December 3, 2006

Differentiate thru content in the IPTV promise

This past summer, when I was leaving AOL, one of the offers I seriously entertained was to run the consumer IPTV business of one of the biggest Indian conglomerates. India is an exciting market - large, young and growing very fast. I however turned down the offer because we were not ready to move back (offer came as a surprise, thru an old IIT batchmate), and I felt the IPTV market in India is still a few years away before attaining a critical threshold.

Phone companies, globally, are pouring billions of dollars into IPTV services mainly as a counter-strike against cable TV companies that have broken into the phone business using another IP technology, VoIP, stealing customers and driving down prices. Phone companies however face a greater challenge, as IPTV and video over DSL are relatively unproven technologies as compared to VoIP.

But nobody is arguing against the disruptive potential of IPTV service. It could transform today's video experience thru richly interactive, personalized and converged TV services for live broadcast, video-on-demand, PVR, peer-to-peer messaging, etc.

Understandably, most of the focus so far has been on the technology side of the equation (delivery mechanism, set-top-box, software, last-mile issue, etc). I however believe that uniqueness of the content and related services will be the critical differentiator for IPTV's long run success. This provides a great opportunity for content firms.

General content categories would be interactive TV content, Internet content and games. Few examples: interactive TV content that includes one-screen voting on shows like American Idol to decide winners, audience participation in game shows, viewers solving crimes on the CSI show, video games on the TV for casual gamers (~45MM in the U.S - largest online gaming segment with very heavy usage), interactive informational shows/educational courses (e.g., Discovery projects its Cosmeo online homework help service could be a $500M annual business when expanded globally), Internet TV (exponentially increasing Internet video on TV), etc.

In markets like N. America, S. Korea, and parts of Europe where cable and satellite already cover over 90% of the market, instead of re-purposing existing cable/satellite programming, IPTV service providers need to come up with original content that leverages interactivity and bandwidth advantages of the IPTV platform to differentiate and give users a reason to switch.

In other markets where the free, over-the-air, broadcast channels predominate with limited cable and satellite penetration (most of the large European countries such as France, Italy, and Spain; Hong Kong, Japan, China, India, etc), competition may be low for IPTV providers. But they still need to invest in unique, interactive programming to promote adoption as user resistance to spending on TV services is high in these markets.

Though the current global IPTV installed base pales compared to that for cable & satellite, encouraging signs are finally emerging. PCCW, world's largest IPTV provider out of Hong Kong, the most penetrated global market, last month reached the 500,000 subs milestone ahead of its projection.

Jon Miller's legacy at AOL

It came as a surprise to lot of folks when Jon Miller, AOL's CEO, was shown the door couple of weeks back. Time Warner had renewed his contract for three years last summer. And Miller is credited for effecting arguably the biggest and most fundamental transformation at AOL (one of many in the Internet pioneer's 20 years of rocky history). This involved changing the basic DNA of the company from an ISP based subscription model to the content based advertising model. So what went wrong? Here is my firsthand observation having been at AOL during this transformation.

Miller opened up AOL's walled garden of content and made most of it available free to web users in a major restructuring in Dec '04 that created three business units: Access (ISP), Audience (advertising) and Digital Services (point subscription products like Safety & Security, music, etc).

Audience became the most glamorous and fastest growing business internally and provided AOL a focused approach to capitalize on the booming online ad market. In some ways it was a last ditch effort to make AOL relevant again with its fast declining dial-up ISP business, which however still generated over 80% of its ~$8b total annual revenue. Opening up the walled garden therefore was a bold move that witnessed severe internal resistance - fear being pre-mature cannibalization of the ISP business. To Miller's credit, he chartered these rough waters admirably by providing the vision of complementarity and synergy between subscription and ad models.

AOL's early success so far (45% growth in Q3 '06 ad revenue) has primarily come from a combination of 1) sudden availability of its vast content for free, 2) the largest ISP consumer base within an immersive AOL client environment that comparatively generates much higher page views, and 3) overall online ad market growth. (1) is difficult to sustain, and (2) is dropping dramatically (AOL lost 2.5M subs in Q3 '06 over the previous quarter and lost 4.9M over Q3 '05). Monthly uniques have largely stagnated over the past few quarters (~110M, incl Time Interactive). People blame Miller's lack of operational experience as part of the reason. Though he did a great job in setting the right strategy and demonstrated persuasive skills in getting it off the ground, taking AOL to the next level requires a seasoned campaigner. His lack of charisma could have also gone against him. Others blame his not-so-cozy relationship with the Time Warner management, which thought Miller acted too independently.

AOL missed the Web 2.0 boat on several fronts (AIM was the original online community, and should have been its "MySpace"), and it has struggled to attract and retain the best talent over the past several years. Location in obscure Dulles does not help either (though the power center may be moving to NYC now).

How Randy Falco, a traditional media veteran with limited online experience, now turns AOL into a nimble, web services and product company could make for another interesting HBS case study (muffed Time Warner/AOL merger being the other famous one).