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IPTV/VoD: The world that's on its way

Part three: We're only 1% of the way there

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Industry comment A lot of frustration is levelled at content providers and it's very easy to see why. Dealing with the studios and production companies can be like pulling teeth if the approach isn't correct.

Surprisingly, dealing with record labels is actually very easy as they've had five years or so of violent erosion into their sales from the establishment of a piracy market for digital files and the new market forcing change upon them involuntarily.

As Universal's recent gesture of opening up its catalogue for free suggests, it has come to accept a new role as wholesaler, will licence to anyone who asks to get its products distributed as widely as possible, and now refuses to deal exclusively with anyone.

The market for digital distribution is already there in the form of piracy. The labels now understand what their retail customers have been telling them for years, and that is the new model in a world of universal ability is aggregation, paid for by revenue-sharing and advertising.

Digital sales are now contributing up to 20 per cent of their total revenues and the profits are piling in. If only their big brother companies in TV and movie-making would listen. They are paranoid about falling into the same trap the labels allowed themselves to walk into, but still won't open their ears.

The attitude these two types of industry share has come to be known as the "Ivory Tower Complex". The conventional way of doing things up until now has to be to spend huge amounts of money on producing high quality content that is licensed exclusively through the rights model to one or two specific customers on a very, very limited basis. That exclusivity commands a lucrative premium. Understandably, they want that to continue, and in some ways it will as people will always be attracted to the premium titles they produce before anything else.

Unfortunately, as the evidence from the music industry shows, the world that's coming isn't going to work like that. Content will be distributed as widely as possible all over the world, to as many different people as possible for maximum profitability. Their products will compete with those from niche markets catering to a specific taste rather than a generalised audience. That means they will lose that lovely premium, and it's quite upsetting.

Luckily, the exciting news is that universal distribution will most likely make them up to 50 times more money in the long term that exclusivity would. What they lose in exclusivity, they will make back in spades through volume. The longer they resist the inevitable, the more painful it will get. Whoever strikes first will conquer.

So assuming they come to adopt this new way of doing things, there will naturally be obstacles in their path as there are with all new technologies and markets. One of the biggest is the industry's new panacea – the so-called "Long Tail", and its "digitisation problem".

The Long Tail is a great idea and a potential source of a lot of lovely revenue, but it has some very crucial flaws which are currently preventing it from becoming a new model for content providers. It's the most basic of issues, namely how on earth you monetise back catalogues of content that no-one will be prepared to pay for in pay-per-view style.

Digitising and storing millions of hours of archives tapes is a formidable challenge, so the only sensible business decision is to provide the most popular 10 to 15 per cent of titles at first. This will mean we will see cascading availability based on viewer demand, and store-for-free/pay-for-playout businesses.

Ninety per cent of the content of the world is not sellable by the conventional mechanism of pay-per-view. It's a sobering thought. Viewers just won't pay for it, even in micro-transaction or through subscription. The most popular video on-demand services are free (for example, so-called "Catch-Up" TV services that allow you to watch programmes you missed), like all products.

That leaves only one viable option as the primary means of recovering the costs of digitisation and monetising the content – advertising. Google, AOL, Universal, YouTube, and others are already flirting with ways to marry advertising content with either the subject of the content being viewed and/or a viewer's personal profile and preferences. Only a fool would follow it as the only route, and as the dotcom and Web 2.0 herd showed, there are a lot of them out there. It may not perfect, but it's a reasonable start.

That principle demonstrates a very simple rule which applies to advertisers, their agencies, and those who want to support their services using the old commercial broadcasting model. The new advertising "space" to be bought by media buyers on on-demand systems is the ability to watch for free. Subscription mounts as a premium service very nicely on top if the ads become too intrusive, and it means advertising can be dynamic and personalised rather than static and perpetual. But it also creates a further problem. Advertising always generates a surge of technological innovation for products that remove it.

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