' Masthead Venture Partners

New Opportunities in Digital Media, Part II: Internet Television

Introduction
Are all the dreams of digital convergence from the boom days of the nineties becoming the stuff that this century's Web is made of? The Internet Protocol (IP) is gobbling up everything: mail, shopping, banking, music, voice. Television is next. Internet TV is becoming a reality because of a convergence of trends: the onward march of digital media innovation and the expansion of advertising markets. Think about it: Thousands of channels meticulously target-marketed and interactive. The content and advertising possibilities are endless.

We are about to witness a revolution in the video industry. There has been a radical democratization of video production. The advent of low-cost hardware and software tools has utterly transformed the video industry. The ability to create videos has reached mass scale and Main Street. We are going to be inundated by a volcanic flow of content. Where will it all go? The next step should be obvious to anyone who's been paying attention.

First, a short history of video distribution. In the beginning, you had movie mogul empires distributing studio-controlled films to select theaters. Broadcast TV broke the stranglehold on video distribution, but only to the scale of three major broadcast networks. Early cable expanded that to 50 channels, with today's digital cable and satellite delivering 100s. The next step has already been set into motion: Internet television distribution and the wonderful world of 1001 channel nights.

Video distribution over IP turns the tables on the traditional operator/network control over video. Internet TV holds before us an open, global, self-empowering medium to carry the ton of content being produced daily in the media cloud of our increasingly digitalized world. Every website, a TV channel.

Internet television is going to be big because of the perfect storm being formed by several technology trends, including the increased use of: Broadband, wireless home networks, rich media formats, and mobile devices capable of carrying Internet and video. Add to all of these trends the ease-to-produce and dropping costs of video production, and you will have a vast base of video content to feed and keep satiated the Internet TV beast.

As with any new platform, Internet TV is spawning a full range of early-stage opportunities, from production through distribution to advertising, search and subscription services.

Production
The migration of broadcast TV to broadband TV is a bigger transition for television than to color or to cable. The Internet drastically lowers the current astronomical costs of producing and distributing a video program. The amount of video content on the Internet will easily dwarf current satellite and cable offerings. Open-source tools will soon enable anyone to easily produce videos and post them on the Net. With Internet TV, every web page has the potential to become a video channel.

Not only will TV over IP enrich life for video producers, the Web's multitasking and interactivity will change the way consumers view the world (or at least its video representation). For example, the sports fan will be in video heaven as he or she will be able to watch multiple sporting events on a single monitor or choose which camera angle to use. With Internet TV, the viewer becomes the producer.

Television boxes will be integrating an Internet connection. Once converged with the Internet, the TV will be networked with all other digital devices, such as mobile devices, which then become additional entertainment platforms carrying Internet TV. With digital tools, video content can be as personalized as any shopping site or search engine, and viewed from anywhere, at any time.

Internet television provides consumers with an unlimited number of channels, choices, and time-shifting capabilities. With the Internet, rather than having a schedule made up by network operators, consumers actively search and retrieve what they want, when they want it. Using TV over IP, video-on-demand would expand exponentially.

Plus, with inexpensive digital video tools and the Internet for distribution, each individual's PC becomes a potential production studio. Every person on the planet, a reporter.

Distribution
There are two emerging models for the distribution of television and video over the Internet. One is closed, the other open. The former is controlled by telecom companies; the latter is the domain of open-range Internet entrepreneurs. These new video rangers are leveraging the fact that the cost of distributing video over the Internet to an extremely targeted segment, who actually want to watch the show, is much lower than broadcasting shows to millions of homes simultaneously in a scatter shot mass-media attempt of finding an audience.

Telecom leaders, such as SBC and Verizon, are planning to deliver IPTV - TV over the Internet Protocol. The telecoms see IPTV as a way to compete with the Cable and Satellite industries and get in the video game by using broadband Internet connections such as fiber optics to stream high-quality video to TVs, and let TVs leverage the interactivity of the Internet.

Spending $5 billion to roll out its IPTV network, SBC projects that that within four years the new IPTV service will be available to 18 million homes. According to the consulting firm, Research and Markets, about 15 million homes worldwide will have IPTV services by the end of 2007, up from the current level of 600,000 homes and global revenues from the sector will exceed $7.5 billion in 2007.

The software mind or media center for this new system comes from Microsoft. SBC and Verizon have both purchased the Microsoft software for IPTV. There are other devices besides Microsoft's Media Center, though, which try to provide personal access to digital media. Akimbo, for instance, can deliver 70 channels of content and provides for 200 hours of stored video. In addition, since IP has gobbled up voice, data, email, finance, and now video into a single network, consumers can easily access all these services from any one of these new IP-connected media centers, such as Internet-enabled TVs, set-top boxes, PCs, PDAs, phones or even game consoles. The telecom's IPTV offering will bring many new features into the consumer's living room: instant channel changing, customizable channel lineups, video on demand, digital video recording, multimedia interactive program guides, event notifications, content protection features and more.

The IPTV of the telecoms will provide normal, studio-created content and channels currently being offered by Cable, with greater interactivity and connectivity, and a host of new Net-enabled features. The telecom's vision, sending television over an IP network to compete with cable, would still leave programming controlled from the top. The opposing open, Internet Television vision sees things differently.

While IPTV offers closed, proprietary content like the cable services sent over an IP-based network and controlled by the telecoms, Internet Television leverages the Web's openness to allow innumerable video producers to offer content for both mainstream and niche channels, which would enable any number of business models built around the Long Tail effect. With IPTV, the telecom controls the IP-network and content. Under Internet Television, the consumer, accessing the open Net, becomes a producer and gains power over programming.

Rather than just offering an old service (cable TV) through a new (albeit, much more robust network (IP)), Internet Televison represents a true video revolution, while at the same time leveraging the Web environment that the consumer has grown to inhabit and to habitually use. By using the open standards of the Web, Internet Television offers a low-cost alternative to production and distribution. It also offers instant global reach. Internet Television may just be the global village we all keep hearing about. It is also a way for every voice to be heard, every face to be seen and every niche to be served.

The Internet Television revolution will have a profound effect as it shifts video production and distribution from a closed system to an open network accessible to everyone on the planet. Once the Internet (and the entrepreneurs and engineers who will lead the charge) cracks open the control of production and distribution of video content, and all video content becomes digital media, new business models will emerge to provide new products and services that move the Internet video revolution forward. Just as the original hypertextuality of the Web, its interactivity, led to the launching of a thousand new companies and markets, from online shopping to auction sites to blogs to open source, Internet Television will also inspire innovation and commerce.

Internet Television will be a regular cornucopia of opporutnities as consumer and advertising dollars funnel into the new medium. Content providers and video producers will have myriad new markets to pursue. Opportunities abound for online subscription and advertising-based services that will produce and deliver these new channels to online viewers.

Advertising
Besides revolutionizing video production and distribution, Internet TV will present a new and expansive medium for highly targeted, interactive advertising.

Even though 20 million online viewers click on video every week, according a report by Arbitron Inc. and Edison Media Research, advertisers have been slow to incorporate it into their strategies, but they are catching up fast. Internet video is still a small part of advertising, $200 million in annual spending compared with the $48 billion spent on television, but it is projected to undergo rapid high growth. Increasingly, companies as diverse as Lincoln Mercury to American Express to Converse are developing online videos meant to capture the clicks and the eyeballs of web consumers. Growing faster than even search, video ads are the hottest segment of Internet advertising, which, according to researcher eMarketer Inc., will expand 33.7% this year, to $12.9 billion.

The major factors contributing to the growth of video advertising on the Internet are:

  • Widespread broadband adoption
  • Highly targeted marketing
  • Entertaining for high clickthrough
  • Inexpensive to produce
  • Instant global branding
The wide-scale adoption of broadband connections is opening the Web to a slew of new applications that demand high performance. Internet TV is one of those apps that need a big pipe to be viable. Today, 36% of American households have some kind of broadband connection, according to eMarketer, and by 2009 that number reaches 60%.

Traditional television has provided a mass media for advertising, but is incapable of one-to-one marketing. Cable has done a slightly better job with niche programming, but only the Internet and digital media will provide true personalization and interactivity. Internet Television offers advertisers the power to target and reach specific consumer subsets, while empowering consumers with the power to customize their digital experience, so they get what they want when and where they want it.

This powerful combination of capabilities, targeted one-on-one marketing, personalization and interactvity, ushers in a new age of advertising possibilities unavailable to previous generations of marketeers. As Internet Television revs up, the influx of advertising revenue will fuel a full range of new business ideas, models, products and services.

Search and Beyond
With millions of video files on the Web, the question for the consumer is: How do you find what you want? With traditional scrolling TV directories, and the Internet's plethora of choices, by the time you read through an entire directory, the show you wanted to see would be over.

With the massive explosion of Internet video, there is an urgent need and opportunity for a new service that searches the Internet for specific video content and downloads it automatically. In the massively multichannel Internet TV multiverse, consumers will need sophisticated video search engines that can personalize a directory, store favorite shows, and even crawl the Net seeking out video that it can predict a consumer will want, while enabling consumers with time-shifting, on-demand viewing.

Today, these services are just emerging, and are mere sub-sectors of Internet search in general, but, as we have seen with today's search engine giants, they only will expand into other areas to dominate. These video search engines and video media sites envision evolving into full-blown Internet video hubs, or online television stations. From search engine sites, they may grow into Internet TV platform and services that allow producers and programmers to deliver television content directly to consumers over the Internet, while enabling consumers to control what content they receive. In the grandest scheme, these nascent Internet TV operators would challenge TV and cable networks and other video distributors.

All the search giants are entering the game. Yahoo, Google, and Microsoft are working, separately, on each of their own video-search features for the Web, and AOL has purchased search company Singingfish. Google is planning to host video files on its computers, which may be a way to create its own Internet TV network, a play that the other giants may follow. Still, even with these behemoths trolling the Internet video waters, there is plenty of opportunity for a small Internet TV startup, fast on its feet and quick with its software, to capture the imaginations and the eyeballs of Web consumers.

Some of the players in the emerging Internet TV market:
  • Akimbo Systems
  • Blinkx
  • Brightcove
  • Google Video
  • Gotuit Media
  • ManiaTV
  • Microsoft
  • Open Media Network
  • Ourmedia.org
  • ShadowTV
  • Singingfish
  • Sling Media
  • TiVo
  • TotalVid
  • TVEyes
  • VCinema
  • Visible World
  • Yahoo Video Search
Summary
It's the brave new world of digital convergence finally dawning: Internet TV. The trends are gathering like the clouds of a perfect storm: Broadband, low-cost video production, video search engines, one-to-one advertising, wireless home networks, rich media formats, and mobile devices capable of carrying Internet and video.

The explosion of Internet video and the integration of TV and the Internet will spawn a full range of early-stage opportunities, from production through distribution to advertising and search to subscription services. Masthead is actively exploring the Internet TV space for new companies that enable video producers and content owners to use the Internet as a distribution channel and that empower consumers with control over programming.

About Masthead Venture Partners
Headquartered in Cambridge, Mass, Masthead Venture Partners is a venture capital firm dedicated to providing early stage information technology, internet infrastructure and services, communications, and IT-intensive life sciences companies with the capital and hands-on operational support they need to develop into industry leaders. The firm has the advanced technical expertise, proven operating experience and deep industry knowledge and relationships to help entrepreneurs build companies with category defining potential. For more information please visit www.mvpartners.com.

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