Online video distribution will be disruptive for video service providers. But the degree of disruption will be highly disparate. Comcast or Verizon and AT&T might suffer some financial distress, but far less so than the satellite and broadcast TV providers.
In fact, in a strategic sense, on-demand online delivery improves the strategic position of cable and telco networks, and is a major disadvantage for the other networks, which simply will not be able to adjust. The reasons have to do with the network topologies.
Telephone networks always have been designed for one-to-one communications. Most other content delivery networks (broadcast TV, satellite TV, cable TV, over the air radio) were optimal for multicast content. As the market slowly moves to more unicast delivery, topology is going matter quite a lot.
What a multicast network cannot do is support much unicast traffic. So as video content delivery slowly moves to unicast, on-demand modes, the providers with the biggest point-to-point networks, with the most bandwidth, will have advantages. Conversely, multicast networks will be stuck with linear, multicast delivery.
If you want to know why Dish Network is so intent on getting into the mobile business, that is why. Whether he says it directly or not, Dish Network CEO Charlie Ergen realizes the limitations of a satellite video network in an on-demand market.
The conventional wisdom (which isn’t always wrong) suggests new Internet-based providers such as Netflix will gain, while traditional incumbents lose customers, revenue and market share. That is a reasonable view, but is not so simple as some seem to think.
For one thing, the existing video distributors undoubtedly will also have the right to offer online programming, on similar terms and conditions, as Netflix, Amazon Prime or any other online services. In some cases, that will mean less revenue than now is earned. In other cases, the shift might well be revenue neutral.
Nor will online distributors have an especially easier time getting unique or even standard content rights. The studios and networks wil decide what their content is worth, and distributors will have to pay.
Nor will online competitors have an especially easy relationship with content owners. As Netflix faces growing resistance from its suppliers, Netflix will have to pay more for content rights, or lose content deals, for example.
Some content owners will try to “go direct” to end users. But one might be skeptical of prospects for single-studio streaming sites, such as the Warner Archive streaming service, as volume will matter, as will ease of use. And it just won’t be convenient for end users to buy multiple discrete services from lots of suppliers. The largest catalog, “with all the good stuff,” will win.
But the fact remains that Netflix and other online services will face significantly higher programming costs, going forward, as they emphase original content.
Also, cable and telco providers will have strategic advantages. Where now both contestants face the two big satellite providers, in the on-demand business they mostly will not have to compete with them.
Oddly enough, cable and telco will face far less competition in an online market than in the current linear video market.
Also, the magnitude of the revenue change might be less than expected, in net terms, as it also is logical to expect telco and cable ISP revenues to grow as demand shifts to online-delivered video.
Telcos and cable companies might be selling higher-priced broadband access services (though the Google Fiber pricing umbrella is a huge problem), even as they face erosion in video revenues. But telcos and cable companies also stand to gain back market share from satellite providers.
Also, telco and cable revenue drivers already are changing. For cable and telcos, the importance of voice, business services and video services are mirror images.
For cable, video is a legacy service that is dwindling because telcos are taking market share. For telcos, share of business services will shrink as cable takes customers, as already has happened in the voice area.
Overall, both voice and video entertainment revenues will be under pressure, mitigated mostly by bundling that provides incentives for consumers to buy services they might not want, to obtain lower overall prices on a basket of services. But satellite and broadcast TV distributors will face bigger problems: unicast destroys much of the value of their networks.
It isn’t completely clear that broadband access revenues will compensate for declining video entertainment revenues. Especially if Google Fiber succeeds in creating a new value-price expectation for gigabit access ($70 for a symmetrical gigabit), there might not be that much upside for broadband access prices.
According to industry researcher Strategy Analytics, the margins on cable broadband services are 70 percent to 110 percent higher than those on video services (depending on whether or not advertising revenues are included in the calculation). What is not so clear is what margins will be possible for online services.
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