General

Outsource Your Television, Kill Your Telco — continued

Getting started
"Our customer needs very little capital to get started," Wagner points out. NeuLion typically takes a percentage of subscription revenues as payment for providing the technology and delivery services. They can also get to market much faster than if they had to build their own IPTV capability.

Customers can deliver content to TV set-top boxes or to computers over the Web. The quality of the video is not the same on a PC. NeuLion uses Windows Media and Flash technology for web delivery. The NHL site, for example, shows video that, while it features remarkably smooth motion and clear images, appears in a small window.

Most customers want the set-top box option, especially if they're looking to offer a full-scale pay TV service like KyLin. Some, such as the NHL, however, can't offer a pay TV service because they've already leased broadcast rights to mainstream networks.

Even if ISPs don't want to partner with NeuLion, they may derive some benefits. The only technical constraint preventing the company from delivering a cable/satellite-quality TV service is ISP bandwidth, Wagner says. With low-end services—such as Verizon's lowest-bandwidth option which delivers "up to" 750 kbps—throughput can dip as low as 300 or 400 kbps. Not good enough for NeuLion's service.

The company has built a network speed gauge into the set-top box. It alerts users when bandwidth dips below 500 kbps and even compiles reports. If it's often enough, the subscriber is advised to upgrade to a higher-speed service. This is presumably a good thing for ISPs—unless, of course, increased bandwidth use leads to increased infrastructure costs, gobbling up all the extra revenue.

Do you really need HD?
Most IPTV providers figure that to compete on equal footing with cable and satellite providers, they will need to be able to deliver multiple streams to multiple TVs in the home, and they'll have to offer HD service. NeuLion can provide service to multiple TVs in a home with additional set-top boxes—given adequate bandwidth. HD service, which requires about 5 Mbps using NeuLion's technology, will have to wait.

"As bandwidth into the home gets richer, that will slowly start opening up the HD opportunity for us," Wagner says.

He doesn't seem terribly anxious to move it forward more quickly. Of course, at this point, NeuLion's customers aren't really competing head-to-head with 200 channel cable and satellite pay TV providers. And the quality of service they provide now is apparently good enough to capture and hold its niche audiences.

The pitch to ISPs
The pitch to ISPs is to partner with NeuLion to provide a branded service. It could be one or more of the existing services which the ISP would resell to its customers, or a new content service co-developed with the ISP. NeuLion proposes paying ISPs a percentage of subscription revenues for one year and then residual payments for renewals.

The benefit to ISPs? It's a better way to differentiate themselves in the market. As Wagner says, "You can't differentiate solely on price, because that's not always fun." Offering NeuLion-delivered TV services will give subscribers a reason, besides price, to stick with or sign up with an ISP. It's also a source of new revenue.

ISPs, on the other hand, are important to NeuLion and its customers because they have access to niche audiences the content providers want to reach. How much is an ISP partnership worth to NeuLion's customers? We're guessing it will depend in part on the demographics of the ISP's subscriber base—how well it fits NeuLion's target demographics—and how finely it can segment its subscriber base to make them easy to access.

The lion's future
"We're just at the beginning stages," Wagner says of the company's marketing efforts with ISPs. "But we've had a lot of interest there."

In the meantime, while NeuLion is adding new content owner customers at a steady pace, its growth rate is limited by the company's size and human resources. To grow faster, it will need to bulk up, Wagner concedes. "You can't have twice the number of networks with same size we are today."

NeuLion is privately held today, with funding from four co-founders and others, including Wang, but no venture capital funds. "Growth capital is always something that we're interested in," Wagner says. "So we've had a lot of discussions with different companies about maybe participating with us from a growth capital standpoint, but we haven't really come to a conclusion about any of them yet."

Conclusions about NeuLion? Good pedigree. Interesting business model. But how good is the fit with ISPs? It depends how much the company values what ISPs can bring to the table.

—End

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