App Partnerships Might Not Move ISP Revenue Needle

Most valuable and useful apps are no longer created internally by service or device providers, a fact with huge business implications.

Devices and Internet access, for example, are most valuable when people derive high usefulness from a huge multitude of apps and services. But few ecosystem participants are able to directly create and then control the value of their apps.

But that is not to say every part of the ecosystem benefits directly and incrementally from each incremental addition of most apps. Instead, it is the broad alignment of the whole ecosystem that creates the most value for each participant.

It would be accurate to say that a huge app ecosystem is what makes Apple and Android devices and Internet access services so valuable.

At the same time, revenue upside largely is indirect, with the clear exceptions of Google Play, iTunes and the Apple App Store, which get a 30-percent cut of app sales revenue (apps,  advertising and in-app transactions).

In that regard, at least some fixed network service providers in the United Kingdom believe business deals with Netflix have had positive financial impact, even if the impact remains relatively slight. “Netflix plays at least some--likely small--role as an upsell driver for some operators, whose customers can only access the app via their most advanced set-top boxes,” said Ted Hall, Research Director at IHS Technology.

Virgin Media and BT TV, for example, are paid when consumers activate Netflix subscriptions from the operator set-tops.

As you also would expect, other service providers remain wary, in large part because of concern that Netflix will reduce demand for premium movie packages and video-on-demand (VoD) offerings.

As always, the potential benefit from app provider partnerships hinges in part on service provider strategy, in part to partnership terms and in part on the perceived end user perception of value.

IHS analysts believe the number of service providers agreeing to partner with Netflix will grow beyond the 25 linear video providers who already work with Netflix.

“Many of the operators working with Netflix have seen customer satisfaction ratings improve under the partnerships, which have helped foster positive operational performances,” said Ted Hall, Research Director at IHS Technology.

Distributor partners typically receive a share of the ongoing subscription fees for customers that sign up using the operator’s set-top box. Generally, that means Netflix functions as one more premium service, or a substitute for operator video on demand services.

The downside of cannibalization is balanced by the upside of some incremental revenue. Strategically, working with Netflix might help linear video suppliers retain their “one stop shop” positioning.

That should become increasingly important as new competitors such as Apple TV, Google’s Chromecast and Amazon Fire Stick become more popular, and essentially themselves bundle over the top content sources. Indeed, in the U.S. market, Amazon already sells subscriptions to services such as Showtime and other traditional linear video premium services.

There likely is yet room for matters to change, in ways that do not benefit the linear video suppliers.

Recall that similar thinking once prevailed among telcos facing competition from Voice over IP services. Then, as with Netflix, the issue was whether to partner, create an owned alternative, or simply ignore the challenge.

That third option sounds silly, but experience has tended to suggest that partnering helps only marginally, while creating owned alternatives is not viable. Strategic indifference is not so dumb.

There might be little an incumbent can do but try and harvest legacy revenues as long as possible.

The other obvious implication is that it increasingly is hard for any single app partnership to "move the revenue needle" for any ISP.