'Driving Digital: What's In The Box Or On The Box'

RTS Speech, Thursday 28th June

Nigel Walmsley

When I look back on the first 1000 days of digital television I am reminded of

"Driving Digital: What's In The Box Or On The Box"

RTS Speech, Thursday 28th June

Nigel Walmsley

When I look back on the first 1000 days of digital television I am reminded of the definition of a Jewish telegram:

"Start worrying - details follow."

It felt at one stage as though the evil spirits lurking in the forest woke up and thought - "Oh goody, we can have some fun with this??." and so, if it couldgo wrong, it would go wrong. Telewest had a supply failure with its digital boxes, Sky's brave Open venture did not catch light, and ONdigital's coverage fell well short of expectations. The cost of boxes did not fall as rapidly as hoped, the costs of sports rights headed north, and the regulators got their knickers and ours in a twist on any number of issues. The goblins and gremlins had a field day.

And yet??.. there are now well over seven million digital homes, and growing, made up of around 4 million converts from analogue pay television and about 3 million new homes, of which about 40% have been recruited by ONdigial, about 50% by Sky and the remainder by cable: equivalent to about 30% of homes of which almost half were recruited in the last two and a half years - or real growth of 5% of homes per year. At this rate we should be able to get to around 60% of homes by 2005. A remarkable achievement by any standards. Digital TV- with ONdigital playing a major role - is well on its way and a sure sign that we are on the right track.

So how did we all recruit three million new digital homes? Were they drawn by the clever technology or by the content? I could fall back on quoting from William Golding's "Adventures in the Screen Trade" and say that in the entertainment business "no one knows anything" but, in truth, we do know. It's content which prompts most consumers to take up digital TV. What is less clear is how clever technology affects their thinking and behaviour. We don't have as good a fix on that and our ability to predict what will appeal is still a hit and miss affair. That's nothing new. Here's a familiar example from long ago.

Many years ago there was a famous radio advertising campaign voiced by Mel and Gryff promoting the new Philips TV and video recorder. The message was that this new model was simple to use. The salesman was confronted by a techno crazed buyer who insisted on buying the appliance with the most knobs on it and ended up buying a washing machine because of its superior knob count! That ad certainly spoke to my condition - 20 years later I along, I suspect, with a great many people, still cannot set the clock on the VCR and unless they start giving away 5 year olds with every new VCR - I never will. Yet I would not be without a VCR in my home. It has become an essential part of the living room furniture in over 80% of homes - and still outsells DVDs by a considerable factor. And what is the VCR mainly used for? Well, all that clever time shifting technology has limited use. On average not more than 2% of all TV viewing is time shifted. No, the VCR and DVD recorder are mainly used for watching rented and purchased videos - and who are the greatest customers???? Small children. Children's videos out sell all other videos - as those of you who have or have had young families will know to your cost. We've all been through those mind numbing hours of watching the same animation fifty or sixty times, often watching them in a state of catatonic addiction long after the little darlings have fallen asleep, or, during the 100th replay of Cinderella, losing control and screaming: "Look, the slipper fits, she marries the Prince, that's it - now scram".

My point is this. Did the early manufacturers of VCR's think that children would be their main market? I doubt it. Any more than the makers of second generation mobile phones thought that there would now be 100 billion text messages a year worldwide or that most teen and twenty- something transient romances would be terminated by a terse "you're dumped" text message. For a younger generation the mobile text message has become an essential feature of daily life.

So, on the basis of these two examples you might conclude tentatively that consumers have an indistinct and uninformed idea about "what's in the box" - the technical functionality if you like - when they buy new equipment - but thorough a process of trial and error, work out what they find useful and, over time, it becomes indispensable. Life without it becomes inconceivable. Life for digital planners would be easy if, today, we could predict with a reasonable degree of certainty what will be digital TV's equivalent of text messaging. Will it be pay per view, video on demand, email, internet access, services interacting with content or advertisements, high speed text, data rich news services, picture in picture, shopping, choosing your own camera angles, built in browsers, PVR hard disks, TV betting, increasingly clever EPGs, voting, playing along with game shows, drop dialling or none of the above?

If you think I am about to predict which are going to be the killer applications - you are in for a disappointment. I am a member of the Alan Greenspan school of public speaking. Last year, after giving his views on interest rate and economic growth trends at a press conference, he was congratulated by one analyst on his clear and unequivoral presentation.

"If you think that what I said was clear and unequivoral", he replied, "you have obviously misunderstood me".

There are some technology features which look like winners. The EPG itself is now in common use and for many digital households the natural choice for channel selection and for listings information. Viewers seem to like voting, and they seem to like pressing buttons for more text or pictures to accompany programmes in real time. You might group these functions under the heading of "things I can do to enhance my viewing experience here and now while I am sitting in front of the tele". Interestingly these are also technologies that are relatively low cost to supply - needing little extra storage or processing power and can be promoted in real time by the very channels whose content they are enhancing.

There are some signs that pay per view is growing in popularity. But for some functionality - video on demand or TIVO type recording devices - for instance the jury is out. The choice of more titles on video on demand is enormous and the technical powers and convenience of TIVO and PVR's are tremendous, but, at this stage in their product cycle, the incremental cost to the consumer, even after subsidy, feels more than the incremental benefit. How much are consumers prepared to pay to replay the replay, as it were? Will they take off as prices fall? I just don't know. But, while in the short term their take up is marginal it is worth reminding ourselves how slow consumers are to change their habits. It is remarkable how often authors of business plans forget this simple truth. So many business plans essentially say - have brilliant idea, launch into receptive market, pedal away to meet instant huge demand, make big profits, bask in adulation of peers, retire rich and happy, watch cricket on TV all day, wonder why wife has left home?????..

I am indebted to Rupert Miles, Carlton's former new technology supremo who was fond of reminding us of an episode of South Parkin which the town was subject to a rash of underpant stealing. Eventually the town posse tracked the thieves to their secret cave. Alas the thieves had fled - leaving behind them a note pinned to the wall headed "Business Plan". It read: Step One: Steal underpants Step two: question mark. Step Three: Make Profits. Answering that question mark in the middle for me is frequently "patience or 'its' dogged that does it" if you can afford the time and money to hang in there.

It's worth reminding ourselves just how long it can take consumers to pick up on new stuff - particularly in the field of media and technology. It took commercial radio almost 20 years to win a 50% share of listening. It took Vodaphone eight years to acquire its first million UK customers. Now, over 70% of the UK population has a mobile. It took 10 years for pay television to get to 9 million homes which means that 15 million homes still only have the five free analogue channels. Three years after the mass market launch of DVDs in the USA more VCRs were sold last year than in any previous year: 23 million against 10m DVD players.

Why do consumers take so long to pick up on new stuff when it offers real benefits like more choice, more convenience, more functions, falling real prices, easy access? Well, here are my four suggestions:

First:

Fear of obsolescence. Will next year's model be better than this years? So much opinion research - including last week's DCMS study - suggest that many people intend to go digital but not immediately. To misquote St. Augustine "Oh Lord make me digital but not just yet".

Second:

We have an aging population and propensity to change diminishes after 40.

Third:

There is a high level of inert satisfaction with established services - free TV, fixed phones, and video's for instance.

Fourth:

And most importantly, you have to experience new technology in order to put it to use and value it - a point well illustrated by two separate pieces of research over the past year. The first, from BRMB International suggested that only 4% of those intending to buy digital TV thought that interactive TV would be a material benefit. The second, from Continental Research suggested that once consumers had bought into digital TV, over half find it better than they expected and their use of the extra technology was higher than they themselves anticipated that it would be.

So??.. what I get from all this is five tentative conclusions:

1.At this stage in the consumers knowledge what's in the box probably isn't a reason why people take up digital television.

2.But once they have got themselves connected they slowly warm to the technology and they are less likely, as a result, to quit.

3.It's too early to say which clever functionality will be the digital TV equivalent of text messaging - so we need to go on giving consumers lots of things to try.

4.Big expensive new functions run up against price barriers.

5.Low cost facilities that enhance the "make it more interesting while I am sitting watching now" seem to be better received - the key phrases are cheap to buy and simple to use.

'??..and now for the commercial. it's been a terrible strain being even-handed so far this evening but there is one piece of technology which could prove to be a killer application - it's an ONdigital (shortly to be ITV digital) exclusive and it is this = the digital multi-channel set top box of the future.

It's called a CAM - Conditional Access Module. It's the world's smallest set top box - as you can see it is the size of a credit card. It slips into the back of any integrated digital television and delivers access to multi channel subscription television. It costs around£40. You call ONdigital/ITVdigital, give your credit details, we send you this card in the mail, you stick it in the TV and - er- that's it. No box, no installation, no nothing. Easy for the consumer and reduces the cost of acquiring a new subscriber by over 70%. It is an important step in positioning DTT as the natural heir to analogue television.

BUT, as we all know - the first step is to motivate and catch the consumer - and all the practical evidence, market research and common sense says that it is content that does it. Content recruits and functionality makes it stick. And the content story can be divided into two parts. First, what do you need to do while digital homes are a minority of the country and second, what can you do when we have complete digital universe.

The script for the first part is largely written. There are four main reasons why consumers choose multi-choice television = more choice, sport - and that is mainly football, with golf, cricket and some other sports in a supporting role, movies, and childrens. They cost a lot to provide and so consumers will have to pay for their choice and that means subscription. And consumers will, by and large, only pay to get what they know they want and that means that the content on offer has to be already famous - the Champions League, Manchester United, Titanic, MTV, Friends, or world famous cartoon brands. All of which militates against original content. You can enhance famous content on pay television but it is much harder to make the unknown famous. You can give already famous dramas and soaps a new lease of life by repeats and second opportunities to view and you can give relatively low cost quality acquired material a certain notoriety - but the drivers of free television - high end dramas, long running soaps, event programmes and the like - need mass audiences to justify their costs and advertising support. So I don't expect new killer content to emerge at any time soon to challenge the supremacy of the established pay TV digital drivers.

That's not to say that there isn't a place for the digital pre-view, the first run on pay of new shows of already established series. I think that broadcasters have been over-cautious about the potential of this. We know for instance that when ITV defers an episode of Coronation Street to make way for a Champions League game, but plays the episode in its standard slot instead on ITV2, there is a massive increase in ITV2's audience without any discernible impact on the audience figures for the main deferred broadcast.

In short, the industry needs to make more intelligent use of the content it has rather than continually adding more and more channels. The salutory reality is that a small number of pay channels account for the lions share of digital pay viewing and a large number of channels account for very little. Just ask the Money channel. Audience research shows that in multi-channel homes only 8-12 channels are regularly watched and only a handful enjoy more than 2% viewing share.

We are clearly now on the verge of channel consolidation. The economics just do not stand up. Inevitably, probably desirably - fewer but better channels will sharpen the proposition. Thomas Beecham famously said that "we should try everything once except incest and folk dancing". Well, the pay television business has tried most things once - and some of them don't work - so as Ray Snoddy said at last months RTS dinner, "let's have a bit of a reality check".

Of course, in the second phase, as digital homes become the majority and ultimately the total universe then new original content can begin to take its rightful place and we might begin to see high end quality material commissioned for networks - just as we have seen the growth in original content commissioned by the USA pay networks - HBO, or USA Network for instance, when the financing of new material can be supported by bothsubscription and advertising but that is not near term.

The next phase is, I suggest, a new synthesis in which, with the established drivers as the bedrock, we encourage fewer more focused content rich channels, exploit existing content more intelligently across channels and integrate their presentation more closely with value enhancing functionality.

Just for a moment let us see how the main broadcasters stack up against this '

BSkyBFull marks for platform investment and for pushing what's in the box as hard as they can. but little history in commissioning original content - with various efforts falling by the wayside most recently Sky Pictures.

Channel 4A bold effort in launching content rich E4 and real innovation in exploiting digital opportunities across channels and functions with Big Brother, but relatively little direct participation in building platforms and distribution.

BBCWhat can I say? Although the UK's largest broadcaster, their participation in building and promoting digital platforms has to date, been marginal to zero. They have not contributed digital driving content and they have devoted more energy and resources to developing internet services than they have to digital television - No E4, no Interactive Millionaire, no new dynamic channels, no promotion of IDTVs, or digital TV kitemarks, no investment in set top boxes. Yes, there is interactive Wimbledon - but why is this developed and promoted particularly for satellite? The BBC were gifted their own DTT capacity so that they could remain in control of their own distribution destiny and not become reliant on third party gatekeepers. Why are they are they overlooking their DTT future in this way?

Channel 5 Er - well - nothing to say really. They were gifted with DTT capacity. They don't really use it - they just rent it out. No content, no functionality, no promotion.

Which brings me to ITV and last month's announcement to bring ITV and ONdigital together in an integrated strategy. Uniquely in the UK this combines all the content, scheduling, channel rights and promotional resource of the UK's second largest commissioner of original and popular programmes - and the digital terrestrial champion with its infrastructure of consumers' equipment, subscriber management and technology investment in interactive TV, pay per view, the internet and email on TV, interactive games, EPG and premium sports rights.

This new partnership is an unique opportunity to blend interactivity with content, to deploy content across channels, to buy free and pay rights in an over-arching content strategy, including the shortly to be launched ITV Sport Channel, to cross promote, to offer viewers and subscribers a composite viewing experience - in short to bring what's in the box and what's on the box together in a way no other broadcasting partnership can, to schedule free and pay channels as part of a common architecture, to create opportunities for famous free brands to expand in a pay and interactive environment. All this is a major contributor to driving digital - and ONdigital - forward.

But, I am still a founder member of Ray Snoddy's reality test club. There is still quite a way to go. No one in TV is making money in digital television - yet. All of us - Sky, the cable operators, ITV digital - are effectively building a new national communication infrastructure - and infrastructures don't come cheap. Where I part company with Ray is around his question "What's the hurry? Surely the existing system can cope for a bit longer?" I'm not sure that it can. There is a hurry. Infrastructure costs - e.g IDTV's, transmission, set top boxes, chip sets - have to fall to give enough margin for broadcasters and platform operators to go on investing. They will only fall fast enough if we continue to maintain good growth in demand. However good current growth rates they are short of what is needed to achieve switch off in 2006, or 7, or 8. There is an achievability gap - and here are three things the Government could do to help if it is serious about early analogue switch off and backing digital Britain and releasing the potential of digital television to secure a wider agenda of educational and social goals.

1.Deliver the coverage of DTT as originally advertised. A million plus subscribers in two years with less than 50% coverage on average is no mean achievement. Just think what could be achieved with full coverage. The facts, however, are that the coverage of the frequencies assigned to DTT by the DTI's Radio Communications Agency has fallen short of the levels they and the ITC predicted, on which our plans were built. Our time and money have been spent in achieving some, improvements but the Government planners need to come along with more frequencies (which we believe are available) and more power increases if we are to make progress fast enough - and to do this means unravelling the bureaucratic knitting which makes even the smallest decision take a year.

2.Significantly reduce Channel 3 licence fees. What is the point in asking the private sector (and mainly ITV companies) to finance the build of a national digital terrestrial infrastructure while charging ITV£300m p.a. in extra taxes. Even allowing for the digital dividend Channel 3 will pay£1.0 billion in these charges over the next 5 years. This is equivalent to providing 5m homes (or 15-20% of the population) with free set top boxes or subsidised IDTVs. To make matters worse, earlier this year the ITC partially reversed the downward trend in licence fees and actually increased them by up to a further£50m p.a. No other broadcaster other than Channel 5 pays these taxes which fall almost exclusively on the backs of the very broadcasters who are building DTT.

3.Make the BBC put its shoulders to the digital challenge - by using its enormous power of promotion, by contributing to the take up of DTT equipment (it is currently free-riding), and by focusing its additional income on making content and functionality that exploits all the potential of digital. Perhaps BBC 3 and 4 will be a step in the right direction - but do we have to wait for these? What is to stop the BBC now from promoting IDTVs, or DVB kite marks or its own digital terrestrial multiplex capacity?

Conclusion

Universal digital is a big prize - for the consumer - access to choice and information: for Government - a digital delivery of information and services and a dividend from redeploying spectrum following switch off: for broadcasters new horizons and, with DTT, a route to maintaining control of their own distribution; for producers - a new key which will one day unlock new creativity. OFCOM and a Communications Bill will be a help when we eventually get them - but, in the real world we need to maintain momentum now.