Thursday, 19 January 2012

20,000 reasons for carriers to consider clearinghouses

Despite Apple’s continued (official) non-participation and the announcement that this would be Microsoft’s last year, CES 2012 proved to be a bumper year for gadget spotters. 20,000 new devices were launched in the course of a week and although I expect that more than a few will fail to achieve the lofty aims of their promoters, they serve to demonstrate the electronics business’ believe that even a weak economy can’t dim consumer appetite for devices.

With so many devices finding their way into the eager hands of consumers this year, I thought it was worth going back to a subject I first talked about after last year’s NAB – that of content clearinghouses. This is a concept that I often get asked about as the buzz surrounding Verizon’s VDMS launch is still reverberating around the carrier industry. The following is a brief introduction to the concept, technology, business model and market for content clearinghouses and in-network media engines.

The challenge of mass distribution of digital media

Mass distribution and monetisation of digital media has been a long held objective for businesses across the media, technology and telecoms industries, dating back to the Enron Intelligent Network of the late '90's. It’s been a long wait, but it seems that consumer enthusiasm and therefore demand for streamed media is finally beginning to match the enthusiasm of suppliers. In the UK, where digital consumption is very well advanced, online viewing makes up less than 5% of total consumption and is growing steadily, driven in part by viable alternative experiences to the BBC’s iPlayer finally appearing (personally, I now use Sky Go more than iPlayer...).

As streamed media becomes more mainstream, so a number of commercial, operational and technical challenges that the industry has coped with for the last decade become more manifest. Despite its relative maturity, the process for taking a TV programme, a movie or a live streamed sports event or news broadcast and making it available to an audience is still cumbersome and costly. There are numerous reasons for this, of which I believe the following to be the most impactful:

  • Consumers have many different types of devices and use many different types and providers of networks to receive streamed or downloaded content

  • A large number of content creators are producing video for consumers to consume digitally

  • An even larger number of digital retailers are selling that content to consumers, or pushing it to them to enable another form of monetisation

  • Content creators have one-to-one distribution and licensing relationships with retailers and each retailer distributes to its own customers exclusively, so commercial relationships are complex and content is stored in many different places. Economies of scale and scope do not truly exist in digital, outside a few US digital retailers (Amazon, Netflix, Apple)

  • There are no standard formats for the essence or metadata of media content, so the task of preparing content for all retailers is a Sisyphean one

  • Rights and regulatory requirements vary by geography and genre, making exporting digital content expensive and complex

  • Core network bandwidth is expensive and controlled by carriers who do not extract great value from the great volume of digital media traffic on their networks

  • The TMT industry is still experimenting with the best way to monetise digitally delivered video – there is no playbook that works consistently and therefore organisations in the industry are still involved in repeated technical exercises to create digital products

  • Despite some consolidation, the supplier base in digital distribution is fragmented.

  • Deploying a digital distribution capability of scale therefore necessitates relatively significant capital investment and investment in skills to deploy, run and upgrade the necessary infrastructure

  • Furthermore, focusing on the detail of delivery often entails reducing focus on business fundamentals such as a sound creative base and licensing strategy for content creators, or differentiated retail proposition for retailers of digital content

In-network media engines

I believe that an answer to the above challenges can be found in a simplification of the supply chain for digital media by telecoms carriers. Conceptually, this means creating next generation services in the telecoms network that enable media to be handled in the same way as voice or data traffic. Commercially, this means taking away the need for every content creation and content retailing business to build and maintain its own digital content warehousing and distribution systems. Content creators can therefore focus on their core business of creating great brands that excite and delight consumers. Retailers can focus on their differentiators of engaging, personalised merchandising experiences.

The clearinghouse is a purely B2B service. It is invisible to the consumer and provides services to any business that can either create professional content or has the rights to sell it on behalf of the creator.

Practically, building a clearinghouse means deploying a number of “in-network media engines” – systems located in the telecoms network that provide services of any kind in order to enable the creation, distribution and monetisation of media. A content clearinghouse is a wrapper for a number of these engines, to:

  • Ingest and transport content efficiently from many sources

  • Transcode master video files into mezzanines that can be used to create versions for consumer devices

  • Quality check the results of those transcodes

  • Manage and store all of the potential versions of a piece of content

  • Manage security, consumption and distribution rights

  • Distribute to end users through the most commercially efficient path at massive scale (say, 20%+ of total video consumption being pushed through the clearinghouse)
Business model

The clearinghouse serves both the creation and retail sides of the digital content market.

To content creators, the clearinghouse sells services that ingest their content and transcode it automatically into the formats required by retailers and distributors, thus simplifying non-differentiating aspects of their distribution. In doing so the clearinghouse makes content more available and therefore more monetisable through different (read smaller) business models and, by reducing cost, stimulates experimentation with new business models.

To retailers, the clearinghouse provides a single service to distribute content to consumers on any device they may have. Because that content is contained in a single logical location, digital retailers benefit from increased speed to market and greatly simplified distribution to end users. The majority of the revenues of a clearinghouse business come from digital retailers. A further advantage besides simplification and reduced cost comes from enhanced quality of service (because the carrier network is inherently more stable and resilient than a CDN alone). There are also security advantages to keeping content in a single logical network from storage to user. Finally, there is additional upside on both sides of the market because a more transparent market place for content will enable an ecosystem of models that are precluded today by excessive cost.

It is worth pointing out that the “retailer” in this model can be an organisation that is not a traditional player in the media content market. For example, the connection of high street retail outlets and their subsequent proliferation of digital signage creates an explosion in the amount of content that these non-traditional players much manage and distribute to the edge of their networks. When more advanced merchandising techniques involving the use of customer data with marketing imagery become common place (as indeed they are in premium retailers like Burberry), then complexity and cost will sky rocket, leading traditional retailers to seek a sustainable solution. The same logic could be applied to education, healthcare and pharmaceutical institutions.

State and future of the market

At present, we are at a very early stage of this evolution of the market. Only Verizon in the US and Bharti in India have publicly announced clearinghouse or related media-engine-based businesses. My understanding is that a number of other carriers in other geographies are at an exploratory phase of similar efforts.

With the growing level of interest and investment, I believe that it is worth stating my view on the ultimate make-up of the clearinghouse market. It seems likely that the (locally borderless) topography of the Internet and the need of supply chain businesses such as the clearinghouse to drive economies of scale through massive throughput will lead to a small oligarchy of clearinghouses. These could form around content features, such as language, or geographic location (i.e. there could be a clearinghouse for Western Europe, one for the Middle East and so on).

This forecast is also based on the fact that content creators are unlikely to favour a model in which they have to provide content to multiple clearinghouses within a single geography. To do so would re-impose some of the inefficiencies that exist in the current media supply chain.

In my view much of the future of the clearinghouse business will be determined by early movers in 2012 and 2013 as they sign up content creators and build the capabilities to distribute within their logical or physical territory. The value of the global clearinghouse industry in 2011 was below $100Mn, however I estimate that the sum value of the services that could be substituted by a clearinghouse were in excess of $5Bn. As consumption over non-traditional media grows in developed and emerging markets and drives increasing desire by content owners to export their content, I expect this business to offer substantial upside to telecoms carriers over the next decade.

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