Video for All, Immersing a Generation in Video

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1 RBC Capital Markets Corp. Mark Sue (Analyst) (212) Joseph Longobardi (Associate) (212) Jon Atkin (Analyst) (415) David Coleman (Analyst) (415) Brian Hyun (Associate) (415) September 7, 2010 This report is priced as of market close September 1, 2010 ET. All values in U.S. dollars unless otherwise noted. For Required Conflicts Disclosures, please see page 37. Video for All, 2010 Immersing a Generation in Video Over the next five to seven years, we believe the consumer s video portal to the world can be measured in 165 diagonal inches. Add up the screen sizes of tomorrow s LED TV, the PC, the tablet or ipad, the e-reader, the smartphone and other devices, and the average consumer portal to video may be measured as 165 diagonal inches. Contrary to most expectations, online video and mobile video are not taking away viewing hours from traditional TV. The complementary nature of multiple screens may be a broader trend that continues as multiple devices flourish. Consumer video viewing habits are changing, with linear TV giving way to ondemand and flexible viewing. Our demographic study points to growth of video on the Web, with consumers demanding their choice of video anytime and everywhere. Video consumption may further fragment, with users paying for premium content and flexibility. With the rising middle class in developing nations, we believe a similar viewing shift may follow developed markets. Higher bandwidth wireless networks may further accelerate the demand for video viewing on mobile devices. Globally we re estimating more than 275M video-enabled smartphone devices shipped this year (+25% year over year). The portability of content combined with higher speed broadband transmission may in turn further spur consumer demand for more content flexibility across multiple platforms. Video viewing outside the home everywhere from the train or taxi, the gas station or airport may see the greatest rate of growth over the next several years as short content and advertisements proliferate in public spaces. Expanding 3D content and a commitment to support feature films from the studios, combined with a sharp decrease in consumer electronics pricing may mean that 3D may move beyond the early-adopter stage. New business models may be tested as linear TV moves to time shifted programming and to over-the-top video. Content creators may be hesitant to disrupt the status quo and in the near term may instead, elect to work closely with distribution partners such as the telco, satellite and cable service providers. Re-transmission consent negotiations are ongoing and for the most part, despite the technological feasibility, most people in the video industry believe there is an added benefit of combining content and distribution. Having said that, tremendous opportunities remain for risk takers who may combine the web as a key distribution mechanism while also creating their own feature content. We expect TV Everywhere may gain further adoption as major carriers such as Verizon, AT&T, Comcast, Time Warner and others embrace the online video opportunities and facilitate the consumer s desire for video flexibility. Bundled services may expand to additional services that offer consumers choice; consider for example AT&T U-verse mobile app, FiOS mobile app and Comcast s Fancast Xfinity. The opportunities for networking vendors who provide medium agonistic technology infrastructure may see supplemental growth opportunities as video momentum necessitates capacity upgrades. Innovators such as game console makers and others such as Google and Apple may also see meaningful growth opportunities from the expansive opportunities of video. Millions of consumers have already acquainted themselves with the Android and Apple operating systems, something that may readily transfer over time back to the consumer living room.

2 Video for All, 2010 September 7, 2010 Table of Contents The Multiple Screens & the Accelerating Consumption of Video...3 Our World through 165 Diagonal Inches...3 The Changing Video Consumption Habits...5 Multiple Devices as the Norm...6 The Demographic Shifts in Viewing...7 Video outside the Home, Much Growth Remains...8 International to Follow U.S. in Video Consumption...9 Mobile Video and the Portability of Content...9 Wireless by the Billions...9 Video on the Go, Apps Make It Easy G LTE as the Mobile Video Enabler...11 Mobile Advertising: Cleverly Avoiding the Annoyance Factor...11 A Side Note on Standards D Video, Technology Hurdles First D Content Growth Led by Sports and Major Studios...13 Bringing 3D into the Living Room D Video Equipment; Time to Buy Everything New...16 Testing New Applications as Web Video Proliferates...17 TV Everywhere But Not Really Everywhere...17 Meanwhile on the Web...19 Game Consoles: Losing Weight, Adding Dimensions...23 Network Infrastructure & The Video Growth Supplement...25 The Potential Value Shift of Video HBO vs. Netflix, Just a Thought...28 We Can t Just Put Everything on the Web...Yet...29 Look Who s Spending...30 Video in the Cloud...30 Video around the World...31 The Global Broadband Penetration Drive...31 British Telecom Reboots with Vision Sky: a Strong Lock on Customers...32 Deutsche Telekom: Big Yet Slow...32 Orange: A Perfect Example of Bundled Services...33 Telefonica: Strong in Spain, Expanding Elsewhere...34 SoftBank Taking the Lead...34 Appendix I: RBC Video Index of Public and Private Companies...35 Appendix II: RBC Communications Technology Research Coverage List...36 Required Disclosures...37 Disclaimer Mark Sue

3 September 7, 2010 Video for All, 2010 The Multiple Screens & the Accelerating Consumption of Video Our World through 165 Diagonal Inches Over the next five to seven years, we believe the consumer s video portal to the world can be measured in 165 diagonal inches. Add up the screen sizes of tomorrow s LED TV, the PC, the tablet or ipad, the smartphone and other devices, and the average consumer s access to video may be measured in 165 diagonal inches. The monthly hours of video consumption may also increase from previously considered saturated levels as traditional TV is complemented by incremental video viewership online and on mobile devices as consumers increasingly demand video anytime and everywhere across multiple devices. Exhibit 1: Screens driving towards 165 diagonal inches Source: Company reports, RBC Capital Markets LED TV Growth Trends; The Bigger the Better We expect the introduction of LED TVs with slim form factors and higher resolution to drive an upgrade cycle in developed markets. Consumer demand for larger higher resolution TVs remains unabated and is expected to drive LED TV unit growth near 20% in each of the next five years driven primarily by emerging markets and the purchase of second or third TVs per home in developed markets. With consumers viewing more video than ever before, their desire to achieve the best viewing experience is driving the trend to high resolution LED TVs with larger screen sizes. Aiding this shift is the price decline of TV models, which is bringing these technologies down market to achieve widespread adoption. The advent of HD drove higher LCD penetration; the introduction of 3D and new form factors of LED models are expected to drive the upgrade cycle in developed markets. Sports, action movies and video games are additional drivers of much of the demand for larger screens. In the next five years we expect the average screen size of the living room TV to reach ~40, with second and third TVs of a smaller size in many homes in developed countries. (TVs in the home to comprise ~70 ). PC/Notebook: Not Leaving Anytime Soon The global PC market has returned to growth mode following the economic recession and we expect to see LCD monitor growth between 5-10% and Notebook growth of ~20% in With an increasing amount of video content available on the Internet, consumers are increasingly using their PC as a source of video consumption. This trend is also driving larger screen sizes as evidenced by the Apple imac, which is available in 21.5 and 27 LED displays. Exhibit 2: PC/Notebook growth trends (M units) E Notebook % Growth 34% 16% 22% LCD Monitor % Growth 3% -3% 5% Source: Corning Mark Sue 3

4 Video for All, 2010 September 7, 2010 We anticipate increased adoption within the enterprise market of a dual or triple monitor computer set-up to increase employee efficiency. As a result, we expect LCD monitor growth to continue to accelerate beyond 2010, driving further increases in the total screen size for each consumer. (PC & Notebooks to comprise ~50 ). Tablet Market Growth Trends The tablet PC market was created with the April 3, 2010, launch of the Apple ipad. Following a very strong launch evidenced by Apple s sale of 3M devices in the first 80 days of availability, a wide range of OEMs are working on launching devices of their own. With the average tablet screen size coming in at 10, this new device category further expands video consumption and accumulated screen count. Please see our RBC Tablet Computing Guide for further details. (Tablets to comprise ~10 ). Smartphones Everywhere: 275M Units Strong Expanding mobile broadband capacity has sparked an increase in mobile video and data content. This, coupled with the smartphone moving down market, is driving significant growth in the global smartphone market. We forecast the global smartphone market to reach 275M devices in 2010 with over 25% unit growth in each of the next five-years. With the screen size of today s smartphones between three and five inches, consumers are demanding larger screens with higher resolution to support their applications and mobile viewing habits. (Smartphone screen to comprise ~5 ). Exhibit 3: Global Smartphone Market % % Smartphone Unit Sales (M) % 15.0% 10.0% 5.0% % of Handset Unit Sales 0 0.0% E Smartphones % of Handset Sales Source: Company Data, RBC Capital Markets And Everything Else As video becomes an increasingly important part of our information gathering and entertainment options, content creators and advertisers are expanding their reach into the consumer s lives. From elevators to taxi cabs to public transportation to signs and billboards, video is all around us. While it is difficult to quantify, we estimate consumers to be exposed to video content on a regular basis. (Miscellaneous screens to comprise ~30 ). Video is ubiquitous and, with further expansion of 3G/4G and mobile broadband networks, video is increasingly mobile. Changing consumer behavior is driving content creators and advertisers to seek out new outlets to get their content in front of viewers. 4 Mark Sue

5 September 7, 2010 Video for All, 2010 The Changing Video Consumption Habits Expanded video content on multiple screens is not causing significant cannibalization among different media; but rather, it is driving adoption of Mobile and Internet video viewing in addition to traditional living room TV viewing. Consumers are watching video on multiple screens simultaneously. With almost 59% of Americans watching TV and using their PC simultaneously and with more Internet content being delivered in video format, broadband demand may accelerate. Contrary to early beliefs that increased mobile and online video content would cannibalize TV viewership, we are seeing instead that aggregate video consumption by the average American is growing. Today, the average American consumes more than 158 hours of TV in the home per month, more than nine hours of time shifted TV, more than three hours of video on their PC and more than three hours of video on their mobile device. According to Nielsen, the amount of time spent watching video on the Internet has grown by 5.6% year over year and it appears that video consumption on the web is replacing traditional web browsing (13% year over year decline). Expanding VOD offerings, time-shifted TV, larger formats and major sporting events have allowed the living room TV to remain the dominant platform for consuming video content. The adoption of mobile and Internet video is driving consumers to simultaneously view content on multiple devices, helping to drive the overall rate of consumption rather than creating a substitution effect. The trend towards video on multiple-screens may accelerate as consumers seek content anytime and anywhere. Higher resolution screens in tablets and smartphones are also making it easier for consumers to watch short form content and feature movies on portable devices. Exhibit 4: U.S. Average Monthly Time Spent Watching Video (HH:MM) 1Q Q Q 2010 YoY % Watching TV in the Home 156:24 153:47 158:25 1.3% Watching Timeshifted TV 8:22 9:13 9: % Watching Video on the Internet 3:00 3:22 3:10 5.6% Mobile Subscribers Watching Video on a Mobile Phone 3:37 3:37 3:37 n/a Total Video Consumption 171:23 169:59 174:48 2.0% Using the Internet 29:15 26:32 25:26 (13.0%) Source: Nielsen Mark Sue 5

6 Video for All, 2010 September 7, 2010 Multiple Devices as the Norm Younger generations expect to access content whenever and wherever they choose and this behavior serves to advance the cross platform penetration. Enabling the proliferation of cross platform viewing are technological advances including: increased broadband connectivity, improvements in the quality of online and mobile video, the growing content library available through online and mobile platforms and the increased availability of Internet-ready TVs. Exhibit 5: TV Viewing by Platform Cross Platform Viewers 29% Online-Only Viewers 6% TV Only Viewers 65% Source: comscore The data on the adoption of cross-platform viewing has been further supported by the recent World Cup where 31% of fans watched matches over the Internet. ESPN stated that through the first eight matches of the tournament, 354 million minutes of footage was watched on ESPN.com, ESPN3.com and mobile devices compared to the 4.5 billion minutes watched on traditional TV coverage. Viewers appear to be supplementing their traditional TV viewing with online content to catch-up on missed episodes as opposed to just substituting them even over today s time-shifted, in-home DVR offerings. Exhibit 6: Video Viewing Time as a Percentage VOD (including Online) 15% DVR 26% Live Viewing 59% Source: comscore 6 Mark Sue

7 September 7, 2010 Video for All, 2010 The Demographic Shifts in Viewing Generation wise, Millennials continue to drive the adoption of online video. Globally, approximately 6% of video viewers receive their content exclusively from online sources, according to comscore. Looking deeper, the user base is closer to 13% for the age group Incidentally, this demographic group is leading in cross platform viewing with 42% of this group viewing video on both TV & online platforms. At first glance it appears that the and age groups are leading the mobile video movement as highlighted in Exhibit 8. This may be partially due to the higher disposable income of these demographics resulting in higher smartphone penetration rates. Looking into the data a bit deeper shows that while only 19% of year olds with mobile devices are consuming video on their mobile device the quantity of video consumed is skewed largely to this younger age group. With over seven hours of video consumed on their mobile devices, we expect younger generations to adopt mobile video and drive adoption rates among older demographics. The higher rates of video consumption on mobile devices particularly among males presents a significant opportunity for advertisers to reach a captive audience of the prized year old demographic in a targeted fashion. Exhibit 7: Monthly Time Spent in Hours: Minutes Watching Video Content by Age Group On Traditional TV 114:04 108:05 124:22 143:32 161:51 195:17 218:48 Watching Timeshifted TV 6:48 5:54 7:04 13:30 12:36 11:01 5:47 Using the Internet on a PC 4:28 8:16 22:28 30:16 32:29 28:14 22:53 Watching Video on the Internet 1:24 2:09 5:33 4:30 3:34 2:20 1:27 Mobile Subscribers Watching Video on a Mobile Phone n/a 7:13 5:47 3:15 2:53 2:10 1:44 Source: Nielsen Exhibit 8: Video Audience Consumption by Age Group By Gender Female: 2+ Male: 2+ On TV 10% 6% 8% 12% 22% 24% 18% 54% 46% On the Internet 7% 6% 8% 17% 30% 23% 10% 54% 46% On Mobile Devices n/a 19% 15% 29% 26% 10% 2% 45% 55% Source: Nielsen Mark Sue 7

8 Video for All, 2010 September 7, 2010 Video outside the Home, Much Growth Remains As video becomes more integrated and widespread in the consumer s everyday activities, public digital screens are one of the largest sources of growth in the future. In a recent study by Arbitron, over 70% of U.S. residents (~181M) ages 12 years and up recall seeing a digital video display at a specific venue in the past month while 52% of U.S. residents (~135M) say they have viewed a digital video display in the past week. These implications are especially relevant for advertising, where 47% of digital video viewers recall seeing an advertisement on screen and, of those 47%, one in five (19%) recall making a previously unplanned purchase in response to the advertisement. Advertising agencies are continuing to shift their models to capitalize on the dynamic trend of consumer s content consumption, mirroring the viewer s movement away from traditional text only media, such as newspapers and magazines to video. Digital video penetration may further increase in traditional venues such as airports, grocery stores, large retail or department stores, and shopping malls. For example, with around 90% of teen and adult U.S. residents (232M) having reported visiting a grocery store within the past month, 28% (72M) recall having viewed digital video. Similarly, of the 65% of U.S. residents (169M) who reported visiting a shopping mall, 27% (70M) recall seeing digital video within the past month. Grocery stores, shopping malls, department stores, and other retailers are exploring ways to monetize video trends to offset cannibalization from online retailers. Increased numbers of uncommon institutions are integrating digital video into their business structure as well. Almost eight out of ten Americans (around 204M) recall having visited a fast food or casual dining restaurant within the past month, with 16% of those (42M) having viewed digital video at the establishment. Along with restaurants, gas stations represent an increasing source of potential video consumption as of the 88% of Americans (227M) who have visited a gas station within the past month, 17% of them (43M) remember viewing digital video during one of their visits. These venues, along with medical offices, hospitals, and coffeehouse/sandwich shops, represent relatively untapped opportunities for digital video. Exhibit 9: Digital Video Viewing outside the Home Location Percent of visitors who watched digital video Stadium or arena 55% Airport 52% Movie theater 47% Shopping mall 42% Large retail or department store 37% Medical office 34% Hospital or medical test facility 33% Health club 32% Grocery store 31% Bar 30% Office building lobby 26% Fast food or casual dining restaurant 21% Gas station 19% Drugstore 17% Convenience store 16% Coffeehouse or sandwich shop 16% Rode a bus, train or taxicab 13% Elevator 7% Source: Arbitron Digital Placed Study Mark Sue

9 September 7, 2010 Video for All, 2010 International to Follow U.S. in Video Consumption Video consumption in the emerging markets may evolve to follow the development pattern of the U.S. While consumers in the U.S. are in the middle of the adoption cycle in the usage of smartphones, tablet computers, and LCD TVs, consumers in these emerging market countries may follow suit in a few years. The sharp growth in the economies in the emerging markets may lead to more consumer spending, which may lead to more video consumption. According to the International Monetary Fund, India s GDP/capita is expected to increase from ~$2,800 in 2008 to ~$3,200 in 2010 and to ~$4,800 in China s GDP/capita is expected to increase from ~$6,000 in 2008 to ~$7,200 in 2010 and to ~$12,300 in With this expected increase of wealth accumulation by the middle class, consumers may strive to purchase luxury goods, which include high-priced consumer electronics. We already see evidence of LCD TV penetration rates dramatically increasing in China and the rest of the emerging markets may not be far behind. Overall, TV penetration in the emerging markets is greatly improving as wealth increases in these areas and the cost of owning a TV decreases. According to Corning, it is estimated that of the TVs purchased in 2010, 86% may be LCD TVs in China and 57% in the rest of the emerging markets. This is a huge contrast to 2008, when only 32% of TV purchases were LCD TVs in China and 23% in the rest of the emerging markets. China in particular is projected to have quicker adoption of LCD TVs due to their subsidy program. Mobile Video and the Portability of Content Sharp unit growth of smartphones is fuelling the uptake of video consumption on mobile devices. As of 1Q10, the number of Americans who are consuming video from a mobile device grew 51% year over year to 20.3M, up from 13.4M according to Nielsen. Advertisers have the ability to reach a more captive and targeted audience through mobile video over traditional TV. Viewing mobile content including prime-time shows, sports and news clips provides a self-selecting demographic which mobile advertisers such as Google and Apple hope to translate into higher average CPMs. Exhibit 10: Mobile Video Gaining Critical Mass 1Q Q Q 2010 YoY % Watching TV in the Home 284, , , % Watching Timeshifted TV 80,066 90,768 94, % Using the Internet 163, , , % Watching Video on the Internet 131, , , % Using Mobile Phone 217, , , % Mobile Subscribers Watching Video on a Mobile Phone 13,419 17,583 20, % % Watching Timeshifted TV 28.1% 31.6% 33.1% % Watching Video on Internet 80.4% 72.4% 70.3% % Mobile Subscribers Watching Video on a Mobile Phone 6.2% 7.7% 8.8% Source: Nielsen Wireless by the Billions The global mobile landscape has evolved dramatically in recent years from a voice centric offering with 700M subscribers primarily on 2G networks 10-years ago to a data-centric offering of more than 5B subscribers. Driven largely by emerging markets including India and China, mobile subscriptions are growing by ~2M per day with expectations for 50B connected devices by 2020, according to Ericsson. As mobile broadband has become the primary growth driver for operators and equipment vendors, carriers have aggressively built-out networks to meet the sharp demand. According to Ericsson, mobile broadband subscriptions are expected to grow from 360M in 2009 to 3.4B by In an effort to capitalize on higher margin data subscriptions, carriers have been aggressively building out 3G networks globally with subscriptions now totalling 500M. Mark Sue 9

10 Video for All, 2010 September 7, 2010 Increased 3G network coverage has aided the availability of data centric connected devices including smartphones, tablets, e-readers and laptops with data dongles. In the U.S., smartphones account for ~20% of the estimated 234M mobile subscribers. Strong competition in the global handset market has resulted in an array of low-priced, entry level smartphones with Internet capabilities which, coupled with reduced data rates on tiered plans, are serving to accelerate smartphone adoption. Underscoring the global demand for mobile data and video is the lack of traditional wireline infrastructure in underdeveloped markets and their reliance on mobile networks for their sole source of broadband connectivity. Mobile content and video have grown to subsequently stress the existing 3G networks and necessitate upgrades. Video on the Go, Apps Make It Easy Better screen technologies (including Super AMOLED), larger sizes in smartphones (3.7 and 4.3 ) and the popularity of the ipad and other tablet devices, are driving demand for more mobile content and may increase the number of hours of video consumed on mobile devices. With some smartphones capable of viewing 720p HD video and new devices such as the Motorola Droid X and Nokia N8 with HDMI outputs, consumer demand for high quality mobile video may accelerate. Content distributors such as Netflix have been aggressive in staying in front of the trend towards mobile. Netflix offers a free app for the Apple ipad where consumers can download and view TV episodes and movies streamed from Netflix to the device. The HuluPlus app also offers a library of current shows from Fox, NBC, and ABC along with archived programming. Also entering the market in an effort to monetize the new audience of mobile viewers are content creators such as ABC, who recently launched its ABC Player for the ipad with free content. Despite the new entrants, YouTube remains the dominant source of short form video content with more than 100M video playbacks per day. YouTube Mobile was revamped in July 2010 to support HTML5 compliant browsers, faster speeds and incorporate more touch-friendly elements. As illustrated below, search remains the primary driver of mobile Internet with ~40% of mobile Internet users utilizing search functionality. Outside of search, the mobile Internet primarily supports the rapidly growing social networking and personal communication segments which includes photo and video sharing services. Time spent on social networking sites like Facebook on mobile devices has exceeded the amount of time spent on the PC. According to comscore, the average mobile user accesses Facebook 43 times per month, spending 45 minutes per day on the site while the average PC user accesses the site 35 times per month, spending 32 minutes per day. Exhibit 11: Primary Uses of Mobile Internet Movie Information Stock Quotes/Financial General Reference Photo/Video Sharing Tech News Maps Work via Browser Entertainment News IM via Browser Sports Information Weather News Personal via Browser Social Networking Search Source: comscore 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 10 Mark Sue

11 September 7, 2010 Video for All, G LTE as the Mobile Video Enabler LTE or 4G wireless marks the next big iteration of high speed mobile networking and deployments may gain steady momentum over the next several years, fuelled by the competitive landscape which has already started to take shape with both Verizon and AT&T targeting LTE rollouts in the U.S. Verizon is deploying LTE in the 700Mhz band and the plan is to launch LTE in 30 commercial markets by the end of The target is to deploy a nationwide network in AT&T may look to launch LTE in "key markets" in 2013 using equipment from Ericsson and Alcatel Lucent. Depending on the vendor, LTE can offer download speeds of up to 100Mbps and upload speeds of 50Mbps, with lab speeds clocking in at even faster speeds. Even cable companies such as Cox are getting on board with LTE rollouts as it is currently in trials. The pace of LTE activity is garnering as much traction world-wide as it is in North America. Vodafone Germany is deploying LTE on MHz spectrum. In Asia, DoCoMo may use 1.5GHz and 800MHz (KDDI) for LTE. DoCoMo's plans are to launch commercial LTE service later this year. In Korea, SK Telecom, KTF, and LG Telecom are deploying LTE at the moment. Telstra in Australia may deploy 2.6GHz spectrum for LTE and fill gaps in areas using 700Mhz. TeliaSonera late last year launched the world's first commercial LTE service in Stockholm and Oslo. France Telecom (FTE) and China Mobile are also committed to LTE. Apart from Alcatel-Lucent, Ericcson is also currently running LTE trials at Verizon. Thus far there has been favorable feedback and we have heard of impressive download speeds of 5Mbps to 12Mbps on Ericsson's gear. Ericsson significantly increased its positioning in the U.S. market following the recent acquisitions of Redback, Sprint's Services and Nortel s CDMA/LTE assets. All major carriers at one point may move forward with 4G and iterations of LTE further enabling the growth of mobile video, depending on spectrum availability among other things. Mobile Advertising: Cleverly Avoiding the Annoyance Factor Greystripe Greystripe delivers ads on iphone, ipad, Android, and Java platforms. It has recently partnered with Adobe to produce new ads in HTML5 as well as convert existing Flash ads into Apple s iad format, providing a work around for advertisers to enable Flash-based advertisements to run on popular Apple devices such as the iphone and ipad. According to a recent comscore performance study, Greystripe s campaign to promote the Buick LaCrosse resulted in a nearly 4% clickthrough rate, an impressive increase over the average 1% click-through rate for static, normal ads. Utilizing a Simon-Says -like game that prompts the user to repeat a progression of flashing colors on the vehicle s tires, consumers spent an average of 2 minutes and 42 seconds on the interactive advertisement. Average click-through rates for Greystripe range from 2-5% with seconds of user engagement. AdMob: Branding and Monetizing the Mobile Web Recently acquired by Google, AdMob supports one of the most extensive and successful richmedia, mobile advertising networks. Its platform is compatible with nearly all types of devices, including the iphone, ipad, Android OS phones and Blackberry s. Along with its advertising services, AdMob also offers analytical data on mobile traffic, consumer trends, and viewer feedback. iad and the Apple Backing iad is the newest advertising initiative by Apple for its iphone s ios platform. By acquiring Quattro Wireless, a leading global mobile advertising company, Apple has indicated that it plans to be a large player in mobile advertising on its popular smartphone and tablet device. Apple may generate revenue both from its 40% cut from ad revenue and its business of creating interactive mobile advertisements for customers such as Ford, Kmart, Disney, Visa, etc. The iad platform may also provide other advertisers with detailed customer information and trends to help them better target their intended audience. Mark Sue 11

12 Video for All, 2010 September 7, 2010 A Side Note on Standards One of the obstacles to widespread mobile TV distribution and viewing is the lack of standardization among video formats. Web and application based mobile video content faces similar challenges as it relates to standardization. The ongoing standardization debate continues to take shape with Apple opting for HTML 5 mobile while blocking Adobe s Flash content on its ipad and iphone devices. In line with Google s longstanding support for open source, it has chosen to support Adobe Flash 10.1 in its Android OS version 2.2 while also supporting HTML 5. Content creators and aggregators are feeling the pressure as well, illustrated by YouTube s development of an HTML 5 compatible browser to supplement its historical Flash video library. The usage of different file formats creates problems for both content developers and consumers. Developers need to create the content in multiple formats if they want viewership on most mobile devices. Consumers with certain devices may not be able to view certain video formats. A possible solution would be if all of the major mobile phone developers chose to adopt one file format going forward, but that does not appear likely in the near future. Another solution would be to have video content stored without a specific format in the cloud that can be streamed into different formats depending on the consumer s mobile device. 12 Mark Sue

13 September 7, 2010 Video for All, D Video, Technology Hurdles First There are numerous methods in which 3D content can be streamed over cable networks. While the BDA (Blu-Ray Disc Association) has set the standard for 3D viewing (Full HD 1080i resolution delivered to each eye) and mandated the coding format (MPEG-4 MVC) to ensure backwards compatibility for all 2D screens, there is still a dispute over which method may be used to create 3D images. The three primary methods of creating the 3D image include: frame sequential, top-tobottom, and side-by-side. Currently, all TVs are equipped to handle almost all formats used in the industry. Blu-Ray relies primarily on frame sequential formatting (maintaining its standard of 1080i to each eye and 48 fps). Cable and satellite providers, on the other hand, are currently providing their 3D content using side by side transmission to stay within their current bandwidth capabilities. Early reviews of ESPN 3D and other 3D content delivered from cable/satellite providers using side-by-side technology have been relatively positive despite the lower resolution and video quality. The need for specialized glasses to achieve the 3D video experience is one of the largest challenges to broad based adoption. There are two prevailing technologies in 3D glasses today, simple polarized lenses and advanced active-shutter glasses. Polarized glasses are often used in IMAX and 3D theaters; they work by filtering out polarized light from the 3D source, allowing one eye to see one stream and the other eye to see the other (creating a stereoscopic effect). Active-shutter, or liquid crystal, glasses are being pursued as the major form of delivering 3D content. Connected to a 3D source by either an infrared or Bluetooth connection, these glasses are enabled by the rapid opening and closing of tiny shutters that allow in specific light to each eye, producing the 3D effect. One major challenge in the current trend is that 3D TV manufacturers are producing their own, proprietary active-shutter glasses, which are not compatible with other company s sets. There are indications that companies, such as Xpand, may provide universal glasses, although exactly how well they may work with different 3D TV sets has yet to be seen. Among the limiting factors to 3D broadcasts are the challenges in creating 3D content. Current technologies require production in HD and 3D. With limited production equipment, the need for fiber optic connectivity at the event site, special positioning of cameras and equipment and the overall cost can increase sharply. The other limiting factor is the small universe of installed 3D TVs. With the incremental cost of 3D capabilities in today s TVs, the consumer electronics space is in the early adoption phase of the technology and as such has low penetration. 3D Content Growth Led by Sports and Major Studios ESPN 3D: Leading with Sports ESPN recently expanded its channel line-up with the launch of ESPN3D, a channel dedicated to 3D sports broadcasts. While adoption is limited by both content and technology, ESPN is a driving force in delivering a 3D experience to the masses. One of the first events for the new channel was the 3D broadcast of the 2010 Masters tournament, which was followed up by the largest project to date: the streaming of 25 World Cup games this summer. Consumer response has been largely positive and has been instrumental in increasing the awareness of the new technology. ESPN plans to broadcast additional sporting events over its ESPN3D channel throughout the year, including: the X-games, MLB Home Run Derby, 13 regular season college football games, and the 2011 BCS National Championship Game. ESPN has pledged to bring over 85 sporting events to consumers in 3D over its newest channel. The network also plans on testing all of its content for 3D-compatibility through its ESPN Innovation Lab, located in Orlando, Florida. ESPN believes that, within two to three years, 3D sports broadcasting may be out of the scientific phase and into the business aspect and full delivery of the product. Disney/Pixar: Up and Up Disney/Pixar established itself as a leader in bringing 3D animated films to the mainstream with its May 2009 release of Up. After netting ~$300M in the box office due in part to higher box office receipts for the 3D format, Disney/Pixar re-released Toy Story in October 2009 and Toy Mark Sue 13

14 Video for All, 2010 September 7, 2010 Story 2 in February 2010 both in 3D. Most recently, Disney/Pixar grossed $301M with its July 2010 release of Toy Story 3. Just as ESPN is the leader in developing 3D content for the TV, Disney/Pixar, with its pipeline of 3D feature films, is doing its part in creating the content to support widespread adoption of the video format. Disney also has plans to employ 3D technology to live-action films including its planned December 2010 release of Tron Legacy. The other large life-action 3D film Disney is slated to release is Pirates of the Caribbean: On Stranger Tides, slated to be released in May, Disney is also working to convert past animated features including Beauty and the Beast into 3D to leverage its video library and capitalize on early interest in 3D. Exhibit 12: Some Upcoming 3D Titles Source: Disney DreamWorks: Starting with Monsters Along with Disney/Pixar, DreamWorks has been one of the leading studios to embrace 3D technology. DreamWorks first 3D film, Monsters vs. Aliens, demonstrated its technical ability in producing an animated film in 3D and has become one of the first movies currently in distribution on Blu-Ray 3D DVD. DreamWorks also released How to Train Your Dragon which generated ~$410M box office and Shrek Forever After, each offering various 3D effects. DreamWorks is building on its 3D foundation with the release of Megamind, and is filming Transformers 3 in 3D using the same camera system James Cameron used to create Avatar. DreamWorks partnerships with Intel and HP continue to provide them with strong technical resources to draw on in the creation and delivery of their 3D content. Fox: Avatar and More Fox Studios is responsible for one of the keystones of the 3D movement and a truly revolutionary film in the form of James Cameron s Avatar. Widely considered to be both a triumph of 3D technology and a masterpiece of film, Avatar was a realization for both consumers of how, when executed correctly, 3D effects can elevate the overall movie experience and proved to studios that people are willing to pay more for a quality 3D experience. Although Avatar in 3D format made up only 40% of the screens that showed the movie, 3D tickets made up 75-80% of the total revenue for the film according to pcmag.com. Fox plans to release Avatar on 3D Blu-Ray DVD in November Fox is looking to leverage the success of Avatar and re-release James Cameron s original #1 grossing film prior to being dethroned by Avatar, Titanic, in 3D in April Resonating 3D Content and the 3D Premium Theaters, including large chains such as Regal, AMC and Carmike along with small town cinemas, are working to take advantage of 3D. While the national average for regular cinema tickets hovers around $7.50, 3D ticket prices can be anywhere from $3-5 dollars more. Although only 10% of the 5,942 theaters (NATO) are 3D capable, screens are being converted each month due to the increasing popularity and profitability of 3D. It is widely believed that the 3D rendering process whereby 2D films are converted to 3D postproduction results in a lower quality experience and that consumers want more of the quality presentation that they received in Avatar. In fact, Disney CEO Bob Iger recently commented that 3D 14 Mark Sue

15 September 7, 2010 Video for All, 2010 title releases should be planned carefully and not merely converted from 2D to 3D for consumers as an afterthought, a trend that could lead to the poisoning of the 3D well. While the current atmosphere suggests that consumers are willing to pay more to watch 3D videos, the production, delivery, and quality management of these films may be a key determinant whether 3D ticket sales continue to do well or viewers decide the premium price isn t worth the marginal effect. Bringing 3D into the Living Room Cable and satellite providers have started to establish channels through which to deliver 3D content to their consumers. Although still young, 3D technology is quickly making its way into consumers living rooms. While many other broadcasters have little or no 3D content available, DirecTV is leading the charge on 3D content by offering 4 3D channels. The offerings include three original DirecTV channels and ESPN3D. The primary 3D channel that DirecTV is offering is N3D. The first channel in the US to offer original 3D programming, N3D includes offerings such as Dinosaurs: Gianta of Patagonia and Wild Safari: A South African Adventure, along with other exclusive shows. N3D may also offer 3D sports that are not covered by ESPN3D, such as the NASCAR Coke 400 and MLB games. N3D on Demand may offer 3D programming on-demand, including content from all of DirecTV s 3D channels. Discovery, partnering with Sony and IMAX, is preparing to launch a new 24/7 3D television network. This channel may focus on bringing a combination of Discovery, IMAX, and Sony content into the 3D realm, with a focus on providing genre content that is well-suited for 3D rendering (such as space, nature, technology, etc.). Sky, one of Europe s premium content providers, has also started to offer 3D content over its network. The first dedicated 3D channel in Europe, Sky 3D is currently being delivered to around 1,000 pubs across the UK and Ireland who signed up for the service. Pubs that were interested in bringing 3D content to their customers are investing in the new technology by purchasing 3D TVs and glasses. Sky 3D is currently focused on bringing sports (such as rugby, soccer, and even darts) to viewers and plans to begin providing the content to consumers homes later in Mark Sue 15

16 Video for All, 2010 September 7, D Video Equipment; Time to Buy Everything New The largest purchase related to enjoying 3D in the living room is a 3D-capable TV. Although many consumers have recently upgraded to HD TVs, newer models may be needed to view content in 3D as the overwhelming majority of current HD TVs are unable to produce the stereoscopic effect. Traditional TV manufacturers such as Samsung, Sony, Panasonic, LG, and Vizio have new 3D models available for sale, with price tags differing according to type (plasma, LED-LCD), size and resolution. The mark-up for 3D TVs in general is in the range of $400-$800 compared to traditional HD TVs. Entry-level 3D TVs, ranging from $1,500-$2,200, are making their way to market. According to isuppli, 3D TV shipments are estimated to be ~4.2M by year end 2010, ~12M by 2011, and ~78.1M by While many of the current owners of 3D TVs are early adopters or 3D enthusiasts, a segment of purchasers are simply seeking the highest-quality or future-proof TVs. Since 3D TVs occupy the top tier of a manufacturer s product offering (offering a wide spectrum of additional perks beyond 3D, such as Internet-connectivity), many consumers are primarily concerned with purchasing topof-the-line TVs, with 3D functionality being a secondary concern. Others are hoping to ensure that their next TV upgrade isn t outdated within the next two to four years as consumers view 3D as the next major step in TV technology. Another key purchase for consumers is the necessity of special glasses to view 3D at home. Active-shutter glasses are currently the major method of delivering 3D content in the living room. Connected to a 3D TV by either an infrared or Bluetooth connection, these glasses are necessary in order to enable the 3D effect. Aside from the high price of the glasses at ~$100, another major concern is that the active-shutter glasses may only be compatible with specific TVs. Universal 3D glasses, such as those produced by Xpand (priced at $150), may be sold as solutions to the exclusivity problem of company-specific hardware. Even with universal glasses, a $600 price tag to provide glasses for a family of four to enjoy 3D content is an expense that many consumers are currently unwilling to pay, although it should be noted that some 3D TVs come packaged with 1-2 pairs of glasses. Exhibit 13: 3D LED TV Source: Samsung A 3D-capable Blu-Ray player is also necessary in order to enjoy 3D movies at home. Running between $200 and $400, there are numerous 3D-capable Blu-Ray players currently in the market available from Samsung, Sony, Panasonic, and others. On the other hand, set top box upgrades are currently in more of a grey area. Current 3D content is being transmitted with the same bandwidth requirements as HD content, making a set top box upgrade unnecessary in the near term. While 16 Mark Sue

17 September 7, 2010 Video for All, 2010 HD delivers 1080p quality to viewers, 3D channels have to deliver two different video streams to each eye, resulting in lower resolution (from 1080p to both eyes to 720p to each individual eye) for 3D content. Although this is the current method in which 3D channels are broadcasted, this may likely change to true 3D HD (1080p to each eye). As more consumers begin to adopt 3D technology, set top box upgrades may be necessary in order to view full 1080p 3D content to allow for a higher pixel clock rate. Additional video decoder support may be needed to accommodate new formats such as MVC, base layer plus enhancement or 2D plus metadata. While there may likely be a market for high-end set top boxes in the early stages of 3D broadcasting, 3D-enabled set top boxes may likely become more broadly adopted as consumers embrace 3D technology. Testing New Applications as Web Video Proliferates Technologically speaking, with high bandwidth access pipes, content caching, and strong encoding, multiple delivery mechanisms are possible when it comes to video delivery to the consumer. Content creators can readily bypass the distribution network of the cable and telco operators to reach customers directly and this process may only get easier over time. Nonetheless, from a business point of view, content creators may be initially reluctant to disrupt their long-standing relationship with the distribution partners in cable, telco, and satellite to go directly over-the-top. In our dialogue with industry pundits, moving the entire video content library to the web (particularly if the content is the same) may provide little added value and instead do more harm to the long standing relationship between content creators, aggregators, and distributors. Instead, we believe most studios and media companies may elect to offer complementary viewing experiences across multiple screens while maintaining an eye on the demographic shifts in video consumption. From a comparison point of view, streamed video rental or episode purchases may not be directly considered a competitor to pay TV although monthly subscription-based content may potentially compete with pay TV over time. Experimentation with flexibility may grow over time by the carrier and their respective partners as they look to maintain control of their assets while also monetizing their content across multiple screens and devices. TV Everywhere But Not Really Everywhere Comcast: Fancast Xfinity Along with traditional cable service, Comcast is offering On Demand Online and VOD services. Its acquisition of NBC/Universal provides it with a large stake in Hulu, the free ad supported online video site. Fancast.com, Comcast s portal for online viewing, may also stand to gain from the increased content rights from Comcast s recent NBC/Universal purchase and its CBS agreement. Fancast XFINITY TV may also play a large role in Comcast s VOD platform; this platform offers more than 19,000 movies and TV shows for online viewing to current Xfinity cable customers at no additional cost. Comcast, with a current subscription base of 23.2M cable customers, 16.4M Internet customers, and 8.1M voice customers, is the largest MSO in the U.S. The company is currently experiencing a declining subscription base in its core cable business, with a 2.8% decrease from 2Q09 to 2Q10. Although Comcast is currently losing video customers to unfavorable macro conditions and nontraditional content providers (Internet-enabled content), it is posting gains in its Internet and voice business over the same period (7.3% and 16.0%, respectively). Along with providing video, Internet, and voice services, Comcast also owns a large number of content providers, including E! Entertainment, VERSUS, G4, Golf Channel, and Style Network. The most important recent development for Comcast has been its planned purchase of NBC/Universal from General Electric for $28B. With a controlling 51% stake in the company, this highly-contested merger would grant Comcast access to all of NBC/Universal s content and channels, including Bravo, USA, Showtime, and MSNBC to name a few. Comcast also recently entered into a ten-year content carriage agreement with CBS that provides Comcast with retransmission consent for CBS content until 2020, allowing greater access to CBS Television content including shows such as How I Met Your Mother and NCIS. The recent expansion of Mark Sue 17

18 Video for All, 2010 September 7, 2010 content available to Comcast, along with its broad video, Internet, and voice product offerings, indicates that it plans on becoming a one-stop shop for both the creation and transmission of entertainment into consumer s living rooms, computers, and mobile devices. Promising increased HD channels, more VOD choices, faster Internet speeds and increased multiplatform features, Comcast is hoping that its new customer-facing brand may be successful in appealing to customers as a premium, comprehensive service. Comcast s VOD and On Demand online services are currently experiencing difficulty in monetizing its streamed content, resulting in increased cable rates being levied across large portions of Comcast s subscription base. Many content providers are expressing discontent over the lack of revenue they are receiving for shows that are being streamed online. The ability for Comcast to find a middle ground between maintaining the value proposition and profitability of its core business while also providing consumers with sought-after over-the-top content across multiple platforms may serve as an integral indicator for the future of MSOs. Time Warner and TV Anywhere With around 9.1M digital video subscribers (12.7M total video subscribers) and 9.3M high-speed data subscribers, Time Warner operates as the second largest cable operator in the nation. Time Warner owns some of the most well-regarded and viewed channels, including TBS, CNN, TNT, HBO, and Cartoon Network. Time Warner, one of the major champions of the industry-wide initiative TV Anywhere, is continuing in its support of the project. TV Anywhere may allow cable subscribers to view the same content that is available on their TV on any Internet-connected computer. The overall reasoning behind this move is not only to provide customers with highly-desired VOD services, but also to try and halt the steadily increasing number of customers that are cutting the cable and relying on the Internet, rather than cable, for their video needs. TV Anywhere is still in its preliminary stages as content providers are reluctant to relinquish their content (and advertising revenues) to the less-profitable VOD platform. In order for TV Anywhere (and cable providers on a larger scale) to be successful in the coming years, a successful model may need to be found to both appease current and future customer demands while also maintaining profitable operations and healthy subscription rates. ATT: Leveraging Wireless for Video Anywhere AT&T now has approximately 2.5M U-verse subscribers, adding 209,000 U-verse TV subscribers in 2Q10. With more than $1B in U-verse revenues in 2Q10, U-Verse is trending to generate more than $4B in annual revenues. Attach rates remain high, at above 90%. Notably, more than threequarters of AT&T's U-verse customers subscribed to triple or quad-play, combining TV, broadband, voice, and wireless. As of 2Q10, U-verse TV penetration is more than 17.9%. AT&T currently offers 130 HD channels across its markets. Supporting the trend towards mobile video, AT&T launched its U-verse Mobile app in August 2010 giving its U-verse subscribers the ability to download and watch popular TV content on their iphone. AT&T is the first TV provider to offer an integrated mobile app that enables users to manage their DVR, download and watch select shows. The app and video viewing is offered at no additional charge to existing U-verse subscribers allowing subscribers to download content over a WiFi connection. This free app is an important tool in AT&T s efforts to extract value out of its large investment in U-verse by driving subscriber growth as consumers are increasingly seeking compelling TV Anywhere offerings. Verizon: FiOS as the Hub Verizon ended its F2Q10 with 3.2M total FiOS TV customers with 174,000 net additions, and with 12.4M homes open for sale, penetration of FiOS TV is 26%. FiOS revenues are up +33% year over year, and ARPU increased +7% year over year. A year ago FiOS made up about 33% of Verizon's consumer revenue and at the end of the June quarter, FiOS represented more than 43% of consumer revenues. For FiOS Internet, Verizon added 196,000 customers this quarter, bringing its total to 3.8M. With 12.9M homes open for sale, Internet penetration is 30%. 18 Mark Sue

19 September 7, 2010 Video for All, 2010 Meanwhile on the Web To combat the possibility of increased subscriber churn, Verizon is offering new peripheral services with its FiOS subscription. Verizon FiOS customers are now able to watch content online through FiOS TV Online. While not all TV and movie content is available through this service, customers can currently stream content from HBO, TNT, TBS and Epix. Customers access the service through the Verizon website and need to authenticate that they are a FiOS customer. The main draw to this service would be for customers who want to watch video content on-the-go through their mobile devices and laptop computers and on demand through their home computers. This offering should give customers a reason to refrain from cancelling their FiOS subscription for Hulu Plus or Netflix. The current content library isn t as large as Hulu s or Netflix s, but the hope is that if Verizon offers enough content online, customers should stick with Verizon s universal offering of video content to the TV, computer and mobile device. Verizon also offers a FiOS app for the iphone and Android phones. The app allows customers to set up their DVRs remotely, which provides users with a better DVR experience through an improved interface. Customers can now set up their recording schedule without using their set top boxes, which frees up more time to watch video content in the home. Hulu: Additional Subscription as an Option Hulu is a joint venture among NBC Universal, Fox Entertainment, and ABC. It is currently one of the largest Internet video distribution networks. The ad-supported website streams video, including TV shows, movies, and other media content, to millions of US consumers. Until now, Hulu has been a free, ad-supported, online video streaming service that provides access to new episodes of top TV shows, entire TV series of some older TV shows, and some full-length feature films. Recently, Hulu also added music video and concert content to their library. Hulu s newest venture is a subscription service titled Hulu Plus, which was made available to consumers for $9.95 per month in June This service includes access to all of Hulu s offerings, along with premium content that only subscribers are able to access. Hulu Plus members may be able to watch HD content on different devices. Initially, content may be available on the iphone, ipod Touch, ipad, and Internet-enabled Samsung TVs and Blu-Ray players. The service may be available on Sony and Vizio devices later in 2010 and Xbox 360 support is estimated to become available early The Playstation 3 recently received official support for Hulu Plus and is currently available in a preview version for Playstation Plus subscribers. There are a few potential drawbacks to the service. Even though Hulu Plus subscribers may be able to view Hulu media on numerous screens, the service may still rely on advertisements to support its service despite being a paid service. This could lead to low adoption rates as viewers have historically experienced either ad-supported free content or fee-based content. Mark Sue 19

20 Video for All, 2010 September 7, 2010 Exhibit 14: Hulu Plus Source: Hulu Netflix: The Potential Disrupter With over 15M subscribers, Netflix draws on its extensive rental movie library of over 100,000 titles to maintain its strong growth and industry position. Netflix has increasingly moved into the realm of online streaming by providing ad-free videos over the Internet in HD and SD formats. With services starting at $8.99/month, Netflix offers both mail-in and streaming rentals. Netflix s subscriptions increase in price as the limit for DVDs out at one time increases, with the maximum being eight DVDs for $47.99/month. Even though there is a limit to how many DVDs can be out at one time, there is no limit to how many movies can be rented or streamed. Netflix has around a 92% customer retention rate and has sustained strong growth over the past two years. Netflix s presence in video on the web has taken a major leap forward in its recent release of its app for the ipad. Owners of ipads who also have Netflix subscriptions are able to stream content through WiFi or 3G. Along with availability on mobile devices, Netflix also has an established distribution network through gaming consoles, offering video streaming on all three major gaming devices (Xbox 360, PS3, Wii) along with its offering through Internet-enabled Blu-Ray players. Exhibit 15: Netflix and the Evolving Model Source: Netflix In recent news, Netflix completed a deal with Relativity Media to offer recently released films through Netflix. While the deal was small (with Relativity Media only responsible for independently producing 10 to 14 films year), the move stands to illuminate the growing power of Netflix and the movement towards streamed video. This deal may allow Netflix to stream Relativity Media movies to consumers as soon as the videos are released on DVD. Netflix is showing that it plans to be a big player in the video industry in the years to come, working to establish itself as a competitor to large and widespread companies like HBO. Currently, Netflix enables subscribers to stream Starz movies (including films from Disney and Sony Pictures), but as it grows, Netflix has the potential to cut out the middle man and provide direct access to consumers. Also, Netflix recently announced an expansion of its content-sharing agreement with Warner Bros. Home Entertainment Group. 20 Mark Sue

21 September 7, 2010 Video for All, 2010 According to a recent study by comscore, Netflix.com has surpassed Hulu.com in Internet traffic (unique visitors). Although Hulu still maintains its rank as No. 2 video site (after YouTube), this is telling news as more consumers are beginning to prefer the wider selection and full-length offerings of Netflix as opposed to the ad-supported Hulu. Certainly the recent advent of Netflix s presence on the popular ipad has garnered interest for the DVD-by-mail Company. Netflix reported that subscribers who watched at least 15 minutes of streaming content in 2Q10 grew to 61%, a 24% increase over the 37% in the year ago period. From 2Q09 to 2Q10, Netflix added close to 5M subscribers, representing a 42% increase; the company states that it could reach close to 18.5M customers by the end of the year. Wal-Mart: Always Lower Prices Wal-Mart s purchase of VUDU in February 2010 signals that the powerhouse retailer is interested in the video streaming business. With users able to purchase content directly with their credit cards, VUDU is a pay-as-you-go service that allows consumers to stream rentals or purchases onto their TV at home. With one-time movie rentals ranging from $0.99 to $5.99 and purchased movies ranging from $4.99 to $24.99, VUDU standard comes with a 250 GB hard drive that is able to store around 50 movies at a time (up to 30 days if you rented a movie, permanently if you bought it). VUDU also offers an XL version that comes with a terabyte of storage. VUDU is unique in that it offers (as of July 2010) the largest library of HD movies (around 2,000 films) with quality of up to 1080i/1080p24, surround sound for its videos, and newly-released films become available the day the DVD is released. VUDU is currently available on Blu-Ray players from LG and Mitsubishi, and Samsung, Sanyo, Sharp, Toshiba, and Vizio devices may be supported later in the year. Wal-Mart s acquisition of VUDU illuminates the trend of customers preferring to stream their movies instead of purchasing DVDs. This acquisition was important for Wal-Mart to earn a share of the video-on-demand market and also to hedge itself against falling DVD sales. Wal-Mart has the opportunity to reach deals with studios and distribution companies to offer the same movies on Vudu that it sells in DVD format. Exhibit 16: Vudu Source: Wal-Mart NBC.com: Cross Platform Viewing with the Peacock Comcast has announced its intention to acquire a controlling 51% stake in NBC Universal, making it the first deal where a network and cable company join together. Comcast is greatly increasing its potential to serve its customers by expanding its video on demand offerings. NBC.com currently offers video on demand services through its online portal for many of its top TV shows, along with exclusive online originals and classic shows. However, the NBC.com s offering is somewhat limited compared to competitors as it only streams the 5 most recent episodes of the latest season of its top shows. For some of its classic programs, NBC has entire seasons available on its website. By far the most extensive selection on NBC s website is its library of short video clips and web-only featurettes/additions of TV shows, which include released and un-released content. Mark Sue 21

22 Video for All, 2010 September 7, 2010 NBC.com is also offering a (beta) direct download service from its website titled NBC Direct. The service is a free platform that allows users to download full episodes of NBC shows to their computers, without the need of an Internet connection. While normal users have access to all videos in Standard Quality (360p), registered mynbc users may have the option to upgrade to High Quality (720p) videos. It allows users to directly download shows or choose series to automatically download when new episodes are released. Exhibit 17: NBC Direct Source: NBC Amazon: Expanding its Offering In an effort to gain a larger piece of the growing online TV business, Amazon is exploring the potential to create a web based subscription video service of its own. While Amazon currently has an a la carte offering selling individual episodes of a variety of TV shows, if successful, the subscription service would increase the level of competition for those including Netflix and HuluPlus. Amazon reacted almost immediately to the recent Apple TV announcement cutting the pricing on some of its TV show offerings from $2.99 to $0.99. Recent reports suggest that Amazon is in discussions with NBC Universal, Time Warner, Viacom and others in the hopes to gain distribution rights for video content. Amazon may be able to leverage its large subscriber Amazon Prime subscriber base which may aid it in attracting the attention of the content owners. While in its early stages, Amazon appears aggressive in pursuing this expansion of its current video strategy and may roll-out the subscription services by 4Q Mark Sue

23 September 7, 2010 Video for All, 2010 Game Consoles: Losing Weight, Adding Dimensions Microsoft and Sony have recently released updated editions of their famous consoles, with each focusing on slimmer builds and additional features rather than significant overhauls of the respective systems as both the PS3 and Xbox are already 3D capable. The Nintendo 3DS is only slightly smaller than its predecessor but has revolutionary auto-stereoscopic 3D capabilities, which allow gamers to experience 3D gaming without glasses. Exhibit 18: Microsoft Xbox 360 Slim and Playstation 3 Slim Source: Microsoft & Sony Microsoft and Xbox: Kinect Soon Microsoft s Xbox platform has been one of the staples of modern gaming for years. With the release of its newest product, the Xbox 360 Slim, Microsoft is focused on it lucrative and loyal audience in the video game industry. Microsoft s Xbox 360 Slim offers little improvement in video processing capabilities because it is already 3D capable. Microsoft is currently choosing to pursue more of a wait and see approach to the 3D gaming trend to determine if the demand is truly there before significantly investing in research and development of 3D games. Aside from playing traditional DVDs, an Xbox Live Gold membership gains access to most of the other video capabilities. One of these is the Netflix streaming program. Xbox owners who also have a Netflix subscription are able to stream video content from Netflix s library directly to their console at home. While this offering is only a small portion of Netflix s overall selection, there are over 12,000 films available, some of which can be streamed in HD. Another is the recently announced ESPN3 online portal, which allows sports fans to view around 3,500 live sporting events and peruse through statistics, polls, instant replays, and other forms of media. Xbox owners may also be able to access Hulu Plus through their Xbox. Along with the new Xbox, Microsoft is also releasing an accessory titled Kinect. This device may allow users to control and interact with the Xbox 360 system without the need for a controller but rather by simply moving a part of the body. Along with this new system of control, the Kinect also incorporates video chat into the repertoire of the Xbox s abilities. Not only may this new accessory allow viewers to chat while watching other content, the in-built skeleton-tracking feature of the Kinect may enable the camera to follow the user as he/she moves around the room. Exhibit 19: Microsoft Xbox 360 Kinect Source: Microsoft Mark Sue 23

24 Video for All, 2010 September 7, 2010 Sony: Adding the PS3 Option Sony has released a slimmer PS3 that consumes less power, and has additional incremental changes. The PS3 is also 3D capable and a few 3D video games are expected to be released like Gran Turismo 5, and Killzone 3. One of the major attractions to the PS3 is its ability to play Blu- Ray DVDs and the PS3 also upgrades standard definition DVDs to a higher quality when they re played on the console. PS3 also comes standard with Blue-tooth connectivity and an in-built wireless connection. Playstation Plus is free but it comes with fewer perks than does an Xbox Live Gold membership. While the Netflix instant streaming service is offered on the PS3, it requires a special disk to be inserted in order to view any Netflix movies. While this isn t a major inconvenience, the additional effort of having to switch out a game disc and place the Netflix disc does represent an area for improvement (especially compared to the rival Xbox setup). One piece of news is that the Hulu Plus may be available on the PS3 upon its official release. While viewing the content may still cost $9.99/month, PS3 owners may have the opportunity to subscribe and watch Hulu videos through the console. Although this functionality is only available for Playstation Plus subscribers in its trial period, Hulu Plus is a large step in providing alternative TV and video programming to video game owners. Nintendo: Smaller and in 3D Nintendo s newest handheld device, the Nintendo 3DS, is a continuation of its highly popular DS platform. Since the introduction of the original Nintendo DS in 2004, it has been greatly received with an estimated 128M units sold across its various models. Nintendo s newest model, the 3DS, may employ the use of auto-stereoscopic 3D, or 3D without the need for special glasses. While this technology is certainly revolutionary for its ability to work without the need of glasses, the gamer must maintain a certain distance from the screen in order to experience the effect. Exhibit 20: Nintendo 3DS Source: Nintendo While the 3DS is primarily a video game platform, Nintendo has also designed the console to have other uses. Wireless connectivity, the ability to take 3D pictures and videos, and the ability to download information from the Internet even while in sleep mode are all new features. The 3DS also has the ability to play 3D movies and DreamWorks s How to Train Your Dragon and Disney s Tangled may be available for viewing on the 3DS. Set to be released sometime in late 2010 or early 2011, the success of the Nintendo 3DS may serve as a barometer for the consumer s interest in 3D technology and its increasing prevalence in media. 24 Mark Sue

25 September 7, 2010 Video for All, 2010 Network Infrastructure & The Video Growth Supplement Overall data transfer and bandwidth usage are increasing as mobile video solutions improve at a fast pace. This trend is putting significant pressure on the wireless network providers to upgrade their existing infrastructure. Since there is a limited amount of bandwidth available, service providers are trying to curb data usage on mobile devices by changing pricing structures. AT&T recently announced that their data plans are changing to a two tiered pay structure, in which the basic plan for 200 megabytes per month costs $15 and the plan for 2 gigabytes per month costs $25. AT&T may generate less revenue from most of their customers who switch to the $15 data plan, but they may save bandwidth by curbing usage from some of the heavy bandwidth users. Currently, of the wireless network infrastructure providers, Ericsson leads with 20% of the wireless infrastructure market, Alcatel-Lucent at 13%, NSN (Nokia Siemens Networks) at 12%, and Huawei at 12%. With the present transition to 4G, we expect the big players to continue to lead in infrastructure spending. With NSN s recent purchase of the network assets of Motorola, NSN may be positioning itself to be a big player in the U.S. market. NSN has also been selected to build out the 4G network for LightSquared, a new 4G wireless network backed by private-equity firm, Harbinger Capital Partners. The deal is still subject to financing. Exhibit 21: Capex of Major Carriers $6.0 $5.0 ($ in millions) $4.0 $3.0 $2.0 $1.0 $0.0 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10E 4Q10E AT&T Total Verizon Total Source: Company Reports, AT&T, Verizon, RBC Capital Markets Google TV, Leveraging Android Slated to be released in fall 2010, Google TV stands to be one of the more significant attempts by a non-traditional service provider to gain access to living room viewers. Google s plan to integrate the Android mobile operating system into traditional TV could potentially shift household viewing habits. What is Google TV and what can it do? Google TV, in its simplest terms, may combine its Chrome web browser and Android platform with traditional TV programming, allowing users to watch linear TV programming, Video on Demand and surf the web on their TVs. Users may be able to minimize the TV program into a smaller window and search for other shows, browse the Internet, or view additional information. While many of the features of traditional cable/satellite may remain the same, Google TV also introduces some new features. One is the methodology that users search for content on their TV. As opposed to manually shuffling through program guides, Google TV users may be able to directly search (using their remote control/keyboard or Android smartphone) for the video or website they are looking for. Mark Sue 25

26 Video for All, 2010 September 7, 2010 Another interesting addition is the ability to operate Android apps on the TV. For example, an Android-based videogame emulator may allow for traditional games to be played on a smartphone and on Google TV. In keeping with its open source culture, Google may release the Google TV Software Development Kit and Web APIs in early Google s current plan involves a multitude of partnerships with large companies. Sony, who has the longest track record of producing web-enabled TVs, may be providing Google TV on its TV screens and Blu-Ray devices. Logitech may have Google TV in its set top box. Intel may provide its Atom CE4100 processor to power both the Sony TV and the Logitech set top box. An interesting feature of the Logitech keyboard is that it may support a voice-enabled search function, where users can simply speak into the device to search for TV programming or online material. As it stands, Dish Network is the first service provider signed on to support Google TV. Google has also identified Adobe as a partner as Google TV may be compatible with the Flash 10.1 platform. Best Buy is the only retailer currently announced to distribute Google TV and may begin selling the product in fall One of the major benefits of Google TV is that it is slated to be compatible across cable and satellite providers and set top boxes. Ideally, content from any service provider may be accessible through Google TV, along with a myriad of other less-traditional services. YouTube (100% owned by Google) has introduced a new service titled Leanback, which is a new initiative that provides a more accessible, customized user interface for viewing YouTube content on web-enabled TVs. Android s Rapid Ascent Google s Android operating system is utilized on a multitude of mobile smartphones across carriers, along with a few e-book readers and net books in a completely open environment which encourages the development of applications. In fact, ABI Research has estimated that 62% of the operating systems in all non-smartphone mobile devices by 2015 may be Linux-enabled devices, with Android almost exclusively supporting this platform.. Google recently released a do-it-yourself app inventor. This software gives people an easy method to create apps for Android smartphones. The ease-of-creation of more simple apps may likely lead to further growth in the number of apps available in the Android marketplace, an area that Android lags compared to the ios (Apple s marketplace has ~250,000 apps available while the Android marketplace has ~70,000). The true potential for Android lies in its future prospects, which include its use on a large number of tablets, new smartphones, and even TVs. As the Android platform becomes more prevalent and supported on a wider variety of devices, the crossover potentials are a source of interest. Exhibit 22: Smartphone Market Share Data Top Smartphone Platforms Platform Feb-10 May-10 Point Change RIM 42% 40% -2% Apple 25% 26% +1% Microsoft 15% 12% -3% Google 9% 14% +5% Palm 5% 3% -2% Source: RBC Capital Markets How does this relate to video? In a word availability. As media providers take note of Google s growth within the smartphone market, there may be a very determined approach to reaching consumers carrying Android in their pocket. Netflix has already begun making its highly popular Netflix app available for the Android operating system. Another key determinant is the ability to play Flash on Android phones, which is not available on iphones to date. Apple and the Next Iteration of Apple TV Apple has experienced widespread success for its revolutionary products over the past decade. Apple has shipped over 320M ipods, ~8M ipads, and 60M iphones since Apple s ios platform has become increasingly prevalent as more consumers purchase Apple products. Apple s itunes store is one of the largest distributors of digital content and not only acts as a storefront for traditional content, but also serves as a portal for downloading applications designed for its 26 Mark Sue

27 September 7, 2010 Video for All, 2010 popular mobile devices. With over 13M songs, 3,000 movies, and 3,000 TV shows, itunes generated over $1B in revenue in Apple s F3Q10. Apple TV, introduced in September 2006 was often referred to as nothing more than a hobby by Steve Jobs, and did not develop into a big hit. However, the device did serve to provide Apple with valuable information into what features consumers are looking for. These lessons appear to have been incorporated in the new Apple TV device which was introduced on September 1, The new Apple TV is 1/4 th the size of the current Apple TV device and houses the same Apple A4 processor that powers the iphone. The device is equipped with HDMI, USB, Optical Audio and Ethernet connectivity as well as n Wi-Fi. Apple TV can support multiple video formats including MPEG-4, motion JPEG and H.264 video up to 720p as well as JPEG, GIF and TIFF photo formats. The new Apple TV is priced at $99 (down from current Apple TV pricing of $229) and will begin shipping in October Figure 23: Apple TV Source: Apple Apple has moved to an all rental, streaming model and away from a buy and store approach. This eliminates the need for storage management and to sync the device. As it relates to the critical component for success, content, Apple has signed agreements with ABC and Fox to stream commercial free HD TV episodes for $0.99. First run HD movie rentals are available for $4.99 and users can also opt to stream Netflix through the device. Apple TV allows the user to stream music, view YouTube videos as well as photos from Flickr and MobileMe. A unique feature to the device is the ability to push video and pictures from one s ipad to the TV providing for a seamless transition from mobile viewing to the living room. While the question regarding consumer s willingness to pay for the device remains, the latest iteration of Apple TV clearly moves the device from a mere hobby and serves as a strong offering in the hotly contested race for control of Internet video in the living room. Content remains the critical success factor and with its existing offering available on itunes, agreement with Fox and ABC and movie content available through Netflix, Apple appears well positioned. Mark Sue 27