DirecTV Might be Next to Get Right to Stream Disney Programming

Dish Network, in what many consider a breakthrough deal, has gotten rights to eventually stream Disney content. DirecTV might be close to gaining similar streaming rights as well.

Those deals will not immediately lead to stand-alone, over the top streaming services that can be bought without also buying a linear video subscription service, for several reasons. For starters, even Disney will not allow such a service to be launched unless the provider also can offer other top-rated networks.

In other words, Disney does not want to be made available as a “Disney-only” service, but only as part of an attractive, broad service that includes much of the standard fare consumers expect to buy as part of a standard expanded basic service from any cable, satellite or telco video services supplier.

On the other hand, one might argue that with the one deal, Dish Network--and DirecTV--are about a quarter of the way to assembling an attractive programming lineup that delivers much of the value consumers expect from an “expanded basic” subscription (the tier of service most consumers buy, including bundles of ad-supported channels).

That’s important, if not the sign such a service will be made available soon.

By itself, Disney might represent about 24 percent of all programming costs for a typical linear video entertainment distributor. Time Warner represents perhaps 21 percent of the program rights cost, NBC about 16 percent, Fox about 14 percent. Getting the three other top networks, in terms of programming cost, would allow Dish Network to provide roughly 75 percent of the value of a subscription, one might roughly argue.

In fact, those four networks account for 75 percent of programming rights fees, and if you assume costs are roughly in line with perceived value, then Dish Network has to reach deals with three more firms to deliver about 75 percent of the value of a traditional video subscription.

Disney distributes the ESPN and ABC family of channels. Time Warner owns TNT, TBS and CNN. Comcast, owns Bravo, USA Network and NBC. News Corp. owns Fox News and Fox broadcast channels.

T-Mobile Doesn't Seem to Think a Sprint Acquisition is Likely

Though T-Mobile US would prefer to sell itself to Sprint or another buyer, to exit the U.S. market, that might not be possible because of high regulator opposition, T-Mobile executives now argue.

That doesn’t mean a sale is seen as impossible over the long term. Indeed, T-Mobile US might well believe that, long term, consolidation is inevitable. But, as with many situations in life or business, the answer to a question is not limited to “yes or no,” but also sometimes is “yes, but not right now.”

Both T-Mobile US and Sprint executives are likely to say, if merger speculation ends, that their firms can compete against Verizon Wireless and AT&T Mobility. What else would you expect executives of public companies to say?

But should merger talks end, the level of competition in the U.S. mobile market is likely to increase. Many observers had expected that a successful Sprint acquisition of T-Mobile US would have reduced the incentives the combined firm would have had to engage in ferocious price competition.

If no immediate prospects for a merger exist, then Sprint is going to have to step up its assault, under conditions where T-Mobile US already has moved first. Logic suggests Sprint will have to try and top T-Mobile US offers, and also cause a greater reaction from AT&T and Verizon.

All of that promotional activity is going to lead to lower profit margins and possibly even less gross revenue, marketwide.

If Sprint and T-Mobile US remain stand-alone firms, there also is going to be heightened pressure for spectrum set-asides or other measures to funnel former broadcast TV spectrum to Sprint and T-Mobile US, on the theory that such new lower-frequency spectrum will allow both to better compete with AT&T Mobility and Verizon Wireless in the coverage area.

Both AT&T Mobility and Verizon Wireless own more lower-frequency spectrum that traditionally is valued because of better signal propagation than higher-frequency signals.

Some would argue that there is a downside to such spectrum set-asides , preventing better-capitalized firms from deploying new spectrum more efficiently. Ultimately, that would work against consumer welfare.

But many believe such policies could well emerge in auctions of former analog TV spectrum, should T-Mobile US and Sprint remain independent entities.

Dish and Verizon Have Different Reasons for Building Streaming Services

Dish Network and Verizon are the two U.S. video entertainment providers most committed to creating and marketing over the top video services that consumers could someday buy without also buying a fixed network or satellite video subscription service.

In that sense, both Dish and Verizon are among firms, with Netflix, Sony, Apple. Amazon and Google, that might emerge as key providers of over the top video entertainment services that do not require prior purchase of a fixed network video service.

But one might argue that Dish and Verizon have different reasons for wanting to do so. Dish rightly fears that, eventually, as the video business moves to an on-demand format, its network will be unsuitable, as satellite is optimized for point-to-multipoint delivery, not point to point services and apps.

Verizon as different reasons for wanting to be in the business. First, Verizon rightly assumes that mobile delivery will be an important distribution opportunity. Also, Verizon rightly assumes it will escape geographical limitations by shifting to mobile delivery.

Verizon owns a national mobile broadband network, while its FiOS fixed network serves but a fraction of U.S. homes and persons.

That latter limitation is a good reason why, though Verizon and AT&T continue to gain video subscribers, their gains have not been even greater. Nearly all U.S. households are passed by a cable operator able to sell video.

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There were about 132.4 million U.S. housing units in 2012, with some 115.2 million of those units actually occupied, according to the U.S. Census Bureau.

U.S. cable operators pass nearly 115 million U.S. homes, meaning cable operators can sell video services to nearly every household.

In contrast, perhaps 23 million U.S. homes are passed by a telco or municipal fiber to the home connection. And including even fiber-reinforced telco access connections using some form of fiber to the neighborhood, Verizon and AT&T actually sell a service to just about four million homes each.

By some estimates, telco video passings will not even reach half of U.S. homes by about 2015.

The practical implication is that even the largest U.S. telcos (AT&T and Verizon) are inherently limited in terms of the amount of market share they can gain in the video entertainment business, based on use of fixed network access.

And that is the real strategic implication of over the top video, not bundled with a fixed network subscription. As satellite video providers are able to reach almost 100 percent of homes, so an over the top provider would be able to reach 80 percent of U.S. homes, based on adoption of broadband access services.

Also, there are regulatory advantages. There are informal understandings that no single video, voice or Internet services provider is “safe” once it passes about a 30 percent share of market, from antitrust scrutiny.

Over the top video, on the other hand, does not suffer from such stringent scrutiny, and likely would also be a fragmented enough business to allow providers to create important new businesses without undue regulatory risk.

Dish Network about 25% of the Way Towards an Over the Top Video Service

source: NPR

Dish says it would like to sell such a service for about $20 to $30 a month. Whether that is possible is the issue.

The reason is the cost of acquiring programming rights. Assume that the content owners do not believe their content is worth less if delivered online, than by a video subscription distributor.

Assume the content rights therefore will cost about the same, for equivalent expected volume, for either linear or on-demand delivery.

The three largest U.S. cable operators (Comcast, Time Warner Cable, Charter), presumably including those with the best per-subscriber prices, paid about $34.06 per subscriber, on average, for programming rights, in 2012, representing 41 percent of total revenue.

Charter’s average monthly programming cost per video subscriber is significantly higher at $38.93 per subscriber, in 2012,  compared to Comcast’s $31.53 per subscriber.

Sports programming, for example, can run as high as $35 a month, per subscriber, depending on how many sports channels are offered as part of a programming package. Granted, limiting the amount of sports content would be an important way to limit end user costs.

Where ESPN costs perhaps $5.50 per subscriber, per month, other popular networks cost less than $1 per subscriber, per month.

Granted, most believe an eventual streaming service would not carry the full expanded basic lineup of channels, just the most-popular channels and networks. But programming costs alone would suggest it will be impossible to hit the $20 to $30 a month retail price target.

And that is before marketing costs, overhead and any content delivery fees or transit fees.

On the other hand, Dish Network has gotten a significant distance towards assembling an attractive programming lineup, perhaps a quarter of the way.

source: paidContent

Though Dish Network has gotten rights to eventually stream Disney content, it still has not yet gotten a critical mass of rights to stream other major network content, something even Disney insists must be in place before a commercial, stand-alone streaming service could be offered.

By itself, Disney might represent about 24 percent of all programming costs for a typical linear video entertainment distributor. 

Time Warner represents perhaps 21 percent of the program rights cost, NBC about 16 percent, Fox about 14 percent. 

Getting the three other top networks, in terms of programming cost, would allow Dish Network to provide roughly 75 percent of the value of a subscription, one might roughly argue.

In fact, those four networks account for 75 percent of programming rights fees, and if you assume costs are roughly in line with perceived value, then Dish Network has to reach deals with three more firms to deliver about 75 percent of the value of a traditional video subscription.

Disney distributes the ESPN and ABC family of channels. Time Warner owns TNT, TBS and CNN. Comcast, owns Bravo, USA Network and NBC. News Corp. owns Fox News and Fox broadcast channels.

So it is reasonable to wonder whether Dish could sell an over the top video service for $30 a month, Dish might have assembled about a quarter of the content it needs to create a credible alternative to linear video services.

source: The Atlantic

Facebook Will Become a Major ISP

Facebook will become an Internet access provider on a wide scale, it now appears, joining Google Fiber as a major supplier of Internet access services.

Facebook has purchased Titan Aerospace, giving Facebook the ability to launch fleets of solar-powered drones providing Internet access to billions of new users in the global south, primarily in Africa, it now appears.

The Titan Aerospace drones would represent a novel attempt to bring Internet access services to billions of people at lower cost than has been possible so far.

The Titan Aerospace purchase is among activities Facebook and others are taking as part of the Internet.org project, which is is similar in intent to Google’s “Project Loon,” which uses fleets of balloons, not aircraft, to bring Internet access to billions of people in the global south.

Internet.org is a Facebook-sponsored effort to connect the unconnected. Ericsson, Nokia, Samsung, MediaTek, Qualcomm, and Opera are members.

As you might guess, both the Facebook and Google initiatives are among examples of instances where traditional suppliers of key communication services face new competition from new providers, with new business models.

The biggest challenge to incumbent service providers (telco, cable, satellite, wireless ISP) are the alternative business models, where Internet access might in many cases be a loss leader or breakeven activity, in other cases profitable lines of business with revenue models beyond actual payment of access fees.

There are any number of potential losers, including satellite providers of access and mobile service providers.

Fixed network providers might actually gain, eventually, as consumers discover the value of Internet access, and then desire faster speeds. Also, an “inside out” approach that extends fixed network access from buildings out into other areas could  achieve an order of magnitude improvement in coverage, Internet.org believes, without imposing heavy new infrastructure costs.

In the near term, there would in any case be little potential for fixed service providers to serve the billions of people the new Facebook, Google and potentially other ISPs will target.

Mobile operators and satellite access providers have the most to lose, as the new delivery methods could have vastly lower capital and operating costs.

Facebook also is working on ways to lower its data center costs, using standard and lower-cost hardware for servers as well as using content delivery networks. Facebook believes CDN approaches could help it lower access costs.

Reallocation of spectrum (including TV white spaces and shared spectrum), particularly when available on a non-licensed basis, also can help.

Overall, Facebook hopes to increase the capacity of its networks by at least an order of magnitude over the next five to 10 years while keeping costs relatively constant.

That in turn would enable lower costs per megabyte, lower by perhaps an order of magnitude.

Better coding and protocols also can help by reducing the need for transmitting so much data to enable use of applications. “Facebook for Every Phone” is one example, allowing Facebook usage on feature phones.

Data compression is another tool. Modern text compression frequently yields results of 70 percent to 80 percent bandwidth savings, for example.

The Facebook for Android app originally used about 12MB per day on average. By focusing on improving data usage, Facebook expects to reduce data consumption to about 1MB per day.

Greater use of Wi-Fi also will help. And Facebook also is “zero rating” Facebook access, a move that encourages people to use the app without worrying about the cost.

The point is that Facebook expects to provider Internet access to billions of people at far lower costs than has been possible in the past. That will be helpful for billions of people, but also prove a challenge to incumbent Internet access providers.

Could "Winner Take All" Become "Even Winner Loses"?

With the major caveat that creating an app-based or software-based company has infinitesimal barriers to entry, compared to building an access network, bond market wizard Mohamed el-Arian says research and development spending buys less than it used to, because markets have tended to take on a  “winner take all” character. Others have documented the "winner take all" trend in technology markets.

The key now is whether a firm can execute on commercializing a killer app, and less about how much money it has put into “innovation.” Apple is the firm that probably comes to mind, even if it has produced what some might call a killer gadget.

Whether network effects always are so strong in all markets is one issue, though. Some argue that winner take all trends are common, across many industries. Consider the recent “battle” between Long Term Evolution and WiMAX to create a global fourth generation mobile network standard.

That was settled in much the same way the VHS versus Betamax standard war was resolved, with complete victory by one of the proposals.  

It isn’t so clear the analogy is so apt in the telecom business, though one might note that scale always has been a key asset in the  access or transport services business.

On the other hand, the “winner take all” concept does resemble the shape of most mature telecom markets, even if that was not the case at the beginning, as with the mobile service provider business in some countries. Some predict African mobile markets will feature a winner take all pattern.

On the other hand, one might also speculate about the future benefits of “winning” in the access market. There are two key aspects, first the value of dominating market share in the access business, and then the broader matter of the relative value of access in any Internet-based business ecosystem.

To be sure, most of the value in any Internet-enabled ecosystem flows to the “application layer” participants, not the “access provider.” That, perhaps, is less the issue. Maybe the bigger issue is what value accrues to the market share winner in the Internet access business.

It’s a bit of an abstract notion. Any contestant in a telecom revenue segment would prefer to be the leading and dominant supplier. In that sense, winning is its own reward.

But one might argue there is a potential dystopian angle. If one accepts the thesis that bandwidth prices tend to decrease over time, then the logical counterweight is to sell more units.

ISPs will be doing that.

At the same time, it is reasonable enough to assume that future revenue contributions from important applications such as voice, text messaging and possibly even video entertainment will decline dramatically.  

To be sure, that is why mobile service providers have such high hopes for machine-to-machine or Internet of Things applications. If mobile penetration increases from 100 percent (one phone per person) to 400 percent or 500 percent (multiple devices and sensor applications per user), it is easy to see the impact of potential new revenue streams.

Still, access networks are expensive, and some firms have legacy cost structures that arguably are too high, compared to other key competitors. So the imponderable is what happens to aggregate revenues in a decade or two? Can a major telco or cable company actually go bankrupt?

To be sure, lots of competitive carriers, and at least a few incumbent local exchange carriers, have gone bankrupt, without apparent long term harm to the national access infrastructure. But those firms were, by definition, not the carrier of last resort, with national or ubiquitous coverage.

But there are some potential warnings one might make. AT&T, one might argue, sold itself to SBC because it otherwise would eventually have gone bankrupt.

So a major telco bankruptcy is not unthinkable, only historically rare.

“Winner take all” economics might occur because of network effects or platform economics. But there is one more hard-to-answer question. Sometimes “winner take all” happens because a market is shrinking.

It is possible, perhaps likely, that major telcos will find a way to create new revenue sources big enough to offset declining revenues from legacy sources. But market failure is conceptually possible.

It hasn’t happened yet. But it could happen.

source: Business Insider

"Utopia" and Tech Bubbles

Sometimes it is hard to know what to make of Tesla. It is hard to know what to make of Google's self-driving vehicles. But we should try not to get silly. 

This analysis of the impact of autonomous vehicles uses the term "utopian society" by 2026. You might keep in mind that "utopian" means "an imaginary place or state of things."

Maybe one sign of a bubble, especially a tech bubble, is that silly things get said. 


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