Category Archives: TV

Cord Cutting in Q3 2016

I do a piece most quarters after the major cable, satellite, and telecoms operators have reported their TV subscriber numbers, providing an update on what is at this point a very clear cord-cutting trend. Here is this quarter’s update.

As a brief reminder, the correct way to look at cord cutting is to focus on three things:

  • Year on year subscriber growth, to eliminate the cyclical factors in the market
  • A totality of providers of different kinds – i.e. cable, satellite, and telco – not any one or two groups
  • A totality of providers of different sizes, because smaller providers are doing worse than larger ones.

Here, then, on that basis, are this quarter’s numbers. First, here’s the view of year on year pay TV subscriber changes – a reported – for the seventeen players I track:

year-on-year-net-adds-all-public-players

As you can see, there’s a very clear trend here – with one exception in Q4 2015, each quarter’s year on year decline has been worse than the previous one since Q2 2014. That’s over two years now of worsening declines. As I’ve done in previous quarters, I’m also providing a view below of what the trend looks like if you extract my estimate for DISH’s Sling subscribers, which are not classic pay TV subs but are included in its pay TV subscriber reporting:

year-on-year-net-adds-minus-sling

On that basis, the trend is that much worse – hitting around 1.5 million lost subscribers year on year in Q3 2016.

It’s also worth noting that once again these trends differ greatly by type and size of player. The chart below shows net adds by player type:net-adds-by-player-type

The trend here has been apparent for some time – telco subs have taken a complete nosedive since Verizon ceased expanding Fios meaningfully and since AT&T shifted all its focus to DirecTV following the announcement of the merger. Indeed, that shift in focus is extremely transparent when you look at U-verse and DirecTV subs separately:att-directv-subs-growth

The two combined are still negative year on year, but turned a corner three quarters ago and are steadily approaching year on year parity, though not yet growth:

att-combined-subsCable, on the other hand, has been recovering somewhat, likely benefiting from the reduced focus by Verizon and AT&T on the space with their telco offerings. The cable operators I track collectively lost only 81k subscribers year on year, compared with well over a million subscribers annually throughout 2013 and 2014. Once again, that cable line masks differences between the larger and smaller operators, which saw distinct trends:

cable-by-size

The larger cable operators have been faring better, with positive net adds collectively for the last two quarters, while smaller cable operators like Cable ONE, Mediacom, Suddenlink, and WideOpenWest collectively saw declines, which have been fairly consistent for some time now.

The improvement in the satellite line, meanwhile, is entirely due to the much healthier net adds at DirecTV, offset somewhat by DISH’s accelerating declines. Those declines would, of course, be significantly worse if we again stripped out Sling subscriber growth, which is likely at at around 600-700k annually, compared with a loss of a little over 400k subs reported by DISH in total.

A quick word on Nielsen and ESPN

Before I close, just a quick word on the Nielsen-ESPN situation that’s emerged in the last few weeks. Nielsen reported an unusually dramatic drop in subscribers for ESPN in the month of October, ESPN pushed back, Nielsen temporarily pulled the numbers while it completed a double check of the figures, and then announced it was standing by them. The total subscriber loss at ESPN was 621,000, and although this was the one that got all the attention, other major networks like CNN and Fox News lost almost as many.

In the context of the analysis above, 500-600k subs gone in a single month seems vastly disproportionate to the overall trend, which is at around 1-1.5 million per year depending on how you break down the numbers. Additionally, Q4 is traditionally one of the stronger quarters – the players I track combined actually had positive net adds in the last three fourth quarters, and I suspect for every fourth quarter before that too. That’s what makes this loss so unexpected, and why the various networks have pushed back.

However, cord cutting isn’t the only driver of subscriber losses – cord shaving is the other major driver, and that makes for a more feasible explanation here. Several major TV providers now have skinny bundles or basic packages which exclude one or more of the major networks that saw big losses. So some of the losses could have come from subscribers moving to these bundles, or switching from a big traditional package at one operator to a skinnier one elsewhere.

And of course the third possible explanation is a shift from traditional pay TV to one of the new online providers like Sling TV or Sony Vue. Nielsen’s numbers don’t capture these subscribers, and so a bigger than usual shift in that direction would cause a loss in subs for those networks even if they were part of the new packages the subscribers moved to on the digital side. The reality, of course, is that many of these digital packages are also considerably skinnier than those offered by the old school pay TV providers – DirecTV Now, which is due to launch shortly, has 100 channels, compared with 145+ on DirecTV’s base satellite package, for example.

This is the new reality for TV networks – a combination of cord cutting at 1.5 million subscribers per year combined with cord shaving that will eliminate some of their networks from some subscribers’ packages are going to lead to a massive decline in subscribership over the coming years. Significant and accelerating declines in subscribers are also in store for the pay TV providers, unless they participate in the digital alternatives as both DISH and AT&T/DirecTV are already.

Cord Cutting Continues to Accelerate in Q2 2016

One of the data sets I maintain is a database on the major cable, satellite, and telecoms operators in the US and their pay TV, broadband, and voice subscribers. As such, each quarter, I dig through those numbers and churn out a bunch of charts on how those markets are performing, and one of the posts I do each quarter is a cord-cutting update. Here’s the update for Q2 2016.

TL;DR: Cord-Cutting Continues to Accelerate

This is going to be a longish post, in which I’ll dive into lots of the detail around what’s really happening in the US pay TV market. But the headline here is that cord-cutting continues to accelerate, a trend that’s been fairly consistent for quite some time.

Here’s the money chart, which shows the year on year growth or decline in pay TV subscribers across all the publicly traded players I track:

Q2 2016 Cord Cutting 560px All Public Players

As you can see, the trend is very clear, with a consistent pattern from mid 2014 onwards of worse declines each quarter (except Q4 2015), culminating in this a loss of around 834,000 pay TV subscribers at the end of Q2 2016 compared with the end of Q2 2015. As discussed in more detail below, these numbers include the positive growth Dish has seen from its Sling TV product, which has added around 800,000 subscribers over the past year or so. Without those subs, the picture looks even worse.

Read on for more in-depth analysis of these numbers and the trends behind them. Reporters who would like further comment or anyone who would like to know more about our data offerings can reach Jan Dawson at jan (at) jackdawresearch.com or (408) 744-6244.

Avoiding false trends with a proper methodology

I’ve lost track of how many headlines I’ve seen over the last couple of years which posit that cord cutting is somehow slowing down off the back of a small number of providers’ quarterly results. This poor analysis is usually based on several key mistakes:

  • Focusing on quarterly net adds rather than annual changes – this is problematic because the pay TV industry is inherently very cyclical, historically doing much better in the fourth and first quarters of the year, and doing worse in the late spring and summer months, reported as part of Q2 and Q3. You have to compare the same quarter in subsequent years to see the real trends.
  • Focusing on one or two big players, instead of the whole market. One of the key trends that’s emerged in recent quarters is that the larger and smaller players are seeing quite different trends, so fixating on the large players alone is misleading.
  • Focusing on one set of players, such as the cable companies. Though “cable TV” is often used as a synonym for pay TV in the US, it’s not a useful one when it comes to doing this kind of analysis. Cable, satellite, and telecoms players are seeing divergent trends when it comes to pay TV growth, and you have to look at all sets of players to get the full picture.

On that basis, then, I focus on year-on-year change in subs, and try to cast the net as wide as possible when it comes to players. My analysis includes all the major publicly traded cable, satellite, and telecoms (CST) providers in the US, of which there are now 17 in my data set, ranging from AT&T/DirecTV at over 25 million subs to Consolidated Communications, with just 112,000. The only major player now missing from this analysis (following the acquisition of Bright House by Charter) is Cox, which has around four million subscribers. In some of the charts below, you’ll see estimates for Cox included.

Trends by player type

So let’s stark to break down that chart I showed at the beginning, to see what’s happening behind the scenes. First off, here’s a chart that shows the year on year subscriber growth trends by player type: cable, satellite, and telecoms:

Q2 2016 Cord Cutting 560px by player type

This chart illustrates perfectly why focusing on just cable operators is utterly misleading – they’ve actually been having a better time of things over the past two years, but largely at the expense of the major telcos, who have seen plunging growth during the same period.

A tale of two groups of cable companies

It gets even more interesting when you break cable down into two groups, large and small companies:

Q2 2016 Cord Cutting 560px large and small cable

As you can see, what’s really been happening is that the four largest publicly traded cable companies have been doing much better over the last two years, while the smaller ones have if anything been doing worse. A large chunk of that improvement by the large companies comes from Time Warner Cable’s impressive turnaround during 2014 and 2015:

Q2 2016 Cord Cutting 560px cable by company

However, Comcast has also had a meaningful improvement over that same period, moving from 200k net losses year on year to positive net adds in the last two quarters. Legacy Charter has also had a slight improvement, while Cablevision has been largely static.

AT&T and Verizon have shifted focus elsewhere

The rest of the market is dominated by two large satellite companies and two large telcos, but the story here is really about the shift in focus away from TV by the telecoms guys. In AT&T’s case, it’s about a shift towards satellite-delivered TV, while in Verizon’s case it’s about slimming down its wireline operations and shifting focus from TV to broadband.

The transformation at AT&T over the last two years has been dramatic. Since the announcement of its plans to acquire DirecTV in May 2014, AT&T has seen plunging net adds in its U-verse TV business, while post-acquisition net adds at DirecTV have been skyrocketing:

Q2 2016 Cord Cutting 560px ATT DirecTV

This is part of a conscious strategy at AT&T to shift its TV focus to the platform with better economics, in addition to its cross-selling and bundling of DirecTV and AT&T wireless services. The net impact is still a loss of subscribers across its TV business as a whole – around 250k fewer subs at the end of Q2 2016 than Q2 2015 – but the economics of the subscribers it’s keeping are way better than for the subs it’s losing.

Dish is suffering, despite Sling TV

The other major satellite provider, Dish, is seeing worsening rather than improving trends, despite its ownership of over-the-top TV service Sling TV. It reports Sling TV subscribers as part of its overall pay TV numbers, through they’re markedly different in many of their characteristics, but even so it’s seen subscriber losses increase dramatically this quarter. The chart below shows Dish’s reported subscriber losses in blue, and adds estimated Sling TV subscriber growth in dark gray to show what’s really happening to traditional pay TV subs at Dish:

Q2 2016 Cord cutting 560px Dish and Sling

As you can see, the year on year change in traditional pay TV subs at Dish looks a lot worse when you strip out the Sling subscriber growth. The company lost almost a million pay TV subs on this basis over the past year, a number that appears to be rapidly accelerating.

Of course, we’re also including Sling subscribers in our overall industry numbers, so it’s worth looking at how industry growth numbers look when we strip out the same Sling subscribers from the overall pay TV numbers (with the Sling reduction this time shown in red):

Q2 2016 Cord Cutting 560px pay TV plus Sling

As you can see, the picture here worsens quite a bit too, going from a roughly 800k loss to a 1400k loss over the past year. The trend over time is also even more noticeable and dramatic.

Broadband may be the salvation for some

We’ve focused this analysis on pay TV exclusively, but many of these players also provide broadband services, and these services have grown to the point where they now rival the total installed base for pay TV. Indeed, a number of the larger cable operators now have more broadband subscribers than pay TV subscribers. This is another area where the larger cable operators are outperforming their smaller counterparts, as shown in the chart below:

Q2 2016 Cord Cutting 560px broadband and TV

Besides those smaller cable operators, the other company that will fare worst from cord cutting is Dish, which we’ve already discussed. Though it has a few hundred thousand broadband subscribers, it’s not remotely competitive in this space on a national basis, and as TV subscribership continues to fall, it will struggle to make up the difference in other areas, increasing pressure for a merger or acquisition that will allow it to tap into the broadband market. DirecTV, of course, now has the AT&T U-verse and wireless bases to bundle with.

Recent M&A leaves six large groups in control

Lastly, I want to touch on the recent merger and acquisition activity. We’ve already mentioned AT&T and DirecTV, but there have also been two other bits of consolidation: the creation of the new Charter from the combination of Charter, Time Warner Cable, and Bright House; and the acquisition of Cablevision and Suddenlink by French company Altice. It’s interesting to consider the scale of the groups formed by these various mergers in the context of the rest of the industry – these are now the six largest publicly-traded groups in the US pay TV market:

Q2 2016 Cord Cutting 560px Biggest groups

AT&T comes out on top, bolstered enormously by the DirecTV acquisition, while Comcast remains close behind despite not having been involved in the recent mergers (despite its best efforts). The new Charter comes in third, Dish in fourth, and then Verizon and Altice are way behind with a very similar number of subscribers a little under 5 million. After that, in turn, the companies get much smaller, with Frontier next at 1.6 million pay TV subs (including over a million recently acquired from Verizon), with no other publicly traded companies with over a million subs. And of course privately-held Cox is again excluded here, but would come in around the same size as Verizon and Altice.

This is a market increasingly dominated by large players, and that’s a trend that’s likely to continue, with Altice publicly suggesting that it intends to roll up more of the smaller assets. The four largest groups already own 78 million of the roughly 91 million owned by the publicly traded companies we’re tracking here, and the six large groups have 87 million between them. The rest of the market is becoming less and less relevant all the time, and as we’ve already seen has been suffering worse from cord cutting too.

Q1 2016 Cord Cutting Update

I gather data on a quarterly basis on the major cable, satellite, and telecoms companies in the US and their reported numbers for pay TV subscribers (as well as broadband and voice subscribers). I package this up into a slide deck for subscribers to the Jackdaw Research Quarterly Decks Service, but it’s also available as a one-off standalone purchase. This post analyzes the data on pay TV subscriptions for Q1 2016.

Cord cutting continues to accelerate

The headline here is that cord cutting continues to accelerate, a trend we’ve seen now for several quarters. As a reminder, in order to really gauge this trend, you can’t look at quarterly adds, because those are highly cyclical, and you have to look at the full set of players in the market, and not just largest, and certainly not just one type of player, such as cable or satellite companies. I’ll provide some more insight into this later in the post. On that basis, then, the chart below shows the year on year growth numbers for the industry, based on all the major public companies in the US and estimates for Cox and Bright House, two of the larger private companies. Pay TV yearly adds incl Cox and Bright House Q1 2016As you can see, the year on year declines that began a year ago in the first quarter of 2015 have grown every quarter since, and are now at over 800k. There’s no doubt at all based on these numbers that cord cutting is happening, and that it’s accelerating. More people are canceling pay TV service from these players than are signing up for service, and the gap between those two numbers is growing every quarter. The rest of this piece talks through additional detail around this trend, in several areas:

  • The additional impact on cable networks of the rise of skinny bundles and over-the-top services
  • The resurgence of cable and the decline in telco TV
  • The huge difference between trends facing larger and smaller pay TV providers.

Skinny bundles and OTT

Of course, cord cutting isn’t the only behavior that’s affecting how many customers subscribe to these services. Two particularly additional trends are the move to “skinny bundles” and the rise of over-the-top alternatives to traditional pay TV. Skinny bundles are a trimmed-down version of pay TV services from traditional providers. Verizon has Custom TV, which is one of the more extreme forms of this trend, while many other pay TV companies have also been providing similar packages with fewer channels. On its quarterly earnings call, Verizon reported that 38% of its new FiOS TV customers in the first quarter signed up for Custom TV packages, which it characterized as lower-revenue but higher margin than its traditional offerings. On the OTT side, perhaps the biggest player is Sling, from DISH. The issue from a reporting perspective is that DISH reports Sling subscribers along with its traditional satellite TV subscribers in its overall totals, without breaking them out. As such, the numbers in the chart above include several hundred thousand Sling subscribers that are generating far less revenue monthly and taking far fewer channels than the traditional pay TV subscriber. If you strip those out of the reporting (as shown by the red bars), the numbers start to look even worse:Cord cutting Q1 2016 with SlingAs you can see, you’re now talking about an annual decline that’s about twice as big, at over 1.6 million rather than 800 thousand. Why is this important? Well, if you’re a cable network, you could be affected just as much by skinny bundles and these smaller OTT bundles as you are by outright cord cutting. This is evident in the numbers reported at least annually by the major cable networks, almost all of which have declined by 2-3 million subscribers year on year in recent quarters. The only exceptions have tended to be newer networks that are still growing from smaller bases, and some of the premium networks like HBO and to a lesser extent Starz.

A cable resurgence

Another important trend we’ve seen over the last year or so is a dramatic change in the trajectories of two major groups of companies within the overall base of pay TV providers in the US. The cable companies have had a resurgence of sorts, while the telcos have faded dramatically in their ability to grow TV subscribers. The chart below compares year on year growth in subs for just these two groups:Cord cutting by cable vs telecomsAs you can see, the telcos regularly added over a million subs a year in 2012 and 2013, but since 2014 things have been heading rapidly downhill and have been increasingly negative for the last two quarters, while the cable companies have been returning closer to flat growth. Hence all those stories you’ve been seeing around earnings time for the last few quarters about the cable companies doing so well in TV sub growth, despite the overall cord cutting trend.

It’s really about large cable companies

In fact, it’s not even just about the cable companies versus the telcos, but about a division even among the cable companies. If you split cable company results by large and small companies, you see quite a disparity again:Cord cutting big vs small cable Q1 2016Here, you can see that the gains have been made almost entirely by the large cable companies, and that the small cable companies (which are even collectively much smaller) have been seeing worsening trends if anything. So it’s really that the large cable companies are making gains, while smaller cable companies and telcos are losing subscribers. The satellite providers are the last group here, and they’ve been seeing a more mixed bag of trends, with AT&T driving a resurgence at DirecTV thanks to bundling and heavy promotional activity, while DISH’s performance has been more mixed, especially if you strip out the Sling results.

Cord-cutting Update Q3 2015

I wrote a post last quarter about cord-cutting and the numbers I collect on pay TV subscribers in the US, and with all the major pay TV providers now having reported their results, I thought I’d do a quick update, especially since I’m seeing some misguided and misleading stuff out there based on others’ estimates. To be clear: cord-cutting is now a very real phenomenon, and it appears to be accelerating. A focus on single quarter results, especially on a sequential rather than year-on-year basis, can easily muddy the waters. But looking at the long-term trends makes the underlying pattern very clear.

Note: the charts and analysis here are based on the data I gather for my clients at Jackdaw Research, and a deck with lots more charts based on this data is part of the Jackdaw Research Quarterly Decks Service. You can learn more about that service and sign up here. The Q3 deck is available now to subscribers and can also be purchased on a one-off basis for $10 by clicking here. The deck from a year ago, which is similar in content, is available on Slideshare.

The three mistakes observers make

There are three fundamental mistakes people trying to measure cord-cutting frequently make:

  • They focus solely on quarterly trends, in what’s an extremely cyclical industry. Comparing this quarter’s net adds to last quarter’s tells you nothing about the underlying trends, because every calendar quarter has its own regular pattern. Ignore those patterns, or look at quarter-on-quarter trends rather than year-on-year trends, and you’ll get things totally wrong.
  • They focus only on some categories of players, such as the cable companies alone, or just the cable and satellite companies. There are three major sets of players in the US pay TV industry: cable operators, satellite operators, and telecoms operators. Ignore any one of these, or focus just on one – however large – and you’ll again come away with the wrong picture. For the last few quarters in particular, telecoms TV net adds have fallen quite a bit – leave those out of the picture, and you get a very distorted view.
  • They focus purely on the larger players. It’s very easy to focus on the largest publicly-traded pay TV providers – they’re by far the largest and  most impactful in industry terms. But even if these players serve the majority of the market, they by no means serve all of it, and in the last couple of years many of the losses have come among these smaller players. Ignoring those losses again risks distorting the picture.

A balanced view of cord-cutting

With that out of the way, I present here what’s as balanced a view as is possible to provide of what’s really going on. It’s very hard to build a truly complete picture, but if you want a representative picture, you have to include all three categories of players, and at least the largest of the smaller players too, while focusing on year on year trends. My post last quarter outlined the players I cover and the definitions I use, so I refer to you to that post if you’d like more context.

First, here’s the view of year on year video net adds for all the publicly-traded players whose reported results I track:Year on year video net adds all public playersAs you can see, the trend is consistent over the last five quarters – from almost 400k net adds in Q2 2014, the number has fallen each quarter, dropping into negative territory in Q2 2015 for the first time, and almost doubling in Q3, with almost 500k net losses among this group of pay TV providers.

The two bigger players we’re missing here are Cox and Bright House, neither of which is publicly-traded. Based on past reporting and estimates, I’ve estimated their results for Q3 2015, and adding them into the mix makes the picture look even worse:Year on year video net adds including Cox and Bright HouseLosses are now just above 500k for the quarter, and the first negative quarter (though it’s invisible in the chart) was actually Q1, when these providers lost 2k subs, according to my estimates. However, again, it was Q1 2014 that was the high point.

The dynamics between player groups are changing

Of course, underlying these dynamics is a set of different trends affecting different players. One of the reasons why some of the early commentary this quarter got things so wrong was an undue focus on the good results from some of the big cable companies. In fact, the cable companies have done better this quarter, but only because two of the big telcos – Verizon and AT&T – have dialed back their efforts in selling their TV offerings. The chart below shows year on year video net adds for these different groups of players (with cable excluding Cox and Bright House):Year on year video net adds by groupAs you can see, the cable recovery which began in late 2013 has coincided pretty much exactly with the telco slump that began around the same time. Telco adds year on year have dropped from around 1.5 million to just a couple of hundred thousand. This quarter, AT&T de-emphasized selling U-verse and actually lost subscribers for the second quarter in a row. Verizon is still gaining subscribers, but so slowly that it’s penetration rate in its addressable markets has actually begun to shrink. The satellite providers largely cancel each other out most quarters, such that their performance impacts overall market performance fairly little, but those slowing adds at the telcos are more than offsetting the slightly smaller losses at the cable companies.

A trend likely to accelerate

Hidden within these results is the fact that DISH now has its own over-the-top streaming video service, which is a potential substitute for some of these pay TV services. Sling TV subscribers are reported within DISH’s total base of subs, such that we can’t see the dynamics between the two, but others have estimated that without Sling DISH would have seen a significant drop in subscribers over the last couple of quarters. And of course Sling isn’t the only company providing these services – whether it’s indirect substitutes like Netflix and Hulu or direct substitutes like Sling, Sony’s Vue, and whatever Apple might eventually announce, a big part of the reason for the cord-cutting that’s now very evident in the market is the availability of substitutes. To date, DISH is the only one of these companies that has a competing product within its own walls, and that may turn out to be a smart strategy. But whether these companies eat their own lunch or lose share to others, it’s increasingly clear that cord-cutting is real, and accelerating.

Thoughts on the new AT&T

AT&T this morning held a conference for financial analysts in Dallas, at which it outlined both its strategy and its financial guidance following the closing of the acquisition of DirecTV a few weeks ago. The event was live-streamed, and the slides from the various presentations are available to download from this page (where I assume a replay of the conference will be available shortly too). In this piece, I’ll share my thoughts in some depth about some of the key announcements, and briefly hit a few highlights on some other items towards the end, before wrapping up with my conclusions on the prospects for the new AT&T.

Note: for broader context on the TV business that’s central to much of what’s below, see my post yesterday on cord cutting, which provides subscriber growth trends for the largest US pay TV providers.

Putting the new AT&T in context

Firstly, I think it’s useful to put the new AT&T in context, among the other large players it competes against. Here is the combined subscriber count for AT&T in the various retail categories it competes in (note that I’ve used retail wireless subscribers, which excludes connected cars, MVNO subscribers and other categories where AT&T isn’t selling directly to end users):ATT subscriber countsAs you can see, this is a formidable company at this point, with large numbers of subscribers across these different categories, with wireless by far the largest base. Verizon is the largest carrier by retail subscribers, with around 110 million, putting AT&T second, and far ahead of T-Mobile and Sprint. But in pay TV, AT&T is now the leader in both the US and the world, a dramatic change from its former position (note that “New Charter” represents the combined subscribers of Charter, Time Warner Cable, and Bright House following their merger, if successful):Pay TV subs post mergersThis combined scale, at almost five times AT&T’s previous standalone scale, is one of the two key benefits from the merger, and is something I’ll come back to below.

Cost synergies are significant, especially around content

The true definition of synergy is when two things come together and are greater than the sum of their parts, whereas the term is often used to mean cost savings that result when two things come together (indeed, AT&T talked up $2.5 billion of run-rate synergies from this deal, and that was entirely about cost synergies). However, AT&T also talked about the positive synergies that would come from putting these two businesses together, and they gave us some very interesting specifics around these.

On the cost synergy side, there are two major categories – content and operations. The content savings will come largely from the fact that AT&T can now leverage that combined scale in content buying – John Stephens (AT&T’s CFO) said during the conference that AT&T’s U-verse customers cost $17 per sub per month more for TV content than DirecTV’s customers. That obviously presents huge opportunities for reducing spend on content over time, and those savings make up a good chunk of the overall synergies. The other big chunk comes largely from consolidating operations across the two companies, getting to a single installation model and so on.

Revenue synergies could be far greater

However, to my mind the revenue synergies are much more interesting, and we got some interesting detail there too. AT&T broke out some of the cross-selling and up-selling opportunities as follows:

  • Of the 57 million households AT&T passes with its broadband service today, only 13 million have U-verse, and only about half could receive U-verse TV, whereas all 57 million could be sold TV now as part of a bundle from AT&T
  • 15 million households have DirecTV but aren’t AT&T Mobility subscribers, and so could be sold mobile services from AT&T
  • 21 million AT&T Mobility subscribers don’t take TV from either DirecTV or AT&T today, and so could be sold TV services
  • 3 million households in AT&T’s landline footprint have DirecTV but not AT&T broadband.

I’m actually somewhat skeptical of the benefits of a double play that simply combines TV and wireless, because it’s missing the broadband piece. As such, the two middle bullets there seem less compelling to me than the other two, which both involve a more traditional (and likely more appealing) bundle of TV and broadband. Landline/wireless bundles have never been popular, in part because they tend to offer small cost savings and little integration and in part because they make for very high monthly bills that many consumers would rather take in two chunks. In addition, the value proposition of a bundle that offers everything but broadband is not that appealing when customers still have to go to the local cable company for broadband, and are likely to pay more for it on a standalone basis than as part of a bundle. The reality is that the broadband/TV bundle is the one most people want to buy, and AT&T has good opportunities to cross sell these two products, and that’s the most interesting part of this to me.

Hints at new products and services

One of the most intriguing things to me was several hints from executives that new products, services, or ways of delivering existing services would be coming at some point in the future. Some of the things that were hinted at included:

  • Going over the top with a video service. There were several references to providing video over both managed and unmanaged networks, and the context was such that this didn’t seem to just be talking about TV Everywhere-type extensions to classic services. I’m very curious to see if this means we’re going to see either DirecTV or U-verse branded video services being sold to subscribers that can’t or don’t want to buy the traditional services from either company.
  • Providing optimized video services for AT&T Mobility customers. The implication here – especially given a comment about being in compliance with merger conditions – was that AT&T might offer its mobile subscribers some special access to U-Verse or DirecTV content, or possibly use the Sponsored Data model AT&T already has in place to provide zero-rated access to this content.
  • New business models for TV Everywhere authentication and sharing. There were lots of references to millennials using their parents’ pay TV login details to watch linear TV without their own subscriptions, and the opportunities to use the Mobile Share model to deal with this. That, to me, implied some sort of model under which TV subscribers would pay on some sort of per-device basis for additional streams, such that AT&T would monetize this sharing of credentials. I wouldn’t be surprised if we see more of this kind of thing from pay TV players and content owners going forward. However, TV Everywhere solutions already have a poor reputation for usability, and AT&T made portability of content a huge selling point today, so I’d expect them to tread carefully with this.

A realistic view of trends in TV

One of the things that was most refreshing about the AT&T executives’ comments during the morning was that they seem very much on top of the actual trends in the industry and not afraid of articulating them, even those that don’t necessarily bode well for traditional players. The excerpt below is from my on-the-fly notes (no transcript is available yet) based on John Stankey’s remarks on trends in the TV industry:

Pure play standalone offerings increasingly challenged. OTT will continue to grow and mature as a distribution alternative to managed networks. % of cord cutters, shavers and nevers will continue to grow. Premium content will migrate to OTT and skinny bundles. As these things occur, traditional TV advertising moves to other forms, pressuring content providers especially those with smaller audiences and less compelling content.

That seems to me both a decent summary of the trends and threats facing the traditional TV industry and a frank assessment of the implications. It’s good to see that AT&T isn’t in denial about all this (in contrast to some recent remarks from other players in the industry) and that it’s factored these trends into its projections for the combined business. In the Q&A at the end of the day, Randall Stephenson dealt with some questions on this and basically said that yes, pay TV was going to decline, but slowly, and that AT&T thought it could both grow fast enough to offset that market decline, and adapt its offerings so as to achieve similar profits off smaller TV bundles if necessary. That’s easier said than done, but given the details above about cross-selling and up-selling, it doesn’t seem too far-fetched, at least for the time being.

Two other quick notes

I don’t want to go into too much detail on this stuff, but a couple of other things were worth noting:

  • AT&T’s new advertising platform and products. AT&T has now combined its old AdWorks unit with the DirecTV advertising platform, and can offer both the scale of DirecTV and the local targeting capabilities of U-verse (and will use LTE where necessary to provide targeted advertising to DirecTV subscribers). It’s interesting to see both AT&T and Verizon investing in cross-platform advertising, albeit in very different ways (Verizon through its AOL acquisition).
  • John Donovan’s segment on AT&T’s technology platforms. John Donovan has been one of the best additions to the AT&T executive ranks over the last few years – he’s presided over a major overhaul of AT&T’s technology operations over the last few years, and that transformation is still going. During the conference, he talked through how AT&T is trying to match and then compound the benefits of Moore’s Law as it seeks cost efficiencies in network performance – it’s well worth a watch.

The new AT&T’s prospects

There’s so much more to talk about, and I haven’t even touched on AT&T’s Latin American strategy. But I just wanted to take a step back and summarize my view on AT&T as a company. I’ve said previously that when it comes to the mobile business, AT&T is the company most focused on what’s next. It began investing in connected cars, home automation, and a variety of other businesses years ago and is now reaping the benefits of its early start, capturing a significant share in connected cars in particular and driving significant net adds through that business. Even as the traditional phone business is saturating, AT&T is tapping into new growth areas better than its competitors, and that’s been important as its own traditional growth has slowed.

Today’s event, though, highlighted the fact that AT&T is still perfectly willing to compete in traditional areas too – the pay TV business in the US, and traditional phone services in high-growth markets like Mexico. Of course, that means exposing itself to some of those negative trends in TV, and Mexico is arguably just a few years behind the US and will eventually hit the same sort of saturation that the US has. However, in the US, its focus in the consumer market is going to be about putting together the different components of its offering in new and different ways. I expressed skepticism above about double play wireless-TV bundles, but I’m much more bullish about AT&T expanding its share of broadband-TV bundles in the AT&T footprint, especially as that footprint expands. At the same time, AT&T’s evolving technology foundation should give it the infrastructure it needs to pursue these opportunities with increasing cost efficiencies, while improving the end user experience. And on the business side, it’s continuing to build what’s arguably the strongest set of global assets for pursuing enterprise customers.

That’s a heck of a lot of moving parts, and there’s plenty of places for things to go wrong, but I’d argue that AT&T is easily the best positioned of the US carriers given its combination of assets and its strategy, and if it can execute well it should have a really good few years ahead of it.

An update on cord-cutting

The last of the major pay TV, broadband, and phone companies has now reported, so we have a pretty good sense of how the industry fared in Q2. As I do every quarter, I’ve put together a series of charts on the industry for subscribers to the Jackdaw Research Quarterly Decks service. As usual, there’s been tons of press about cord-cutting lately, but so often numbers that are bandied about only tell part of the story, so I wanted to provide an update with as much transparency as possible about where these numbers come from and what they represent.

A lot depends on what you measure

The reality is that this was a down quarter for the pay TV market, almost no matter how you look at it. Some of the numbers people report only provide a partial view, whereas I look at three discrete groups of companies in my reporting:

  • Major Public Players: The largest publicly-traded cable, satellite, and telecoms providers, a group that includes AT&T, Cablevision, Charter, Comcast, DirecTV, DISH, Time Warner Cable, and Verizon. These companies account for a large majority of overall pay TV subscribers in the US, but by no means all of them.
  • Public Players: A longer list of publicly-traded companies in those categories, which adds Cable ONE, Consolidated Communications, Frontier, Mediacom, Suddenlink, Windstream, and WideOpenWest to that list. This list gets even closer to covering the whole market, but is still not comprehensive. However, it doesn’t rely on estimates, and so is the most robust of the sets of numbers in its mix of comprehensiveness and foundation in actuals.
  • Public Players plus Cox and Bright House: That list plus estimates for two other companies: Bright House and Cox, the two largest privately-held cable companies, which don’t report their subscriber numbers publicly. I’ve used a combination of my own estimates and those provided by companies like the Leichtman Research Group to fill in these gaps. This longest list still isn’t utterly comprehensive, but accounts for the vast majority of US TV subscribers, though it relies on some estimates.

In the charts below, you’ll see these groups denoted as “big players”, “all players”, and “incl. Cox/Bright House” respectively.

A down quarter, no matter how you look at it

However, no matter which of these three groups you look at, it’s clear that the industry had a poor quarter, and arguably its second in a row. What’s important to note about this industry, however, is that it’s extremely cyclical, and the second quarter is usually the worst quarter of the year. As a result, I tend to look at year on year comparisons because that eliminates the cyclicality somewhat. The three charts below show net year-on-year changes in pay TV subscribers for the three groups described above:Year on year video adds big playersIf we look first at the “big players”, the trend is already obvious: year on year growth is well down on all the quarters in the past two years, albeit still marginally positive. But of course these numbers don’t include the smaller players, which often lose subscribers to the big ones. When we wrap those numbers in, we see the following:Year on year video adds all playersAs you can see, now we’re suddenly talking about a real decline year on year, and not just slowing growth. Those smaller players between them lost quite a few subscribers, and when they’re factored in we see a more complete picture. However, we’re still missing the two privately-traded companies, but based on past numbers and extrapolation we can add a reasonable estimate for them, too:Year on year video adds including Cox Bright HouseAnd now we see that this is not the first, but the second, quarter of negative growth for the industry. And you can also see that the trend started a year ago, as year on year net adds began declining then and have fallen every quarter since. Behind all this, though, is a series of interacting dynamics between the various groups of players in the market – cable companies, satellite providers, and telecoms operators. The results for these different groups are shown below:Year on year video net adds by categoryWhat you can see here is that the cable companies have actually been doing better over the past year or two, reducing their total net losses from 1.5 million to 1 million in that period, while the telecoms operators’ growth has slowed much more significantly, falling from 1.5m year on year to just over five hundred thousand. As the two major satellite providers have also seen a combined slowing of growth, the net result is that the industry has contracted for the last two quarters. There’s a little short-term stuff in here – last quarter AT&T focused on profitability in its TV base and actually saw a slight loss in subscribers, while Verizon’s marketing was constrained by its legal scuffle with content providers over its Custom TV bundles. So it’s possible we’ll see some recovery next quarter for the telecoms side of this business. But it’s increasingly clear that this is a zero (or negative) sum game, and that if telecoms gains do grow, they’ll likely come at the expense of the cable companies.

Household context worsens the picture

However, things can get even worse. The US population isn’t static, of course – the number of households is actually growing fairly rapidly, so that even static TV subscribership would mean falling penetration. Even the change from 2013 to 2014, when subscribers grew, represented a slight reduction – around half a percentage point – in penetration. And the last six months, with real year on year shrinkage, just accelerates that trend. We’re somewhere around 79% penetration at the moment, but it’s likely that this number is likely to fall by around 1% or so per year over the next few quarters. Cord cutting really is happening at this point, and it will only accelerate as more and more alternatives to the traditional pay TV bundle become available. That’s not to say it’s going to go to zero – there are still lots of barriers to adoption of alternatives, not least sports programming – but for many users, the alternatives are becoming good enough, especially as cable mainstays like HBO become available outside the bundle.

Google Fiber’s real innovation

I’ve written about Google Fiber just once before, and that was to talk about my installation experience when I briefly lived in one of the very few areas where the service is available, in Provo, Utah. However, today I wanted to unpack something different about Google Fiber, in part in response to some recent articles I’ve seen, such as this one. These pieces often cite competition from Google as the major factor in a perceived shift in the status of broadband in the US, and that isn’t quite what’s happening. I would argue that Google has had a significant impact on the rollout of broadband in the US, but mostly not because of direct competition.

Maps tell part of the story

As I mentioned in that opening paragraph, Google Fiber is actually available in very few places today. Here’s the map from Google’s Expansion Plans page:Google Fiber map

 

The company being most aggressive currently with rolling out gigabit services is AT&T, and here’s its equivalent map:

Screenshot 2015-07-06 10.33.41

 

Note, first of all, that both companies have the same three categories – cities where they offer service today, cities where they will definitely launch in future, and cities which are in an exploratory stage. That’s something that we’ll come back to later.

But the second thing to note is that, of the 27 metro areas listed in total on the two maps, just seven appear on both maps, with the other 20 being mutually exclusive. Yes, you can absolutely make the argument that AT&T is responding to competition from Google in some of these markets, notably Austin (the same goes for some of the incumbent cable operators). But in a majority of cases, AT&T is launching or contemplating a launch in cities where Google isn’t present. So, though Google helps to explain why AT&T is launching gigabit service in some markets, it’s clearly not the whole answer.

Google’s real innovation: turning the model on its head

In what sense, then, is Google having a significant impact on the market? Well, the answer is that the key innovation Google brought to the broadband market has nothing to with technology and everything to do with business models. Essentially, it turned the traditional model on its head. If you’re not familiar with how broadband and TV operators usually roll out service, here’s how it’s traditionally worked. The provider approaches the municipality where it wants to offer service, and requests permission to do so. The municipality then extracts every possible concession from the potential provider before finally (if the provider accedes to the terms) granting permission. These concessions have typically included minimum coverage requirements, free access for schools, libraries and the like, carriage of local content on TV services, and so on. Essentially, providers have traditionally had to bribe municipalities with a variety of goodies just to get permission to offer service, and then have often still had to work very hard to get access to infrastructure needed to roll out the service.

Enter Google. Google’s process, of course, was entirely different: it essentially announced a competition for a city to become the first Google Fiber location, and invited cities effectively to bid for the privilege. What happened as a result was that over a thousand cities across the US applied, and Kansas City was eventually chosen. In the process, Google turned the usual model on its head – instead of municipalities extracting concessions from Google to roll out fiber, Google would extract concessions from cities for the privilege of having Google Fiber rolled out. Cities wouldn’t impose any “redlining 1” restrictions, they’d smooth the path for Google to build the necessary infrastructure, and so on.

The first reaction of Verizon and AT&T, which had just spent painful years getting franchises in many individual municipalities for their fiber rollouts, was outrage. However, their second reaction was far more productive, which was to say that they, too, would be willing to roll out such services if cities would offer them the same terms and concessions, starting with Austin, Texas, where AT&T was one of the incumbent operators. Though this claim was met with some initial skepticism, AT&T has since followed through not just in Austin but in a number of other cities where Google isn’t present at all. AT&T, then, has benefited enormously from Google’s business model innovation, which allows for a demand-led rollout facilitated rather than held back by local municipalities. And it’s this innovation which has allowed AT&T to rapidly expand its GigaPower services to many other cities too, well beyond those where Google is competing with AT&T. (Verizon, of course, had largely completed its FiOS rollout by the time these changes happened, and so wasn’t able to take advantage of them in the same way).

Rollout details

As I close, I’ll return briefly to something I asked you to note earlier – the three categories of cities both Google and AT&T list on their maps: open markets, announced markets, and markets under consideration. This is a critical part of this whole model, and the innovation Google brought to the market, because the markets under consideration are those currently being invited by the two companies to make big enough concessions to make a rollout worthwhile. The same process that got Google Fiber into Kansas City is now being repeated across the country by AT&T and Google in very much the same way.

What’s very different between the two companies, though, is the way they treat those first two groups, and Austin is a great case study of this difference. Google announced the Austin market in 2013, and now has one neighborhood (or Fiberhood, to use Google’s terminology) up for sale. Four other neighborhoods are listed as under construction, while “Rest of Austin” (the vast majority of land area in the city) is described as “coming soon”. Contrast this with AT&T, which made a rushed announcement within a week of Google’s, but completed its 1 gigabit rollout by September 2014. AT&T’s big advantage, of course, is that it already has a network and lots of customers in Austin, and in almost all the other cities where it will launch GigaPower service. This obviously dramatically speeds up the rollout, and in almost all cases will mean that AT&T is way out ahead of Google even in cities where the two compete. (In Austin specifically, the fact that AT&T owns a lot of the infrastructure Google needs access to for its rollout has been another significant factor).

Closely connected to this is the size of the cities these two companies are targeting – though Google has tended to focus mostly on second-tier cities in its early rollout, AT&T is already in Chicago, Miami, Atlanta, Dallas, and Houston, and has other major cities like LA, San Francisco, and San Diego on its exploratory list. Again, when you already have a network, contemplating a rollout in a major metropolitan area is much more palatable than if you’re having to start from scratch. So, AT&T’s launched cities see far greater availability more quickly, but its announced cities are also likely actually see gigabit services widely deployed far faster than Google’s.

So, in the end, though Google spearheaded this move to gigabit broadband, it’s quickly ceding the market to others, and especially AT&T, which are piggybacking off its business model innovation and rolling out services much more quickly. In the end, though, perhaps that meets one of Google’s original goals very effectively, and perhaps better than Google’s own rollout could have done. After all, one of the major drivers behind Google’s rollout was improving broadband access across the US.

Notes:

  1. Redlining is the name given to the practice of excluding certain neighborhoods from an infrastructure rollout on the basis of lower incomes, lower propensity to pay, or for other reasons, which has traditionally been banned by municipalities requiring universal access.

DISH T-Mobile makes sense except for broadband

The rumors of a DISH-T-Mobile combination make a lot of sense. This is the comment I sent to several reporters last night:

This deal makes perfect sense. Given the increasing consolidation in the market, T-Mobile and DISH were in danger of becoming the lone single-service providers left in the market, with everyone else combining TV, broadband, and wireless. T-Mobile has a growing subscriber base and network but not enough spectrum, while DISH has lots of spectrum and no network, so their assets are very complementary. This merger would also go some way to overcoming some of T-Mobile’s lack of scale compared to its larger competitors, AT&T and Verizon.

Ina Fried had a more colorful formulation of the same basic idea in her piece over at Recode:

A deal between Dish and T-Mobile is akin to two people who hook up because they are the last ones left in the bar at closing time.

I think there’s a lot of logic to the deal, and it also fits with something John Legere said on T-Mobile’s Q1 earnings call about the synergies between wireless and pay TV:

I have always said on consolidation, it’s not a matter of if it’s when and how and now I’m going to add and who, because I think as we think ahead you need to think I still reiterate that in five years we will think it comical that we thought about the industry structure as the four major wireless carriers and as I said before and as Mike says many times as content and entertainment and social are moving to the internet and the internet is moving mobile, these industries, the adjacent industries are in the same game that we’re in. So whether it’s what you see Google doing. What you see the social media companies is doing or as you start to see cable players trying to move content Wi-Fi integration with mobile network et cetera, these are individual customers that are looking at both offer sets. So I think you need to think about the cable industry and players like us as not competitors but potential partners and alternatives for each other in the future.

So I think once you broaden the definition of things and I think in my mind the fixed wire and home broadband industry is the one that was of a concern there, but when you start to broaden the definition as I said of content and entertainment and video going to customers on fixed and mobile devices together and you start thinking of that industry is a far more broad set of potential partnerships integrations and mergers that the United States could be looking at and in that case I think you will see consolidation of a much broader set.

I’ve been somewhat skeptical of T-Mobile’s Un-Carrier moves, as I’ve written about quite a bit here in the past, but there’s no denying it’s disrupted the industry and created some useful innovation for consumers. Now imagine that same attitude applied to the pay TV market, and things could get really interesting.

Broadband is the elephant in the room

However, I think the elephant in the room here is broadband. Yes, T-Mobile’s LTE network is growing all the time, but wireless networks simply aren’t an efficient way to deliver broadband to the home, especially if users are expecting to be able to stream video services at increasingly high quality. Even with the combined spectrum of the two companies, there’s no way they can provide the 100-200GB of monthly bandwidth many consumers are going to be consuming. So, T-Mobile and DISH together can provide a useful bundle of mobile voice and broadband together with pay TV, but if consumers want to use Sling TV or any other over-the-top video services, that combination isn’t going to cut it, and neither mobile nor satellite broadband technology is going to solve that problem any time soon. So that’s my biggest question about the merger. I’m curious to see how the companies plan to address this if they end up announcing something.

Importantly, AT&T-DirecTV faces to some extent the same problem, but AT&T does have broadband in a significant part of the US, so this is a regional, rather than national problem. So it’s not quite the same.

Why an Apple television doesn’t make sense (and does)

It appears some sources at Apple have this week indicated to Daisuke Wakabayashi at the Wall Street Journal that Apple is no longer actively working on making a television. This doesn’t surprise me in the least – the project never really made sense to me as I’ve repeatedly written and told reporters over the past several years. It may seem like odd timing, but I thought I’d outline my thoughts as to why this is so, and at the end talk briefly about a couple of reasons why it does make sense.

Cost, margins and differentiation

If Apple did make a television, there are several things we can be fairly sure of: it would make it out of the same premium materials as almost everything else it makes, and it would want to make sure margins on such a product were in line with the rest of its product line. The challenge here is that Apple would be starting at a very small scale, so would enjoy none of the benefits of economies of scale that current TV makers have, and current TV makers already operate at razor-thin margins. Consumer electronics generally is an incredibly low margin business – single digit operating margins are the norm when companies make any money at all. For Apple to come in, raise the cost significantly because of both premium materials and its lack of scale, and then to try to recoup its supra-normal margins too would drive a price at least twice as high as televisions with similar specs, if not significantly higher. And of course we have a precedent for this in similar products: Apple’s 27” Thunderbolt display retails at $999, while Dell’s equivalent product retails for $599, Asus has one for $430, and low-cost brands go significantly lower. (I’m even completely ignoring, for now, the emergence of 4K televisions – which would magnify all these issues significantly, putting an Apple television into the stratosphere in TV pricing terms).

So why couldn’t Apple do this again in the TV space? To my mind, it comes down to differentiation. The Apple display is differentiated at least in part on the basis of its materials and its look. Arguably, the presence of the Apple logo is also a great signal in a workspace that this is a premium product – for the kinds of creatives who are likely to use these displays, this is an important signal to clients and others about the kind of work they do, and the products they use to get it done. But think about TVs and how they’re evolving. They’re mostly either attached to walls, on stands up against walls, or hidden away in cabinets much of the time. Bezels are shrinking and even disappearing. The prominent logos which once sat under the screen are disappearing with them. To a great extent the television is becoming the purest version of the black rectangle in our increasingly black-rectangle-filled lives. How would Apple differentiate on hardware here? Would it turn back the clock and increase the size of the bezel? Would people even notice if the tiny bezel were made of aluminum instead of black plastic? Would they care? Differentiation in TV hardware today is primarily about making everything but the screen disappear, and this seems totally at odds with Apple’s hardware differentiation.

How, then, to convince customers to part with double or more what they’d pay for an equivalent TV from competitors when the differentiation in hardware will be largely invisible? One option, of course, would be to add additional functionality to the hardware – a camera and microphone for FaceTime calls, for example, with the microphone doubling as an enabler of Siri for the TV. But these things have been tried and failed – FaceTime on personal devices works, but no-one has ever been able to convince families that they should be paying lots of extra money for a TV they can use as a videophone. It appears from Wakabayashi’s piece that Apple did indeed tinker with some of these things, but clearly concluded much the same thing.

Integration vs. a single input

The other way Apple could have differentiated a television is through software, and of course the vast majority of Apple’s products do differentiate through a combination of beautiful hardware tightly coupled with easy-to-use software. So, how would Apple differentiate an Apple TV through software? Well, the problem here isn’t so much that Apple couldn’t do this, but that if all the differentiation is in software, why can’t it be fed to the TV from a companion box like today’s Apple TV? What’s the difference, ultimately, between software baked into a TV and software baked into a box which directly connects to the TV? The challenge with companion boxes and traditional pay TV set top boxes today is that you often need more than one of them to meet your needs. TVs (and accessories such as receivers) come with more and more HDMI ports to cater to the range of devices the average individual or family wants to connect to them: pay TV set top box, Blu-Ray player, game console, a streaming box or stick, and so on. In such a world, it’s easy to imagine an Apple television providing a better way to manage all these inputs in a way a companion box simply can’t solve.

But what if Apple’s vision for the TV space involves more than just being another input plugged into another HDMI port? What if Apple’s plan is to take over the HDMI1 slot and convince you to dump all the other boxes you have historically plugged into your TV? To be clear, this is exactly the strategy I expect Apple to pursue with a revised Apple TV box and the Apple TV service. Under this scenario, input-switching goes away as a problem, and there’s very little meaningful difference between an Apple television and a generic third-party television fed by an upgraded Apple TV box. The only real differences are the need for two remotes and the lack of any audio integration with the TV hardware for Siri and other related functions. Both problems could easily be solved with the use of a better remote for the Apple TV, acting as both a universal remote and as an audio input device (much as Amazon’s Fire TV remote does).

The addressable market

The third reason why an Apple television makes far less sense than an upgraded Apple TV box is the addressable market. Were Apple to sell TVs, it could only target those willing to swap out whatever television they have for a new one, and at a significantly higher price than they’re used to paying. However, an Apple TV box, at a fraction of the price, has a significantly lower ASP but a vastly bigger addressable market – anyone who has any HD TV today and sees the value in adding an Apple experience. Now think about the potential revenue stream from an Apple TV service tightly bundled into the Apple TV box, and suddenly the overall addressable market and the associated revenue becomes significantly larger for this combination than for a television set. Factor in refresh cycles for televisions and the effect is magnified still further – a single purchase every 5-10 years versus more frequent upgrades on hardware and monthly recurring revenue from TV services becomes a no-brainer.

The counter-argument

Having spent most of this post talking about why a television doesn’t make sense, I’d like to briefly review a few reasons why it might, despite all these objections:

  • Control and integration: Apple’s standard model for product development is to approach hardware and software hand-in-hand, and create complete, end-to-end experiences. The current Apple TV flies in the face of this model, because it sits in the background behind a TV built and branded by someone else. An Apple television would be much more along familiar lines, tightly integrating hardware, software, and services, and creating an end-to-end Apple product.
  • Feeding the base: the reality is that many of Apple’s most ardent customers, who likely view Samsung as an inferior brand, nonetheless have Samsung TVs in their living rooms. For those used to buying high-end, well-designed hardware that works together seamlessly, having a relatively inferior product as one of the most visible pieces of consumer electronics in their homes may be irksome. Feeding the Apple base by providing them with an Apple product for this prominent piece of hardware must be tempting. There are no doubt those who would pay the massive premium to have an Apple television set, even if the total number is small.
  • Shutting out others: as long as Apple only makes a companion box, its role is essentially the same as other boxes plugged into the TV, and it has no control or leverage over them. With both the pay TV set top box and the television itself getting smarter and incorporating more functions, there’s a risk that the Apple TV slowly gets pushed out. But turn the model on its head, with Apple making a television, and suddenly Apple is the one calling the shots. It could gain huge leverage over the pay TV providers and how their content shows up on the television, for example.
  • Visible differentiation: one of the interesting things about the Apple TV is that it’s the only one among Apple’s product line today that’s made substantially out of black plastic rather than its usual premium materials. The reason for this is simple: it’s far cheaper, and the device in many cases will be hidden away in a closet or TV cabinet, especially when not in use. A television set, however, would allow Apple to be far more visible in the living room.

I don’t think any of these today come close to overcoming the objections I outlined above, but I can see why Apple at least wanted to explore the category for these reasons and others. Over time, it’s possible that the relative dynamics I’ve outlined above could shift such that the reasons for making a television start to overpower those for holding back. But for now I’m confident Apple has made the right decision.

ESPN shows Verizon it wasn’t bluffing

When Verizon announced it would be launching Custom TV, its semi-a-la-carte FiOS offering, and news first broke that some of its content partners didn’t like it, I tweeted this:

My theory here was that Verizon clearly knew its contracts forbade such a move, but that it was banking on such strong consumer support for the idea that any content owner who publicly opposed it would immediately be seen as anti-consumer. I characterized that attitude as naive, but everything Verizon has said and done since then seems to bear out the theory. Firstly, Verizon went ahead and launched the service anyway over the following weekend, and in its marketing materials it clearly played up the pro-consumer angle:

Verizon Gives Customers an Unrivaled Level of Choice With the New FiOS ‘Custom TV’…

FiOS Custom TV is designed to give customers more freedom and flexibility to choose the perfect TV plan for their home…

FiOS Custom TV delivers consumers more choice and control over their TV…

On Verizon’s earnings call this past week, the company reiterated this approach, in response to a question from an analyst:

Look, this is a product that the consumer wants. It’s all about consumer choice. I mean, if you look at the TV bundles today, most people only on average watch 17 channels. So, this is a way to give consumers what they want on a choice basis. And we believe that we are allowed to offer these packages under our existing contracts.

Note that Verizon isn’t formally relying on the pro-consumer strategy – it still claims that it believes its contracts allow this unbundling of channels. But it’s very clear that it intends to lean heavily on the pro-consumer angle in its public communications, if not in court.

Now, of course, ESPN is suing Verizon over Custom TV, which is a pretty significant step when it comes to disputes between pay TV providers and content owners, which never usually get this far. ESPN (and its owner, Disney, referenced in my original tweet) clearly isn’t intimidated by Verizon’s strategy. It’s hard to see this as anything other than ESPN calling Verizon’s bluff in the strongest possible terms.

Things could still go one of two ways here:

  • Verizon ultimately prevails in court and gets to keep its Custom TV offering. This outcome would be groundbreaking for the industry as a whole, and not just for Verizon – it would potentially open the door for more experimentation by pay TV providers along similar lines.
  • Verizon loses in court and is forced to withdraw the service, including canceling service for whichever customers have taken up the option. This would be embarrassing, to say the least.

However, the problem with the whole approach is that it sets Verizon at odds with the content owners, and especially the most powerful, Disney, in a far greater way than any simple carriage dispute does. Verizon has set itself up in opposition to the content owners on this question, not just in a matter of dollars and cents, but on the whole central question of how content gets packaged and delivered to customers. Even if Verizon wins the case (which seems like a stretch), it seems likely to damage Verizon’s relationships with these critical partners in the TV business irreparably, which could well have nasty longer-term effects too.