CLOUD/IP-BASED VIDEO PLATFORMS: REINVENTING THE DIGITAL CONTENT ECOSYSTEM THE GOLDEN AGE OF VIDEO CONSUMPTION

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1 CLOUD/IP-BASED VIDEO PLATFORMS: REINVENTING THE DIGITAL CONTENT ECOSYSTEM Tuna N. Amobi Director, S&P Capital IQ Media & Entertainment Equity Research September 26, 2013 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public. Copyright 2013 by Standard & Poor s Financial Services LLC (S&P). All rights reserved. THE GOLDEN AGE OF VIDEO CONSUMPTION Overarching thematic framework: convergence of Internet and traditional television (content, technology and services). Key catalysts: explosion of mobile devices/gadgets and other secondary screens (smartphones, tablets, gaming consoles, etc.). Ubiquitous Internet connectivity (fixed/wireless broadband). Personalization of content consumption including evolutionary dynamics of time-shifting and place-shifting (VOD, DVR, etc.). Proliferation of content choices and outlets over-the-top video (e.g. Netflix, Hulu, Amazon, etc.); authenticated TV Everywhere services (HBO Go, Showtime Anywhere, Sky Go, etc.). Penetration of new IP streaming devices (Apple TV, Roku, TIVO, Microsoft Xbox, Sony PlayStation, Google Chromecast, etc.). 2 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public. 1

2 CLOUD/IP VIDEO A GAME CHANGER FOR VIDEO DISTRIBUTORS Enhanced value proposition (including out-of-home viewing, etc.). Improved customer satisfaction, NPV per-subscriber economics (reduced video losses, lower churn/sac, higher ARPU, etc.). Potential defensive weapon against competition from over-the-top video - OTT (vs. pay TV cord cutting or cord shaving ). Incremental high-margin business opportunities (e.g. home security, targeted/addressable advertising, enhanced TV, etc.). Accelerated video innovation, differentiation and speed-to-market Improved network management, scalability and flexibility. Long-run cost savings (capex/opex) via deployment of hybrid IP boxes (vs. traditional CPE/set-top boxes); reduced truck rolls; etc. 3 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public. THE NEW MULTI-SCREEN ERA: CONTENT IS KING Multiplicity of consumer touch points (via multi-platform access) for brand extensions and improved brand recall. Aggressive exploitation of branded content across genres (including entertainment, news, sports) via higher-margin windows (SVOD, VOD, DVR+, etc.) for ultimate profitability. Higher consumer engagement (including enhanced social features e.g. search/discovery, recommendations, etc.). Multi-platform and integrated advertising campaigns aimed to enhance value-add for ad buyers (TV upfront market). Targeted marketing/promotions and improved offerings. 4 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public. 2

3 EVOLUTION OF CLOUD/IP VIDEO: POTENTIAL HURDLES Audience fragmentation and measurement deficiencies for mobile/online and VOD (vs. live TV and DVR playback). Legal/copyrights issues (including out-of-home viewing). Monetization challenges new and/or unproven business models (e.g. free/ad-supported, subscriptions, download). Cannibalization of traditional ( core ) revenue streams (ads, subscriptions, TV syndication/licensing) and/or disruptive technologies (e.g. Aereo s cloud DVR and/or ad-skip DVRs). User interface/interoperability issues (DRM, video formats). Policy framework (Net Neutrality vs. broadband caps). Security and reliability (data integrity, privacy, recovery). 5 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public. CLOUD-ENABLED INITIATIVES: CASE STUDY (1) COMCAST CORP. Company facts: largest U.S. pay TV distributor (~22M video subs); vertically integrated conglomerate (~$115B mkt. cap). Challenges/constraints: maximize ROI on ~ $5B annual cable capex (primarily CPE/set-tops); OTT rivalry ( cordcutting ); legacy infrastructure limitations for OTT/multiscreen (program guides, etc.); programming cost pressures. Solution: early shift to IP-based architecture (with advanced all-digital migration); accelerating deployment of X1 cloudbased platform ( X2 RS-DVR upgrade by Q ); broad array of content choices (VOD, Streampix, TV Everywhere). Results: lower churn; cost savings (CPE costs per HH; truck rolls); faster innovation; growing home security business. 6 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public. 3

4 CLOUD-ENABLED INITIATIVES: CASE STUDY (2) THE WALT DISNEY CO. Company facts: pure content provider (major TV/film franchises); leading entertainment conglomerate (~$115B market cap). Challenges/constraints: further TV audience fragmentation (on industrywide declines in broadcast and cable ratings); underexploited streaming rights for maximum ROI (vs. escalating fees for pro sports rights); sub-optimal film output deal (with Starz). Solution: comprehensive pay TV retransmission deals (>70 channels); authenticated apps (Watch ESPN/ABC via Apple ios, Android, Kindle, XBox); ground-breaking Netflix pact (first-run movies); TV episodes via SVOD (Netflix, Amazon, Hulu); newly launched cloud locker for movies ( Digital Copy Plus ). Results: sizable incremental revenues (multi-year); higher viewer engagement (apps downloads); multi-platform brand extensions. 7 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public. EVOLUTION OF THE DIGITAL CONTENT CHAIN: KEY FIVE-YEAR PREDICTIONS Industrywide adoption of cloud-based DVR and hybrid OTT solutions with integrated all-ip deployment (vs. legacy set-tops). New entry of virtual multi-channel operators (e.g. Google, Sony, Intel) to intensify competition for linear broadcast/cable content. Significant milestones in standardized cross-platform audience measurement including mobile (and online) viewing. Major breakthrough in ad insertion to drive new revenue stream. Compelling UIs with advanced search and discovery (e.g. voice /gesture control) and full social integration (Facebook, Twitter). Convergence by vendors on fewer technical standards for cloud video; UltraViolet seen as de facto digital locker for movies. 8 Permission to reprint or distribute any content from this presentation requires the prior written approval of S&P Capital IQ. Not for distribution to the public. WINNING MANTRA: DON T FIGHT THE CONSUMER! 4

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