Can Charlie Ergen Do it Again?

John Chambers, former Cisco CEO, is known for his belief that the technology business is about making transitions.

There are likely many observers who believe Dish Network cannot make another transition in its business model, as Comcast, Verizon and AT&T have done in the past. People sometimes forget (or never knew) that Charlie Ergen, Dish Chairman and also chairman of Echostar, has made at least a couple of business model transitions.

He started out in business selling personal earth stations, back before there was a direct broadcast by satellite business. That business of retailing television receive only dishes existed at a time when satellite TV programmers did not encrypt their signals, allowing any owner of a TVRO earth station to watch the feeds at no incremental cost.

That was declared lawful by the Federal Communications Commission in late 1979, allowing consumers willing to put up a 20-foot reflector to watch HBO, and eventually many other satellite-delivered channels, for free.

But programmers started encrypting their signals, killing the TVRO business. So in 1990 Ergen purchased satellite orbital slots, founding EchoStar in 1993, to support a new DBS service known as Dish Network,  that arose to supply satellite TV on a paid basis to subscribers, largely in rural areas.

In the intervening years Dish Network acquired Blockbuster, the chain of video retail outlets, and then continued to acquire other satellite assets, making bids for Hulu and Sprint as well as Clearwire. Those the Hulu, Sprint and Clearwire efforts did not result in a transaction, you can see the development of thinking about business model.

Separately, EchoStar moved into decoder manufacturing and also bought Hughes Network Systems, the supplier of satellite enterprise network services,  and consumer internet access.

Most recently, Dish has amassed, by acquisition and spectrum auctions, 5G spectrum assets that now represent the future of the company.

The point is that Ergen has made at least one major successful business model transition (TVRO to DBS), with a key diversification into satellite enterprise services and consumer internet access by satellite through EchoStar.

Ergen also has attempted to become a key player in streaming (Sling TV) and mobile services.

So it arguably is clear that Ergen has seen the need for a further business model transition out of DBS and into something else for quite a while. Some would say the 95 MHz of 5G spectrum now represents nearly the entire value of Dish Network, as the DBS business continues to shrink.

Many have believed that Ergen ultimately would simply sell the spectrum, rather than try and pull off yet another major business model transition. But at least some now believe Dish has no choice but to go ahead and build a narrowband internet of things network as the foundation for its next transition.

The reason is simply that no acquirer would be likely to get transaction approval before the deadline for building an operating network using much of the spectrum purchased at auction. That has to be done by 2020 or Dish (or any other owner) loses the AWS spectrum assets.

That buildout includes a stipulation that the network be active and reach about 70 percent of U.S. population in 2020.

So it now appears Dish will have to do so, spending perhaps $1 billion to create the narrowband IoT network as a first step. The actual revenue model has not yet been talked about (Dish could operate as a wholesaler to others who want to create a national NB-IoT network, or could sell at retail to enterprise customers.

Some likely continue to think Ergen will not be successful making that sort of business transition from video entertainment provider to mobile service provider. But skeptics believed cable TV operators would not be good at programming, or that AT&T would not be all that successful as a video retailer, or that AT&T cannot be competent as a programmer.

To be sure, some still might question some parts of those theses. But video suppliers have become competent providers of communication services, while telcos now are successful video subscription suppliers, and there is no reason to doubt, in principle, that a big video subscription services supplier cannot become a competent programmer.

Ergen has made big business model transitions in the past, and he might well do so again.

Networks Creep Towards A La Carte

It is an open question whether most of today’s linear programming networks (delivered using one or more fixed or satellite networks) could exist if they had to go direct to consumer as stand-alone streaming packages, as does HBO, or as a few other networks might contemplate.

So far, channels historically not supported by advertising have had the easier time of the transition. HBO, Starz and Showtime, for example, can be purchased as streaming services.

A key issue is consumer expectations about cost of a single channel. Surveys show consumers expect a cost of about $2 per channel, per month, roughly five to eight times more than many channels now charge.

Few streaming channels are sold for such prices, though, suggesting the economics of stand-alone streaming---for most channels--does not allow the expected pricing of a couple dollars per month, as one might deduce from today’s 40-channel bundles selling for up to $40 a month.

CBS sells streaming access as well, suggesting the possibility that the most-watched ad-supported channels might be able to create stand-alone streaming services.

A sort of hybrid step is allowing big retailers such as Amazon to handle sales and distribution. Amazon Channels feature:

• HBO ($14.99 per month)

• Showtime ($8.99 per month)
• Cinemax ($9.99 per month)
• Starz ($8.99 per month)
• Mubi ($5.99 per month)
• Sundance Now ($6.99 per month)
• Sports Illustrated TV ($4.99 per month)
• Comic Con HQ ($4.99 per month)
• History Vault ($4.99 per month)
• Comedy Central Stand-Up ($3.99 per month)
• PBS Masterpiece ($5.99 per month)
• IndiePix Unlimited ($5.99 per month)
• DocComTV ($2.99 per month)
• Smithsonian Earth ($3.99 per month)
• Reelz ($3.99 per month)
• Daily Burn ($14.99 per month)
• PBS Kids ($4.99 per month)
• Shudder ($4.99 per month)
• Cheddar ($2.99 per month)

Some will point to the success of Netflix, Amazon Prime, Sling TV, DirecTV Now, Hulu and others.

Some of those services still use a bundling concept (a menu of TV shows, movies and specials), but not discrete channels. Others use a “skinny bundle” of channels to keep costs lower.

And while Disney and ESPN will undoubtedly be early to test the economics of single-channel streaming, most other networks are likely to resist, as it remains profoundly unclear whether such a strategy would be profitable.

Also, bundles remain popular with consumers, leading to the creation of “skinny” bundles that cost less because they contain fewer channels (and therefore less “cost of goods”).

OTT Versus Linear Video is Becoming a Global Battlefield

By now, nobody is surprised to hear that linear video subscriptions continue to drop or that over the top subscriptions are growing. Perhaps the bigger story is the globalization of the business. Netflix now is a global content supplier, while most other providers operate mostly in a single country, or a small number of countries.

So while it still makes sense to track how U.S. service providers are doing, compared to U.S. competitors, the battle has become global, and Netflix arguably is the leader, in that regard.

source: Statista

In aggregate, there are more U.S. paid streaming accounts than linear accounts in service.

Netflix has some 55 million U.S. accounts, while Amazon Prime has some 90 million subscribers. All the largest linear video providers together have about 92.2 million accounts.

Total revenue is another story, as monthly subscription revenue earned by a linear account can be an order of magnitude greater than the revenue from any single OTT streaming account.

source: Ovum (Informa)

In 2017, for example, the major U.S. providers lost about 1.5 million accounts, up from some 760,000 in 2016, according to Leichtman Research Group.

The big swing was that streaming services owned by the linear providers gained 1.5 million accounts, nearly the amount lost by the two satellite services.

The biggest six cable companies now have about 48.1 million video accounts. Satellite TV services claim 31.5 million subscribers (including DirecTV, owned by AT&T).

The largest three fixed network telephone providers have 9.2 million subscribers (nearly all provided by AT&T and Verizon).

The top OTT services have about 3.4 million subscribers.

Pay-TV Providers	Subscribers at End of 4Q 2017	Net Adds in 2017
Cable Companies
Comcast	22,357,000	(151,000)
Charter	16,997,000	(239,000)
Altice	3,405,500	(129,000)
Mediacom	821,000	(14,000)
Cable ONE*	283,001	(37,245)
Other major private companies**	4,200,000	(90,000)
Total Top Cable	48,063,501	(660,245)
Satellite Services (DBS)
DIRECTV	20,458,000	(554,000)
DISH TV^	11,030,000	(995,000)
Total DBS	31,488,000	(1,549,000)
Phone Companies
Verizon FiOS	4,619,000	(75,000)
AT&T U-verse	3,657,000	(624,000)
Frontier	961,000	(184,000)
Total Top Phone	9,237,000	(883,000)
Internet-Delivered
Sling TV^^	2,212,000	711,000
DIRECTV NOW	1,155,000	888,000
Total Top Internet-Delivered	3,367,000	1,599,000
Total Top Providers	92,155,501	(1,493,245)

Video Entertainment "Market" Now Smashes Separate Regulatory Walls between "Content and Apps" and "Delivery"

The new move by T-Mobile US video streaming business is portrayed by the company itself, and news reports, as representing competition with cable TV.

“The Un-carrier will build TV for people who love TV but are tired of the multi-year service contracts, confusing sky-high bills, exploding bundles, clunky technologies, outdated UIs, closed systems and lousy customer service of today’s traditional TV providers,” said John Legere, T-Mobile US CEO.

A few reports correctly described the service as a streaming offer more akin to over-the-top services offered by AT&T, Dish Network, YouTube and Netflix.

But that might be quite the point. T-Mobile US itself describes its move as representing a move into the $100 billion revenues subscription TV market dominated by cable and telco suppliers.

““We’re in the midst of the Golden Age of TV, and yet people have never been more frustrated by the status quo created by Big Cable and Satellite TV,” said Mike Sievert, Chief Operating Officer of T-Mobile.

The over the top service represents the “successor” service to linear TV, virtually all observers agree. That is why Disney is launching its own retail streaming services, for example.

And that is perhaps among the most-important ramifications of the move. In the application business--including the application businesses traditionally operated by telcos and cable TV--app delivery has been decoupled from the use of access networks.

Relevant competition for cable TV includes satellite and telco services, but also DirecTV Now, Netflix, Amazon Prime, Hulu, Sling TV and other services, with additional competition coming from Facebook, YouTube and many social networking apps.

In other words, the traditional regulatory distinction between unregulated “content or data services” and regulated access service providers is evaporating. Netflix and others create their  own content, bundle and license content and deliver that content.

That makes Netflix (if not a “perfect” substitute) a rival for linear TV subscriptions. The move by T-Mobile US into the OTT video subscription business represents that evolution.

Streaming services might be owned by app providers (social media, YouTube), commerce providers (Amazon), content studios (Sony, Hulu), or distributors (AT&T, Dish Network, Verizon, Comcast).

Whomever the owner of the assets, the new reality is that content creation, packaging and delivery now is becoming independent of the access mechanism. That will--or should--eventually have regulatory implications of major scope.

Defining the scope of a “market” now is more complicated--and much broader--than it once was.

One Time When Scale Apparently is a Negative

Scale matters in telecommunications and network-delivered content. But some forms of scale, namely the number of channels offered to consumers, seem to have negative impact. In other words, offering “too many” channels leads to much lower revenue per channel, as you would expect.

The relationship between market share and revenue per channel is less clear, if only because some smaller providers also offer the smallest channel lineups, while some larger suppliers offer the most channels.

source: Ampere Analysis

Service Providers	Subscribers at End of 1Q 2017
Cable Companies
Comcast	22,549,000
Charter	17,147,000
Altice*	3,500,000
Mediacom**	832,000
Cable ONE	307,187
Other major private company***	4,275,000
Total Top Cable	48,610,187
Satellite Services (DBS)
DIRECTV	21,012,000
DISH-DBS^	12,173,000
Total DBS	33,185,000
Phone Companies
Verizon FiOS	4,681,000
AT&T U-verse	4,048,000
Frontier^^	1,065,000
Total Top Phone	9,794,000
Internet-Delivered
Sling TV^	1,355,000
DIRECTV NOW^^^	375,000
Total Internet-Delivered	1,730,000
Total Top Providers	93,319,187

It also is possible to note that suppliers will smaller subscriber bases also tend to carry more channels, which, all things being equal, also lowers revenue per channel.

Nobody yet really knows how fixed wireless enabled by a 5G network will compare, in terms of deployment cost, with fiber to home costs, except to say virtually everyone expects that cost to be less than FTTH.

source: Leichtman Research