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Cable Technology Feature Article

September 18, 2014

A Big Gatorade Bath for OTT-Averse Cable Operators

By Bob Wallace, Founder, Fast Forward Thinking LLC

It’s not the ice bucket challenge, but an OTT Gatorade bath might raise awareness among cable TV providers to imminent problems, as costs continue to soar and while profit margins reach five-year highs powered by gains in broadband services (not TV).

Continually citing increasing programming costs as the culprit, cable TV companies continue to pass along costs to increasingly annoyed consumers. This group has grown tired of broadcast, sports and other fees, and has dropped premium channels and packages to move to a far cheaper plan and added OTT, or left cable altogether for web alternatives such as Netflix.

All this is happening while the OTT competitive threat gains traction, ironically, from TV providers such as Dish, AT&T, Verizon (News - Alert) and content owners such as Sony.

Boxing OTT

At a time when seemingly everyone is throwing their hats in the OTT service ring – Verizon last week and AT&T’s CEO hinting at it this week – cable operators need to be thinking and acting well outside the set-top box.

Maybe thinking should be directed to other boxes given that media player giant Roku announced this week it has sold 10 million units since 2008, having reported sales of 3 million units in 2013 alone. This has been accomplished in an increasing competitive market that now includes Apple (News - Alert) Fire TV.

Remember, pricing for connected TVs continues to fall, with the yearend holiday shopping season within sight. Combine that with TV makers and others pushing “the next big thing” – ultra HD TVs using the 4K format.

Coming Attractions

Dish and Sony are already set to launch actual OTT services by yearend.

The entry of AT&T is no surprise given its deal with The Chernin Group earlier this year. The same holds true for Verizon, which bought the TV assets of Intel and created a new unit for those and other resources. It plans to launch an OTT service in mid-2015. These are two new offerings consumers have to think about when reviewing their monthly TV invoices.

The cable cost killer, as has been written here countless times before, is live sports content whether its via broadcast channels such as NBC, CBS, Fox and ABC, or ESPN and other emerging regional sports networks (RSN).

Perhaps that’s why many of the current subscription OTT services – Netflix, Amazon Instant Video, etc. – and planned – Sony, and Verizon – are almost devoid of live sports content. Dish has a few RSNs and ESPN which should make it the higher priced option of the bunch.

AT&T admitted again this week that if its bid to buy DIRECTV – home of NFL Sunday Ticket – is approved its costs will rise even though it claims it will realize huge sums in operational synergies and other efficiencies.

Cable One

Claiming that sports content now represents a third of its overall programming costs, Cable One this week decided to assess the video users a $2.94 monthly “surcharge.”

"Networks are now paying billions of dollars for the ability to broadcast college and professional sporting events," Cable One said in a letter to customers. "These increasingly expensive sporting events are carried by networks in every level of our channel lineup, including dedicated sports channels such as ESPN, NBC Sports and the NFL Network, as well as on general entertainment networks such as TNT, TBS, USA Network and your Regional Sports Networks.”

Cable Profits Soar

A report that made news this week and based on data from EY (aka  Ernst & Young), claimed cable profit margins will reach over 41 percent in 2014, the sector’s best performance in a whopping five years, a stretch in which cable operators lamented often rampant cord cutting by fed up TV subscribers.

So it should come as no shock that, according to the EY data, the fat profit margins are driven primarily by growth in broadband services and subscribers. I’ve noted before that Verizon with FiOS (News - Alert) and AT&T with U-verse have reported far greater high-speed Internet additions than new TV customers.

The cable sector profit margins could be different, but EY chose (and rightly so) to include the nation’s largest cable provider and NBC Universal owner Comcast (News - Alert) in the media conglomerate category. As most all know, Comcast is amidst a huge-ticket bid to acquire closest cable rival Time Warner Cable.

The Toughest Sell?

While retaining live sports programming and levying RSN and other sports content-related fees on TV subscribers could qualify as the toughest sell today, especially given that a sizable number of customers don’t watch sports. Many have long since fled to Netflix and OTT friends.

Cablecos could even star in a reality TV show by that very name given the EY data this week – “The Toughest Sell.”  The RSN and sports related surcharges are frequently in addition to sports content channel packages created and offered to subscribers separately and for an extra monthly charge.

Multiple Irons

Clearly, with the OTT lineup due to lengthen in the months ahead, and likely more next year, it’s time for cablecos to listen to what C-level AT&T and Verizon execs have said they envision – multiple offerings meaning multiple business models. The one-approach-fits- all TV approach of cable is shortsighted.

Cable companies need to get multiple irons in the TV fire or risk continued or larger cord cutting. The gains they realize in broadband set the foundation for what they need to offer. Remember, their profit margins according to EY are based on broadband subscriber growth.

It’s either that or continue to pass along the hit to annoyed TV subscribers as seemingly everyone and their family tree launches a sports channel, network or channel group, down to the individual college level as is the case with the University of Texas’ Longhorn Network.

Watch Telco TV

Tracking one-time telcos AT&T and Verizon reveals that fully plan to deliver TV programming in multiple ways using different business models. That fact became clear as HD when Verizon partnered with Redbox on a streaming service and then bought CDN EdgeCast and the TV assets of Intel.

For its part, AT&T made the huge investment in The Chernin Group and not long after announced plans to merge with satellite TV provider DirecTV (News - Alert) in a deal that could be scrapped if the company doesn’t retain NFL Sunday Ticket after the 2014 football season concludes. It’s an exclusive deal now.

AT&T execs spoke of plans to deliver the coveted live NFL content in July to roughly 100 million of its wireless subscribers if the deal is approved. This week, they spoke of plans to deliver the football content and other DIRECTV programming with wireless broadband services to rural areas over dedicated airwaves late next year.

The Bottom Line

While actions speak far louder than words from execs driving mega-merger acceptance, they need to be taken together by cableco programming and product development execs (throw in CMOs). The list of those competitors planning to offer OTT services in the next two to 12 months is plenty log enough to eat away at the fat profit margins EY reported this week.

Whether consumers combine OTT with downgraded (lower end) cable services as a supplement, or as a complete replacement, cablecos are losing revenue. Not deciding is deciding for operators who may be closely watching the competitive landscape and also see the OTT service menu that’s growing fast.

Actions speak louder than words. But even words at this point would help the cable TV cause.

Stay tuned!

Edited by Maurice Nagle

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