GLG News by James Meyers, MS. EBA

Implications: 1. Fox and Paramount “experiment” with new release sales on iTunes      2. Studios have hesitated to offer new releases for sale on iTunes due to pricing fears and the fear of Apple becoming al too powerful.

Analysis:  Fox is offering JUNO for purchase on the same day as DVD and Blu-ray release.  Paramount has begun testing iTunes download sales. Recently, Paramount’s BEOWOLF was offered for purchase shortly after DVD release and JACKASS 2.5 was made available one week before DVD release.  

Due to concerns about iTunes pricing and fears of iTunes power in the Music business other studios have hesitated to sell new releases through the Apple platform.  Until recently, Paramount only sold a limited library of older titles through iTunes.  

As predicted in an earlier posting “Apple Plans VOD Platform to Placate Studios” 9/7/2007, the resistance to iTunes is softening as the studios are gaining more control over their movie release windows and pricing.  In January, all the major studios agreed to license to the iTunes rental service during the video-on-demand release window.  The licensing terms of the Apple rental deals are comparable to the VOD revenue splits with the cable and IPTV players (if not somewhat better for the studios).  

Moreover, the studios are wrestling with growing electronic sell-through and electronic rental, without further weakening DVD sales. Fox, Paramount, Warner Bros, Universal and Sony have a variety of new and old releases for sale and rental on Amazon’s Unbox platform. However, one and a half year old Unbox does not appear to have added much to Amazon’s business as the service isn’t mentioned in last quarter’s earnings announcement.  

As for new releases, expect some further growth as Fox plans on offering more releases for sale on a title by title basis and Paramount will continue its experiment with iTunes on a down load to own basis during the DVD release windows as well.

Implications: 1.  Sharp recently regained the number one spot for sales of HD LCD TV’s from Vizio.  2. 60% households who are planning to purchase a new television in the next six months are planning to buy an HDTV set.      3.  DIRECTV is achieving strong HD growth.

Analysis:  Sharp recently regained the number one spot for sales of HD LCD TV’s from Vizio.  The North American TV brand sell-in rankings were shaken up in Q3 2007 with Sharp on top in LCD TVs for the first time since Q1 2005. Sharp led the North American LCD TV market with an 11.3% share, rising from #3 in Q2 2007. Vizio fell to #2 despite 334% YTY growth. Vizio had the slowest QTQ growth of the top five LCD TV manufactures. Vizio’s slower Q3 2007 sequential growth can be explained by the less seasonal nature of its primary sales channel: the warehouse club channel.  

Almost all households in the U.S. have at least one television in their home (99%) with 47% having three or more television sets. HDTV penetration currently stands at 23% with 22% of these HDTV households having two or more HDTV sets. World Wide flat panel TV spending will exceed $100 billion this year with US HDTV sales to top $65 billion by 2009.  According to CTAM (Cable and Telecommunications Association of Marketing), 60% households who are planning to purchase a new television in the next six months are planning to buy an HDTV set. Of those households, 47% are planning to purchase a LCD set, with 33% planning to purchase a plasma HDTV set.  

DIRECTV achieved strong HD performance in Q3 as well, with net subscriber additions increasing by 45 percent to 240,000, driven by gross additions of 1.032 million.  Over 50 percent of the gross 1.032 million additions in the quarter signed up for HD and/or DVR services compared to only 28 percent a year ago.

Implications: Viewer-ship is down at the broadcast TV networks.   The new Nielsen ratings system may have an equalizing effect on the flight of ad dollars from broadcast to cable TV.

Analysis: For the first time since 2001, advertising expenditures have deteriorated for two quarters in a row. Ad spending is down from 2006 levels, especially across traditional media: broadcast TV, newspaper and radio. Total advertising spend has dropped 0.3 % in the first half of 2007 to $72.6 billion as compared to the first half of 2006. Moreover, with the uncertainties of near term economic growth and consumer spending it is expected that ad expenditures will continue to weaken through the second half of the year.

Viewer-ship is down on the broadcast TV networks as the cable networks continue to consume the broadcast networks’ audience. For the week ended Sept. 2, 2007, Nielsen registered a 20-year low in ratings among the highly desired 18-49-year-old bracket for NBC, Fox and ABC. As such, network TV is being impacted as advertising income has dropped 3.6% to $11.8 billion since the first half of 2006 and in response, cable TV adverting income has risen by 2.8% to reach $8.4 billion for the same period.

Interestingly, the new Nielsen ratings system may have an equalizing effect on the flight of ad dollars from broadcast to cable TV.

Implications: FiOS concentration on customer satisfaction is translating into very low churn.     FiOS TV is top in customer satisfaction with DirecTV second, Dish Network third, Comcast tied with AT&T U-verse in fourth place, followed by Cox, Cablevision, Time Warner, and Charter.

Analysis:  

FiOS TV beat all its competition in the September 12, 2007 customer satisfaction survey conducted by ChangeWave Research. The study measured the responses of 1,586 consumers and counted the number of people who are either very satisfied or somewhat satisfied with their current TV provider. Adding these two responses together, FiOS TV scored 96%!  DirecTV was second with 89% and Dish Network came in third with 82%. Comcast tied with AT&T U-verse in fourth place with 73%, followed by Cox with 72%, Cablevision with 70%, Time Warner with 68% and Charter with 56%. This survey also revealed that 13% of subscribers are considering changing their TV service provider, with nearly half of those planning to switch to fiber-optic service.

In another survey FIOS overwhelmed all of its broadband access competition, getting 96% “excellent” or “good” rating. In this survey, ComputerWorld poled 1,163 of its readers. Of the whole broadband industry 79% of the respondents rated their overall broadband service excellent or good, 73% were satisfied with download speeds and 59% rate their upload speeds “excellent” or “good.”

Verizon’s FiOS has received top scores from a number of important surveys in recent months, including the American Customer Satisfaction Index and PC World. These results show the importance to delivering a great customer experience in a very competitive marketplace. Furthermore, these efforts have resulted in FiOS TV churn (approximately 1.5% per month) to be better than half of the Cable TV average (3% per month).

Implications: 1. iTunes is cannibalizing NBC home video sales.    2. Apple’s solution: open an iTunes rental / Video-on-Demand platform.

Analysis: Part of the issue NBC has with Apple is that iTunes is cannibalizing home video sales. The model iTunes is utilizing today is one of ownership. The typical home video ownership / rental window usually does not open until the TV season is complete and the studio then can offer the whole season on DVD. By allowing iTunes to make the show available for ownership the moment the show has aired (and also offering discounts on pre-buying the season) is ultimately impacting the very lucrative home video market for these hit TV series.

Apple does have a solution: opening an iTunes rental / Video-on-Demand platform. Studios that already sell movie downloads on iTunes, such as Paramount and Disney, are very interested in the VOD offering. Furthermore, when the VOD service launches, Apple TV could see a huge pick-up in sales. Apple TV has not been able to gain much traction with consumers since its launch last spring.

The licensing terms of the Apple VOD deals would be comparable to the revenue splits with the cable and IPTV players. However, some of the studios are not licensing their content until they can resolve the issue of price with Apple.

Most of the studios have very different ideas about the price of their content compared to Apple and Steve Jobs. Only Disney, where Jobs is the biggest individual shareholder, is selling new movies thru iTunes. For $12.99 the iTunes consumer can own Disney movies and for $9.99 they can own library titles from Paramount, MGM and Lions Gate.

Implications: The Internet may soon become US consumers’ primary entertainment source. The consumer is ultimately looking for longer professionally produced content for their online and mobile experience.

Analysis: The Internet may soon become US consumers’ primary entertainment source. For consumers age 18 to 34, TV usage is decreasing while cell phone and PC use is on the increase. In a recent study 19% of all demographic respondents said they spend six or more hours each day on personal internet usage. Only 8% reported to spending that much time on TV. One to four hours of TV Usage was reported by 66% compared to 60% for the Internet.

Furthermore, consumers are divided over their preferences for advertising supported content compared to subscription based content without advertising. About 30% prefer free/ad-based content while 20% are willing to pay for an ad free, HBO style, subscription model.

For online video content the most popular sites are still user generated content sites such as You Tube, where 39% say they most frequent. For internet video offers, 33% go to the professional content of TV Network sites such as NBC or CBS, 32% go to search engines such as Google, MSN or Yahoo! and 28% go to social-networks such as MySpace and Facebook.

Interestingly, another recent study, exclusively executed with teenagers, asked what do you want most on your mobile phone? First, was full length hit movies, second was popular TV series… User Generated Content ranked in at sixth. Also, the number of video streams for 2007 is expected to equal the number of video steams of 2006 - however, the streaming durations are expected to be 2 to 3 times longer on average…The consumer is looking for longer professionally produced content from their online and mobile experience. A crucial lesson for the studios is: make your content available everywhere.

Implications: 1. Warner Bros, Disney, News Corp and Sony have been working for years in the Indian TV sector.     

2. Hollywood movies only account for 8% of the Indian Box Office.

Analysis: Hollywood movies flourish internationally, however only account for 8% of the Indian box office. India box office revenues are growing as more multiplexes are being built and the Hollywood studios are set to increase their share through being part of the Bollywood production game. Warner Bros, Disney, News Corp and Sony have been working for years in the Indian TV sector and are leveraging their experience and presence.

Typical high value movies are made in India for production costs between $700 K and $1 million. $4 million to $6 million budgeted movies are considered pricey and the most expensive movie ever was “Devdas” which was produced for a record $11 million.

Viacom in May created a joint venture with Network-18 Group which focuses primarily on TV ventures plus the Indian Film Co… a new studio which just raised $112 M on the London Stock Exchange. The Indian Film Company, which Viacom has and equal stake to the Network-18 Group, has 22 Movies on the slate with start dates over the next 18 months.

Disney has partnered with Yash Raj Films with plans to make one $4 million to $10 million budgeted CGI animation film each year.

Sony Pictures is investing is “Saawariya” which is being directed by “Devdas” Director Sanjay Leela Bhansali.

Hollywood movies have had a very strong year as “Pirates of the Caribbean", "Harry Potter" and "Spiderman" performed very well at the box office…This success however has highlighted the small share of the Indian movie box office the Hollywood Studios actually enjoy.

Implications: 1. Sumner Redstone is known for forcing out executives  2. DreamWorks’ and Paramount’s bond may be unraveling  3. Family businesses have a low probability of surviving the third generation

Analysis: Sumner Redstone, Chairman of Viacom and CBS, is moving to sideline another from a long line of potential successors to his media empire, this time his daughter Shari. Mr. Redstone, who amassed his empire from a collection of Family owned cinemas, is known for forcing out executives.

Sumner dispatched the highly respected Frank Biondi, Viacom’s CEO, in the 90’s: The advertising guru Mel Karmazin left (was forced out) three years ago to run Sirius Satellite Radio after creating stellar growth in Viacom’s stock value; MTV founder Tom Freston was let go last September after just 14 months on the job.

The fight within the Redstone Empire is not unusual in family businesses. When it comes to issues of control and succession most family businesses have issues…Only 10% of U.S. family businesses survive the third generation. Sumner faces a formidable foe in Shari as she is every bit as tough, shrewd and competitive as he.

On top of the family and succession issues the DreamWorks/Paramount bond may be unraveling. After recent stellar successes of the two studios, there is a possibility that David Geffen and Steven Spielberg may walk in 15 months with the DreamWorks name as they both feel that Mr. Redstone has been ignoring them, thus aggravating earlier snubs and credit grabs at Paramount.

Implications: According to Nielsen-NetRatings MySpace statistically dwarfs Facebook

Analysis:  

Despite Facebook’s impressive growth during the past twelve months, according to Nielsen, MySpace continues to overshadow the social networking competition in the US. In June MySpace had 59.7 million unique visitors as compared to 16.5 million for Facebook. News Corp.’s MySpace users increased by 14 million over the last year as compared to Facebook’s 8.6 million.

MySpace also dwarfs Facebook in terms of engagement, or time spent on the site. The average user in June was on MySpace for 158 minutes. Facebook’s users were on the site for an average of 68 minutes. MySpace also outpaced Facebook in terms of engagement growth rate: MySpace saw an engagement increase of 40% year-over-year whereas, Facebook only saw and increase of 24% over the same period.

Facebook’s decision in September to allow all web users (as opposed to being open only to users with a valid high school or college e-mail address) has paid off. Facebook’s growth has been greater among non-college-age users over the last year: 18 to 24 year olds have only grown 38%, 12 to 17 year olds have shot-up by 149%, 25 to 34 year olds have jumped by 181% and above 35 grew by 98%.

Implications: The most measurable medium, the Internet, is causing the most controversy over how it should be measured.

Analysis:  

It has long been a dilemma for TV, radio and print: Can the audience be measured? Despite the Internet’s detailed information regarding the user’s online activities, many audience measurement services such as Nielsen, ComScore and NetRatings provide mostly statistics based on page views covering panels of Internet users and thus are subject to estimation and statistical errors.

Furthermore, as the use of Internet video and audio entertainment grows, the measurement of page views becomes less relevant. Thus, there is an expanding interest in the amount of time the audience spends on a site. Last week Nielsen introduced a new measure of engagement or time spent. ComScore has announced it will also add such measures sometime in 2007. This shift in audience measurement practices will lead to a period of uncertainty as most Internet advertising rates are currently based on page view and other similar metrics. It is expected the shift in practices will take approximately 12 month before they are fully accepted.

Another issue that looms is: Who is the audience? Programmers can’t decide what content to provide or develop if it is not clear who the audience is…”What is my demographic?”

Implications: 1. Could Charter, Cox and Cable Vision be targets in the next round of consolidation?  2. Will AT&T look to acquire DIRECTV or Echostar to create a quick fix?

Analysis: Over the last year, shares in Comcast are up 50%. Charter Communications have risen over 300%. The founding family of Cablevision, the Dolan’s, recently made another run at taking the company private. This time they offered $36 a share, which was a 10% premium. The stock price went above this offer as it did their last two offers as shares in the cable firm are up 80% over the last year.

On the other side of the pond, Virgin Media has tapped Goldman Sachs to prepare the company for a possible auction. Virgin Media's largest shareholder is Virgin Group kingpin Richard Branson, who holds a 10.5% stake. The cable and wireless provider was rebranded Virgin Media earlier this year following the merger of Brit cable and telecom concerns NTL and Telewest. The company was approached earlier this year by Providence Equity Partners and other U.S. private equity players about a $15 billion bid. Virgin Media has been struggling since its merger.

Interesting enough the US Cable companies that had been struggling in the stock market until recently have seen a turnaround in their fortunes due to the triple play. These cable companies were in a funk on the stock market, but values of their underlying assets started to climb in mergers and acquisitions pushed by industry insiders about two years ago. Three to five years ago, most cable transactions involved small rural systems with non-upgraded plant that were purchased by private equity companies or MSOs backed by venture capital firms. Cox Enterprises’ $9 bil. acquisition of its cable system affiliate Cox Communications in 2004 set the stage for a possible privatization trend in the cable industry.

The most likely candidates to be purchased during the next phase of consolidation are the medium size players: Charter, Cox and Cablevision each with 3 million to 5.5 million subscribers and APRU growth due to triple play bundling at an annualized rate of 15% to 20%. Charter in particular does not have the capital to fight the phone companies as they come to market with their own TV, broadband and phone product bundles. Its larger siblings, Time Warner Cable and Comcast, do. However, with market values doubling, tripling or quadrupling over the last year, there will be no bargains.

On the other hand, AT&T with its limited U-verse bandwidth may decide to take the quick fix and purchase either DIRECTV or Echostar. A combined solution would allow AT&T’s 26 Mbps to be utilized exclusively for telephone and Internet, thus putting AT&T in a better competitive position in the near term. AT&T could also use either Sat-caster’s partnership with Clearwire Corp. to expand its telephone and Internet footprint.

Implications: 1. MySpace may be closing the gap (in some respects) with Google/YouTube     2. News Corp. understands that advertisers are looking for more than just web traffic.

Analysis:  

MySpace is closing the gap on YouTube in at least one respect: In April, the site's video views were at 50 million, only slightly behind YouTube's 58 million. The number of MySpace video users rose by 50% since February. MySpace is taking a serious shot at Google-YouTube by launching MySpace TV. MySpace TV is a video site that plans to lure not just amateur videos but content from the networks and studios.

Advertisers want to see traffic. The quick way to build traffic is to offer polished user-generated tools. However the big advertising dollars are attached to professional content. Professional content is not easy to land. The biggest MySpace TV deals are for professional content are from smaller players like National Geographic, webisode versions of library shows like "Diff'rent Strokes," plus some web-originals, such as the Michael Eisner’s "Prom Queen." MySpace is saying it is only a matter of weeks before other networks and studio deals are announced.

MySpace TV will become a separate branded site and URL which may attract non-MySpace users and tap traffic from YouTube. At the same time, MySpace TV will more fully integrate video into the main site, MySpace, looking to strengthen the site's hold on the young demo that uses the site for personal pages …the business that has been increasingly siphoned off by Facebook recently.

With the move, News Corp. is forming a very different strategy than another leading Google competitor, Viacom. Viacom is building its own online domain with the acquisitions of Atomfilm and Xfire. However, Viacom has refrained from undertaking major online video initiatives. The billion-dollar Viacom lawsuit against YouTube, could end with a licensing deal between the companies.

On the other hand, News Corp. is building its own network that can distribute News Corp. content and the content of others, thus rendering outside partners unnecessary.

Implications: 1. Many consumers are looking to Apple iPhone to redefine phones as the Apple iPod did Mp3 players 2. Will the iPhone help reverse AT&T’s declining share in new mobile customers?

Analysis: Analysts generally agree that the iPhone with its sleek touch screen will change what consumers expect from mobile phones. Many of AT&T’s competitors argue that they have competitive devices that take sharp pictures, allow music down loads and are designed for extensive use of text messaging and internet connectivity. However, it is a confirmation to Apple’s brand and reputation that many consumers are looking to Apple to redefine phones as the iPod did mp3 players.

A recent study found that 64 percent of the US mobile phone subscribers were aware of the iPhone and 14% of that group was highly interested in buying one…This is an extremely high awareness and interest for any product before it has hit the market.

AT&T launch of the iPhone is about moving the whole AT&T brand. This is a challenging time for AT&T Mobile. AT&T’s share for new monthly subscribers has fallen over the last year from 29.5% in Q2 2006 to 25.8 in Q1 2007. Also AT&T is doing worse in terms of churn than Verizon. AT&T is now losing 1.7% of all subscribers per month compared to Verizon with 1.1% monthly churn. (T-Mobile’s churn is 2.6% per month and Sprint’s is 2.3%).

It is expected that the interest in the iPhone will also generate interest in AT&T’s other products. The iPhone will drive huge amounts traffic to AT&T’s stores. However, the timing would be better if AT&T was ready to deliver “Three Screen” and a stable U-Verse service at the AT&T Experience Stores.

Implications: 1.  What do the puzzling moves of Rupert Murdoch’s News Corp mean for Social Networking, MySpace and Facebook?    
2.  Is it time for a broader News Corp digital / media strategy?     

Analysis: The sheer dollar differential of a Yahoo-MySpace deal would make the swap another shrewd Rupert Murdoch play. News Corp paid about $580 million for MySpace in August 2005; twenty-two months later it would receive a stake valued at more than $10 billion as Yahoo is currently valued at $37 billion.

The current power and value of social networking is illustrated by the the ability that Murdoch can use such a small asset like MySpace to take out such a big piece of a company like Yahoo. However, with the most recent moves Murdoch may be signalling that social networking may have peaked and it is time for an even broader digital/media strategy for News Corp.

News Corp. has spent the last several years as Wall Street’s digital master, grabbing MySpace, building Fox Interactive and launching a "YouTube killer" as other media companies watched. However, News Corp.'s most prominent acquisition play at the moment is very Old Media… the $5 billion bid to buy the Wall Street Journal thru the acquisition of its parent Dow Jones.

Some would dismiss the Yahoo deal as a political move to show Murdoch is in an acquisition mode or even a way to save face if the Dow Jones bid doesn't go through. If the Yahoo deal is not such a political move you can be assured it is based on News Corp. analysis that MySpace is currently at or close to its perceived peak value and it is time leverage that value to make a broader new media play.

Implications: Beyond DVR ratings, the broadcast networks are recognizing that the Internet is the new window for revenue.

Analysis: The broadcast networks, CBS, ABC, Fox, NBC and The CW (merged UPN and the WB), have spent the past few years reinventing their business models; adding DVR viewings to their ratings is another tweak to the model. Beyond DVR ratings, the broadcast networks are recognizing that the Internet is the new window for distributing their programming and during 2007, broadband distribution continues to be an important source of growth.

Case in point: CBS says 53 percent of viewers who watched a new show this season online, did so before viewing any episode of that show on a broadcast network. Internet access is providing a new means to expand the sampling of new programs.

The market for advertising surrounding online streaming of broadcast network shows is on the upswing, with demand exceeding supply for top-rated shows. The market is estimated to be in the $300 million–$400 million area today with a projected growth to about $2 billion to $3 billion by 2010. If this market materializes, it will add a second revenue stream for broadcasters.

Despite the strength of the broadcast TV marketplace and the adding of DVR ratings, most analysts are still not projecting much overall ad growth for the broadcast networks this year. Partly because there is no NBC covered Olympic Games in 2007, plus the merging of UPN and the WB into The CW network means there are far fewer ratings points than there were in 2006.

Implications: Can MusicStation, a phone based music service backed by Motorola, Samsung, Nokia, Sony-Ericsson, Universal Music Group, EMI Music, Sony BMG and Warner Music, beat Apple’s iTunes / iPhone combination?

Analysis:  

Apple iPhone has a new challenger in Europe and Asia: The mobile phone industry will launch a low cost, flat rate music service called MusicStation. The service has the backing of Motorola, Samsung, Nokia, Sony-Ericsson, Universal Music Group, EMI Music, Sony BMG and Warner Music. MusicStation launches ahead of the June 29^th US introduction of Apple’s iPhone.

The manufactures will pre-load MusicStation software into their phones. These handsets will be mid-priced compared to the iPhone release price of $499. About 100 million MusicStation enabled devices will be sold over the next twelve months…Apple will only be shipping 10 million iPhones during the same period of time.

For a weekly fee of Euro 2.99 (US$3.98), MusicStation users will be able to listen to a catalog of 1 million songs and store them on the phone. However, MusicStation subscribers will not be able to burn songs to a CD, will not be able to distribute songs to other devices or over the internet.

For the MusicStation service to impact the iTunes / iPhone combination it must beat Apple’s overall satisfaction, performance and reliability, cost of service, billing, image, offerings and promotions, and customer service. This is a tall order for Omniphone, the privately owned UK start-up behind the MusicStation service.

Implications: 1. Research In Motion Ltd.(RIM), Motorola and Nokia Corp have been eating into Palm’s handheld organizer business with sophisticated phone and email devices for years. 2. Palm was late in recognizing that RIM’s Blackberry was a competitor to its organizer and smartphone business. 3. Palm has created problems with smartphone churn due to low memory and rebooting issues

Analysis:  

Palm is finally realizing, with the release of Research in Motion’s Curve and Blackberry 8830, and the soon to be released of Apple’s iPhone, it needs to focus on product development and deployment.

Palm was the innovator in the handheld organizer market building an extremely stable and easy to use platform with the Palm OS. Palm started out with some of the easier functions of the ill-fated Apple Newton. Where Palm ran into trouble was adding connectivity to the picture. The first two generations of Palm’s smartphones the Treo 600 and Treo 650 were released before the product was ready. With low memory, both units would constantly crash. High quality LCD’s were not ready for the Treo 650 during its launch which caused an extremely large return rate during the first 6 months due to screen failure. Many of the first Treo customers had been long time Palm users and were so offended by the faultiness of the Treo that they have churned for the long term to Research in Motion, Motorola and Nokia. The new Treo’s are much more stable, however it is difficult to get a customer back once they churn to a competitor that delivers quality devices and services.

The Executive Chairman to be, Jon Rubinstein, will need to concentrate on three things at the new Palm: 1. Ramping-up development to compete with the quick rate of innovation in the smart-phone market. 2. Instill quality in Palm’s deployment of products while using his experience in memory to fix Palm’s low memory issue…The newish top of the line Palm Treo 755p only has memory of 128MB (60MB persistent user storage). 3. Marketing and PR must be targeted to bring back customers who have churned and to bring in a new generation of smartphone users. Rubinstein, the former head of hardware at Apple, has the experience to take on the development and deployment points. However who, using the companies overhaul as cover, will remove the tarnish of Palm’s reputation through marketing and PR.

Palm fell behind the competition as they did not want to recognize that RIM was targeting them. Now it will be up to Rubinstein and Anderson to play catchup. They will need to be working at lightening speed with all the knowledge gained at Apple.

Implications: SMS can be a damaging form of advertising for mobile contentSubscription revenue schemes have worked well and increased ARPU in ChinaContent aggregators may ultimately be squeezed by the mobile carriers

Analysis:  

The saga of QQ (Tencent Holdings) in Chinais quite interesting. QQ is the dominant form of online communications in China with around an 80 percent market share. It supports instant messaging, voice messaging, games, mobile TV services and a number of value-added services.

QQ is the biggest SMS platform in China. Historically SMS is a very effective distribution channel for new mobile content products, leveraging subscriber information from the carrier. However, this sales tactic created many unwanted messages, leading to customer complaints in China. Thus, the government decided to regulate this marketing scheme. Currently China’s mobile content aggregators are shifting their marketing tactics to off portal channels such as internet or traditional media such as TV, radio and magazine advertising. These off portal advertising costs are much higher and are thus lowering the profitability for the mobile content operators by more than 50%.

QQ and the other content aggregators had a very profitable business thru subscription revenue. However, towards the end of 2006, the carriers (China Mobile and Unicom) shifted their policy forcing the content aggregators to largely transform their transaction models to one time downloads for a fee. The margins of the one-time downloads are lower than those of subscriptions. Also ARPU has dropped due to the lack of the recurring revenues from subscriptions. QQ is essentially being squeezed by the mobile carriers, China Mobile and Unicom.

Today, China Mobile is doing direct deals with the major record companies and News Corp. However, the content aggregation business by the likes of QQ is still viable but limited to those aggregators targeted by the carriers. Carriers in China are taking a hybrid approach. The carriers have realized that mobile content providers have a comparative advantage in many genres both in terms of operational experience as well as economics. Thus the carriers are contracting with specific aggregators to source certain genre of product (such as games, music, auto, real estate).

A main difference with the carriers in the US as compared to China is AT&T and Verizon both are building large content aggregation teams at U-verse and FiOS. Due to government infighting, China Mobile and Unicom are years away from such integrated content services. Ultimately, AT&T and Verizon will have the experience and content licensing clout to be the primary aggregators of mobile content in the US. Thus leading to the conclusion of Fox’s Interactive Senior Vice President John Smelzer: “we intend to be in (the content) business with the carriers.”

Implications: 1.3-D is compelling the exhibitors such as Regal Entertainment Group, AMC Entertainment Inc. and Cinemark to replace their film projectors with the higher priced digital projectors2.Due to Digital Cinema Initiatives, LLC (DCI) initial domestic focus, U2 3D may have one big liability Internationally--Not many non-US theaters are equipped with 3-D technology.3.3ality and Real D are making the 3-D viewing experience much more comfortable and enjoyable for the consumer3.3ality and Real D are making the 3-D viewing experience much more comfortable and enjoyable for the consumer2.Due to Digital Cinema Initiatives, LLC (DCI) initial domestic focus, U2 3D may have one big liability Internationally--Not many non-US theaters are equipped with 3-D technology.3.3ality and Real D are making the 3-D viewing experience much more comfortable and enjoyable for the consumer3.3ality and Real D are making the 3-D viewing experience much more comfortable and enjoyable for the consumer

Analysis:  

With the cost of digital projectors so much higher than that of the film projectors they're replacing, exhibitors need a compelling reason to make the change.

At this year’s ShoWest, the main get together for theater owners, 3-D was named the killer application. Warner Bros. Intl. Cinemas prexy Millard Ochs was quoted as saying "From a distributor's point of view, the whole reason for purchasing a digital system is that I saw what (3-D provider) Real D was capable of doing for the future."

Real D announced in March new agreements with Regal Entertainment Group, AMC Entertainment Inc., Cinemark and other exhibitors to license additional locations with Real D Cinema technology. The deals brought the installed total to more than 680 screens worldwide, more than 600 of those domestic, for the March 30 release of "Meet the Robinsons." Now as of May 2007, it is expected that the current 705 screens will expand to 1,000 by November's release of "Beowulf," and 2,000 by the end of 2008.

However, Digital Cinema Initiatives, LLC (DCI), a joint venture of Disney, Fox, Paramount, Sony Pictures Entertainment, Universal and Warner Bros. Studios, has been mostly focused domestically. Thus, the majority of the 3-D cinemas are US based. In Asia where many digital cinemas exist the DCI standards are ignored. Thus, U2 3D will be mostly viewed in the US shunning a big portion of U2’s fan base (no 2-D verion of movie will be released).

With 3-D driving adoption of digital projection and more 3-D content on the way, demand for a 3-D pipeline is inevitable, especially in post-production. It creates a different kind of work, forcing filmmakers to rethink everything, from shooting and editing techniques to color timing and sync issues. Almost every 3-D film the audience sees gets tiring on a cut-to-cut basis because the audience’s eyes are constantly adjusting to the depth of each shot. It is vital to get the two images perfectly aligned. Even tiny misadjustments give viewers headaches, and today's digital cameras weren't made with that in mind. 3ality manages depth and convergence through software that begins a few frames before the edit point and merges the depth to meet the next shot.

Where live-action films like "U2 3D" have to cope with the limitations of digital cameras, computer-animated films have the luxury of simply rendering a second image of each frame. However, on animated projects like "Meet the Robinsons," the filmmakers do their work on computer monitors, using red-blue glasses. They make adjustments, then screen their work, refining as they go. The process can be time consuming, and therefore very expensive. Creating the 3-D version for “Meet the Robinsons” was more than twice the work in post production.

Implications: 1.AT&T U-Verse has encountered legal technical and outsourcing problems, resulting in AT&T putting the service in fewer markets than originally expected. 2. Verizon FiOS is making inroads to Cable Vision Systems and Comcast Communications coverage areas 2. Verizon FiOS is making inroads to Cable Vision Systems and Comcast Communications coverage areas

Analysis: AT&T has reported just 18,000 to 20,000 U-Verse subscribers to date, a drop in the bucket compared with the cable industry's sizable advantage in the multichannel category and Verizon’s FIOS growth of 141,000 net TV subscribers over the last quarter. U-Verse has encountered legal, technical and outsourcing problems, resulting in AT&T putting the service in fewer markets than originally expected last year.

According to AT&T’s 10-Q, “our rate of expansion will be slowed if we cannot hire and train an adequate number of contractors and technicians to keep pace with customer demand or if we cannot obtain all required local building permits in a timely fashion." Furthermore, “If the courts were to decide that state and local regulation were applicable to our U-Verse services, it could have a material adverse effect on the cost, timing and extent of our deployment plans."

For the other main multi-service telco, Verizon Communications' FiOS service, Wall Street has been optimistic. FiOS added 141,000 net new subscribers in the first quarter to end it with 348,000. Verizon recently reported that the number of net additions per business day has risen compared with the fourth quarter.

Cable executives have signaled that their subscriber growth momentum and especially their user churn has been affected by the competition from FiOS. Tom Rutledge, Cablevision Systems COO, said in a quarterly earnings call that he believes his company's churn has been impacted by FiOS. Furthermore, Comcast Corp. COO Stephen Burke has said at his company's analyst and investor day that some of his firm's customers seem to have moved to FiOS.