Will a New Apple Streaming Service Cannibalize Linear Video? If So, How Much?

It’s still too early to know what impact HBO Now, any future Apple TV effort, Sling TV and other efforts will have on linear video subscriber numbers, except to note that, at the very least, the new services will limit growth for linear services by diverting new subscribers to the over the top services.

Baird Equity Research estimates that if Apple can achieve 10 percent adoption of U.S. broadband households, Apple "could generate $4 billion of annual service revenue,”

Baird Equity Research says.

If the U.S. linear video subscription business represents about $90 billion in annual revenues, then Apple, at such levels, might then be a business that is about four percent the size of the U.S. linear video market.

Separately, Business Insider Intelligence estimated that a new Apple streaming service will gain more than four million U.S. subscribers in its first quarter on the market, 7.4 million at the end of 2016, and 10.7 million by the end of 2018.

That would translate to revenue of more than $4 billion a year by the end of 2018.

The important observation is that if an Apple streaming service actually reached those levels, it would be a stunning achievement, as the number of U.S. homes having broadband, but not buying linear video, might be about 10 million homes.

Unless one assumes that nearly 100 percent of homes with high speed access, but no linear video, a significant percentage of new Apple streaming customers would have to come from the ranks of existing linear video customers.

Is a Price War Going to Break Out in Satellite Backhack Business by 2017?

Fears about overinvestment, overcapacity, plunging capacity prices and market share disruption happen periodically in many businesses, and within the last couple of decades have devastated large portions of the telecommunications industry.

That is about to happen again in the satellite business, but in a way that resembles the overinvestment in capacity in the undersea and terrestrial backhaul businesses during the telecom boom and bust from about 1997 to 2002 or so.

In that instance, huge amounts of capital were invested in long haul networks to support the explosion of Internet companies requiring capacity.

Too much, as it turns out.

Many will not remember Globalstar, Iridium or Teledesic, all using business models based on huge fleets of new satellites, using low earth orbit, not the geostationary satellites that are the industry mainstay.

The huge unmet need back then was voice communications, since mobile service at that time was expensive and lightly purchased by consumers. The problem, as outlined by David Burr, O3b Networks VP, was that mobile service unexpectedly caught fire with consumers, closing the LEO-based business market window.

Simply, mobility fulfilled market demand for voice communications, at the expense of fixed networks and LEO providers alike.

Rapid mobile adoption basically killed the earlier generation of LEO business plans and companies, argued  David Burr, O3b VP, essentially absorbing the demand the earlier LEO connectivity providers had hoped to serve.

“Where is that danger now?” Burr asked. Some of us might argue the answer is the same as last time: mobile service providers.

Some veterans of those ventures continue to work in the satellite industry, and were again speaking from the podiums at Satellite 2015. Firms such as OneWeb, O3b and LEOSat, plus others such as SpaceX were there, suggesting the new wave of potential LEO constellations that could disrupt business models and pricing across much of the satellite industry.

To be sure, different business models are being floated. Some providers plan to attack the consumer Internet access retail market. Others will focus on enterprise or business user segment.

Still others will seek roles in backhaul, either “conventional” backhaul for mobile operators, for example, or less traditional backhaul that competes directly with undersea capacity suppliers.

It’s too early to say how it will all play out. But it is clear that industry capacity and latency performance will be challenged, starting about 2017, if LEO capital and launch plans remain on track.

Low Earth Orbit Satellite Constellations Top of Mind at Satellite 2015

“Constellations,” in satellite industry parlance, are top of mind at Satellite 2015. The immediate reason is a sudden upsurge of low earth orbit satellite ventures that is bringing with it fears about overinvestment, overcapacity, plunging capacity prices and market share disruption.

Not for perhaps a couple of decades have such issues been so “top of mind” in the satellite segment of the communications industry.

The reason for the sudden eruption of talk about the impact of new constellations is the threat of industry disruption that happens in any capacity-related industry when suppliers use new technology to support mas market business models built on lower capital and operating costs, allowing new lower retail prices, leading to more price competition, at the same time also offering better performance and user experience.

It’s a recipe for potential disruption.

Consider consumer Internet access by satellite, which has one level of current offers the upstarts threaten to overturn.

Asked about the challenges of supplying Internet access across South Asia and Southeast Asia, where hundreds of millions cannot afford to pay 41 cents a month for Internet access,

Dave Bettinger, OneWeb CTO quipped off stage, we’re talking about “15 cents a month” as an “ability to pay” hurdle to be overcome.

That is an issue incumbent satellite service providers will have to confront, assuming there are at least some winners in the emerging LEO segment of the business.

No geosynchronous satellite Internet service provider can afford to sell retail access at such prices. To be sure, geosynchronous providers will be working on getting their own cost structures down.

The issue is how much more performance they can wring out of their operations.

That isn’t the only potential threat to existing providers. Latency always has been an issue for services based on use of geosynchronous satellites, especially for isochronous apps (events or sessions that rely on equal time periods) such as interactive apps such as videoconferences or voice.

That is another area where LEO constellations will be a new threat. Operating at lower orbits, LEO satellites will feature lower latency than geosynchronous service providers can provide.

Caching helps with user experience in some cases, but encrypted HTTPS is a problem, compared to non-encrypted traffic, said Dave Rehbehn, Hughes Network Systems senior director. And the problem is growing, since more traffic is being encrypted.

HNS has a way of improving user experience by pre-fetching some web page elements, for example.

The unanswered question is what “outside the industry” developments might shape LEO success as “outside” developments once lead to the demise of Globalstar, Iridium and Teledesic (early LEO business plans and entities).

Rapid mobile adoption basically killed the earlier generation of LEO business plans and companies, argued  David Burr, O3b VP, essentially absorbing the demand the earlier LEO connectivity providers had hoped to serve.

“Where is that danger now?” Burr asked. Some of us might argue the answer is the same as last time: mobile service providers.

Comcast Will Launch 1 Gbps in 2015

Comcast plans to offer gigabit access service in U.S. markets starting in 2016, said Jorge Salinger, Comcast VP. The service will enabled by use of DOCSIS 3.1 technology that Comcast now is testing at employee homes. Salinger was too conservative, though.

Comcast will do so by the end of 2015.

"Our overall goal is to be able to deploy DOCSIS 3.1 and gigabit-per-second in a broad scale starting in 2016,” said Salinger.

DOCSIS 3.1 is in many ways a departure from past cable TV transmission schemes, in that it is the first to abandon the 6-MHz (8-MHz in many other countries) channelization plan that is a legacy of the industry’s origins as a TV retransmission network.

One question many will have is how Comcast will price the 1-Gbps service, to protect its legacy high speed access pricing. Comcast’s existing 505 Mbps service, primarily aimed at business customers, costs $300 a month, Comcast’s 105 Mbps high speed access services, aimed at consumers, costs perhaps $50 a month, depending on the package a consumer buys.

Most Internet service providers will face similar dilemmas, as they introduce gigabit services. In fact, some ISPs might find they sell more packages at slower speeds, even if gigabit access is the marketing headline.

Much depends on what speeds an ISP offers, at what price points. Google Fiber has a simple offer: a gigabit for $70 a month, or 5 Mbps for free. That pushes buyers immediately to 1 Gbps.

Other ISPs face tougher packaging choices. In my own Denver neighborhood, CenturyLink will sell a 100-Mbps service that costs $70 a month, with the price guaranteed for a year.

The 40-Mbps service costs $30 a month, guaranteed for a year. All those prices are for stand-alone service, with no phone service.

In that sort of environment, many consumers are going to conclude that 40 Mbps is “good enough,” and provides a better price-value relationship.

34% of all Video Now Consumed on Mobiles, Tablets

About 34 percent of all video consumed online--on a global basis--was watched on a mobile device (phone or tablet) during the fourth quarter of 2014, according to Ooyala.

Tablet and smartphone plays grew 200 percent in the past year, 500 percent since 2012 and 1600 percent since 2011, Ooyala says.  

December saw the highest percentage of video plays on smartphones and tablets at 38%. That’s the highest since the Global Video Index began publishing.

In fact, December mobile plays were 15 percent higher than in November and 114 percent  higher, year over year.

Does "Moving Up the Stack" Actually Work, and if so, When?

Whenever a leading service in the telecommunications or video entertainment business begins to suffer margin compression, lower take rates and usage, observers offer the advice that suppliers need to “add more value” or “move up the value chain.”

Such advice normally is given because the compressing profit margins are largely the result of price pressure caused by competitors.

Call me a cynic, but that advice rarely, if ever, has been shown to produce significant and sustained revenue improvements.

Some might argue that is because suppliers have failed to add new value. In that line of thinking, suppliers have failed to transform--or at least significantly enhance--products under pressure, and that is why the “add more value” approach seems not to produce serious gains.

Others might argue the efforts have largely come to naught because buyers do not want to pay more for the enhancements. In that alternative explanation, buyers do not see the value, or, if they see the value, do not wish to pay extra.

In the cable TV business, suppliers have justified rate increases because “we are giving you more channels.” But one can question whether most buyers actually wanted the extra channels, or want to pay more to receive them.

In the voice business, VoIP services priced close to zero seemingly have gained usage and market share compared to other forms of voice with “enhancements” (high definition audio quality).

In fact, the successful adaptation seemingly has been to “cut prices,” the polar opposite of “adding more value.” True, selling at lower prices, and bundling features that formerly could be obtained only at extra cost, might be positioned as moves that add value.

Reasonable people will debate whether that is an example of “adding value” or an instance of cutting price.

No doubt, as streaming video suppliers begin to proliferate, there will be calls for video entertainment suppliers to “embrace the trend,” much as voice suppliers were urged to embrace VoIP.

The “cannibalize yourself” strategy has merit, to be certain. But the greatest merit tends to happen when suppliers cannibalize their legacy revenue streams by replacing them with entirely new revenue sources, not “adding value” to legacy services.

In other words, cable TV did better by getting into the new voice, high speed access and small business communications businesses than it did by “adding more value” to basic cable.

Telcos did better by getting into linear video, high speed access and mobility than by innovating in voice.

Generally speaking, competing on price has helped preserve the declining products, but hasn’t really enabled service providers to innovate themselves out of mature product problems.

In other words, recent history suggests that harvesting a declining business while growing new lines of business is what works. So far, one would be hard pressed to cite many instances where adding more value actually reversed a trend of revenue or subscriber decline.

That does not necessarily mean that adding more value is irrelevant. One might argue that adding more value can slow the rate of business decline. That can be an important business objective, and well worth some amount of investment.

What seems clear is that such efforts have yet to demonstrate they can sustainably reverse a pattern of decline, in a mature business category.

Apple to Launch New Streaming Video Service?

Now that Dish Network, HBO, CBS and NBCUniversal have announced plans to market new streaming video services, it perhaps was inevitable that Apple would do so.

The Dish Network and Apple services offer bundles of perhaps 20 to 25 channels at prices between $20 and $40 a month. HBO will cost $15 for a single channel. Pricing for  the CBS and NBCUniversal offers are not yet public.

As always for a content-driven and content-based business, value and price will matter. Given the emphasis on reaching a customer base that, it is believed, does not want to spend $90 a month for linear video, as well as the demographics of the resisters, the initial content focus will be on channels or bundles of channels believed to appeal to a Millennial demographic, with or without children.

The initial thinking seems to be that broadcast TV and HBO, plus sports content, are the key demand drivers. The other bit of thinking is that Millennial buyers with children will want programming for them as well.

Eventually, we are likely to see experimentation with other bundles or channels, aimed at other possible segments of the market, with or without devices, with or without multi-network access.