Verizon Communications Inc. (NYSE: VZ) is making an ambitious bid to become the virtual glue that holds together the digital media distribution ecosystem while making it easier for service and content providers to execute on their TV Everywhere strategies.

Its new Verizon Digital Media Services (VDMS) unit, announced this week at the National Association of Broadcasters (NAB) show in Las Vegas, lets content owners and digital media retailers reach consumers regardless of what device they are using and enables consumers to move their authorized content across devices and networks. (See Verizon Unveils Digital Management & Distribution Platform )



Verizon's Digital Media Services includes two unique components, for which Verizon is pursuing patents. First is a two-tiered distribution plan that combines a centralized Media Transformation Fabric where live, linear and video-on-demand (VoD) content is transcoded and formatted for the full range of potential formats with a Media Distribution Fabric that pushes that content out to edge nodes close to major markets, where all that formatted content is stored for consumer access.

The second piece is session management, which maintains the state of a specific consumer's content to enable device hopping, even when one device is a flat-panel TV on a cable network and the second a smartphone supported by a wireless operator.

Built for scale:
Connected by Verizon's global IP network, VDMS is intended to deliver the scale needed to support millions of unicast content streams of a single piece of popular content, and to offer content providers and digital media retailers the chance to create one high-quality master file and deliver it over a growing number of digital platforms, ranging from IP-enabled TVs to tablets and smartphones.

Verizon also hopes to make a push to add content distribution for pay-TV providers, including cable companies and other telcos, although that product will come second to the Digital Media "factory," where content is transcoded and formatted.

"We think this is the world's first fully automated, fully managed, end-to-end -- meaning content-to-consumer -- digital media utility," says David Rips, an entertainment industry veteran hired by Verizon as president of Verizon Digital Media Services.

Verizon already has nine digital media retailers signed as charter customers, including Turner Broadcasting, Hearst Magazines and The Associated Press, and has about six broadband service providers signed as charter customers as well, although none is a cable company to date, Rips says.

Page 2: The Analyst Attitude The analyst attitude
The move does enable Verizon to inject itself higher into the video value chain at a time when the success of over-the-top video threatens pay-TV distribution such a Verizon's FiOS TV, says Heavy Reading Senior Analyst Adi Kishore.

"OTT applications and services could potentially threaten service provider revenues, so it's important that they look for ways to create new revenue generating services," Kishore says. "Expanding their service footprint up the media distribution value chain is a good way to do that. Caching and content delivery allows Verizon to use their network assets while launching a new service and leverage its scale to compete aggressively on price. The transcoding and video preparation capability is a natural incremental component."

Kishore thinks, however, that Verizon will be challenged to compete in a space already dominated by global content delivery network (CDN) players, even with the unique attributes and scale of VDMS.

"Most content 'retailers' are already distributing their content using third-party or in-house content preparation tools for transcoding etc., and working with CDNs for delivery, so Verizon has to pull customers away from these relationships," Kishore says.

Vince Vittore, Yankee Group Research Inc. analyst, believes Verizon is taking a big step forward because many content companies will be thrilled by the opportunity to totally delegate the responsibility for keeping up with the latest in consumer devices and the formats needed to support them. But he admits that the uniqueness of Verizon's value proposition may actual hamper its success.

"They are doing something unique -- it's a market of one," Vittore says.

Both analysts think there will be major challenges for Verizon to sell its media distribution story. Kishore sees Akamai Technologies Inc. (Nasdaq: AKAM)'s global reach as a tough act to follow, especially since the VDMS push is initially much stronger in the U.S. than in Europe and Asia.

Verizon plans to have "double-digit" edge nodes built out this year in the U.S. with a handful ready in Europe and Asia beginning in 2012.

In the U.S., Vittore warns, major operators such as Comcast Corp. (Nasdaq: CMCSA, CMCSK) might see Verizon as too great a competitor strategically, even if the VDMS solution makes sense operationally.

IDC Analyst Melanie Posey points out, however, that Verizon might not need to land a Comcast deal at all, if it wins over the content creators, such as HBO, that could be eager to reach consumers directly.

"Verizon would have had to build this for itself," Posey says. "It makes sense that they decided to then make it a wholesale offer."

Page 3: The Consumer Advantage & How It Works

The consumer advantage
Consumers would benefit by being able to access the content at any time and by seeing common menus, Rips says. Content creators and digital media retailers would have a more cost-effective means of reaching scale and supporting device formats that are constantly changing.

"They want to be able to stop chasing technology and focus on core business," he says. "They just have to create the products and figure out how they want to market it and merchandize on different platforms."

Verizon's centralized approach uses its existing data centers, including two of its largest -- one in Reston, Va., and another in Torrance, Calif. -- to house the Media Transformation Fabric, where content is transcoded and formatted. The edge nodes are located near major metropolitan areas, and are connected to the data centers at one end and to the distribution points at the other by Verizon's IP network.

How the content reaches the consumer will vary, depending on how Verizon's customers want it distributed, says Stu Elby, CTO for Verizon Digital Media Services. Some content owners who already have deals with CDNs may want the content delivered to the CDN, while a cable operator or telco may want it delivered to their headends.

"We are agnostic about the type of broadband access," Elby says.

How it works:
Here's how Elby explains the process: Content is transcoded and formatted in the Media Transformation Fabric and all those different inputs become SKUs, or stock-keeping units, which are then pushed out to the edge nodes where they are stored.

"When a customer goes to their retailer, say a Netflix Inc. (Nasdaq: NFLX) portal, assuming they are a customer of Verizon DRM, and the customer clicks on a title, Netflix passes us a token which says 'This customer is entitled to watch this movie over whatever window on these devices'," Elby says.

Verizon's service determines which is the best edge node from which to deliver that content, picks the right SKU and inserts the right form of ads, which can include targeted advertising based on the person or the device, and the delivers it to the consumer over.

— Carol Wilson, Chief Editor, Events, Light Reading