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Kangaroo court - December 4, 2008

Recommended reading: Dan Cryan and Arash Amel of Screen Digest have an excellent analysis of the UK Competition Commission's preliminary ruling on Kangaroo, the proposed online joint venture among ITV, Channel 4 and the BBC that would allow consumers to download content from the three networks, as well as wholesale the content to other online operators. The analysts' take: The commission got the decision basically right in finding that Kangaroo would likely harm competition, but for all the wrong reasons.

While Media Wonk is hardly an expert on UK antitrust law, Screen Digest's analysis of where power lies in the online video business seemed spot on:

In paid markets it has become clear that the device and not content is king. There is already a well established consumer behaviour where first consumers buy a device (e.g. an iPod or Xbox 360) and then start to buy content for that device. In practice what this means is that on the back of the iPod/iTunes ecosystem Apple is the leading digital content provider in the UK for music, movies and online TV.
[...]
Moreover, Apple and Microsoft have already established their online content businesses, not as major revenue generators in their own right but rather as value-added services designed to help promote their core business. In Apple’s case this means using the possibility of buying content to encourage iPod, iPhone and Mac sales (the attach rate of ~30 songs bought per iPod sold worldwide suggests that actually buying content is less important to consumers than an attractive device and having the option to buy if they want it); in Microsoft’s it means promoting the Xbox platform to facilitate game sales.

The result is twofold:

i.) the use of ‘value-added economics’ means the leading platforms are comparatively unconcerned by high wholesale prices charged by content owners because they are not invested in making money directly from their online services, and
ii.) the strength of their platforms means that their negotiating position is entrenched enough to resist heavy handed negotiation.

To put it another way: were the Kangaroo partners to withhold content from any of these platforms
it would be the UK online TV market that would suffer and not these companies' hardware sales.

Bingo.

Where the Kangaroo cabal could have a negative impact, however, is in the development of the market for ad-supported TV content online.

Cryan and Amel:

In this case it’s the small size of the online TV advertising market (0.9 per cent of all online advertising revenue in 2008) in relation to search (80.5 percent of online advertising revenue) which betrays the infancy of the online TV sector and the emerging nature of a format that ad buyers and sellers are still grappling with in a protracted effort to develop a mutually beneficial sales strategy. Any ad-funded Kangaroo platform (in conjunction with the partners’ own services) is likely to mop up the vast majority of premium advertisers because it will dominate the monetisable online TV in the UK (YouTube and the BBC’s iPlayer will continue to attract viewers but not ad spend). This has the potential to stunt the online TV market at a key time in its development as third parties are likely to find it hard, if not impossible to find advertisers willing and able to buy high [CPM} in-stream advertising in sufficient volumes to cover the costs incurred by many services.

Did you hear that, Hulu?

The Competition Commission's review now enters the second phase, where it considers possible remedies.
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