Stats on OTT Viewing

A recent study by comScore examined OTT usage in detail across the country. They studied the OTT viewing habits in 12,500 homes over time across all devices. They looked at 52 OTT services, which collectively account for virtually all of the OTT content available. Their study is the most comprehensive study of OTT that I’ve seen to date.

Not surprisingly Netflix is the largest OTT provider and accounted for 40% of all viewing hours of OTT content. I must admit with all of the hype about Netflix that I thought they would be larger. They were followed by YouTube at 18%, Hulu at 14%, Amazon at 7% and all of the other OTT sources sharing 21%.

When it came to consumer engagement, measured by the amount of time that people watch a given service, the leader is Hulu with the average Hulu household watching over 2.9 hours of their content per day. This was followed by Netflix at 2.2 hours, YouTube at 2.1 hours and Amazon at 2.0 hours per day.

Here are some other interesting statistics generated by the survey:

  • 51 million homes in the US watched OTT content this past April. That is 41% of all homes.
  • The growth of OTT watching is exploding and only 44 million homes watched OTT in October 2016.
  • As you would expect, there is a substantial number of cord-cutters that watch OTT. The types of OTT viewers include 44% that also have a landline cable subscription, 22% that also have a satellite TV subscription, 18% that are pure cord-cutters, and 16% that mix OTT content with free content received through rabbit ears.
  • The average home watched OTT content 49 hours in a month. That viewing was spread on average across 15 viewing days – meaning that most homes don’t watch OTT content every day.
  • As you would expect, cord-cutters households watch OTT for more hours monthly than other households. For example, cord cutters watched Hulu 37 hours per month while other households watched 29. Cord cutters watched Netflix for 36 hours per month compared to 27 hours for other households.
  • OTT viewing largely matches regular TV viewing in that there is a big spike of viewing in the evening prime time hours.
  • However, OTT viewing differs from traditional cable with big spikes on weekends, largely due to binge-watching.
  • The survey shows that 10.1 million households use network TV apps (apps from a programmer such as HBO or ESPN).
  • There is an interesting correlation between the size of a household, the amount of OTT viewing, and whether a family has cut the cord. For cord cutting families, the smaller the size of the household the greater the amount of OTT viewing. But for families that still have a paid-cable subscription it’s reverse.
  • Single-member households are almost 50% more likely than average to be a cord cutter and 24% more likely than average to be a cord-never.
  • Cost of cable subscriptions have always been shown in other surveys as a factor in cord cutting. This survey shows a strong correlation between income and cord-cutting. The survey shows that hourseholds making less than $40,000 per year are cutting the cord at 19% more than average while households making between $75,000 and $100,000 are at 87% of average.
  • Their survey also was able to detail the devices used to watch OTT content on television screens. Of the 51 million homes that watched OTT in April, 38 million homes used a streaming stick / box like Roku, and 28 million homes used a smart TV.
  • The study also detailed penetration rates of streaming boxes / sticks for homes using WiFI: 16% own a Roku, 14% have Amazon Fire; 8% own Google hrome and 6% have AppleTV.
  • Samsung and Vizio are the big players in the smart TV market with shares in WiFi-connected homes of 33% and 30%. LG and Sony were next with 10% and 7% penetration with all other manufactures sharing the remaining 20% of the market.

The survey also analyzed Skinny bundles. They show that 3.1 million homes now have a skinny bundle. 2 million of those homes have SlingTV, with DirecTV Now and PlayStation Vue having most of the other customers. The survey shows that homes with one of these services watch the skinny bundle an average of 5.3 hours per day.

The main takeaway from this survey is a demonstration that OTT viewing has become mainstream behavior.  OTT viewing is now part of the viewing habits of a little over half the of homes in the nation that have an in-home WiFi connection.

 

Mary Meeker’s Internet Trends for 2017

Mary Meeker of Kleiner Perkins Caufield & Byers issued her annual slideshow on tech industry trends. As always she covers an amazing amount of information. The full slideshow can be found here.

Here are a few of the highlights that are of interest to ISPs:

Internet Growth. Worldwide Internet growth is still at about 10% annually with over 350 million new Internet users expected this year. At the end of 2016 there was 3.4 billion Internet subscribers, a global penetration rate of 46%. The worldwide industry has exploded since having 1.6 billion Internet subscribers in 2009.

Internet Usage. In the US the average Internet usage is now 5.6 hours per day per person, up from 5.4 hours in 2015. This includes 3.1 hours of mobile usage, 2.2 hours of desktop usage and 0.4 hours on other devices.

Netflix Growth. Netflix now earns 30% of the home video entertainment dollars in the US. The company had almost 94 million worldwide customers at the end of 2016 and is adding around 6 million new subscribers per quarter.

Interactive Gaming is Huge. There were 2.8 billion worldwide interactive gamers in 2016, up from 100 million in 1995. This is driving a huge amount of Internet bandwidth. The average age of a gamer in the US is 35.

Streaming Music. Streaming music now drives 52% of the revenue in the music industry. Less than a quarter of the industry revenues comes from physical media like CDs.

Smartphone Growth is Slowing. The growth of smartphones sales in 2016 was down sharply and only grew worldwide at 3%, down from 10% in 2015. With that said there were still over 1.4 billion phones sold in 2016 and there are 2.8 billion total smartphone users in the world, up 300 million since 2015. The industry has seen tremendous growth and there were only 300 million smartphone users in 2009. Around 84% of smartphones use Android.

Internet Shopping Continues to Grow. Online shopping is still growing at a torrid pace. Parcel deliveries in the US from Internet shopping were at 10 billion in 2016, up 9% over 2015 and up from 7 billion in 2010. It’s predicted that 7,000 retail outlets will close in 2017.

Online Advertising. In the US the amount of online advertising was $73 billion in 2016, up 22% from 2015. The amount of mobile advertising now equals the amount of desktop advertising. Desktop advertising has dropped by over $2 billion annually since 2015. Google and Facebook dominate US web advertising with the two companies getting 85% of ad revenues in 2016. Google earned over $35 billion in ad revenues for the year.

Voice Used for Queries. Voice is replacing typing and 20% of all queries made through smartphones are now done using voice instead of typing. It’s reported that the accuracy rate of voice recognition is now at 95%, up from 76% in 2013. It’s expected for voice interface to grow rapidly in homes and businesses due to voice recognition devices – Amazon Echo has sold over 10.5 million Echo devices by the end of 1Q 2017.

Social Media Changing Customer Loyalty. Over 82% of customers stopped doing business with a company after a bad experience. This is up from 76% in 2014, with the difference credited to the feedback from social media.

Immigrants and Tech. I’m not sure what this means, but 60% of the most highly valued US tech companies were founded by first or second-generation Americans including Apple, Google, Amazon and Facebook.

Comparing Streaming and Broadcast Video

One thing that doesn’t get talked about a lot in the battle between broadcast TV and on-line video is video quality. For the most part today broadcast TV still holds the edge over on-line video.

When you think of broadcast TV over a cable system I can’t help but remember back twenty years ago when the majority of the channels on a cable system were analog. I remember when certain channels were snowy, when images were doubled with ghosts and the first couple of channels in the cable system were nearly unwatchable. Today the vast majority of channels on most cable systems are digital, but there are still exceptions. The conversion to digital resulted in a big improvement in transmission quality.

When cable systems introduced HDTV and the quality got even better. I can remember flipping back and forth between the HD and SD versions of the same channel on my Comcast system just to see the huge difference.

This is not to say that cable systems have eliminated quality issues. It’s still common on many cable systems to see pixilation, especially during high action scenes where the background is constantly changing. All cable systems are not the same, so there are differences in quality from one city to the next. All digital video on cable systems is compressed at the head-end and decompressed at the settop box. That process robs a significant amount of quality from a transmission and one only has to compare any cable movie to one from a Blu-ray to realize how much is lost in the translation.

In the on-line world buffered video can be as good as good as cable system video. But on-line video distributors tend to compress video even more than cable systems – something they largely can get away with since a lot of on-line video is watched on smaller screens. And this means that a side-by-side comparison of SD or HD movies would usually favor the cable system. But Netflix, Amazon and a few others have one advantage today with the spectacular quality of their 4K videos – there is nothing comparable on cable networks.

But on-line live-streamed video still has significant issues. I watch sports on-line and the quality is often poor. The major problem with live-streamed video is mostly due to delays in the signal getting to the user. Some of that delay is due to latency – either latency in the backbone network between the video creator and the ISP or latency in the connection between the ISP and the end-user. Unlike downloading a data file where your computer will wait until it has collected all of the needed packets, live-streamed video is sent to end-users with whatever pixels have arrived at the needed time. This creates all sorts of interesting issues when watching live sports. For instance, there is pixilation, but it doesn’t look like the pixilation you see on cable network. Instead parts of the screen often get fuzzy when they aren’t receiving all the pixels. There are also numerous problems with the video. And it’s still not uncommon for the entire picture to freeze for a while, which can cause an agonizing gap when you are watching sports since it always seems to happen at a critical time.

Netflix and Amazon have been working with the Internet backbone providers and the ISPs to fix some of these issues. Latency delays in getting to the ISPs is shrinking and, at least for the major ISPs, will probably not be an issue. But the one issue that still needs to be resolved is the crashes that happen when the Internet gets overloaded when the demand is too high. We’re seeing ISPs bogging down when showing a popular stream like the NBA finals, compared to a normal NBA game that might only be watched by a hundred thousand viewers nationwide.

One thing in the cable system’s favor is that their quality ought to be improving a lot over the next few years. The big cable providers will be implementing the new ATSC 3.0 video standard that is going to result in a significant improvement in picture quality on HD video streams. The FCC approved the new standard earlier this year and we ought to see it implemented in systems starting in 2018. This new standard will allow cable operators to improve the color clarity and contrast on existing HD video. I’ve seen a demo of a lab version of the standard and the difference is pretty dramatic.

One thing we don’t know, of course, is how much picture quality means to the average video user. I know my teenage daughter seems quite happy watching low-quality video made by other teens on Snapchat, YouTube or Facebook Live. Many people, particularly teens, don’t seem to mind watching video on a smartphone. Video quality makes a difference to many people, but time will tell if improved video quality will stem the tide of cord cutting. It seems that most cord cutters are leaving due to the cost of traditional TV as well as the hassle of working with the cable companies and better video might not be a big enough draw to keep them paying the monthly cable bill.

The Myth of OTT Savings

One of the reasons touted in the press for the recent popularity of cord cutting is the desire of people to save money over a traditional cable TV subscription. But as I look at what’s popular on the web I wonder if the savings are really going to be there for people who like to watch a variety of the best content.

There has been an explosion of companies that are pursuing unique video content, and this means that great content can now be found at many different places on the web. Interestingly, most of this great content is not available on traditional TV, other than the content provided by the premium movie channels. But considering the following web platforms that are creating unique content:

  • Netflix. They are the obvious king of unique content and release new shows, specials, movies and documentaries seemingly weekly. And they seem to have a wide variety of content aimed at all demographics.
  • Hulu. They are a bit late to the game. But the newly released The Handmaid’s Tale is getting critical acclaim and will be part of a quickly growing portfolio of unique content.
  • HBO. HBO has always had a few highly popular series with Game of Thrones still drawing huge audiences.
  • CBS All-Access. CBS has made a bold move by offering the new series Star Trek: Discovery only online. It’s bound to draw a lot of customers to the online service.
  • Amazon Prime. The company says they are going to invest billions in unique programming and are aiming at overtaking Netflix. Their recent hit The Man in the High Castle is evidence of the quality programming they are pursuing.
  • Showtime. They have historically created limited amounts of unique content but are now also looking to create a lot more. Their new show Twin Peaks has come out with high reviews.
  • Starz. This network is also now chasing new content and has a hit series with American Gods.
  • Seeso. Even services that most people have never heard of, such as Seeso are creating popular content such as the comedy series My Brother, My Brother and Me.
  • YouTube Red. The industry leader of unique content is YouTube which has allowed anybody to create content. While most of this is still free, the platform is now putting a lot of great content such as the comedy Rhett and Link’s Buddy System behind a paywall.

Subscribing to the above online services with the minimum subscriptions costs $79 per month (and that’s without figuring in the annual cost of Amazon Prime, which most people buy because of the free shipping from Amazon). The above line-up doesn’t include any sports and you’d have to buy a $30 subscription from Sling TV to watch ESPN and a few other popular sports networks. ESPN recently announced that they still don’t have any plans to launch a standalone web product but are instead pursuing being included in the various skinny bundles.

Not considered, though, in the above list are numerous other less-known paid OTT subscriptions available on line. As listed in this recent blog there are dozens of other platforms for people who like specialized content like Japanese anime or British comedies.

Of course, one thing the above list shows is that there is a world of content these days that is not being created by the major networks or the traditional cable networks. There is likely more money pouring into the creation of content outside of the traditional networks.

So OTT doesn’t seem to save as much as hoped for people that wish to enjoy a variety of popular content across different providers.  But there are other benefits driving people to OTT programming.  One of the great benefits of OTT programming is the ability to subscribe and cancel services at will. I have been trying various OTT networks and it’s really tempting to subscribe to each for a month or two until you’ve seen what you want and then move on to something else. I’m starting to think that’s the way I will use these services as long as they continue to allow easy egress and exit.

And OTT programming allows for non-linear TV watching.  As long as somebody lives near to a metropolitan area a cord cutter can still view the traditional network channels using rabbit ears. But what a lot of cord cutters are finding is that they quickly lose their tolerance of linear programming. I know that when I travel and have TV available in the room that I only watch it if I want to catch a football or basketball game. I can no longer tolerate the commercial breaks or the inability to pause linear TV while I want to do something else. And that, perhaps more than anything, is what will bring down traditional cable TV. As much as cable companies tout TV Everywhere, their basic product is still showing content linearly at fixed times. There is such a huge volume of great OTT content available any time on any device that it’s not hard for somebody to walk away from the traditional networks and still always have something you want to watch.

Trends in Traditional TV

Nielsen has now been publishing quarterly reports on TV viewing habits since 2011. Comparing the latest report for the 4th quarter of 2016 to the original 2011 report shows a major decrease in the hours spent by younger Americans in watching traditional television – which is defined as the combination of both live viewing and time-delayed viewing of network television content.

The changes differ by age group and don’t paint a pretty picture for the traditional TV market:

  • Teens (12-17) watched almost 14 hours per week of television, but that’s down almost 11% from 2015 and down 38% from five years.
  • Younger Millennials (18-24) watched 15.5 hours per week of TV, and that’s down 39%, or 1.5 hours per day over 5 years.
  • Older Millennials (25-34) watched 22 hours per week, and which is down 26.5% over five years.
  • Gen-Xers (35-49) watched almost 40 hours per week and have seen a 10% drop over five years.
  • Baby Boomers (50-64) watched 43 hours per week and have had a slight increase over five years of 1.6% in viewing time.
  • 65+ viewers watched 52 hours per week which is up 0.6% over 2015 and is up 8.4% over five years.

So what are the younger people doing other than watching traditional TV?  The numbers for 19-24 year old users is interesting.

  • They spend 15.5 hours per week watching traditional television (including time-shifting).
  • They spend 20.8 hours watching subscription-based OTT content like Netflix or Amazon.
  • They spend another 17 hours watching something else, which includes things like DVRs, video on social media, or free web content like YouTube.
  • That’s an average of 53 hours per week, about the same amount of screen time as those over 65 watching traditional TV.

This same group also uses a variety of different screens. That includes an average of 9.2 hours per week watching video on a PC or laptop, 1.5 hours per week watching on a tablet and 1 hour per week watching on a smartphone. The rest still use a television screen, even if the content is not a traditional TV feed.

The good news for the whole industry is that young people are not tuning out from watching video content – they are just watching a lot less traditional television. And that means less of the major networks, less sports, and less of all of the various networks found on cable systems. They have decided, as a group that other content is of more interest.

It’s soon going to be harder for Nielsen and others to quantify the specific types of content viewing because the lines are starting to blur between the various categories. If somebody watches a live feed of a basketball game or a traditional network show on Sling TV that is basically the same as watching traditional TV. But on that same platform you can also watch streaming movies in the same manner as Netflix. And traditional broadcasters are doing something similar. For example, CBS All-access not only includes traditional CBS programming, but there is new content like the new Star Trek series that is only going to be available on-line.

We’ve known for a long time that younger viewers are not watching television in the same way as older generations, but these numbers really highlight the differences. Those over 65 years old are watching four times more traditional television than teens. And viewing hours for younger viewers are steadily dropping while older viewers are watching as much or more TV than five years ago. You only have to trend this forward for a decade to foresee continued dramatic drops in total TV viewership.

For years there has been hope in the industry that as kids age and get families and buy homes that they will return to the traditional pay-TV packages. But numerous surveys have shown that this is not happening. It seems that the viewing habits of youth influences viewing habits for life. And that creates a real challenge for the advertising-supported pay TV model. TV advertisers are only reliably reaching older viewers, and yet most advertisers still believe that TV advertising is one of their most effective tools. But each year TV advertising is going to reach fewer and fewer younger viewers, and at some point the advertisers are going to be forced to look elsewhere.

Why Isn’t Cord Cutting Going Faster?

If cord cutting is such a big deal, then why aren’t more people leaving traditional television? That’s a question I’ve been asked several times lately and it’s a good one.

Cord cutting is definitely real. Numerous articles make cord cutting seem like an imminent disaster for the cable industry. But industry estimates are that between 1.7 million and 2.5 million people walked away from traditional cable TV in 2016. The lower number is the net drop in national cable subscribers while the higher number takes into account the fact that there were over a million new housing units built in the country – and I think the higher number is closer to correct.

And while losses of that many customers hurts the cable industry, it’s hard to yet call it a flood. If annual losses stay at this level the cable industry will still have over 50 million customers twenty years from now. The real story might be that most people aren’t yet cutting the cord. There are a lot of reasons for this, but I think the most important ones are:

People Still Like Cable. Total pay television subscribers just fell to under 100 million sometime last year. There are a lot of households that still like the variety of channels that come with the big packages. While a lot customers are now time shifting by the use of DVRs and TV everywhere, they still like what they are buying.

Bundling Discount. It’s really easy to forget that the big cable companies have priced their bundles in such a way as to penalize customers for leaving just one service. Cord cutters generally want to retain their broadband while dropping cable – and when they go to do this they find that the savings is not as large as they thought. Interestingly, if you want to keep cable and drop broadband the same thing is true. The big cable companies apply the ‘bundling’ discount to whatever product you want to drop – meaning that you then revert to paying full market price for whatever product is kept. People that want to save $20 per month by switching to an OTT service like Sling TV quickly find out that they actually won’t save much.

Cord Shaving Instead. There is a whole lot of cord shaving going on – that is, people migrating to smaller cable packages. Cord shaving lets people who mostly like Netflix to keep local network stations and a few other things they like about traditional TV, without fully cutting the cord. This is best evidenced by looking at the subscriber numbers to the various cable networks, which are losing subscriptions at a much faster pace than total pay TV subscribership. For example, ESPN has lost around 12 million subscribers since their peak in 2013, and the majority of other cable networks are also seeing large subscriber losses. Since the total net subscribers to pay television are dropping more slowly, the only explanation is that customers are opting out of the big cable packages for smaller ones. The cable companies don’t release statistics on cord shaving, and so we can only guess at the magnitude of the changes by seeing what is happening to ESPN and other networks.

The Alternatives are not that Different. Over half of the homes in the country now subscribe to at least one of the OTT services like Netflix. But it appears that most homes are viewing this content as alternate content and not a straight replacement for traditional cable.

There are a lot of new alternatives to traditional cable such as Sling TV or Playstation Vue – but I don’t think most customers are seeing them as significantly different than traditional cable content. I’ve been trying some of these services and they honestly still feel like cable. The content is mostly streamed at fixed times and even with smaller line-ups I find I’m not interested in most of the channels they carry. While these alternatives can save money, they often don’t have the same reliability or quality of picture as a cable system. The bottom line, at least to me, is that services like Sling TV still feel like cable offerings to me.

It’s Not Easy for Some. It’s not easy for the technically unsophisticated to totally cut the cord. Unless you live in a major metropolitan market you’re going to want to somehow tie in your local network stations with other online programming, and that is still not that easy. You can get an antenna to pick up off-the-air content, but that is not easily integrated into any easy-to-use program guide or search engine.

It’s also not always easy to drop the cable company. People get tied up in contracts that are expensive to break. There is a whole gauntlet of steps needed to get away from the cable company from listening to retention specialists to returning settop boxes that make leaving a hassle – and the cable companies know that these tactics work.

We may get to a time when cord cutting accelerates more quickly, as happened with landline telephones. But before that happens there needs to be easier to use and more satisfying alternatives to draw most people away from traditional cable altogether. If there is any one issue that might push more households over the edge it’s the price of cable packages – but the big cable providers are now introducing skinny bundles to try to retain the budget minded customers. I’m looking at the numbers and thinking we are going to have traditional cable around a lot longer than many people predict.

Comcast as a Competitor

Somebody recently asked me about Comcast as a competitor. They have been a formidable competitor for many years, but I think they are pulling ahead of other cable companies in many ways. I’m sure that over time some of the other cable companies will try to emulate them. Consider the following:

  • They’ve created Comcast Labs (similar to Bell Lab). This group of scientists and engineers are concentrated largely on developing products that improve the customer experience. Nobody else has a research arm of this size and focus.
  • One of the first things out of Comcast Labs has been the proprietary X1 settop box, which has rave reviews and is heads above any other box. It has easy-to-use menus and is voice activated. It integrates the Internet into every TV. And it includes a growing list of unique features that customers really like.
  • Comcast has also now integrated Netflix and Sling TV into their settop box to keep customers on their box and platform. I suspect that Comcast takes a little slice of revenue for this integration. And it looks like they have a goal of becoming what the industry is starting to call a superbundler. There are around 100 OTT offerings on the market today and my guess is that over time they are going to integrate more of them into their ecosystem.
  • Comcast is working on skinny bundle packages that will let people buy smaller and more focused TV packages to keep them from leaving. Comcast is highly motivated to keep customers on the system since they own a lot of programming.
  • Comcast has found great success with their smart home product. This is probably the most robust such product on the market and includes such things as security and burglar alarms, smart thermostat, watering systems, smart blinds for energy control, security cameras, smart lights, smart door locks, etc. And this can all be easily monitored from the settop box or from a smartphone app. They don’t report numbers, but I’ve seen estimates that they now have a 7% to 8% customer penetration. Those customers are totally sticky and won’t easily drop Comcast.
  • Comcast has been an industry leader in in the race to unilaterally increase customer data speeds. They moved my 50 Mbps product to 75 Mbps with plans to raise it again to 100 Mbps after the DOCSIS 3.1 upgrade. I think they have figured out that faster speeds means a lot fewer customer complaints.
  • They are going to soon be offering cellphone services and will integrate them into the bundle. They just announced tentative pricing that looks to be lower than Verizon and AT&T in two-thirds of the markets in the US. Analysts say that over five years they could capture as much as 30% of the cellphone business in their markets. We’ll have to wait and see if that happens – because the cellular companies have better customer service than Comcast. But there is no doubt that they will get a lot of customers, and that those customers will also be sticky. They just bought a pile of spectrum that will help them offer some service directly to improve their margins.
  • One big advantage Comcast has over wireless competitors is that they own a lot of programming content. The industry expects them to use zero-rating, meaning that they will give their cellular customer access to all of their programming without having it count against cellular data caps.
  • As the biggest ISP Comcast probably has the most to gain from the reversal of customer privacy rules and net neutrality. Comcast already does well selling advertising but could become one of the major players online using customer data to target marketing.
  • Comcast is putting a lot of money into making their customer service better. They are quickly moving away from making everybody call their customer service centers. They also now have a decent customer service by text process. And they now allow people to ask and resolve questions by chat from their web site. Each of these improvements satisfies a niche of their customers and relieves the long wait times for a customer service rep.

They are also moving a lot of customer service back to the US, finally understanding that the cost savings of using foreign reps is not worth the customer dissatisfaction. But what they (and all of the other big companies) are banking on is the general belief that within five years there will be a decent artificial intelligence system for handling customer service. This will not be like the dreadful systems used today by airlines and banks. The expectation is that an AI will be able to satisfactorily handle the majority of customer service calls satisfactorily without needing a human service rep. Comcast will have these systems long before smaller competitors, giving them a big cost advantage.

I probably have a dozen blogs over the last few years blasting Comcast for their various practices and policies. But it’s not hard to see that they are possibly the most formidable competitor in the country. When you consider all of these positives and also understand that on a local basis that Comcast will match competitor’s prices – they are hard to beat. Like with any large ISP there are probably 20% of their customers that will choose somebody else out of reflex. But after that it’s a real challenge prying and keeping customers away from them.

Who Wins with Cable Deregulation?

There has been a lot of press lately discussing what might happen if the FCC does away with Title II regulation of broadband. But broadband isn’t the only battle to be fought and we are also in for big changes in the cable industry. Since our new FCC is clearly anti-regulation I think the future of cable TV is largely going to be won by whoever best copes with a deregulated cable world.

Cable companies today are governed by arcane rules that rigidly define how to provide terrestrial cable TV. These rules, for example, define the three tiers of cable service – basic, expanded basic and premium – and it is these rules that have led us to the big channel line-ups that are quickly falling out of favor. Most households watch a dozen or so different channels regularly and even big cable users rarely watch more than 30 channels – but yet we have all been sucked into paying for 150 – 300 channel line-ups.

It’s likely that the existing rules governing cable will either be relaxed or ignored by the FCC. A lot of the cable rules were defined by Congress in bills like the Telecommunications Act of 1996, so only Congress can change those rules. But the FCC can achieve deregulation by inaction. Already today we see some of the big cable providers violating the letter of those rules. For example, Verizon has a ‘skinny’ package that does not fit into the defined FCC definition of the structure of cable tiers. The FCC has turned a blind eye to these kinds of changes, and if they are more overt about this then we can expect cable providers everywhere to start offering line-ups people want to watch – and at more affordable prices if the cable companies can avoid paying for networks they don’t want to carry.

The cable companies are now in a battle with the OTT providers like Netflix, Sling TV and others. It’s clear to the cable companies that if they don’t fight back that they are going to bleed customers faster and faster, similar to what happened to landline voice.

One way cable companies can fight back is to introduce programming packages that are similar to what the OTT providers are offering. This is going to require a change in philosophy at cable companies because the larger companies have taken to nickel and diming customer to death in the last few years. They sell a package at a low advertised price and then load on a $10 settop box fee, a number of other fees that are made to look like taxes, and the actual price ends up $20 higher than advertised. That’s not going to work when competing head-to-head with an OTT competitor that doesn’t add any fees.

The cable companies are also going to have to get nimble. I can currently connect and disconnect from a web service like Sling TV at will. Two or three clicks and I can disconnect. And if I come back they make it easy to reconnect. The cable companies have a long way to go to get to this level of customer ease.

Of course, the big ISPs can fight back in other ways. For example, I’ve seen speculation that they will try to get taxes levied on OTT services to become more price competitive. Certainly the big ISPs have a powerful lobbying influence in Washington and might be able to pull that off.

There is also speculation that the big ISPs might try to charge ‘access fees’ to OTT providers. They might try to charge somebody like Netflix to get to their customers, much in the same manner that the big telcos charge long distance carriers for using their networks. That might not be possible without Congressional action, but in today’s political world something like this is conceivable.

Another tactic the cable companies could take would be to reintroduce low data caps. If the FCC eliminates Title II regulation that is a possibility. The cable companies could make it costly for homes that want to watch a lot of OTT content.

And perhaps the best way for the cable companies to fight back against OTT is to join them. Just last week Comcast announced that it will be introducing its own OTT product. The cable companies already have the programming relationships – this is what made it relatively easy for Dish Network to launch Sling TV.

It’s impossible to predict where this might all go. But it seems likely that we are headed towards a time of more competition – which is good for consumers. But some of these tactics could harm competition and make it hard for OTT providers to be profitable. Whichever way it goes it’s going to be an interesting battle to watch.

Content Finally is King

One of the more common memes in our industry is the phrase “content is king.” This was first said by Sumner Redstone of Viacom in 1994 but made more famous by Bill Gates in 1996. The phrase has been used since then to describe how the creators of content have the power in our industry – be that programming or web content.

John Stankey, the CEO of AT&T Entertainment, recently emphasized this same concept in talking about the company’s planned merger with Time Warner. At the recent Mobile World Congress in Barcelona he said, “We just cannot envision a future where AT&T is relevant if we don’t directly participate in some of the water flowing through our pipes.”

All of the big ISPs have decided that content is key to their survival. Comcast already owns a mountain of programming, and after the merger with Time Warner, AT&T will be a content powerhouse as well. Verizon has climbed into the game with the acquisitions of AOL and Yahoo. There are web companies with the same philosophy. Netflix has built a new industry by creating new content. Google is pushing content heavily through YouTube. Amazon has started to create unique content and recently said they are going to make that a priority. Facebook is becoming a content force through Facebook Now.

I remember having this conversation with Derrel Duplechin of CCG back in 2000. We were asked by several clients to speculate about the future of the carrier industry and we foresaw that most carriers were likely on the path to eventually become what we called “dumb pipe” providers. I remember that this was a story that many of our clients did not want to hear.

We lived in a different carrier world in 2000. Most homes still had telephones and voice was the most profitable product for most carriers. The cable TV product that many of our clients sold then also had decent margins. But we predicted that both products would eventually sink in importance and in margins and that eventually most of our clients would earn most of their profits from broadband. We thought this would happen to all carriers, small and large, and we figured that the most profitable future companies would be those that found some other line of business other than just selling data pipes to end users.

We had some clients take this to heart and some of them have made a really good living by providing extra value to customers. For example, we have several clients who thrive by bringing a suite of products to businesses other than just plain connectivity. But for the most part, the majority of the ISP industry sells dumb pipes today. They compete with the speed of those pipes and with price and with good customer service – but the primary products (and the driver of most of the profits) are now data pipes.

The big companies like AT&T, Verizon and Comcast looked at that future and it scared them. It’s pretty obvious that if your only product is dumb pipes that your earnings are not going to continue to grow fast enough to satisfy Wall Street. This is probably what convinced Verizon to stop expanding their FiOS network. Both AT&T and Verizon got huge earnings boosts from expanding their cellular businesses, but that industry also seems to be heading towards the same plateau as landline ISPs – cell service is becoming a commodity.

So these big companies are now pursuing content because it looks to be the last area in our industry with the potential for significant bottom line growth. It’s going to be an interesting race to watch. Content providers have succeeded or failed over the years according to their ability to find smash hits. A huge hit movie or TV series can mean huge returns to the bottom line. But content providers that don’t create what the public wants to watch suffer badly in terms of stock prices and earnings. Being a content provider is not predictable in the same way as telecom.

Interestingly. AT&T, Verizon, and Comcast are now direct competitors of Facebook, Google, Amazon and Netflix. Content certainly is king, but content also brings the risk from competition. The companies that fall behind in this race are likely to be gobbled up by their more successful competitors. I find it extremely unlikely that all of these big companies will still be in existence in 10 years.

There is no real barrier to entry into the world of content creation other than having a pile of money. It’s likely that other big companies will join the content fray. But all of these companies are entering a world that is in big flux. For example, traditional video and web content might well be replaced by virtual and enhanced reality. The companies that succeed in content will have to spend a lot of money staying one step ahead of the competition, and my money is on the more nimble technology companies. Twenty years ago I would have been shocked to know that someday AT&T would have a CEO of Entertainment – and that may turn out to be the most important job in the corporation.

AT&T and Time Warner

ATTI have been thinking about the AT&T and Time Warner merger since it was first announced. Generally the reasons for megamergers are apparent – there is generally some big efficiency or cross benefit to both companies that makes sense. But I had a very hard time seeing very much benefit to either company with this merger.

The obvious intersection between the two companies is programming. Time Warner produces a lot of content – networks including HBO, TNT, TBS, CNN and a host of smaller networks.  And AT&T has a lot of cable customers through DirecTV and U-verse.

But as I think through the programming advantage it’s not as big as you might think. AT&T is not likely to buy any more cable content from Time Warner after a merger than it does today. It’s likely that all of Time Warner’s content is already delivered to AT&T’s video customers. In fact, once the two companies combine, any transactions between the two of them disappear upon consolidation when creating the financial statements for the combined companies.

The non-accountant will say, “Wait, doesn’t that mean that AT&T gets the content for free”? And the answer is no, because it also means that the revenue that AT&T pays to Time Warner today in real cash also disappears. On the consolidated books both sides of the transaction disappear, as if they never happened.

And it’s hard to see any of the typical merger savings from consolidating management. The two businesses have almost nothing in common and it would make no sense for program executives to run a giant ISP or for AT&T executives to make programming decisions.

The only other obvious benefit is for AT&T to somehow leverage the Time Warner content to grow the wireless business. When the merger announcement was first announced the FCC sent a letter to AT&T and told them they would be investigating their zero-ratings practices. Zero-rating is when an ISP provides content to customers without counting the usage against any data caps. AT&T already does this today with a limited amount of content, but if they owned Time Warner they would have far more content they could send over cellphones that wouldn’t count against data caps. An AT&T customer could watch Game of Thrones, for instance, on their AT&T cellular plan without worrying about their monthly data cap. But if they watch non-AT&T video they would be penalized.

With the new administration it looks like zero-rating (and net neutrality in general) is likely dead. But how much of a benefit is zero-rating to a wireless company? Certainly this could drive more advertising revenue to the combined company, but that doesn’t seem like a big enough motivation for the mega-merger. And unless one cellular companies gets killer content that everybody wants to watch on a cellphone, it’s hard to think that zero-rating is going to be a big game changer in terms of shifting wireless customers between providers. I have a hard time seeing AT&T zero-rating as a Verizon Wireless killer.

The only real benefit I can foresee is a bit of a scary one. With each of these mergers between ISPs and programmers the industry collapses to fewer and fewer major players. This merger would put AT&T on the same footing as Comcast in terms of programming content. And maybe that is the major reason for the merger – just keeping up.

But what is to stop the biggest companies from selling content to each other in bulk? I could foresee AT&T and Comcast agreeing to sell content to each other at a reduced price based upon some volume discount. This would end up giving both companies an edge over every other ISP. These two mega-companies (and probably a few others) would then be able to leverage that advantage to crush their other competitors – leaving the nation with even fewer competitors than today.

I don’t know that this scenario could be sustained. It seems like the public is migrating away from a lot of traditional content towards programming produced independently by companies like Netflix. But if the AT&T / Time Warner merger is allowed to happen, what will stop one of these big companies from buying Netflix and every other independent content provider that pops up?