MSOs, Studios and Telecoms Emerge As OTT Winners at Netflix's Expense

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com

REPORT

August 23, 2012 Companies: AAPL, AMZN, ARRS, CBS, CHTR, CMCSA, CSTR, CVC, DIS, DISH, LGF, NFLX, NLSN, RENT, T,

TWC, TWX, TYO:6758/SNE, VIA, VZ, YHOO

1

Reverdy Johnson, rj@blueshiftideas.com, 415.364.3782

Summary of Findings MSOs, telecoms and studios will be the near-term winners in the

OTT market. Netflix Inc. (NFLX) and OTT set-top box makers will be the losers.

Thirteen of 16 sources said cord cutting remains a small and manageable development for MSOs. Operators are embracing OTT delivery to supplement broadcasts and retain subscribers.

Most major MSOs are introducing on-demand and streaming video products to challenge Netflix and to meet subscribers’ increasing demand to view TV anywhere. Comcast Corp. (CMCSA) and Time Warner Inc.’s (TWX) Turner are leading this development.

Viacom Inc. (VIA) and Sony Corp. (TYO:6758/SNE) are the studios best positioned and most aggressively seeking ways to monetize back libraries. Time Warner and The Walt Disney Co. (DIS) have been slower to embrace streaming products.

AT&T Inc.’s (T) U-verse and Verizon Communications Inc.’s (VZ) alliance with Coinstar Inc.’s (CSTR) Redbox are early successes for telecoms becoming video providers, and will even challenge MSOs.

Rising competition is expected to hit Netflix the hardest. Competitors offer better prices and have stronger relationships with content providers. Two sources said Amazon.com Inc. (AMZN)’s Instant Video is gaining on Netflix.

Standalone OTT boxes could be rendered irrelevant by MSOs’ and studios’ own streaming and on-demand efforts.

Nielsen Holdings N.V. (NLSN) still falls short in tracking OTT viewing patterns or trends.

Telecom’s Role in OTT Netflix Cord

Cutting

Industry Specialists

Studio, Network Execs

Cable and Satellite Execs

Content Creators N/A

Research Question:

Who will be the OTT market’s big winners and losers in the next three to six months?

Silo Summaries 1) INDUSTRY SPECIALISTS Most major MSOs are rolling out proprietary streaming video products that challenge Netflix’s early market leadership and slow audience drift to other entertainment delivery paradigms. AT&T’s streaming video service and Verizon’s alliance with Redbox are early successes and show telecoms’ growing influence on the market. Three of four sources warn that standalone OTT devices have failed to achieve critical mass with consumers and face an unclear future as MSOs move these services back to the set-top box. 2) STUDIO AND NETWORK EXECUTIVES OTT does not pose a near-term disruptive threat to conventional MSOs. Two sources pointed to Sony’s Crackle service as a model for content creators eager to sell their product directly to the audience; others like Epix and Starz are expected to produce similar offerings in the next six months. Viacom is a well-positioned studio while Time Warner and Disney prefer to remain loyal to DVD sales and broadcast cable channels. 3) CABLE AND SATELLITE EXECUTIVES These four sources said they are using OTT delivery of content to supplement their traditionally broadcast content and to appease subscribers who have come to expect content available on-demand. By embracing OTT as another viewing outlet, cable and satellite companies can retain subscribers. Turner’s authentication model for viewing its drama series content is expected to become the standard for viewing TV content anywhere, including sports, while requiring pay TV subscribers to maintain their relationships with cable operators. Tablets are disruptive as a second viewing screen, often used simultaneously with a primary screen. AT&T’s U-verse is a leader in delivering content in various ways over the Internet, providing competition to the cable and satellite operators. 4) CONTENT CREATORS Four sources said cord cutting is not yet a viable option for most consumers, and cable operators are fending off the OTT threat with their own streaming content through the TV Everywhere concept. Demand is growing for original programming from OTT platforms, though sources are split on whether such content will be compelling enough to threaten viewership at traditional providers. Operators that have quality content available OTT only for subscribers are creating another viewing avenue while maintaining subscriber loyalty. Two sources said Amazon streaming is a better value proposition than Netflix and is gaining share, while another said Netflix is the better option.

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 2

Background Sources for Blueshift Research March 15 OTT report said cord-cutting was insignificant and that MSOs were offering content across all platforms to encourage subscription renewals. Children were leading the charge in accessing content away from the TV. However, on-demand and mobile-device viewing was viewed as a supplement to rather than a replacement for TV viewing. Blueshift’s Dec. 15, 2011 OTT report, found that cable companies require an OTT solution in order to address viewers’ demands and that customers will remain MSO subscribers. Our July 2011 and October 2011 highlighted Comcast as best positioned to benefit from OTT growth. CURRENT RESEARCH In this next study, Blueshift assessed which companies were poised to be the winners and losers in the over-the-top viewing market for the next three to six months. We employed our pattern mining approach to establish and interview sources in five independent silos:

1) Industry specialists (4) 2) Studio and network executives (4) 3) Cable and satellite executives (4) 4) Content creators (4) 5) Secondary sources (10)

We interviewed 16 primary sources, including eight repeat sources, and identified 10 of the most relevant secondary sources focused on data showing cost motivating cord cutting more than lack of content, cable companies fending off OTT threats, a local TV station offering its programming on mobile devices, disappointing Summer Olympics streaming in the United States but record-breaking streaming for the BBC Worldwide Ltd., Larry King resurfacing on Hulu (a joint venture by Comcast, Disney and News Corp./NWSA), Amazon Instant Video with an app for the iPad, and Apple Inc. (AAPL) with a new patent to potentially allow Apple TV viewers to skip commercials.

Next Steps Blueshift’s next report covering OTT will drill down into specific MSOs to see who is farthest along, who is executing best, and who is lagging in delivering content to viewers in a TV Everywhere format. We also will dig deeper on the progress of telecoms becoming video providers and the effect it is having on traditional MSOs. We will track the progress of studios delivering streaming content directly to consumers. Finally, we will assess Netflix’s position amid growing competition, and we will assess the market for Apple TV.

Silos 1) INDUSTRY SPECIALISTS These four sources said most major MSOs are rolling out proprietary streaming video products that challenge Netflix’s early market leadership and slow audience drift to other entertainment delivery paradigms. AT&T’s streaming video service and Verizon’s alliance with Redbox are early successes that defy the industry trend of slow but persistent subscription decline, and show telecoms’ growing influence on the market. Three of four sources warn that, except for Apple TV, standalone OTT devices have failed to achieve critical mass with consumers and face an unclear future as MSOs move these services back to the set-top box. One source said Time Warner Cable Inc. (TWC) is the lone operator keeping on-demand and streaming at arm’s length because of its relationship with Time Warner studios and its DVD business. Editor of a digital TV industry publication; repeat source

Bundled VOD systems are almost ready to compete head-to-head with Netflix and its standalone service. Phone networks are soon to launch on-demand movie services; both AT&T and Verizon are positioned to challenge cable companies. OTT

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 3

device makers that depended on Netflix as a key content relationship are at risk of being marginalized. No truly compelling content has been created to draw attention away from broadcast TV and film libraries.

“The biggest thing coming down in the remainder of the year is the phone networks’ homegrown watch-all-you-want movie services. AT&T is getting a lot of buzz for its bundled U-verse video service, and Redbox Instant from Verizon should be rolling into that company’s TV households as well over the next six months. Between them, that’s knocking about 6 million households out of the potential Netflix market.”

“Netflix is already floundering to keep its streaming service together while it tries to convert the DVD subscribers. They don’t need to be climbing into any walled gardens to grow, and frankly I don’t think they have the marketing muscle to force their way in anymore.”

“The major cable operators all have on-demand or first-run premium movie channels going straight to the set. Comcast is pushing ahead with Streampix to get onto the mobile screen as well, and Time Warner Cable has HBO Go and the TWC TV app. This puts additional pressure on Netflix in those households. All these network-resident products are half the price of Netflix streaming, and they have better relationships with the content providers.”

“If cable offers a Netflix-like product and the phone carriers offer a Netflix-like product, that’s theoretically about 95 million U.S. households that might take a fresh look at Netflix and opt for the low-cost vendor, especially if the economy keeps grinding. I’m not saying Netflix is locked out of that market, but their cost to acquire and retain households is going to soar. Meanwhile, the operators squeeze that extra $5 a month out of their subscribers instead of letting it go to Netflix.”

“Naturally, all of these operators have their own set-top boxes, so this is partially an effort to move more content onto the box and freeze out competing devices and services that don’t have a must-see content piece of their own. I’d put just about everyone in that camp. Until there’s a breakout YouTube [Google Inc./GOOG] HD series or some other IPTV content riveting enough to get people to buy the new box, these will all be niche or novelty products. If the aura of Netflix as the OTT streaming standard bearer fades, that fate becomes a lot more likely.”

“If Netflix has to pay extra to stream movies that its competitors are already providing across their premium relationships, it has no compelling content. It becomes one of those public domain libraries from the early days of online video that started out well enough and quickly became a ghost town as the content owners locked up their material for DVD release. We don’t even remember the names of those sites now.”

Managing editor of various convergent video industry trade publications; repeat source

Netflix is losing its competitive momentum. Cord cutting is a real threat to MSO franchises, forcing operators to spend more to retain subscribers as the “triple play” value proposition weakens. Winners now can be found in the telecom sector, where Verizon and AT&T are becoming viable top-tier video providers. OTT manufacturers are failing to achieve critical mass.

“Cable cutting is still going on. It’s an inevitable long-term decline similar to what we saw with wireline telephony over the last decade. We’re not nearly as far along yet, but the erosion has started to trouble the MSOs. They universally discredit the idea, but it’s real. The top four cable-based video providers in the United States shed a net 275,000 subscribers last quarter. Granted, it’s a seasonally bad quarter in terms of churn, but nobody says every cable cut is permanent either. That’s why all of these companies are looking to move their video offering onto non-TV screens now, rather than suffer the pain we saw in wireline telephony.”

“Paradoxically, the old wireline giants are winning all the TV subscribers the top-tier MSOs are losing. AT&T U-verse is taking off as a high-speed Internet plus value-added video play, and FiOS from Verizon is getting a fresh head of steam also, years after people thought it was dead in the water. These are the fifth and sixth largest non-satellite video providers in the country now, of a similar scale to Cox [Communications Inc.] or Charter

The biggest thing coming down in the remainder of the year is the phone networks’ homegrown watch-all-you-want movie services. AT&T is getting a lot of buzz for its bundled U-verse video service, and Redbox Instant from Verizon should be rolling into that company’s TV households as well over the next six months. Between them, that’s knocking about 6 million households out of the potential Netflix market.

Editor Digital TV Industry Publication

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 4

[Communications Inc./CHTR], and unlike either of those cable operators, the telephone-based triple plays are growing at a rate of 2% to 3% a quarter.”

“Nationally it’s still anyone’s race, of course. But the telephone names have suffered most of the really significant wireline subscriber losses they’re going to suffer in the short term, so their triple play base is pretty loyal. The phone numbers that are still in place aren’t going away, and they don’t fully trust cable to give them the wireline service that the phone company provides. These are older, less technologically sophisticated consumers. Where you get your TV from is a much more open question, and in an overall shrinking market, competition might start eating smaller cable operators alive by the end of the year.”

“AT&T is probably the more aggressive right now in terms of reengaging with the video side of the triple play. The U-verse bundle is getting a lot of buzz for its on-demand movies hitting the screen at the start of the DVD release window, rather than waiting weeks or months for the studios to get their retail cut. That’s huge. It establishes U-verse not only as a competitor against in-house premium TV channels or Netflix streaming but with the Netflix DVD rental operation itself. Who needs Netflix?”

“FiOS was quiet for a few years while Verizon consolidated its national footprint, but now they’re actively marketing themselves as well. The issue here seems to have been whether Verizon would compete directly with existing streaming systems or co-opt them as a kind of aggregator. It looks like the Redbox deal will let them do it all. Want a DVD window release? Use Redbox Instant. Want something farther back? Look through the partners and see where you get the best deal. And the company that brings it to you is always Verizon.”

“The over-the-top boxes just aren’t making it. Moxi [from Arris Group Inc./ARRS] faltered before it could really establish itself; Roku [Inc.] and Boxee [Inc.] are not doing much better. Google TV was arguably a disaster for first-generation manufacturers, and the news coming out of the second generation is muddled. Meanwhile, Apple sells as many of its OTT devices per quarter as the rest of the industry sold last year, and Apple TV is still considered a ‘hobby’ product.”

“There’s just no time for any of these products to get the commercial traction they need to create the relationships they need with content distributors, with the possible exception of Apple TV, which has the relationships and is finally becoming a viable market force. And without a significant install base, the content distributors who were relying on the OTT boxes as their entree into the TV set are finding themselves both frustrated and vulnerable.”

“I think Moxi is dead. Boxee, Roku and Google TV are essentially interchangeable Netflix/Amazon streaming devices. They live or die depending on what happens with Netflix and Amazon. What else do they have? Maybe fine variants in terms of content provider support and user interface, but do people really buy a device because they love the remote? They buy the cheapest device, and that’s a race to the bottom for these vendors who were, I think, hoping to establish a new category and rule for a few years before competitive realities emerge.”

“Apple TV has the iTunes integration, which overrules every other argument for rival OTT boxes as music servers. And while the video side of iTunes hasn’t really been developed as much as the music side, quite a few of the cable cutters over the years have built up a substantial library of Apple video content and are pretty loyal to the platform. Apple TV has a lot of room for growth and integration into the evolving iOS universe, and not much of the risk of huge decline that the other manufacturers are facing.”

Market analyst for a global consumer electronics consulting firm

VOD is becoming a mainstream entertainment delivery model, but neither OTT device makers nor independent content distributors like Netflix will ultimately reap the benefits. Cable operators already are incorporating VOD into the set-top box. Internet-ready TVs also pose a serious competitive threat to the OTT box. Although Netflix may find a niche as a branded on-demand movie channel, its lack of direct studio relationships argues against its long-term survival. Amazon and Apple remain question marks.

“Streaming IP video to the TV is a reality now and will be ingrained in mass American media consumption habits by the end of the year. We’ve been talking about this since the mid-1990s, if not before, and it’s finally here. Unfortunately, it’s not going to be a revolution at this point in the sense of creating industry upheaval. The entrenched cable operators will get stronger and the symbiosis between delivery and

OTT boxes will be looked on as a brief historical curiosity by future generations, a failed evolutionary path. We see that now with the lack of penetration for any of the standalone boxes. … Standalone OTT boxes will be irrelevant, with the possible exception of Apple TV.

Market Analyst Consumer Electronics Consultancy

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 5

content production will become tighter, squeezing out marginal players that currently survive in the space between.”

“OTT boxes will be looked on as a brief historical curiosity by future generations, a failed evolutionary path. We see that now with the lack of penetration for any of the standalone boxes. These companies have stopped seriously trying to compete in the marketplace. They’re trying to survive to get bought out when the money runs out and have their technology and user bases incorporated into a bigger box, a cable platform or both.”

“Standalone OTT boxes will be irrelevant, with the possible exception of Apple TV. They don’t want to open up the iTunes account to stream to non-Apple screens without the Apple TV device in place. I think that’s a mistake, but who knows what they’re really planning?”

“Netflix occupies a similar position but from the content side. If the OTT box piggybacks on the set-top to feed third-party content to the set—and bypass the MSO—Netflix piggybacks the studios and their existing channels for delivering library content. Remember, this is a company that for all practical purposes exists to provide a secondary market for entertainment content in the DVD format. It’s a reseller, and in an age of direct on-demand delivery there’s not much space for resellers.”

“The cable companies are working with the studios to clarify the windows into which they can feed studio content. First-run theatrical is still sacred because the studios need the exhibitors to recover their production costs, but as DVD vanishes the studios are becoming more eager to explore sharing the traditional DVD retail window with cable. The old premium and syndication tiers have collapsed into a general on-demand library where in theory you can call up anything ever produced a la the Netflix DVD model, only without the DVDs. When that happens, the cable companies split the subscriber fee with the studio. They can bicker over the split, but Netflix is left with scraps at best.”

“This collapse of the windows is happening now. The DVD retail window is going away now. I see The Hunger Games coming to VOD the same day as the DVD release. That’s direct convergence of DVD/VOD for that blockbuster release, and it won’t be the first. Netflix can’t compete with that on a streaming basis because at best it has its DVDs in the mail a few days after the retail release. Its streaming is even more delayed now as it has to obey the Epix [Studio 3 Partners LLC] window, which is more or less on the premium movie channel calendar.”

“Don’t rule out IP-ready TVs, which already account for 25% or so of new shipments. These screens can already run Web video and music, so you don’t need a special box to play YouTube or Hulu on the wall screen. People who sold that box are out of luck. And people buying TVs now are either affluent … or desperately in need of an upgrade.”

“You see things like Boxee trying to stay afloat through suing the cable companies for a space at the table. As my colleagues have pointed out, if the cable companies recognized this technology as a serious threat, they’d simply settle and acquire. Comcast didn’t want to buy out Boxee to shut them up. That’s ominous in my opinion.”

“Where I see us next summer is Netflix continuing to implode on the streaming side. It’s becoming as chic to hate the company as it was to love them back in the red-envelope days. That’s alarming. The cable companies will keep rolling out their $4 to $5 monthly streaming plans and peeling subscribers away from Netflix. All the majors have them or are working on them. From what I’ve seen, it only takes three to six months to go from announcement to launch, so the time frame is very close.”

“Amazon can keep streaming to Kindle and other allied devices, but realistically, they’re vulnerable to the cable companies moving their streams back up to the Kindle. Comcast streaming on Kindle is not a moneymaker for Amazon, and then suddenly Amazon is trapped back in the decaying DVD retail world as far as video goes. Again, they might surprise me, but who knows?”

“Two years from now, if not sooner, DVD is a fringe platform for old people who can’t work their DVR. One-time cable cutters start trickling back because Netflix no longer has the new titles fast enough for them. Studios push first-run releases straight to the premium VOD window. DVD retail withers. DVD rental withers. The studios make the content, and broadband serves it up. They split the entertainment pie.”

Where I see us next summer is Netflix continuing to implode on the streaming side. … The cable companies will keep rolling out their $4 to $5 monthly streaming plans and peeling subscribers away from Netflix. All the majors have them or are working on them. From what I’ve seen, it only takes three to six months to go from announcement to launch, so the time frame is very close.

Market Analyst Consumer Electronics Consultancy

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 6

Convergent media evangelist and broadband industry commentator; repeat source Streaming VOD has arrived as a threat to broadcast TV and DVD retail. Triple-play vendors are promoting streaming services to maintain their overall value proposition. Telecom-based operators have been marginally more receptive to developing their own OTT video services, but MSO competitors still have the upper hand. Although Netflix growth is slowing, the company still is expanding its streaming audience faster than all other providers put together. Amazon is not yet a credible VOD provider.

“Netflix finally proved that streaming video could be a very lucrative consumer business, and now everyone with a pipeline and the ability to take credit cards wants a piece of that game. All the cable companies are racing as fast as they can to set up in-house Netflix-like VOD channels, and the next six months should see almost universal availability. This is the death knell for real-time broadcast TV and physical DVD sales. I don’t know how well Netflix itself can compete in a much more crowded market.”

“The triple play is starting to show its age. Americans bought into the bundle because they needed a phone, really liked cable TV and wanted broadband Internet. Now the phone users are starting to die off—the demographics are shifting toward a generation who will never own a fixed-line phone—and broadband is the necessary evil for most households. The video entertainment piece is the pivot on which the modern triple play balances. Do people cut the video cable or not? The operators have to sweeten that piece or end up as gigantic ISPs selling bandwidth on a utility model, which they don’t exactly look forward to becoming.”

“AT&T and Verizon have come the farthest in terms of making their video piece more attractive. Arguably, it’s because they don’t have the legacy biases of cable against a la carte video entertainment. Remember, ‘a la carte’ is a dirty word in the MSO world. They want to give you the broadest pipe and charge you for just a little more of it than you can ever really use. The telcos, on the other hand, are old friends of the nickel-and-dime added-service model, so they’re happy to charge you an extra $1 or $2 a month for a movie or a streaming channel or whatever it might be.”

“I think this is why AT&T and Verizon are increasing their TV subscription base while the cable providers are seeing real decline in some demographic groups. Overall subscription levels are flat nationwide, but drill down into the pieces of the triple play. Phone is what it is. Broadband has room for carriers to compete on service and speed, but that’s expensive. TV is where share is shifting, and it seems to be shifting away from the MSOs. Maybe not a cataclysmic decline, but it’s where the growth is and everyone should want to be winning there.”

“It’s still the MSOs’ hand to lose. Comcast, Cox, Cablevision [Systems Corp./CVC], Charter all have their on-demand or streaming initiatives at various stages. Time Warner does too, of course, but they always struck me as stuck in their arm’s-length relationship with Time Warner, the studio. The studio doesn’t really want to blow out the DVD market quite yet. They’re still cautious. That’s fine, but to the extent to which the cable company takes its cues from the studio, it’s going to impair its will to compete in this field.”

“Netflix is still adding, what, 500,000 streaming subscribers a quarter? That’s definitely better than anyone in the MSO world is doing in terms of upselling their live TV/DVR subscribers into streaming packages. It’s better than everyone in the MSO world is doing, actually. In terms of looking at the world as cable versus streaming, Netflix is still growing at the expense of live TV/DVR audiences. Even the telco-based TV platforms, FiOS and U-verse, grew out their TV subscriptions by maybe 300,000 households total, and we don’t know how many of them opted for the added streaming package. As yet, Netflix is still eating cable. Cable has not even begun to nibble at Netflix.”

“Broadcast TV suffers because there’s no such thing as ‘must-see TV’ anymore. Everything is already time-shifted except for true mass-cultural events like big sports, awards shows, the biggest watercooler

All the cable companies are racing as fast as they can to set up in-house Netflix-like VOD channels, and the next six months should see almost universal availability. … I don’t know how well Netflix itself can compete in a much more crowded market.

Convergent Media Evangelist & Broadband Industry Commentator

DVR crippled the networks’ ability to gather maximum eyeballs and the more viewing hours shift to on-demand models, the more the audience fragments. We will see the end of live TV within the decade and the networks transitioning to online streams by the end of the year. Those that don’t, won’t survive.

Convergent Media Evangelist & Broadband Industry Commentator

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 7

series, and how many of them are there these days? DVR crippled the networks’ ability to gather maximum eyeballs and the more viewing hours shift to on-demand models, the more the audience fragments. We will see the end of live TV within the decade and the networks transitioning to online streams by the end of the year. Those that don’t, won’t survive.”

“DVD suffers because physical ownership of films was a generational blip. Streaming ‘rentals’ are taking over, in line with cloud models of music ‘ownership’ or subscription-based on-demand listening. As the streaming video providers become more competitive, they’ll blow out all the stops to get exclusive movies or get blockbusters faster, right up to the DVD release date. And from the viewer’s point of view, once I can get the movie on demand as part of my $7 or $8 a month, there’s no reason to buy the DVD ever. Once that title streams, scratch off the DVD market for it, even if you don’t factor in things like piracy. Some of the studios are fighting this because they’ve come to depend on DVD. Some are a bit more willing to entertain sweetheart deals that might dig into the DVD but give them a faster payoff and a no-cost delivery system.”

“There’s only so much media a household can consume—only so many hours in the day—and I suspect we’re into saturation already. That means that it’s not a question of who offers me more channels or more movie titles but who will I favor with my limited viewing hours and dollars every day. This is a ratings game now, and that rewards the distributors that have the content people actually want to see at the cheapest price possible. There’s no longer any honor in simply having the broadest selection.”

2) STUDIO AND NETWORK EXECUTIVES These four sources said OTT does not pose a near-term disruptive threat to conventional MSOs. Broadcast and cable channel operators may struggle to compete for viewers, but one source is optimistic about local stations’ ability to migrate their streams online and keep their audience. Original programming is a potential key differentiator for OTT providers, but few concrete opportunities have emerged for content producers to monetize their efforts. Among streaming services, only Netflix has successfully branded itself, forcing rivals to compete on price and quantity of content. Two sources pointed to Sony’s Crackle service as a model for content creators eager to sell their product directly to the audience; others like Epix and Liberty Media Corp.’s Starz are expected to produce similar offerings in the next six months. Viacom is a well-positioned studio, effectively monetizing its back library through streaming opportunities while Time Warner and Disney, to their detriment, prefer to remain loyal to DVD sales and broadcast cable channels. Independent feature film producer

OTT is moving rapidly from a Netflix-dominated distribution channel to an integrated piece of the studio revenue cycle. Viacom is in the best position to monetize its content library via streaming relationships, while Time Warner and Disney may be left behind. Major studios are negotiating overly strict terms with streaming providers and taking more than their share of licensing and marketing budgets. The promise of IPTV and VOD has only marginally expanded the opportunities for working content producers. Although demand for original content is theoretically robust, the availability of free user-generated video has effectively capped the amount of professional material that distributors are willing to buy.

“Video-on-demand is large and in charge. The exciting thing now is that streaming rights are completely up for auction as a new subsidiary revenue stream, which is great for people who can seize the opportunity and market a creative title straight-to-stream, so to speak. This also makes it possible for a lot of creative models and new competitors to emerge to occupy niches where Netflix isn’t executing.”

“The studios learned from the ugliness surrounding home video and new media rights back in 2007–2008, and all that’s being locked down now. This is why you see studios like Disney in particular telling Netflix to pull the titles from the streaming library. They don’t want to provide even the slightest show of weakness here.”

“Viacom is cheerfully billing streaming services to use its content, and it’s working. Viacom is earning money ‘renting’ its titles, and otherwise it would have to churn up interest in DVD sales or other rebroadcast rights. That’s a pain and it costs money, so why not just write out a bill … and take the money? They can do that because they’re less concentrated on recent blockbusters than some of the other majors. They’re a library-driven studio, and this maximizes what their library can do for them in the here and now.”

“Disney hates streaming. It’s too close to piracy, and now that they’ve finally embraced DVD with the Marvel super-hero movies, it threatens DVD. Warner Brothers is also dragging its feet because their interest is feeding the premium and even the basic cable movie channels like Turner Movie Classics, and because HBO original

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 8

programming is already a subscription cash cow for them. They have no interest in streaming out HBO shows and endless outlets for their back library.”

“In general, the majors are driving really hard bargains with the streaming services that are desperate for this week’s blockbuster in order to prove to subscribers they’re worth it. The idea of an exclusive film or even a one- or two-week exclusive has been floated around, but I think the studios would make it so prohibitively expensive that no streaming service can afford it.”

“Hulu is good about a revenue split and adding documentaries in particular to their shelf, but you’ve got to market yourself. They’re all about selling placement there, and so the broadcast TV shows pay the bucks to get their slots. Everyone else is on the platform, but viewers have to know what they’re looking for.”

“I’m cautiously optimistic that the ‘explosive demand’ for independent content will actually materialize. What actually happened was that the mainstream entertainment universe imploded when the channel menu exploded and then DVR freed people from the broadcast calendar. We live in a world of 20 to 30 blockbusters a year—if that—that are bigger than they ever were, and then a sea of indie, semiprofessional and user-generated video. The middle market is still there and may even be bigger than it was 20 years ago, but it gets lost compared to the two extremes of the audience barbell. That’s an opportunity, but it’s really challenging.”

“Everyone knows they need compelling, unique, exclusive content to stand out and make their service stand out against Netflix or, if you’re Netflix, stand out against what’s on cable or, if you’re YouTube, instill some order in the chaos. But nobody is willing to step up and identify, acquire and promote that content.”

“You also have to fight the YouTube phenomenon where the streaming sites have no interest in paying for anything but a long tail. That’s fine for small projects, but we have investors to repay and debt to service, so we need a slightly faster return on capital. Even an indie movie is expensive to make and represents vast investment of time and money and talent. That’s why broadcast TV still works on a series model even though they’re really DVD series now. It’s why movie theaters are still open. You need that first quick hit to start paying back. Streaming originals just don’t do that yet.”

Independent feature film producer with content distributed straight to DVD or on-demand, 30-year industry veteran

So far only Netflix has branded itself as a streaming video service while recent entrants seem content to compete on a commodity basis. The profusion of OTT delivery systems presents an opportunity for truly adaptive content developers to creatively market their material in the next year. Most original Web content still gravitates toward YouTube if advertising-supported or toward Apple via an on-demand approach. Apple’s video downloads still dwarf Amazon Instant Video. Crackle’s studio-owned pay-per-view model is interesting and likely to spawn imitators among studios and independent aggregators. Pay-per-click Web advertising makes broadcast audience tracking services irrelevant.

“All the streaming boxes look the same to me, to be honest. They’re Netflix-to-TV boxes. … That’s kind of bad for the boxes because it means they’re already interchangeable clones. Where do they go from here? Where’s their moment in the sun to be TiVo [Inc./TIVO] and win a devoted fan following?”

“The same is true for the cable on-demand channels. … I can’t tell you why you’d want to pick one cable company or one cable on-demand service over another. They all give you all the channels, and if they miss one, you call and complain. Maybe they put it on, but if not, you’d never really notice. They all look alike and are happy with that. They don’t want to compete for viewers; they don’t want to stand out from the crowd.”

“But there’s always someone who thinks it would be a good idea to stand out from the crowd. Maybe they’re young or not as well established; they have something to prove. Those are the people you want to cultivate because they’re the ones who can be convinced to give you a space in their catalog where you can compete with the blockbusters. They love you because they can say they have something none of the rest have, even if it’s a

Viacom is cheerfully billing streaming services to use its content, and it’s working. Viacom is earning money ‘renting’ its titles. … They’re a library-driven studio, and this maximizes what their library can do for them in the here and now. … Disney hates streaming. It’s too close to piracy, and now that they’ve finally embraced DVD with the Marvel super-hero movies, it threatens DVD. Warner Brothers is also dragging its feet because their interest is feeding the premium and even the basic cable movie channels... They have no interest in streaming out HBO shows and endless outlets for their back library.

Independent Feature Film Producer

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 9

$30,000 high-school slasher movie. You, of course, love them because finally you have a chance to earn that $30,000 back a little faster.”

“We have a chance here to find those people and get onto the platforms as the number of platforms multiplies. That’s always the case, but we’re in another cycle of too many platforms and too many people looking for ways to prove themselves and protect their jobs. They’re willing to take a risk. One will actually pay off, most will build cult or niche followings—largely on accident—and some will flame out spectacularly and spoil the market for the rest of us.”

“This is the year that straight-to-stream production could become viable if anyone is brave enough and confident enough in their content to produce first and distribute later. I don’t really see anyone stepping up right away in my bracket, and people below me definitely don’t have the money to risk on a labor of love. It will probably take a major studio burning off their next grotesque misfire to force the streaming companies to create a revenue model that works for original content.”

“Failures and experiments go to YouTube as expensive show reels, maybe earning a bit on ads if they go viral. Features with backing and patience are selling through iTunes and on Amazon. It’s similar to the old straight-to-video earn back cycle, and it takes about as long when you add up the duplication costs and all the layers of retailers taking their cut. I do pretty well on iTunes and Amazon. Most people do better on iTunes, maybe 20:1 against Amazon. I do pretty well with Amazon simply because of the mix of titles I have there versus iTunes and the fact that my crowd isn’t exactly the slick iPod commercial type.”

“Sony owns Crackle and doesn’t need Netflix anymore, really. They distribute through YouTube, which I think is fantastic in itself, and through Hulu as well as the boxes. Hulu’s happy because they have money moving through the site. So is YouTube. The boxes get to give people a reason to buy them in the first place.”

“I know the other big studios are dying to build their own Crackles and go straight to the audience—no middle men anywhere. It’s the dream they’ve had since they lost their captive cinema chains: no more sharing the pie with independent exhibitors, video stores, rental, TV, Netflix. That day is coming once they can get all their streaming licenses in one place and find the right people to team up with to make it happen.”

“People whine about how the broadcast numbers never reflect streaming and download, but really, who cares? The content owners know exactly who they’re reaching on the network sites and places like Hulu. They see careful logs of how many ads serve on their shows, who sticks around for the entire video, how long they stay. That’s better than Nielsen ever was. Let Nielsen stay on television while it lasts.”

Vice president of advanced technology for a TV broadcasting group

The lion’s share of OTT content is live-streamed, and the majority of live content is created by local broadcasters, such as network affiliates. The threat of OTT does not factor in that national networks are entering the field, that technology is already in place for local broadcasters to stream, and that local broadcasters are actively creating standards to reach the mobile market. Current standards of TV measurement are insufficient to manage the granular targeting that is available over the Internet. Within three to five years, local broadcasters will be the dominant players in OTT content.

“Networks are trying to become OTT players, be it through Hulu or whoever, to grab that other part of the time that people are not watching local TV.”

“OTT is simply trying to fill in that other 50% of the time people watch programming outside of local broadcast TV. Everyone wants to be there, but it’s got to be relevant content.”

“Open any trade journal and the first thing reinforced is that the most relevant platform is broadcast. Why else would you have Aereo and BarryDriller.com [technologies that capture broadcast programming and stream it without license from the broadcasters] trying to steal that content?”

“[Broadcasting has argued] as an industry for 13 years that we have to be in mobile. With the right technology, we would be the dominant mobile provider of content.”

I know the other big studios are dying to build their own Crackles and go straight to the audience—no middle men anywhere. It’s the dream they’ve had since they lost their captive cinema chains: no more sharing the pie with independent exhibitors, video stores, rental, TV, Netflix. That day is coming once they can get all their streaming licenses in one place and find the right people to team up with to make it happen.

Independent Feature Film Producer

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 10

“We need to be the entity that ties consumers with advertisers. And the free over-the-air TV industry as a whole is going to blossom over the next three to five years to be that entity.”

“We could deliver the same individual advertising that the Internet delivers. In broadcast, everyone in a market gets the same commercial, but on mobile, I could deliver you a different advertisement, and that will drive dollars.”

“We want to be in everybody’s hands wherever they are; they can flip their phones or turn on a tablet and get programming OTT.”

“We want people to be wireless. I’m not saying they shouldn’t have a cord in the home, but that we should be able to get to every device the consumer has today. We can’t; not because we don’t want to, but digital standards have been incapable of competing with platforms of the Verizons and AT&Ts.”

“Cable is the heavyweight giant. If you go to any market you have at least one cable enterprise. But if you burrow down to the numbers, the largest variety of programming watched originates in local broadcast TV stations. … They’re the outlet for national networks.”

“People are trying to take our content and repackage it for distribution; broadcasters have not had the rights to stream the content distributed to them by their networks.

“Local broadcasters can stream any content they produce and own, and have licensed rights to. And some broadcasters have been diligent over the last 10 years to work into their distribution agreements and syndication agreements to do more than just broadcast over the air.”

“People are enthralled to believe they’re engaged in live, real-time viewing, and the Olympics were a high point in proving that. Look at those numbers; even in online and streaming viewing, 80% of it is to watch live real-time programming.”

“We’re looking for a way to create an understanding with the networks that they already give us exclusivity for broadcast rights, why not for streaming? But they want to do it themselves, and use things like Syncbak, which provides [authentication to cable subscribers] to watch over-the-air and cable programming on the most available screen. If the iPad is available to them, they will watch on that.”

“Broadcasters are looking for those rights to extend viewership across platforms; that is what mobile TV and OTT content is all about. Why shouldn’t the viewers be able to turn on an iPad or iPhone and have the right to watch content that’s being distributed?”

“We need to do that before phone companies become the mobile [TV] providers.” “We believe our content has value, and when you put our content alongside the rest of the content out there …

the fact is, people watch local content.” “On a scale of one to 10, Nielsen’s a one because you’ve got to have a currency. Rentrak [Corp.’s/RENT]

something higher than one because we’ve got a granularity that’s certifiable that we’ve never been able to get out of Nielsen. They’re measurement firms by name, but there’s been far too much guesswork involved, and we need a real connection with real consumers.”

“The local broadcast market was the first way advertisers could segment the distribution. Baltimore’s a different market from Boston, and you could advertise crab in Baltimore and lobster in Boston, and bifurcate and reach the most relevant audience by buying local ads, as opposed to buying a national ad on NBC or CBS [Corp./CBS].”

Former Sony Entertainment executive and new media entrepreneur

Crackle’s position within Sony demonstrates that it is considered an in-house competitor to broadcast and cable licensing and not a replacement for DVD sales. Sony has coveted a direct online delivery system for over a decade, and this is the studio’s chance to truly go over the set-top box. Other vendors probably will be welcome to Sony’s library as long as they pay license fees. VOD represents a serious threat to broadcast TV.

“It’s Sony Television that runs Crackle.com, which tells me that the people there now strategically consider this a form of monetizing the film library via TV-like revenue models. The people heading up the site know about

On a scale of one to 10, Nielsen’s a one because you’ve got to have a currency. Rentrak’s something higher than one because we’ve got a granularity that’s certifiable that we’ve never been able to get out of Nielsen. They’re measurement firms by name, but there’s been far too much guesswork involved, and we need a real connection with real consumers.

VP of Advanced Technology for a TV Broadcasting Group

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 11

licensing the back titles to TV networks, effectively renting them out to people who can then sell ads around the air time. Sony is going around the networks to play its own movies and capture its own ad dollars.”

“We wanted dedicated-to-the-premise distribution back in the 1990s, and now they’re finally getting it. Whether it works or not is anybody’s guess, of course. But finally they have their own Disney Channel, their own Turner Classic Movies. It’s just online and not on the cable box, but maybe that’s OK. The cable box is showing its age.”

“The potential of a lot of library content is fairly exhausted, so this is a chance to squeeze incremental revenue streams out of those exhausted titles. It’s like what publishers do with on-demand midtier books: make them available but don’t spend any money on them and reap the long tail. These titles tend to be deep in their long tail after decades of overplay on cable and in home video.”

“That said, I’m sure other units of Sony Television are happy to rent the film rights to any channel or content packager who steps up. There’s a chance that making these titles available on-demand will have an impact on the licensing rights, but I suspect for most of these titles the license is close enough to zero now that it doesn’t really matter. Most of the movie slots on TV now are on channels that are allied to various studios anyway, so it’s not like there’s a huge third-party demand for air time at any cost.”

“Streaming effectively opens up infinite viewer-defined channel spaces and so renders the channels irrelevant. Think of what the rise of on-demand electronic music did to radio. Kids today barely know how radio works. They discover music through YouTube, playing songs on-demand for free. Streaming on-demand video does that to TV, or will in a few years.”

“I see that Sony and Lionsgate [Entertainment Corp./LGF] are working together to stream their horror titles [on Comcast’s FEARnet channel], and then there are premium cable channels like Epix and Starz moving toward VOD. We should see things develop here very quickly, maybe in the next three to six months.”

“The danger for content creators is that in a world with everything in history available online on-demand, how do you sell your product? I don’t see this as a golden age for new content. I think the music industry shows us what happens when the playlist is theoretically infinite. People swim in the backlist or wherever they can get good stories at a fair price. There are more good stories in the libraries than anyone can watch in a lifetime. Who’s really stepping up and demanding something new? Broadcast is doing it because they need to perpetuate the need to tune in every night. Cable is doing it as a differentiator, but not so much.”

3) CABLE AND SATELLITE EXECUTIVES These four sources said they are using OTT delivery of content to supplement their traditionally broadcast content and to appease subscribers and viewers who have come to expect content available on-demand. By embracing OTT as another viewing outlet, cable and satellite companies can retain subscribers, have a vehicle for additional content, and fend off threats from competitors trying to lure away subscribers. Comcast and Turner are winners for seeing OTT as an opportunity, Netflix and Hulu are leaders in streaming, and Apple and Google Inc. (GOOG) expected to push the next generation of streaming. Turner’s authentication model for viewing its drama series content is expected to become the standard for viewing TV content anywhere, including sports, while requiring pay TV subscribers to maintain their relationships with cable operators. Tablets are disruptive as a second viewing screen, often used simultaneously with a primary screen. AT&T’s U-verse is a leader in delivering content in various ways over the Internet, providing competition to the cable and satellite operators. Vice president of online development and strategy for a pay TV service; repeat source

Pay TV subscribership will lose little ground to cord cutting in the next several months (although all pay providers are leaking subscribers). Most of the country still can afford pay TV and subscribes for must-have content like sports. Viewers seem to accept that they will not find superior content for free. Forward-thinking pay TV providers make their content available online but with authentication. Networks do this as well; for example, the Turner networks required authentication to watch live-streamed NCAA basketball this spring. Comcast also is at the forefront, but the laggards

I see that Sony and Lionsgate are working together to stream their horror titles [on Comcast’s FEARnet channel], and then there are premium cable channels like Epix and Starz moving toward VOD. We should see things develop here very quickly, maybe in the next three to six months.

Former Sony Executive & New Media Entrepreneur

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 12

appear to be waiting until the business model is perfected. Tablets are proving a disruptive device as a common second screen for TV content.

“There are companies generating a good amount of revenues, principally through YouTube, which has invested a lot of money into OTT, and through other people creating programs out of their garages.”

“Original programming from Hulu and others is not a threat at this point. But that is not to say it couldn’t change. Look at the content they distribute; the percentage of original programming is miniscule.”

“They’re competitive to the extent that they are, probably more on the Netflix side, competing for exclusive rights to professionally produced content that was distributed in other ways. [Time Warner’s] HBO this week reupped its Fox deal. Had Netflix got the Fox deal and HBO lost it, that would have been bad for HBO and not good for us either because we distribute HBO and make money; we don’t make money from Netflix.”

“The majority of people are not [cord cutting]. But this week or last, the results came out from the MVPDs and MSOs, and they all lost subscribers. The question becomes, did we all lose subscribers because they’re cutting the cord and watching Netflix, or because they can’t afford it anymore and would have stayed if they could? No one knows the answer.”

“I don’t think that cord cutting is a big issue as things stand today. Most of the country appears able to afford a pay TV service, and most of the country has it. It’s a mature business, and cord cutting is not really a viable alternative.”

“But if all you really want to watch is broadcast comedy and drama, then you may think, why am I spending $75 a month to get TV? And if you like watching sports, there’s no question: You’re sticking with pay TV. There’s no good way to get it otherwise.”

“Getting content on the iPad is really key; the pay TV operators are moving more and more to making it available on the iPad, and we might be on the forefront.”

“For a subscriber paying for the content, it doesn’t matter so much if they watch on a 56-inch TV screen or an iPad; for them, it’s the ability to watch that content in a reasonably convenient way.”

“My two-and-a-half-year-old knows what the TV is, but it’s rare that he watches content on it. And he’s never asked us to turn it on. The iPad he asks for several times a day, maybe to watch Sesame Street.”

“I don’t think that’s a bad thing for pay TV operators; I’m seeing the networks and operators all working to make their content available on-demand on different platforms. Some operators are faster than others; some networks are faster than others. But … everyone in the TV business knows they have to move to on-demand and multiplatform.”

“Dish and Comcast have embraced it more than others. The laggards are most everyone else; they’re not putting the systems in place to make it available or haven’t publicly done it yet. They’re not necessarily wrong; there is no profit for TV Everywhere, it’s only loss. No one charges more or makes additional money from it. Does it help the pay TV operator to obtain and retain a subscriber? The answer is yes.”

“Companies not at the forefront have likely concluded it’s still the early days and they don’t want to be the first; they’ll wait to see what happens on the network side. The problem is, if you’re an ad-supported network as most are (with the exception of HBO, for example), how do you monetize content on those platforms? The currency is Nielsen, and Nielsen is not able to measure viewers on the different platforms yet.”

“Some of the nets like Turner are definitely at the forefront, and I think they’re smart. Others are saying, ‘There’s no way to get paid so we’re not doing that.’ I think they’re wrong.”

“I don’t think cable nets will start making their content available for free. I’m virtually certain of that. Right now if you want to get [Time Warner’s] TNT [online], you have to sign up with a pay TV operator; you can’t just pay TNT directly a few bucks a month. To watch the NCAA tournament, you had to be a pay TV subscriber.”

“The cable guys have certainly become the standard for Internet service; I definitely think that helps propel subscribers, and that’s what we see in the earning reports. Their phone subscribers are also increasing, but they have more competition there from landlines, and of course everyone has a cell. On the Internet side, there’s really not much competition; it’s from cable companies or telcos, who are clearly not pursuing that strongly. And if you as a subscriber want the best speed possible, you go with cable.”

“Our on-demand viewing is increasing. I can’t offer percentages.”

I’m seeing the networks and operators all working to make their content available on-demand on different platforms. … Everyone in the TV business knows they have to move to on-demand and multiplatform. … Dish and Comcast have embraced it more than others.

VP of Online Development & Strategy Pay TV Service

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 13

“The price of content has gone up to the extent that if I want to license a movie for subscription video-on-demand, I pay a lot because Netflix has driven up the price.”

“Verizon and Coinstar seem more of a competitor to Netflix and Amazon than to MVPDs or pay TV.” “I don’t think anyone is going to drop us for Comcast because of Streampix. We have our own version. Streampix

was more of a defensive move against Netflix than anything else.” “I wouldn’t call Amazon Prime a threat—certainly competition. I have to imagine Netflix is paying close attention

to that—it’s Pepsi to their Coke. Netflix clearly has the lead and must be keeping tabs on what Amazon is doing.”

General manager for two Florida cable stations and an award-winning producer Cable operators are safe from the threat of OTT options for now because their services are entrenched and easy to use, but longer term they will be severely threatened by the growth of streaming content. For OTT hardware, Roku is an easy-to-use option, while Netflix and Hulu are the best choices among streaming content providers. Apple and Google are likely to lead the new generation of streaming content.

“The mass market will still want the convenience of cable and satellite subscriptions for some time. Cable operators have a very solid hold on most consumers and require a lot less tech savvy to operate [than OTT options].”

“[Longer term] cable companies are the most threatened [by OTT]. The movie theaters will also be hard-pressed to stay ahead of the curve as 60-inch 3D TVs and streaming movies becomes the norm.”

“Cable companies will need to modify their business plans if they want to stay in the game. With all of the converter boxes already in the market bringing streamed programs in HD to your TV, the writing is on the wall as to the direction of distribution of home entertainment.”

“Cable and satellite operators will need to improve their streaming abilities or partner with companies that have the capability of delivering dependable, high-quality programming over the Internet. In our area, AT&T U-verse is already in the game providing TV, DSL, cell and home phone service.”

“The big winners will be the viewers who get more choices, better scheduling and more interaction opportunities. The big company winners will be those already leading the pack, such as Apple and Google.”

“I use a Roku box and have Netflix and Hulu as my main streams for Internet programming, and think they are attracting a lot of viewers because of their simplicity.”

“OTT outlets [such as Netflix and YouTube] need to develop original programming that has the same technical and creative quality as the top cable and network shows if they want to steal their viewers. I think [original programming from OTT providers] is a great way for creatives to develop new shows on a fraction of the network budgets that feature fresh actors outside of the Hollywood systems.”

“The need to stream programming and create shows specifically for streaming and on-demand has required a new level of knowledge [for cable station operators], both creatively and technically. Our viewers now expect programs to be available on-demand and all live meetings and events to be streamed. It has opened up a lot of new opportunities to reach target and new markets, but has also required investments in equipment, personnel and service contracts with various server providers like Go Daddy.”

“We have been streaming our two channels live 24/7 for over five years. … We have a limited cable household reach of about 800,000 homes. By streaming, we are providing our programming free of charge to anyone with Internet access. This has greatly expanded our ability to service neighboring counties/communities as well as obtain sponsors for programming. It has also introduced our programming to other government and public access stations around the country that are requesting to carry many of our shows.”

“Streaming has also provided a new avenue for live programs. We can now create and produce programming such as concerts, conventions, forums and special events for clients and stream them live to their audience, separate from the programming on our channels. This has been very successful when working with convention centers and performances with national audiences.”

The Internet and streaming have totally changed the program content industry. I used to create and develop programming to fit the half-hour, hour or two-hour time slots required for TV. Now I find myself creating content that can be edited in various ways to meet the needs of TV and Internet markets.

General Manager of Cable Stations & Award-winning Producer

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 14

“We also provide most of our programs as VOD. Viewers can go to our website and watch any of our shows whenever they want, and also copy the video link and email it to others or embed it on their website. To better accommodate these viewers, we have started to break down programs to segments that can be viewed individually.”

“It’s a whole new world for content creators and distributors, and lots of fun trying to keep up with the demand.” “The Internet and streaming have totally changed the program content industry. I used to create and develop

programming to fit the half-hour, hour or two-hour time slots required for TV. Now I find myself creating content that can be edited in various ways to meet the needs of TV and Internet markets.”

“My personal production company develops and produces a variety of programming, from series to documentaries. Some of the programming we are developing is for streaming markets only. These programs take advantage of the web viewer’s habits, needs and desires, and provide a test audience that if enthused about the program can become a stepping-stone for producers to get the attention of networks and/or sponsors.”

General manager of a cable and online sports network

This network competes by providing programming that is complementary to its broadcasts as well as with its own OTT content, available through authentication to cable subscribers. The sports broadcasting industry is largely immune to cord cutting; avid sports fans place a premium on the content and are willing to pay for it. Long term, authentication is likely to be the most common model for this type of broadcaster.

“There’s a premium that users will place on quality sports content, such that it’s more immune to cord cutting than other types of content, even from time shifting. Fans prefer to watch it live.”

“Video content is a huge area of growth both in digital sports and in digital more broadly. We’ve made some pretty material investments in original video content; that’s an area of strength for us as a TV company. We have some rights-based video we’re able to throw in the mix as well.”

“We’ve invested heavily in ‘digital shoulder programming,’ supplementary to our TV content like fantasy league shows, football previews—programming that’s digital first.”

“There’s an insatiable appetite for content, which is more and more taking the form of video, in addition to watching a live game on TV.”

“Our long-term model is definitely a TV Everywhere subscription model, an authentication model for content available only to cable subscribers.”

“For a long time there was a discrepancy between the business models of linear and on the web. … We’re now at a point where the digital business model for watching live sports is [equal to] the TV model in terms of having access to live content.”

“Business models are evolving, but content reigns supreme.” “As users’ watching habits continue to evolve, our goal is to be ubiquitous across platforms. That puts an

emphasis on watching live but with the ability to watch in an airport lounge, at the mall.” “Another strategy for us as people watch on TV is that more and more fans have a second screen device; we’re

also offering a complementary experience to the linear broadcasts.” Director of programming for a digital satellite TV network that distributes content traditionally and OTT

This source views broadcast and OTT not as threats but as opportunities of which wise studios will take advantage; the studios must meet viewers where they go, and younger viewers increasingly go to the Internet. Companies like Nielsen (TV-oriented) and ComScore Inc. (SCOR; Internet-oriented) have yet to prove they can provide accurate multiscreen analytics and are not worth the cost, particularly to niche providers that will have lower-than-average numbers.

“We’re streaming via LifeStream.tv, a contractor that provides a streaming video feed. It takes our satellite signal and converts it to streaming video. That’s how we can be a broadcast station but go over-the-top ourselves.”

“We used to do it ourselves; we’ve been streaming since ‘96. But it became too much to maintain. LifeStream.tv can grab our satellite signal, pass the captioning through, perform all the maintenance.”

We’re now at a point where the digital business model for watching live sports is [equal to] the TV model in terms of having access to live content.

General Manager Cable & Online Sports Network

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 15

“We are a cable network in that any cable system can pull and use us, and we’re on DirecTV [DTV]. Our station is an owned and operated affiliate.”

“The pie is definitely getting sliced up in many more portions than it was before, which is why we went to streaming when we did: We could reach anyone with an Internet connection. And our content creators are also our key advertisers, so we’re a bit out of the ordinary that way.”

“We’re lucky in that LifeStream.tv groups our niche programming together, puts up like-minded content creators, and people who want our kind of programming can find us easily. And we pay a low cost to reach them.”

“Everybody’s feeling competition from the Internet; we have an over-the-air local TV station, but we do see that people are unplugging from cable, either because they can’t afford it or they’re fine with Internet TV. I’m seeing two extremes: a push toward over-the-air and toward the Internet.”

“I try not to see either as a threat but as an opportunity. It depends on your audience and their technical comfort zone. Some are not comfortable with the Internet and go with over-the-air, but certainly the young people embrace the streaming content.”

“We’re not a Nielsen subscriber. We’re definitely ‘niche’ … so Nielsen won’t provide a true picture of our numbers.”

“Companies like Nielsen, comScore … say they can provide you an accurate picture on multiple screens, but they haven’t proven that yet. And we’re on multiple screens, so I just don’t know if they would do much for us.”

4) CONTENT CREATORS Four sources said cord cutting is not yet a viable option for most consumers, and cable operators are fending off the OTT threat with their own streaming content through the TV Everywhere concept. Demand is growing for original programming from OTT platforms, though sources are split on whether such content will be compelling enough to threaten viewership at traditional providers. Operators that have quality content available OTT only for subscribers are creating another viewing avenue while maintaining subscriber loyalty. One source said operators can take advantage of the move toward OTT by developing content for its various niche audiences since OTT allows for more creative flexibility with content production. Two sources said Amazon streaming is a better value proposition than Netflix and is gaining share, while another said Netflix is the better option. One source said MSOs such as Comcast are in good position to weather subscription defections since they offer the Internet plans needed by OTT viewers. Animation producer and consultant to TV show creators; repeat source

Cable and TV networks are joining the OTT trend but using streaming video as a way to supplement their regular programming. Broadcast networks are the most vulnerable to losing viewers to streaming video because of the quality of content available on cable. OTT providers like Netflix, YouTube and Yahoo Inc.’s (YHOO) Yahoo! TV have yet to introduce any original programming that is good enough to influence the TV market. Amazon is the best among the streaming content providers.

“We’re starting to see some companies using online video as an extension [of their regular programming] but not as a replacement. That’s where we’re really seeing most [OTT video]. TV offers more opportunity to self-promote than the Web does. For example, when you’re watching the Olympics, you know everything NBC is releasing this fall, which will drive us toward it. You’re not seeing the same [ads] on their streaming stuff online.”

“HBO just announced four Web-only videos, but they’re not for the general public. They’re for HBO Go. You have to have a [cable/satellite] subscription with HBO to access it. They won’t be shown on TV; they’re only available online. They’re using it as a low-budget testing ground prior to putting a larger-budget production together.”

Companies like Nielsen, comScore … say they can provide you an accurate picture on multiple screens, but they haven’t proven that yet. And we’re on multiple screens, so I just don’t know if they would do much for us.

Director of Programming Digital Satellite TV Network

I’m seeing more and smarter use [of streaming video], but we’re not seeing the number of eyeballs come close to TV yet. .. I think we’re a long way away from [cord cutting as a mainstream option].

Animation Producer & Consultant TV Show Creators

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 16

“We’ve also seen the SyFy [Comcast] network putting some really nice looking short-form video series online. You can capture someone when they’re at the bus stop or waiting at the airport when they have shorter amounts of time. It doesn’t replace TV, but it keeps the eyeballs.”

“I’m seeing more and smarter use [of streaming video], but we’re not seeing the number of eyeballs come close to TV yet.”

“I think we’re a long way away from [cord cutting as a mainstream option].” “NBC is doing an interesting thing with the Olympics. You can only watch it streaming when you can specify

which cable outlet you are already paying for. When you go to watch the streaming, you have to log in to your cable service with your password and ID. It’s a very smart strategy. For a number of years, people have been trading dollars for pennies by moving stuff online, and there’s still very little income to be made from [streaming video]. That’s a way to protect both ends. I thought it was a very smart.”

“The broadcast networks [are the most threatened by OTT] for the same reason cable networks are taking viewers from them. Cable has some of the best writing on TV because they don’t have to try to satisfy everybody, and it allows sex and cursing and nudity. With online streaming giving people so many options, broadcast networks because they have the highest costs, are going to be the hardest hit.”

“A lot of the big announcements [about original programming from OTT providers] haven’t come to fruition yet. We’re still waiting for that Fox show [Arrested Development] that Netflix bought, and they’re making a new season of it. That one show in particular has gotten a lot of press because it’s the first time a show has moved from cable or network to the Web. But they haven’t shot it yet.”

“YouTube has announced quite a number of series with high-profile creators. Some of them are really great pieces, but they also feel very cheap because they are cheap.”

“Yahoo! TV invested a bunch of money into an animated series by Tom Hanks, Electric City. It’s a beautiful looking piece, but I only watched the first couple of episodes and I didn’t care about the rest. It still comes down to content.”

“On YouTube, there are so many hundreds of millions of videos, it’s easy to get lost. The scale, at that point, starts working against you. Same thing with mobile video. My company was one of the first in the country to provide animation on mobile video. Our numbers were great instantly, but within two or three months Disney and Warner Bros. and a bunch of others jumped in there. We didn’t have the marketing dollars to compete, and so we were lost, completely lost. Without the larger dollars that come from being supported by substantial advertising and cable fees, it’s very hard to get those eyeballs there. The use of streaming is more an addendum than a replacement for TV. TV is still the place where people find out where the better online content is.”

“Amazon Prime [is the best OTT content provider]. It actually streams better than Netflix. It has virtually the same content, but it’s cheaper. One of the things Netflix does that I like is that when I watch a movie, it gives me a bunch of options of similar movies based on my viewing patterns. I actually find a lot of movies that way.”

“There are more opportunities [for content creators] simply because there are more networks. And more and more networks are putting more money into original programming.”

“A lot of people complain about [the quality of TV], but when you have more content overall, you’re going to have more good and more bad.”

“AT&T U-verse has a new thing: wireless connectivity to the DVR. You can now put a DVR into a room that does not have a cable connection, which I think is brilliant. It allows a lot more freedom.”

“A lot of cable companies’ DVRs are able to record a ton of stuff, record four channels at the same time, but not all of them have the ability to access the same video on different DVRs. … That’s something Bright House Networks does not offer, and we switched to AT&T U-verse because of it.”

Consumer products VP for a leading animation studio and worldwide media distributor; repeat source

Cable and TV networks will continue to hold onto viewers as long as they have the best content, as they do now. But OTT platforms like Netflix and YouTube developing original programming should be a big concern to cable and satellite providers as it could make cord cutting more viable. Cable operators will have to better market their streaming options in order to combat the growth of OTT platforms. Amazon’s streaming video service should take market share from Netflix, but a clear winner has not emerged within the industry in terms of content.

Amazon Prime [is the best OTT content provider]. It actually streams better than Netflix. It has virtually the same content, but it’s cheaper.

Animation Producer & Consultant to TV Show Creators

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 17

“Recent trends show that although OTT viewing is increasing, we are still not seeing a large shift in the decline of cable subscriptions. This is primarily due to the type of content that is available through the various outlets.”

“The networks are still the driving force in content development and acquisition. Recent trends in new content development from online and streaming platforms will ultimately begin to raise the viability of cord cutting, and we may see a very different landscape in three to five years.”

“[OTT platforms developing original content] is an area that could transform the current landscape. YouTube has done a good job in creating content and channels that are interesting to watch, but I would argue that the average consumer has trouble finding the content as their current interface is cluttered.”

“That being said, I believe this is an area that should concern the networks and cable operators. As this trend develops and the content continues to improve, there could be greater conversion to strictly OTT viewing among consumers.”

“The TV Everywhere initiative is the answer to keeping subscribers for cable operators. The issue to date is that the cable/satellite providers have done a poor job in communicating the service.”

“Many would say that the cable operators are most threatened by the transition [to OTT], but the TV Everywhere initiative should create opportunities to hold onto a part of this market.”

“Although Netflix has done a great job with branding its service as a leader in the [OTT] space, in terms of value Amazon Prime has a leg up on the competition. And now that the platform is accessible through various devices—Xbox Live, PlayStation, etc.—I believe they will start to gain more market share.”

“With regards to content, there still is not a clear winner as each service—Netflix, Amazon Prime, Hulu Plus, Apple TV, etc.—has benefits as well as drawbacks in terms of their offerings and/or their accessibility.”

“There will be several winners as streaming becomes more mainstream. Smaller, independent producers could become big winners in this climate as streaming services are creating opportunities that offer greater creativity and more flexibility.”

“Device manufacturers will continue to create value to investors, and platforms that deliver the content will also benefit as their services bring lost catalog titles to life as well as fresh, new content offerings.”

“Eventually, with the growth of technology, the viewing experience on TV, online and handheld devices will be synonymous for consumers, who will ultimately be the biggest winners as there will be more content across various interests.”

Film producer specializing in online media; repeat source

Cable operators are in a good position with the growth of OTT since they offer both TV and Internet connectivity. Cable operators can improve their programming by finding new creative producers through OTT channels. YouTube is the best OTT platform for the source’s business, though others prefer InterActiveCorp.’s (IACI) Vimeo and Brightcove. The growing demand for streaming video could be great for content producers.

“I personally need cable to connect to the Web, so I think there will always be a need for a direct link to the home. When fiber optics becomes available, we’ll go that route. Cable and streaming online go hand-in-hand. Dish will always be necessary in remote places.”

“The nice thing about YouTube is that you can always find new talent. I would suggest to cable companies to find the independent content producers they like online and support them. YouTube is a huge talent pool. Whoever finds ways of plucking out the good producers will be successful.”

“YouTube [is the best OTT outlet]. Of course there are limitations, but for my clients and me it seems the best way to use all aspects of online video. I canceled my Netflix account. I didn’t know that Amazon has video. I occasionally use iTunes. Many of my colleagues use Vimeo over YouTube for better quality of video. Brightcove is also a cool platform for higher-end distribution.”

“Anybody can be a winner [with the growth of OTT] if they are creating good content. Joe’s Shoe Repair can make a series of great videos and become world famous. People would only feel threatened if they can’t adapt to, and take advantage of, the trend.”

The TV Everywhere initiative is the answer to keeping subscribers for cable operators. The issue to date is that the cable/satellite providers have done a poor job in communicating the service.

Consumer Products VP Leading Animation Studio

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 18

“The growth of streaming video has been good for me. My business model took into consideration this trend, and I have been on the front end of its development. I was able to use a variety of online tools to help launch my channel, and the power of Google search allows my videos to reach a growing global audience.”

President of a 3D video content firm; repeat source

The growing demand for streaming content benefits content producers because it gives them more creative flexibility and more opportunities. Cable operators can improve the quality of their programming and retain subscribers by sharing more information about consumer viewing habits with content producers.

“As a small, very efficient producer of quality content, streaming is our key market and we can do well with a reasonable amount of small to medium buys. Not needing commissions or coproduction money allows us to completely own the content and maximize revenue.”

“Netflix is still the best deal [among OTT providers] if you don’t feel a need to see the latest content as soon as possible.”

“We haven’t seen any information on how [developing original content] is paying off for OTT providers [such as Netflix and YouTube]. But as a producer, the more buyers, the better.”

“We specialize in 3D content, so most of our sales have been to IPTV and VOD services. And because we’re not working for broadcast networks, we have some freedom to tell the story we want. We don’t have to hit specific running times and build in commercial breaks.”

“As a content producer, I wouldn’t presume to tell cable operators how to best run their business. That said, they might be able to help us help them. It would be helpful to get data from the operators outlining what their customers are actually watching, how long, most and least popular genres, a trend in tune-out points, etc. Of course, that information is proprietary, but sharing some of it with their most reliable producers might help us improve commercial appeal and ultimately increase revenue for everyone. Otherwise, producers will likely play it safe by creating more of what the buyers picked last round.”

Secondary Sources In our review of secondary sources, we found discussion of cord cutting being influenced more by cost than lack of content. Also, cable companies are fending off OTT threats, and a local TV station is offering its programming on mobile devices. Streaming of the Summer Olympics was disappointing in the United States but was a very popular viewing option for the BBC. Larry King has resurfaced, this time on Hulu. Meanwhile, Amazon Instant Video now has an app that will allow viewing on the iPad. Apple recently was awarded a patent for a system that allows Apple TV viewers to skip commercials. June 29 Marketing Charts article

Cord cutters are leaving their subscriptions because of cost more so than desire for greater content online and OTT. “One-third of cord-cutters say they would not re-install services even if the cost of cable was slashed, according

to June 2012 survey results from TechBargains.com. Of note, despite indications that cord-cutters are going online for their content, recent research from GfK Media reveals that among those who have cancelled their pay TV service, online options were cited as the reason by less than 1 in 5. Instead, more than 7 in 10 said that cost was their prime motivator for cord-cutting.”

“This aligns with the TechBargains.com survey results, which found that 83% cut the cord due to costs, with only 17% saying their decision was based on cable and satellite not offering the best quality and variety of content. It is interesting to note that despite cost being the prime reason for canceling service, a significant proportion of cord-cutters (up to 42% of those aged 51 and over) would not re-install services regardless of price.”

“The survey results show a higher proportion of cord-cutters (up to 35% among those 30 and younger) than has been estimated previously. For example, an April 2012 report from Convergence Consulting suggested that 2.6% of US TV subscribers, or 2.65 million subscribers, cut the cord between 2008 and 2011 to rely solely on online, Netflix, and other sources. And while the GfK study indicates that the percentage of TV homes reporting broadcast-only reception is on the rise, only one-third of those 17.8% of TV homes actually cut the cord.”

As a small, very efficient producer of quality content, streaming is our key market and we can do well with a reasonable amount of small to medium buys.

President, 3D Video Content Firm

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 19

“Estimates regarding future cord-cutting also vary. While the TechBargains.com survey suggests that 17% of respondents plan to cut the cord next year (with 83% citing cost as the reason), the Convergence Consulting report forecasts only a 1% point hike in cord-cutting households this year, while the Deloitte study from January (see link above) found that 11% were considering cutting the cord to focus on watching their favorite content online.”

“Although GfK analysis of its study concludes that online or streaming video is not necessarily a primary driver of consumers moving to broadcast-only reception, it does admit that it has an important role to play. Indeed, almost three-quarters of the TechBargains.com survey respondents report streaming video on TV, with 57% using a gaming console and 43% using streaming media players. 47% of mobile phone owners, 72% of tablet owners, and 77% of laptop owners stream on their devices.”

“Online video viewing is clearly on the rise: according to recent research released by NPD DisplaySearch, more than 70% of consumers report viewing video content on devices other than TV sets, with laptops, desktops, and mobile phones the most prevalent devices used. Though tablets are the least-used alternative devices, their use for viewing TV/video content has more than doubled year-over-year in the 14 regional markets surveyed, primarily due to increased adoption.”

“According to the TechBargains.com survey, respondents without children are more likely than those with children to have cut the cord (31% vs. 26%).”

“Respondents who are single are more likely than those who are married to have cut the cord (31% vs. 27%), and men are slightly more likely than women to have done so (29% vs. 26%).”

“Among those who stream video, a plurality (43%) watch the most on their TV. Laptops (24%), desktops (20%), and tablets (10%) outpaced mobile phones (3%) in popularity.”

“About the Data: The TechBargains.com survey was conducted on the site and received 1,640 respondents. The GfK ‘Home Technology Monitor’ study uses GfK Media’s syndicated research service that has measured media technology in the home for 32 years. The NPD DisplaySearch ‘Global TV Replacement Study’ is based on nationally representative samples of more than 14,000 TV owners.”

Aug. 16 Hollywood Reporter article

Cable companies are adapting their offerings to fend off threats from OTT options like Netflix and Hulu, and are winning the cord-cutting war.

“Reading press reports, one might think waves of Americans are canceling their pay TV subscriptions in favor of lower-cost options such as Netflix, YouTube and Hulu. The evidence, however, shows that cord cutting’ remains at minimal levels and pay TV subscribership remains stable, even in an environment of low household growth.”

“Consider the data: During the first half of 2012, the number of occupied homes without pay TV (i.e. those dreaded cord-cutters) grew by only 40,000. In a 100 million-customer U.S. pay TV market, this is minor. (Occupied homes are the true market for pay TV because people, not buildings, subscribe to a cable, satellite or telco service.)”

“During the past year, pay TV penetration in occupied homes has dropped by about 0.3 percent, while subscribers essentially have stayed flat. Overall, pay TV penetration is at worst eroding very slightly, in line with long-term expectations that total subscribers in the U.S. will stay about flat as penetration gradually declines.”

“So, with Netflix offering an increasingly popular streaming service and Hulu serving up many TV shows online, what’s keeping people from cutting the cord? The fact is, pay TV continues to provide customers with the

Among those who have cancelled their pay TV service, online options were cited as the reason by less than 1 in 5. Instead, more than 7 in 10 said that cost was their prime motivator for cord-cutting. … This aligns with the TechBargains.com survey results, which found that 83% cut the cord due to costs, with only 17% saying their decision was based on cable and satellite not offering the best quality and variety of content.

Marketing Charts Article

Though tablets are the least-used alternative devices, their use for viewing TV/video content has more than doubled year-over-year in the 14 regional markets surveyed, primarily due to increased adoption.

Marketing Charts Article

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 20

content they want, a lot of which isn’t available outside the traditional pay environment. Sports, for instance, remains key content that is difficult to obtain without pay TV as major events (like Monday Night Football) are not available via broadcast channels and over-the-top packages (like MLB.TV) typically black out local teams.”

“Another key reason for pay TV’s resilience is that it has adapted to compete for customers who might defect to cheaper online alternatives. Distributors are doing this primarily by adding online and mobile content access and launching pricing tiers designed to appeal to more cost-conscious consumers.”

“In particular, pay operators are expanding ‘TV Everywhere’ offerings by obtaining mobile and online rights to their programming to ensure that people paying for TV can get content in the format they want, when they want. HBO’s popular HBO Go service falls squarely in this category. It’s now typical for contracts between programmers and distributors to include not only traditional linear rights but also extensive mobile and on-demand rights.”

“At the same time the TV Everywhere offerings are showing higher-end customers an increased value proposition, several TV distributors are launching value-oriented offerings designed to retain price-sensitive consumers. In particular, these packages often include fewer sports offerings—a logical omission given that sports programming (national channels like ESPN and regional networks such as Fox Sports West in L.A. and YES Network in NYC) is the largest single driver of higher programming costs.”

“Distributors are limited in the extent of these offerings given that their deals with programmers typically have minimum carriage commitments. Still, these offerings likely will expand as distributors learn how better to appeal to customers who might otherwise pass up pay TV entirely while not cannibalizing higher-value customers who otherwise would buy a full pay package.”

“One way of maintaining the high-value proposition is restricting the availability of new content—particularly on cable networks—to customers who subscribe to pay TV, rather than making it widely available on platforms like Hulu. Programmers and distributors benefit when pay TV consumers can’t see their favorite shows unless they maintain their subscriptions, and that alignment of interest is crucial in fending off digital competitors.”

“Another area of alignment is programming bundling, by which pay TV providers must take less appealing channels to get ‘must have’ channels sold by a given content provider. If, for example, Time Warner chose to sell HBO online a la carte, it likely would make more per subscriber than it does now by selling the channel through its pay TV partners. The risk, however, is that customers, able to get HBO without a pay subscription, would cancel pay TV entirely and therefore cease to generate revenue for the range of other cable networks Time Warner offers, including TNT and CNN.”

“While online services clearly offer an attractive alternative for some consumers (particularly the most price-conscious), cord-cutting hasn’t meaningfully impacted the traditional pay TV paradigm thus far. Given the tools pay operators have at their disposal to improve and expand offerings to appeal to price-conscious customers, they’re well-positioned to keep cord-cutting in check.”

March 14 KHQ.com article

KHQ in Spokane, WA, become the first local station to offer mobile broadcasting to smartphone and tablet users, using the Syncbak app.

“For sixty years, KHQ-TV has pioneered local television in the Inland Northwest. Today, KHQ Incorporated is proud to announce another bold step forward. Spokane’s first television station is now the first mobile broadcast channel in America. Thanks to a remarkable new technology, the over-the-air signal for KHQ and SWX-TV will be delivered to wireless devices throughout our region.”

“A company called Syncbak has included KHQ and SWX in a trial release of their mobile TV platform. Simply visit KHQ.com and click on the link that will take you to a page where you can select either the iTunes Store or

Pay TV continues to provide customers with the content they want, a lot of which isn’t available outside the traditional pay environment. … Another key reason for pay TV’s resilience is that it has adapted to compete for customers who might defect to cheaper online alternatives. Distributors are doing this primarily by adding online and mobile content access and launching pricing tiers designed to appeal to more cost-conscious consumers.

Hollywood Reporter Article

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 21

Android market (Google Play) and download the Syncbak app. From there, you can click on the KHQ or SWX logos to watch news, weather and sports programming—anytime, anywhere, ‘right now.’”

“Eventually, Syncbak’s live TV mobile app will be offered everywhere in the United States. But for now, the Inland Northwest is the first mobile region in the country.”

“‘This is especially huge for SWX!’ remarked Patricia McRae, President and General Manager of KHQ, Incorporated. ‘All of our exclusive programming can be watched from a smart phone or tablet. Satellite customers can watch their favorite Shock and Chiefs games, not to mention their favorite high school and college teams.’”

“SWX programming will initially be available on KHQ’s Syncbak channel during certain dayparts. From there, the sky is literally the limit.”

“‘KHQ Incorporated wants to deliver content the way the viewer wants," added McRae. ‘As the mobile revolution marches forward, we continue to be on the leading edge.’”

August 13 Huffington Post article

The 2012 Summer Olympics were the most-watched event in U.S. TV history, showing consumers’ appetite for sports on TV despite having an OTT viewing option.

“The 2012 London Olympics won gold in the ratings race this year.” “More than 219.4 million Americans tuned in, making this year’s Olympics the most-watched event ever in US

TV history, according to Nielsen. The 2012 Olympics beat out the 2008 Beijing games, which brought in 215 million viewers.”

“The NBC primetime broadcast of the Olympics averaged 31.1 million viewers, making it the most-watched non-US Summer Olympics in 36 years. The closing ceremony brought in 31.0 million viewers, also making it the most-watched closing ceremony for a non-US Summer Olympics in 36 years.”

“The London Olympics boasted an unprecedented 5,535 hours of coverage across NBC and its affiliates, surpassing the 2008 Beijing Olympics coverage by an amazing 2,000 hours.”

Aug. 20 Tweet from Dan Rayburn about an Aug. 17 YouTube blog regarding Summer Olympics streaming

Rayburn was disappointed in smaller-than-expected streaming viewership numbers. In the United States, 37% of streaming video viewing came from mobile devices.

Rayburn’s tweet: “Live streaming of the Olympics only peaked at 500K users. For all the hype about online, that’s not very big at all.”

YouTube blog: “Across the US and 64 countries in Africa and Asia you watched 231 million total streams. Of those, 72 million total streams came from IOC YouTube Channel.”

“At peak, YouTube delivered video for more than half a million livestreams at the same time.” “Live video looked better than ever before, with a 7X improvement in quality based on low buffering and high

frame rates.” “In the U.S., we powered online coverage for NBCOlympics.com, delivering more than 159 million total streams.” “Through NBC’s native apps, 37 percent of views came from mobile devices, and more than half were in HD.” “The U.S. Olympic Committee YouTube Channel shared behind the scenes video with more than 6.75 million

views, and 50 YouTube Creators ‘Invaded’ London to show the full experience through their eyes.” Aug. 21 Cedexis.com article

This summer’s Olympics marked an important milestone in using the Internet for live sports streaming. BBC web traffic set a record of 700 gigabits per second during a cycling event featuring a British rider.

“In years past, the Internet shifted into idle during the summer months; a reflection of holiday rest and relaxation, away from the digital tools of work life.”

“But the arrival of mobile broadband, smartphones and tablets appears to have changed this trend. Being connected anywhere at any time is the norm today: Just look around at all the tablets or smartphones at the beach!”

Spokane’s first television station is now the first mobile broadcast channel in America. Thanks to a remarkable new technology, the over-the-air signal for KHQ and SWX-TV will be delivered to wireless devices throughout our region.

KHQ.com Article

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 22

“The Olympic Games certainly confirm that we were glued to our Internet screens this summer. According to Telecoms.com, the BBC web traffic peaked record of 700 gigabits per second when the cyclist Bradley Wiggins won his race against the clock.”

“Such volumes of traffic remain a challenge for broadcasters and online medias editors despite their preparations for such big events. Such surges will remain an ongoing issue for network operators as well, surely for the Rio games in 4 years. Has the trend of calmer days for the Internet during the summer doldrums come to an end?”

August 15 Los Angeles Times article

Talk-show host Larry King has resurfaced on Hulu, taking his program online after his retirement from CNN. “A year ago, King entered a partnership with the world’s richest man, Mexican telecommunications magnate

Carlos Slim, who is bankrolling a new digital programming service called Ora TV. The venture currently produces just one program, ‘Larry King Now,’ which runs on Hulu, the popular online video service.

“The new talk show, which launched last month, is a lot like the old one. The same slightly stooped guy with suspenders asks the same succinct questions of guests.”

“But it feels a little different.” “King spent his entire career on a schedule that unfolded with military precision. … At CNN, he was in his seat in

the network’s Sunset Boulevard studio for a live talk show that started promptly at 6 p.m. PT.” “Now, people can catch his show on Hulu any time. He tapes interviews when guests are available, whether it is

at 11 a.m. or 4 p.m.” “King, who started his radio show in 1957, already has earned the distinction of mastering radio and TV.” “Now, King could get new traction on the Internet, said Hulu’s senior vice president of content, Andy Forssell.” “‘Larry is relevant,’ Forssell said. ‘He’s pretty timeless and it’s all about the guests. There is no ambiguity, no

mystery to solve, and that clarity works well on the Internet.’” Aug. 1 Mashable article

Amazon Instant Video is now available for viewing on the iPad through a new app. “A day after Hulu Plus landed on Apple TV, another player in the streaming video market, Amazon, has released

a viewing app for the iPad.” “The free Amazon Instant Video for iPad app hit the App Store Wednesday morning. The app lets you buy and

stream videos from the company—Amazon claims a library of 120,000 videos—or, if you’re an Amazon Prime member, watch more than 17,000 of them for free. Another feature is offline viewing: You can download purchased and rented videos from Your Video Library and watch them when a Wi-fi connection is unavailable.”

“That feature is already available for the Kindle Fire, but it hasn’t been for the iPad until now. At the moment, the iOS app is just for the iPad—there’s no iPhone version.”

“Amazon Instant Video was introduced in early 2011 and was initially available on Mac, PC, Roku, TiVo and a variety of Internet-connected TV and Blu-ray players. The service was seen as a competitor to Netflix and an enticement to further subscriptions for Amazon Prime, a $79 annual program that offers free shipping and free streaming video.”

Aug. 21 Business Insider article

Apple’s new patent could let viewers skip commercials when watching Apple TV. “Apple was awarded a patent today for a system that would allow people to skip unwanted parts of audio and

video content, reports Apple Insider.” “It’s US Patent #8,249,497 and it’s called ‘seamless switching between radio and local media.’” “The system is designed to automatically switch between streamed content and locally stored media when

commercials pop up.” “The immediate application could be for podcasts and other streamed content, but the speculation points

toward Apple planning something big for the living room.” “Imagine never watching another television commercial again as your TV automatically switched to short videos

designed to kill time while you waited for a commercial break to end. It could be a pretty killer feature.”

OTT

321 Pacific Ave., San Francisco, CA 94111 | www.blueshiftideas.com 23

Aug. 12 CNET article BarryDriller.com, a TV streaming service, is being sued by Fox for retransmitting its programming without permission and, thus, violating its copyright.

“Fox has filed a lawsuit against another TV streaming service, alleging that BarryDriller.com is violating its copyrights by retransmitting the programming of one if its affiliates.”

“The network filed a lawsuit against the upstart service Friday in Los Angeles, claiming BarryDriller.com violates its right of public performance by streaming the signal of L.A. affiliate KTTV to BarryDriller.com subscribers without authorization, according to a Variety report. The site, which just launched this week, streams New York channel programming, as well as that of KTTV-DT, to subscribers for $5.95 a month.”

“‘No amount of technological gimmickry by Defendants changes the fundamental principle of copyright law that those who wish to retransmit Plaintiffs’ broadcasts may do so only with Plaintiffs’ authority,’ the lawsuit states.”

“The site is apparently named after Barry Diller, a chief backer of rival TV streaming service Aereo, which has also been peppered with copyright infringement lawsuits from the four major television networks. However, a federal judge last month denied a request by the networks to prevent the streaming service from rebroadcasting their programs over the Internet.”

“The site is run by Alki David, who told the Wall Street Journal last week that he aims to compete with Aereo.”

Additional research by Seth Agulnick, Scott Martin and Dann Maurno The Author(s) of this research report certify that all of the views expressed in the report accurately reflect their personal views about any and all of the subject securities and that no part of the Author(s) compensation was, is or will be, directly or indirectly, related to the specific recommendations or views in this report. The Author does not own securities in any of the aforementioned companies.

OTA Financial Group LP has a membership interest in Blueshift Research LLC. OTA LLC, an SEC registered broker dealer subsidiary of OTA Financial Group LP, has both market making and proprietary trading operations on several exchanges and alternative trading systems. The affiliated companies of the OTA Financial Group LP, including OTA LLC, its principals, employees or clients may have an interest in the securities discussed herein, in securities of other issuers in other industries, may provide bids and offers of the subject companies and may act as principal in connection with such transactions. Craig Gordon, the founder of Blueshift, has an investment in OTA Financial Group LP.

© 2012 Blueshift Research LLC. All rights reserved. This transmission was produced for the exclusive use of Blueshift Research LLC, and may not be reproduced or relied upon, in whole or in part, without Blueshift’s written consent. The information herein is not intended to be a complete analysis of every material fact in respect to any company or industry discussed. Blueshift Research is a trademark owned by Blueshift Research LLC.