Wave Systems Corp. (fka WAVXQ)

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They Want Their Net TV

http://yahoo.businessweek.com/technology/content/may2006/tc20060530_574553.htm

Consumers are getting much more video entertainment online. And that's putting big pressure on cable, telecom, and satellite companies to step up to the plate

by Olga Kharif
SPECIAL REPORT
High-Tech TV

Rob, a systems administrator in Illinois who didn't want his last name to be used, had a video-download dilemma. About four months ago he had missed an episode of his beloved Doctor Who Confidential, the BBC series about the sci-fi classic. So Rob turned to the Web. Sure enough, he found the show, downloaded it onto a PC, and then burned it to a DVD.

While he was at it, he also nabbed an installment of the British TV comedy quiz show Quite Interesting and a slew of other online programming. Rob's newfound penchant for programming downloaded from the Web -- legally or otherwise -- combined with use of online movie-rental service Netflix (NFLX) -- has cut his TV-viewing time (typically two or three hours) in half. "My wife and I explicitly discussed dropping cable," he says. "I am a lot happier getting exactly what I want."
NET-VIEWING SURGE.

So are a lot of other Americans, it seems. In all, some 40% of U.S. cable-TV subscribers are unhappy with their current service, saying it lacks variety of content and features, according to research conducted by software giant Microsoft (MSFT). Like Rob, many are flocking to content delivered directly over the Internet, often shunning programming delivered via traditional cable or satellite systems.

The number of people viewing video online rose 18% in March from October, according to comScore, which tracks Web trends. The average consumer viewed slightly less than 100 minutes of online video content a month, compared with an average of 85 minutes in October.

That could translate to a windfall for Internet companies and service providers eager to serve up video for a fee, or sell advertisements posted alongside that programming. To name a few: YouTube.com, MSN Video, MySpace (NWS), AOL's In2TV (TWX), and Google Video (GOOG) (see BW Online, "The Online Video Revolution").
"BAD NEWS."

Between last October and April, traffic to YouTube.com, whose users post some 35,000 new videos a day for others to watch, grew by more than 2,000%, according to Nielsen/NetRatings. YouTube.com, launched in early 2005, is now the 27th most popular site worldwide, ahead of AOL.com (see BW, 4/10/06, "YouTube:" Way Beyond Home Videos").

Google Video, launched in beta in January, 2005, already boasts a unique audience of 8.6 million. And within one week after Disney's (DIS) ABC began offering Desperate Housewives, Lost, and other shows for free online, traffic to its video-streaming site surged 42%, according to consultancy Hitwise.

But what about the companies whose lifeblood is monthly satellite and cable subscriptions, or the telecom providers shelling out billions of dollars to create their own systems for delivering TV? "It's bad news for traditional television," says Colin Dixon, an analyst with The Diffusion Group, a consultancy in the digital-home markets and new media. "We are educating a whole new generation of viewers that TV is irrelevant."
TV REVOLUTION.

Not if the cable, satellite, and telecom industries have anything to say about it. Of course, some providers, such as Comcast (CMCSA) and Time Warner Cable (TWX) benefit from the Web-TV revolution insofar as they sell high-speed Internet access. Ditto for the telcos such as Verizon (VZ) and AT&T (T), which generate revenue from Net access and themselves are building out TV networks.

But they're also swiftly changing tack in other ways. They're increasing the amount of content they sell in the form of on-demand video and boosting the amount of programming available via their own Web sites. "In the next five years, TV will change more than in the past 50 years," says Ed Graczyk, Microsoft TV's director of marketing (see BW Online, 5/10/06, "Microsoft: Let's Make More Deals").

The industry that could be shaken up most by Web TV is satellite, where the dominant providers are DirecTV (DTV) and EchoStar (DISH). Unable to offer extensive video-on-demand capabilities through their own networks, which are optimized for one-way broadcasting, satellite TV providers are hoping to find salvation online.
COUNTER MANEUVERS.

DirecTV currently offers fewer than 100 on-demand titles a month, compared with 7,500 programs from Comcast, the largest U.S. cable operator. But later this year, DirecTV will release a digital video recorder, to be used when its satellite TV service is resold through telecom carriers such as Verizon. The DVR will plug into the telcos' broadband connection to give users access to thousands of on-demand movies. Early trials show that adding the service increases loyalty, says Eric Shanks, executive vice-president of entertainment at DirecTV. When it's included, churn, or the rate of customer defection, drops by two-thirds, he says.

DirecTV, partly owned by News Corp. (NWS), is also working to make streaming video available through its own Web site. It's also in talks with popular social-networking site MySpace, fully owned by News Corp., on a possible joint video service, says Shanks. MySpace already offers an array of music videos, but analysts believe it could eventually provide a rich variety of video content.

Comcast, which sells a high-speed Internet service alongside cable TV, in December formed Comcast Interactive Media, which will offer a wealth of videos to broadband subscribers online. Eventually, cable customers could end up getting the same content online as they do over their TVs, says Comcast CTO Dave Fellows.
"NOT GOING AWAY."

Telcos are also working to introduce cool, new Internet-based features. Verizon is building out its Web site video-content library. "There's definitely audience fragmentation [happening because of Web sites]," says Marilyn O'Connell, the strategist for Verizon's TV service. "We are trying to face that reality."

Verizon just introduced an application allowing customers to view local weather and traffic information with a click of a button on their TV remote. AT&T, which will introduce its TV-over-Internet service in as many as 20 new markets this year (it's in one market now), is exploring allowing people to go through their television onto Yahoo's (YHOO) site and viewing photos stored there in a TV slide show.

Indeed, many video Web sites could emerge as partners, instead of rivals, of traditional TV services. "We believe that television is not going away," says Julie Supan, senior director of marketing for YouTube.com, which doesn't plan to offer longer videos. "By working with us to promote their [longer TV programs], they could drive people back to the TV."
TOO MANY DEMANDS?

Google Video is already in talks with cable companies to discuss various models of content distribution, says Jennifer Feikin, director of Google Video. For now, though, the service has no wins to report.

Problem is, traditional TV providers may not be switching gears fast enough. "The technology is there, but all operators have a lot of things on their plate," says David Alsobrook, a director of video products at set-top box maker Scientific Atlanta, a division of Cisco (CSCO). "You can overwhelm the consumer with too many things."

Or worse -- you can underwhelm them with too few.