(As many of you know, I recently returned to the world of independent consulting, after a stimulating and rewarding four years as Chief of Analysis and Research at multiplatform video ad management provider BlackArrow. Due to overwhelming demand (thanks to both of you who asked) I’m bringing back the Niemeyer Review Newsletter, last seen in 2004. The Niemeyer Review Newsletter will be a weekly look at the business of advanced video and television, including broadband, DVR, VOD, interactive TV and mobile. As much of what I’ve done over the past seven years (at BlackArrow and consultancies DiMA Group and my own Centrimedia before that) has been to use quantitative analysis to inform qualitative insights, you’ll see ample evidence of my being a “numbers wonk.”)
For the first “new” edition of the newsletter, I’ll set the stage a bit by reviewing some landscape metrics for online video, DVR and VOD. I’ll look at what they are now (as of the end of 2008), five years ago (end of year 2003) and what they’ll be in three years (end of year 2011).
(A note… unless otherwise noted the following estimates are mine, developed using analyses based on data gained from public sources.)
Broadband Household Penetration (as a proxy for online video availability*): At the end of 2003, 22% of US HHs (households) had broadband service. As of the end of 2008, it had grown to 59%. At the end of 2011, it should be 68%. Notes: Broadband adoption is now slowing after accelerating up to almost 50%, with growth rates declining since the peak years of 2005-06. The reason is simple – most of the people who actually use the Internet from home have already gotten broadband. Based on Nielsen Online data, websiteoptimization.com estimates only 7% of active home Internet users in January used dialup.
(* Or don’t you remember what it was like to watch video on dialup?)
DVR Household Penetration: At the end of 2003, 2.5% of US HHs had DVRs. As of the end of 2008, it had grown to 29% (according to current Nielsen estimates). At the end of 2011, I estimate we’ll reach the magic metric of 50%. Notes: In five years DVRs have gone from something only in homes of the earliest of early adopters to a mass market phenomenon. And this growth pace should continue at least into 2011. Since September 2007, Nielsen data has shown DVR penetration increasing at an almost linear rate of slightly over 7% of US HHs per year, even during the economic “excursion” of the past six months. I believe assuming this DVR rate will continue for the next three years is a conservative assumption. Broadband adoption accelerated all the way up to almost 50% and only then did growth rates start slowing. DVR service costs less than broadband, is easier to acquire and maintain (no self IT support required) and provides enormous utility to America’s #1 waking activity – watching TV**.
(** I’ve run the numbers and yes… in the US there are more hours of TV viewing than paid hours worked (based on Nielsen and US Dept. of Labor data).)
VOD Household Penetration (cable and telco VOD – sorry satellite, not counting here VOD-like services on some of your DVRs): At the end of 2003, 12% of US HHs had access to VOD. At the end of 2008, it had grown to 36%. As of the end of 2011, VOD should be in 49% of HHs. Notes: VOD penetration has tripled since 2003 driven by an increase in the number of digital cable/telco IPTV homes and operators expanding the VOD footprint (rising from 60% of digital cable homes in 2003 to almost 100% of today’s cable/telco digital HHs). Going forward, VOD growth will be defined by the growth in digital cable/telco TV HHs. The rise of telco IPTV (Verizon and AT&T had a combined three million TV subs at the end of 2008) and cable’s moves towards “all digital” accelerated adoption up through Q1 2008 just in time for the economy to tamp it down again. Provided we don’t go back to an economic stone age, adding five million digital cable/telco TV HHs a year seems a conservative assumption.
This all seems like great news – advanced video platforms are widely deployed and still growing their footprint. But what really matters – for networks, operators and advertisers – is usage. And the ability to monetize that usage.
For online video, with almost 60% of households having broadband service, it’s widely available, usage is growing rapidly and there’s been enormous value creation in video-centric enterprises. But… use is still very small compared to TV viewing. My estimate is online video viewing was slightly over 1% of total US video consumption in 2008 (including TV, VOD, DVR, online and mobile/portable). Even at the current rapid growth rates, I estimate online will still only be 3% of total video consumption in 2010.
We’ve seen dramatic advancement over the past three years in online video advertising techniques and revenues using the rapid development environment, de-facto standard tools and open path to the consumer the Internet affords. But at 1% of total video viewing, TV networks are challenged in using online video to mitigate their ad inventory losses caused by DVRs and shifts in TV viewing patterns. For cable networks, their restrictive (and lucrative) carriage agreements with operators constrain their ability to put top shelf content online, leaving the playing field largely open for broadcast networks (news reports of “coming” operator online on-demand services for cable content notwithstanding).
In the future, there is the looming dramatic acceleration in online video use that will occur when “Over The Top” (OTT) solutions are widely deployed, making it easy for Americans to view Internet delivered video on their TVs. While it’s clear OTT is coming, it’s not clear what the specifics will be on when and how – that’s a subject for another newsletter – or two.
For DVRs, almost one third of US HHs have them. And large usage is not an issue, given most are connected to the “content fire hose” of operator multi-channel service. In its recent “Three Screen Report” for Q4 2008, Nielsen reported 74 million Americans watched time shifted TV (up 37% from a year ago). The report shows 4.8% of all TV viewing was time shifted (up 51% vs. a year ago).
While this may not seem like a large number, remember that all TV demographic/daypart viewing is not created equal (in the minds of advertisers). Magna Global reported for the first four weeks of the 08/09 season, 50% of 18-49 primetime broadcast program viewing in DVR homes was time shifted. Nationally, 16% of all 18-49 primetime broadcast program viewing was time shifted. Given that networks don’t get paid for skipped ads and Magna has reported separately that about 2/3 of primetime ads are fast forwarded during time shifting, this is sizeable inventory erosion in the key TV advertising currency that is only going to grow.
Unfortunately for TV networks, there’s very little they can do about DVR time shifting. In theory, networks could use DVRs as a powerful targeted interactive ad delivery platform (it’s a computer after all) offering high value engagement advertising (say… like what being done now on the Web) that could mitigate revenue losses due to ad skipping and potentially create higher per view revenues than linear TV. In practice, they can’t. TiVos and some satellite DVRs offer a limited set of advanced ad capabilities that have not been employed to a large degree by advertisers. And no cable operators have offered advanced DVR ad features on their DVRs.
For VOD, despite almost 40% of US HHs having access to it, usage is still low. My estimate is VOD viewing in 2008 was slightly over 1% of total video consumption (about the same as online video). This seems odd for a service that offers high quality on-demand video delivered directly to TV sets – it’s “in place Over The Top.”
So why is use so low? The labyrinthine menu systems seen on many VOD services aren’t helping but I believe the biggest reason is the TV content Americans want to watch the most is mainly missing – current top rated broadcast and cable networks series. Those are missing because many networks and advertisers, frustrated by the still-continuing lack of VOD ad insertion and minimally-acceptable reporting, are minimally participating in VOD while actively engaged in advancing the state of the art for advertising in TV programming online. Nonetheless, the MSOs cite VOD as a differentiator in subscriber retention, despite its low use past the success seen with premium, music and kids content. If they were to deploy ad insertion and work with networks to make a robust portfolio of top rated content available, they would see total VOD usage increase dramatically (my research says 2-4X in the moderate term is not unreasonable), resulting in the differentiation they cite, in turn providing higher subscriber satisfaction and the financial benefits of reduced churn.
I’m energized about the overall advanced video and TV space, even given the current economic tribulations. Unlike The Bust of 2001, today consumer adoption of the base capability to use advanced video and television is widespread and growing. The opportunities in advanced video and television are many and sizeable (as are some of the challenges). More to be discussed in future…
I look forward to diving deeper on these and other topics in coming Niemeyer Review Newsletters. Please feel free to suggest topics by commenting on this article, or emailing me directly.
A REPORT CARD
For fun (if you can call it that) – let’s take a look at my past estimates and how they compare to where we are now:
DVRs – I first “went public” with my DVR estimates in August 2004 in my regular landscape presentation at the bi-monthly ID!A cross industry working group meetings. I estimated DVRs would be in 40 million US HHs (35%) as of the end of 2008, vs. the 29% (about 33 million) that was ultimately was reported by Nielsen. I’ll give myself a “not bad,” considering DVR penetration was 5% at the time.
VOD – At the same meeting, I estimated VOD would be in 40 million households at EOY 2008 (vs. an August 2004 current 17 million). My current estimate for EOY 2008 – 41 million households (the dartboard was working well back then).
Broadband – It wasn’t until the ID!A meeting of August 2006 that I started to present estimates for future broadband adoption. For EOY 2008, I predicted 64% HH penetration vs. the 59% we actually saw (the ramp off past 50% being steeper than I had thought). At the time, penetration was 44%.