With more and more TVs and Blu-ray players coming with pre-installed broadband-connected services, cable companies, online video providers and programmers, both new and old, are rethinking the technologies they use for linear and on-demand video. Last year, for example, Utah-based broadband ISP Cable & Wireless teamed up with Move Networks in an effort to provide linear video programming to consumers in 38 countries worldwide. Those services will be rolled out in markets where Cable & Wireless sells broadband services, such as DSL, but no local TV infrastructure.
Launching a pay TV service has never been an easy (or inexpensive proposition). Verizon and AT&T, for instance, have spent tens of billions of dollars laying fiber and rolling out the infrastructure necessary to provide some much-needed competition against local cable monopolies. But for new entrants, delivering IP video to large audiences is in many ways more scalable than doing it the old-fashioned way.
For those operators that already have an established cable plant, it enables them to take their relationships with content providers and pitch services in markets where they don’t already have a presence. All of which means that cable operators that don’t already have an over-the-top strategy could find themselves commoditized to being pure bit pipes for someone else’s video services if they don’t act soon.
So, who’s most likely to start offering virtual TV services in the coming years? The following is a look at market participants that could shake up the current business model for paid TV with over-the-top video services.
Cable and Satellite TV Providers
Don’t think these guys aren’t aware of the competitive threat that faces them. Some — like Comcast and AT&T — have moved aggressively to address the competitive threat that on-demand video sites like Hulu present, largely by rolling out their own video aggregation sites. But they could find themselves going even further and launching their own broadband-delivered TV services. In doing so, they wouldn’t just be competing with online video sites; they’d be competing with each other. In fact, becoming a virtual network operator could be a relatively inexpensive way for companies like Comcast, DirecTV or Verizon to boost their already large subscriber numbers in markets where they don’t yet operate — and they could do so without having to make investments in new infrastructure.
The flip side is that by offering over-the-top video services, cable operators and other service provider could disrupt current pay TV business models. Cable companies and other local ISPs that don’t already have a clear strategy for over-the-top video could find themselves being used for broadband services only, which could have a major effect on their financial health, as they’re forced to upgrade their networks to handle a growing amount of web video while only being able to charge increasingly commodity prices for broadband access.
Consumer electronics manufacturers
Cable and satellite TV companies have typically called the shots about what type of content makes it to the TV through their set-top boxes, but an increasing number of consumer electronics manufacturers like LG, Samsung, Sony and Vizio are rolling out Blu-ray players and HDTVs that have Ethernet or Wi-Fi connections built-in. And they are increasingly striking content deals directly with online video companies like YouTube and Netflix (see below) to make a diverse range of content available through those devices. With consumer adoption of connected TVs taking off, it only seems like a matter of time before CE manufacturers try to cut out the middle man (i.e. the cable company) to launch their own video services.
While the big CE companies get the most attention when it comes to rolling out new over-the-top services, there are also a growing number of startups that already provide live and on-demand video content through broadband set-top boxes. Earlier this year, for instance, broadband set-top maker Sezmi rolled out a limited trial of its hybrid over-the-air and online TV service in Los Angeles, with plans to expand that service nationwide by the end of the year. As a startup, Sezmi is a dark horse candidate to lead the revolution in over-the-top video. But it’s not alone. Roku and Boxee also are looking to expand the amount of content consumers can access over the top with their own Internet video set-top boxes.
YouTube/Google
YouTube has the technical capabilites — and the audience reach — to offer up an alternative to traditional TV. But so far, the Google-owned online video site has tread lightly while going up against traditional cable companies. While the No. 1 online video site is definitely interested in becoming a site for premium video content, striking deals with CBS and others to bring small amounts of premium on-demand content to the site, it hasn’t begun offering linear video programming — but it could.
The site has already showcased a number of live events, including presidential press conferences and concerts, that have demonstrated its live video capabilities. And its most recent foray into live sports programming — in which it streamed live every game from the Indian Premier League’s 2010 season — shows that it doesn’t plan to just provide on-demand content forever.
And there’s increasing evidence that Google will launch a platform for TV applications at the company’s Google I/O developers conference this week. With a window into the living room by serving as the operating system that HDTVs and other connected devices run on, Google could easily create a set of video delivery services that could rival that of the big cable distributors.
Netflix
Netflix already has 14 million subscribers to its DVD rental service, and about 55 percent of those last quarter used its streaming service to watch TV shows and movies over broadband connections. More than any other web video provider, the video rental firm has managed to find its way onto game consoles, TiVo DVRs, Roku broadband set-top boxes, Blu-ray players and HDTVs, bringing the online video service directly onto consumer TV sets. In total, Netflix expects its Watch Instantly streaming service to be available on more than 100 different consumer electronics devices by the end of the year.
With such a large install base, it is already bigger than some of the largest cable companies — so what’s stopping it from offering live cable programming? Nothing.
In fact, here’s a little-known bit of trivia: Netflix has had a live stream of the Starz cable channel running on its website for the last two years, ever since signing a deal to distribute the cable network’s Starz Play on-demand content. The stream isn’t available through any of the consumer electronics devices that carry its streaming service. But if they did, Netflix could soon find itself competing with other cable distributors that carry Starz as part of their premium movie packages.
Cable Networks
There’s nothing technically stopping a cable network from offering broadband services direct to consumers — after all, a few are already making their content available online through authenticated TV Everywhere initiatives like HBO Go. But for business reasons, most cable programmers have shied away from making too many full-length movies or TV shows available, for fear of alienating their distributors, the big cable companies. Since the cable nets depend on per-subscriber carriage fees to fund their businesses, they may see limited upside in going direct-to-consumer with a broadband offering.
Still, there’s a big question of how much more money they could make by going charging monthly subscriptions fees for over-the-top services vs. what they make through their existing cable carriage deals. Charging a monthly subscription fee of $10 for online access to cable TV content, for instance, would give most networks a significant premium over the fees they receive from the cable companies, and could allow them to capture the interest of consumers who don’t want to pay $80 a month for a package of all the cable channels, but would be willing to pay for individual pieces of content.
Conclusion
For now, the biggest hurdle for any of these plans is the ability to get rights to the content that consumers would be willing to pay for. Premium content owners — particularly the cable networks — are ever mindful of the subscription fees they collect from cable companies for distribution over traditional cable services and are loathe to disrupt that business.
However, in the coming years it will matter less and less whether a piece of content is transmitted over traditional cable coax or through an Ethernet or Wi-Fi connection — except, of course, to the companies that build out those networks. To avoid commoditizing their businesses, those network operators will need to have a strategy of over-the-top video, or risk losing out to a more nimble competitor.
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