Network Insight Institute

Malcolm Alder

Malcolm Alder, KPMG Consulting

So where does the money come from? All of this, when it's all said and done, comes down to the money. Free-to-air television is driven by advertising revenue, pay TV by subscription revenue from people like you and I, who are prepared to pay a certain amount of money a month for a value proposition which will vary from a basic subscription to a somewhat more expensive one.

So the fundamental question is will that current revenue model change significantly as we move ahead? You do need to look at the cost side of that equation, but really unless the revenue model is going to support it, then it's going to be pretty difficult.

There was a lot of talk this morning about set-top boxes and end-user equipment in the home. Jason Romney also put up a number of scenarios all of which, as I recall, were predicated on some level of subsidy.

Clearly two things have to happen. Firstly, the unit cost of set-top boxes has to fall before people are prepared to pay for it. I am not going to delve back into the issue of multiple platforms and so on but clearly, as we know, that's far from insignificant in all of this. Who is going to pay for the set-top box? It is unlikely I would say that we are going to see the mass support of the Sky view of the world in the UK, with the amount of money that they invested from a sin-gle source. So this is an open question at this stage.

The next question is, will the free-to-airs invest in their own end-to-end networks required to close the loop and have a back channel and everything else? Logic says to me that that is not intuitively a sensible economic thing to do. I have a view that both in broadcasting and in telecoms people recognise that overbuild and replication of infrastructure is a chronically wasteful use of resources, not just for that company but at a national level.

I would therefore endorse the whole notion of 'Platform Co'. I see a future where a 'Platform Co', be it broadcasting or telecoms, is really just a separate financing vehicle, the same as basically a property trust is today. What goes on within the building is entirely separate to ownership of that physical infrastructure.

On the availability of content, my view would be that once we get over some of the hurdles that Jason Romney was discussing this morning, for example of the need for some certainty about what platform you are creating to, content will become available and then it will just be about selection of the fittest. There is no shortage of content in a general sense, available in all forms of media, and I don't see any reason to believe that it won't just flow fairly naturally to digital and interactive TV.

In the UK, we need to remember that Sky did have a killer app. I generally hesitate to use the term 'killer app' but Premier League soccer is without question the killer app that has driven Sky. Now Channels Nine, Ten and Foxtel in their new consortium have placed a fairly significant bet on AFL. In terms of the way it covers demographics and geography and so on, the AFL is the closest we have to the Premier League.

Having said all of that, I though I would just quote from the yesterday's Herald:

Murdoch was instrumental in stitching up the (AFL) deal, potentially signalling a turning point in the protracted battle for supremacy in the pay TV industry (Annie Lawson, The Herald, 15 October 2001).

The article also quotes Murdoch as having previously said 'sport absolutely overpowers film and everything else in the entertainment genre'. In the entertainment genre I would agree. I think that more broadly, over time, the potential for gaming and gambling and associated things is enormous, legislation in the Australian environment notwithstanding. Obviously we need to temper that with social policy to protect people from themselves if required.

So when will interactive television come? The major challenge, as we have said, is the existence of a compelling value proposition to the viewer. I firmly believe that is achievable. However, what they are prepared to pay for that proposition, both in terms of the set-top box and the services available, remains an open question. Nevertheless, I think it is possible to create pricing points at which consumers will take those things up in pretty significant numbers if everything else falls into place.

It will however be a progression. Rob Nicholls talked earlier on this morning about the lean forward/lean back medium. The original early-day stuff of Web TV and so on was very much about transplanting the Internet to the TV. That has now pretty much been blown out of the water. The sort of fairly aggressive Bloomberg channel, with the L-shaped tickers and everything else, does not have the general permission of the audience. We need a progression over time.

For some quick concluding remarks. Yes, interactive TV needs to be a logical extension of current TV behaviour. In Australia, I don't think there is a single killer app. There is however a well packaged proposition of sport and gaming, with entertainment and education acting as supplements to those main two drivers. Altogether these ingredients can make a compelling proposition.

The two key issues that we are yet to overcome are the economic burden of sharing the costs around, and ownership of the customer. I don't think that any of us have the crystal ball answer to these issues. It does become particularly murky if we take that environment I talked about earlier, in which the free-to-air operators choose to share infrastructure with pay TV operators. Here you would have a debate between the free-to-air, pay TV operator, pay TV chan-nels, the advertiser and possibly even the middleware provider, as to who actually owns the customer. That is a pretty difficult mix.

It is fairly obvious that the local pay TV operator constraints need to go. I also think that the advertisers need to take a more pro-active position. Duane and I spoke a little about this just before we started. He deals with them a lot more than I do, so he has a lot more insight into what they are doing. But given the amount of money that hinges with the agencies in all of this, I would expect them to be taking a much more pro-active position. They may not be able to shape the industry, but they can at least spot where the rivers are flowing and change their proposition.

Quite recently McKinsey talked about the ability to generate US$80 per year per household just in interactive advertising revenue. If we say in 2008, 40 per cent of households have access to interactive services and spend money, then that is about three million homes. We take a straight translation from the McKinsey figures of $80 Aussie dollars rather than US, then that gives you a potential market in the order of $250 million. This is just advertising revenue. We could maybe scale that up to $400 - $500 million.

The question then becomes, would $500 million be enough in 2008, when you share it across all of those parties that I've just described, who would be fighting over those dollars to get a return on the back end systems, the set-top boxes, and the ongoing operating costs. I will leave that as an open question.

Click here to view Malcolm Alder's powerpoint presentation.

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