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IPTV: The Business Model (PART II)

By | September 1, 2007

      In August, we reviewed IPTV (Internet Protocol TV) as a driver of next-generation fixed satellite service and direct broadcast satellite service. We looked at the technology and identified four likely business demand triggers for IPTV rollout: high-definition TV, video on demand (VOD), interactive programming and bundled services for voice, data and video (the triple play).
      Now, we will look into these services in more detail, focusing first on VOD services and the vertical relationship between the satellite VOD provider or operator, distributors down the chain such as other multichannel video programming distributors or end-user subscribers, and up the chain, the content owners and providers of programming.

      VOD has its roots in cable TV pay-per-view programming and requires server-based storage of programming to allow subscribers to select the offering. The satellite operator’s teleport and in-orbit facilities require broadband throughputs capable of handling the IPTV uplink and downlink feeds. The VOD provider’s network architecture includes a headend to accept and process the signal by imposing bit rate, packet format, compression and other standards; server facilities for content storage and access; and loop facilities for bringing the programming to subscribers. Some or all of this architecture may be owned and/or operated by satellite providers.

      VOD comes in several variations, and as compression and digital indexing technology evolves, is moving towards a model in which the subscriber has the ability to start the selected programming at any time, stop, pause, rewind, play back and skip sections (including advertising). The VOD provider is therefore faced with a complex accounting and billing function linked to, but independent of, network architecture, to track subscriber use of VOD programming and bill and collect for it.

      A satellite or terrestrial VOD provider normally will enter into a license agreement with a content provider — the owner of the programming — in which the content provider is licensor and the VOD provider is licensee to distribute the programming. From the VOD provider’s point of view in negotiating against the content provider licensor, the VOD license agreement should specify the programming content being licensed, the term of the license, the royalty or fee structure of payments back to the licensor, and other terms of the license grant such exclusivity, revocability and assignability. The VOD license should expressly carve out from any license restrictions the VOD provider’s right and need to index, segment, copy, compress, record, digitize or otherwise technologically manipulate the content for the purposes of adapting it for use on its network architecture.

      The VOD license should also set forth the content provider’s obligation to refresh the content with new content, the programming and distribution rights of the VOD licensee in how often in a given period it can show the programming, and the royalty rates or fees to be paid from subscriber charges. Additionally, the VOD provider should negotiate option-like rights on future programming to ensure distribution availability and pricing so the provider does not invest marketing costs in building subscriber demand for given programming only to find itself over a barrel with respect to future subscriber demand of which the content provider is aware and for which it will withhold availability or raise prices. Typically, first run or premium-type programming will be subject to limitations — and therefore higher fees — on the number of times the VOD provider may show it, while older or commoditized programming — less subject to devaluation by overprogramming — will be less restricted.

      The amount of advertising content in the programming should also be negotiated, as will the advertising and promotional obligations of the parties and the right of the VOD provider to pull the programming from distribution and have economic remedies in case of poor subscriber demand and utilization of the programming. There should be a reporting process and audit rights.

      Finally, the VOD license should provide for indemnification of the VOD provider by the content provider for third-party intellectual property infringement claims, since the licensor is in a better position to know whether its intellectual property infringes that of a third party or not. The VOD license should insulate the VOD provider from licensor or third-party claims based on subscriber digital video recording activity. The VOD license should also treat control of subscriber information for digital and consumer privacy.

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