OTT Video Ecosystem Really is Not Aligned

Retail pricing is a big deal in the transition from linear to over-the-top video entertainment, and particularly for consumer and provider expectations of “what access to a single channel is worth.” Up to this point, services such as Netflix have been priced below the purchase of a channel such as HBO, which runs about $15 a month (unless HBO is part of a promotional bundle).  

Consumers seem to perceive the value of a single ad-supported channel somewhere between $1.40 and $1.60 per channel. Those same respondents suggested they would pay $3 a month for ad-free HBO. That implies a consumer value about 80 percent less than presently charged for HBO.  

Consider the stark reality of misalignment: implied wholesale prices for channels in big bundles run from a cents to $1.50 a month, with ESPN costing about $6.10 a month.

In other words, even in volume, the wholesale cost of a single channel--before delivery, marketing and overhead costs--might approach expected retail prices.

“Our projections call for the average TV station's retrans (re-transmission) fee per subscriber per month to rise from $1.40 in 2016 to $2.21 by 2022,” SNL Kagan estimates. In other words, the wholesale content rights cost for video distributors already is about the level consumers tend to believe they would pay.

Any realignment of the ecosystem likely involves higher prices than most consumers expect, but also lower revenues than many content providers expect.

source: Wall Street Journal

source: SNL Kagan

source: MoffetNathanson

Most Video Customers are Satisfied; Still Will Consider Switching

Few executives at any company would deny that “happy or satisfied customers” are an unimportant outcome. The logic is simple: unless potential buyers think they will be satisfied with a product, they are unlikely to buy. Unless actual buyers are satisfied, they are rather unlikely to keep buying.

On the other hand, there is some wisdom in understanding that even satisfied buyers will desert their subscription video providers.

In other words, as important as customer satisfaction might be, it offers questionable protection from customer desertion.

The latest Digitalsmiths (Tivo) survey shows that perhaps 21 percent of linear video customers are “unsatisfied” with their provider’s service. The other 79 percent either are “satisfied” or “very satisfied.”

On the other hand, when asked if they plan to change providers in the next six months, 45 percent “might” or “will” change providers. With the caveat that consumers often do not act as they say they will, that suggests even “satisfied” customers are not loyal (defined as willingness to keep buying a product from a current supplier).

To be sure, most of the potential switchers (about 30 percent) say “maybe” about switching. Only about 15 percent suggested they were definitely going to switch.

To be sure, a rational consumer might well consider switching from one provider to another if the price-value relationship represents a big enough inducement for switching.

So the issue might be better phrased. Though “satisfied” or even “very satisfied” customer ratings are better than “unsatisfied” or “very unsatisfied” ratings, even apparently-happy consumers will desert an entertainment service if the rival offer is attractive enough. The biggest danger comes from rival offers with a dramatically-different--and better--relationship between perceived value and retail price.

The issue is not the percentages of “satisfied” customers any firm presently can count. The bigger issue is a disruptive package offered by a rival. Satisfaction does not offer much protection from churn, if and when disruptive offers come to market.

source: Digitalsmiths

SpaceX Applies for Permission to Create LEO Satellite Constellation

Space Exploration Technologies Corp. (SpaceX) has asked the U.S. Federal Communications Commission for permission to create a network of earth stations that would support a proposed fleet of satellites providing internet access from a huge fleet of satellites in low-earth orbit.

The initial deployment might entail launching 1,600 satellites, eventually growing to 2,825 satellites, and would blanket every inch of the surface of the earth.

Financial backers of the company Alphabet's Google Inc and Fidelity Investments, which together have contributed $1 billion to Musk's space launch firm.

The proposed SpaceX network would begin with the launch of about 800 satellites to expand internet access in the United States, including Puerto Rico and the U.S. Virgin Islands, the FCC filings showed.

OneWeb and by Boeing Co. also are trying to create such a network.

source: SpaceX

source: SpaceX

FCC Pulls Business Data Services Item from Agenda

Special access price controls now appear off the agenda of the U.S. Federal Communications Commission, as a vote on that item (business data services) has been taken off the Commission’s Nov. 17, 2016 meeting. The withdrawal appears to be a reflection of the coming change in FCC composition when President elect Trump takes office in January 2017, triggering a change in agenda, chairman and membership of the FCC.

Deletion of the item, assuming the next FCC will not be inclined to pursue the matter further, will likely be financially beneficial for sellers of special access (Comcast, Charter Communications, AT&T, CenturyLink, Verizon and a few other firms). Buyers of special access services (Sprint, T-Mobile US) will not see lower prices for special access, as the FCC would have put into place price controls on such services in many markets.

In a clear sign that job losses were expected if the rules had been put into place, the Communications Workers of America also opposed the price control rules.

Such forbearance is not unusual. The FCC also refrained from undertaking major rule changes in the months leading up to the first term inauguration of President Barack Obama.

Nokia Hopes its Future is Software

Execution will matter, but Nokia believes it can create an important new role for itself at the intersection of three big industries: telecom infrastructure; enterprise software;  and webscale, open source, do it yourself software.

It will not be easy, but it is bold. Basically, Nokia hopes a relatively small contributor to present revenue can eventually become a big revenue driver: big enough to offset the hardware business that is going away.

As Nokia explains it, the objective is to “build a strong, standalone software business” that moves the company “beyond our current product-attached software model and create a software business with the margin profile of large software companies, focused on areas including enterprise software and IoT platforms.”

CEO Rajeev Suri believes that suppliers of access services might include traditional telcos, new entrants, big internet companies or governments.

source: Nokia

Will Telcos Ever Again Grow Fixed Network Internet Access Accounts?

It always comes as a bit of a shock when an analyst suggests a core product will never grow again. But that is precisely what Jeffrey Wlodarczak, Pivotal Research CEO, says about U.S. fixed network telco chances to make net additions to their high speed access accounts.

“With cable aggressively ramping their speeds (boosted by the widespread rollout of DOCSIS 3.1 technology [and its promise of widespread 1 gig + download speeds]) it is a reasonable assumption that the telcos may never generate positive net fixed data subscriber growth again," he says.

In fact, U.S. cable companies have been taking market share in the fixed network high speed access market for years. In 2016, for example, U.S. cable TV companies will capture all the net account growth in the internet access market.

That happened in 2015 as well, when cable got all the net growth in high speed access accounts. In fact, cable companies have outgained telcos every year since 2007, in terms of net additions.  

DirecTV Now: Analog Dollars to Digital Quarters

One enduring observation made by content business executives about the gross revenue or profit margin impact of digital content is that companies exchange analog dollars for digital pennies. That might be overstating the problem, but the general direction of the analogy probably continues to be correct.

For AT&T, the biggest provider of linear video in the U.S. market, the new DirecTV Now streaming product will clearly represent much less gross revenue. The gross revenue and profit margin changes is more on the order of digital quarters for analog dollars, though.

Where a linear subscription might generate $118 a month, DirecTV Now might generate about $35 a month in subscription fees. Gross margin for the linear product might be as high as 45 percent, while gross margin for DirecTV Now might be as low as four percent, on subscription revenues, and perhaps as high as 18 percent, after adding in advertising revenues.

chart from Deutsche Bank that shows how DirecTV Now will likely compare to linear TV:

Deutsche Bank

source: Deutsche Bank