Category Archives: TV

The challenges ahead for Apple’s TV service

The Wall Street Journal is reporting that Apple is finally beginning to get somewhere with its TV service, and has several key content providers on board. Techpinions readers won’t be surprised by any of this, because I’ve been talking up this strategy for some time now, starting a year ago in March 2014 and most recently this past week following the HBO Now announcement. At this point, the outcome I pointed to in that first piece seems more likely than ever, but it’s still not certain that it’ll be a success. As such, I wanted to talk about some of the details of the power struggle that remains ahead for Apple (and for other would-be providers of new pay-TV services) which I haven’t said much about previously.

From lots of little games of chicken to one huge one

What’s ahead is really a huge game of chicken, with the players being Apple (and other would-be new pay TV providers), the major existing pay-TV providers (and especially the major cable operators), and the content owners, both broadcasters and cable networks. There’s already a power struggle between the content owners and the pay TV providers over the fees the latter pay the former, due to two major evolutions:

  • the shift from must-carry to retransmission consent models for local broadcasters, which means they’re now insisting that would-be carriers pay them for carriage
  • the steady increase in affiliate fees for both some individual channels and for ever-expanding packages of channels from some of the major content owners, driven in particular by the rising cost of sports rights and additional sports channels, but also by the increasing investment in original content.

We’ve seen one carriage dispute after another in recent years, with several short-term blackouts, some smaller cable operators dropping Viacom or other content providers entirely from their lineups, and most recently Verizon dropping the Weather Channel, which had hitherto been the most widely-available cable channel in the US. These carriage disputes represent smaller games of chicken, with both sides calling the other’s bluff, and waging public battles for the minds of end users. In most cases, the pay TV providers have ended up caving to some extent and ponying up the required money to keep channels on air, but it’s no longer a sure thing. The relationship between these two sets of players has become increasingly tense, but with these traditional pay TV providers the only channel to market for cable networks in particular, and realistically the main route to market for broadcast channels too, there’s been little alternative but to reach terms and move forward. But many of the content owners would love a real alternative to the traditional hegemony of major cable and satellite providers. The two major telecoms companies, AT&T and Verizon, have provided some competition, but operate very much on the same basis as the old guard.

Incentives to deal, but also penalties for stepping out

All this gives the content owners huge incentives to find alternative routes to market, both as insurance against future carriage disputes and as leverage over the pay TV providers. Few of the content owners, though, have the broad, recognizable brands that would enable them to go it alone in any meaningful way, though CBS is one of a few to be testing the waters. What they would much prefer is to partner with a player which itself has leverage and a huge potential market for TV services, and that’s where Apple comes in. To be sure, Apple today is a tiny player in the overall video market, which generates about a hundred billion dollars in the US each year, the vast majority of it going through the cable providers. But what Apple has is eyeballs, credit cards, and platforms, all of which could be applied to such a service. Apple’s leverage is entirely in its potential as a provider.

The problem, though, is that any such move by the content owners would be seen for what it is – a gambit to break down the power of the traditional pay TV providers. And as such, those providers would retaliate. They have power over these content owners in several forms, with the harshest being refusing to carry channels, but the more moderate (and more realistic) being withholding marketing dollars from promoting those channels and the packages that contain them. Until such a time as any new partnership delivers equivalent benefits (which seems far off at best) they simply can’t afford to sacrifice their existing relationships.

Apple tried one way, but now for plan B

All this creates a dilemma, and a need for a strategy which balances these competing demands. The content providers need to forge partnerships which allow them to build leverage over the pay TV providers without alienating them. For this reason, and because Apple understands the inherent challenges of going up against the pay TV providers, Apple’s plan A was to work with the pay TV providers, rather than against them. It reportedly worked with Time Warner Cable before the Comcast deal was announced, and then switched to Comcast itself, but apparently without success. Comcast is unwilling to yield two things: the customer relationship, and the lucrative set top box fees that go with controlling the delivery of the TV service. Apple would have displaced both of those in a deal with Comcast, which meant it could never happen. Comcast apparently made this clear, and so Apple went to plan B.

If Apple is successful, of course, Comcast will lose both the things it refused to sacrifice in a much worse way than it would have done had it dealt with Apple instead of shutting the talks down. At this point, its greatest leverage is its NBC Universal holdings, with NBC apparently the major holdout broadcaster, but that’s far from a deal killer for the service Apple is creating. Disney is arguably the most important content partner, with its ownership of ESPN, but with the other major broadcasters on board too along with several others, and the recent HBO deal, Apple suddenly has a pretty compelling proposition on the way. The big question now is how the larger game of chicken plays out. So much of the success of Apple’s service will depend on the exact pricing and structure, and the completeness of its content offering. And that’s where the game of chicken comes back in. If the content owners provide overly attractive terms to Apple, they undercut their relationship with the pay TV providers. If the terms aren’t that attractive, Apple’s service won’t be priced competitively.

The challenges ahead

Some of the content owners – Viacom among them – are likely to be more desperate than others, and will sign up with Apple at decent rates. Others have already shown their willingness to break ranks with the pay TV operators through their deals with DISH’s Sling TV. But others will want to tread a more careful path, and that’s the other challenge Apple faces: being truly disruptive to the current model when it can’t undercut on price, and may well end up building a comparable bundle without the a la carte options some consumers (think they) want.

One other interesting piece of leverage Apple has with the content providers is its ability to track usage across its various devices, and across live/linear, DVR, and VoD, something advertisers are particularly keen on and which traditional pay TV providers have struggled to deliver. At some point, all of this reaches a tipping point where Apple’s TV service (and those like it, from Sony and potentially others) gains enough momentum and customer and content provider support that all the content providers can swing their support fully behind it. At this point, Comcast’s refusal to play ball with NBC content will become increasingly untenable, and I would bet Apple would make it very clear (either directly or through the media) that Comcast is to blame for NBC content being absent. The big question is how long it takes to reach this tipping point, and whether Apple can get enough support in the meantime to make things worthwhile.

Of course, for some consumers, simply being rid of the cable operator would be benefit enough, but of course Apple won’t be providing the broadband service over which these services will be delivered. The cable company will still play a role in many cases as the broadband provider, and with the loss of valuable TV revenue it’ll be tempted to compensate by raising broadband prices. If cable operators then also offer comparable over-the-top TV services as a retention strategy, the appeal and impact of Apple’s TV service may be further blunted. Apple’s differentiation will be greatest in the areas it specializes in – creating great user experiences across devices. Apple can apply some of what it’s acquired through Beats to develop recommendation features, and surely has plenty else up its sleeve. The effectiveness of this differentiation is ultimately what will drive Apple’s success or failure as a truly disruptive TV offering.

US cable, satellite and telco provider review for Q3 2014

As a counterpoint to the US wireless market trends deck I published last week, today I’m making available a review of some of the major operational metrics and revenue trends for the largest publicly-held cable, satellite and wireline telecoms providers in the US market. This deck focuses on pay TV, broadband and voice telephony services, and shows growth on an annual and quarterly basis as well as total revenues and revenues per user for these services. Some of the key messages are:

  • TV subscribers aren’t shrinking – if looked at annually, to overcome the inherent cyclicality in the market, subscribers are actually growing very slightly
  • Broadband is still growing rapidly, adding several million subscribers each year
  • Voice is shrinking fast, though the rate of decline has slowed recently, as decent cable growth fails to offset the rapid shrinkage among the telcos
  • Pay TV is around a $100 billion a year market, and shows no sign of shrinking despite the shift in viewing habits towards DVR, VoD and online consumption.

I’ve embedded the deck below. You can also see it directly on SlideShare here, where you can find the code to embed it elsewhere or download it as a PDF. As with the wireless trends deck, the data behind these slides is available as a paid service from Jackdaw Research. Please contact me if you are interested in this option.

Thoughts on Netflix earnings for Q2 2014

I’m continuing my look at consumer tech companies’ earnings with a quick review of Netflix’s results released today. The whole series is available here, and last quarter’s analysis is here.

DVD by mail: Netflix’s dial-up business

Netflix has three products, with very different characteristics: domestic streaming, domestic DVD by mail, and international streaming. Domestic DVD is to Netflix what the dial-up business is to AOL, which is to say it’s a legacy business in which the company is no longer investing, and which therefore has very steady fixed costs and essentially zero sales and marketing cost. As such, it’s very profitable:

Netflix domestic DVD financials per subscriberNetflix generates a very predictable $10 or so per month from these subscribers, and half of that is profit. That’s a really great business to be in, and it helps to fund and offset the other parts of Netflix’s business.

International streaming: tantalizingly close to profitability

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Thoughts on Google Fiber, from a user

A few weeks ago,  I had Google Fiber installed at my home in Provo, Utah. Since there are still relatively few of us Google Fiber users out there, I thought I’d share some thoughts on the service from the perspective of a user. This is just a short summary of my experience. I’ve also posted a much longer, deep dive into the whole thing here.

First, the bandwidth side of things. The bandwidth is amazing, but only when you’re hard-wired into it. I get 700Mbit/s down and almost 600Mbit/s upstream pretty consistently when connected via Ethernet into the Network Box Google provides. It’s not quite the gigabit speed advertised, but it’s well over ten times the speed of any other broadband connection I’ve ever had. That makes for very fast iTunes downloads (I downloaded HD movies 3-4GB in size in 1-4 minutes and HD TV shows in well under a minute, and was able to upload a 1GB movie to Vimeo in about two and a half minutes. iTunes topped out at around 180-190Mbit/s, while Vimeo and Flickr seemed to operate at less than that (likely because of limits on processing speed at the other end).

However, all this falls apart somewhat on WiFi, which is what the vast majority of devices in the home will connect over. Right next to the Network Box (which also acts as a WiFi router) I get about a tenth of the download speed compared to being hard-wired, and about a third of the upload speed. Down in the basement, the speed drops further, and down a long hallway in my home office, the Google-provided router is completely useless. 60 feet away, the signal is so poor as to be unusable, and I’ve had to use my own router instead. That router provides 30-40Mbit/s up and down, which is OK but a far cry from gigabit speeds. And that’s a fundamental limitation of Google Fiber (and of WiFi technology) which dramatically reduces the utility on devices like tablets and smartphones, and on many other devices such as laptops which aren’t going to regularly be connected to Ethernet.

For most of what most of us use our devices for – web browsing, watching streaming video and so on – there’s going to be very little difference (at least today) in the experience on reasonably fast standard broadband and Google Fiber. And a 200Mbit/s connection would probably be about as fast as most online services could handle anyway. The other 800Mbit/s simply isn’t going to make a measurable difference.

As for the TV service, it’s totally fine for the basics, and has some clever features in the DVR and (as you might expect) search. But it’s also surprisingly un-Googley. The interface shares little design-wise with any of Google’s other services or platforms. There is no integration with other Google services such as YouTube, Google Play Music or Video and so on. And there’s no remote access to the DVR functions, which is particularly surprising in this day and age. In fact, the only way to control these functions is to be in the house, on the same network as the TV box. It seems odd for Google to be behind in the online/cloud aspects of running a modern TV service, but that’s where it is today.

The Google Fiber service doesn’t offer phone service, at least here in Provo. I suspect this is a regulatory issue, but it’s inconvenient to have to purchase voice separately, especially since landline-class VoIP services sold separately are going to be tied to the one place in the house where you can hardwire a terminal adapter. This was potentially an opportunity to do some interesting things here with Google Voice and so on, but Google seems to have decided the regulatory headaches weren’t worth it.

So what does all this mean? A couple of things. Firstly, the rush to gigabit speeds feels a bit premature, somewhat validating the more slow-and-steady approach we’ve seen from the incumbent players. Yes, we’re going to need increasing amounts of bandwidth over the next few years to support our growing demand for HD and eventually 4K video, but other than that it’s hard to see the applications that drive the need for gigabit speeds as opposed to 50Mbit/s or even 200Mbit/s. Secondly, Google Fiber still feels very much like an experiment, and one that’s disconnected from much of the rest of what Google does. That limits its effectiveness in some ways, and reduces the chances we’ll see Google do something really disruptive on a significantly larger scale. Lastly, WiFi is a big barrier to making these sorts of speeds meaningful in real life: once you get over about 30Mbit/s, most people’s WiFi routers are not going to be able to pass on the benefits to most of the devices in their homes. Future WiFi variants will help with this, but it’ll be a long time before gigabit speeds can be tapped by the devices most of us use most: smartphones and tablets.

Thoughts on Google Fiber, from a user (deep dive)

A few weeks ago,  I had Google Fiber installed at my home in Provo, Utah. Since there are still relatively few of us Google Fiber users out there, I thought I’d share some thoughts on the service from the perspective of a user. This is going to be a fairly long post, which I’m going to break up into several sections:

However, if you’d like the short version, you can go hereContinue reading

Verizon, Net Neutrality and Intel

This past week has seen two major news items featuring Verizon: the defeat of the FCC’s net neutrality regulations in court, which was instigated by Verizon, and the acquisition by Verizon of Intel’s Cloud TV business. So far, I haven’t seen many articles drawing a connection between the two, but in reality they’re both part of the broader picture of Verizon’s video strategy.

FiOS has been the focal point of Verizon’s video strategy

That strategy was kicked off years ago, when Verizon launched its first video services over 3G and then over its FiOS networks. Over time, those two efforts were united to some extent as a more coherent video strategy emerged, and  it eventually became clear that FiOS was the focal point of Verizon’s video strategy, with mobile efforts merely appendages to that. The FiOS video offering has since grown to five million subscribers, representing just over a third of the homes where it is available. This business generates several billion dollars a year in revenue for Verizon, alongside FiOS broadband and voice services, and represents Verizon’s main video business today.

However, Verizon appears to recognize that this opportunity may be under threat from trends in the market. A recent interview with the guy who heads Verizon’s consumer and small business wireline operations, Bob Mudge, hints that the company sees the writing on the wall for traditional pay-TV services from cable and satellite companies and telcos:

The pay-TV market is shrinking. It’s a slow shrinkage…
Data connectivity is what you must have. That gives the customer more options, whether to get traditional video or to use that data pipe for over-the-top (OTT) video and other online applications.

The key point here is that Mudge recognizes that many consumers will not want to buy classic pay-TV services, and that many of their needs may be met by other options. I think he’s wrong about broadband being the key service (though it’s understandable why he’d make that argument given Verizon’s strength in this area). Consumers fundamentally want content, not connectivity. Connectivity is a means to an end, and if it’s the right combination of fast and good value, they won’t care who they get it from. The TV offering is going to be the key differentiator in the consumer space, not broadband.  Continue reading