Cashing In on Changing Consumer Content Consumption

While a diving economy can sink service providers and their infrastructure vendors, those that can adapt to changing spending habits could see success in increasingly tough times. But accomplishing that tall task means smarter infrastructure spending, all while generating new revenue streams by monetizing assets such as HD content. Are they up to the task?

To the first point, with the cost of gas and utilities climbing, along with the cost of content, it stands to reason that savvy, cost-conscious consumers will look hard at ways to cut spending — but likely without completely cutting off entertainment. So, operators that buy smarter when it comes to executing their content strategies stand to gain by cutting the cost of providing their services.

As an object lesson, at least one recent and major product announcement called attention to the need for operators to do more with less from a power and footprint perspective: the launch of Cisco Systems Inc.’s monster edge router, the ASR-1000. Citing third-party analysis from Synergy Research, the vendor claims that, when compared to competitive offerings, each implementation of the Cisco ASR-1000 Series can result in carbon footprints savings up to 3,754 gallons of gasoline or 17 tons of coal annually. Those are some impressive numbers; to boot, it also requires minimal electricity for a router with the functionality of several separate boxes built in.

Cisco’s ASR-1000 provides big capabilities in a small, low-energy box.

The release does as much to help the vendor itself reduce costs as it does to help service providers potentially reduce theirs. It’s powered by a new processor that costs $100 million and four long years to develop. “It’s not the place in the product line where a new chip with high performance would shine, and so it leads to a question of whether the new chip is more to reduce cost of the hardware and thus hold up the margins,” mused Tom Nolle, president of CIMI Corp. “But as the first application of the new chip, it’s obviously interesting.”

That interest lies in the fact that by placing this kind of power at the network edge, service providers can more easily and efficiently supply content-heavy services to large groups of residential customers. The Cisco router supports features in software, instead of hardware blades, which means the ability to upgrade, minus costly truck rolls, which is music to many a service provider’s ears.

On the demand side, which is really what service providers are most interested in as economic turmoil takes hold, HD programming has big potential to whet even budget-strapped consumers’ appetites for the premium stuff. For instance, HD immensely has helped sports giant ESPN, which plans to have four channels in the format by year-end based on initial success. A test in the Los Angeles market found that ESPN programming in HD homes rated 22 percent higher than in standard-definition homes. That can be parlayed into higher ad rates for HD spots, according to Bryan Burns, vice president of strategic business planning and development at ESPN. The recession will have little impact on that, it seems: The percentage of HD ads for Monday Night Football was 20 percent in 2007, ESPN’s first year of carrying the telecasts. The figure is expected to reach 60 percent this year. “It‘s clearly a differentiator that has steered us to sponsorships over four-and-half years that total dozens of millions of dollars,” said Burns.

Service providers see the same opportunity. “It’s been years and years and we’ve finally reached the tipping point,“ began Bob Leighton, senior vice president of programming at Liberty Global Inc., a large cable company. “We finally have a business model that makes sense, and it’s focused on using HD to induce folks to take the digital programming package.”

More than 47 million American households will be paying for some type of high-definition TV service by the end of 2008, according to a new Pike & Fischer forecast. That figure is expected to soar to 103 million households by the end of 2012, the analyst firm said, a year in which multichannel operators are expected to land $2.6 billion in revenue.

“People may decide they'll save more by investing in home entertainment,” said Scott Sleek, director of Pike & Fischer’s broadband advisory services. “That way, they can microwave some popcorn and order an HD movie on demand instead of spending $50 or more to go out for dinner and a movie.”

Many providers that offer HD charge consumers anywhere from $7 to $10 per month for the set-top box needed to receive the HD signal in the first place. And then operators with VoD pay-per-view movies give consumers the option of viewing a title for 24 hours at $4.99 a pop. But price-wise, that’s still much cheaper than hitting the movie theater at nearly $10 per ticket per adult at night, or even buying new DVDs at anywhere from $15 to nearly $20 each. And, no time or gas is consumed as it would be in traveling to cinema monsterplexes, nor is extra money spent on buying overpriced snacks or playing expensive, colocated video games. And so, by combining HD with a cheaper and easier alternative to viewing TV shows and movies, service providers can be better positioned to help price-conscious consumers make their buying (or renting) habits more palatable.

This opportunity grows when you consider content options. Operators already are cutting deals whereby they get new movies for the VoD pay-per-view the same day as those titles become available on DVD. And for those that don’t want to pay anything for first-run movies and are fine with watching them on their PC screens, the list of Web options grows by the week. Service providers aren’t left out in the cold there, either; they can create innovative ad-driven revenue streams around this. Hulu.com provides movies for free if consumers agree to watch a two- to three-minute movie trailer. And others also are leveraging free-to-view by accompanying the content with ads you can’t skip. Follow the revenue profile and the picture looks pretty positive.

Meanwhile, DVRs from TiVo Inc. offer much more entertainment functionality than their recording roots. In the last few months, the consumer product pioneer has enabled its units to access and play movies from popular Web sites, and play music from Rhapsody, while allowing users to upload videos from YouTube through the box to the TV, on-deck.

And so, the bottom line is, cost-saving entertainment in the home options are aplenty. Effectively delivering and promoting them, however, will separate the winners from the losers as challenges get bigger and consumer spending shrinks.

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