Santa Clara entertainment information firm to benefit from FCC proposal

Acceptance of the FCC's proposed AllVid standard would lead to tremendous growth among metadata and interactive programming guide providers, including Santa Clara based Rovi Corp.

The FCC is poised to implement a sweeping new regulation that would extend access of television channels and exclusive content to third-party consumer electronics manufacturers.

Under the proposal, submitted last April by FCC Chairman Julius Genachowski, the new AllVid provision would create a standard adapter to accept television channels, tuner functionality and guide programming and in turn pass it to “smart devices.” The end result: a perennial “shopping mall” of video content whereby users could freely access television listings alongside Internet-based video  (over-the-top content) and content from users’ home networks.

Currently, consumers must lease set-top boxes from multichannel video programming distributors (MVPD), such as Comcast and Direct TV, to access channel listings as well as premium content, including on-demand and pay-per-view services. Under the AllVid system, MVPDs would no longer retain a monopoly on the set-top box market. Consumer electronics manufacturers would be able to incorporate the MVPD signals into their devices, allowing users to choose which program they’d like to see irrespective of the content source.

MVPDs remain fearful that such a proposal would decrease the value of their services and that their transmission lines would be reduced to “dumb pipes.” However, members of the Consumer Electronics Association, which represents the interests of over 2,000 companies involved in the manufacturing, distribution, sales and applications of consumer electronics equipment, contend that the proposal would restore competition to the market and lead to increased innovation in the digital media sector.

For companies like Tribune Media Services, Baseline, IMDb and Santa Clara based Rovi Corp. (NASDAQ: ROVI), which maintain extensive collections of piecemeal program information (metadata) and create customized interactive programming guides (IPGs), the new platform could lead to a bonanza of new business.

Replacement standard long overdue

Over the last decade, media consumption behaviors have drastically changed in the United States. Individuals now access entertainment content from multiple sources, regardless of their physical location. They stream movies to portable media players and mobile phones, rent movies from their television and even watch live sports broadcasts on their laptops. Yet one critical barrier remains preventing the integration of these sources: access to television signals provided by cable, satellite and IPTV companies that distribute Internet TV services distributed over phone lines such as AT&T’s U-verse.

Only four consumer electronics manufacturers – Tivo, Moxi, ATI, and Ceton – currently produce devices that support the FCC’s CableCARD tuner that allows for the decryption of video signals provided by MVPDs. Few of these devices support additional two-way functionality that allows users to access premium on-demand and pay-per-view content.

“Cable operators have deployed 18.5 million leased devices pre-equipped with CableCARDS, compared to only 489,000 CableCARDS installed in retail devices connected to their networks,” said FCC Commissioner Mignon L. Clyburn in the FCC’s AllVid Notice of Inquiry.

Nevertheless, the demand for MVPD-provided set-top boxes has meant good business for Rovi. The company has experienced tremendous growth in the service provider market, selling programming information and interactive guides to the top five MVPDs and many others.

“In Q4 2010 we continued to benefit from double-digit percentage growth in our digital offerings due to increased shipments of IPG-enabled devices and sales,” said Rovi’s Chief Financial Officer James Budge during the company’s latest quarterly earnings call.

Cord-cutting and its effect on MVPDs

Yet the market for programming data and interactive content guides seems to be shrinking. MVPDs have seen their subscriber numbers plummet as consumers dump their television providers and move toward the Internet as the primary source for television shows and movies, a phenomenon the industry has dubbed “cord-cutting.”

According to a report from industry analyst firm SNL Kagan, the fourth quarter of 2010 saw a combined gain of 65,000 subscribers compared to 251,000 subscribers during the fourth quarter of 2009. In 2010, MVPDs experienced an overall increase in subscribers of 211,000 compared to 1.8 million new subscribers in 2009.

The biggest losses within the industry came from cable providers whose 2010 losses represented a 42 percent jump over 2009, with market share dropping below 60 percent as both satellite and telecommunication providers experienced medium growth over the same time period.

“Despite the inconclusive trend lines between sub adds and sub penetration rates, the fourth-quarter gains do reinforce the importance of multichannel video, and we project more stable macroeconomic conditions will guide the way for absolute video sub adds if not gains in penetration,” according to the SNL Kagan report.

However, the firm did substantiate concerns over the increasing number of screen and access to content previously exclusive to MVPDs.

“The changing content landscape impacts the potential pool of video subs negatively so we expect intra-multichannel competition to escalate while video penetration rates decline over the long-term,” wrote SNL Kagan.

Rovi prepared for changing media consumption landscape

Given the leveling off of MVPD subscriber growth and increased pressure to enable video consumption from a variety of sources, the market seems ready for the regulatory intervention included in the AllVid proposal, analysts say. The new system would establish an adapter enabling “smart devices” produced by consumer electronics manufacturers to access television channels, tuner settings, programming data and interactive guides provided by MVPDs. These “smart devices” could then juxtapose this content alongside over-the-top media to create a comprehensive media browsing experience. It would be similar to shopping for groceries at a single, large supermarket instead of visiting different markets for each separate food item.

Rovi, anticipating this change in consumption habits, has already established itself within the new media ecosystem with its latest MediaCloud offering, which the company unveiled at the 2011 Consumer Electronics Show.

MediaCloud utilizes various web-based services, such as search and recommendation engines, programming data and advertising, to deliver a robust user interface through which users can discover and access media content.
Available for a variety of platforms (including televisions, desktop/laptop computers and mobile devices), MediaCloud only requires an active Internet connection to deliver its array of services.

“Rovi is helping our customers and companies in the entertainment industry bring a variety of products for the connected digital entertainment experience,” said Corey Ferengul, Rovi’s Executive Vice President of product management at the 2011 CES.

At the demonstration, Rovi presented a customized user interface integrating web-based video and users’ personal content on a Samsung television. Rovi hopes its other customers, including nearly every major television manufacturer (i.e. Vizio, Pioneer, Sharp, Philips, Panasonic, etc.), incorporate MediaCloud services into their new lines of web-connected “smart TVs”. Though sales of “smart TVs” remained tepid in 2010, Rovi and consumer electronics manufacturers expect these sets to be more attractive to consumers if the AllVid proposal were approved by the target date of December 31, 2012.

Meanwhile Rovi’s short-term growth is expected in the area of mobile entertainment. While the company has built IPG apps for mobile phones and tablets, “the app is merely a beginning for us,” said Rovi’s President and Chief Executive Officer Fred Amoroso during the company’s Q4 2010 earnings call. Amoroso envisions the creation of a new basic “white label” app capable of delivering MediaCloud services to consumer electronics manufacturers and MVPDs, spurning increased competition among the two customer bases.

Should the AllVid proposal become an established standard, consumer electronics manufacturers and MVPDs would be free to display their own IPGs, allowing the end-user to choose which guide suits them, said Ferengul at the 2011 CES. For Rovi, which stands poised to charge premium prices for programming data and interactive guides, analysts say, competition is likely to bear better business.

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