Monday, September 14, 2009, 10:08 AM ET|Posted by Will Richmond
Though TV Everywhere ("TVE") is still in a nascent stage, with trials either underway or not even yet started, there has been no shortage of hype around it. I've been among those who have argued that if these trials work as intended and the rollouts ensue, TVE would be a big win for video service providers (cable, satellite, telco), content providers and consumers. But recently I've started to think there's another TVE angle that has not really been explored - the possibility that "TVE 2.0" could enable certain cable operators and telcos themselves to become the biggest players in "over-the-top" (OTT) video.
(For those not familiar with the term OTT, it refers to the idea of video being delivered to homes over a broadband network that isn't owned by the video provider itself. So for example, when you watch Hulu in your home over a Comcast broadband connection, Hulu is going "over-the-top" of Comcast. Hulu doesn't own the underlying network, it just rides on top of the one that's there, in effect competing with Comcast's own video service.)
To date TVE has been positioned by incumbent video service providers as an online adjunct solely available to their traditional, paying multichannel subscribers. While Comcast has been most emphatic on this point, no other operator that has announced TVE trials has deviated from this approach either.
But what if, at some point down the road, TVE was "unbundled," meaning that you could subscribe just to TVE, and not the traditional video service? Cable operators and telcos have little incentive to do this within their current service or "franchise" areas, but the lure to offer TVE 2.0 to households outside their franchises could prove irresistible. If pursued, this could actually turn cable and telcos into the biggest over-the-top players themselves, potentially dwarfing those typically thought of as key OTT competitors (e.g. CE companies like Sony or computing companies like Apple, or aggregators like Netflix or Hulu). In a TVE 2.0 world, the hunted could become the hunters.
The franchise concept is key to understanding how the cable and telco video distribution business work. In short, a cable or telco needs to win an agreement with the "franchising authority" - typically a municipal government - to offer video service in the municipality. Agreements are required because the video distributor needs legal access to rights-of-way to operate (to hang its wires on poles, dig up streets when necessary, etc.). Franchising may seem anachronistic in the digital age, but it remains the essential determinant of where cable companies or telcos operate (note that because satellite companies don't require rights-of-way, they operate nationally, outside the franchising domain).
Now put yourselves in the shoes of Comcast, for example. You've worked hard to wring every possible dollar out of subscribers who live in your franchise areas, by successfully introducing triple-play video/voice/Internet bundles, digital tiers, sports tiers, movie channels, HD, additional outlets, DVRs, etc. With all of these services, the average revenue per home serviced today is a multiple of what it was just 15 or 20 years ago.
But growth is slowing, and new competition from OTT providers looms. So where does the biggest new growth opportunity exist? Answer: outside traditional franchise areas. To get a sense of how big this opportunity is, even Comcast, the largest U.S. cable operator, serves only about 25% of the country, meaning almost three-quarters of American homes are currently out of its reach. To grow their addressable universes, Comcast and others traditionally bought other cable operators. In fact, fearful of the power any one cable company could gain, the FCC imposed a 30% ownership cap. Coincidentally that cap was just overturned by a U.S. Court of Appeals a few weeks ago.
In the traditional video distribution business, buying other operators was the only way to build an operator's footprint. But with TVE 2.0, a company like Comcast could use broadband so that, for the first time, it could operate everywhere. They key is being willing to unbundle TVE from core cable service so that a consumer can subscribe solely to TVE service.
Doing so would in effect pit Comcast, for example, against other cable operators, a major breach of cultural etiquette in the clubby cable industry. But faced with the choice of acquiring other operators for around $5,000 per sub, or just introducing a capital-efficient and high-quality linear/on-demand OTT service over broadband, powered by Move Networks (as one option) it wouldn't even be a close call. In fact, Comcast could cherry pick the incumbent's video customers, in turn driving that company's valuation down and thus opening up the option for it to eventually swoop in and acquire the incumbent operator for far less. Or it could decide not acquire, and instead just focus on rolling up OTT subs.
Will cable and telco go over the top? Who knows. They will surely have what it takes - TVE expertise, requisite technology, content relationships, private video delivery networks, customer care facilities and deep pockets. All that's really needed is the motivation to proceed. For now, operators are rightfully focused on getting TVE working right for their own subs. But I suspect the business cases for TVE 2.0 are already being run.
What do you think? Post a comment now.