Positive potential implications: Wal-Mart (WMT54 *****), Apple (AAPL209 ****), Google (GOOG533 ****), Tivo (TIVO10 ****), Microsoft (MSFT29 ****), News Corp. (NWS16 ****) (NWSA14 ****), Yahoo (YHOO16 *****), General Electric (GE16 ****), Walt Disney (DIS32 ****), CBS (CBS13 ****), Time Warner Cable (TWC47 *****), DIRECTV (DTV34 ***), Dish Network (DISH22 *), AT&T (T25 *****), and Verizon (VZ29 ***).

As Hollywood prepares its envelopes and readies to bestow accolades upon studios and talent at the 2010 Academy Awards over the weekend, a contest over another sort of Tinsel Town leadership is playing out in the digital world. S&P Equity Research believes that in the battle for living room market share, specifically professional video content distribution and viewing, there is still plenty of room at the top, which could bode well for all the companies involved.



The playing field for providers of digital entertainment already appears crowded even as major new entrants emerge. Amazon (AMZN125 ***), Netflix (NFLX 70 NR) and Blockbuster (BBI 1 NR) continue to battle it out over leadership in DVD sales and rentals. Meanwhile, online access, through either download or streaming video, is ever increasing. On February 22, Wal-Mart (WMT54 *****) announced plans to acquire video-on-demand (VOD) provider VUDU, and in recent weeks, Apple (AAPL209 ****) has been courting TV networks and studios for downloadable content for Apple's iPad tablet computer, which should be available in stores at the end of March.



"I believe the online video market for professional content, as opposed to sites with a large amount of user-generated content such as Google's (GOOG533 ****) YouTube, is still nascent for any one company to stake a claim as the dominant provider, or for that matter, to be 'challenged' by potential new entrants," says S&P Equity Analyst Tuna Amobi. He sees an economically feasible platform that encourages continued experimentation by a multitude of content and hardware providers.



The hardware Amobi refers to includes set-top boxes and entertainment devices -- such as Apple's Apple TV and iPad, Tivo (TIVO10 ****), Microsoft's (MSFT29 ****) Xbox 360, and Sony's (SNE35 **) PlayStation -- and a long list of network-enabled TVs. Market research firm iSuppli estimates more than 60% of high-definition TVs will connect to the Internet by 2013, potentially further disrupting the fledgling digital-video industry.



"While it's still unclear if web-enabled TV sets, including high-def, would offer the latest 'killer app,' at the minimum, I believe it portends another emerging trend that could have a dramatic impact on the traditional means of TV or film content distribution and consumption," he says, noting that over the longer term, TV viewers will be increasingly able to receive digital video streams from cable companies and web sites.



What is clear is that consumers are increasingly choosing to watch videos online. Audience measurement data from comScore (SCOR16 NR) suggest that online video viewing continued to reach record levels in December 2009: nearly 178 million or 86.5% of the total United States Internet audience watched online video during the month with 33.2 billion videos viewed during the month. YouTube.com, an ad-supported video-sharing site for non-professional content, delivered 13.2 billion videos in December 2009, accounting for nearly 99% of all videos viewed at parent company Google.



However, the vast majority of online viewers are not yet watching TV or film productions online. The top site for online viewing of professional digital-video content produced by TV networks is Hulu. In December 2009, viewership at Hulu reached an all-time high with 1 billion videos viewed, according to comScore, which said Hulu has a 3% market share in total online video viewership. Hulu, ranked second in overall online video after YouTube, and is followed by Microsoft sites, which rank third with 561 million (1.7%), then News Corp's (NWS16 ****) (NWSA14 ****) Fox Interactive Media with 551 million (1.7%) and Yahoo (YHOO16 *****) sites with 539 million (1.6%).



Pay per download vs. ad-supported streaming VOD by subscription are still relatively new delivery and revenue models for professional content. Although the direction the industry will take in coming years is not clear, Amobi thinks that the future strategy for Hulu, which is a joint venture of General Electric's (GE16 ****) NBC Universal, News Corp's Fox Entertainment Group and Walt Disney's (DIS32 ****) ABC, might hold some clues as to how the overall market might continue to evolve, according to Amobi. Hulu was launched as an advertiser-supported site, but S&P Equity Research believes plans may be underway to unveil some premium subscription-based offerings.



From the viewpoint of content providers, such as studios and networks, Amobi sees a confluence of online-video monetization strategies around ad-supported business models, such as with Hulu, and the download models, in which Apple -- through its iTunes store -- is the leader. "I expect pay-for-download and subscriptions-based models to co-exist in the foreseeable future," he says.



The reason why there are two business models available today is that major players are still trying to work out some key concerns around technologies and viewership data, according to Amobi. "Content and service providers alike are grappling with the question of which model or models provide the greatest upside without cannibalizing core revenue streams. Another potentially vexing issue is the potential impact of these streaming services on audience measurement," he says.



Amobi points to the "TV Everywhere" initiative as an example of how the cable and broadcast industries are attempting to embrace the growth in online video while managing challenges. TV Everywhere is an authentication system whereby certain premium content, such as TV shows and movies, are available online, but only if the user can prove or "authenticate" that he has a subscription to a multiservice operator, such as a cable, satellite or telco-TV offering. So far, the No 1 TV network in terms of audience, CBS (CBS13 ****), is the only broadcaster to join the TV Everywhere initiative.



Meanwhile, other video distributors that are at various stages of developing TV Everywhere-style initiatives include Time Warner Cable (TWC47 *****), DIRECTV (DTV34 ***), Dish Network (DISH22 *), AT&T (T25 *****), and Verizon (VZ29 ***).



As technologies and subscription-based businesses continue to evolve, S&P Equity Research believes that the "battle of the bundles" among cable operators, satellite TV providers, and telco-TV offerings is likely to intensify. Attractively priced bundled offerings may also play into the choices consumers make when considering their online video options.



--ISABELLE SENDER, S&P Editorial

03-Mar-2010 12:00:12 (15182143)   Copyright 2009 The McGraw-Hill Companies, Inc, Standard & Poor's, a division of The McGraw-Hill Companies, Inc., and their affiliates (collectively, "S&P"). Reproduction of this content in any form is prohibited except with the prior written permission of S&P.