CenturyLink Pondering OTT Video Service of Its Own: What are the Implications?

With the news that CenturyLink “is looking at offering an over the top video service, while AT&T has hinted it is certain to do so, we now have additional evidence not only of a fundamental shift in the video entertainment business model, but also an interesting twist on operating costs, with some possible implications for longer-term strategy as well.

To be sure, the main reason CenturyLink, AT&T and Verizon offer, or want to offer, streaming video is that the market is shifting in that direction. To remain relevant “triple play” providers, they need an OTT streaming option.

At a tactical level, there also are possibly-significant operating cost advantages, some incrementally helpful capital investment implications and at least a potential new opportunity to escape geographic limitations.

Consider the tactical considerations, which are important. Operationally, installing linear video now requires a truck roll that represents about 42 percent of the total cost of an install for a cable TV operator, for example.

Delivering an OTT video service does not. To the extent a truck roll costs  no less than $150 to $200, and could range much higher, the ability to turn up a service without a truck roll saves the provider money. Costs for cable TV providers are likely to range closer to $150, while telcos likely routinely spend closer to $200 for each install.

That is the cost of the truck roll for physical activation, not the cost of other hardware.  To turn up a video service requires one or more decoders, representing capital investment of perhaps $700 or more for set-top decoders. The investment varies with the number of decoders required at each location.

So, for starters, an OTT “install” can be done without a truck roll, and without the cost of a decoder, since the consumer likely uses their already-purchased Internet access modem and Wi-Fi (integrated into the modem, increasingly).

So OTT saves a great deal of money in the form of truck rolls, ancillary hardware and decoder costs, assuming the customer already has purchased fix network Internet access from any Internet service provider.

"As others are doing, we're also looking at an over the top product that we could deliver either some of or all the content we have today," said Stewart Ewing, CenturyLink CFO. "This is a product that we'll trial in 2016 that we believe we can get to the customer without a truck roll so it could help us decrease the cost of delivering the video to the customer."

CenturyLink logically would seek to use OTT video to reduce its capital and operating costs across the areas where it already operates fixed networks, and where, at a minimum, 10 Mbps downstream speeds routinely are available.

So far, only Verizon has intentionally structured an OTT service designed to work on “any mobile network.” But that is the final strategic angle.

Assuming advantage can be gotten, can a geographically-bound former telco create market-leading over the top services in other areas? Over the past decade, many tier-one fixed network telcos have pondered the value of providing OTT voice or messaging services, with relatively limited success.

More recently, mobile service providers have begun adding voice over Wi-Fi features that essentially make voice an OTT app.

The broader strategic issue is how much further OTT can grow, as a business strategy, for access providers and ISPs, and where the opportunities are greatest.

Verizon’s go90 can be viewed by any mobile phone with data access. Telefonica’s Tu Me was designed to be used globally, but was shut down, as the business model did not work.

The Internet access function, as it turns out, remains the sole area where a facilities-based approach (retail or wholesale) is required, and mandatory. All other “apps” are designed to run independently of the underlying physical layer, though they might be bundled with the physical layer access.

Still, any OTT service able to gain traction might not necessarily have to be limited to use “on my network only.” In fact, that would be non-sensical for any other app provider.

Service providers (retail fixed or mobile) have not yet seen major success operating over the top, out of region, with the exception of the MVNO business, perhaps.

So far, the pattern has been to expand by buying facilities outside of the historic core region.

Whether that “always” is the pattern is the larger question.
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