A couple of months ago, I wrote a piece called “The Virtual MSO” which described a vision for the Internet video service of the future, the platform that would support it and how the Virtual MSO will fundamentally re-shape the pay television industry. Here, I handicap the winners and losers in that new world order.
The central point I made in “The Virtual MSO” is that the migration of TV to the Internet will pull along attributes from both the traditional cable model (“MSO” or “Multiple System Operator” is the industry term for a cable operator, like Comcast) and the first generation of ad-supported Web video services like YouTube and Hulu. I refuted the assumption by some that free, ad-supported Web video would displace consumers’ need for pay TV services and cause them to “cut the cord”. But I hypothesized that if a new type of service (the “Virtual MSO”) offered consumers something that blended the best of both, consumers would embrace it and the traditional pay TV business would be seriously pressed to adapt.
“What if someone offered you a service for, say, $69.99? per month that integrated Web video and pay TV — allowed you to get any Web video (like free broadcast network TV from Hulu), along with a handful of linear channels you select (we really only need linear for sports and breaking news) plus a rich VOD library of premium TV content and movies? And you could access it from anywhere at any time from any device – TV, PC, netbook, smart phone. Streaming or download. No special set top box (Web connected TV’s and open set top devices will leapfrog service-specific boxes), no truck roll, not restricted by geographic footprint or multi-billion dollar infrastructure build outs – because it’s an IP based, broadband distributed, managed service.”
In one sense, this is obvious. It’s hardly controversial to suggest that there will be Internet distributed pay TV services that follow their cable, satellite and telco predecessors. Cable came first, DirecTV took the same basic business but used satellite distribution, AT&T, Verizon and others followed with telco IPTV services. The difference is that the Internet distributers, aka the Virtual MSOs, will have the benefit of the lessons of the TV past and the lessons of the Web. We now know people value an on-demand experience more than linear except in a handful of instances (again, sports, other live events and breaking news). So the service will have the inverse ratio of linear to on-demand, relative to the traditional MSOs. The business model will look more like the traditional pay TV dual-stream - subscription and advertising - revenue model. High-quality, high production value content is expensive to produce and advertising alone isn’t likely to be enough. But the user experience will reflect the best of the Web – largely on-demand, in the cloud and available on any device, Web-like search and discovery, etc. There will be a huge cost advantage to the operator, which unlike its competitors, would not have to build out its own proprietary network.
Some commentators, like Mark Cuban, have written that the Internet can’t support full-blown Internet TV today. Mark’s right. Today, it can’t support millions of simultaneous users on linear video streams, but the popularity of premium on-demand content services like Hulu and Internet-distributed live events like March Madness along with technology and equipment advances like Cisco‘s new CRS-3 router show that we’re heading there and even Mark acknowledges that it’s a matter of time. If the capacity is there in a meaningfully disruptive way (and remember, the VMSO is a largely on-demand service with select linear programming) in the next, say, five years that’s a big, big, deal for the $364 billion global pay TV business. Particularly since five years is plenty of time for agile companies like Apple and Google who are gunning for this business, but may not be enough time for the slower moving pay TV operators who will have to find a way to adapt to save themselves from becoming dumb pipes. And remember, it doesn’t have to be “as good as” it just has to be “good enough”. The landline voice business laughed at cord cutting for a long time -- ‘no one will rely on flaky cellular networks with scratchy quality and dropped calls in lieu of a home landline, ha ha ha’. Then cellular got "good enough", hit the tipping point, and nobody in the landline business laughs at cord cutting anymore.
So who will be the winners and losers in this new TV world order?
The New Entrants
The best bets among the newcomers are -- no surprise -- on four large consumer Internet companies – Apple, Google, Microsoft and Amazon.
They all have:
- the ambition
- the experience running consumer-facing services
- the technical/ software leadership (the VMSO won’t be a network or box-centric business, but a software-centric business)
- the very deep pockets needed to get over the content rights hurdles
- staying power (it will be a bumpy road)
Netflix, Hulu, YouTube, Boxee, Sezmi and many other agitators will help drive the movement (and may be acquired by these larger companies to advance their causes in one way or another), but ultimately I think these big four consumer Internet companies – Apple, Google, Microsoft and Amazon -- are the most likely to change the pay TV landscape forever and Apple and Google are the clear frontrunners.
Apple is building a subscription video service on its iTunes platform and will likely come out with a living room display device, think an iMac with a 52” screen built to replace your flat screen on your living room wall with a hybrid remote/keyboard and seamless integration with other Apple devices in your house (like the iPad on the kitchen counter). Apple people will love it and if the premium content library is there (the big “if”), for the first time a meaningful segment of the population will be just fine with Apple (along with the open Internet) as their sole pay video provider. Another significant development favoring Apple is its recent embrace of advertising. The fact that it has acquired Quattro Wireless to build a mobile ad business is important in many ways not the least of which is that it is a fundamental shift for Apple which has up until now eschewed advertising altogether. People have suggested that the economics of Apple’s planned subscription video service won’t work because it’s a single revenue stream business – well, probably not any more. Apple is now in the ad business too.
Google has stumbled in its premium video efforts to date (partly as a result of trying to run premium video services under the YouTube brand – obviously a losing battle). But it seems to now be getting serious about this space and its new Google TV JV with Sony and Intel shows it wants its Android platform to be the OS for the VMSO. It has said suggested that it does not plan to acquire rights and offer the consumer content service as part of this initiative, but that will likely change as Apple and others assemble rights and expand services. Google’s an ad-driven business. It built the Adwords/ Adsense cash machine on top of its consumer search service (not on top of platform technologies like Chrome or Android). Google will need to build a premium video service to build the video ad business to which it aspires.
MSFT is building multi-screen platform capabilities in its Mediaroom IPTV middleware platform as well as in its Silverlight technologies. MSN has aggregated rights for an over-the-top consumer content service offering in Europe. My guess is that these initiatives will likely come together with some sort of broader based consumer video service in the not too distant future. Although Microsoft’s opportunity may be challenged by its silo’d culture and it may take the vision and initiative of someone at the top to connect the dots within Microsoft.
Amazon is a little less obvious but I think it should be taken seriously. Amazon’s video service plus its huge investment in cloud infrastructure provides key building blocks for a VMSO. It has done a lot of legwork on rights acquisition. It could put together a bundled white-label infrastructure with aggregated rights for other aspiring VMSO operators or launch a full-blown consumer VMSO service itself.
Each will need to build (or buy) an online software platform that can manage all the things an MSO does but in an Internet environment – linear and on-demand video, packaging and publishing, entitlement and authentication, subscriber and device management, integration with advertising, transactional and billing platforms, DRM, CRM etc – as well as integrate web video along with social, search and discovery features etc. – and manage all of that across any device (disclosure: this is what my company, Extend Media, does)
The biggest question mark around all of this has to do with the content rights landscape. Each VMSO operator will need to acquire the content rights for their services and they will have to write very big checks, but the rights are available. There is Federal law to the effect that cable programmers have to do deals with any operator who is willing to pay their market rates (the result of court battles weighed by the nascent satellite industry years ago). Right now digital distributors are approaching this by trying to acquire narrow slices of digital rights in a piece meal fashion to satisfy nascent web or mobile services, but before too long, the opportunity will be obvious enough, the Internet capacity problems will have foreseeable solutions and they will start approaching things more like they are aspiring pay TV operators and they will say (in the courts, if they have to) “we are no different from a start up cable, satellite or telco TV company (other than the fact that we will take a different distribution path) and we want the entire bundle of TV rights (linear and VOD) that you license to everyone else in the pay TV business and we’re willing to pay just what a fledgling cable, satellite or telco operator would pay”. Accordingly, the new VMSO’s will have to adopt the existing pay TV business model (subscription and advertising) to pay the big bucks for subscriber fees to programmers. The costs of entry will be great, but also the potential rewards. That may seem like a reach today, but before long the several hundreds of millions that they will have to pay to get it all (i.e. the full bundle of rights required for the VMSO to be viable) will seem like a good bet and all of Apple, Google, Microsoft and Amazon have the means to do it (for example, my guess is Google could have pre-paid three[?] year’s worth of the full monty of TV/digital rights for a VMSO service for what it paid for YouTube).
I should also mention the CE/ HDTV manufacturers -- Vizio, LG, Sony, Samsung, etc. It’s possible some Web connected TV manufacturers will launch VMSO content services of their own. More likely, they will become aggregators of services and when you take your web-connected TV home you will plug in a broadband cable, turn it on and see a collection of widgets for a variety of content services aggregated by the TV manufacturer with whom you may have the primary billing relationship. But some of these guys might also pay up for the full array of content rights and try to displace your current pay TV provider.
The Incumbents
The incumbent pay TV operators are, of course, well equipped to build virtual MSOs in many ways. They are in the MSO business already and own many of the broadband connections over which VMSOs would presumably deliver their services (and since we now have complete uncertainty around Net Neutrality this could be very important). Their biggest problem is that they have the most to lose. So many will only move when newcomers force them to. Even then, some will stick their heads in the sand (dumb pipes). Others will try to respond but will be unable to move quickly enough (more dumb pipes). Others, the survivors and winners in this category, will decide that if anyone is going to cannibalize them, it had better be themselves. They will launch subscription broadband video services, in and out of footprint, that appeal to the generation that grew up on the web instead of the TV -- the real threat to the pay TV industry is less cord cutting that it is a whole generation that may not care to buy the cord in the first place -- and position it as a compatible entry level tier alongside their full service cable, satellite or telco TV offerings.
I think Comcast is the only operator that is currently adequately prepared and positioned for the VMSO. In 2006 Comcast bought the software capabilities (its acquisition of thePlatform), and then it launched an aggressive IP network infrastructure initiative (Project Excalibur). With the pending NBCU acquisition, it will control a sufficient wealth of premium content that, when combined with web content, will be enough to launch a meaningful consumer offering. When it can’t grow its traditional business and/or one of the newcomers pushes it, Comcast will have the all the ingredients for a viable VMSO offering – in and outside its cable footprint – and won’t need anyone’s permission. At the outset it might not have all the programming customers want, but it could be “good enough” at the right price point to compete against the newcomers and other operators.
Comcast is the only operator who sees broadband video as both a threat and an opportunity and understands that its TV Everywhere efforts have a dual purpose -- preserve the status quo as long as possible but also build the offering (they are getting the digital rights to content now) and be ready to offer a national broadband subscription service when the time comes.
The other big challenge for incumbents is technology. They have a lot of it for their current pay TV services but not the kind they need for the VMSO. They will need to develop a software platform with capabilities that can run a service on and over any network and the old approaches of hardware and network based solutions won’t be particularly relevant. The telco operators will be a little better off with their more modern IPTV infrastructures and platforms but unfortunately they used a lot of legacy cable technology in many of those buildouts.
Content
We’re hitting a ceiling on free ad-supported premium content on the Web. The pendulum is swinging back. Free ad-supported premium sites, namely Hulu, are having trouble growing their free libraries and are being pushed to add subscription services to expand their offerings. Content owners and TV distributors are successfully collaborating to stop the bleeding with efforts like the cable-industry’s TV Everywhere (where cable programming is made available for free online only after a consumer “authenticates” that he/she is a cable TV subscriber). It’s in both the content companies’ and operators’ interests to preserve the status-quo dual revenue stream business model for television and I think that will continue to shape the landscape. So, I think premium content creators will fare relatively well in the VMSO world. That industry is going through a revolution of its own partly in response to the rise of Internet video but also as a part of a long-overdue right-sizing of the cost side of the business. But more importantly, the broader industry is recognizing that the economics of premium content – high production value, high quality TV and film content, which the US does better than anyone else in the world -- does not match well with the economics of free ad-supported Web video. Eventually the content companies will embrace the VMSO as just another pay TV business with a dual subscription and ad business model that can expand access to their content.
Conclusion
As I said upfront, Internet distributed subscription video services (VMSOs) are as natural an outgrowth from the cable seed as the satellite and telco TV businesses were. I’m not saying it will happen overnight. As I said earlier, I think this is a five year evolution. And I’m not saying it will necessarily destroy its predecessors, just as satellite and telco TV haven’t killed cable. But it will change everything and for the less agile in the pay TV business that may not be enough time to adapt, even if they start now.
