Triple / Quad Play

Here is the battle to be won. In the UK the customer’s package of choice from the Major Service Operators (MSO’s) like Sky, BT and Virgin is currently broadband dual-play (telephone + broadband or, to a lesser extent TV + broadband). Since the late 90’s the challenge the MSO’s have set themselves, is to convert as many customers as possible to triple play - Telephone + Broadband + Television - bundled services. But before any have achieved success in that task, a new challenge is threatening to upset the apple-cart; namely the availability, via the Internet, of network agnostic Over The Top (OTT) television service. OTT service represents a serious challenge to the ascendancy of triple play subscriptions. Indeed it threatens to bring the trend to a halt. Any man and his dog, is now capable of running a television service and delivering it via the broadband connection, the customer is already committed to paying for each month at a flat rate, with broadband already, in the UK at least, the largest subscribed for service amongst the triple-play set.

There are some modest preconditions that need to be met before customers participate in comfort with OTT service (see below) but once they are in place, there is no friction or inertia that will prevent it taking eyeballs previously destined for the tethered goggle box. Indeed there are now more reasons than ever to think instead there will be considerable factors driving the transition.

OTT has lead to a great deal of talk about “cord-cutting,” which refers to a process where customers opt to cancel their cable television (or satellite) subscription in preference for OTT services. Currently cord cutting is a tethered service provider fear more than a reality. However there are now good reasons to think the fear will translate into reality much faster than the TV industry has been predicting. [Edit, whilst writing this post - I have come across this Tech Crunch post confirming my argument, that cord-cutting rates have been underestimated by the TV Industry, now predicted to be 2 million in the US by the end of this year, up from 1.6 million previously predicted by the Toronto based Consulting Group] Why, can best be understood by challenging the very term “cord-cutting”. Cord-cutting may be the most appropriate term for early adopters, but “cord-withering,” is more appropriate for the general market (though I readily admit it lacks the alliteration required for it to coined by the industry). The distinction may be subtle, but when the new dynamic is fully understood it becomes clear. Triple-play figures are unlikely to challenge dual-play as was once thought at least not without a radical rethink of pricing packaging and contract terms.

Marketeers have a natural conservatism, and are fearful of making grandiose claims about the speed of adoption of a new technology because, most usually, over-enthusiasm proves to be a mistake. However every now and then this strategy is the wrong one. Every now and then a confluence of game changing factors occurs which drive adoption far quicker than was previously anticipated.

The term “cord-cutting” plays into the natural tendency for conservatism implying positive action is required for the transition to OTT to occur and that therefore there is something of an “inertial shield,” or natural “stickiness” that will protect tethered TV service providers for some time yet. It implies the customer has to take radical and slightly risky - scissors through the cord - action to switch. But is this really how it will play out?

Here, as I see it, are the dynamics of the transition to OTT:

Today

The position today. Users are subscribed on mass to TV services because the have had to buy in to a minimum subscription charge that are required to cover the high infrastructure and operational investment of tethered TV service. However by far the largest commercial service from the triple play set, is broadband. As Next Generation (NG) Fibre To the Curb (FTTC) and Fibre To the Home (FTTH) IP network’s continue to role-out, from a purely technical standpoint the need for dedicated TV service infrastructure has largely evaporated. Between them, in the UK alone, Apple TV is proving the quality of delivery can be of the highest calibre (out of over 25 movies rented so far on this service I have yet to encounter a single glitch or failure to stream), BBC iPlayer is proving catch up catalogue content is highly attractive and Sky Player is proving live TV service is entirely feasible. So currently, though there is no single OTT delivered comparison to the full panoply of tethered TV services, there are solutions which demonstrate the practical implementation of every element required to deliver such a service.

Consider the list of often cited strengths of tethered service.


*see my earlier post on HTTP Live Streaming for an example of a key OTT enabling technology

Secondary Phase

As the MSO’s continue to push triple-play services OTT usage will continue to rise because it’s available and per event on demand purchases are standard. OTT adoption is heavily gated by the connection of either a PC or OTT device to the living room TV, however passing that gate is increasingly low-cost and easy to do.

Until industry standard transport and transaction standards are established, the cost of OTT adoption is equal to the cost of a 802.11n WiFi and HDMI capable TV device. Currently this stands at around $99. Note however XBox and Playstation 3 owners already have a sufficiently capable devices and the combined global customer base exceed that of any single Cable Television network. These devices are hampered because their content offerings are restricted to closed portals but we can expect that to change or at least relax as the model is challenged by game changing devices like the iPad (the iPad also provides a walled garden of sorts, but it is not one where Apple define the navigation of the content hubs - the content owners are doing that).



Whenever exclusive OTT content is available (as is beginning to happen in the US with Netflix service), OTT will gain customer eyeballs and the customer threshold for switching to a triple-play solution will get that bit higher. But the reverse is never true. Exclusive content available via tethered delivery channels won’t similarly excluding OTT service adoption, meaning the process is a one-way street. The inevitability of the outcome can’t be emphasised enough.

Additionally changes to content owner licensing models are also travelling a one-way street. Where is the incentive for any content owner to be tied in to exclusive deals with a restricted market with OTT already promising the greatest reach and with OTT holding out the greater promise of high margins and brand control?

However, in my view, the games consoles and TV connected devices like Apple TV aren’t going to be the prime drivers in the switch to OTT (they aren’t opening to common standards or allowing content owners sufficient scope to integrate with the open internet ecosystem that will prove so effective for driving traffic). There’s a new kid of the block and failure to factor in its effect means predictions regarding OTT service adoption have probably, in my view, been excessively conservative. The new kid is, of course, Apples’ iPad.

True the iPad doesn’t provide a sufficiently dedicated solution for delivery through to the living room TV without the addition purchase of Apple TV. But that means it has been missed out of the equation when evaluating OTT adoption rates. With Airplay and recently released HDMI connectors, the iPad (as well as the iPhone and even the iPod touch) have become mobile TV transaction and subscription processing and play-out devices. However focussing on connectivity to the TV misses the deep and present nature of the challenge. With the iPad proving to be the second fastest selling consumer device in history (second only to the Kinnect, but with far better prospects of sustained sales - and one that starts at $500 to boot) TV service providers need to understand a large part of its success is that it has become an entertainment destination in itself. One that is highly competitive with TV (as well as increasingly likely to drive Apple TV sales).

A key factor the TV industry has failed to adequately identify, is the additional leverage OTT delivered content obtains curtesy of delivery via the open Internet. Facebook, Twitter and the more traditional media channels such as those provided by News International and Sky that have been adapted to the internet are providing increasing competition for customer eyeballs previously watching TV of any description.

The iPad has the enormous benefit of integrating hyper-navigation and televisual experience. iPad video can be initiated from a link in Facebook. It is the nexus and nirvana of media consumption. It has solved the lean/back lean/froward problem providing for Internet usage in the context of relaxation and entertainment time and has quickly obtained massive user affection for that fact. It is proving to be the left of field event that is bound to change the TV industry completely.

Forget all those years of abortive TV STB widget production trying to integrate social networking with STB’s. That model is gone. Interaction with the TV will now be via the tablet interface. Then, when you start watching video on your tablet device and decide you want to share it with others in the room, just throw it onto your TV through airplay. No other device so centrally or so effectively integrates the open internet and media consumption.

So let’s add another row to that table and really consider what these figures mean:


*Wall Street analyst Charlie Wolf of Needham & Company
** Source: Gartner April 2011

Wow, I mean just wow! From a standing start in 2010 iPad adoption at least in the estimation of this analyst firm, is expected to rival where all existing OTT devices are today and overhaul them through having a far more compelling integrated interaction model, all by 2012. [Edit 11/4/2011: Gartner have released their report, indicating just how conservative the previous figures before. Again (and to me unsurprisingly) we are finding earlier estimates have been conservative and have been greatly underestimated - further underlining the main point I am making with this article] This is why iPad should be factored in to projections of TV service adoption more than the PC ever has been. It’s attacking entertainment time and just look where that will have got to by the end of this year.

Tertiary Phase

The OTT consolidation with increased adoption of subscription packages. Like mobile as the customer realises he is consistently making sufficient volume of purchase the content provider will have the opportunity to sell in subscription packages with a fixed monthly rate. By the time this starts to occur - what space will be left for tethered TV services?

That’s cord withering.

The customer isn’t ever going to have to think “I’ll drop all subscriptions and try this OTT thing” The customer will be there already and one day realise tethered TV is bad value. At that point tethered TV will become a mere add-on offer and will no longer be a driver for dual or tripple play service.

The Tech Crunch post on cord-cutting finishes on a cautionary note, reflecting natural marketeer conservatism:

Netflix may be paying up to be able to stream TV shows and movies left and right, but it is still paying only a fraction of what the cable companies shell out for programming. For instance, Convergence says that this year Netflix will double the amount it is estimated to pay for programming to $1.1 billion, while Apple will pay about $450 million, and all the other online providers will pay almost $400 million. Not quite $2 billion total from the Interent for TV and movie programming rights. Meanwhile, traditional TV access providers are expected to pay $38.7 billion for programming.

On a per subscriber basis, last year Netflix only paid one tenth the amount for programming ($34/subscriber) as did cable and satellite TV providers ($359/subscriber).  As a percentage of revenues, it is approaching what TV access providers pay for content.  Last year it was 25 percent of revenue going towards content, and this year it will be an estimated 39 percent, versus 42 percent for cable companies (and 70 percent for Apple TV).  But the absolute gap will remain massive for the foreseeable future.

But consider this, with all the powerful logic behind making the switch - isn’t the disparity in these revenues simply evidence of the enormous potential the OTT model holds? I say again - this isn’t the either/or scenario the term “cord-cutting” implies. Broadband Internet, the prime pre-requisite for OTT service, has the highest penetration of triple play services. The cost of entry for professional OTT service is down to about $100 for these customers. Other devices (iPad) are now driving adoption of services most effectively competing for entertainment time and that offer a more compelling model than POT (Plain Old Telephone Television) plus providing a direct challenge to the TV STB when coupled with the $99 Apple TV. To me the revenue disparity looks more like an indication of the scale of the opportunity available to first movers. I sense a tectonic shift is on the cards, all we are really waiting for is some form of flashpoint event .

Current research by the TV industry has focussed on reasons for “cord-cutting” and blinkered by old usage patterns has not unsurprisingly failed to find many. But that approach has failed to take account of a game changing developments like tablet computing. The conclusion has then been drawn that considerable inertia will see the industry in rude health for years to come. I suspect whilst POT Free to Air will be around for the foreseeable future, subscription service, at least on the current model, has a shorter shelf-life than most TV service professionals currently think will be the case. In what will seem like no time at all the consumer market, currently starting to rounding the curve, will be past the apex. The tipping point will be past. A once vibrant tethered TV service industry will be appear no more than a legacy backwater of diminishing significance. Tethered service with year long contracts that once used to drive revenue, will increasingly be positioned as a mere sweetener for Telephone and Internet available on a month by month rolling subscription.