Tag Archives: NetFlix

OTT By the Numbers

roku-3-2Lately I’ve been reading about how much OTT video services have grown and so I looked to see how big the phenomenon has become. What I found was that you get a different answer depending upon who is doing the counting and how you define OTT.

It’s easy to start with Netflix, which is clearly the largest provider of alternate programming. As a public company they publish their subscriber numbers every quarter and at June 30 of this year they had 29.8 million paid subscriptions in the US and had added 605,000 customers in the quarter. With approximately 134 million housing units in the country that’s a penetration rate of over 22%.

Parks Associates tracks the OTT industry and they recently released a list of the top 10 OTT companies, ranked by the number of paid subscribers. They say there are over 100 pay OTT services available in the US. The top 10 list is interesting and probably includes things that many people aren’t aware of or that don’t think of as OTT. The most recent top 10 list is as follows:

  1. Netflix
  2. Amazon Video
  3. Hulu
  4. MLB TV
  5. WWE Network
  6. HBO Now
  7. Crunchyroll
  8. NFL Game Pass
  9. The Blaze
  10. Sling TV

I think most people would have guessed the top 3. It’s interesting that 3 of the top 10 are sports networks. The subscriber numbers for baseball and football are very seasonal and move up and down the list depending upon the time of the year. Major League Baseball (MLB TV) just announced that starting next season they will only make their programming available to subscribers of a cable service, so they will fall off this list. Crunchyroll features Japanese anime, manga, and auto racing. The Blaze includes Glenn Beck and various other political shows. To show how low the threshold for getting on the list is, number 10 is now Sling TV that just started early this year and currently claims about 400,000 subscribers.

Using the above definition of OTT, Parks Associates reports that 58% of US broadband households have used at least one OTT video service in the past 30 days. They say that a little more than 25% have used two or more different OTT services.

But there are others counting OTT using a wider definition. For instance, the numbers jump way up if you include things like YouTube, which has more viewers than Netflix. The multiservice screen provider Clearleap reports that when counting services like YouTube 71% of households report using OTT services. This count differs from the Parks Associates count by also considering smartphone-only usage rather than only considering homes with a broadband connection.

There are a number of other surveys around also and each differs in defining what is included as OTT and also differ by the type of platform used to watch the content. So any time you see OTT statistics it’s important to dig a bit to understand just what and who is being counted.

One thing that all of the surveys agree on is that younger people view a lot more video than anybody else. Common Sense Media just reported that teens between 13 and 18 use an average of 9 hours per day of entertainment media. This would include not only OTT content, but normal TV, on-line games, social media, and sites like Vine which are not counted as OTT but which include video content. As a parent of a teen I would say that number sounds just about right.

Why No Redundancy?

Copper wireI usually load a blog every morning between 7:00 and 8:00 eastern. But today my Internet was down. I first noticed then when I woke up around 2:30. Don’t even ask why I was up then, but that is not unusual for me. My Internet outage was also not that unusual. I have Comcast as my ISP and they seem to go out a few times per month. I’ve always given them the benefit of the doubt and assumed that a few of the late night outages are due to routine network maintenance.

So I grab my cell phone to turn on my mobile hot spot. Most of the outages here last an hour or two and that is the easy way to get through outages. But bam! – AT&T is out too. I have no bars on my LTE network. So my first thought is cable cut. The only realistic way that both carriers go out in this area is if the whole area is isolated by a downed fiber.

I check back and hit a few web sites and I find at about 3:00 that I have a very slow Facebook connection, but that it’s working. I can get Facebook updates and I can post to Facebook, but none of the links outside of Facebook work. And nothing else seems to be working. This tells me that Facebook has a peering arrangement of some kind with Comcast and must come into the area by a different fiber than the one that was cut.

So I start looking around. The first thing I find is that Netflix is working normally, just as fast as ever. So now I have a slow Facebook feed and fast Netflix and still nothing else. After a while Google starts working. It wasn’t working earlier, but it seems that I can search Google, although none of the links work. This tells me that Comcast peers with Google but that the Google links use the open Internet. I force a few links back through the Google URL just to see if that will work and I find that I can read links through Google. No other search engines seem to be working.

The only other think I found that worked with the NFL highlight films and I was able to see the walk-off blocked punt in last night’s Ravens – Browns game. It’s highly unlikely that the NFL has a peering relationship with anybody and they must have a deal with Google.

So now I know a bit about the Comcast Network. They peer with Netflix, Google and Facebook – and since these are three of the largest traffic producers on the web that is not unusual. And at least in my area the peering comes into the area on a different fiber path than the normal Internet backbone that has knocked out both Comcast and AT&T.

But I also now know that in my area that Comcast has no redundancy in the network. I find this interesting because most of my small clients insist on having redundancy in their networks. Of course, most of them operate in rural areas that are used to getting isolated when cables get cuts – it happened for many years with telephone lines and now with the Internet.

But I can see that Comcast hasn’t bothered creating a redundant network. This particular outage went for 7 or 8 hours which is a bit long, so this must be from a major fiber cut. But I look at a map of Florida and it is a natural candidate to have rings. Everybody lives on one of the two coasts and there are several major east-west connector roads. This makes for natural rings. And if our backbone was on a ring we wouldn’t even know there was an outage. But with all of their billions of dollars of profits, neither Comcast nor AT&T wireless cares enough about redundancy to have put our area backbone on a ring.

And I also don’t understand why they don’t have automatic alternate routing to bypass a fiber cut. If Netflix, Facebook and Google were connected everything else could have been routed along those same other fibers. That is something else my clients would have done to minimize outages for customers.

This is honestly unconscionable and perhaps it’s time we start clamoring to the FCC to require the big companies to plow some of their profits back into a better network. These same sort of outages happened a few times to the power grid a decade ago and the federal response was that the electric companies had to come up with a better network that could stop rolling outages. I know some of my clients that are electric companies spent some significant dollars towards that effort, and it seems to have worked. Considering how important the Internet has become for our daily lives and for commerce perhaps it’s time for the FCC to do the same thing.

New Video Format

alliance-for-open-mediaSix major tech companies have joined together to create a new video format. Google, Amazon, Cisco, Microsoft, Netflix, and Mozilla have combined to create a new group called the Alliance for Open Media.

The goal of this group is create a video format that is optimized for the web. Current video formats were created before there was wide-spread video using web browsers on a host of different devices.

The Alliance has listed several goals for the new format:

Open Source Current video codecs are proprietary, making it impossible to tweak them for a given application.

Optimized for the Web One of the most important features of the web is that there is no guarantee that all of the bits of a given transmission will arrive at the same time. This is the cause of many of the glitches one gets when trying to watch live video on the web. A web-optimized video codec will be allowed to plow forward with less than complete data. In most cases a small amount of missing bits won’t be noticeable to the eye, unlike the fits and starts that often come today when the video playback is delayed waiting for packets.

Scalable to any Device and any Bandwidth One of the problems with existing codecs is that they are not flexible. For example, consider a time when you wanted to watch something in HD but didn’t have enough bandwidth. The only option today is to fall back the whole way to an SD transmission, at a far lower quality. But in between these two standards is a wide range of possible options where a smart codec could analyze the bandwidth available and could then maximize the transmission by choosing different options among the many variables within a codec. This means you could produce ‘almost HD’ rather than defaulting to something of much poorer in quality.

Optimized for Computational Footprint and Hardware. This means that the manufacturers of devices would be able to maximize the codec specifically for their devices. All smartphones or all tablets or all of any device are not the same and manufacturers would be able to choose a video format that maximizes the video display for each of their devices.

Capable of Consistent, High-quality, Real-time Video Real-time video is a far greater challenge than streaming video. Video content is not uniform in quality and characteristics and there is thus a major difference in the quality between watching two different video streams on the same device. A flexible video codec could standardize quality much in the same way that a sound system can level out differences in listener volume between different audio streams.

Flexible for Both Commercial and Non-commercial Content A significant percentage of videos watched today are user-generated and not from commercial sources. It’s just as important to maximize the quality of Vine videos as it is for showing commercial shows from Netflix.

There is no guarantee that this group can achieve all of these goals immediately, because that’s a pretty tall task. But the power of these various firms combined certainly is promising. The potential for a new video codec that meets all of these goals is enormous. It would improve the quality of web videos on all devices. I know that personally, quality matters and this is why I tend to watch videos from sources like Netflix and Amazon Prime. By definition streamed video can be of much higher and more consistent quality than real-time video. But I’ve noticed that my daughter has a far lower standard of quality than I do and watches videos from a wide variety of sources. Improving web video, regardless of the source, will be a major breakthrough and will make watching video on the web enjoyable to a far larger percentage of users.

If All Programming Went Online

TelevisionRecently, in a comment made on one of my blog posts, somebody postulated that eventually cable lineups will get much smaller and cable companies will be reduced mostly to a platform to broadcast live sports events. That is a possibility because sports are clearly the most valuable programming asset that broadcasters have today.

But even in the sports world we have seen some experimentation with the web. On fall Saturdays, for every football game that is on one of the cable sports networks there are a lot more games that are only on ESPN3, the online channel from ESPN. For most of these games online is the only way to view them. And even ESPN itself has allowed their ESPN, ESPN2, ESPNU, ESPN Deportes and the SEC Channel onto Sling TV and it’s likely they are negotiating the same deal with others.

But let’s assume for a second that the more lucrative sports like pro football stay off the web. What might a world look like where most programming was streaming rather than broadcast?

First, this would create a huge increase in web traffic, particularly in the evenings in each time zone. According to Nielsen, in 2014 the average home watched broadcast TV for almost 143 hours per month while the average home watched streaming video on the Internet for 6 hours and 41 minutes. This means that less than 5% of video programming being watched is on the web. The companies that control the Internet have already been screaming about the impact of Netflix on their networks, and yet the web is still only carrying a small portion of the video content that people routinely watch.

There are certainly problems to solve before we can put most video on the Internet. One must first consider the difference between broadcasting live video versus streaming video like Netflix does. There is not a lot of live video on the web because the web architecture is not really designed to always deliver content exactly on time. I’ve reviewed Sling TV on my blog a few times and their live sports programming is so terrible that it’s basically unwatchable. Anybody who has watched ESPN3 will tell you a little better story, but even that is not great. ESPN3 mostly is made to work by sending out fairly low quality video to hold down the bandwidth demand. And unlike Sling TV, ESPN seems to have invested in carriers with a more robust backbone. The live streaming problem is not just about sports because many of the other popular shows that have been aired live on the web, like the Oscars, have been a debacle.

There is a huge difference between live shows and streamed video. Netflix can send out many copies of a streamed video at the same time because each end user is basically downloading a large file. As long as the download speed can stay ahead of where the show is being viewed then the viewer gets the intended quality. It doesn’t matter if the download process is erratic as long as the viewer stays ahead of the download. But live shows must be delivered immediately and to many homes at the same time. And when there is any glitch anywhere in the network, the live broadcast is going to hiccup or crash. If there is a local problem then only a few viewers have a problem, but if there are network delays then many viewers will suffer.

The results of moving everything to the web would be dramatic at the customer end of the network as well. The first issue would be all of the customers using DSL or slow cable modems that can’t easily receive multiple video streams. The FCC set the new standard of 25 Mbps download based upon homes wanting to watch 3 videos simultaneously as well as doing other normal web things. If you are sitting today on a 6 Mbps DSL line you already know that watching even one Netflix stream can sometimes be a challenge.

But even assuming that everybody gets upgraded speeds (which might be hard since most DSL won’t go much faster), I still have to wonder how the cable companies and telcos would handle a 10 times increase in video download demand. Almost all local networks have some sort of shared nature. In fiber-to-the-home networks a data stream is typically shared with up to 16 homes. But in cable networks that number can be greater than 500 homes.

You don’t have to remember back more than a few years when the speeds on cable networks almost died every night during prime time as most homes got on the computer. Cable companies have responded by increasing the size of the data path to the nodes and by cutting many nodes in half. But a 10 times increase in video volumes would bring every cable network to their knees. They would have to construct a lot more fiber and they would need to reduce the size of their nodes down to something a lot closer to the size of fiber systems. And they would have to do all of this without getting any additional revenue.

And rural folks would just be left out. All of the millions of homes that are being upgraded to 10 Mbps download by the Connect America Fund (and the tens of millions of other ones already with slow DSL) would be shut out in a world where most video was on the web rather than on the cable systems. I wonder if the politicians could ignore a rural TV gap in the same manner that they ignore the rural broadband gap?

Taxing the Internet

Numismatics_and_Notaphily_iconStarting on September 1, Chicago is trying something new and will be adding a 9% tax onto almost every service provided on-line. The city, along with the state of Illinois, is having huge budget problems and they are obviously leaving no stone unturned in looking to fill the tax coffers. But Chicago is the first local jurisdiction in many years that is trying to tax Internet-based services, something that will have wide repercussions.

So what are they trying to tax? The short answer is every information service that uses the Internet. For instance, the tax would apply to services that provide searchable databases—things like the LexisNexis system used by lawyers to find legal cases and precedents. As the data we use moves to the web this is a huge source of potential revenue for the city. Consider all of the services around today that charge people to access data. The Ordinance lists services like access to consumer credit reports, real-estate listings, car prices, stock prices, economic statistics, weather statistics, job listings, resumes, company profiles, consumer profiles, marketing data—any information or data that has been compiled, entered, and stored in a provider’s computer and then sold to others. The tax is also going to apply to taxable leases of personal property that include “cloud computing, cloud services, hosted environment, software as a service, platform as a service, or infrastructure as a service.

This tax does not apply to buying things over the Internet; it is not a sales tax on tangible assets, for instance, it would not apply to all of the physical products bought from Amazon. It would instead apply to companies like Netflix and Spotify and any other web service that sells electronic products. It would be up to the companies selling the onlune services to collect the tax and to remit the revenues to Chicago.

Obviously this new law will be challenged because it taxes a whole lot of things for the first time. It will also be interesting to see if this law is infringes on the protections provided several times by Congress in the Internet Tax Freedom Act as well as multiple times by the FCC, most recently as part of the Net Neutrality ruling.

But the city might have found a clever loophole. They are not taxing Internet access, but rather are taxing access to information and information services that happens to be stored somewhere else and then delivered over the Internet. It will be up to courts to sort out that nuance (or for Congress to pass a new law which is more specific).

One has to think that this law is very bad for businesses in Chicago. A 9% tax on anything is significant. Businesses spend huge amounts of money today on access to online databases and on cloud-based services that are moving their own information to the cloud. In effect, this law would tax companies for accessing their own data that they have chosen to store somewhere other than at their own business. I would not be surprised if this law drives businesses that spend heavily for such IT functions out of the city.

This also affects most people who live in the City directly. Almost everybody today who has an Internet connection buys some service over the web, be that a movie service like Netflix or Amazon prime or a music service like Spotify or Apple.

This kind of tax potentially adds a lot of cost for on-line service providers. Every town, county and state in the country has a different basis for assessing sales and service taxes like this one, and so this is going to require companies like Spotify to incorporate the tax assessment and collection process when they sell a subscription – something they don’t do today.

One would think that there will be a lot of avoidance of such a tax. It’s not hard for a business with multiple locations to be billed from a location that doesn’t get the tax. And since most on-line services don’t verify people’s addresses, somebody living in Chicago could most likely avoid these fees just by telling a Spotify that they live somewhere else. It’s hard to think that the City is ever going to be able to dig deep enough into online transaction to ever audit this.

But the real issue is not how the people in Chicago will deal with this. I am sure people and businesses there will take steps to avoid the new taxes if possible. The bigger issue is that other localities will copy the Chicago example if this holds up in Court. There is an old maxim that politicians have never seen a tax they don’t like, and so its not hard to foresee this tax spreading all over the country. And that is going to add costs to the online services we buy today, and since more and more things are migrating to the cloud this will become even more significant over time.

Our Shifting Viewing Habits

Old TVNielsen did a huge survey earlier this year where they asked 30,000 viewers worldwide questions about how they view video content. The responses show how quickly people are changing their viewing habits in response to the proliferation of new options.

Even as recently as a little more than a decade ago, options to view video other than at the scheduled broadcast time  time were rare. I was an early adapter to TiVo and got my first set in 2000. At that time almost nobody watched TV on a time-delayed basis. But TiVo let me watch things on my own time schedule and I quickly invested in a CD burner that would let me capture content from the relatively small TiVo hard drive to further expand my options to watch on a time delay.

The cable companies responded to TiVo by introducing video on demand, which provided watch-anytime capabilities to a subset of their programming. I am probably somewhat unusual in that I can’t recall as an adult having ever watched a network TV series by watching at the scheduled time. I just have never been able to structure my life in that manner (or even remember what day of the week it is).

But today we have a huge array of options and this survey shows that people are using them. We can, of course, still watch TV live and sit and surf the channels. But the cable company video on demand offerings are much larger than in the past. The large cable companies and networks have also provided on-line delayed viewing for most of their popular content that is available with a cable subscription. There are the huge libraries of content at Netflix, Amazon Prime, and other streaming services. There is some pretty decent content today being produced only for the Web, along with an absolute mountain of content on YouTube. And for those willing to hunt, there are huge piles of older movies, newsreels, and offbeat content all over the web.

Here are a few of the more interesting findings of the Nielsen survey:

  • Only 48% of people now prefer to watch video live. This means that the shift to time-delayed viewing is now the predominant way of viewing video.
  • A gigantic 63% of people say that time-shifted viewing best fits their personal schedules.
  • Only 51% think that the big screen TV is the best device for watching video. This is a pretty amazing shift that says that people not only have gotten used to watching video on computers, tablets, and smartphones, but a lot of them now find those alternatives to be their favorite way to watch video.
  • 37% now finding watching video on their cellphone to be ‘convenient’.
  • Another 37% say that a tablet is as good of an alternative as a television screen or a computer.
  • 58% of people like to catch up on content through binge viewing and watching more than one episode at a time.
  • 21% of people are more likely to watch content that has a social media tie-in.

The survey also shows that the type of content affects which device we use. People still prefer the television when watching live news, documentaries, comedies, and dramas. But less than half of viewers choose the television screen to watch reality TV shows. And almost nobody uses a TV screen to watch short videos under 10 minutes in length.

Probably the most interesting phenomenon is that the choice of multiple screens is killing off the once-powerful social impact of watching television with others. I remember the days when the whole family sat around in the evening watching whatever happened to be on (since we could only get three networks that wasn’t a big choice). But this survey shows that 65% of viewers now watch video alone. I know that my wife and I share almost no common interests among the things we watch, and we routinely watch different things at the same time.

This shift is certainly still not over. I still have many older relatives who only watch traditional TV on the screen as it is broadcast. But just about the opposite is true of young viewers and they have largely abandoned the big TV screen except perhaps as background noise while they are multi-tasking on their phones.

The one place where these shifts ought to soon have a huge impact is TV advertising. With over half of all viewers now watching content on a time-delayed basis the traditional advertising model is quickly dying. Surprisingly, TV advertising spending is only slightly down this year, but it won’t be surprising one coming year to see a huge fall-off in TV advertising spending. It seems a waste to pay to advertise where fewer and fewer of us are viewing.

How Real is Cord Cutting?

Fatty_watching_himself_on_TVAlmost every article you read these days about cable TV mentions cord cutting. Service provider are looking for products to satisfy cord cutters and analysts seem to be obsessed by it. But how real is it? I thought I’d take a look at the latest statistics since I haven’t done that for a while.

Total paying cable customers decreased by 31,000 customers in the first quarter of 2015 compared to a gain last year in the same quarter of 271,000. This is looking at cumulative customers for the whole industry including cable companies, telcos, and satellite. But within that number, the net losses for satellite for the quarter was 74,000 customers with a loss at Dish Networks of 134,000 customers and a gain for Direct TV of 60,000.

And cable companies as a whole are still losing customers to AT&T and Verizon, who together gained 129,000 new customers for the quarter, although as a group these two sectors had a tiny gain for the quarter.

This brings the overall loss for the year ending 1Q15 to 0.05%. While that doesn’t seem large, it’s the biggest (and the first) loss the industry as a whole has ever seen. And within the numbers is a worse story. Cable has now been shrinking for several years when measured against the growth of new households in the country. For the first quarter customers actually dropped 2.3% compared with the net change in total households, and for 2014 this was even worse with a net decline for the year of 2.8%.

As somebody who watched the telephone industry decline with landlines this is feeling very familiar. The industry first became sluggish for a few years, then had some tiny losses, and eventually began to bleed customers. But the loss of landlines was accompanied by the meteoric rise of cellphones, which gave people a good alternative to the home phone.

It’s impossible to sit and predict the same rapid decline of cable. For that to happen people are going to need to feel that the alternatives to cable are attractive enough for them to drop the traditional cable packages. So how are some of the alternatives to cable doing?

In the fourth quarter of last year Netflix streamed 10 billion hours of video, which represents 6% of all TV viewing. That number has been growing by double digits and is expected to continue to grow at that same fast rate. 6% of the market may not seem like a lot, but analysts say that Netflix contributed to 43% of the decline in ratings that TV experienced in 4Q14. So it’s not just that people are watching Netflix, but they are watching it during prime time.

And this is all very largely age-related. In the fourth quarter of 2014, viewing of linear TV (watching live broadcasts) was down 10.6%, a huge decrease over the year before. Millennials are flocking from traditional TV to either delayed viewing, viewing alternate content like Netflix, or viewing shorter content on their cellphones. Only about a quarter of millennials now watch linear TV while 44% of baby boomers do.

Linear viewing, in terms of hours watched, peaked in 2013 but has seen significant decreases since then. Over time this has to result in fewer people willing to pay the big monthly bill for something they don’t watch.

There have been surveys for years that predict an upcoming surge in cord cutting, but for various reasons none of those polls has held to be true. These polls tell that us that people are thinking about dropping cable subscriptions, but something is stopping them from pulling the trigger – there is a noted difference between intentions and actions.

There was another such survey recently released by TiVo. This poll says that about 1.5 million customers plan to ditch traditional cable in the next year. The survey says that another 38.1 million customers are dissatisfied with their pay-TV service. But that survey also reported that 20% of respondents had increased their TV packages within the last year, meaning there is a solid core of people who really love TV.

The TiVo survey might be right. When you consider that there has been no growth in cable for several years now it’s possible that there are already between 1 and 2 million people per year dropping cable, and that those drops are being masked by new households entering the market. But since most new households are younger and are the ones not buying cable that is probably not the case. The whole industry is scratching their head in the same way that I am, because the actual behavior in the market doesn’t match what surveys are telling them.

What’s Up With Cable?

Fatty_watching_himself_on_TVThe results for 2014 are in, so today I am going to take a fresh look at the cable industry. The largest nine traditional cable companies lost just under 1.2 million cable customers in 2014, an improvement over the 1.7 million they lost in 2013. But looking at the bigger picture, the top thirteen cable companies lost only 125,000 customers for the year, which is slightly higher than 95,000 in 2013. Within those numbers, Direct TV and Dish Networks together added 20,000 subscribers for the year and Verizon and AT&T added just under 1.1 million cable customers for the year, down from 1.4 million from the prior year.

The industry as a whole is hanging solid and these thirteen companies have 95.2 million customers. Hidden in these numbers is the growth of cord cutters. For a number of years running, the cable industry as a whole has been slightly shrinking even though there is roughly one million new households entering the market each year.

Of course, the growth for the cable companies is in broadband. The largest cable companies in the group added 2.6 million high-speed data customers in 2014, while AT&T added 1,000 and Verizon 190,000. Time Warner Cable said in their annual report this year that their data product has a 97% margin, a number that opened a lot of eyes.

There are two other trends that are not captured in these numbers. First is the growth in time spent by people watching online programming like Netflix and Amazon Prime; and with that a corresponding decrease in time spent watching traditional cable TV programming. The overall hours spent per viewer for traditional cable dropped 4.4% for the year, but Nielsen reported that this was accelerating at the end of 2014. The most shocking number published this year came from Nielsen which reported that over 10 million millennials had largely fled linear TV just in the last year. Primetime viewing dropped by 12% during 2014 as more viewers are changing to time-shifted viewing.

The other trend is in the continued increase in rates. Most of the cable companies are reporting profits up 7–9%, due in part to more data customers, but also due to continued rate increases. As an example, Cablevision raised cable rates by 5.3% last year, or $7.86 and their average revenue per customer is now up to $155.20. It’s a bit mind boggling to think that’s the average and that there are a lot of households paying a lot more than that.

For yet another year the largest cable companies came in dead last in nationwide customer satisfaction surveys. This puts cable companies behind banks, airlines, and large chain stores and the satisfaction scoring for the cable companies dropped significantly just since 2013.

There is anxiety in cable boardrooms. Just in the last weeks there have been mixed signals from Wall Street when some industry analysts downgraded cable stocks due to the FCC’s net neutrality ruling, while others said there would be no significant impact from it. I tend to side with the second crowd since the FCC has excused broadband from rate (and most other kinds of hands-on) regulation.

But the real anxiety comes from a look at the demographics supporting the industry. The average age of cable viewers is increasing quickly as younger people eschew watching traditional TV. The average age of viewers for many shows and networks is now over 55, up sharply from even a decade ago. This is already starting to be felt in terms of advertising revenues, with the pre-sale for the current ad season down sharply from 2013.

There is also a lot of anxiety over Over-the-Top (OTT) programming on the web. It seems like there are weekly announcements of new alternatives coming online. The biggest recent shocks were when HBO, Disney, and ESPN said they would have some product on the web. These have been considered the bedrock channels of the cable company line-ups. Sling TV seems to be doing well with an abbreviated line-up (but which keeps growing). Sony is supposed to be unveiling what they are calling a major new online product later this year, and there are another dozen companies trying to put together web TV packages. The FCC is also looking at changing the rules that might make it easier for online content providers to obtain programming. The feeling is that 2015 is possibly going to be a sea change year and that we will start to see major shifts in the industry.

Meanwhile, programmers keep raising the rates they charge to cable companies, and the rate of programming increases is accelerating. Many programmers don’t seem overly concerned about the problems faced by the cable companies because many of them expect to have content included in online packages, and many are seeing explosive growth internationally in subscribers.

Liberty Media chairman John Malone chastised the industry recently for not implementing TV everywhere fast enough. That is the product that lets customers watch programming on any device on their own time. He says that this is probably the number one reason why Netflix and others have fared so well (which does sort of ignore the cost issue).

The larger cable companies are putting more effort into this area as witnessed by the new X1 settop boxes that Comcast is deploying. They have reported that there is significantly less churn from customers who have the newer technology. What can be said is that the industry is in turmoil. It may not look so bad when looking at customer numbers, but everybody in the industry senses that things are going to start changing quickly.

As an aside, I know somebody with the new X1 box and they tell me a different story than what Comcast is publicly saying. They recently moved and were given the new X1 box and they hate it. It regularly won’t record shows, or it goes offline and they can’t access regular programming or their recorded programming. They’ve asked repeatedly to get back their old style of box. They instead have been given numerous credits and one manager, as he was giving them a credit, admitted that Comcast had rolled out the new box too fast and there were problems with it everywhere. They have called several times to cancel but have instead been given another credit. When I told them what I was writing, they speculated that there is less churn because Comcast is just not letting people go. I don’t know how widespread the problems are with the new box, but cable companies have been known to withhold bad news from investors in the past.

How’s Cable Doing?

Cord cuttingWith all of the talk of cord cutting, cord-shaving and the general demise of the cable industry I thought it would be useful to take a snapshot of the cable industry at the end of the third quarter of 2014 to see how the industry is doing. Here are some key facts for a numbers of major cable providers:

Comcast. For the quarter they lost 81,000 TV subscribers compared to losing 127,000 in the 3rd quarter of 2013. Meanwhile they gained 315,000 data customers compared to 297,000 customer a year before. Overall profits were up 4% over the year before. Comcast now has 22.4 million video customers and 21.6 million data customers.

Time Warner Cable. The company lost 184,000 cable subscribers in the third quarter compared to 122,000 in the previous year. But the company did add 92,000 residential data customers for the quarter. Earnings were up 3.6%, driven by cable rate increases and growth in the business services group. The company saw a 9.6% increase in programming costs, driven by a bad deal they made for the programming rights to the LA Dodgers.

Charter Communications. Charter lost 22,000 video customers for the quarter compared to 27,000 a year earlier. They saw data customers increase by 68,000 compared to 46,000 a year ago. Overall profits were up 8% driven by rate increases and data customer gains. Charter finished the quarter with 4.15 million cable customers.

CableVision. The company saw significant loss of 56,000 cable customers, Profits for the company dropped to $71.5 million for the quarter down from $294.6 million a year earlier.

Cable One. The company lost 14,000 video subs and ended with 476,000 at the end of the quarter. The company has not renewed programming from Viacom starting in April of this year

Suddenlink. The company added 2,200 video customers for the quarter compared to a loss the previous year of 3.200 subs even though they have dropped Viacom programming. Revenues increased by 6.6% compared to a year ago.

AT&T. U-verse added 216,000 cable customers for the quarter and added 601,000 data customers. The company now has more than 6 million video customers and 12 million data customers. U-verse profits were up 23.8% compared to a year earlier.

Verizon. The company added 114,000 new video customers and 162,000 new data customers for the quarter. The company now has 5.5 million video customers and 6.5 million data customers.

DirectTV. The company saw a decrease of 28,000 customers for the quarter while revenues grew by 6% due to rate increases. The average satellite bill is up to $107.27 per customer per month.

Netflix. Netflix added 1 milllion US subscribers and 2 million international subscribers for the quarter. They now have 37 million US customers and almost 16 million international ones. But these growth rates were less than their predictions and their stock tumbled 25% on the news.

Amazon Prime. The company does not report number of customers. But their earnings release says they gained significant customers even while increasing their annual fee from $79 to $99.

What does all of this mean? As can be seen by looking at all of the major players who make quarterly releases (companies like Cox do not), one can see that total video subs are down by maybe a net of 100,000 for the quarter. But cord cutting is growing when you consider that the industry used to routinely grow by 250,000 customers per quarter for now households being built. So it looks like cord cutting is growing by perhaps 1.5 million per year.

Within these numbers one can’t see the effects of cord shaving. It’s been widely reported that customers are downsizing their cable package as a way to save money. None of these companies report on their mix of types of customers.

Netflix and Amazon Prime continue to grow significantly along with other on-line content providers. It’s been reported that over half of the households in the country pay for at least one of the on-line services and many others watch free content available at Hulu and other sites.

One thing that is obvious is that broadband is still growing for all of the service providers. In fact, Comcast and other traditional cable providers are starting to refer to themselves more as ISPs than as cable companies.

The FCC and Peering

Zeus_peering_around_a_corner__(9386751334)As the politics of net neutrality keep heating up, Senator Pat Leahy and Representative Doris Matsui introduced the Online Competition and Consumer Choice Act of 2014.

This bill requires the FCC to forbid paid prioritization of data. But then, Senator Leahy was quoted in several media outlets talking about how the bill would stop things like the recent peering deal between Netflix and Comcast. I’ve read the proposed bill and it doesn’t seem to ban those kinds of peering arrangements. His comments point out that there is still a lot of confusion between paid prioritization (Internet fast lanes) and peering (interconnection between large carriers). The bill basically prohibits ISPs from creating internet fast lanes or in disadvantaging customers through commercial arrangements in the last mile

The recent deals between Netflix and Comcast, and Netflix and Verizon are examples of peering arrangements, and up to now the FCC has not found any fault with these kinds of arrangements. The FCC is currently reviewing a number of industry peering agreements as part of investigating the issue. These particular peering arrangements might look suspicious due to their timing during this net neutrality debate, but similar peering arrangements have been around since the advent of the Internet.

Peering first started as connection agreements between tier 1 providers. These are the companies that own most of the long haul fiber networks that comprise the Internet backbone. In this country that includes companies today like Level3, Cogent, Verizon and AT&T. And around the world it includes companies that you may not have heard of like TeliaSonera and Tata. The tier 1 providers carry the bulk of the Internet traffic and peering was necessary to create the Internet as these large carriers need to be connected to each other.

Most of the peering arrangements between the tier1 carriers have been transit-free or what is often referred to as bill-and-keep. The traffic between the major carriers tends to balance out in terms of originating and terminating volumes and in such cases it doesn’t make a lot of sense for two carriers to bill each other for swapping similar amounts of data traffic.

But over time there were peering arrangements made between the tier 1 carriers and tier 2 providers that includes the large ISPs and telcos. Peering was generally done in these cases to make the network more efficient. It makes more sense to interchange traffic between and ISP and somebody like Level3 at a few places rather than at hundreds of places. It’s always been typical for these kinds of peering arrangements to include a fee for the tier 2 carrier, something that is often referred to as a transit fee.

There is no industry standard arrangement for interconnection between tier 1 and tier 2 providers. And this is because tier 2 providers come in every configuration imaginable. Some of them own significant fiber assets of their own. Others, like Netflix have a mountain of one-directional content and own almost zero network. And so tier 2 providers scramble to find the best commercial arrangement they can in the marketplace. One thing that is almost universal is that tier 2 providers pay something to connect to the Internet. There is no standard level of payment and transit is a very fluid market. But payment generally recognizes the relative level of mutual benefit. If the traffic between two parties is balanced then the payments might be small or even free. If one party causes a lot of costs for the other then payments typically reflect that imbalance.

Netflix has complained about paying Comcast and Verizon. But those ISPs wanted payments from Netflix since the traffic from Netflix is large and totally one-directional. Comcast or Verizon needs to construct a lot of facilities in order to accept the Netflix traffic and they don’t get any offsetting benefit of being able to send traffic back to Netflix on the same connection.

In economic terms, on a national scale the peering market is referred to as an n-dimensional market, meaning that a large tier 2 provider has the ability to negotiate with multiple parties to achieve the same result. For example, Verizon has a lot of options for moving data from the east to the west coast. But eventually the Internet becomes local, and that is where the cost and the contention arises. As Internet traffic enters a local metropolitan market it begins to hit choke points where the traffic can overwhelm the local facilities and cause congestion. The payments that Comcast or Verizon want from Netflix are to build the facilities needed for getting Netflix movie traffic to and through these local hubs and chokepoints.

Peering arrangements like this make sense. I find it hard to believe that the FCC is going to get too deeply involved in peering arrangements. It’s an incredibly dynamic market and carriers are constantly rearranging the network as they find better prices or more efficient network arrangements. If there is any one place where the market works it is between the handful of large carriers that handle the majority of the Internet traffic. Most of the bad things that can happen to customers are going to happen in the last mile network, and that is where net neutrality should properly be focused.

And why the picture of the kitten? I work at home and at my very local part of the network this is the kind of peering that I often get.