Telco 2.0 is running a series of depth interviews with senior people in the Telco-Media-Tech sector. To start with, to support our summer research programme on new Content Distribution business models, we caught up with Tony Rallo, CTO of Televisa, the Mexico-based media giant which is also the world’s biggest creator and distributor of spanish-language content.

Tony has deep expertise in digital media (previously he worked for Apple in Europe). The global spanish-language market he serves (LATAM, Spain, US Hispanic) is huge and complex, with a GDP of $2.4 trillion, bigger than that of China. Televisa creates over 50,000 hours of video content per year (more than ABC, NBC, CBS combined) and has been at the forefront of exploiting it through the multiple media platforms they own (4 x TV channels, cable companies, soccer teams, live event venues, websites, merchandising operations) and through selling it to others worldwide.

Tony has a strong belief that Telcos potentially have much to offer the content industry…if only they’d think differently. Here’s what he had to say to us about the current state and future direction of content distribution - his personal views, not his company’s - over a beer as he passed through London:

INTERVIEW:

Q1: Is the movement of video content into the online world an opportunity or a threat for media companies?

A1: It’s a big opportunity for all players in the value chain but you have to be aware of some important usage factors when creating an effective strategy. Firstly, the terminals. The PC, the TV and the mobile support different types of experience that are affected by time of day and type of content. This is more subtle than the normal debate around ‘lean-back’, ‘lean forward’, ‘participation’ and ‘snacking’. They all have different impacts on revenue and cost models.

For example, advertising models need to be adjusted depending on if the content is live or time-shifted. Sports content is consumed (and monetised) in different ways to entertainment and sub-categories like soap operas (‘telenovelas’). Mobi-sodes and other made-for-mobile content is going to be very important for the majority of mobile phones, but when you get to 3.5” screens (iTouch/iPhone) and bigger (Mobile Internet Devices) then normal video content can work fine.

Q2: What are the best business models for monetising video content online?

Advertising is still king for non-movie Video on Demand. Paying for individual content is not going to work on a mass scale partly because users just won’t be able to manage all their media files effectively and will get frustrated. Clearly there will also be a “Download to own” market within walled gardens like iTunes or XBox Market Place, but compared to the advertising and sponsorship models, I believe it will be small.

Renting will be a better model, especially for movies. Syndication and merchandising is obviously important - Televisa generates huge revenues from live events and merchandising around telenovelas like Rebelde [link]. Bundling with other communications products may also be an effective approach. For example our cable network in Mexico City - Cablevision - allows us to add voice to our packages as well as giving us another reverse channel for our online content. [Ed - It’s a similar model to how Comcast competes with Verizon in the US.] We’ve sold 27,000 voice lines on our triple play bundling since December 2007. We’ve also recently made investments in two other cable operators, Cable Mas and TVI, which we think is important given the nature of the Mexican telecom market.

In terms of our bundling with mass entertainment brands like Rebelde we take a 360 degree approach that goes beyond merchandising and Live events to include special Rebelde content for paid TV, Premium SMS (Ringtones, etc), a Rebelde custom made Magazine, eMarketing through databases to registered fans, specific online activites and exclusive (‘behind the scenes’) content online, an official website, and a Home Video Division which sells DVDs with all kinds of extras on too!

Q3: What’s the key role of IP (internet protocol)?

IP really helps address the issues of matching a multitude of different user experiences with a growing number of devices and content types. New technology, helps us to see what people are watching. This helps us to target advertising. For example we are currently evaluating Black Arrow for our online delivery platform. In cable we track 10,000 set top boxes per day in Mexico City via a custom made tracking application.

Q4: Broadcasting across frontiers - how well does content originated in Mexico play in other Spanish-speaking territories?

Telenovelas and similar drama-based entertainment seem to have universal appeal that transcends geographical and cultural borders. While Televisa is a Mexican-based company, we believe we are a global player. We have been selling content for more than 40 years. Today we sell in over 90 countries around the world, either via cable signals to MSOs or as ‘canned’ content to broadcasters. Most of the content is dubbed into 15 languages: from Mandarin to Turkish to Italian, Portuguese and French. But, as part of our expansion into new business areas, we are now locally co-producing successful formats like ‘Ugly Betty’ in countries such as China and France, producing them with local talent in the native language.

Q5: What are your views on piracy and security issues around online video?

Firstly, the industry must accept that hackers will never be beaten. Secondly, we need to think creatively about ‘traffic shaping’. Rather than the current approach of stopping people doing what they want, we need to think about differentiating services and access prioritisation based on consumer needs.

For example, one approach might be to improve throughput of important business traffic like email during office hours and then let other activities like P2P file transfers to happen unfettered at night time. Ultimately, every service provider will have to develop an appropriate approach based on their local telecom market situation and regulatory environment. Comcast has been in the press a lot recently for their battle with BitTorrent . Maybe if a Telco should develop a service proposition that charges differently depending on what priorities of services the user wants? This has not been resolved at all and it goes back all the way to the Net Neutrality discussion everyone is having. [Ed. - we couldn’t agree more. The two-sided telecoms business model addresses this head on. See here.]

DRM (Digital Rights Management) is another issue we haven’t seen well resolved so far. In delivery platforms such as “Pay TV” (i.e Sky, Cable) the digital rights are managed de facto since the content is encrypted throughout the distribution chain. But many content owners are “covering the sun with one finger” since today My HD Digital Signal can be transcoded to Analog and back to a digital file in a format like Windows Media or Quicktime with very HIGH quality and then uploaded to any website such as youtube. I mean any normal PC with good horsepower and Media Center Windows Edition can record a lot of content from any Analog” Signal….

Therefore I expect DRM on the business to Consumer side to be a long, complex debate. Steve Jobs recently proposed making iTunes DRM-free, but the industry hasn’t fully processed the importance of what he was suggesting. My view is that if we get our pricing right users will always be willing to pay for high quality protected content just as they do for high quality software.

YouTube is great for user generated content [see Chinese Backstreet Boys example below!], but Telco 2.0 readers should keep a close eye on what is happening with Hulu in the US. There you have high quality content delivered in a high quality fashion. There are predictions that within two years Hulu will have larger revenues than YouTube. It is very hard for YouTube to justify advertising in content which they haven’t developed and don’t own the proper rights. [Ed. - cf. Our analysis of YouTube vs iPlayer in the UK here].

Q6: How do you see telcos role in content creation?

Telcos have proven throughout the world, time and again, that they are not good at creating content. Telefonica made an interesting move in buying Endemol, but that seems to have been a temporary blip.

For one thing, they don’t really appreciate how complicated a critical issue like digital rights management is. All the contributing elements of a piece of commercial video (actors, musicians) have different types of rights attached to them, which is extremely difficult to manage.

Secondly, technology choices: a recent survey showed that the best penetration rates for IPTV were typically only 10% of the DSL install base. Why would users switch from cable if the cable services are up to par or better? My view is that content distribution via IP is an expensive option compared to broadcasting via antenas or satellite, even though the cost of broadband is dramatically reducing in a number of key markets. We are trying to do our share in Mexico since broadband penetration is directly correlated to economic prosperity, especially in the small and medium sized business market which is a very important part of the social fabric of the country’s economy.

For consumer entertainment, though, DTH (Direct-To-Home) satellite is a much better choice for a telco trying to create a national footprint, especially in a country with large geographic size.

Approaches to Mobile TV need some re-thinking too. The network technology is just not ready yet. Mobile TV certainly has a future as a broadcasting platform, but only for certain types of content. DVB-H, MediaFlo and DMB are very good complementary solutions for content owners and wireless operators to prevent streaming video saturating operators’ GSM and 3G networks and allowing 14 (or more) good quality video channels to be broadcast to a handheld device. [Ed. See more analysis of video on mobile here and of MediaFlo here].

Q7: So, telcos should focus on content distribution?

Yes, they should become a new type of MSO, but using a different platform and architecture. [Ed - We’ll be exploring what this might look like in a report coming out in September].

Q8: And what about the huge costs of over-the-top content distribution that ISPs are currently incurring (cf. iPlayer example in the UK)?

In the past users consumed roughly 30% of their daily bandwidth allowance, but were charged for 100%. Now, with P2P file sharing, and increasingly with services like the iPlayer in the UK, Hulu in the US, and high-quality YouTube they are starting to consume 100% (and more!). So, ISPs need to wake up and smell the coffee - they should charge their consumers more cleverly for different levels of content and service quality, as I mentioned before.

In Mexico, for example, pricing has been a big problem, but that is more because of local monopoly issues. Having broadband at USD$30 a megabyte won’t be sustainable in the long run!

Q9: So, what propositions could telcos develop to support your online video business, and make a decent profit in return?

• Usage data to help targeted advertising? Yes, they could do a lot more here. If you consider how much we pay for unscientific usage data today, we’d certainly be willing pay for anything more accurate. However, as it stands today, we have received no propositions from telcos in this area.

• Billing and payments, to collect content charges indirectly? Yes, but mobile operators are being far too greedy today. They are asking for 50% of the transaction, when Amex want 6% and Visa 4%! As a result we’re looking at alternative (pre-paid) approaches to avoid telco charges.

• Content delivery services that reduce distribution costs and improve QoS? Yes, theoretically. But companies such as Akamai and LimeLight already have a very holistic offering. Their footprint and intellectual property in this area is very strong. Telcos are not good at maintaining server racks in the way Akamai or Limelight are. Perhaps they should buy a CDN (Content Delivery Network) company!

Q10: What’s your big message to the telco industry?

Telcos need to create a new type of brand proposition to the content industry - a new B2B2C ‘Lovemark’ . It needs to be based on a win-win, two-way street which helps the consumer receive a high Quality of Service, Quality of Content and Quality of Experience.

Telcos should be talking to content providers a lot more than they been to date. Otherwise situations like the iPlayer in the UK will continue. We need to avoid situations where the content provider launches a new platform/ service and the Telco Infrastructure becomes stressed. Paradoxically both sides need to communicate a lot better.

Ultimately, telcos need to help content owners move from ‘Network’ Television to ‘Networked Television’.

Telco 2.0 take-aways:

Telco’s clearly have a role in distributing video content. More and more content players we speak to see telcos as an additional distribution channel to audience viewing, fulfilling the content owners’ need to distribute to as many eyeballs as possible. Satellite, Cable, Fixed-line and Mobile all have a place in their distribution plans.

Security of content, quality of viewing experience and usage metrics are clearly features that content owners value and appreciate that Telcos have potential supporting capabilities in these areas. However, Tony’s view that Telco’s are, relative to the CDN players, not strong in managing racks of servers and software should be a real worry - we believe that this will be a core competence for content distribution in the future.

We are not surprised that Tony highlights telcos’ lack of success in creating content. We believe that vertically integrated approaches whereby Telcos buy content rights is the wrong strategy and one doomed to failure (a view we get supported time and again in our survey results).

Our analysis suggests that the two-sided business model offers the best prospects going forward for both content owners and telcos. And there are some good early models to learn from (cf. Telenor’s Content Provider Access programme).

Most importantly, the interview with Tony highlights the most interesting conundrum facing online video distributors: broadcasting is a cheaper way of reaching mass markets and attracts higher advertising rates, so how can Online Video become profitable - is it through interactivity, personalisation or just as a niche play?

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This Blog is republished from www.Telco2.net/blog. The Telco 2.0 Initiative is a new industry program focused on helping with this thorny question: "How do we (telcos, handset manufacturers, Media companies, IT players, NEPs, etc) make money in an IP-based world?"