New tricks needed to drive online video

The consumer-oriented online entertainment market is going through a paradigm shift due to the enriched online video experience and tremendous increase in broadband penetration and bandwidth in Asia Pacific.

Although the use-base has increased significantly, profitability remains limited. In-Stat's 2006 survey of consumer's willingness to watch online video found that most Asia-Pacific users are looking for inexpensive relaxation and entertainment from the Internet. The results show 60.3% of all respondents in Asia Pacific watch online videos regularly, with 44.7% choosing free sites such as Google video and YouTube and only 17.1% willing to pay over $4 a month for premium content.

Lack of scale

The two key challenges for the industry are the difficulty in obtaining legal content at a low cost and the proliferation of free user-generated content.

The majority of online video service providers are small aggregators. Many of them are unable to obtain exclusive licensed content, especially in markets like mainland China and Taiwan. With increasing regulations and governance of copyright laws in the region, aggregators and P2P streaming sites will likely face lawsuits in a similar manner as what Napster and others have faced. However, it is difficult for small players to negotiate with film producers and TV channels to obtain authorized content at a reasonable price in order to make their business sustainable. Content is the single largest issue limiting the growth of the online video market.

YouTube, MySpace and others provide a platform for users to upload/download and watch videos online, together with user interactive functions, which have attracted huge numbers of new users in the past 18 months. In contrast, the content provided by online video service operators is not significantly different from traditional video services, in terms of variety and interactivity, keeping the subscription price for online video low.

To survive in this ever-changing market, online video service providers need to modify their current business model to expand their subscriber base and be competitive in price without compromising profitability.

Adding advertisements is one way to keep the subscription price low for many smaller players, once more countries in the region crack down on unlicensed content, which will significantly increase the cost of content. The ads can also be customized according to subscribers' viewing history to make them more targeted.

Interactive video content that enhances the user experience will help service providers expand their subscription base and raise ARPU. User-defined content delivery could be a powerful option. Female viewers can decide the direction of the story of a Korean drama, and kids can choose the ending of their heroes when watching animation online. Similarly, personalized programs could also be based on viewing behaviors or include interactive gaming with other viewers. However, compared with online advertising, developing interactive capability requires significant investment and it takes time to change user behavior.

With the possibility of sharing digital video between PCs and portable media players, operators will be able to attract more subscribers with the added convenience of watching video any where, any time. Apple announced plans to release a wireless 'iTV' device in Q1 2007 to store video content and streaming media. However, the service may not be widely available in Asia Pacific in the next two to three years due to legal concerns and the timing of large content providers' roll-out plans.

 

Adding digital ads capability is the best way for online video service providers to survive in the short term, while enhancing the user experiences and making online video available on personal devices will boost opportunities in the future. The total market revenue is expected to reach $2.86 billion in 2011, as consumer awareness increases and technology creates greater content and new forms of online videos.

Alice Zhang is a research anlayst covering multimedia for In-Stat in Singapore

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