Verimatrix – We can support OVP revenue sharing for the first time

We love talking to CEOs, and Tom Munro of Verimatrix is one of our favorites, and last week we talked for a while about something we covered back in November, its new Federated Rights Management system, which is a real sign of the times, a form of encrypted analytics data that can be shared between pay TV operators and content owners, almost interactively across the cloud.

Interestingly Munro points out that communication needs to be two way, so essentially across the cloud – in IP format.

Back in November it was the Verimatrix CTO, Petr Peterka and Pete Wood, Senior VP Digital Distribution at Sony Pictures Home Entertainment who started the theme that Munro wanted to flesh out, talking about moving from a world where satellite delivered MPEG2 files in MPEG2 Transport stream wrappers, were transcoded and re-encoded for every kind of multiscreen delivery.

Sony’s Wood at the time described the problem back then, “If you had told me ten years ago that there would be movies on cellphones I would not have believed you, but now if you don’t have that, you are irrelevant. Generation Z barely looks at a TV. Back then all video was geo filtered. And a few years ago Sony decided to lead on 4K and had 60 titles converted to 4K – 18 months later, we moved to an entirely new format which included HDR and then we have to add watermarking.

“In the coming years we will have to accommodate 360 degree video, AR and VR. All of this is more complexity. This world will not get any easier. A CMS built for full UHD content is very different from an older CMS. We also need richer metadata to provide the modern video experience,” said Wood.

When you consider that each content producer has 1,000s of licenses around the world it sometimes took Sony 8 months to get them the VoD content they were after. Today they want content to be fluid and manageable.

And this is pretty much where Munro came in saying that Verimatrix can help by managing all the communications between content creators and OVPs, and creating a kind of shared analytics platform – so each content owner knows how many people watched how many copies of the content, and on what devices, in which geo-location.

“This whole thing is cloud predicated,” starts Munro, “If you count the subscribers that Netflix and Amazon are getting and look at the gains in delivering over the Access network that companies like Akamai are bringing and then look at the tools that partners like Amazon can provide – effectively all the components are there to do this in an integrated fashion.”

“But this is more than just the Elemental acquisition – remember Amazon also owns iMDB and has its own preference engine,” and then Munro is back at the Sony problem. “Delivery at Sony used to be from an FTP server at best or better still they sent it over on a hard drive to a video distributor – now it never leaves the Amazon cloud.”

“That way a lot of friction comes out of the process, steps which we used to take, but which today are completely unnecessary. All you are left with is a URL of where the asset sits, a set of policies, some metadata and an encryption key.”

The role he sees Verimatrix conducting is a kind of analytics – a form of audience measurement, what used to be CMS reporting, and ensuring both sides are working with the same, accurate information about what has happened to a VoD asset subsequently. Of course this means that Verimatrix software has to be installed on every server throughout the distribution chain, and that has to be mandated by the content owner through its distribution chain.

“This reduces the effort of delivering content to a smaller operator because previously there was no way of ensuring compliance. That distributor may show it to 1 million people, when his contract says it will go to 100,000. And it may be consumed in ways that were not agreed when the contract was signed. The owner has no way of knowing.”

The answer is a kind of second life to the Verimatrix proprietary VCAS system (Video Content Authority System) which used to be used exclusively for DRM to the end user device, but instead it handles all communication up to that point. VCAS perhaps needs a second life, what with browser suppliers taking the bulk of the license costs for end user video delivery in DRM, leaving companies like Verimatrix with tighter margins and looking for new markets.

“It can enforce compliance and each discrete policy, such as geo-location, can be reported on, not in real time, but in weekly or monthly overviews. On both sides, it gives you some facts to ‘argue’ with as you are negotiating payments.”

“Before it was a bit like playing poker, a distributor offers 50 cents for an asset, something he thinks is not all that popular, and then when it turns out to be a lot more popular he can’t keep quiet about it. Our software allows the studios have a discussion about revenue share deals for the first time.”

Now this is important. Smaller OTT suppliers were always shouldered with high up front costs to get a library in a particular format, by a particular time, and this legislated against the truly small OVP. They needed a minimum amount of money just to pay for the processing work to get their hands on content. But in a world where the content owner wants as many people selling content as possible, this lowers the cost of entry for an OVP and makes for a sellers’ market.

“In the past Nielsen was the basis of the argument and there was huge unpredictability of viewer numbers – for instance I was talking to a Brazilian operator who had the rights to the Winter Olympics and found he could not sell adverts against the sport of curling. But when the curling ran, it turned out that it had a huge and engaged audience – you need something that can predict that audience in advance in order to sell any advertising against the asset.”

Curling has been identified as a sport that lesser humans can be quite good at, with know how more important than physique, but an ice-based sport in a hot country is always hard to predict. But Munro is perhaps getting ahead of himself – just ensuring an open flow of data between buyer and seller won’t give you this, you need access to that preference engine at AWS, or something like it, as well.

But we accept his core premise, “This opens up the kind of commercial contracts as yet untried by distribution platforms before. Wholesale deals, revenue share deals, and operators can speculate more with a basket of non-exclusive rights,” and we take his point, “We never had the tools before”.

One thought that comes out of this is that if video first goes to the cloud to be edited and then played out surely it has no need to ever leave it. So does that mean that satellite as a distribution mechanism is dead? Certainly it’s not used in VoD says Munro and he can see a time when all video is simply constructed in the cloud and even live channels are played out and delivered in the right format all inside the cloud. There’s a headache for the satellite industry right there.

The role of a pay TV operator now becomes very clear – it is customer engagement, and little else. And the cloud player does all the steps in data preparation and recording, and the content owners does just that, own content.

What has stopped operators moving to the cloud before? According to Munro it was a universal mistake of preferring capex. “A lot of people in our industry get paid by delivering a high EBITDA. Now Capex sits largely outside the P&L. You spend $100 million and you still have $100 million of assets.

Typically the effect on the profit and loss account is to spread that capex over 7 years, then divide it into quarters, so you have amortization of $3.5 million each quarter which goes into the P&L – but because EBITDA stands for earnings before income tax, depreciation and amortization, it is not touched. So people were effectively encouraged to spend Capex, not Opex and to embrace the cloud you need to deliberately take on Opex. “EBITDA was the stone tablet of the media industry,” he said.

“It is the uncertainty that is surrounding the media market in the US right now that has forced a change. How much would a pay TV operator have to spend in capex to deliver 4K, full UHD with HDR. Maybe $10 million. But he no longer knows how many people will watch it, so he can’t know how much money it is safe to spend. It is better to do it in operational expenditure one piece of video at a time.”

Munro is a quiet man, not given to excitement and superlatives, but he is getting properly evangelical now, “What is the metabolic rate of the internet. Someone like Netflix will launched this stuff through the cloud in a heartbeat. Every time you log onto these services they are different. Pay TV can’t just stay still when it’s up against that.”

Getting a new passion is perhaps what every DRM business is tasked with right now, because the pay TV content protection industry has changed beyond all recognition in the last few years, and it’s changing still.