Category Archives: Video

Four Quick Thoughts on Snap’s Spectacles

Over the weekend, Snapchat (now Snap, Inc.) announced its video-recording glasses, Spectacles. In talking to reporters on Saturday and spending some time pondering the move, four main thoughts have been running through my brain. I think we’ll almost certainly spend a good amount of time on this week’s Beyond Devices Podcast discussing this, so look out for that episode on Thursday morning.

Two takes on hardware for immersive video

Firstly, it’s interesting to see Snap and Facebook both investing in more immersive video, while also making hardware investments in this space. However, they’ve chosen different focal points for their hardware:

  • Facebook is encouraging people to use their smartphones to capture 360° photo and video, but has chosen to make its hardware investment on the consumption side (Oculus)
  • Snapchat has made a hardware investment in a capture device for 115° video, but the consumption will happen on smartphones.

That reflects a broader strategic focus for each company, with Facebook focused not just on video but on owning the next big platform after missing out on owning smartphone hardware and operating systems, while Snapchat is redefining its identity (see below). Neither company, obviously, is precluded from eventually moving into the other hardware space over time either.

Snap Inc, the camera company

While speaking at a Columbia University startup event in April, Evan Spiegel first began referring to Snapchat as a camera company, and that was now obviously a setup for the Spectacles launch, which has been in the works for at least two and a half years, and Snap Inc has embraced this tagline as its official self-description now too. This redefinition makes sense – there have always been several ways to look at Snapchat: a content company, a social company, an app company, or a camera company. Of those, three still make sense as descriptors after the Spectacles announcement, but what Snap clearly doesn’t want to be seen as anymore is just an app company. But the camera identity makes in some ways the most sense – it’s the first thing users see when they open the app, and snapping and sharing pictures and video is clearly the central purpose of the company.

One of the things Snapchat has done amazingly well since its founding is evolving out of its original narrow pigeonhole into something much broader. Though known in its early years mostly for the ephemeral nature of the content shared through the platform, and thereby gaining a reputation as being somewhat shady, its identity is now very different. The additions of Stories, Discover, Lenses, and a variety of other features has turned it into something much broader, which consequently captures much more of its’ users time. Spectacles, though, are arguably the first addition to the portfolio that isn’t in and of itself about getting users to spend more time in the app, and that’s interesting.

Inevitable comparisons to Google Glass

You can’t launch a video-recording pair of glasses in today’s world without drawing comparisons with Google Glass. But the target demographic, the price point, the design, and the intent are all very different for Spectacles compared with Glass. In addition, the Snap team had the benefit of learning from what went wrong with Glass.

It’s also interesting to think about where the Spectacles technology came from – thanks to the Sony email hack, we know that Snapchat acquired Vergence Labs in March 2014 for around $15 million. Vergence sold video-recording eyeglasses under the Epiphany Eyewear brand, and actually launched before Google Glass. But there were some important differences between EE’s glasses and what Snap has now launched:

  • The price ranged from $300-500 based on storage, versus Spectacles at $130
  • The glasses required a USB connection to plug into a computer for uploading videos to a proprietary hub, from which content could be shared to various social networks, versus sharing over Bluetooth or WiFi direct to a phone running the Snapchat app
  • The glasses had a subtler design, with just one camera discreetly tucked in the corner, versus Spectacles’ yellow-rimmed cameras in both corners.

Interestingly, though, Vergence had this quote on its website when asked about the differences versus Google Glass: “Glass appears to have a few more “electronics features” and we have more “eyewear features”.” This is a great summary of the difference between Snap’s Spectacles and Glass too – the former is a pair of sunglasses that records video, while the latter was technology strapped to your face.   There’s definitely much less of a cyborg vibe to Spectacles. The Spectacles do own their role as cameras – those yellow rims are clearly intended to highlight the presence of the cameras, and lights will further highlight when you’re actually recording. Snap has obviously learned from the privacy concerns around Glass.

Why hardware?

The biggest question in mind throughout all this has been why Snapchat would undergo this transformation from an app company to an app plus hardware company, because that’s a tough transition to make. Consumer electronics involves industrial design, manufacturing, shipping and retail, break-fix capabilities, and much else besides, which an app company never needs to worry about. The business model is very different too – the incremental cost of serving an additional user with an app is close to zero, whereas the incremental cost of selling another unit of hardware is significant. Moreover, the vast majority of Snapchat’s end users have never paid it any money for anything in the past, and will now be asked to stump up $130. Given that for many of Snapchat’s users, their disposable income is probably best described as pocket money rather than a salary or even wages, that’s probably a tough sell.

Two obvious reasons present themselves: business model and differentiation. On the former front, Snapchat’s main business model has been advertising, so hardware revenue can provide a useful additional revenue stream while also hedging against any future challenges in driving ad revenue. But a proprietary camera also allows Snapchat to differentiate itself in much the same way its software Lenses already do. The Spectacles have a unique field of vision and video format, which in turn will be uniquely available in the Snapchat app, and that’s not to be underestimated.

Having said all that, we’re likely talking about a small production run here, which means the risks involved will be limited. If the product takes off, Snapchat can presumably churn out tens of thousands and make lots of money. If it doesn’t, it won’t hurt its financial performance too much (though the big bet on changing the name and identity of the company may look a little hubristic later if that’s the case). The big question is whether Snapchat can actually make money selling these glasses at $130 a pop, when Vergence Labs was selling their predecessors for more than twice that, and Snap’s version has two cameras and two wireless chips.

It’s also interesting to consider what else Vergence Labs was working on at the time of the acquisition – there were three future projects listed on the website at the time: smarter transition sunglasses, a HUD for heart-rate tracking during exercise, and an AR application. Those and others (especially given the dual cameras) are possible future directions for Snap’s glasses efforts too.

The NFL’s Twitter Gamble

Earlier today, I published a post titled “Twitter’s NFL Gamble“. The post illustrates perfectly the danger of jumping on breaking news too quickly, in that a major piece of information emerged after I hit “Publish” on the post, which totally changed the dynamic of the story. So here I am with a second post in the same day on the same topic, from quite a different perspective. A good deal of the material in the initial piece still holds, but the key point from the title no longer makes as much sense.

The key piece of information was reported by Recode, and concerns two important elements – the price Twitter paid, and the nature of the content it will carry, specifically as it relates to ads. Here are the two key paragraphs from that piece:

“While the NFL and Twitter haven’t disclosed the price for the package, people familiar with the bidding said Twitter paid less than $10 million for the entire 10-game package, while rival bids topped $15 million. Those numbers are a fraction of the $450 million CBS and NBC collectively paid for the rights to broadcast the Thursday games. (A note from Twitter’s Investor Relations Twitter account notes that the company had already baked the cost of the deal into their 2016 guidance.)

One big reason for the disparity is that CBS and NBC have their own digital rights, and they will own most of the digital ad inventory in their games, people familiar with the deal say. So Twitter will be rebroadcasting the CBS and NBC feeds of the games, and will have the rights to sell a small portion of the ads associated with each game.”

With this as context, it becomes clear that this is far less of a gamble for Twitter than I originally understood, and actually far more of a gamble for the NFL. Splitting the broadcast and digital rights for the Thursday night games was a great innovation, and one I actually wrote up pretty positively in a post for Techpinions. But it now appears that the NFL has chosen not to be as disruptive as it might have been. Rather than license these rights to a new online video player, with all the advertising rights packaged in, the NFL has chosen to forego a big new revenue opportunity from the digital world and instead hand the ad revenue opportunity mostly to CBS and NBC, while Twitter merely gets the benefit of increased traffic from broadcasting games almost entirely packaged up by others.

That represents a big gamble on the NFL’s part, that it’s better off giving most of the rights to traditional players rather than opening up a new opportunity with a major video player from the online world. The Recode reporting certainly suggests that the NFL even chose to go with Twitter despite the fact that its offer was lower than others. The NFL may appear to be doing the opposite of gambling here, but the risk is that it’s setting up these online rights as something much less than what they could be. Over the next few years, these online rights could be really lucrative, and this Thursday night package was a great way to really test that market, but the NFL is putting all its eggs in the broadcast basket instead.

Twitter’s NFL gamble

Bloomberg broke the news this morning that Twitter is the winner of the digital rights package of Thursday night games the NFL has been auctioning off recently. Twitter came out of left field (if that’s not the wrong metaphor for this particular sport), and it’s worth thinking about both why Twitter would want this deal, and what the implications might be.

Update: some significant new details have emerged since I wrote the first version of this post, notably that Twitter has likely paid far less for these rights than previous rights owners, in part because it will sell very few ads itself and will largely carry the broadcast and ads provided by the network broadcasters. As such, the size of the gamble is significantly smaller, and the comments about guidance also make more sense. I subsequently wrote a second piece which covers the later news.

Firstly, we know now that Jack Dorsey really is serious about making live – and live video specifically – a focus in 2016! So far, Twitter has been used almost entirely for people to talk about live events being broadcast on other platforms, which has meant it hasn’t been able to benefit as directly as some other players from those live events, even if massive numbers of tweets were sent and even shown on television. Last night’s NCAA Championship basketball game is a great example of this. This deal suddenly gets Twitter directly into the business of showing these games and tapping into some of the additional associated revenue opportunities. It also significantly ups Twitter’s live video game from short, grainy videos to professionally produced content.

One of the most interesting things is going to be seeing how this fits into the Twitter product – with all the other bidders, there were obvious existing platforms for broadcasting NFL games, but with Twitter they’ll have to create a completely new home for this kind of thing. It’s possible they might use Periscope, but given the poor quality of most Periscope videos until now, I would think the NFL might have qualms about having their high-quality content appear there. Now that the news is out from the NFL, with comment from Twitter, we know that Twitter is describing the experience as being “right on Twitter,” but I’m curious to see the exact implementation.

The other big questions is how Twitter will do selling ads against this content – it’s obviously a very different type of advertising from what they’ve sold before, but it gives them their first real opportunity to cross-sell these different types of ads and break into television advertising for the first time. It may also be a first real opportunity to make really good money from the “logged-out users” Twitter has been talking up for so long, but who are so hard to advertise to effectively.

And then there’s the question of how much Twitter paid for the rights here. It’s hard to guess at because this package of rights is very different from any other similar package sold before – non-exclusive in the US, but exclusive internationally. But almost no matter what the exact number, it’s likely to be a meaningful fraction of Twitter’s overall revenue. That’s one of the reasons Twitter is such a surprising bidder (and winner) – it’s a much smaller company than most of the other names that were bidding, with just over $2 billion in revenue last year. If the rights costs in the hundreds of millions of dollars, which seems likely, then they may well cost 10-20% of revenue. That’s a huge gamble, and we all know the gamble didn’t pay off for Yahoo. The strangest thing is that the Twitter Investor Relations account tweeted this morning that all expenses associated with the rights are already baked into its guidance for the year. That seems particularly odd given that Twitter likely didn’t know whether they’d won the rights yet when they announced their guidance, and it’s a material amount of money.

Hopefully we’ll get more detail on all of this either later today or over the coming weeks, but it’s a fascinating illustration of the sheer breadth of the companies getting involved in the live video business at this point, coming from a diverse set of starting points within the broader industry.

Quick thoughts on Netflix Everywhere

Note: you can see all my previous posts on Netflix here. The analysis here draws on financial and operating data I collect on Netflix, along with around a dozen other big tech companies. Subscribers to the Jackdaw Research Quarterly Decks Service get quarterly charts based on this data, and data sets are also available to purchase on a one-off or subscription basis. Please contact me if you would like more information about any of this.

Netflix just announced that it’s expanding to around 130 new countries including many of the largest countries it wasn’t in yet. This was a huge and unexpected move, at least so early in 2016, since Netflix had previously indicated that it would make this move more gradually during the year, with just a handful of markets pre-announced for early 2016. I want to focus on the possible financial impact of this expansion, because it seems to me that it could be significant.

First off, Netflix’s International business is significantly less profitable than its US business:Netflix contribution marginsI’ve written in the past (somewhat jokingly) that every time its international business threatens to turn a profit, Netflix expands into a few more countries. As you can see, though, its International segment continues to be unprofitable at this point, and has much lower margins than its increasingly profitable US streaming business. Why is this? There are several reasons, but they’re all applicable to this new expansion and the likely financial impact.

Free trials

Firstly, Netflix offers one-month free trials to customers. Naturally, the impact of these free trials is heaviest in new markets, and you can see this when you look at the percentage of Netflix customers in various markets who are included in its membership count but not in its “paid members” count:
Free trial subscribersIn the past, as Netflix has expanded into new markets, this percentage has been in the 30% range, though it’s recently dropped down to around 10% or just below. However, with 130 new countries going live simultaneously today, it’s likely that this number will skyrocket. With 25 million members in its existing markets, it’s easy to imagine that Netflix might garner comparable numbers of free trial subscribers in the coming months in 130 countries. As such, a huge percentage of its subscribers overseas will be incurring costs but not generating revenue.

Marketing costs and scale

Another major reason why new markets are less profitable is that Netflix has to do far more to promote itself in these markets where customers aren’t yet familiar with its brand. This chart shows marketing spend as a percentage of revenues for the US and International streaming businesses:Marketing costsAs you can see, marketing spend is a much higher percentage of revenue in the overseas business than domestically, where Netflix has actually been reducing its marketing spend other than in its big new content launch quarters.

As Netflix scales in a given market, this impact is reduced, as the base of revenues from existing customers allows the company to spread that high marketing cost over a larger base, and as awareness and therefore word of mouth marketing grows. However, with 130 new countries, Netflix will have to spend heavily on marketing in the coming months to promote its services. Another huge scale effect is the shared costs of doing business in a new country – converting content to new languages, hosting the content locally, and so on all adds up, and in these countries those costs will be shared by a very small number of subscribers in the short term.

Outgrowing the DVD business

One interesting aspect of Netflix’s business which I’ve covered in the past is the fact that the US DVD business continues to throw off very nice profits, which in turn has largely funded Netflix’s overseas expansion:International vs DVD contributionsThe problem is that this new expansion will be so significant that it seems very unlikely Netflix will be able to offset the losses with its cash cow anymore. As such, overall margins will likely suffer significantly.

The financial impact could be considerable in the short term

For all these reasons, I believe the financial impact of Netflix Everywhere could be very significant in the short term. I’ve been pretty bullish on Netflix overall, and I’ve felt that its slow and steady international expansion coupled with its gradual improvement in US streaming margins was a fantastic combination. This big-bang approach threatens to derail that strategy, albeit only temporarily, bringing what might have been a longer-term dampener on margins forward into a much more compressed space of time, but opening up a far bigger opportunity longer term. I’m very curious to see how Netflix talks about the financial impact here – its press release on the news was conspicuously devoid of any talk of the financial side. But the market certainly seems to like the news so far.

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.

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.

Thoughts on Neflix’s Q1 2015 earnings

I’m kicking off the Q1 2015 earnings season (past earnings posts here) with a post on Netflix, just as I did last quarter. I’ll also be doing an updated deck for subscribers to the Jackdaw Research Quarterly Decks service. Having done a pretty broad run-down last time around, I’m going to focus on three things this time around:

  • Subscriber growth, especially in the domestic streaming business
  • Profitability of the US streaming business
  • Profitability of the other two businesses.

Subscriber growth in the US becomes ever more cyclical

As I said last time around, subscriber growth in the US is likely to slow down over time as the service reaches later adopters and much of the lower-hanging fruit is already harvested. However, Netflix had a really good quarter for net additions in Q1, and year on year additions were flattish compared to last quarter rather than down dramatically too:

Quarterly net addsYear on year sub growthSo what happened? Was I wrong about the long-term trend? Actually, no. What’s happening is that Netflix’s domestic subscriber growth in particular is becoming increasingly cyclical, driven heavily by new series launches in Q1 and lower in every other quarter. This is easier to see in this quarterly chart showing just US streaming subscriber growth: Continue reading

Quick Thoughts: Periscope and Meerkat

I’ve been meaning to write something about Meerkat for a while, but haven’t got around to it. Now that competing product Periscope has launched, I feel like it’s finally time. A brief primer for those to whom these names mean nothing: Meerkat launched several weeks ago, and is a barebones personal video broadcasting app for iOS, and Periscope is a very similar but more polished app which Twitter acquired a while back and launched yesterday.

Watch me talk about this stuff

I did a quick interview with Reuters TV yesterday on the topic of these two apps, and you can see that here.

Also yesterday, by way of testing Periscope, I did a quick Periscope session where I talked about the two, which I subsequently uploaded to YouTube:

Meerkat’s faster start helped rather than hurt Periscope

Given that people knew about Periscope even before it launched, there has always been discussion about how the two would compete and whether Meerkat would have such a lead by the time it launched that Periscope would be dead in the water. I was always skeptical about that – being first doesn’t always (not even mostly) lead to winning in these battles. and first-day results from Periscope seemed to bear that out. Dan Frommer of Quartz posted this chart this morning:

This shows the number of Meerkat and Periscope-related tweets over the last few weeks. As you can see, it took Meerkat most of that time to reach the 30k per day mark, but Periscope almost hit that number in its first day. What I’ve wondered about, and what now seems to be happening, is that Meerkat actually did Twitter and Periscope a huge favor by teaching people about the concept and letting them experiment with it, such that by the time Periscope came along people immediately understood the value proposition.

I prefer Periscope so far

On top of that, as I alluded to in my first paragraph and in the video above, I find Periscope to be much more polished and easier to use than Meerkat. Meerkat seems very much like a cheap Android app, somewhat ugly in its interface and hard to navigate around. Periscope seems much more better thought out, nicely designed and professional, much more at home on iOS (the only platform both apps are on, for now). And of course then there’s the fact that Meerkat got cut off from Twitter’s social graph shortly after launch, which will make it harder for Meerkat to sign up new users, because the process of finding followers will be much harder. For power Twitter users, custom curation of following and follower lists has always been important, but for mainstream users easy setup is key, and Meerkat has likely lost some of that.

Periscope isn’t perfect – the fact that I had to post the video of my session from my camera roll to YouTube rather than being able to share it directly from the app is something I hope they’ll fix in time. Both apps force you to use a portrait orientation, which is fine for selfie-style videos but poorly suited to either group shots or shooting a scene (and, as this BBC citizen journalist expert mentioned, poor for incorporating into professional news broadcasts too). But I like the fact that it keeps sessions in the app for viewing after they’ve ended, unlike Meerkat, although finding those needs to get easier.

It’s still early days here, but I think Periscope has a fantastic chance to dominate, given its polish, its ownership, and the fact that Meerkat laid the groundwork for it. Meerkat isn’t necessarily doomed, but there’s little in my mind to recommend it over Periscope, and I think the latter will pretty quickly become dominant.

Why did these products break through now?

The other question worth thinking about is why these two apps suddenly appeared at this time, and what’s made them so successful when other previous efforts have failed. I think it comes down to two main things, and a third factor which has helped too:

  • Mobile-first products – these products don’t really exist in any meaningful sense on the web or desktop – they’re mobile-first, and only enable streaming from iPhones. Meerkat allows sessions to be viewed from the web, while Periscope doesn’t, but they’re clearly designed for both broadcasting and viewing on the device you have with you all the time. This also allows them to tap into notifications, which are huge for real-time services.
  • Twitter as megaphone – speaking of real-time, Twitter has become the real-time platform, with many people keeping it open and watching the tweets roll in more or less as they happen. It’s already been the real-time platform for covering current events, but that has largely meant text and the occasional picture. Video adds a whole new dimension to this real-time element, and Twitter becomes the megaphone through which these broadcasts from apps get shared with the world. Tapping into existing Twitter audiences and leveraging the retweet as a way to seamlessly rebroadcast popular streams is a huge part of why these services are successful. It’s also the biggest reason Twitter’s acquisition of Periscope makes sense – it adds another vital dimension to Twitter’s “media” strategy.
  • Tech reporters getting on board – this was arguably less a catalyst than an accelerant, but quite a few tech reporters quickly jumped on board with Meerkat, tried it out, broadcast themselves and got the product through its awkward “here’s me eating my lunch” phase that all sharing platforms seem to have to go through. Though that phase was repeated as Periscope launched as regular people tried it out, that early reporter experimentation meant we quickly learned what worked and what didn’t, and this early experimentation by those with significant followings helped the product to get far more attention than it would have got through more of a grassroots adoption by regular people.

Breaking into the mainstream is the next challenge

The challenge will be transitioning from this early success among those who have significant followings on Twitter to regular people. Are ordinary people whose Twitter audiences consist mostly of people they know in real life going to use either of these two services? Or will their broadcasts only be meaningful when they happen to find themselves in the right place at the right time, as with yesterday’s building collapse and fire in Manhattan? I suspect that over time we’ll see some new Meerkat and Periscope celebrities emerge, just as we’ve seen Instagram and Vine give rise to new personalities with significant followings seemingly out of nowhere. But I think that, most of the users will be viewing, not streaming, and that actually fits great with Twitter’s new direction.

Quick thoughts: Defragmenting media on Facebook

Facebook seems to be working on two fronts to bring content from third party sites natively into the Facebook experience. This began with video, where Facebook has been quietly bringing both major traditional brands and smaller content creators into the core Facebook experience. But there are now reports that Facebook plans to do the same with news articles from major publications like the New York Times, Buzzfeed, and National Geographic.

I’ve talked previously about the video efforts, and in that piece I said this:

Facebook has become a massive destination for video, but almost all the video is actually hosted on other platforms. That obviously has cost advantages for Facebook, but it means that it doesn’t own the content, and therefore can’t monetize it effectively. It also means that engagement around videos on Facebook is fragmented, with popular YouTube videos attracting millions of comments scattered across hundreds of thousands of different user shares of the same video.

There are lots of aspects to all this, and Facebook is no doubt talking up the performance and monetization benefits of publications hosting their content directly on Facebook. But I think one of the other key benefits is the ability to overcome this fragmentation, and that applies just as much to news as it does to video. So let me expand on that a bit. The problem as things work today is that there’s no single version of either a video or an article on Facebook, just the original on the third party site. Meanwhile, there could be thousands of individual shares of that video or article on Facebook, with no connection between them. On the third party site there might be an indication of the number of third party shares, but the site has no easy way to digest what’s happening on each of those shares, and Facebook users have no visibility into how many shares, comments or other metrics the article or video is capturing in total across Facebook. Sometimes Facebook takes an article shared my multiple friends and bundles it into a single card with a single link, but there are still two entirely separate discussions happening among two separate groups of friends.

What Facebook could do if these things were being shared natively through Facebook is start to aggregate all this activity much more effectively, both for the content owners and for users, with commenting, stats tracking and so on happening much more effectively. And of course Facebook could share much more data about the users sharing the content with the content owners, so that they’d get a much better picture of who’s viewing the content. One of the key challenges with Facebook (in contrast to Twitter) is that sharing is inherently private, which provides almost zero visibility for content owners. With native sharing on Facebook, that could change, though of course it raises some interesting privacy implications. If you’re commenting on my video or article on Facebook, does that mean I now get to see your comments, even if they’re only shared with your friends and not public?  And in a world where many news sites have either switched off comments or left them on but failed to curate them effectively, could Facebook help to provide a better class of discussion?

There are so many aspects to all this, including some significant risks for the brands involved. But it seems to me that they would at least in part be making the following tradeoff: ceding control over hosting and branding the content itself in favor of better visibility and tracking of the engagement with that content. For some of them, at least, I’m guessing that’s a tradeoff worth making.