Internet Video: Where's the Pony?

By Gary Kim

New availability of HDTVs with direct broadband Internet connections, as well as content services optimized for direct delivery to the TV, or Web applications optimized for operation directly on TV screens, were a clear trend at this year’s Consumer Electronics show.

As helpful as that may be for Cisco, Apple, Netflix, LG Electronics or Yahoo, the trend is not especially helpful for broadband access providers, as these developments generally increase the cost of providing broadband service, without generating compensating revenue.

On the other hand, one is reminded of the old quip about the boy mucking out the stalls in the barn. Asked why he was whooping and hollering in delight, he said “With all this **** around, there must be a pony here somewhere!”

There is little doubt about growing consumer and at-work use of streamed video. For ISPs, though, the key issue is how to generate more revenue to match the increased cost of providing access services with a growing video character.

Researcher comScore, for example, reports that November 2008 data indicate U.S. Internet users viewed 12.7 billion online videos during the month, representing an increase of 34 percent over the same month in 2007.

According to comScore, 77 percent of the total U.S. Internet audience viewed online video, and the average online video viewer watched 273 minutes of content.

Separately, Yankee Group researchers say Internet-delivered long-form and episodic television is emerging as a more common activity. Some 82.3 percent of Internet video viewers report they watch TV shows online because they missed the episode on TV. That ultimately offers multi-channel video providers an opportunity to drive more-extensive digital video recorder services.

The key, however, is the cost. If so many users report they can satisfy their needs using their existing broadband connections, DVR functionality has to offer much better experience to offset the “no additional cost” positioning of Internet video.

In fact, say Yankee Group researchers, even DVR owners are more likely to watch online than they are to record a program in advance.

But there are other questions. Perhaps Internet video is so popular because viewing is not tethered to the television, because different content is available or because Internet video conveniently can be watched in-between other tasks also occurring on a PC.

If that is true, DVR capabilities might not necessarily help much, since the consumption does not take place at the TV in the home, but at other locations. Still, most Internet video viewing does seem to take place at home.

Among online TV viewers, almost nine out of ten watch online broadcasts at home, according to the Conference Board. About 15 percent say they watch internet broadcasts in the office, and six percent report watching TV online from other locations, including the library or a friend’s home.

On the other hand, Nielsen Online says that with a 96 percent broadband penetration among at-work Web visitors in October, and many employees spending nearly eight hours a day at their computers, workdays are prime time for online video viewing.

Nielsen says that 65 percent of online video viewers stream content between 9 am and 5 p.m. Monday through Friday.

Yankee Group researchers say 24.5 percent of the Internet video audience watches either once or several times per day, for an average session lasting 26.5 minutes.

In fact, Yankee Group researchers say, media and content provider “priorities should be on Internet video first and foremost.” The reason is fairly simple: new revenue opportunities exist for the Internet medium.

Cable operators and IPTV operators, on the other hand, should emphasize “social” elements such as communities, recommendations and other ways to facilitate Internet video consumption on traditional pay-TV platforms such as HDTV, video on demand and DVR. The reasons there are equally clear: ISPs do not benefit much from increased “over the top” viewing.

Researchers at Nielsen might agree. In Nielsen’s review of third quarter 2008 viewing, it was time-shifted viewing, powered by use of DVRs, that had the strongest growth, at 34.5 percent growth over the third quarter of 2007.

But that is not the full story. Internet video viewing, which Nielsen was not tracking in the third quarter of 2007, already garners more viewers than DVR viewing does. In terms of viewers, Internet viewership represented 64 percent of combined time-shifted and Internet consumption.

On the other hand, viewers are spending most of their actual viewing minutes watching time-shifted material. Internet video represents about 28 percent of the viewing minutes, looking at time-shifted and Internet video viewing. In other words, there are more users watching Internet video than time-shifted DVR content, but DVR users watch more minutes of video. That stands to reason if all DVR content is long form, and more Internet viewing lasts less than 30 minutes, suggesting shorter-form content is more frequently viewed on the Internet.

The Conference Board also reports that online TV viewing has been gaining in popularity. Nearly 20 percent of American Internet households watch television broadcasts online, double the viewership from 2006. And as if to underscore the observation that both professional and user-generated content are getting traction, the study shows the top two destinations for online broadcasts are programming network home pages and YouTube.com.

And though many policy advocates, and at least some users, object to usage caps precisely because of what that might imply for the continued growth of online video consumption, obviously something that does not help the linear video business model, there is at least potential for some upside.

That could occur if ISPs encourage users to download or stream from multi-channel video sites, not from over-the-top sites. That could be done as simply as not counting such usage against monthly consumption caps.

“Being able to watch broadcasts on their own time and at their convenience are the top reasons users tune in online,” the Conference Board says. Of course, avoiding commercials and content portability also are important. Nearly 72 percent of online households log on for entertainment purposes on a daily basis, and one in ten users indicate entertainment as the most important Internet activity.

“Most consumers are pressed for time and require flexibility in their daily schedules and TV viewing habits,” says Lynn Franco, Conference Board Consumer Research Center director. “Being able to watch broadcasts on their own time and at their convenience are clearly reasons why we are seeing a greater number turning to the Internet. And, it is the reason why we would expect to see this trend continue.”

Separately, there are market shifts within the multi-channel video universe. Cable operator video service penetration hit an 18-year low in July 2008, according to the Television Bureau of Advertising. Cable competitors served 28.4 percent of television households in July 2008, an all-time high up from 27.5 percent in July 2007.

Of households that do buy a multichannel video subscription, competitors now have 32.1 percent share, another all-time high.

Over the same period, national wired-cable penetration of television households fell from 61.1 percent to 60.9 percent.

Direct broadcast satellite delivery is now estimated at 28.2 percent, up from 27 percent in July 2007.

Researchers at the Yankee Group also report that, from video to gaming and music, users now spend time online that exceeds that spent watching television. But multitasking is commonplace, with individuals accessing multiple media at once. About 56 percent of television viewers are online, browsing the Web or sending email, while they also are watching television.

So where is the pony? Though some policy advocates do not like the idea, some form of assured delivery is required for adequate consumer experience when watching online video on a large HDTV screen. It is one thing to watch standard-definition video in a small window on a PC. It is quite another thing to watch video on a larger screen, where the consumer expects rock-solid image delivery.

As video continues its move to online delivery, plus display on big TV screens, there is little question but that consumers will not tolerate degraded performance. At one level, video will drive demand for higher-bandwidth connections. But bandwidth alone does not ensure reasonable video performance.

Unless arguably-misplaced regulations prevent ISPs from providing such value-added services, there would seem to be quite a pony in the “quality delivery” space. At the moment, some of us would not want to watch online-delivered video on a large screen. We barely can tolerate standard-definition content in a small window on a PC. IP