Photobucket. Another popular feature is access to Rhapsody music through TiVo, allowing users to listen to virtually any song from their living room. TiVo also teamed up with One True Media to give subscribers a private channel for sharing photos and video with family and friends. They can also access weather, traffic, Fandango movie listings (including ticket purchases), and music through Live365. In the summer of 2008 TiVo announced the availability of YouTube videos on TiVo. The TiVo service was launched in the United Kingdom in the autumn of 2000. It sold only 35k units over the next 18 months. Thomson, makers of the only UK TiVo box, abandoned it in early 2002 after BSkyB launched its Sky+ integrated 'set-top' decoder and DVR which dominated the market for DVRs in homes subscribing to BSkyB's paid-for satellite TV service. Many manufacturers, including Thomson have launched integrated decoder boxes/DVRs in the UK for other digital platforms, including free satellite, terrestrial, cable and IPTV. On 24 November 2009, Virgin Media entered into a strategic partnership with TiVo. Under the agreement, TiVo will develop a converged television and broadband interactive interface to power Virgin Media's next generation, high definition set top boxes. The terms of the deal are not disclosed. TiVo will become the exclusive provider of middleware and user interface software for Virgin Media's next generation set top boxes. Virgin Media will become the exclusive distributor of TiVo services and technology in the United Kingdom. Virgin Media currently anticipates its first TiVo co- branded product in 2010. As payTV providers added DVR capabilities to their STBs competition has grown. As of October 2009, TiVo has 2.76 million subscribers in the US, down from a peak of 4.36 million in January 2006. Hence, why TiVo has modified its business model to work in partnership with operators in markets that are not as receptive for its proposition. WALMART / VUDU Vudu in 2010 said it would no longer make its own set top box but would rather stream movies via other companies‘ devices. The Vudu Box is designed to exist separately from both a computer and cable/satellite television system. A user must only provide a broadband Internet connection to use the service. Users do not pay a monthly subscription fee; instead they add a selected amount to an online account which is depleted depending on how many movies the user rents or purchases. Users can purchase and rent movies via the set-top box or through the company‘s website. On February 24, 2009, VUDU became the first on-demand service to offer high-definition movies for download to own. Prior to VUDU allowing users to purchase high-definition movies, studios only allowed their films to be purchased in standard-definition format. LG was the first to integrate VUDU into their HDTVs, with access beginning in August of 2009 though the TV's NetCast application. On Jan. 8, 2010 Vudu announced it was abandoning its set top boxes and would provide its service to select HDTVs and Blu-ray players from LG, Mitsubishi, Samsung, Sanyo, Sharp, and Toshiba. The company also announced its Vudu apps platform for delivering internet services including embedding Wikipedia links in its movie descriptions On February 22, 2010, Wal-Mart announced that it was acquiring the company for a reported $100 million. 78 OF 93

APPLETV Apple TV is a digital media receiver made and sold by Apple. It is a small form-factor network appliance designed to play digital content originating from the iTunes Store, YouTube, Flickr, MobileMe or any Mac OS X or Windows computer running iTunes onto an enhanced-definition or high-definition widescreen television. Apple TV can function as either a home theater-connected iPod device or a digital media receiver, depending on the needs of the user.. The devices started shipping on March 21, 2007. This initial version shipped with 40 GB of storage. A second version with a larger 160 GB hard disk started shipping on May 31, 2007. Since the launch, sales appear to have grown: in the fourth quarter of 2008, sales were triple that of the fourth quarter of 2007.[ On September 14, 2009, Apple discontinued the 40 GB model, leaving the 160 GB model as the sole Apple TV offering. AMAZON ON DEMAND Amazon Video On Demand (VOD) is an Internet video on demand service, only available in the United States, offered by Amazon.com which offers television shows and films for rental and purchase. The service became available on September 7, 2006 as Amazon Unbox. On September 4, 2008, the service was rebranded as "Amazon Video on Demand.‖ Amazon.com describes the content as "DVD quality". The average video bit-rate of an Amazon Unbox download equals 2500 kbit/s; this means that a two hour movie consumes roughly two gigabytes (2 GB) of storage space. In comparison, a typical DVD averages 5600 kbit/s, which makes a 2-hour movie about 4.7 GB. However, Amazon uses the VC-1 codec, a more modern codec than MPEG-2, which is used on DVDs. VC1 achieves a higher quality picture at a smaller file size. The quality for the TiVo files is advertised as being 2800 kbit/s and as being "of equal or better quality than videos recorded at the Best Quality setting on a TiVo Series2 DVR." Due to the large size of the files being downloaded, the service requires a broadband internet connection capable of sustaining transfer speeds of 800 kbit/s. A 2-hour movie may take 7 hours and 20 minutes to download using a 750 kbit/s DSL/cable connection or 1 hour and 50 minutes with a 3.0 Mbit/s DSL/cable connection. Amazon asserts that for customers with an internet connection of 3 Mbit/s or more, any Unbox file will start playing within 5 minutes. In November 2007, TiVo enabled "progressive download" for content so that users may watch downloaded files before the download is complete. Users of the streaming video on demand service need only a web browser with the 32 bit Adobe Flash plugin to stream videos. For transfer to portable device, the service requires the installation of a client application which manages playback and the transfer of video to portable devices that bear the Microsoft PlaysForSure certification, such as the Creative Zen or a Portable Media Center. For use with a TiVo DVR, no client application is needed. The user only needs a broadband enabled (and connected) Series2 or Series3 DVR. Sony BRAVIA TVs require an Internet Video Link to play Amazon VOD videos. Some models come equipped with this device; for other DMeX- capable models, a separate device must be purchased and installed. It is also available on Panasonic 79 OF 93

TVs with VIERA CAST; and available on Samsung 650 series and above HDTVs, as well as newer Vizio and LG TVs. The cost of episodes and series available from Amazon on Demand vary from 99c to $2.99 per episode, complete series are available for $5-$20. A critical experience difference competed to PayTV on demand services is selection is made through the PC, hence the experience is far more refined than via the TV. CUSTOMERS‘ CRITICAL MATH For customers that are more movie and show-centric in their viewing, that is sports programming is not a deciding factor, and taking a US centric view of the cost equation as shown below, customers are currently paying a up to an additional $600 in taking a Cable or Satellite service compared to an OTT approach. Now the decision is more complex than that as picture quality also matters and there is the risk that their ISP may start charging, capping or rate limiting the customer hence impacting the analysis shown below. Cost of premium Cable per year ($137.5) $1650 Cost of premium Satellite $1460 Cost to Replace Cable Digital antenna (local free to air) Free-$50 Hulu+ $120 Joost, YouTube, Fox, other websites Free Netflix on Demand $120 Cost of box (TiVo, PS3, Wii, Xbox) Free-$80 Amazon on Demand $778 (one show per week night in HD, 2:99) Total $1018-1148 Cost of laziness up to $632 NETFLIX Netflix offers online flat rate DVD and Blu-ray Disc rental-by-mail and video streaming in the United States. The company was established in 1997 it started its subscription service in 1999. In 2009 it was offering a collection of 100,000 titles on DVD and surpassing 10 million subscribers. On February 25, 2007, Netflix announced the billionth DVD delivery. On July 19, 2010, Netflix announced its service would be made available in Canada starting in the third quarter of that year. 80 OF 93

Netflix offers internet video streaming ("Watch Instantly") to all subscribers, enabling the viewing of films directly on a PC or Mac, or TV at home. Internet video streaming comes at no additional charge with Netflix's regular subscription service, however only a limited portion of Netflix's content is available via the "Watch Instantly" option. In its simplest form, video is streamed to the user using standard PC hardware, and requires Microsoft's Silverlight software to be installed. Viewing is initiated by pressing a "Play Instantly" button, and played back on the PC monitor. Films can be paused or restarted at will. Video can also be viewed on various set-top devices which are listed in the Device support section. Technically, the system streams videos in VC-1 format at lower or similar qualities than that available on DVD-Video (typically affected by the user's broadband bandwidth, and more often by the processing power of their computer if using the newer Netflix player and Microsoft Silverlight versions). Currently the Watch Instantly service features more than 17,000 movies and recorded television shows. Major studios including NBC Universal, MGM, 20th Century Fox, CBS/Paramount, ABC- Disney, Warner Brothers, Lions Gate Entertainment and New Line Cinema distribute films and television shows via the service. On October 1, 2008 Netflix announced a partnership with Starz Entertainment to bring 2,500+ new movies and television shows to Watch Instantly in what is being called Starz Play. According to CEO Reed Hastings, the Watch Instantly feature will become available to users outside of the United States during the second half of 2010. In August 2010, Netflix announced it had reached a five-year deal worth nearly $1 billion to stream movies from Paramount, Lionsgate and MGM. The deal increases the amount Netflix spends on streaming movies annually. It spent $117 million in the first six months of 2010 on streaming, up from $31 million in 2009. This deal adds roughly $200 million per year. Underlying Netflix is a critical technology, that of CDN (Content Delivery Network) which is provided by Level 3. The CDN ensures optimum deliver of content to the customer, using both DNS and local storage at the customers‘ ISP‘s peering point. GOOGLETV Google TV is a software platform for set-top boxes and HDTVs based on the Android operating system and co-developed by Google, Intel, Sony and Logitech. The project was officially announced by Google and its partners on May 20, 2010. As of today, most TVs that offer web access, only offer web-based apps to access online content (for example Panasonic has Viera Cast). There is usually only limited Internet usage such as playing a video from YouTube or viewing photos from Picasa. However, since Google TV will use the Google Chrome web-browser—along with Adobe Flash, users will not only be able to search through the Web, but also through online video content in a similar way to what currently exists on desktop computers and some mobile devices. The Google TV system will also include an open-source platform that will enable developers to create widgets for the system. Upon launching the service, Google stated that it would be updating 81 OF 93

the Android operating system to facilitate the development of web applications specifically for Google TV. It is anticipated that Google TV will have fewer user restrictions than current systems. The Google TV platform is expected to allow users to access any website from their television, with particular support for services such as YouTube, Twitter, Netflix, and Hulu But Google TV is going one step beyond the above list, it wants to the EPG (Electronic Program Guide) of choice. Think of it as your landing page on the TV. An EPG covering your recorded content (stuff you've paid for in one way or another and view when convenient to you), your recommended content (both free and paid for), content search, and broadcast listings across all media; i.e. video, music, photos, games, etc. So rather than your cable or satellite EPG being your first stop when turning on the TV, the aim of Google is to make it Google TV; whether it resides as middleware on your TV or a separate STB. For TiVo customers who tend to watch recorded content (the time-poor) this will be nothing new, only a much slicker user experience. The emerging battle will be between EPGs on TVs, DVRs, PayTV STBs and dedicated devices. The winner will decided by the customer based on which EPG is the easiest to use and delivers the best value. TiVo will need to step up its game. The CE manufacturers have traditionally struggled with user experience; just try navigating the set-up menus on most HDTVs; so they will likely in the end partner with a middleware solution from Google, Microsoft, Apple or an independent vendor such as Espial. It‘s not going to be a quick battle for a number of reasons: it requires customers to change behavior in how they consume content (we change habits slowly), and it requires the customer to buy either a new TV or yet another box to connect to the TV. GoogleTV is a long run play, not a quick win, but regardless an EPG consisting of a long list of linear TV channels is changing for some customers. The EPG war will be long fought. Content owners will be the winners as multiple channels to market weaken the channels and the margin they can command. Customers will split into many different consumption models based on their preferences, stage of life, and which TV in the home is being used. The bulk of consumers will continue to watch free-to-air or broadcast PayTV. We'll likely see people who adopt interactive TV use multiple EPGs. The North American market will be quite different to the rest of the world. MAPPING THE LANDSCAPE Given there is currently no open platform connected to the TV, rather a variety of closed solutions, software and hardware must be combine to deliver a solution to the customer., with many of the software solutions being bundled into consumer electronics. From the above descriptions its clear the market is in transition, as shown by the arrows in Figure 40, Apple is a consumer electronics manufacturer so AppleTV and iTunes provides a defensible business. Tivo though in decline with direct customers in the US has joined with payTV providers, e.g. Telecom New Zealand, RCN and Virgin Media, to create a new line of business. 82 OF 93

For payTV providers this marriage with TiVo is not as surprising as some have found. The main principles of greater consumption are shown below, and it‘s clear across recommendations, related content and search TiVo has a well patented lead.  Recommendations  From sophisticated algorithms, to simple things such as top rated, ―last night‘s TV,‖ or ―what‘s new‖  Package up-sell, essential its related to viewing habits  Related Content  Follow a theme, e.g. episodic programming, same Director, same subject  Community  The ability to communicate and share with friends on STB, PC or mobile (TV Everywhere) – both real-time and off-line  See who‘s watching what, and what they are thinking of the show (canned messages for STB)  See friends ratings and recommendations  Search integrated into the EPG and available across PC, mobile and STB  PC remains the best search tool for programmatic content, discover on the PC and view wherever (TV Everywhere) Figure 40. Mapping the InternetTV on the TV Landscape 83 OF 93

Vudu‘s focus on a software platform rather than its own STB, is perhaps a precursor to Wal- Mart launching an on-demand store similar to that of Amazon on Demand and Netflix would not be out of the bounds of reality. Miniweb is carving a solid TiVo alternative in internet delivered content, allowing the monetization of viewer interaction with broadcast and broadband media and providing a richer, community-driven viewer experience. SOCIAL NETWORKS AND TV Social recommendations and community are becoming elements of how both payTV and OTT TV providers are improving the customer‘s experience, essentially encouraging customers to spend their time on their services. Bebo is a social network owned by AOL. Bebo successfully pioneered running TV content specifically for online TV. Sofia‘s Diary first ran on Bebo before later transferring to channel Five in the UK, episode 2 on Bebo got 5m views, about the same as The Bill (a popular prime time show in the UK.) And it‘s not just content for teenage girls. Shampoo brand Suave partnered with US operator Sprint to target at home mums. Written by Hollywood screenwriters, it starred sitcom actress Leah Remini. Consumers were given opportunity to contribute own stories, social network style. The campaign was MSN‘s best performing webisode series to date. It was later snapped up by ABC to run on its TV network. And of course YouTube, the most popular source of online video: 90m unique users/month. Predominantly UG (User Generated) short form content, but in reaction to customers‘ engagement with Hulu, BBC iPlayer etc. YouTube works with a limited number of content partners providing full length formats, e.g. Star Trek and Beverley Hills 90210. SOCIAL TV There have been a number of Social TV trials. One of the earliest was TNO in 2007, see Figure 41 for summary, whose results have been confirmed in numerous other trials. Customer feedback, shown in Figure 42, shows it‘s considered a valuable additional service. Figure 41. TNO Field Trial (Source TNO) 84 OF 93

Figure 42. TNO Results (source TNO) Figure 43. Commercial Opportunities Enabled by Social TV (Source TNO) 85 OF 93

Social TV brings the same everyday social pressures into TV viewing to drive value added services to be seen as an individual (personalization), status (premium services), and churn reduction (loss of being part of a group), as shown in Figure 43. TNO Telecom‘s social TV trials demonstrates significant customer engagement, with increased viewing and active (every day) use of communication features Majority of customers found Social TV improved their IPTV experience, with key Social TV Features:  Buddy lists with channel/program context (i.e. what they are watching)  Recommendations (programs / channels)  Presence / context (including privacy)  Chat (voice, video, text)  Emoticons  Games / quizzes / league tables / status  Must be easy to use from the remote control  This requires canned messages and use of T9 for text input  Must be integrated into the operator‘s broader communication infrastructure  Across mobile and PC ONLINE TV NETWORKS Most Online TV networks have ceased operations. Owning content is critical; Hulu is backed by the owners of most of the content available on TV. So Hulu is very similar to broadcasters such as BBC making their content available over the internet with the iPlayer. HULU Hulu offers web-based commercial-supported streaming video of TV shows and movies from NBC, Fox, ABC and many other networks and studios. Hulu videos are currently offered only to users in the United States. In order to ensure that no international users outside the US have access to the video channel, Hulu has blocked many anonymous proxies and virtual private networks. Hulu provides video in Flash Video format, including many films and shows that are available in 360p and 480p. Hulu also provides web syndication services for other websites including AOL, MSN, MySpace, Facebook, Yahoo!, and Comcast's fancast.com. Hulu is a joint venture of NBC Universal (General Electric), Fox Entertainment Group (News Corp) and ABC Inc. (The Walt Disney Company)[5], with funding by Providence Equity Partners, which made a US$100 million equity investment and received a 10% stake. At an industry conference on October 21, 2009, News Corporation Deputy Chairman Chase Carey stated that Hulu "needs to evolve to have a meaningful subscription model as part of its business" and that it would likely start charging for at least some content by 2010. 86 OF 93

ALSO RANS Joost: On December 17, 2008, Joost sent an email to its customers explaining that the project was moving to a website-only model, and that the Joost application would stop working Friday, December 19 2008. On November 24, 2009, Adconion Media Group announced that they would be purchasing the company's assets. Veoh: On February 11th, 2010, in an open letter published on his blog, company founder and CEO, Dmitry Shapiro, indicated that "the distraction of the legal battles, and the challenges of the broader macro-economic climate have led to our Chapter 7 bankruptcy.‖ Zattoo: Lawyers for Universal and Warner Bros instigated legal proceedings against Zattoo in May 2009. CONCLUSIONS In the battle across the TV landscape, see Figure 44, its clear content power is critical. Essentially online TV networks can only be successfully run by the content owners. The wildcard in this landscape is the customer, will they change their TV consumption behavior, and if so how fast. It‘s clear some customers are moving towards programmatic consumption, but will it remain anything more than a niche? For most content owners the current lucrative business model is likely to be tough to move away from, as witnessed by the excessive salaries earned by ‗stars‘ compared to the average wage. Can the other Consumer Electronics manufacturers copy Apple in getting the user experience right and building a store? Or will they focus on being a service platform for other web-based stores, e.g. Google, Amazon, Netflix and Microsoft. Its likely Apple will remain the exception rather than the rule, hence Device Power and Computing Power may join forces to put payTV providers under increased competitive pressure. PayTV providers‘ strength today comes from their network, the hours customers spend watching TV over their networks, and an established and sophisticated business model. So the skill comes in ensuring they remain the content owner‘s best path to cash from the customer. Hence ensuring continued high levels of consumption (viewing times), and leveraging their network-related assets and services to maintain an edge. In reviewing the principles of greater consumption and how the payTV providers can differentiate:  Recommendations  From sophisticated algorithms, to simple things such as top rated, ―last night‘s TV,‖ or ―what‘s new‖ – given the bounded problem payTV operators should be able to match Amazon‘s engine.  Package up-sell, essential it‘s related to viewing habits. Local content matters, payTV operators have the edge of their subscription-based business model (e.g. Sky UK winning the Premier League rights.)  Community (Social TV) 87 OF 93

 The ability to communicate and share with friends on STB, PC or mobile (TV Everywhere) both real-time and off-line. Social communications is key, deliver in a user friendly way across multiple platforms. Telcos should be solving this as a general communications problem, so should be well placed to leverage their solutions.  Search integrated into the EPG and available across PC, mobile and STB  PC remains the best search tool for programmatic content, discover on the PC and view wherever (TV Everywhere.) Telcos have potentially an edge in the PayTV business as they understand all three channels and how to create a good experience. For the payTV provider focusing upon the user is going to be critical to remain relevant in the emerging TV landscape – as in the limit it‘s the customer that‘s going to decide. Figure 44. Battle Across the TV Landscape Content Power Studios Broadcast / YouTube, Cable Networks Facebook Hulu Google, Network Telcos & Amazon, Computing Power MSOs Customers Power Microsoft TiVo Consumer Electronics Manufacturers Device Power 88 OF 93

F U T U R E O F H Y B R I D T V & R E C OM M E N DA T I O N S MARKET FORECASTS Hybrid TV is here to stay, it is much more than a telco adding free to air DTT (Digital Terrestrial TV) to an existing IPTV service; this is satellite, cable and DTT broadcasters adding interactivity to their offers as well. Based on data gathered through interviews in building this report I‘ve broken out an estimate of the payTV subscriber base that is likely to become Hybrid over the coming years, as shown in Figure 45 and the data for that graph in Figure 46. Figure 45. Market Estimate of TV Subscriber Growth between pure-play and Hybrid Subscribers 700 600 HybridSatellite 500 Hybrid DTT Subscribers (M) Hybrid Cable 400 HybridIPTV 300 PureSatellite PureDTT 200 Pure Cable Pure IPTV 100 0 2008 2009 2010 2011 2012 2013 Figure 46. Data Table for TV Subscriber Growth 2008 2009 2010 2011 2012 2013 Pure IPTV 8 11 12 14 15 20 Pure Cable 128 157 193 216 235 253 PureDTT 60 69 78 85 90 89 PureSatellite 131 138 140 137 125 116 HybridIPTV 10 14 18 26 30 35 Hybrid Cable 2 3 7 14 25 37 Hybrid DTT 0 1 2 5 10 21 HybridSatellite 4 7 15 28 45 64 Total Hybrid 16 25 42 73 110 157 Total Market 343 400 465 525 575 635 89 OF 93

SERVICE ROADMAPS In discussions with service providers there was a long list of services being evaluated, below is a sample of the list, some of which are being trialed or have already been deployed by some operators. Some are quite controversial as they open up a number of business models that could impact the payTV operators existing revenue flows.  Enhanced EPG  User experience was mentioned many times, making it easy for customers to find stuff. This included:  Search & Recommendations: Local market appropriate. Many operators highlighted the importance of local market needs.  Personalization: Show suggestions, recording similar content, VoD suggestions, offers, etc.  Social TV and linking with Social Networks (to find friends): Viewing, recommending, chat  WebTV  Content from the web viewable and discoverable on the TV. This goes beyond YouTube to the many other web based video services and content.  Enabling web content to enhance the broadcast experience, for example, linking to web videos from programs, e.g. news programs.  Linking PC to TV  Allow pictures and videos on the customer‘s PC to be viewable on the TV; and allow content on the TV to be viewable on the PC, which includes broadcast channels. This can be implemented over the home network, or as a managed service over the operators network is in part linked to the need for backward compatibility with older STBs.  Interactive / targeted advertising  Hybrid overlay to broadcast advertising, with additional advertising revenues though the ‗clickability‘ enabled from the hybrid experience – as per the higher fees with broadcaster‘s online advertising revenues.  Nomadic & Ubiquity  TV Everywhere – anytime, anyplace, any device.  With appropriate security & content protection. 90 OF 93

 STB App stores (unbounded applications)  EBIF, Java applications, e.g. traffic, weather, alerts, offers, games, web site access.  BYOB (Bring Your Own set top Box)  Support for Wii, Xbox, PS3 as alternative STBs for the operators service  Allow TV connected devices to view content and search, e.g. enabling people to use tablets, e.g. iPad, as a way to interact with their TV service.  Integrated content protection and security across the network and STB.  A common theme mentioned by many operators was the need for the operator‘s network to protect customers from phishing and malware as STB become interactive; as well as protect their content as well as the content owners‘ rights.  Ultra HDTV, 3DTV  No dates were given on when this would happen but the core service will continue to evolve. 3DTV is currently being experimented with by a number of operators today. RECOMMENDATIONS RECOMMENDATIONS FOR PAYTV PROVIDERS Regardless of access technology hybrid TV must be a core part of all payTV providers‘ strategy. PayTV providers‘ strength today comes from their network, the hours customers spend watching TV over their networks, and an established and sophisticated business model. So the skill comes in ensuring they remain the content owner‘s best path to cash from the customer. Hence ensuring continued high levels of consumption (viewing times), and leveraging their network-related assets and services to maintain an edge. In reviewing the principles of greater consumption and how the PayTV providers can differentiate:  Recommendations  From sophisticated algorithms, to simple things such as top rated, ―last night‘s TV,‖ or ―what‘s new‖ – given the bounded problem PayTV operators should be able to match Amazon‘s engine.  Package up-sell, essential it‘s related to viewing habits. Local content matters, payTV operators have the edge of their subscription-based business model (e.g. Sky UK winning the Premier League rights.) 91 OF 93

 Community (Social TV)  The ability to communicate and share with friends on STB, PC or mobile (TV Everywhere) both real-time and off-line. Social communications is key, deliver in a user friendly way across multiple platforms. Telcos should be solving this as a general communications problem, so should be well placed to leverage their solutions.  Search integrated into the EPG and available across PC, mobile and STB  PC remains the best search tool for programmatic content, discover on the PC and view wherever (TV Everywhere.) Telcos have potentially an edge in the payTV business as they understand all three channels and how to create a good experience.  Integrated security and content protection across the network and devices to keep customers safe as their service becomes interactive. For the payTV provider focusing upon the user is going to be critical to remain relevant in the emerging TV landscape – as in the limit it‘s the customer that‘s going to decide. RECOMMENDATIONS FOR IPTV / HYBRID TV SUPPLIERS Hybrid support should be a core capability of all IPTV solutions, across the backend systems, STBs and middleware. Solution providers should look to the broadcast industry as potential customers especially Satellite TV providers. Standardization in solutions is critical. Hybrid TV should be treated as an opportunity to harmonize solutions across the payTV and possible the consumer electronics space. Integrated security and content protection across the network and devices to protect customers as their devices come online. Suppliers must aim to be the strategic partners of the payTV providers, supporting them with new services and user experience innovations, enabling them to remain relevant to their customers. Else there is a long-term risk of Internet TV / CE and Internet Stores taking a significant role and reducing margins across the industry. RECOMMENDATION FOR STB APPLICATION DEVELOPERS Currently HbbTV has the industry‘s attention. Its supporters claim DVB MHP/GEM had its chance; technology and customers‘ expectations have moved on. Operators appear more circumspect, given the operational headaches in deploying the latest technology. We‘re likely to see the CE manufacturer‘s take the lead in CE-HTML implementation, if it works reliably at scale, and customers enjoy the experience operators will likely follow. 92 OF 93

Developers should look to CE developer ecosystems in building CE-HTML applications, while operator developer ecosystems will likely be initially MHP/GEM focused, so developers should look to build across both platforms as it will likely take 3/5 years before there is clarity on which platform wins in the market. RECOMMENDATIONS FOR INVESTORS Look for companies that have hybrid solutions applicable across a broad segment of payTV operators. As the pendulum swings to hybrid solutions there will likely be opportunities for trade sales into NEPs in middleware, STBs, recommendation engines, security and content protection across the network and devices, social TV, STB app stores, and anything that improves the customer‘s experience. 93 OF 93

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Evolution of Hybrid TV and Over The Top (OTT or internet) TV

by Alan Quayle

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Evolution of Hybrid TV and Over The Top (OTT or internet) TV Document Transcript