Reuters is reporting that cable operators are working on a plan to allow customers to purchase channels on an individual basis, also known as à la carte. This represents a 180 degree change in strategy and position, from an industry that has long held that established advertising models preclude any departure from the “tiered” channel system.
Glad to see you’re finally coming around, Cable.
Not that you had much choice. And not to be uncharitable, but golly, it feels good.
You see, our camp (those who have been citing the need for à la carte bundling for the past 4+ years) has been rather sparsely populated of late. In countless reports, presentations and one-on-one meetings with Cable executives over the years, we have pointed out that à la carte is not just a consumer preference—it is a Pay TV imperative. Meanwhile, through industry blowhards and paid quote-models, we have been told that it can’t work, that it won’t work.
Our response has always been that it has to work, if Pay TV is to survive.
And after years of dismissing it out of hand, of categorically rejecting any survey data or consumer insights contradicting their established talking points, Cable is finally listening—the wires and airwaves are filling up with the sounds of pundits finally changing their tunes.
“There is a growing recognition that the current model is broken," one epically overexposed talking head quipped yesterday.
How’s that for groundbreaking insight?
First, they said net losses were just a “blip”—an anomaly. When losses persisted in sequential quarters, the stagnant economy and high unemployment were to blame. When that no longer held water, the talking point morphed into a we didn’t want you anyway argument—that those churning or dropping were low value customers. A report we just published completely discredits that explanation as well.
Fresh out explanations, and having bled 400,000 subscribers in Q2’11, Pay TV really has no choice.
For as long as I’ve been covering this space, I’ve cited survey after survey confirming a strong consumer preference for à la carte —and indeed, a willingness to pay MORE for à la carte. Consumers feel ripped off—they want to feel that they are in the driver's seat. They need choice—or the illusion of choice.
And contrary to what some suggest, money is not the primary motivator for consumer churn —it’s about perceived value. It’s about control of content.
Indeed, our latest report, which draws on a recent survey of of 2,000 US households, further confirms this notion. It shows that 21% of American Pay TV subscribers would be willing to pay more than they currently do if it means they have some say in what channels they get.
Glad you’ve seen the light, Cable. What took you so long?
At this year’s CES, we said that 2011 would the year of the Smart Home Applications. To be sure, tablets took the forefront at the show, but the “smart home” could not be ignored. We estimated the US market value alone to be on the order of $5.6 billion by 2015. While the term “Smart Home Applications” could conceivably a variety of services, in our analysis, we included Remote Energy Management, Broadband-enabled home security, and Telepresence
Up until now, despite what seems like years of trade show mockups, demos, and media hype, Smart Home Applications have failed to garner the attention of Service Providers on any measurable scale. In 2011, market conditions and consumer interest appear to be finally aligning.
Two recent Service Provider announcements suggest momentum:
AT&T’s acquisition of its longtime home monitoring and smart home application partner, Xanboo late last year garnered some brief media attention, then quickly receded below the radar. AT&T was—and continues to be—reluctant to disclose their plans with regards to the acquisition. A March 31st letter sent by AT&T’s counsel terminating dealer relationships effective July 2011 suggests that the company may be preparing to rebrand and relaunch in the near future.
Verizon last week announced a partnership with Healthsense to provide remote health monitoring to senior communities—another indicator that years of industry talk is finally being converted into action. Penetrating the target-rich MDU (multi-dwelling unit) market is one way to reach CEO Ivan Seidenberg’s stated goal of 40% takeup of the FiOS service. Adding Cisco’s umi Telepresence to the mix could make virtual doctor consultations a reality though, as always, pricing is an issue.
Recent talks with clients confirm this renewed interest in the Smart Home area—Service Providers are clearly eager to uncover new revenue streams, and view Smart Home Apps (SHAs) as a new and uncluttered adjacent market. They are likewise keen to mitigate churn, and our research has consistently shown that bundling provides some “insulation” against churn. Manufacturers see SHAs as a potential “hook” into the home, and are just as interested in how this plays out.
The past two years have been tough on Pay Cable TV. In 2010 alone, the industry saw over two million video subscribers drop their subscriptions. While certainly not great news, there was a silver lining. In the same seven quarters, Cable High Speed Internet (HSI) gains more than compensated for Pay TV losses.
We’ve heard (and indeed, have been saying) for so long that traditional Service Providers were threatened with “disintermediation” and risked being relegated to the role of a “dumb pipe.” I, along with many analysts, have advised Service Providers to avoid this trap at all costs.
But in retrospect, is being a “dumb pipe” such a bad idea?
As Pay TV subscribers (and margins) continue to dwindle, Cable Broadband profitability is growing. Our analysis shows that HSI margins are anywhere from 70% to 110% higher than Pay TV (depending on whether or not advertising is included in the calculation). Broadband is likewise changing the face of the “traditional” Cable bundle. In 2008, Video contributed 59% to Cable’s Revenues. In 2010, the number was 53%.
TWC’s CEO Glen Britt told analysts on the company’s Q1’11 earnings call that the company is rethinking the role of broadband in the company’s portfolio. “High-speed data is quickly becoming the anchor product in the eyes of our customers," he said.
While on the surface it may seem like a no-brainer, doubling down on broadband may not be the best long-term strategy for Cable.
As a highly commoditized consumer offering, it is extraordinarily challenging to differentiate, and is one easily duplicated by competitors. Furthermore, prospects for increased ARPUs in fixed broadband are decidedly limited, as few have been able to successfully monetize incremental bandwidth offerings.
To be sure, it’s doubtful that any MSO would abandon its core TV offering. But as Cable ponders its next move on the OTT front, it should be of some comfort that broadband continues to take up the slack.
Netflix today reported 23.6 million subscribers in Q1’11, surpassing Comcast, the number one Cable operator in the US. This represents a major turning point for so-called “Over the Top” (OTT) distribution of content—services that allow consumers to bypass the Cable or Satellite company to grab their shows via the Internet. Long accustomed to underplaying and dismissing OTT, Service Providers can no longer afford to bury their heads in the sand.
US Cable TV providers witnessed over two million video customers evaporate from their rolls in 2010—losses not seen in other competing platforms such as Satellite and Telco/IPTV. Until very recently, the industry was in a state of denial, dismissing any semblance of a problem.
Does Cable TV have a Charlie Sheen problem? Can they really claim to be “winning,” while at the same time losing customers at the rate of roughly 500,000 per quarter?
The industry at large has come up with various and sundry explanations for the losses, none of which holds up to close scrutiny. In fact, a report we've just published looks closely at the role of macroeconomic factors on Cable’s subscriber losses. In short, the piece finds that neither the economy nor the housing market is to blame for Cable’s losses.
In addition,” cord cutting,” whereby customers drop their Pay TV subscription altogether in favor of Internet- based or free to air television, is rearing its ugly head again. Even though Cable would like nothing more than to change the subject, the evidence is clear that it’s not going away.
Even Cable’s favorite talking head has been forced to change his tune. Not even one year ago, we heard that cord-cutting was “perhaps the most over-hyped and over-anticipated phenomenon in tech history.” Last week, the same analyst told Ad Age “it's hard to pretend that cord cutting simply isn't happening."’
We have always maintained that cord cutting is real, and that it does pose a threat to traditional Pay TV providers. Research we published in late 2010 found that 13% of Americans intended to “cut the cord” in the upcoming 12 months. While the numbers are not extraordinarily large today, they are indicative of a trend. Our research has shown that the profile of a cord cutter is far from the deadbeat some would suggest, and are the rising demographic Cable needs to keep its eyes on.
As the technical sophistication required to get content from the Internet becomes less and less onerous, we anticipate a shift from the “early adopter” cord cutters to a segment of convenience and value-motivated consumers.
The hyperbole has been quite fantastic on both sides of the cord cutting debate—and while we’re not forecasting a falling sky any time in the near future, nor do we believe that Service Providers can simply continue on status quo. Though the numbers might not be jaw dropping today, cord cutting is a reality. Service Providers need to keep their eyes on the issue, before it balloons into something unmanageable.
Cisco today announced a “comprehensive plan” to restructure its operations—pulling out completely from certain segments of its consumer offerings and refocusing efforts on five key priorities. This should come as welcome news to customer and shareholders alike, and provide some clarity to an otherwise confused marketplace.
Closing down the Flip business should come as no real surprise. Once hard to keep on the shelves, the small and affordable point-and-shoot camcorder was unable to compete with an array of new entrants, and increasingly high-quality video on smartphones. I still have one—somewhere.
The pulling back from the direct to consumer space does not appear to mean abandoning existing lines. In fact, in talking to Cisco today at the NAB show, it was clear that the Videoscape business was spared, and remains fundamentally unchanged. Rather than building devices, though, the strategy will be one of enabling them.
On the other hand, ūmi –the consumer Telepresence product/service launched late in 2010—will be folded into the existing enterprise Telepresence business, and the focus will be on devising “go to market” plans with Service Providers, rather than trying to sell and service end users directly. The Cisco exec I spoke with today referred to this as a ‘doubling down’ strategy.
As I mentioned back in October, the high price point, exorbitant service fees and limited utility made ūmi a tough sell from the beginning. I’m still not writing it off, as there are real applications, particularly in the Business to Consumer (B2C) space, but this will likely only achieve any measurable traction under a subsidy model.
Cisco’s consumer strategy had many customers (and industry analysts) scratching their heads. As my colleague, David Mercer points out in a blog posted today, reconciling the company’s dual strategy (Service Provider + Consumer) was never an easy task.
It is, therefore, encouraging to see the company righting its course. Cisco’s core competencies have always sat in the network, and it is exactly there that they should refocus. The most relevant customer base for the company is the Service Provider community, and the announced plans to focus attention that segment is a positive one.
I spent several years of my impressionable twenties living and teaching public school in remote and rural Iwate, Japan –the very region that has sustained much of the tsunami and earthquake damage over the past week.
Watching the news each night, I feel a pit in my stomach as I see and hear reports from town after town in the area where I once had friends. Names of villages and cities long since filed in the dark recesses of my brain now come back, many with painful familiarity.
Amid the carnage, destruction and multiple disasters profiled incessantly on TV, it is surprising for many to see the calm and resilience the Japanese public is exhibiting.
There is no looting of convenience stores. Despite seemingly interminable lines and food shortages, the expressions on the faces of people who have lost everything appear eerily unfazed. There are teary eyed reunions, certainly, but there is no panic. There is an unsettling sense of tranquility amidst human tragedy and horror.
And while many do find this type of behavior remarkable and surprising, I do not. To me, it’s part of the script.
I find the reactions and behavior we’re witnessing to be absolutely in character for the Japanese. Indeed, one of my observations one year into my teaching assignment in Japan was that the entire country seemed to be reading off a script. The verbal exchanges of virtually every interpersonal connection (teacher-student, teacher-boss, teacher-neighbor, teacher-ramen shop owner) appeared to be predetermined and guided by verbal cues. Social harmony in the country depends on it.
I still cringe when I think about how slow I was on the uptake.
On one occasion in the Japanese municipal government office where I worked, I recall becoming visibly frustrated at the glacial pace in which a request I had submitted was being handled. I’m not sure, but it is very likely that I let out one of my signature deep sighs. The woman who sat next to me—a co-worker who would later become an adopted Japanese mother of sorts—in a terrifying departure from her usual cheerful character went into parental mode, audibly scolded me.
Gaman shinasai she said abruptly.
It’s an expression often overheard at grocery stores and on trains, in lines at the post office and in elementary school classrooms. Mothers regularly tell their toddlers to gaman. Shape up and shut your yap seemed to be the message. Little did I know at the time that gaman goes way beyond “shut your piehole.”
Translated literally, the characters that make up the word gaman are those for 我“self” and 慢“neglect.” Though regularly mistranslated into English as “patience,” the concept of gaman goes light years beyond that.
Paper training a puppy requires patience.Losing your house, your belongings, your family and your village while simultaneously suppressing any outward sign of remorse, entitlement or anger falls squarely into gaman territory.
Years ago, a Japanese friend once colorfully described the concept of gaman as a “silent endurance,” and to this day I struggle to find a better description. Two years later, I left Japan convinced that the concept of gaman is what sets the country apart.
In English, we tell people to be patient. In Japanese, you do gaman. It’s an action verb.
Are the faces we see on television really devoid of human emotion? Of course not. They are devastated, hungry, disoriented, sleep-deprived, anxious, lost and pissed off. But rather than pretending to “be” patient, the Japanese are following the cultural script, and “doing” gaman.
And that doing is exactly what will lead Japan out of this chaos.
Followers of the industry will no doubt recall the unstoppable buzz at the 2010 CES Show in Las Vegas, where the story was 3DTV, and how it was poised to overtake the American living room. In the ensuing 12 months, though, it seems that much of the excitement around the technology has subsided—if not evaporated.
Indeed, we shared our views on the 3DTV opportunity at this year’s IBC in Amsterdam: essentially saying that consumer excitement around the technology was quite high, but that translating that enthusiasm into a viable business model would be a challenge. Our feelings in that regard haven’t changed substantively.
What we have seen in the past five months, however, has been a swift roll out of 3DTV programming worldwide. Two notable examples are 3net, the joint venture of Sony Corporation, Discovery Communications and IMAX Corporation, as well as ESPN’s announcement of its dedicated 3DTV channel.
A crucial, and often over-looked, question is: who will actually pay for this? There are significant premiums associated with producing content in 3D compared to 2D. Our estimates based on industry interview set the premium in the range of 80% to 100%. In the theaters, it is the moviegoer who pays the premium to see the latest 3DTV release—indeed it is evident in the ticket price.
The question is, who pays at home?
As we have pointed out in the past, our US consumer survey research and forecast modeling suggest only a relatively modest opportunity for 3DTV in the home. Overall, fewer than half of respondents showed a willingness or expectation to pay any premium for 3DTV.
We have, however, identified and isolated a group of consumers we believe to be most likely to actively view (and more importantly, pay for) 3DTV services.
This group of individuals, whom we dub “Cube Tubers,” represents between 8%-10% of the overall population. Cube Tubers are unique in their intentions to purchase a 3DTV in the upcoming year, and to be active premium/HD customers.
Compared to overall survey respondents, Cube Tubers exhibit a much higher interest in receiving 3DTV programming at home, with 74% saying they are “somewhat” or “very” interested, compared to 36% in the overall sample. Likewise, they were significantly more likely to expect to pay some sort of monthly or one-off premium than the general sample.
Content aside, 3DTV still faces an uphill battle in other respects. Perceived health risks (true or not) will stifle widespread takeup, as will the need for specialized glasses.
Despite impressive demonstrations of “Auto-stereoscopic” 3DTVs by vendors at recent trade shows, we don’t expect to see a commercially viable “glassless” solution any time soon.
The FCC’s recent approval, by a 4-1 margin, of the merger between Comcast and NBC Universal effectively transforms the nation’s biggest cable company into its largest media company as well. The $30 billion joint venture which was first announced in 2009 has many—including News Corporation, Time Warner and Disney—calling foul. To nobody’s surprise, the affirmative ruling (all 279 pages of it) came with some significant strings attached, including provisions around Net Neutrality, Over the Top (OTT) distribution and transparency, broadband affordability, as well as the new company’s role with Hulu.
The FCC’s Net Neutrality ruling last December was a compromise of sorts, leaving none of the interested parties particularly happy. In essence, the decision created “rules of road” for the Internet, though different rules for fixed and mobile services. As stated previously, we believe that the final disposition of this issue will take place in the Supreme Court.
It is interesting, then, that one of the “voluntary commitments” (as opposed to “conditions”) of the deal concerns net neutrality. The order states that “neither Comcast nor Comcast-NBCU shall prioritize affiliated Internet content over unaffiliated Internet content,” Furthermore, the order protects the commitment against any future (and probable) modification. It states, “in the event of any judicial challenge affecting the latter, Comcast-NBCU’s voluntary commitments concerning adherence to those rules will be in effect.”
What this commitment essentially does is to lock NBCU into Net Neutrality, irrespective of the potential disposition in the courts. The implications could be significant if NBCU-Comcast eventually finds itself subject to rules that its competitors aren’t.
One condition that could potentially open the floodgates to new Online Video Distributors (OVDs) is the provision stating that “Comcast offer its video programming to legitimate OVDs on the same terms and conditions that would be available to an MVPD,” and that it make “comparable programming available on economically comparable prices, terms, and conditions to an OVD that has entered into an arrangement to distribute programming from one or more of Comcast-NBCU’s peers.
From an OTT video service perspective, the conditions that FCC attaches to the merger approval do not harm—and could actually benefit—the value proposition of OTT services. The FCC requires that Comcast make available certain comparable content to an online distributor if one of its competitors does so. Although it does not imply a dramatic change to the current media distribution environment, it shows the FCC’s gesture to ensure OTT video services to have an equal opportunity of acquiring content and competing with MVPDs. Given emerging OTT services’ efficiency of formulating and executing strategies, an equal competitive environment gives them the upper hand to out-innovate those larger and slower MVPDs.
The single OTT video service that will benefit most from this merger approval is Netflix. As Comcast is spending its time integrating NBCU and probably will have to restructure or realign the company and redesign its online distribution strategy, Netflix is running far ahead in terms of expanding its content catalog, releasing more apps on different platforms and CE devices and improving user experience.
Another provision of the ruling requires Comcast/NBCU to relinquish managerial control. uncertainty has mounted around Netflix’s main competitor in the online video space, Hulu, as Comcast/NBCU will have to relinquish managerial control in the online video distribution site. It makes possible for NBC to pull back its investment from a venture it would have little control, making Hulu less attractive to consumers and financially weaker than it is now.
For Hulu, the provision requiring Comcast to relinquish the managerial control of the OTT service could be beneficial as long as Comcast continues its investment in Hulu both in terms of financial backing and content availability. But different from NBCU, the new Comcast has had its own online strategy, which might be at odds with Hulu’s proposition. So Comcast may not want to invest in the Hulu business as much as NBC did before. On top of that, Comcast might eventually prefer to reduce or sell off its stake in Hulu due to the relinquishment requirement of managerial control on Hulu’s board.
Nobody wants to buy something that they don’t know much about and cannot control. If that were to happen, Hulu could still get NBC content as the approval requires, but it would lose its favorable position in the OTT space as the son of NBC--especially important when it comes to content deal negotiation.
Overall, the merger approval makes the prospect of Hulu fuzzier, if not gloomier.
One of the most under-reported and potentially worrisome provisions of the order requires that Comcast provide standalone broadband access at “reasonable” prices. In theory, of course, this makes sense. Consumers should not be required to take on a cable package in order to receive broadband, nor should it be constructed in such way that a bundled offering is, as the report notes, “the consumer’s only reasonable economic choice.”
Where it gets hairy, though, is in the details. The order goes so far as to mandate the minimum acceptable package and pricing (“At a minimum, Comcast shall offer a service of at least 6 Mbps down at a price no greater of $49.95 for three years”). Seeing the FCC set pricing and package specifications should send a chill down the spines of free market enthusiasts.
Critics of the merger—and there are many— fall into two camps: those who feel the conditions go too far, and those who fear that they don’t go far enough. Dissenting FCC Commissioner Michael Copps pointed out that the ruling has implications on every corner of the media landscape, and that it “confers too much power in one company’s hands.” Others call it a regulatory shakedown, setting a potentially worrisome precedent of the FCC inserting itself in the workings of an industry over which it has no mandate or authority.
Or so goes the Texas adage.
The debate, which has been a five year long rollercoaster ride, came to a head in what is being described as “rules of the road” for the Internet. The inherent fuzziness of the provisions, which include such vague concepts such as “transparency,” “network management,” and “unreasonable discrimination” all but guarantee that the matter will ultimately be decided in the courts.
Furthermore, the same rules don’t apply to fixed and mobile networks.
FCC Chairman Julius Genachowski made a point of characterizing the rules as “middle of the road” approach—though likely one where no side even feels a little bit ok about it.
“On one end of the spectrum, there are those who say government should do nothing at all, on the other end of the spectrum are those who would adopt a set of detailed and rigid regulations.”
The Chairman said he rejects “both extremes in favor of a strong and sensible framework - one that protects Internet freedom and openness and promotes robust innovation and investment."
Indeed, critics are vocal on both sides, with opponents comparing it to the “government takeover of the Internet,” and Net Neutrality supporters calling it “worse than nothing.”
Outspoken Senator Al Franken calls it the “most important free speech issue of our time,” and surmised that “ If corporations are allowed to prioritize content on the Internet, or they are allowed to block applications you access on your iPhone, there is nothing to prevent those same corporations from censoring political speech.”
Republican FCC Commissioner Robert McDowell, in a Wall Street Journal Op/Ed piece said that the new rules will squelch innovation and investment, and reflect more “coercion than consensus or compromise.”
He goes on to say:
“On this winter solstice, we will witness jaw-dropping interventionist chutzpah as the FCC bypasses branches of our government in the dogged pursuit of needless and harmful regulation. The darkest day of the year may end up marking the beginning of a long winter's night for Internet freedom.”
It’s not over—not even by a long shot. April’s ruling by the U.S. Court of Appeals for the District of Columbia challenged the very role of the FCC in regulating broadband. Certainly, this is yet to be scrutinized and debated in Congress, and ultimately in the courts.
While the rules voted on today preclude service providers from blocking “lawful content,” they apparently do little to discourage the practice of “paid prioritization. ” The rules, set to go into effect in 2011, create a “toll road” of sorts on the metaphorical information superhighway—a road that companies such Google and Netflix may be forced to take.
Markets don’t like fear, uncertainty and doubt. We all know that. And while Chairman Genachowski suggest that the rules “increase certainty in the marketplace, and spur investment both at the edge and in the core of our broadband networks”, the result may be just the opposite.
Well, that’s what it smells like anyway.
With Comcast alone hemorrhaging over 600,000 subscribers since January, and the overall industry faring hardly better, cord cutting doubters have had no choice but to change their respective tunes. Cord cutting is a reality, as we have long held. And the current Cablevision-News Corp debacle sure isn’t doing much to engender any warm feelings between subscribers and their cable providers either.
Way back in June, the Wall Street Journal quoted Sanford C. Bernstein & Co. calling cord-cutting "perhaps the most over-hyped and over-anticipated phenomenon in tech history."
Indeed, downplaying and writing off the threat of cord cutting has been de rigeur of late—a kneejerk and dismissive tendency all too prevalent in the pay TV world. But the recent numbers don’t lie, and we don’t think dissatisfied customers do either.
Cable companies were, of course, quick to explain away the recent subscriber losses--citing the overall ill economy, rather than any systemic issues. Comcast said that online video services have had "almost no impact"on their customers’ decisions to cut the cord.
Need some spin? Call in the Cable industry’s “go to” quotemeister, who wasted no time coming up with a catchy explanation.
The New York Times reported:
“Mr. Moffett said the image of the cord-cutter had been that of a ‘cutting-edge technologist’ who preferred to bypass cable to watch programming on computers and on an ever-proliferating array of devices. ‘The reality is it’s someone who’s 40 years old and poor and settling for a dog’s breakfast of Netflix and short-form video.’”
Sounds good, right? Except that it’s completely wrong.
Cord cutting is real. Sound familiar? It should, we’ve been saying it for years. And now, the numbers bear it out. In our latest report, we analyze results of our recently-fielded survey of 2,000 Americans, which shows that 13% of Americans intend to cut the cord in the next 12 months.
And it’s not “poor” forty-somethings settling for a “dog’s breakfast. “
In fact, the “typical” American cord cutter is:
In our survey, the number one reason cited by intending cord cutters for dropping service was poor value for money. . And with average cable bills approaching $100/month, it’s understandable that consumers are questioning value.
More importantly, our research suggests that it doesn’t really matter what motivates a subscriber to leave. When asked to rank their five "must have" channels, Pay TV consumers chose the four "free networks" (CBS, ABC, NBC, FOX) as the top slots. ESPN rounded out the top 5.
Colorful quotes are fun, but facts do matter.