ANALYSIS
Is Comcast Barking Up the Right Tree?

In the age of online entertainment, consumers get virtually unlimited choice of content and unlimited means to entertain themselves. They can stream their favorite episode of "Lost" from ABC.com, watch full-length movies on Hulu or even download episodes of shows like the "The Office" from NBCDirect, and they can do it all for free.

These choices offer consumers an unprecedented amount of control over their entertainment experience, which is bad news for incumbent content aggregators: cable, satellite and IPTV (Internet protocol television) companies. The incumbents have to create a way to deliver increasingly sophisticated entertainment to consumers for free.

Amy Banse, the president of Comcast (Nasdaq: CMCSK) Interactive Media, alluded to some of these challenges during her keynote at the Parks Associates Connections event in July

Comcast is a great example of an incumbent provider working hard at establishing new entertainment avenues for consumers. In 2006, it launched Ziddio, a user-generated portal similar to YouTube. It followed up with FearNET.com, a horror movie and community site. In 2008, it launched Fancast, a video aggregation and streaming site.

A Holistic Experience

Not all its experiments have been a success . In August, Ziddio closed its doors (or shut down its servers) for good. FearNET, on the other hand, is alive and growing. In 2007, Comcast expanded it onto the video-on-demand (VoD) platform. This is a critical step for Comcast, as it is trying to build a holistic consumer experience, linking TV, Internet and mobile into one.

Comcast's latest foray into the digital media distribution is the launch of it's Fancast store this month. Using the store, any broadband customer in the U.S. can download from over 3,000 titles. Comcast plans to expand the library to 10,000 by the end of 2008. With the new store, users will have an option to buy or rent the video and download it to their PCs at prices comparable to Amazon's: US$10 to $15 to buy and $4 to rent.

This latest expansion makes me pause to think about what Comcast is trying to accomplish. Have they not learned from iTunes, Hulu and Veoh? What about Netflix (Nasdaq: NFLX) and Wal-Mart (NYSE: WMT), who got their own bruises trying to set up digital distribution?

No Easy Road

Without a doubt, Comcast will face many of the same challenges as distributors listed above; however, in Comcast's case, there are significant benefits that would make this strategy worth the risk and give Comcast a chance to succeed. Let's take a look at each in greater detail. First, let's consider the challenges:

• Unfavorable economics. The same argument that applied to Hulu and Veoh and Joost applies to Comcast: Content owners keep the bulk of the video advertising revenue. Although Comcast did not comment on the revenue arrangements, it did admit that content owners sell ads in the videos featured on Fancast, which usually means that content owner retains 70 to 90 percent of the revenue. With the launch of the Fancast store, Comcast acquires an additional revenue source: consumer purchase and rental fees. However, it is also likely that content owners keep the bulk of those.
• Digital rights ruin consumer experience. Content owners manage media rights very carefully to ensure revenue maximization. This would hinder the delivery of the holistic consumer experience mentioned above. For example, a movie, or a TV episode may be available on Fancast site, but not available on VoD.

  Additionally, content owners are adamant about protecting their content with the digital rights management (DRM) software. Fancast is no exception, using Windows Media DRM. DRM further restricts how viewers can enjoy video. For example, consumers can only watch video on a PC, not a Mac, mobile device or a TV.

  Such limitations also interfere with "for pay" business models outlined above. Rather than downloading a heavily protected video file that can only be watched on a PC, consumers will opt to buy (or rent) a DVD, which can be watched on TV or PC and now even on a mobile device, as some DVDs include digital versions.

• Competition will hinder success. The online video field is extremely hot, with many hands reaching for very little revenue. From the broadcast networks to the device manufacturers, companies like ABC, NBC, Apple (Nasdaq: AAPL) and Microsoft (Nasdaq: MSFT) are all striving to deliver the next generation of the consumer entertainment experience. Standing out in this crowd will require an exceptional product with clear differentiation.

The Rewards

There are, however, opportunities for Comcast in pursuing this strategy:

• Content owners crave secure, multi-platform distribution. As consumers increasingly engage in concurrent media consumption and ad avoidance, the effectiveness of advertising in media decreases. Advertising revenues pose the bulk of revenue for many content owners, and they want to ensure that if effectiveness of one channel, such as TV, diminishes, they have another channel, such as Internet, to supplant it with. Service providers such as Comcast make very good partners for media companies, potentially yielding better revenue splits and more lenient distribution rights.

  According to Alix Cottrell, general manager of Fancast, this is the route that Comcast intends to follow. Current plans will allow Comcast customers with VoD or DVR (digital video recorder) to either copy online content into their VoD folder or have it recorded on their DVR (if the show is only available on linear TV). Comcast plans to implement this service within 12 months. In the next 24 to 48 months, Fancast also plans to launch a mobile component. Initially, consumers will still have to download content to PC and then port it to a mobile device. If the Clearwire partnership is successful, however, Comcast may also launch a direct-to-device service on par with AT&T's (NYSE: T) Mediaflo or Verizon's Vcast. Finally, thePlatform, Comcast's video delivery arm, has recently acquired Chirp, a social application developer, suggesting that Comcast is gearing to dramatically expand social features of its Fancast service.

• Can build biggest libraries. As a media aggregator and distributor, it is easier for Comcast (and most service providers) to build large video libraries. It can leverage its linear distribution relationships to secure content from many providers. It is also not bound by the media ownership regulations that restrict some of the other aggregators. For example, Hulu still doesn't have ABC's and CBS' content in its libraries, and it likely never will. Even if the ideological differences between partners get resolved, media ownership regulations will preclude Hulu from adding more content partners.

So does Comcast's launch of the Fancast store make sense? Will the store succeed? I think it's safe to say that it does, and it will. Of course, it is important to keep in mind that success will NOT be measured by revenue or profitability of an individual property like Fancast. Fancast will, however, condition consumers to seek video online and will also build stronger links in consumers' minds between Internet video and traditional TV.

As content owners relax their rights requirements, Comcast will be in the position to deliver the holistic consumer experience, which envelops consumers in content (and advertising) regardless of where they are or which device they are using. That service may even be compelling enough for consumers to consider opening their wallets!