Bill Tancer is General Manager of Global Research at Hitwise. He writes a weekly column for TIME magazine on consumer Internet usage and is the author of Click: What Millions of People Do Online and Why it Matters, to be published September 2008 by Hyperion.

There’s a lot of hype about the rise of online video. Network and pay-TV brands are scrambling to devise strategies to maintain viewers without cannibalizing revenues. Panic seems reasonable given how we’ve seen the Internet rapidly erode other industries such as print news, with readership and revenue streams rapidly disappearing. Is the pay-TV industry next? If so, what is the proper course of action?

Hitwise online competitive intelligence service reports on the Internet habits of over 10 million Internet users in the US. More than hypotheticals it gives a clear picture of actual Internet user behavior. The Hitwise sample reports on over one million websites that are divided into 172 industry categories – including entertainment and multimedia.

It is indisputable that when you discuss online video there is really only one significant player today: There’s YouTube and then there is everything else. Hitwise tracks over 740 different online multimedia sites. If you combine all of these sites, YouTube would account for 55% of all user visits. The next closest competitor is MySpaceTV with only 7.1% of visits to the same category. Since YouTube is a Google subsidiary, if you add Google’s video search element, video.google.com to YouTube’s market share the combined properties have over 58% of the market. Since it premiered in 2005 no video site has mounted a credible challenge to this video behemoth.

YouTube’s impact

Having eliminated most of the noise in the debate about the future of online video, we can focus on the industry leader and its impact on traditional media. With YouTube as the primary threat to traditional television content the next logical question is who is consuming videos online. The pervasive myth is that online video continues to be the domain of young Internet users. Actually while that statement was true at YouTube’s launch in 2005, today the most predominant demographic for YouTube isn’t the 18-24 year-olds or even the 25-34 age group. The largest demographic, accounting for 22.3% of all visits to YouTube over the last four weeks, is 35-44 year olds. But here’s the shocker: The 55+ age group isn’t far behind. It accounts for 19.1% in the same time period.

‘The pervasive myth is that online video continues to be the domain of young Internet users . . . While that was true when YouTube launched in 2005, today the most predominant demographic . . . is 35-44 year olds. But here’s the shocker: The 55+ age group isn’t far behind. . .’

With such a wide spread of visitor age groups you might convince yourself that it’s game-over for traditional television. However I wouldn’t come to that conclusion just yet and here’s why.

Traditional TV adjusts to reality

The saving grace for pay-TV today comes down to a single issue: form factor. While every age and socio-economic group has glommed on to online video, only the younger online viewers are willing to watch traditional length content on computer screens versus a wall mounted plasma or LCD.

Perhaps it’s due to age, the ability to watch extended content on a small screen, or the generation gap. The fact is that traditional online media is consumed primarily by two groups: business travelers and Generation Next.

In fact if we look at the average session time for visits to YouTube across all age demographics the average time is just over 20 minutes per visit over the last year. When YouTube launched in 2005, the average time per visit was just over five minutes. This is important as it represents a typical timeframe for uploaded consumer generated media as well as a suitable time period for watching music videos and professionally produced skits.

How long are online video visits?

Looking at the average visit time over the last three years, it appears that the consumption of videos online has hit the wall short of the 30-minute television sitcom. Until the convergence of Internet and television becomes a mainstream reality (and the second generation of Apple’s iTV may be the first step) the online 20-minute limit will protect television in its current incarnation.

Should cable and satellite operators completely disregard online media consumption? Absolutely not. The key to survival for television as it exists today is for players to act outside the box and do the counter-intuitive. They should embrace online video.

Given the statistics I quoted at the beginning of this article, that doesn’t mean competing with YouTube. Unless someone comes up with the next disruptive online video technology, such a move would be certain online suicide. Rather, in order to succeed, pay-TV operators have to embrace what some would consider the biggest competitor to television.

The challenge for traditional media is to find video material that satisfies the appetite of the online video watcher, but which also serves a very specific purpose: to drive online viewers back to their TV sets.

All it takes is a little guerilla market research. Bear in mind that YouTube sorts its video content by ranking and popularity. This provides an interesting gauge of the types of content that gain traction. By supplementing market research with competitive intelligence and demographics, content specifically developed for the Web can serve to reverse the tides, sending online viewers offline.

The simple fact is that YouTube and online video specifically aren’t going to go away. Online video viewership will only continue to grow as long as mass adoption continues. If used correctly this new type of media can be the perfect advertising and branding vehicle for today’s television programming. Winners in the new Wired World 2.0 will have to find a seamless way of integrating all forms of content consumption.

Despite strong cases on both sides the fact remains that upgrading set-top boxes is expensive. The opposing interests led to an impasse because neither the operators nor their subscribers were interested in facing increased costs. The technology was ready but neither side was ready to pay for it.

“As is sometimes the case with financial decisions, this can be a deal breaker,” says Alexandre Maes, VP Sales, NDS France. “In addition to the advantages for all parties, changing set-top boxes to add functionality can be an investment issue,” he explains, “because operators traditionally buy the boxes and rent them to their subscribers.”

Hard drive meets STB

NDS recently deployed a solution to this impasse. Working with specifications from the CANAL+ GROUP in France, one of Europe’s largest pay-TV and DTH operators, NDS middleware now enables subscribers to connect an external hard drive to their STB via a USB port. In the case of CANAL+, they decide which hard disks their subscribers can use. The result: DVR functionality without changing STBs.

CANAL+ GROUP is now encouraging customers to upgrade to HD and DVR functionality. They have deployed NDS middleware to support their latest satellite dual tuner HD STB in France.

Dual tuners enable subscribers to watch one program while recording another.

The bottom line for pay-TV operators is that they can pass the buck back to the subscribers. Should subscribers be up in arms? “Definitely not,” Maes says. “Introducing the possibility of using external hard drives increases their viewing flexibility. They can benefit from DVR functionality without actually having a DVR,” he says.

The technology that enables this change is a new version of NDS MediaHighway® middleware which can be automatically downloaded to the STB. “HD STBs now detect a new external hard drive,” Maes explains, “and format the drive to be used as a DVR. Actually, subscribers can even use more than one external hard drive if they want,” he says.

NDS middleware has been deployed in over 83.1 million devices worldwide and its DVR technology leads the global market, having been deployed in over 12.1 million devices. By introducing external hard drives into the equation these numbers are set to grow.

“MediaHighway enables CANAL+ GROUP to offer its consumers the choice of the industry-leading pay-TV solutions it required,” says Caroline Le Bigot, NDS VP EMEA. “In the process it has demonstrated that it can handle complex requirements,” she says.

Benefits of external drives

• External drives are more cost effective than a new STB and the subscriber pays the bill. However, subscribers also gain because they may already own a compatible hard drive.

• The price of memory goes down constantly while the price of development of STBs doesn’t. In any case there is minimal cost to the operator while the cost to the subscriber is not prohibitive.

• External hard drives can actually extend the life of STBs which traditionally have a fixed amount of memory built in. By attaching external hard drives subscribers can upgrade their STB without increasing their monthly fee.

• Convenience. Traditionally subscribers go to the retailer to choose both the box and the service(s) they want. This takes time and energy. No one wants to replace the STB a few years down the line in order to accommodate new functionality. External DVRs work with the STBs subscribers already have. No replacement is necessary.

• This process is immediate. It works with the already installed customer base in a few days, minimizing logistical implications.

“This can be both a major step forward as well as a new business model for pay-TV operators worldwide,” Maes says. “What our experience with CANAL+ GROUP shows is that they were able to turn thousands of STBs that did not have hard drives into DVRs virtually overnight. And it didn’t cost them anything in hardware investment.”

“By using MediaHighway, subscribers can now plug a hard drive into their STB and in a matter of minutes they have a DVR,” Maes says. CANAL+ GROUP has deployed the latest generation of MediaHighway which easily allows subscribers to transform their HD set-top boxes into HD DVRs.

“NDS middleware has enabled CANAL+ to improve its offering,” Maes explains. “CANAL+ GROUP saw how successful it is in just a few months. And because subscribers don’t really have to do anything, what this amounts to is ‘convergence plug and play.’ There is no down time,” he says.

“This is the first time that external hard drives are being deployed in this way,” Maes says. But considering the advantages that NDS middleware delivers to both operators and subscribers, it may very well become a major step forward in the pay-TV market worldwide.

For more information:

NDS MediaHighway®

Two recent pay-TV industry events in India illustrate how important this burgeoning market is to NDS. First was the Convergence India 2008 Exhibition held in New Delhi in mid-March. Second was the opening of the NDS office in New Delhi, announced this month.

At Convergence India, NDS was one among hundreds of exhibitors. “What we showed is a full range of solutions geared to help TV service providers enable convergence and capitalize on the business opportunities it presents,” says Hong Kong-based Martin Kaufmann, NDS Corporate Director for Consumer Devices.

“Specifically NDS presented a live demonstration of the Tata Sky end-to-end solution that features VideoGuard® conditional access technology which provides the robust security required to deliver services and premium content to multiple devices, as well as NDS middleware and the latest NDS interactive services for subscribers,” Kaufmann says.

[For more on Tata Sky, see “Tata Sky's MD & CEO Vikram Kaushik: "Target is 1 million subscribers in first year” in World Vision No. 34.]

“At Convergence India we also showcased NDS’ latest and future technologies designed to help service providers take advantage of the business opportunities that convergence presents in the region.” Kaufmann is in a unique position to comment on the commercial potential in each territory in the Asia Pacific region.

India: ‘Dynamic and exploding’

With close to 130 million TV households, India is a potentially huge pay-TV market. Of this total there are an estimated 82 million pay-TV subscribers, of which only about 4 million are digital subscribers. Kaufmann describes the Indian market as “both dynamic and exploding. Operators want everything yesterday. Because of the scale of the market, almost the only consideration is financial.”

Given the financial pressures, one could discount how robust the Indian market is,” Kaufmann says. “But that’s one of the paradoxes. The operators are really delivering. It’s not uncommon for an operator to gain 1 million subscribers annually.”

“One of the reasons for the fierce competition is government regulation,” he says. “Basically all operators must offer the same channels,” he says.

Despite tight regulations, seven new operators have been granted DTH licenses recently. “New operators are entering the market all the time. Despite the impressive performance of some of them, I wonder how many more the market can support in the long run,” he says. “After all, for all intents and purposes the US only has two major satellite operators.” In light of this analogy, Kaufmann wonders how Indian operators will survive.

The answer: Digitization, added services

Because of the vast size and scope of the Indian market there are significant opportunities for savvy DTH and digital cable players to enter the fray and gain market share prior to likely future consolidation.

“At present most of the platforms and analog providers don’t even have real EPGs. This opens up opportunities for the major players to offer digital services like customized EPGs as well as effective conditional access, interactive applications, multiple languages and DVRs.”

Does he expect the Indian market to settle down? “I think it will -- eventually. What we expect to see is increasing competition between DTH and cable providers for position and market share. The market is still very competitive and driven by financial considerations. This will ultimately benefit viewers who will be able to choose from a broader selection of higher quality services at competitive prices.”

MPEG-4 and DVB-S

On the technological and standards side of the Indian market there is good news and bad news. MPEG-4 is the good news.

“Virtually all Indian operators are launching MPEG-4 for standard definition broadcasting,” Kaufmann says. This is at a time when most European operators are still using MPEG-2. “The result of introducing MPEG-4 is that it has brought down the price of STBs and related CE devices to a level the market can support.”

“Because of the size of the Indian market the shockwaves that result from this situation have in fact affected STB prices around the world,” he explains.

Despite this effect on the world market there is still tight regulation on STBs as well. The Telecom Regulatory Authority of India (TRAI) specifies what STBs must do, how much they can cost, and what percentage of programming can be commercial. “What this means is that on one hand the Indian market is determining the worldwide fixed scale price for STBs while on the other hand, the local regulators are determining what these STBs must include.”

Now for the potentially market-inhibiting bad news: the dynamics surrounding DVB-S and DVB-S2 – variants of the standard for satellite broadcasting. “There are currently discussions about what standards to adopt.” DVB-S is the original satellite broadcast standard, while DVB-S2 is the more recent standard. “The problem is that some of the legacy broadcasters are trying to block the introduction of DVB-S2 because they see this as a way of maintaining their advantage over newcomers.” Their arguments are being considered.

Cable market: ‘Amazing’

“It’s abundantly clear that numbers are what drive the Indian pay-TV market,” Kaufmann says. This applies to both numbers of subscribers and prices. “When it comes to the cable market the numbers are nothing short of amazing.” He explains that of the estimated 60 million potential cable homes only about 2 million have actually been connected.

“There are somewhere between 30,000-80,000 cable operators in India today. No one knows exactly how many operators there are and virtually anyone can obtain a license.” Some of the operators are as local as serving one street in a major city.

“In other words the Indian cable market has been extremely fragmented but it is now entering the consolidation phase,” he explains. This will require operators to identify their subscribers, have proper accounting procedures and obtain licenses for the channels they offer. “This will no doubt change the face of cable broadcasting in India,” Kaufmann predicts.

“Taking into account factors like the dynamics of the local market, the size and the scale, as well as regulations, operating locally is a major advantage for a company like NDS,” he says. “We employ 900 people in India. This is divided between our commercial offices in Mumbai, our new sales and support office in New Delhi, as well as our Bangalore R&D center.” As for other countries in the Asia Pacific region, NDS also has local offices and R&D centers in China, Korea, Hong Kong and Australia. “Each market is different but each is essential to NDS,” he says.

China: ‘Highly regulated’

China is the second major market in the Asia Pacific region. This market was discussed in "China: World’s Largest TV Market Poised for Major Advances" in World Vision No. 38.

“What is significant in China is that it is a highly regulated cable market,” Kaufmann says. “There is no satellite broadcasting.” The government has mandated a program called Ping-yi that will switch off all analog broadcasting by 2015.

“At present the offerings are very basic. This means there are virtually no EPGs. But Chinese operators are starting to ask NDS for DVR services as well as hybrid IP and middleware applications. The Chinese market is clearly poised for a variety of key changes,” Kaufmann says.

Korean market: Technology is paramount

If the pay-TV market in India is characterized by its size and effect on the world market, and China is known for its size and regulations, the market in Korea is most characterized by the advancement of technology.

“Because of the emphasis on technology, the market in Korea is very different from both India and China. The Koreans are often more interested in pushing the bounds of technology than in determining whether they actually need a given application or poring over spreadsheets assessing how much commercial sense it makes.”

“Where the extremes come together is in Indonesia, Malaysia and the Philippines,” Kaufmann says. “In these countries the pace is slower and they are interested in both price and technology.”

Massive growth and change afoot

It is obvious that there are considerable opportunities in the Asia Pacific region. This is based on the fact that the region has three main leaders: India and China because of the scope of their markets, and Korea because of its technology leadership.

“As the region rushes towards digitization of the pay-TV industry we can expect to see massive growth and change,” Kaufmann says. “New operators will enter developing markets and will want to establish their market share. As markets become more established the key players will probably have to consolidate. This will result in a more sustainable long term situation.”

“It is too soon to know who the winners will be in this rush to lead this dynamic emerging digital market,” Kaufmann says. “What is clear is that they will have to have deep pockets and be early adopters of value added services made possible by digital pay-TV technology.”

When Hugo the Troll was first introduced almost 20 years ago, no one really expected him to become a pioneer. But he did.

At the beginning, Hugo’s presenter used the Animation Mask System (AMS). This was basically an ice hockey helmet with sensors that monitored face movements. What was important about Hugo’s early capabilities was that the action was real time. He could talk to viewers at home.

In the course of time the AMS system was replaced by the Virtual Interactive Animation System (VIAS) which brings life to one or more virtual characters in a virtual studio. A game controller, a microphone and a dedicated graphical user interface (GUI) are used to control the characters, virtual cameras, lights, and other elements of the virtual scene. This set-up increases flexibility. For example it can be operated either by a single person or by an actor who controls the character inputs while a producer switches between the different cameras. The result is that the VIAS application renders high quality video and audio that is ready for broadcast.

Developing real time 3D characters

The VIAS System can also enable a virtual TV host or multiple virtual characters to interact with each other. The system can be used in a live situation as well as offline to create cost effective interstitials (gaps) or program bumpers.

“The latest challenge is making Hugo and other characters appear in three dimensions without losing the real time element,” says Martin Ciborowski, Team Leader of Video Based Entertainment for NDS Denmark. His team includes an animator, two 3D graphic artists, four programmers and Ciborowski who functions as the art director.

“We develop 3D interactive TV characters that are animated in real time. The 3D interactive technology delivers characters that look real and act real,” Ciborowski says. But that’s not all. “Broadcasters can now choose to have a 3D version of one of their brands as host of a TV show,” Ciborowski explains.

“Most of the early real time 3D applications were for children’s programming,” Ciborowski says, “but we’ve moved way beyond that. What we’re doing now is looking for ideas and products that support 3D interactivity on TV.” For example, his team is currently working on a poker application. “The idea is to have a lot of people playing poker,” he says. Real people. “Well, they’re actually 3D interactive TV characters who look like and respond like human beings in real time.”

Lifelike Internet poker

The 3D poker application looks like a game of poker on the Internet, he says. “The difference is that in this case each character is represented by a 3D avatar. We have hosts and poker experts in a virtual studio,” he says. “They can bring up the action at any table. It’s a streaming poker application.”

“What’s important to us is that we’re constantly looking for new technologies that enable us to interact with lifelike 3D characters in real time. These are the characters that we create.”

In other words, Ciborowski and his team are bringing 3D characters to life.

One of the possibilities Ciborowski’s team is currently working on is having a camera that can track the characters’ activities and motions. “This would enable us to translate the motions into the motions of a 3D character that looks real.”

3D Talk Show Repartee

Who would be interested in such a character? He explains that on a late night talk show, like Jay Leno, producers currently use two dimensional characters when they want to present a parody of someone in the news.

“What we’re working on is having an actual 3D character on a TV talk show host’s desk. The host could carry on a conversation with a character that looks real.”

In order to create such a character, Ciborowski’s team has to translate and adopt body language, facial expressions and even emotions for a variety of characters. “Development of these characters is a constant challenge,” he says.

“A possible next step is implementing a game pad that can be swung by the player,” Ciborowski says. This will allow people to play golf or baseball at home.

There’s more. “In order to enhance an actor’s actions, we’re investigating the possibility of using 3D cameras that show different parts of the body and actually recognize hand and head movements,” he says.

“Basically all of these potential applications require bringing the actor (or host) closer to the 3D character in real time,” he says. “This means that in the near future we could actually have 3D characters taking part in a game or a meeting.”

Endless Possibilities

The 3D engine that runs these applications can also be used for both PC and console games, Ciborowski adds. “This will allow us to develop an almost endless variety of games. At present we’re using the 3D engine to take control of 3D characters.”

As an example, good old Hugo is now in a game called “Cloud Cruiser.” “We have Hugo standing on a hover board. During the game he negotiates a track through the clouds, picking up coins as he goes.”

The way the game works is that players call into a live TV show and use buttons on their telephone to have Hugo jump between different tracks while avoiding obstacles.

“At NDS Denmark we are developing games and interactive applications for set-top boxes that are as interesting and exciting as commercial games developed for games consoles,” Ciborowski says.

“One of the challenges we face is taking 3D games and porting them to an STB so that the video content is actually stored on the subscriber’s DVR,“ he explains. This means viewers can choose if they want to play a game live (via their phone) or in their home, whenever they want, when it is streamed to their DVR box.

“We’re looking in many different directions,” he says. “The fact is, the possibilities are endless when it comes to developing 3D applications,” he says. “The real test is delivering real time animation to the subscribers.”

For more information:

NDS Interactive TV

Gerry Oberst is a partner in the Brussels office of leading law firm Hogan & Hartson. During his 17 years in Brussels he has participated in numerous CEPT and European Commission activities related to radio spectrum and regulation of electronic communications. The views in this article are his own and not based on client or law firm positions.

The global shift towards digital broadcasting is supposed to free up radio spectrum resources because efficient digital transmissions take up less spectrum than traditional analog technology. The question of who gets to use this so-called “digital dividend” (in the UHF 470-862 MHz band) is creating policy and technical controversy, as major industry players seek to snare the newly available spectrum. The ongoing technical work among European spectrum managers on how to use the dividend has dug up so many technical hurdles that final parameters could linger until shortly before the 2012 goal to turn off the last of Europe’s analog television transmissions.

Europe has a special challenge of seeking to coordinate the spectrum demands across its many national boundaries. Decisions require a large degree of coordination by regulators across markets because radio waves do not stop at national borders.

There is general recognition that resolving the technical issues is key to unlocking the dividend for new services. France’s government commission on the digital dividend made this point clearly in a report issued in the first quarter of 2008, when it said that the switchover from analog to digital transmissions does not automatically create new opportunities. Instead, the only way to create a dividend is to adopt a definitive frequency plan that best reconciles the needs of the different potential users.

This will not be an easy job. Legacy broadcasters want to keep the spectrum they have traditionally used to provide new services; wireless broadband and mobile telephone providers want new spectrum wherever they can get it; and both sectors are searching for new mobile broadcasting opportunities. Meanwhile, conservative spectrum managers have a difficult time reconciling different national views on how to co-ordinate the frequencies and work out the technical details.

Plans and constraints

There are some basic constraints on how to use the digital dividend. The new digital television broadcasting channels were organized for Europe in an international conference held in Geneva in 2006. The resulting “GE-06” plan allotted the bands to permit reception of up to 7 or 8 channels in most regions, each capable of supporting a multiplex of programming. The channels were carefully planned to prevent interference, with the result that in certain countries some television channels will not be used for broadcasting, but instead will be used for services such as aeronautical radionavigation or fixed services.

Another constraint is that the most recent regional world radio conference allocated the upper part of the UHF spectrum in Europe to mobile services from the year 2015. Some European countries could use the band earlier as long as the use is technically co-ordinated.

Nobody wants to return to an international conference that takes years of effort and involves countries outside Europe. Thus the GE-06 plan is more or less fixed in stone. Nevertheless, European regulators will be rearranging some of the GE-06 bands with their neighbors for years, through bilateral or limited multilateral co-ordination to increase their available channels. These efforts will create a trail of uncertainty irrespective of digital dividend considerations. The experts say that the digital dividend’s technical issues should be included in these efforts to avoid duplication.

Trying to cut through the technical issues, the European Commission has taken two tacks. First, it issued a policy communication in November last year, proposing a harmonized “clustering” approach to create harmonized bands for mobile television, wireless access and other services while leaving broadcasting spectrum to national management. Second, it issued so-called mandates to the Conference of European Postal and Telecommunications Administrations (CEPT) to examine the technical details. It is not obvious, however, that the answers coming from the technical side are consistent with the Commission’s high level concept of clustering services into defined -- and mandatory -- bands.

Harmonization is feasible

The first mandate, issued in January 2007, called for an overall analysis of the digital dividend. The CEPT has already issued two lengthy reports plus an update, with a third report pending. The basic message of these reports is that harmonization is feasible, but only if it is not mandatory and individual member states are given flexibility to negotiate with their neighbors. A harmonized approach that is not mandatory is the standard CEPT modus operandi but this often results in delays, because some administrations do not implement “non-binding” decisions.

In its pending third report to the mandate, the CEPT has reviewed how to permit new services to use gaps between the assigned channels. These gaps are called “white spaces,” which vary over time and may only be available in limited areas. Traditionally these frequencies have been used by broadcasters for wireless microphones, short range transmissions connected with special events and other “program making” services (under the general acronym of PMSE). In addition to accommodating the PSME crowd, the CEPT focused on new approaches including short range personal devices, such as WiFi cards in laptops computers and “cognitive radio” techniques based on equipment that would sniff out unused frequencies and only operate when no interference is possible. The CEPT report (presently still in draft) depends on a substantial level of national flexibility.

Technical considerations

The technical beat still goes on. In April this year, the European Commission adopted a second mandate on technical considerations, calling for final reports into technical conditions by June 2009, channeling arrangements and how best to protect the PMSE services. This last point shows the continuing strength of the broadcasters, whose ancillary services are elevated in this second phase to a major topic.

The CEPT body working on these issues has scheduled meetings to the middle of 2009. However this schedule does not signal the end of the technical considerations because the CEPT has already developed a “technical roadmap” for relevant options and scenarios, which on its face seems to require work beyond the June deadline.

Reconciling the aim of the European Commission to harmonize the bands with the approach of CEPT spectrum managers to adopt non-mandatory structures is the task ahead. We do not expect to see an early resolution. Broadcasters are still fighting a rearguard action to preserve all their spectrum birthrights while mobile operators warn that the US is already reassigning channels. Countries such as the UK that are more advanced on the digital trail are itching to get on with the process. Others may not even make the 2012 deadline for the analog cutoff. On the policy side there is a sense of urgency, but the technical roadmap is still long and challenging.