This emerging world is a far cry from the early hopes of web enthusiasts that content owners would have direct access to consumers and wouldn’t have to go through gatekeepers. That vision has been realised in the sense that content owners can host shows on their own websites, market direct to consumers and make money either via charging directly or advertising, but it is increasingly clear that the best way to access a large audience online is to do a deal with one of the companies listed above. Netflix and Hulu et al are the new gatekeepers.

From a consumer perspective I don’t think this is good. I fear that we will be faced with choosing between rival subscription packages which offer only a fraction of the shows we would like to see (something we haven’t had to worry about too much in the UK). Worse still, I fear that as the battle between the pure online players and traditional companies like Sky and Comcast intensifies the market will get more fragmented and the total amount of content in any given subscription will shrink. In the short term I suspect this will also be bad news owners of anything other than A-grade content, including up and coming hopefuls, who will find it harder to get in front of large audiences. Owners of A-grade content and top stars should do well as the TV rivals battle each other for material that will help drive subscriber growth.

Live sport programming is the next frontier. We heard in December that the 2012 Super Bowl will be streamed live online by NBC, but it in the UK at least there is no legal live online access to big games. Once there is I will turn off my cable subscription, but probably not before.

This is a big event and it is not on CNN, or Fox News – it is on the web, this is over-the-top (OTT) TV that isn’t routed via a cable provider or set top box.  The President doesn’t care for social media or web TV per se, he simply reaches for the channels that will give him the most reach, and his choice on this occasion shows that Facebook and the web are right up there.  I’m guessing there are two reasons for that – firstly the volume of users and secondly the amplification of publicity that comes with Facebook.  Every person who leaves a question for the President, ‘Likes’ or comments on anything to do with the event, or watches it will have that broadcast in their friends news feeds.  There is nothing traditional TV can do to compete with that.

The other notable thing about this event is that it is a mass audience live broadcast.  The technical challenges of streaming live video to large numbers of concurrent users are often held up as a raison d’etre for traditional broadcasters going forward.  The argument is that live categories including sport, and reality TV are the most popular and that TV can’t move to the internet because there isn’t the capacity.  That argument is looking weaker.

• Time spent online continues to grow, I imagine driven by gaming and social networking
• Time spent watching TV is slightly down but is still by far the largest category – not enough to call a trend, but maybe an indicator of where things are heading
• The era of mobile is now definitively upon us – the average American spent as long staring at her mobile as she did reading newspapers and magazines combined

I expect all these trends to continue – continued growth in online gaming and social networking will drive time spent online (and we may even be approaching the end of the console era) and increasing smartphone penetration and quality will get us all using our mobiles even more.  Both of these will take time away from TV, and at some point the shift from time online to mobile will become noticeable.

The only caveat is that with connected TVs going mass market, a 2011-2012 phenomenon, people will likely watch less video on their laptops, preferring instead to watch their movie and TV streaming services on their TVs.

Finally a note on data quality.  I think this research is useful and I believe in the trends I’ve described, but I am suspect about the absolute levels reported and even the ratios between the different categories, largely because these are not apples for apples comparisons.  Most obviously, people often have their TVs and radios on in the background when they are hardly paying attention – time that counts in this survey but isn’t the same as an hour spent online, and hence I suspect the TV and radio figures are over-stated.  Secondly, time spent online is not all about consuming media in the way that reading a book is.

Of perhaps equal significance at the industry level, for the first time cable television subscriptions have fallen for two quarters in a row.  Welcome to over the top television.

On the back of this the stock market has sent Netflix’s shares up fourfold since January, and the company is now valued at $10bn.

The studios are now (of course) waking up to the power of streaming video and want in on the action, either via charging Netflix more for their content or by launching their own services.

Here in Europe the market is a little way behind, but we are catching up, and as of earlier this month movies from our portfolio company Lovefilm is now on the PS3.

The good news for the media industry is that it looks like streaming movies is becoming more popular than downloading them illegally.  Bit Torrent only accounts for 8% of US internet traffic during peak hours (although I guess a lot of torrents are accessed outside of peak hours).

I’ve long argued that as soon as there is a convenient and reasonably priced alternative to peer to peer consumers will flock to it, and that streaming services have all the characteristics required to bring consumers back to the right side of the law – principally because they are quick and easy to use.  The instant access you get from streaming services trumps waiting around for P2P files to download (if they do).

The big question has been whether media streaming services will be able to operate profitably at a price point that is acceptable to the consumer.  The debates about ad funded models vs subscription services in music services (Spotify vs Napster/MOG) show how difficult this problem is.  The data from Netflix is encouraging though – theirs is a subscription service with no free element which implies that if they are generating 20% of US traffic (at peak times) they are making a lot in sales.  The question, of course, is whether they are making enough to cover their substantial outlay on digital streaming rights.

I saw a demo of Sky’s 3D TV at the Rewind Music Festival earlier this summer and at the time I tweeted “Just seen 3 min demo of Sky 3D. My view – it’s quite cool, but not enough to go prime time” – and today Henry McCracken has a post up saying much the same thing.  He is at the IFA tech show in Berlin, which is apparently all about 3D, and according in Henry’s words:

All the 3D at the show had one thing in common: It’s lousy.

I’m not saying it’s all equally lousy: Some of it (especially at Panasonic’s booth) was at least somewhat better than I expected. Much of it was unusually blurry–some of the sets that required glasses looked only slightly better than Fraunhofer’s no-specs technology  demo. None of it rose to the level of being good, and I came away thinking that the level of hoopla was bizarre given the lackluster products being hyped.

You might wonder why it is that the TV industry is putting so much effort behind this new technology when the product isn’t great – and the answer is, of course, money, or rather the hope of money.  Hardware companies hope that 3D will drive a massive wave of television replacement, and content companies hope they will be able to add an extra line or two to our cable/satellite TV bills in the way they have done for HD.

I’m writing about this because it creates a dangerous environment for startups.  Judging market timing is key to being a successful entrepreneur and it is important to make a judgement call on whether vendor led technology pushes are going to be successful.  A lot of startups (and VCs, including yours truly) bet on WAP back in 1999/2000 and most of those bets went bad because the underlying technology wasn’t good enough for the mainstream.  3D could go the same way.

Making these judgement calls correctly can be tough, particularly for startups focused on enterprise customers.  Back in the days of WAP there was no shortage of people who really believed, and considerable amounts of money were available from network operators and other businesses to launch services.  Unsurprisingly lots of entrepreneurs went chasing those dollars.  However, when he services they created failed to get traction projects got canned and pipelines dried up, leaving many startups in a difficult place.

Many of those industry insiders believed in WAP because of its potential to transform their business, as the wired internet had done for many other companies over the previous five years.  Their excitement stopped them from thinking rationally about all aspects of the technology and consumer experience – something which happens surprisingly often.  Industries that are in desperate need of a story (arguably like the content industry today) are particularly prone to going down this path, and sometimes large numbers of companies club together to create an echo chamber which leads quickly to collective myopia – as happened with WAP and maybe happening with 3D TV now.

Successful startups (and their investors) need to have the presence of mind and self confidence not to get caught up in all the hoopla.

• Bloomberg reports that Apple is Said to plan Netflix service on new TV product – that would be a c$10 per month subscription product.  Others are predicting the worlds favourite consumer electronics company will offer 99 cent rentals of TV shows.
• Meanwhile the Wall Street Journal says that Amazon is working on a movie and TV subscription service to run over the internet

It looks like the American consumer will soon have access to a plethora of legal movie and TV services via their broadband provider.  As I discussed with Alan Patrick in the comments to my previous post on this subject that will allow them to pay for the content they want and drop the subscription to the bloated cable TV bundle with tonnes of channels they never watch.  There are clear analogies here with the declining popularity of music albums, many of which are bloated with second rate ‘album tracks’.

The interesting thing here is that even though the traditional music business model is collapsing the music industry is more loath to embrace streaming than the movie/TV industry, whose legacy model is merely starting to decline (the number of US pay TV subscribers suffered a quarter on quarter decline for the first time ever in Q2 this year – detail here).  Paradoxically, it might be precisely because the music industry is in freefall that its executives are unable to countenance the short term sacrifices that moving to internet distribution might entail.

The FT has a very good piece of analysis on developments in video streaming today which makes a number of noteworthy points:

• Analysts are divided on whether pay TV has a future [the first time I’ve seen this].  Some argue that Pay-TV’s advantages in live sport and prime time shows like American Idol will sustain it going forward, whilst others argue that “cable will go the way of the landline phone industry.  It is nothing more than an empty pipe which the internet will replace”.  [I’m in the second camp.]
• HBO plans to launch its own streaming service and won’t make its content available via any other sites.  [I think this is the way forward for large content companies.]
• Netflix is in the first skirmishes of what could turn into a full-blown bidding war with the cable companies for movie rights.  The Girl with the Dragon Tattoo was available on Netflix before pay TV.  [A bidding war seems likely to me.  Exclusivity drives subs like nothing else (look at the way Sky’s UK business was built on its Premiership football rights) and we may be on the cusp of a general land grab for streaming customers.]
• To enjoy streamed video services you need a 2MB internet connection to your home.

The other interesting piece of the movie/TV streaming conundrum is the device on which the streams are watched, and if it is to be the TV, how the streams will get from the PC to the TV.  Anecdotally, increasing numbers are watching direct on their laptop screens, and there are a number of companies looking to sell set top boxes and/or technology embedded into TVs which will help bridge the living room – not least Google, Apple and Microsoft.  And, of course, people can simply hook their PC up to the TV, either via cable or wireless.  That’s what we’ve done in our house, and it seems to me like it could turn out to be the simplest solution for many others.