The document discusses the evolving landscape of the pay TV market, highlighting the rapid transition from analog to digital platforms and the growing competitive pressures from various content owners and alternative viewing options. It emphasizes the complexities surrounding 'cord-cutting' and consumer preferences, which are increasingly driven by economics and the demand for bundled services. Additionally, advancements in technology and consumer electronics, including gaming consoles and cloud applications, are reshaping the television experience and creating new challenges for traditional pay TV operators.

1. Pay TV’s Uncertain Future Vince Vittore Dmitriy Molchanov August 31, 2010

2. Agenda Business and Strategic Issues Radical Redesign of the Home and Services Key Takeaways and Q&A

3. Analog cable rapidly falling and almost being replaced by digital IPTV growing at a rapid clip Satellite holding steady but some downward signs Pay TV Market Moving Rapidly to Digital

4. The Wallet Still Rules Decision-Making Base: 562 What could convince you to switch from your primary pay TV provider in the next year?

5. Competition Coming from All Sides Content Owners Hulu, NFL, MLB, NBA, NHL Alternatives PlayStation Network, Xbox, Google TV, Retail STBs, iPad Traditional Competition MSO, IPTV, DBS Cloud-Based Content Netflix, CinemaNow Pay TV Operator

6. Cord-Cutting: Myth or Reality? It’s a Myth Pay TV revenue continues to increase Consumers are watching more TV than ever before Cable programming has crossed the chasm in terms of quality and now dominates key awards People love bundles, and nothing bundles programming as well as 200+ channels of content It’s Reality Consumers are dedicating more time to the Internet Economics dictate that increasing programming costs will lead consumers to re-evaluate bills Competitors’ ability to target economic niches is very high Proliferation of devices is driving consumers to seek other options

7. Poll – Cord-Cutting: Myth or Reality? Which of the following statements best represents your belief about cord cutting? Cord cutting is already happening in full force Cord cutting is just beginning and will continue to gain momentum We are still years from cord-cutting realization, and it will remain a niche market It’s completely myth—cord cutting will never happen

8. Cord-Cutting Attitudes Bases: 5,306 in 2009; 1,069 in 2010

9. Economics Will Be the Biggest Factor in Cord-Cutting Average monthly pay TV bill is around $65 and is increasing at least 5% annually

10. Pay TV As the relationship between programmers and pay TV operators strains, there appears to be no end in sight to programming cost increases How do you expect to reduce the cost of your subscription TV service? (Please select all that apply.) (n=206)

11. Video Game Consoles Challenge the STB Applications Interactive Video Social Networking Information Streaming Multimedia Exclusive Content Sony has led the pack in bringing exclusive content to the game console world with its own reality show, “The Tester,” which airs this winter, and with exclusive content from Marvel for comic book fans. Targeted Advertising Microsoft’s Advertising Business Group has partnered with Nielsen to begin researching ad placement through Xbox LIVE. Honda and Sprint have invested $1 million in advertising opportunities. 3-Screen Both Microsoft and Sony are leveraging their consoles’ well-developed online communities to bring their content outside the living room with PSN and Zune Video. Cloud

12. Regulatory Concerns Impact of Comcast/NBCU Likely to pass but with significant restrictions Exclusivity on the endangered list A la carte looming? How deeply will Congress get involved in disputes between programmers and operators?

13. Agenda Business and Strategic Issues Radical Redesign of the Home and Services Key Takeaways and Q&A

14. Proliferation of Household Devices n=5,804 Percentage of households with at least one of the following devices:

15. Watching Video Frequency Base: People who own the device (Asked in Wave 1)

16. These Trends Mean Three Things Consumers demand a seamless experience across devices Consumers expect their content to “thread” across devices Amazon’s Kindle pioneered dropping a book on one device and picking up where you left off on another Home networking will expand drastically But consumers need help getting their devices connected. New standards like G.hn that extend across coax, phone and powerline will help; so will diagnostic tools from operators like Verizon Opportunities for operators to act as intermediaries Operators can leverage strong marketing and brand spend, billing tools and consumer data to fight back against cord-cutting and deliver premium services

17. Familiarity and Convenience Are Highly Desired

18. TV Takes on More Responsibility Applications Interactive Video Social Networking Information Targeted Advertising Home Monitoring Videoconferencing Streaming Multimedia Distance Learning Network Management Home Health Care 2010 2015 Services Applications

19. Smartphones Get Even Smarter Mobile Devices Will Interact with Home Networks Home Network 2010 Remote DVR Place-shifting 2015+ Home Network Media Sharing In-Home Input Devices Remote Home Monitoring Remote Elderly Care Both AT&T and Verizon are leveraging smartphones and tablets to control home devices Alcatel-Lucent TeleHealth Manager has been cleared by FDA QCOM’s Skifta application allows users to share their media through their phone when on a friend’s LAN FrontPoint security and Alarm.com applications monitor home security systems

20. Devices Move Into the Cloud Gaming OnLive and Playcast experiment with Cloud Gaming: 1 Mbps for 640 x 480 resolution. Personal Media Ultraviolet creates new open standard for digital lockers backed by Warner and Microsoft. Disney also pushing “KeyChest.” Streaming Multimedia Brick-and-mortar retailers entering digital distribution: Walmart acquires VUDU, Barnes and Noble invests $140 million in e-book distribution. Cloud

21. Applications Moving from Passive to Interactive Customer Attractiveness Interactivity HIGH LOW HIGH Standard Def VoD UGC on TV Social Networks Web on TV Catch-Up TV Interactive TV Content DVR Advanced EPGs Exclusive Content 3-D TV Application Stores NPVR T-Commerce High Def

22. App Store for the TV? Consumer pays for app via iTunes Apple takes 30% of the revenue Apple sends 70% to developer on a monthly basis In the iPhone world In the video world Consumer Content Owner Rights Holder App Developer Operator Consumer Talent Sports Leagues

23. 3-D TV Wheel Has Begun Turning Television Channels: ESPN, Discovery, Sony and Imax all working on 3-D channels Recording Equipment: Panasonic pushing AG3DA1 line of inexpensive 3-D cameras TV Sales 3-D Content Peripheral Hardware Sales Consumer Demand Price: Panasonic 3-D sets priced at nearly a $500 premium over similar HD sets; price decreases as TVs scale Glasses: Active shutter glasses currently $100; manufacturers developing auto-stereoscopic displays Blu-Ray: Panasonic bundling 3-D Blu-Ray player with 3-D TV for roughly $3,000 Game Consoles: PlayStation 3 introduced 3-D through firmware upgrade; Nintendo 3DS demoed Apps: Motorola ensuring that STB applications are visible in 3-D Consumer Survey: 34% of consumers think 3-D is “highly important” to their next TV purchase decision

24. How HDTV Content Is Viewed Base: People with an HDTV set at home; asked in Wave 4

25. Agenda Business and Strategic Issues Radical Redesign of the Home and Services Key Takeaways and Q&A

26. Key Take-Aways The pay TV market is on the cusp of radical change as new forms of competition put pressure on traditional business models Cord cutting already is appealing to a small niche audience and will grow with consumer recognition of alternatives The TV will be the most important screen in the household and will take on new roles Gaming consoles and the associated networks represent the greatest threat to traditional pay TV

27. Q&A Vince Vittore, Principal Analyst Service Delivery Architecture, Broadband, Regulation Blog: http://blogs.yankeegroup.com/author/vvittore/ Twitter: @vvittore Recent research: “ A Tale of Two IPTV Telcos, Revisited ” & “ Service Providers Put Interactive TV Advertising to the Test ” Dmitriy Molchanov, Analyst Access Devices, Converged Consumer Applications Blog: http://blogs.yankeegroup.com/author/dmolchanov/ Recent research: “ Mobile Broadband's Next Big Push ” & “ 2010 Anywhere Device Index: Identifying the Next Game-Changer ”

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