Over-the-top television (OTT-TV) services have achieved widespread adoption on PCs, and their transition to TV sets will be driven by hybrid broadcast-broadband services. This will inhibit the growth of IP television (IPTV), and many telecommunications operators will decide to partner as service enablers rather than competing as content aggregators.

• The sheer volume of videos consumed through services such as Hulu, iTunes and the BBC iPlayer has brought OTT-TV into the mainstream.
• The number of households able to watch OTT-TV services on their TV sets is rapidly outpacing the number of IPTV subscribers worldwide.
• IPTV will still be successful where specific market conditions apply, but in many countries, hybrid broadcast-broadband services will relegate IPTV to a niche platform.
• Project Canvas could provide a blueprint for hybrid digital terrestrial television (DTT)-OTT services that may be adopted across Europe.

• DTT and satellite TV broadcasters: Add broadband Internet connectivity to enhance your offerings, improve customer engagements and enable personalized recommendations.
• Broadcasters, Internet service providers (ISPs) and OTT-TV service providers: Develop Canvas-like ecosystems to optimize the cost and quality of your video delivery, and to support sustainable value chains for hybrid TV services.
• Regulators: Approve open platforms with tiered service levels to balance the needs of consumers, content providers and ISPs, rather than enforcing strict net neutrality.

OTT-TV poses a potential threat to all TV service providers — including terrestrial, cable, satellite, and IPTV — because it provides a mechanism for new content aggregators to enter the market without the cost of acquiring and maintaining their own distribution infrastructure.

Incumbent service providers may be somewhat insulated from this threat by having strong brands, multiyear content rights contracts, and strong customer relationships. However, because they're new, IPTV service providers are typically the most vulnerable, and, for the past three years, OTT-TV has threatened to become IPTV's nemesis.

Until recently, the IPTV industry was unwilling to address this possibility. Instead, it has almost universally pursued a pure-play vision of walled-garden TV services delivered over managed IP networks:

• First, it focused on the technology infrastructure necessary to deliver stable video signals, and discussions centered on access technologies (such as ADSL2+ and fiber to the home), quality-of-service (QoS) testing, and scalability.
• Then the focus shifted to increasing the average revenue per user, and discussions centered on best practices in driving up video-on-demand (VOD) buy rates (see "The IPTV Industry's Focus Moves From Technology to Revenue").
• Then the focus shifted to how IPTV could differentiate itself from digital cable and satellite TV, and discussions ensued regarding personalization, interactivity, and widgets (see "IPTV Seeks Differentiation").

However, in 2009, for the first time, the IPTV industry has openly acknowledged the disruptive threat posed by OTT-TV, and it's looking for the best ways to respond to it. At the IPTV World Forum in London in March 2009, only about one-quarter of the sessions concerned pure-play IPTV; the rest covered a range of alternative distribution technologies, including mobile TV, OTT-TV, IP cable, and various hybrid combinations.

Why this change in scheduling? In previous years, access to TV shows via the public Internet was generally dismissed as consisting of peer-to-peer piracy and unlicensed clips on YouTube. However, in 2008, the sheer volume of TV shows consumed through services like Hulu, iTunes, and Netflix in the U.S., and the BBC iPlayer in the U.K., brought OTT-TV into the mainstream. Challenges remain, but the IPTV industry is actively discussing a wide range of TV distribution technology choices.

During the past couple of years, consumers have shown an increasing demand for open, anytime, anywhere access to professional TV content on their PCs. This is helping to drive a range of initiatives to deliver similarly flexible access to content on TV sets:

• TV service providers are launching hybrid set-top boxes (STBs), which give access to broadcast channels via terrestrial or satellite networks, and to on-demand content via the Internet.
• IPTV operators are opening their walled gardens to provide access to Internet-based video services, such as YouTube.
• TV manufacturers are adding Internet connectivity to their TV sets to allow access to Internet content via microbrowsers or widget platforms.
• Internet VOD service providers are adding terrestrial TV tuners to their STBs to provide consumers with a single-box solution.
• Common standards are being developed for STBs, which will allow any TV set to be connected to the Internet. Such standards are being discussed as "the next big thing" to disrupt the traditional value chains in the TV industry.
• Consumers are already building their own hybrid solutions by combining a broadcast TV service with movies on demand via an Internet-connected game console (such as Xbox 360 or PlayStation 3), a digital video recorder (DVR — such as TiVo), a media center, a digital media adapter, or a TV with integrated Internet access.

Gartner estimates that there were about 20 million IPTV subscribers worldwide at the end of 2008. By contrast, in May 2009, Microsoft announced that there were more than 20 million active members of the Xbox Live community. Since a single OTT-TV platform matches the worldwide IPTV installed base, it's clear that the total number of households able to watch OTT-TV services on their TV sets is already outpacing the number of IPTV subscribers.

Pure-play (nonhybrid) IPTV services may still be successful in geographical regions with particularly favorable local-market conditions. Examples include areas where the population is concentrated in metropolitan areas, such as Hong Kong, Iceland, and South Korea, or where there's strong competition among ISPs, such as France, or between incumbent telephone companies (telcos) and cable TV operators, such as Belgium. However, in many countries, the rollout of hybrid broadcast-broadband services will prevent IPTV from developing beyond the status of a niche platform. In recognition of this, most traditional IPTV hardware and software vendors at the IPTV World Forum were actively promoting their hybrid credentials.

Many different hybrid services have been launched or announced, some from incumbent TV service providers and some from new entrants. Three examples are:

France Telecom's IPTV service requires 5 Mbps of sustained bandwidth, which, according to the company's data, means that around half of all broadband subscribers in France can't receive IPTV. Having invested in premium football and movie rights, France Telecom needed to increase the reach of its TV services, so, in July 2008, it launched a hybrid service combining satellite and broadband delivery. This provides access to broadcast channels via satellite, and to VOD via the Internet. In fact, the STB contains direct-to-home (DTH) and DTT tuners, so if subscribers are in an area where they can't receive satellite service, they can still get access to a more-restricted range of broadcast channels via terrestrial TV. France Telecom's hybrid satellite service had more than 300,000 subscribers at the end of March 2009.

The OTT VOD service provides downloads rather than streaming, and requires a minimum bandwidth of 500 Kbps. With a 2 Mbps connection, subscribers have to wait about 10 minutes for a movie to start; alternatively, they can preorder the movie via PC, and then it's downloaded in advance. Clearly, this doesn't provide the same quality of experience as the full IPTV service, but it doubles the number of households that are able to receive the VOD component of the Orange TV service.

Sky Digital is the most-successful satellite pay-TV service in Europe, with around nine million subscribers in the U.K. It has a reputation for innovation and a strategy of being early to market with new developments, such as digital transmissions, DVRs, and high-definition television (HDTV), and it's already running trials of 3-D TV.

Sky Digital has an OTT-TV service called Sky Player, which is used for VOD, search, and navigation across platforms; its focus is on providing access to the long-tail, rather than catch-up, TV. Sky Digital also owns an ISP, and has so successfully cross-sold broadband Internet access to its satellite TV subscribers that it's one of the largest ISPs in the U.K.

At the IPTV World Forum, Sky Digital confirmed that it will launch a hybrid satellite-VOD service within the next few months. It believes that "hybrid is the future," and that the combination of DTH satellite with a DVR, and a broadband Internet connection, is the perfect TV platform. For more than a year, Sky Digital has been gradually migrating its TV subscribers to HD STBs with DVRs and broadband connections. Thus, there will be a significant installed base of subscribers who can take advantage of the hybrid service when it's launched.

Deutsche Telekom's IPTV service, T-Entertain, had about 500,000 subscribers in Germany at the end of 2008. Its target is to reach one million subscribers by the end of 2009. Germany is a notoriously difficult market for pay-TV operators, mainly because there's good-quality free-to-air (FTA) programming on cable and satellite TV, including a wide range of movies and sports. Deutsche Telekom believes that the critical success factors for IPTV in Germany are:

• Content: The service must have a wide selection of premium content, and, in particular, the VOD service must have the same day-and-date release as DVDs.
• Multiscreen: The service mustn't be purely for the TV, but must also deliver video content to PCs and mobile devices.
• Interactivity and personalization: IPTV must offer a completely new level of customer experience compared with cable and satellite; in particular, it must include personalized recommendations within the electronic program guide (EPG).
• Third-party access: IPTV services mustn't be restricted, walled-garden services, but rather must provide open application programming interfaces, giving access to OTT-TV and user-generated content (UGC) on the public Internet.

The last point is particularly interesting. It shows that hybrid services won't just be launched by satellite and terrestrial broadcasters that are defending themselves against the superior choice and functionality of OTT-TV and IPTV services. Even IPTV is going hybrid.

A critical challenge facing OTT-TV and hybrid services is that the Internet isn't ready to deliver TV services to the mass market. Content providers lack end-to-end control, and most content delivery networks (CDNs) only deliver content to the ISP, not the end user. Many customers of existing OTT-TV service providers complain about buffering, freezing, HD streams switching to standard definition, lack of lip-sync, and so on.

As OTT-TV consumption shifts from the PC to the TV, driven partly by hybrid services, the volume of high-quality video streamed over the Internet will increase dramatically. Unless network capacity issues are addressed, these problems are likely to get worse. Therefore (as discussed in "Broadcast and Broadband TV Distribution Are Converging in Hybrid Services"), if OTT-TV and hybrid services are to succeed, ISPs need to be brought into the value chain to improve QoS for consumers.

On this model, ISPs would build video delivery networks within their own infrastructures so they could carry large amounts of video without impacting traditional Internet traffic. By caching on-demand video within their networks, they would be able to reduce content providers' transit CDN costs, and the content providers would pass on part of that cost savings to ISPs in return for guaranteed QoS. Vendors active in this area include Velocix and BT Wholesale.

If content providers and ISPs can cooperate, then everyone benefits. Content providers would benefit from reduced costs and guaranteed QoS. ISPs would benefit from new revenue streams and a CDN capability that could be used to provide additional content services. Consumers would benefit from improved QoS. However, this vision faces three challenges:

• It would create a potential conflict of interest for triple-play operators, wherein their broadband services would compete with their TV services.
• Depending on the number of major content providers and ISPs in any market, it could be slow and inefficient for each player to sign separate agreements and negotiate individual terms for, as an example, what constitutes guaranteed QoS.
• The idea of content providers paying for privileged treatment undermines the principle of net neutrality, which is a politically sensitive issue in some regions.

In the U.S., high-speed broadband access is dominated by cable-TV multiple system operators (MSOs), for which OTT-TV is a disruptive technology. If the MSOs provide low-price, high-speed broadband Internet access, then it may be used to deliver OTT-TV, which will, in turn, compete with their existing TV services. Therefore, they have an incentive to keep the cost of broadband high to reduce cannibalization. Of course, OTT-TV is also potentially disruptive to the IPTV services from AT&T and Verizon, so they face the same dilemma regarding the relative pricing and quality of the broadband and TV services within their triple-play bundles.

Incumbent digital cable MSOs and IPTV challengers are likely to dominate TV distribution in the U.S. during the next 10 years, and will provide much of the value — in terms of on-demand content, interactivity, and personalization — that OTT-TV and hybrid services can offer. However, if premium content providers increasingly use OTT-TV to go direct-to-consumer, and if consumers and advertisers begin to drift away from the traditional cable-TV model, then MSOs and IPTV operators may find the margins on their broadband business becoming more attractive than those on their TV services.

The triple-play dilemma is less important in Europe, where most households receive TV via terrestrial or satellite broadcast networks, and, with only a few exceptions, digital cable and IPTV are relatively embryonic.

Cooperation and commercial agreements between content providers and ISPs will require QoS guarantees, which would be greatly facilitated by the development of common standards for what constitutes an acceptable, TV-like experience. A possible blueprint for how such standards could be agreed on is provided by Project Canvas in the U.K.

Project Canvas is a proposal for a hybrid FTA platform that would combine broadcast TV — via digital terrestrial (Freeview) or digital satellite (freesat) — with OTT catch-up TV services, such as the BBC iPlayer, ITV Player, 4oD, and Demand Five. The platform would also give access to public service and e-government Web sites, such as www.bbc.co.uk , www.direct.gov.uk , and www.nhsdirect.nhs.uk (National Health Service), as well as UGC sites such as YouTube and Flickr. If the proposal is approved, then compliant STBs are expected to be available in U.K. retail outlets in 2010, and cost from £100 to £200 ($150 to $300). Devices will support HDTV, and many will include DVRs.

Technically, the proposal is for a set of specifications (effectively, a set of common standards for OTT-TV) and a marketing consortium that would promote the platform and license it to consumer electronics manufacturers. It was developed by a consortium including the BBC, ITV, and BT. The BBC has submitted it to the BBC Trust for approval.

Project Canvas is positioned to extend Freeview and freesat into the hybrid world, and is designed to prevent FTA viewers from being technologically disadvantaged relative to digital cable, IPTV, and satellite subscribers, who will all have access to a wide range of on-demand content.

The U.K. has experienced one of the most-successful DTT rollouts in the world, and this is largely due to the marketing power of the BBC. If Project Canvas is approved, then the rollout of hybrid DTT-OTT services in the U.K. is likely to be successful, especially given the widespread awareness of the BBC iPlayer service. This will create economies of scale for consumer electronics manufacturers, which, in turn, may encourage other European broadcasters to adopt similar standards to benefit from low-cost hardware.

More important than the hardware specifications is that Project Canvas will define what constitutes a minimum "TV-like experience." The platform will be open to any ISP and any content provider, but only if they agree to conform to those standards, and conformance creates obligations for ISPs and content providers. For an ISP to claim that it's Canvas-compliant, it will have to upgrade its network to guarantee adequate QoS. Also, for content providers to be allowed onto the platform (and be listed in the EPG), they will have to show that they signed carriage agreements with Canvas-compliant ISPs.

Consumers will be able to buy an STB in a retail outlet and then receive catch-up TV services, such as the BBC iPlayer, on their TV sets with guaranteed QoS. The consumer value proposition will be so strong that any ISP that doesn't support Canvas is likely to lose subscribers to ISPs that do. Similarly, any content provider that doesn't support Canvas is likely to lose audience to those that do.

Although the core Canvas proposition is FTA, the platform is likely to include optional pay-TV services. For example, BT's IPTV service, BT Vision, is planning to market its pay-TV content through Canvas. As an IPTV service, BT Vision has to maintain an expensive infrastructure, and can only market its services to BT's consumer broadband subscribers. As part of Canvas, BT Vision will just pay carriage fees, and can then market its content to any compliant ISPs' subscribers.

This highlights that Canvas defines a new value chain that lies between traditional OTT services — where Internet access is a commodity, but there's no guaranteed QoS — and traditional IPTV services, where there's guaranteed QoS through vertical integration. This, in turn, leads to the issue of net neutrality. The traditional net-neutrality debate poses a dichotomy:

• With net neutrality, all traffic must be treated equally and move at the same speed over an ISP's network. This prevents ISPs from holding content providers to ransom, but turns access into a commodity and provides no QoS guarantees for consumers or content providers.
• Without net neutrality, ISPs are free to create tiers of video service and charge accordingly, either bundled or a la carte. In principle, this allows consumers to choose to pay for the quality of video they prefer. In practice, ISPs would have the ability to treat different content providers differently, which could be anti-competitive.

Project Canvas points to a possible third way between these two poles. Under a Canvas-like system, the platform would be open, which would remove the ISP's power to control access to content. However, there would be guaranteed QoS, which would be better for consumers and content providers than the current unpredictability of the public Internet.

The IPTV industry is finally facing up to OTT-TV, and this will result in a variety of responses. Some telcos will continue with a traditional, vertically integrated walled-garden IPTV strategy. Others will migrate to a hybrid approach, combining their IP delivery with broadcast services via satellite or terrestrial networks. Still other telcos will abandon the development of their own branded TV services and focus on providing IP video delivery and associated services to third-party content providers and aggregators.

However, telcos' ability to choose among these options will depend on what approach regulators adopt toward net neutrality. Project Canvas points to an interesting third option between the traditional two extremes. Regulators need to determine how to define and regulate openness within a Canvas-like value chain to balance the needs of consumers, content providers, and ISPs.

"The IPTV Industry's Focus Moves From Technology to Revenue"

"The Future of Television Will Require Channel Integration"

"IPTV Seeks Differentiation"

"Broadcast and Broadband TV Distribution Are Converging in Hybrid Services"

"Two Roads to TV 2.0"

"The Race to Dominate the Future of TV"