Sunday, February 16, 2014

Quarterly Second Screen Market Trend Update

2nd Screen had a tumultuous run up to CES 2014 with the press continuing to be split between hype and disillusion.  While we normally would have written and presented this update at CES, we decided to focus on releasing our research on monetization on behalf of our society members to help them and their primary stakeholders (investors, customers, management) cut through the hype and the disillusionment and focus on clear examples of what is working.  Ironically, the additional insight gained in the first few weeks of January has been invaluable with regards to both consolidation (Yahoo closing IntoNow) and M&A (Viggle buying Dijit, TiVo buying Digitalsmiths).  NATPE also did the production industry a favor by publishing some great research on enhanced viewing experiences as seen through consumers’ eyes as well as those of the production executives making decisions about where to invest in content development (in-depth blog).  Finally, the holiday season has continued to accelerate the proliferation of devices into the market place, driving continued growth in engagement and monetization opportunities for the 2nd Screen companion and viewing experience ecosystem.


In this brief quarterly summary, I am going to make references to our published research, as well as to blogs and conferences we have hosted and attended during the past 6-9 months.  However, the information should still be relatively coherent regardless of your attentiveness to those events.
a)     Market Trends.  Ten (10) major trends continue to define the 2nd Screen market in terms of consumer engagement and monetization:
1)     Hype and disillusionment.  First and foremost, similar to my letter to 2nd Screen Society members in our annual journal, the second screen market is in the life cycle stage somewhere between the Hype and Trough of Disillusionment (a graphical metaphor developed by Gartner).  The natural consolidation of such a nascent space (both by failure and M&A) and the hangover from journalists and investors from the previous market hype is going to generate a fair amount of negative press.  But as sure as the web did not die after the 2001 dot com crash, neither will 2nd screen go away because of failed investments, poor user experiences or negative press.  Keep in mind that what is driving this market isn’t prescient investors or clever experiences, but the sheer proliferation of tablets and smartphones and consumers’ natural tendency to reach for them while watching “TV”.  Evidence of consumer engagement and monetization is what all of us should be focused on—not salacious headlines in the press.
2)     An ecosystem, not an app.  Chromecast continues to make their push into the marketplace.  While so many players in the market place focused on an app, Google was able to catch Apple and Samsung sleeping by launching an ecosystem that enables any app to leverage its own UX for Discovery and leverage the Chromecast receiver (and the DIAL protocol) for Control.  Expect to see “Cast enabled” apps to start showing Enhanced Viewing experiences to take advantage of the 2-way DIAL protocol (demos already exist) that by definition enables synchronized 2nd screen delivery.  I am still surprised that neither Apple nor Netflix have responded yet.  Apple is starting to show evidence (some AirPlay implementations free up the phone) and we have seen the Netflix experiments in the marketplace for sometime.  Samsung seems to have changed direction, letting go most of the internal staff that was driving their second screen investment in San Jose in favour of outsourcing the work to third parties.
3)     Convergence of companion and viewing experiences.  The majority of mainstream apps are now figuring this out either by necessity (implementing Chromecast) or by competitive forces (CBS, Fox, Turner’s sports apps, etc) or out of the need to better monetize their investments (dynamic video ad insertion).  With the continued proliferation of smartphone sizes (phablets) and the march of the full-sized tablet, expect this to become the norm in 2014, developing for 2 primary consumer use cases: the consumer in the living room with mostly companion experience functionality and the consumer on the go (or the millennial) who requires primarily streamed video with less visual real estate given to the companion experiences (mostly discovery and social except for sports which are focusing on social and scores).
4)     Ad supported video on mobile and connected living devices.  Our Q3 summary touted Comscore’s tracking of 22.9B video ads and December’s report contained 35.2B video ads—a 54% increase in only 3 months.  Further evidence continues to reveal itself that the 2nd screen is becoming (or already has become) the dominant digital video viewing device in the marketplace, with 64% of the BBC’s iPlayer traffic taking place on smartphones and tablets the day after Christmas.  With Aereo pushing their services into more markets and more platforms (now on Roku), expect the major networks to respond by pushing their direct to consumer ad supported services to the same “Connected Living Room” platforms to attempt to capture that consumer directly. 
5)     Monetization.  We spent significant research effort in Q4 to help identify where the successful monetization is taking place and to try to quantify the size of potential prize for app publishers.  Viggle, a publicly-traded leading brand in this space, is attracting $7.27 per active user per quarter.  They are once pace to do more than $40 million in the next 12 months—not bad for an app that launched in early 2012.  This market is marching forward on pace to grow more than 300% over the next 4 years, buoyed primarily by advertising and eCommerce.  Taken another way, Tivo announced a definitive agreement to acquire Digitalsmiths, the leading Discovery capability provider for TV services in the second screen market for $135 million in cash—certainly a successful exit for their investors.
6)     The rise of the mobile web.  While PC sales continue to decline at alarming rates, they are being supplanted by the 2nd Screen.  The combination of the explosive growth of social media and general app fatigue has conspired to make the “mobile web” the preferred method for consuming short form media and entertainment.  The positive impact of this trend is that well known brands can more easily overcome the consumers’ inertia to install new apps; something that requires an investment in responsive HTML 5 both within app and as a mobile web experience.
7)     The rise of ad blockers.  Per our previous identification of this trend in our Q3 summary, the challenge presented by video and display ad blockers to the second screen ecosystem is both a threat and an opportunity.  The percentages of affected revenue appears to be rising in certain demographics (gamers, millenials), while the reduction in consumer engagement from PCs verse the 2nd screen seem to be positively affecting the bottom line.  App publishers need to keep a close eye on the technology and demographic trends lest they find their most opportune monetization strategy hijacked by ad blocking services.
8)     Social TV.  There has as of late been negative press about the prospects of Social TV while at the same time near fervor around Twitter Cards and Facebooks autoplay videos (with potential advertisements).  If Vine and Instagram Video are any indication of how powerful short form videos can be in social media, you shouldn’t be surprised to find NextGuide’s Reminder service and Twitter/Comcast’s “SeeiT” feature being combined with in-line video advertisement directly in your second screen app (whether dedicated to social media or as a companion or even viewing experience).  Video has always been more engaging for advertising to consumers than display or text and now that the technology is catching up with the medium people use to communicate with real measurability, the dollars will quickly follow.
9)     Consolidation.  Ironically, this trend should not be surprising to anyone in the technology venture space.  It is well understood that the vast majority of new technology ventures fail in the first few years (90%+) and the vast majority of the successful ventures are then acquired by larger incumbents (called a “successful exit” by the investors), yet somehow the press takes this as an indication that the market is doomed.  How many Pets.com’s failed in the late 90’s?  Yet Amazon is surely proof that eCommerce is a successful business strategy (and market segment) and just because they acquired MyHabit and Zappos does not mean those companies failed but rather they succeeded.  While disappointing that Yahoo shuttered IntoNow (acquired 3 years earlier), the successful exits of Digitalsmiths, Dijit and Unicorn Media are positive indications that investment is continuing to pour into successful business models as larger companies begin placing their bets in this marketplace.  Remember that a company needs both a successful consumer engagement strategy and a successful monetization strategy to survive through to positive cashflow.
10)  Discovery.  TiVo is certainly betting that Discovery is one of the hardest and potentially lucrative facets of the second screen user experience.  Their purchase of Digitalsmiths puts them into the white label discovery service for a huge portion of the U.S. pay TV market.  There is something incredibly powerful about being able to use an interface you are familiar with to search for content across multiple services.  NextGuide, Fan and BuddyTV have all been chasing this powerful consumer use case.  Chromecast is betting that the best Discovery UI is the app you already know well (Hulu, Netflix, etc), combined with the ability to push that content to your larger first screen.  Iris.tv is taking a different approach, providing a service to video publishers that quickly assesses the consumer’s viewing habits based on what they are watching to concatenate other desirable clips into a TV-like experience, increasing viewing time by as much as 30% (their claim)—which increases revenue by the same in ad supported models.
b)     Market sizing.  We took a bold stance in our research report (page 55) on revenue in the 2nd Screen space, claiming that 2012 had already seen $490m of attributable revenue from this market segment and the we expected the market to reach $5.9B by 2017.  When I stood on stage at CES 2013 to discuss this, there was a lot of disbelief in the crowd.  We walked the room through the breakdown of mobile and online video advertising  ($6B growing to $17B) and m-commerce ($76B growing to $158B) and out logic for the incredibly small sliver of those markets that will be captured by 2nd Screen experiences in the living room.  Right out of the gate, Super Bowl 47 had press for CBS Interactive claiming to have sold $10-12m in advertising for the 2nd Screen along.  While m-commerce has not yet taken off, the “Show me the money” panels we have moderated over the past few months continue to demonstrate a few strong trends in the space around interactive advertising (CPT or Cost per Touch via @JesseRedniss), Tune-in revenue (classic affiliate model), display advertising, and the lucrative in-stream video advertising powered by new technologies that combined the video stream and ads for converged sporting apps and mobile experiences on the fly with CPMs that are already challenging classic broadcast TV in value.  Mentioned several times above, Viggle with a mere 3M active accounts is attracting revenues of $4.6M per quarter currently, but growing at a rate of 289% year on year.  The market is revealing itself rather quickly and our latest forecast has this market growing to nearly $9 billion by 2018.
c)     Consumer app experience.  To round out the Q4 view, we should look at what applications have significantly improved their feature set.  This is important because no matter what the revenue or business model is for a particular app experience or ecosystem, if the consumer isn’t engaged and using the app on a regular basis, there is no opportunity to attract revenue.
1)     Sports.  The Super Bowl made strides across multiple sets of apps, but especially in the NFL’s official app.  However, HuluPLUS surprised everyone by building a companion experience for the ads of the Super Bowl, allowing you to vote on which ads were your favorite, driving their ranking higher in the app itself.
2)     3rd Party Apps.  Xbox Smartglass for Xbox One has been even stronger than its predecessor.  Rosa Thomas did an amazing job demonstrating a number of the newest gaming apps with 2nd Screen experiences at CES.  Machinima’s Wingman app and the NBA’s Gametime app will only further cement that dominance.
3)     Network apps.  Showtime Sync continues to develop is companion feature set while a wide panel of show producers confirmed how important companion experiences are in NATPE’s published research.
4)     Converged experiences continue to gain momentum.  HBO, CBS and Fox continue to further develop their converged consumer experiences.  However, in the next few weeks both the Masters and March Madness will come out with their 2014 app experiences—something worth waiting for is past experience is any guide for us.
The conversation at CES 2014 was fantastic, with more than 350 people joining us for our Monday afternoon event in Las Vegas.  We are looking forward to continuing the next conversation over dinner at MWC in Barcelona on February 26th in Barcelona and at 2nd Screen Sunday @ NAB in Las Vegas on April 6th (www.2ndScreenSummit.com),  and of course through our blog and Twitter activity (@ChuckParkerTech, @S32Day).
Look out for the next quarterly update on our research in general and a deep-dive report on sports on April 6th at our NAB event.

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