Wednesday, October 30, 2013

The 2nd Screen: Transforming video consumption - Q3 Update

Third Quarter, 2013: Impacting the 1st Screen

The first 9 months of 2013 have been explosive for 2nd Screen, though confidence by the trade press and investors has wavered somewhat during the summer.  Apps have continued to improve, new apps have kept coming, monetization evidence is in plain site through several engagement models, and the convergence of 2nd Screen companion experiences and 2nd Screen viewing experiences has continued to gain momentum.  The rise of the 2nd Screen Ecosystem continues to be a blessing and curse for nearly all of the players in the video ecosystem, especially the content distributors and the brand advertisers.
In this brief summary, I am going to make references to our published research (“2nd Screen: Transforming Video Consumption”, a 252-page report published during our 2nd Screen Summit @ CES on January 7th, and the Q1 and Q2 Updates of the same published on April 7th and June 27th ), as well as to blogs and conferences we have hosted and attended during the last 9 months.  However, the information should still be relatively coherent regardless of your attentiveness to those events. I have also included the introductory Executive Summary below for your reading clarity.

a)     Market Trends.  While four (4) important market trends continue to develop and gain momentum in the market place, two (2) new major trends have emerged which deserve your close attention:
1)     An ecosystem, not an app.  In June we discussed the importance of Microsoft’s Xbox Smartglass having nearly 20M downloads vs. the leading 3rd party from zeebox (5M) and Viggle (3M).  However, now that Chromecast has stormed into the marketplace, it is even more plainly evident how critical this concept of a passive yet pervasive 2nd Screen capability is for a video platform (for Discovery and Control). By Christmas, I would expect to see Chromecast touting 20 or more mainstream apps that have been enabled for Chromecast—meaning the consumer uses that same HuluPlus or Netflix app they have always used on their smartphone for Discovery, but now have the option to play the video to their Chromecast enabled TV, freeing up the smartphone for Enhanced Viewing or Social experiences.  I would also expect to see major capabilities launched with Netflix (the “PS3 capability” is still viewable by consumers, now with the “cast” symbol on it) and by Apple (who purchased Matcha before the holiday shopping season).
2)     Convergence of companion and viewing experiences.  The current implementation of the CBSi app is perhaps the current best example in the marketplace of a converged experience app, delivering both a great viewing experience AND the capability to “sync” the 2nd Screen to the first (or 2nd) screen for enhanced viewing experiences.
3)     Ad supported video on mobile and connected living devices.  Comscore continues to confirm month after month that ad supported digital video continues to explode in every facet of the marketplace (46B online videos viewed in September, supported by 22.9B video ads).  YouTube recently reported that nearly 40% of its views are now on mobile devices, and the tried and tested monetization model of display ads and video ads being placed in front of 2nd Screen consumers is clearly the market leading monetization method for Discovery (Tune-in) and Enhanced Viewing experiences.  For example, Viggle reported Q3 revenues of $4.6M, a year on year growth of 289%.
4)     Monetization.  With well-developed apps finding better engagement with the consumer and apps reaching larger audiences, app publishers will continue to further their monetization approaches through display and interactive advertising, m-commerce, and in-stream video advertising (for converged experiences).  Video monetization has taken an early lead with much higher CPMs than display and a more common business model than t-commerce.  In fact, according to Jeffries, online video advertising is expected to have a CAGR of 39.7% thru 2016, reaching $10.5B in the U.S. alone.
5)     The best app might not be an app.  An important trend has been emerging and looks like it has crossed the consumer chasm to mainstream: 66% of consumers are recently surveyed are saying they prefer to get their media and entertainment on mobile devices on the “mobile web” vs. “in app”.  Meaning, they prefer to point their mobile browser to or rather than downloading the app for those same experiences.  That makes responsive HTML5 experiences more critical than ever for deployment with consumers if 2nd Screen experience developers are to be able to afford the marketing cost of deploying at scale with consumers against the current inertia to install new apps.
6)     The rise of ad blockers.  For years now, tech savvy consumers have been able to download a browser plug-in to block display ads on their PC.  But the landscape has become much more sophisticated, with services that can block display and video ads on the PC and even devices that can block all ads into a broadband household (eg “AdTrap”), resulting in an average ad blocking reduction of ad calls on media sites of 22.7%.  With the most successful monetization business model in the cross hairs, this is a serious trend for all 2nd Screen executives to pay attention to or risk having their monetization strategy pulled away from them by 3rd parties.
7)     Perhaps the best way to gauge where the market is headed to look back at the major trend predictions we made in the report (page 77) and to see if we are on track:
                                               i.     The "digital land grab" continues, marked by consolidation, failure, and improved user experiences.  Dish continues to “pour on the gas” with improvements in their app experience for Discovery, Social and Enhanced Viewing experiences.  DirecTV and Comcast continue to deploy new features as well.  Lead by CBS, nearly every major network has continued to further develop their converged viewing experiences for consumers.  While we thought we lost Matcha in Q2, they announced an acquisition by Apple shortly after the last quarterly summary.  We also lost a few more app development companies including Magic Ruby and TV Dinner, while Yap.TV has re-focused itself as a B2B app experience developer.
                                             ii.     Social feeds will be a feature, not the experience.  Twitter and Facebook took all of the press during Q3, with Twitter working to establish itself as the Social 2nd Screen champion and Facebook trying to establish its own credibility.  The press has further confused the space, often describing Twitter as the winner of 2nd Screen in its entirety, despite its focus on only one segment of the market.  Comcast and NextGuide have perhaps made the most strategic use of social yet in 2nd Screen—making it easy to move from a social stream about a show to actually book marking or recording the show for viewing later—Tune-in at work. 
                                            iii.     "Discovery" will become a household word.  Tune-in is driving the push towards better Discovery, with the “bookmarking” applications from Comcast and NextGuide leading the charge, and new “virtual TV stream” technologies like working to drive video consumption on mobile higher by creating customized continuous playlist for consumers that are built from the very first click of play on a clip.
                                            iv.     Tablet and smartphone usage reports will become about activities related to the TV.  2nd Screen usage is an established fact.  Nearly all of the research published now is focused on what the usage scenarios are telling us about consumers (i.e. when, where, why, how).
                                              v.     Studios and networks save money, apps grow in 2 directions.  Metadata syndication continues, leveraging the power of 3rd party apps while preserving brand integrity for content creators.  The major TV networks continue to consolidate their apps around their major brands while 3rd party apps continue to expand functionality.
                                            vi.     Gamification will begin to lose favor with the press and consumers, only to begin to add value again towards the end of 2013.  Viggle’s numbers prove that gamification is a serious consumer engagement model (average viewing time: 55 minutes) and a serious monetization model (see their Q3 numbers above).  But perhaps more importantly, the concept of using a companion app during actual gaming is now a real trend facing consumers with the announcement of the launch of Machinima’s Wingman app, giving Xbox One gamers the ability to see videos of the game they are playing on their 2nd Screen while play the game on their first.
                                           vii.     Amazon and eBay will engage in a battle for the Second Screener's M-Commerce.  Amazon continues to poise itself for a major launch in this space, with rumours of a set top box, more kindle models, ad supported content, and more 2nd Screen applications.  Stay tuned.
                                         viii.     Cloud-based digital lockers will finally be taken seriously by consumers and the rest of the ecosystem.  Ultraviolet continues to march forward with over 12m accounts now active (reported in Q2), but more importantly, movie studios have changed their distribution tactics and are now launching on UltraViolet 2-3 weeks before making the titles available via DVD or Blu-ray.  This gives them the ability to sell digital copies BEFORE they end up in the Netflix or Redbox rental system, giving them a much higher contribution margin per title.
                                            ix.     Device makers will jump into second screen with both feet.  Samsung acquired Boxee.  Apple acquired Matcha.  Google deployed Chromecast.  This trend is accelerating.  Expect more in the run up to the holiday shopping season.
                                              x.      ACR and the battle of the digital video ecosystems.  While Civolution, Audible Magic and Gracenote continue to make announcements in the space, it is the passive ecosystem plays that haunt major CE competitors with Chromecast leveraging DIAL for its secret sauce and Xbox continuing to build out its Smartglass ecosystem in preparation for the launch of Xbox One.
b)     Market sizing.  We took a bold stance in our research report (page 55) on revenue in the 2nd Screen space, claiming that 2012 had already seen $490m of attributable revenue from this market segment and the we expected the market to reach $5.9B by 2017.  When I stood on stage at CES to discuss this, there was a lot of disbelief in the crowd.  We walked the room through the breakdown of mobile and online video advertising  ($6B growing to $17B) and m-commerce ($76B growing to $158B) and out logic for the incredibly small sliver of those markets that will be captured by 2nd Screen experiences in the living room.  Right out of the gate, Super Bowl 47 had press for CBS Interactive claiming to have sold $10-12m in advertising for the 2nd Screen along.  While m-commerce has not yet taken off, the “Show me the money” panels we have moderated over the past few months continue to demonstrate a few strong trends in the space around interactive advertising (CPT or Cost per Touch via @JesseRedniss), Tune-in revenue (classic affiliate model), display advertising, and the lucrative in-stream video advertising powered by new technologies that combined the video stream and ads for converged sporting apps and mobile experiences on the fly with CPMs that are already challenging classic broadcast TV in value.  Mentioned several times above, Viggle with a mere 3M active accounts is attracting revenues of $4.6M per quarter currently, but growing at a rate of 289% year on year.  The market is revealing itself rather quickly.
c)     Consumer app experience.  To round out the Q3 view, we should look at what applications have significantly improved their feature set.  This is important because no matter what the revenue or business model is for a particular app experience or ecosystem, if the consumer isn’t engaged and using the app on a regular basis, there is no opportunity to attract revenue.
1)     Sports.  The Summer was slow for events, but the start of the football season brought a new NFL app and improved experiences for college Football from ESPN.  The playoff series for baseball was very strong with MLB’s app.  Perhaps the best consumer feature that is now widely adopted is the idea of push notifications that drive consumers back to a clip for that touchdown or homerun, often monetized with an in-stream video ad.
2)     3rd Party Apps.  Xbox Smartglass continues to out do itself with new experiences for live TV, movies and games.  Machinima Wingman and the NBA app will only further cement that dominance.
3)     Network apps.  Every network continues to pour effort into their companion and converged viewing experiences.  We had the opportunity during the S3@IBC event to listen to case studies by Channel 4, M6, and Sky Italia (S3 members can request access to those presentations here).
4)     Converged experiences continue to gain momentum.  While HBO continues to build amazing converged experiences, CBS has jumped into fray with their ad-supported episode viewing app that carries a “sync” capability. 
So another short but very action-packed summary for another 90 days of market activity. 
The conversation at IBC was fantastic, with more than 250 people joining us for our Sunday afternoon event in Amsterdam.  We are looking forward to continuing the next conversation at CES on Monday, January 6th (,  and, of course through our blog and Twitter activity (@ChuckParkerTech, @S32Day).

You can find the supporting detailed reports to these facts here.
You can find a summary of our research which is updated quarterly here.

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