VOD has a bumpy ride in the UK

June 06, 2011
For an informed view on connected entertainment in the UK & Ireland, visit Cue Entertainment 

The Video On Demand (VOD) service SeeSaw will shut down later this month, a victim of legislative interference and consumer indifference. Arqiva, the company that acquired the assets from the wreckage of the joint venture (JV) between BBC Worldwide, ITV and Channel 4, has bowed finally to the inevitable. After two years of intensive care, the erstwhile Project Kangaroo is dead.

The losers are the content owners who have fewer outlets for their rights and the users that have supported SeeSaw over the past 16 months. The winners might be US DVD-by-mail and online streaming service Netflix and advertising-supported VOD service Hulu, which have been knocking on the UK’s door for a while. The demise of SeeSaw might be the cue for one or both of them to enter the British market.

When the Competition Commission inserted the last-but-one nail in the coffin of Project Kangaroo in February 2009, several expert witnesses lined up to testify that there would be “a substantial lessening of competition” if it survived. The list of complainants includes Joost, Babelgum, Virgin Media and News Corporation, which is a major shareholder in Hulu.

Only the Producers Alliance for Cinema and Television (PACT) spoke out against the closure of the JV. In its submission, PACT said, “Prohibition would slow the development of VOD in the UK, lessen consumer choice, undermine the network TV model in the on-demand age and undermine investment in UK content.” The passage of time has shown how right PACT was.

Four months after the Commission published the report that put an end to the JV’s plans, Joost pulled out of the VOD market. Joost CEO Mike Volpi made his excuses and left in July 2009 with the parting words, “In these tough economic times, it has been increasingly challenging to operate as an independent ad-supported online video platform.”

Babelgum, despite its advocacy of the open market and an Italian billionaire backer with deep pockets, provides very little long-form content that would attract a British audience. An advertising-supported site, Babelgum offers a collection of video clips and entertainment unknowns sprinkled with BBC content. The package bears little comparison to YouTube, let alone to a full VOD service. In its submission the company said, “ … prohibition is the only remedy which adequately addresses all our competition concerns and results in the lowest costs to third parties and/or the market”.

Both Joost and Babelgum got what they wanted, although stopping Project Kangaroo in its tracks produced no discernible benefit to their bottom line.

The Commission reported, “We found that there was a wide range of existing and likely future VOD services being offered in the UK. These were all at a relatively early stage, and offered a range of different business models and approaches to pricing, as well as different content aggregation strategies … including VOD services on a download to rent and download to own basis to UK customers through Tescodigital.com in early 2009.” The latter has yet to happen.

Project Kangaroo was ready to roll with a London staff of 50 people and a marketing campaign in place when the Competition Commission closed it down. Arqiva picked up the pieces in August 2009 after the mobile phone operator Orange pulled out of talks to acquire the technology. By that time, public and media attention had turned elsewhere.

Two years after publication of the report, few of its predictions have proved correct and its authors have achieved precisely what they set out to avoid. Competition in the UK VOD market is now substantially lower than it was before the Competition Commissioners became involved.

Despite a spirited attempt to establish SeeSaw as a brand, Arqiva never had adequate funding in place for the premium content acquisition and aggressive marketing campaign required to compete with Virgin Media, Sky Anytime+ and BT Vision. One look at Sky’s boast that it offers “the only VOD service to be rated five stars by the Sunday Times” (a News Corp. newspaper) reveals the power of the forces lined up against SeeSaw.

Inexplicably, the Competition Commission dismisses the potential for overseas content on a VOD service. “We found that familiarity with content was important and that non-UK content that had been broadcast on linear TV in the UK is a closer substitute than other non-UK content. Our assessment of negotiations for the wholesale supply of content also indicated that for VOD viewers, non-UK content was not a good substitute for UK content.” 

Tell that to fans of “The Sopranos” or “The Office” from the US; “The Killing” from Denmark, or “Wallander” from Sweden.

Elsewhere in the report, the Commission says, “Hulu told us that it had held very productive discussions with many of the largest third-party producers in the UK. However, it judged that the content available from these companies was insufficient in total to represent the critical mass needed to launch a successful online offering in the UK.”

Therefore, with Kangaroo out of the way, the companies that objected to its existence could cherry-pick content from JV sources, dominate pricing and ignore third-party content producers. If anything sounds anti-competitive, that does!

With SeeSaw gone too, North American content creators and aggregators must be licking their lips as they eye the potential of the UK market. Last month, the financial analyst Trefis tipped Netflix to make the UK its next port of call and judged that there are 18.7 million broadband households with the potential to subscribe to the service.

In an analysis that the Competition Commission failed to provide, Trefis reports, “The UK market is equivalent to the two most populous US states, California and Texas, combined. The total number of households in the UK stands at a little over 26 million, which is less than 23% of the households in the US. While internet households are around 19.2 million, not all of them are broadband. Thus we are left with about 18.7 million broadband households that can potentially subscribe to a service like that offered by Netflix.” Netflix claims 20 million subscribers currently in its home market.

With the domestic VOD business weakened, the door is open to foreign competition and it seems unlikely that the regulators will intervene to close it. Trefis lists Virgin Media, Blinkbox, Lovefilm/Amazon and BSkyB as potential UK competitors for Netflix. It points out that the relationships that Sky has with Disney, Fox, NBC, Sony and Time Warner will ensure access to profitable content and lead to a contest between Netflix and Sky that is similar to the one Netflix faces with Comcast in the US.

The combined output of the JV companies might be no match for the American production giants but together they would have offered a counterbalance to US content. Although the BBC continues to be successful with its free iPlayer catch-up service, particularly in conjunction with Virgin Media, the direct exploitation of its archives on VOD must await the arrival of YouView.

That service began life in 2008 as Project Canvas, the embryo broadband equivalent of Freeview and Freesat. It has jumped through many hurdles in its short existence but the Office of Fair trading gave it permission to proceed in 2010, unlike Project Kangaroo,

The story since then, however, is depressingly similar to the on-off history of Kangaroo. There once were six partners: the BBC, ITV, BT, Channel 4, Channel 5 and Arqiva. Channel 5 is long gone and the continued support of Arqiva must be in doubt. Boxes should have appeared on retail shelves by Christmas 2010 but then YouView delayed the launch until June 2011. The current prediction is “sometime in 2012”, long after connected TVs will dominate the displays in CE stores and too late to have much impact on the digital switchover.

Constant meddling and changes of technical direction have led some of the best and brightest brains involved in the project to abandon ship. Technicolor announced in May that it is to withdraw as a manufacturing partner for the YouView project, presumably to concentrate its efforts on Hybrid Broadcast Broadband TV (HbbTV), the proposed European standard.

YouView announced a new chairman in March in a bid to sort out the confusion and delay. It will be the Amstrad founder and set-top box tsar Alan Sugar, who sold his company to News Corp’s BSkyB in 2007. His predecessor, Kip Meek, arrived from Ofcom and occupied the position as YouView Chairman for less than seven months. 

With luck, Lord Sugar will have an apprentice ready to fill his vacancy when it occurs.