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Cable Technology Feature Article

April 01, 2014

Despite Multiscreen and OTT Thirst, Pay-TV Operators Still Own the Video Scene

By Tara Seals, TMCnet Contributor

Consumers essentially first gained sovereignty over the use and enjoyment of their video programming with the launch of the first consumer VCR. Not long after, society as a whole settled into the idea of recording and time-shifting content on-demand—a phenomenon that was not only good for the average citizen but which ended up giving content and media companies a whole new way to widen their audience. And today, we’re seeing a similar shift as people quest after a fully personalized video experience by, in part, making content portable through the interoperability of the increasingly diverse collection of devices that they own.

Tablets, phablets, laptops, smartphones, gaming consoles, connected TVs, Roku boxes, e-readers and even smart watches are contributing to a bonanza of video-enabled screens, fed by video-friendly broadband links. Consumers want multiscreen capabilities; media companies want to serve up content across screens. But what’s missing in this perfect storm are the market forces that encourage increased video choice when it comes to distribution outlets—meaning that for the foreseeable future, cable, satellite and IPTV will continue to dominate the landscape.

For one, telcos and cable MSOs have a corner on the facilities-based market. The US Consumer Electronics Association (News - Alert) (CEA) recently filed comments with the Federal Communications Commission (FCC (News - Alert)), in response to its 16th Annual Notice of Inquiry regarding competition in the video industry, urging the FCC to do its part to protect opportunities for mobile and online video choice by lowering physical barriers to broadband implementation.

"Twenty years ago, consumers could record and review live programming only through devices attached to their televisions,” said Julie Kearney, regulatory affairs vice president of CEA. “But increased mobility and greater access to video content mean we're now able to use our mobile devices to watch what we want, when we want, no matter where we are."

But statistics from the National Broadband Plan estimated that the "expense of obtaining permits and leasing pole attachments and rights-of-way can amount to 20 percent of the cost of fiber-optic deployment." Restrictions on pole access can cause deployment costs to skyrocket, particularly if a provider is forced to install its own poles or place its wires in new underground conduit. And that limits network ownership—and the ability to deliver a managed video service—to a select few incumbent video and communications providers.

Consumer choice and widening opportunities for content and media has also been limited by archaic methods of attaching devices to networks—i.e, the protection of the set-top box hegemony, according to the CEA. The association argued that pay-TV operators have limited innovation and purchase opportunities for some classes of consumer products.

"Consumers seek an individualized experience in connected devices: aggregating their own choice of services, sources and content, receiving recommendations, and handling payment and billing," Kearney said. "However, one area that has resisted such aggregation and has grown more slowly is the market for set-top boxes dedicated to video programming, which remains dominated by products leased to consumers by providers of specific services."

CEA cited research showing that consumers choose electronics products primarily depending on the viewing situation (e.g. in-home or externally) and the content available on the device. Consumer preferences for choice and mobility are especially pronounced among younger consumers.

"New media choices result in new device choices and vice versa," Kearney said. "Constraints in either area will slow innovation or harm competition in the other. The FCC should do everything it can to facilitate those preferences in a manner that is technology-neutral – not picking winners and losers based on the business model of the entity offering the content."

Unfortunately, the landscape has gotten more complicated for competitive video sources thanks to the Net neutrality changes that have come about in the wake of a court finding for Verizon (News - Alert) earlier in the year. Big Red prevailed in a lawsuit to block the Federal Communications Commission's ability to enforce Net neutrality rules. Since then, consumers have anecdotally reported slower video streaming experiences across a variety of providers—again, favoring those that control the last mile—and can therefore offer a managed service.

After the decision, Netflix agreed to pay Comcast for delivering its traffic to end users, in a paid peering arrangement that most expect will be replicated across incumbents. CEO Reed Hastings is clearly not happy about it.

 “Some big ISPs are extracting a toll because they can -- they effectively control access to millions of consumers and are willing to sacrifice the interests of their own customers to press Netflix and others to pay,” Hastings noted in a blog. “Though they have the scale and power to do this, they should realize it is in their long term interest to back strong Net neutrality (News - Alert). While in the short term Netflix will in cases reluctantly pay large ISPs to ensure a high quality member experience, we will continue to fight for the Internet the world needs and deserves.”

He added, “Some major ISPs, like Cablevision, already practice strong net neutrality and for their broadband subscribers, the quality of Netflix and other streaming services is outstanding. But on other big ISPs, due to a lack of sufficient interconnectivity, Netflix performance has been constrained, subjecting consumers who pay a lot of money for high-speed Internet to high buffering rates, long wait times and poor video quality.”

Once Netflix agrees to pay the ISP interconnection fees, however, sufficient capacity is made available and high quality service for consumers is restored.

In light of this new reality, other OTT providers may have a long road when it comes to participating fully in the video market. Those that can afford to pay – i.e., the likes of Google, Amazon, Netflix, Apple et al—will be able to offer QoS via preferential access to the last mile; other smaller providers? Not so much.

“In other words, some of the content from the Internet is likely to seek an alternative, off-line path to the home,” said Barclays analysts, writing in a research note to investor clients. “In our view, this is likely to be a completely different commercial service offered by cable companies to companies like Apple who want to have an off-network presence apart from a presence on the Internet.”

“Apple and Google, who have been supposedly the victims of the Net neutrality debate thus far, are likely to actively seek an alternative path outside the internet for higher quality of service, especially when it comes to video,” Barclays concluded.

And QoS looks to be critical for consumers. A survey from Parks Research has found that consumers expect the same TV user experience throughout their home, regardless of whether the service is offered OTT, a managed terrestrial operator network, satellite or other delivery mechanism. Expectations also remain the same regardless of the receiving device, including set-top box or connected CE device—including a thirst for the bells and whistles of a traditional pay-TV service within the user interface for OTT.

"While some operators might see OTT delivery or use on a connected CE device as a way to offer a slimmed-down version of their user interface, consumers still expect the full-feature service and interface experience regardless of how it is delivered to the TV," said Brett Sappington, director of research at Parks Associates (News - Alert).

That means that competitively, the market is already weighted towards telcos, satellite companies and cable MSOs.

Content companies realize that pay-TV providers remain ascendant when it comes to dominating consumer reach—and are ironically contributing to that state of the market remaining intact, even though a more diverse distribution landscape would be in their best interests in the long term.

“In our opinion, any relationship between Apple or for that matter other companies looking to get into the TV market (Amazon, Google, etc.) and a cable company depends on what content rights either party has,” Barclays noted. “In this respect, MVPDs enable a revenue stream more than $100 billion to content owners through affiliate and retrans fees and advertising, and bring…a subscriber base to the mix. Apple today does not own the rights to linear TV which enables this revenue stream nor does it bring a subscriber base for any linear service. As a result, in order to offer any credible product, Apple will either have to, one, rely on an MVPD’s linear content rights; or, two, pay for these rights on its own”—which is an exceedingly expensive proposition.

Edited by Cassandra Tucker

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