The Future of Connected Entertainment

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1 Minerva Networks, Inc. The Future of Connected Entertainment White Paper 3/1/2015

2 THE FUTURE OF CONNECTED ENTERTAINMENT Abstract Improvements in broadband infrastructure and video streaming technology have paved the way for new pay TV aggregators to compete with traditional facilities- based operators. Competition has rapidly changed consumer expectations: Personalization, highly tailored content bundles, ease of content discovery and a responsive user experience across multiple devices are now essential to attracting and retaining pay TV subscribers. More delivery options and higher consumer demand, combined with the reduction in broadcast advertisement revenue, are driving a constant increase in content costs. Pay TV providers will have to make significant adjustments to thrive in the face of increased competition, more demanding consumers and escalating content costs. This paper highlights how facilities- based operators can reduce capital and operational expenses while delivering more compelling television services to their subscribers and establishing new relationships and revenue opportunities with both content providers and advertisers. 1

3 PAY TV MARKET DYNAMICS The pay TV market is changing rapidly as it attempts to address the evolving needs of consumers, content owners, advertisers and services providers. 1. Higher Consumer Expectations Most pay TV subscribers are only watching a fraction of the content available to them and do not feel they are getting enough value out of their offerings. Simultaneously, content is increasingly becoming available through additional sources as virtual content aggregators, broadcasters, and content owners attempt to offer content directly to consumers. This has placed increased competitive pressure on incumbent multichannel video programming distributors (MVPD), as consumers are demanding a more personalized and flexible television experience that enables them to easily discover relevant content and enjoy it anytime and anywhere. a. Personalization: Simplifying the content discovery process and increasing the consumer awareness of all the available content has become a major source of differentiation among pay TV services. Recent research by Nielsen shows that while the average number of channels available to consumers grew from 129 to 189 between 2008 and 2013, the average number of channels watched remained flat at This is in stark contrast to new SVOD sites that show a much broader range of content consumption. A key factor in this disparity has been the lack of personalization and ease of content discovery in legacy pay TV environments. Consumers are now expecting personalized recommendations for programming available across Linear, VOD, Catch Up and DVR content sources. b. Time Shifting: Since its introduction in the late 1990 s consumers have rapidly embraced digital video recorders (DVRs) as they bring great flexibility to the television viewing experience. More than 50 percent of homes in North America and the UK are equipped with a DVR and subscribers in those households time shift more and more of their television viewing. Consumers are now looking for even more viewing flexibility as they expect to pause and restart (Restart TV) any live program. They also expect linear content to be immediately available on demand after it is broadcast (Catch up TV). b. Place Shifting: Consumers are increasingly using tablets, smart phones and personal computers to watch content both in the home and on the go. While the TV is still the preferred viewing device, subscribers tap into new screens to add flexibility to their lifestyle. This change in viewing habits will be potentially taxing to networks carrying video traffic. While traditional linear TV is delivered in broadcast or multicast, when consumers view content on their connected devices they are served unique (unicast) streams that can increase overall bandwidth requirements on last mile access networks. 2

4 2. Rising Content Costs Content licensing fees both in the United States and in many countries around the world have increased dramatically over the past decade. In the United States, broadcast retransmission fees have increased at an average rate of 108% annually since Competition among incumbent and new pay TV aggregators trying to secure exclusive rights, escalating production costs and decreasing advertisement revenue are some of the key drivers behind the constant rise of content costs. Content owners and broadcasters are also contemplating the launch of their own direct- to- consumer pay TV services hoping to capture higher advertising and subscription revenue. Facing a more than 50% decline in TV ratings over the past 10 years due to an increase in time shifted and on- line viewing, broadcasters in the United States have relied on steep increases in advertising and retransmission fees to grow their top lines. Past content rights agreements only contended with an assumed right to provide content onto televisions. In today s world, there are many more ways for content to be distributed and consumed which is allowing content providers the opportunity to charge additional fees tied to device type, time and place. Figure 1. Content Rights Permutations What used to be a straightforward negotiation regarding content rights has become quite complex. 3

5 3. Decreasing Advertisement Revenue With the proliferation of broadcast and cable channels, video- on- demand, and digital video recording devices, television audiences are becoming increasingly fragmented, with fewer viewers watching each program. Audience fragmentation decreases the value of each television spot. Recent research by Sanford C. Bernstein shows that total TV viewership fell by 10% in the 3 rd quarter of 2014, and the tendency of viewers to record programs and then fast forward through advertisements further aggravates the decreased value of television advertising. At the same time, the rise of Internet advertising gives companies cheaper, more measurable and convenient alternatives. While TV advertising remains a large part of total ad spend, technologies utilized by Internet advertising offer a higher level of targeting at a lower cost than traditional 30 second TV spots. 4. Competition Among Pay TV Aggregators Incumbent pay TV operators are competing with an increasing number of online content aggregators for a share of home entertainment wallet share. Improvements in broadband infrastructure and video streaming technology have paved the way for new pay TV aggregators (e.g. Netflix, Apple, Amazon, Hulu) to compete with incumbent facilities- based operators. The new entrants are offering extended content catalogues and innovative navigation and discovery tools. Inspired by these emerging online providers, a few broadcasters and content companies have launched their own over- the- top services, as in the case of CBS All Access in the US or HBO Go. Some incumbent pay TV operators, like Dish (Sling TV) in the US, are also extending their offerings beyond their own facilities. Figure 2. The Perfect Storm 4

6 Increased competition, higher consumer expectations, rising content acquisition costs, and decreasing advertisement revenue have contributed to the perfect storm facing Pay TV operators worldwide. NEXT GENERATION VIDEO DELIVERY INFRASTRUCTURE While over- the- top providers have so far only addressed a portion of the overall television experience (primarily video on demand services) they have successfully deployed and proven the advantages of a next- generation video delivery infrastructure. By turning the client interface into applications running on a broad range of consumer devices powered by a highly scalable cloud- based service management platform, and delivering high quality streams with robust content delivery networks, Netflix has captured more subscribers in the same time span than any facilities- based pay TV provider. Over- the- top aggregators have demonstrated that a next- generation video delivery infrastructure minimizes in home deployment costs, enables a highly personalized consumer experience, simplifies content delivery to all connected devices, and enables faster service innovation. Figure 3. Winning Strategies for Incumbent Pay TV Operators In order to remain competitive and create new value for customers, content owners and advertisers, facilities- based pay TV aggregators need to quickly evolve their service delivery platforms to better reach their subscribers, engage them with a compelling experience, and respond to their needs through improved analytics. By taking these steps, operators will be well positioned to deliver better television services enabling greater monetization and improved customer satisfaction. 5

7 PAY TV DELIVERY PLATFORMS EVOLUTION Pay TV operators will have to evolve their infrastructure to offer a more compelling and personalized entertainment experience across a broad range of device types. This transformation will impact every component of their current pay TV delivery platforms: features of set- top boxes will migrate into the network, removing the cost and complexity of provisioning, maintaining and managing dedicated devices; new intelligence and video processing functionality will be added to access networks as they are scaled to support increased unicast traffic, while legacy back- end systems will be replaced by modular cloud based services management platforms. Figure 4. Next Generation Video Delivery Infrastructure Empowered by next generation video delivery infrastructures, pay TV operators will be able to deliver a responsive and personalized experience across a variety of devices, accelerate time to market for new services and create new revenue opportunities while reducing both capital and operational expenses. Below we examine some of the elements and benefits associated with this transition. 1. Streamlined Home Environment Consumers are investing in a range of powerful connected consumer electronic devices that offer operators the opportunity to deliver television services without investing in dedicated customer premise equipment (CPE) and costly truck rolls. In order to support a broad set of devices, operators will require highly portable and customizable client interfaces (e.g. HTML5- based clients). 6

8 This transition will occur gradually, with consumer electronics (CE) devices initially complementing existing set- top boxes. CE devices such as streaming media players and smart TVs could be used at first to deliver services targeting a younger generation of consumers who may otherwise only be interested in over- the- top offerings. Over time, as more intelligence can be moved from the client into the network, the use of CE devices can be expanded. 2. Intelligent Delivery Network Intelligent, two- way networks are required to enable service providers to deliver premium pay TV services to consumers on any connected device. Besides supporting the origination of high quality streams and the reliable delivery of significant unicast traffic, next generation video delivery networks will provide more and more functionality traditionally offered by dedicated set- top boxes, including digital video recording and user interface acceleration. a. Agile Head- end: Many pay TV head- ends built with technology coming from the broadcast industry (e.g. constant bit rate encoding) are now being upgraded to reach a wider range of devices through adaptive bit rate streaming formats. Unlike specialized legacy equipment, new video encoders offer greater flexibility by decoupling the video processing applications from the underlying physical hardware, therefore significantly reducing encoding costs by leveraging off- the- shelf hardware. New head- ends can be easily upgraded to support new standards, such as H.265/HEVC, and higher resolution formats like Ultra HD by adding more hardware rather than requiring a complete reinvestment in encoding infrastructure b. Advanced Content Delivery Networks (CDNs): CDN technology is well understood and broadly deployed to support the delivery of Internet- based content. Service providers can leverage similar technology to distribute high- quality video to various connected devices. In order to offer a richer and more personalized experience to their subscribers, pay TV operators are tapping into new and more advanced CDN functionality like session awareness and video processing. Awareness of individual user content requests and video session management enables operators to optimize delivery by manipulating the flow of each stream based on current network conditions, on the type of content being viewed and the target consumption device. The ability to manipulate content at the edge of the network allows the delivery of a personalized experience, such as the insertion of advertisements targeted to a specific subscriber. c. Network- based DVR: By migrating the hard- disks and processing power of DVR set top boxes into the network, service providers can deliver time- shifting functionality without procuring, installing and maintaining expensive hardware in the subscriber s home. Besides reducing capital and operational expenditures, network DVR enables users to watch recorded shows on any device, anytime and anywhere. Service providers can generate incremental revenue by offering subscribers more storage and more 7

9 simultaneous recordings. Advertisers and content owners can also benefit from network based digital video recording as they gain more control over content recording and consumption. d. UI Acceleration: As dedicated set- top boxes are replaced by consumer devices, operators are faced with the challenge of delivering a user interface that meets the expectations of pay TV subscribers across a fast growing and diverse collection of consumer electronic devices, including personal computers, smart phones, tablets, game consoles and smart TVs. Much of the industry is embracing HTML5 for its flexibility and portability. HTML- based UI s allow operators to more quickly make changes to their service offerings, improve usability, and provide better visibility into how consumers engage with the service. However, HTML5 can create challenges when it comes to insuring a consistent and responsive user experience across networks with varying latency and devices with varying memory and processing power. Service providers can address this challenge by moving into the network memory and CPU intensive functionality typically handled by the set- top box, including metadata caching, filtering and search. Reducing the end device processing and storage requirements and replacing legacy ( thick ) user interfaces with simpler, highly portable thin clients, makes it easy for operators to support new devices and guarantees a consistent and responsive user experience. 3. Flexible Back Office As the central point of service creation, management and monetization, the back office is a critical element of the pay TV infrastructure. Legacy back offices that are vertically integrated with existing service delivery infrastructure cannot easily handle the increasing complexity of next- generation pay TV services. Modular and flexible solutions are needed to handle more devices, more content sources, deeper personalization and more sophisticated business rules. Next generation pay TV back offices will consist of a collection of specialized cloud- based services, such as content management, content protection, search, recommendations, analytics and advertising, integrated by a service management platform responsible for the delivery of a unified user experience. This architecture will provide flexibility (simpler integration of new services) and scalability (new services can be test marketed and then scaled up to millions of subscribers) while delivering superior functionality. Sophisticated analytics combined with advanced CDNs capable of ad insertion, for example, makes it possible to better target television advertisements. 8

10 Figure 5. Benefits of Next Generation Video Delivery Solutions A next- generation video delivery infrastructure can create new monetization opportunities and bring added value to all pay TV stakeholders as operators will be able to offer a more personalized television experience to their subscribers, while delivering more relevant advertisements and content bundles more tailored to their needs. MINERVA S NEXT GENERATION SERVICE DELIVERY PLATFORM Personalization, ease of content discovery, a responsive user experience and broad device support are becoming essential ingredients for pay TV operators to retain their subscriber base. In addition, operators need to innovate at Internet speed to stay ahead of new agile competitors, while maximizing operational efficiencies in order to scale their services reliably and cost effectively. Developed to meet these stringent requirements, Minerva s new service delivery platform (Minerva 10) provides an unmatched set of unique features and capabilities to enable operators to deliver next generation television services across a variety of networks and devices. Personalized HTML5- based Client: Most pay TV subscribers are only watching a fraction of the content available to them and do not feel they are getting enough value out of their offerings. The Minerva 10 Client experience addresses this challenge in a number of unique ways. Through a Landing Page consumers are offered a personalized starting point to begin their content discovery experience. Recommendations for Linear TV, DVR, VOD and SVOD are all presented to the user, enabling subscribers to begin watching relevant content with just a few clicks of the remote control. 9

11 Figure 6. Landing Page The display of metadata is graphically rich, and provides an immersive discovery experience of relevant content from various sources. In depth search can be easily and intuitively conducted through responsive, user selectable filters that allow viewers to quickly narrow large VOD libraries down to a few relevant items. Testing performed against a VOD library containing 18,752 titles showed that the application of just three filters reduced, in less than 1 second, the available assets presented to the user to 82 unique titles. Figure 7. User Selectable Filters 10

12 The Landing Page, in combination with the Filters, enables a significant reduction of the time spent by subscribers searching for relevant content. In addition, an integrated multiscreen experience allows consumers to conveniently browse and enjoy available content from whichever device they prefer. Distributed Architecture with Edge Processing: While HTML5 technology enables client flexibility and portability, it creates challenges when it comes to insuring a consistent and responsive user experience across networks with varying latency and devices with varying memory and processing power. Minerva 10 s distributed architecture not only caches metadata in the Edge to accelerate delivery to the client, but it also off- loads computationally intensive functionality (e.g. Search, Filter) from the client, insuring a responsive UI on cost- effective consumer devices. Extensive performance benchmarking has demonstrated that Minerva s Edge servers improve the use interface response times by more than 70% while reducing the overall Back Office transaction processing by almost 60% with Edge without Edge >460 Figure 7. Sample UI Response Time With and Without Edge This distributed architecture, besides being uniquely well suited for large scale deployments across broad service territories, enables the Minerva Back Office (shielded from direct connections to the clients) to be deployed virtually anywhere, including data centers and private or public cloud environments. Flexible Back Office: Legacy monolithic back office solutions are no longer capable of supporting the flexibility and rate of innovation required by advanced pay TV services. The Minerva 10 modular back office enables the seamless introduction of new services while minimizing capital investments and operational complexity. It comes pre- integrated with leading content protection systems, content management and video on demand systems, origin servers, recommendations engines and OSS/BSS systems. Minerva 10 features a powerful analytics sub- system that enables operators to collect 11

13 more data and gain deeper insights on their subscribers behavior to better segment their customer base and optimize their offerings. Figure 8. Sample Analytics Cross- service data intelligence provides operators with a distinct competitive advantage over potential over- the- top entrants. By capturing and analyzing subscriber and device usage data through Minerva 10 s cloud- based analytics platform, operators can gain the insights they need to tailor service offerings, identify and respond to emerging customer segmentation opportunities, and optimize their agreements with content partners and advertisers. SOLUTIONS FOR MULTIPLE DEPLOYMENT SCENARIOS Service Providers need new solutions to expand the reach of their pay TV services across various types of access networks to a multitude of managed and unmanaged devices. Minerva has certified its platforms with a broad range of eco- system partners (encoders, transcoders, CAS/DRM systems, recommendation engines, VOD servers, CDNs, STBs and consumers electronics devices) to insure service providers can deploy next- generation pay TV services across heterogeneous networks while preserving existing assets and infrastructure. Unique features such as seamlessly mixing multiple linear content sources in a single channel line- up, including QAM, IP Multicast, and adaptive bit rate streaming, as well as being able to manage and define unique channel packages by device type provide unprecedented flexibility to service providers and enables them to offer services to a broader range of subscribers. A Best- of- Breed Multi- vendor Approach Unlike legacy Cable TV and IPTV solutions that deliver services to managed devices (STBs) over highly managed networks (e.g. multicast- enable broadband networks), next 12

14 generation pay TV services will reach an increasing number of connected devices over multiple networks (both managed and un- managed). Also, new over- the- top market entrants are innovating at a pace unsustainable with legacy, monolithic systems in which no component can evolve independently. These industry trends favor open, modular, best- of- breed multi- vendor solutions over closed, monolithic, single vendor platforms. Minerva has worked with leading vendors and system integrators worldwide including Harmonic, Envivio, Elemental, Imagine Communications, Verimatrix, Anevia, Edgeware, Broadpeak, Entone, Kaon, Amino, ADB, Pace, and IBM, among others, to integrate, test and certify best- in- class, next- generation pay TV solutions. Figure 9. Typical Deployment Configuration Service providers can adopt such solutions to support deployment models that best fit their needs, from fully hosted and managed cloud- based systems for OTT services, to premise- based systems for IPTV, Cable TV and OTT. Unique Expertise and Track Record Minerva s goal is to enable service providers worldwide to offer an engaging entertainment experience to their subscribers on any device, across any network and at any time. We have been at the forefront of the transformation of video services to IP- centric solutions since the very beginning. Today, Minerva s award winning platforms power over 290 pay TV deployments worldwide, far more than any other vendor. 13

15 Figure 10. Minerva Offices and Deployments Starting in the early 2000s, many Telco s, attempting to defend against voice, data and video service bundles offered by cable operators, have launched television services over their managed broadband networks through Minerva s IPTV platforms. The second wave of digital TV technology evolution began in the late 2000s, fueled by connected consumer devices and increased broadband access through wireless and wireline networks. It became possible for service providers to deliver video content to a broad array of devices anytime and anywhere. Once again, Minerva pioneered the delivery of pay TV services over unmanaged networks as we powered several OTT deployments around the world. Working closely with our partners and customers we have achieved several key milestones over the past fifteen years, including: 2015: First distributed entertainment delivery platform Minerva releases next generation platform (Minerva 10) enabling the delivery of a highly personalized entertainment experiences to millions of subscribers 2013: First integrated multiscreen deployment Minerva powers multiscreen deployment with seamless integration between set- top boxes and mobile consumer electronics devices through a single back- office. Minerva receives TV Connect 2013 Industry Award for Best Service Deliver Platform for IPTV and OTT 2012: First Broadband TV deployment Minerva powers first pay TV deployment over unmanaged broadband networks. Minerva is recognized with Telco TV 2012 Vision Award for Best Innovation in Middleware 2011: Minerva powers 250 deployments worldwide Minerva offers the most deployed IPTV platform worldwide. Minerva receives Telco TV 2011 Vision Award for Best IPTV Middleware 14

16 2010: First blended pay TV and Internet video delivery platform Minerva introduces the first complete solution for the management and delivery of blended pay TV and Internet video services 2008: Powering more than 1 Million devices More than 1 Million IP- based STBs deliver advanced television services powered by Minerva's software 2007: First IPTV platform featured in 100 carrier deployments Minerva's platform is featured in 100 deployments worldwide 2005: First HDTV solution for IPTV Minerva powers first IPTV deployment with support for HDTV 2004: First IPTV PVR deployment Minerva deploys first PVR solution for IPTV 2003: Largest IPTV deployment in the United States Minerva powers the largest IPTV deployment in the United States 2001: First turnkey IPTV system Minerva deploys first end- to- end IPTV system in the United States Today hundreds of operators around the world are delivering compelling television services powered by our platforms. Figure 11. Pay TV Success Strategy 15

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