Cutting the Cord: Common Trends Across the Atlantic

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013

Joint Interview between Gilles FONTAINE, IDATE and Eli NOAM, Columbia Business School

Summary of this issue: "Video cord-cutting" refers to the process of switching from traditional cable, IPTV, or a satellite video subscription to video services accessed through a broadband connection, so called over-the-top (OTT) video. The impact of cord cutting will probably differ among countries, depending on the level of roll-out of digital cable, fibre optic networks, and/or IPTV, on the tariffs of legacy video services, on the quality of broadband access and on national players’ strategies.
Regulation will play a key role in this new environment, as a strict enforcement of net neutrality could prevent network operators from leveraging their access to customer base to market their own video services.

Columbia Business School, 
New York, USA

 Joint interview with

 Montpellier, France
 Eli NOAM, Columbia Business School
 New York, USA

C&S: How would you define cord-cutting, from a US or European perspective?

Gilles FONTAINE: Cord-cutting, in Europe, is seen mainly as a USA phenomenon, where consumers would trade-off their pay-TV subscription for over-the-top Internet services. The last years, in Europe, have rather seen the rise of powerful cable and IMPTV operators competing in the pay-TV market with legacy satellite packager.

Eli NOAM: Cord-cutting is the dropping, by consumers, of expensive cable TV subscriptions in favor of online access to TV programs and on-demand films. Drawbacks for consumers are less certain quality (bandwidth), less availability of live programming such as sports, and absence of some channels. Advantages are cost-saving, no need to pay for undesired channels, better search, less advertising, greater choice, more control. In a broader sense, cord-cutting is a transition of TV from a broadcast/cable push model to an individualized pull model. So this is not just about switching to yet another delivery platform. That's the easy part. It is much more fundamental. Looking ahead, one change will be that by going online, TV will move from a slow-moving, highly standardized technology controlled by broadcasters and consumer electronic firms to a system where multiple technical approaches compete with each other and propel video delivery into an internet-rate of change and innovation. And that's just the technology. Equally important changes will take place on the content level, and in the structure of the media industry, in the advertising and business models, and in the policy.

Do you see any evidence that cord-cutting is really happening?

Gilles FONTAINE: Cord-cutting, in Europe, is not happening, or is not happening yet. Several reasons account for this: on the one hand competition is intense in Europe between networks, and is driving Internet access and television prices down, therefore limiting the incentive to "cut the cord". On the other hand, Internet services are far from having the same level of offer as US ones, even if catch-up television is increasingly available throughout Europe. Also, the video-on-demand market is very fragmented, with still limited catalogues and interfaces that could be improved and subscription video on demand is nascent, and mostly pushed by US-bases players, even if some European players have launched first services. Finally, the penetration of connected TVs and connected set-top-boxes is probably also lower in Europe than in the USA.

Eli NOAM: In the short run, there is less cord-cutting than media reports and hype suggest. For a variety of reasons, almost all participants in the media industry have an interest in dramatizing the issue. Broadcasters are making investments in ‘second screen' distribution, partly to be prepared for change, and need to justify them. ISPs are expanding bandwidth to position themselves as providers of mass entertainment options. Telecom companies, similarly, need to upgrade their networks. New providers of bypass service to broadcast and cable, such as Aereo in the US, create buzz to their market-disruptive activities. Media cloud providers such as Amazon or Netflix present new options. And even cable TV operators, who are the ones negatively affected, have an interest in presenting the problem as a crisis, at least to policy makers, in order to gain regulatory relief.

The reality is more modest, at least in the short term, but not insignificant. According to a credible analyst, Craig Moffett, The "pay TV sector" – cable, DBS, and IPTV – lost 316,000 subscribers in a 12 month period mid-2012- mid-2013. Since IPTV has gained subscribers, cable losses must have been larger. That is a loss of about 0.3%. Another estimate for 2012 has the number at 1.08 million. In a 4-year period 2008-2011, anywhere between 3.65 and 4.75 million subscribers were lost. But that was in the midst of the Great Recession, and thus not all can be attributed to cord-cutting.

Do OTT services really challenge telcos and cablecos managed TV and video offers?

Gilles FONTAINE: Many studies seem to show that OTT services propose a better customer experience than the equivalent launched by the telcos or the cablecos. OTT services are Internet natives, customer friendly companies, with a rhythm of innovation that is difficult to compete with. Telcos and cablecos still concentrate on the "linear television model", even if they have developed their own on-demand offers, whereas OTT services specialize in on-demand services. But telcos and cablecos still benefit from a privileged access to the TV set through their TV set-top-box, a competitive advantage which is about to be undermined by low cost solutions to connect the TV set, such as Chromecast from Google.

Eli NOAM: Overall, the extent of video streaming has been quite large. In the evening hours, about two-thirds of internet traffic are video-bits. Netflix alone has added 630,000 streaming subscribers in the US in 3 months in 2013, to a total of 30 million. Thus, while the numbers of cord cutters is not huge yet, as mentioned, a steady loss of subscriptions is to be expected, and it is backed up by surveys in which cable subscribers grumble about staying with expensive subscriptions which they do not fully utilize. This is particularly true for the younger generation. 34% of the Millenials (cohorts born 1980-2000) say that they watch mainly online video and not broadcast TV. For Gen X and for Boomers the numbers drop to 20% and 10%.

With OTT available, the traditional business model of cable companies unravels. In the past, they were able to raise prices and to pass on the raises by channel providers. This becomes more difficult. Similarly, it becomes more difficult to offer only bundled channels ("prix fixe"). Similarly, the ability of channel providers to offer content to viewers directly reduces their bargaining strength considerably. If they want to keep up, they also need to develop expertise in online technology, social networking, and mobile communications.

UK cableco Virgin Media and Sweden cableco recently signed a distribution agreement with Netflix. Do you foresee any revision of the cablecos and telcos triple-play model?

Gilles FONTAINE: Building an IPTV service is not straightforward for a telco: network costs can be high to ensure a homogeneous quality of service. They also face high programming costs and the complexity of negotiating with the media world. On-demand services hardly prove to be profitable, because of the market power of Hollywood studios combined with the strong competition between telcos and cablecos, has for instance led to almost unrecoupable minimal fees to access programs. The situation can be similar for a cableco that would not have the resources to acquire exclusive, attractive content: the recent deal between Virgin Media or Com Hem and Netflix heralds a change of strategy for the smaller telcos and clablecos, which could favor to comfort their Internet access business by offering the best OTT services rather than pushing their own television packages.

Eli NOAM: Overcoming all of these challenges is possible but requires an acceleration of internal processes, major investments, and a willingness to give up some control. There are signs of change in that direction. Comcast, which has just paid $ 39 billion for NBC Universal, thus gaining vertical control from the camera lense to the eyeball, has now announced a trial of a cord-cutting offer to subscribers: if they take a Comcast broadband service (of a quality that is today an upgrade for most customers) they get at basically no additional charge HBO Go (HBO's archive of self-produced shows plus current other shows, available anywhere in the US from most devices), plus the free broadcast channels. The regular monthly price $ 70/ month, compared to a price of $ 135 for a full complement of 200 channels including HBO Go. So the viewer willing to skip regular cable channels saves a lot of money. The data cap for such a service is 300 Gigabytes. This is about 120 hours of HD viewing per month, which is adequate for single viewer but tight for a multi-device, multi-viewer household.

So this shows that cable companies are considering to embrace cord-cutting as an inevitablity. Another development in that direction is the US cable industry's considering to integrate Netflix into its operations. They are holding talks with Netflix to make Netflix an option on their set-top boxes. In such a scenario, Netflix would, in effect, become cable companies' major VOD provider and revenues would be shared. This, together with the cable MSO's own cord-cutting option, would in effect accelerate cord-cutting. However, cable companies would not be entirely bypassed. They would mitigate cord-cutting into channel cutting. Ultimately, cable companies' main asset is their transmission network. Its exploitation will undergo transformation.

TV channels also face another form of cord-cutting, as viewers may directly choose their on-demand programs. How do you see their future role, if any?

Gilles FONTAINE: TV channels, as aggregators, may lose their specific role if on-demand consumption develops significantly. However, they will evolve proposing more and more live events to continue gathering strong audiences at the same time. Moreover, there is still a need of arranging the on-demand catalogues, pushing the right content to the right viewer at the right time and on the right device. TV channels should be able to leverage their linear programming to play their aggregator role in an on-demand market. But they will need to heavily invest in IT and review their trade-off between linear and on-demand distribution.

Eli NOAM: TV channels gain and lose. They gain in bargaining power over cable and other distributors. They can deal directly with users, though more likely they will go through new types of intermediaries such as Apple and Amazon.com. In a profusion of content offerings, strong brands are a valuable way for users to search for content. And if they can identify users or user characteristics they can fine-tune and individualize advertising. The danger for channel providers is that the loss of cable MSOs hold over viewers means that they cannot share in the MSOs pricing power. Furthermore, content providers can disintermediate them by going directly to viewers. Sports leagues, for example, could deliver their events directly and cut out the networks. Most of the channels do not have major operational IT expertise, and this provides an opening for an entire industry of new service providers and video clouds.

Gilles FONTAINE's Biography

Gilles FONTAINE is IDATE's Deputy CEO and is also in charge of IDATE Business Unit dedicated to media and digital content. During its 20 years experience in the Media sector, Gilles Fontaine has become an expert of the media economics and of the impact of Internet on content. He directed numerous studies for both public and private clients, including the EC, governments and local authorities, telcos and TV channels. Recent assignments have included a participation in the future MEDIA programme ex-ante assessment, the analysis of new video internet services economics, a long term forecast project on the future of television. He has also monitored the impact of digitization and online distribution on other media, radio, press and music. Mr. Fontaine holds a degree from the highly reputed French business school, HEC (Ecole des Hautes Etudes Commerciales, 1983) and from the Institut MultiMédias (1984).


Eli NOAM's Biography

Eli NOAM has been Professor of Economics and Finance at the Columbia Business School since 1976. In 1990, after having served for three years as Commissioner with the New York State Public Service Commission, he returned to Columbia. Noam is the Director of CITI. He also served on the White House's President's IT Advisory Council. Besides the over 400 articles in economics, legal, communications, and other journals that Professor Noam has written on subjects such as communications, information, public choice, public finance, and general regulation, he has also authored, edited, and co-edited 28 books. Noam has served on the editorial boards of Columbia University Press as well as of a dozen academic journals, and on corporate and non-profit boards. He was a regular columnist on the new economy for the Financial Times online. He is a member of the Council for Foreign Relations. He received AB, AM, Ph.D. (Economics) and JD degrees, all from Harvard. He was awarded honorary doctorates from the University of Munich (2006) and the University of Marseilles (2008).

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013

Sophie NIGON
Managing Editor


Interview with Craig MOFFETT MoffettNathanson LLC, New York

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013

Video cord-cutting

Summary of this issue: "Video cord-cutting" refers to the process of switching from traditional cable, IPTV, or a satellite video subscription to video services accessed through a broadband connection, so called over-the-top (OTT) video. The impact of cord cutting will probably differ among countries, depending on the level of roll-out of digital cable, fibre optic networks, and/or IPTV, on the tariffs of legacy video services, on the quality of broadband access and on national players’ strategies.
Regulation will play a key role in this new environment, as a strict enforcement of net neutrality could prevent network operators from leveraging their access to customer base to market their own video services.

MoffettNathanson LLC, New York
Interview with Craig MOFFETT
MoffettNathanson LLC, New York

Conducted by Raul KATZ,
CITI (Columbia Institute for Tele Information),
New York


C&S: Is cord-cutting affecting equally cable TV and telcos in the US?


There's a fundamental difference between the cord-cutting experienced by the cable operators, which is all about video, and that experienced by telcos, which is all about voice. Video is a high bandwidth service and voice is a low bandwidth one.

Low bandwidth services are the easier target, so up to now we've seen much more aggressive cord-cutting in voice than in video. The fact that the cable operators have a more robust physical plant than the phone companies has left the telcos losing share in broadband as well as in voice, making the losses all the more painful for the telcos.

Video is such a high bandwidth service that video cord-cutting is only just beginning. By our estimates, there are now as many as 2 million households that have cut the Pay TV cord in the U.S. That's only about 2% of the market, but it is a growing segment. In these early numbers you can see the beginnings of a bigger problem.

What are the different retention strategies deployed by each type of player to prevent an acceleration of cord-cutting trends?

The telcos seem to have concluded that they are fighting a losing battle to retain wireline voice customers. The residential voice market as a standalone business is vanishing before our very eyes. Unlike in Europe, bundling wireline and wireless therefore isn't really an option. In the U.S., the telcos have regional wireline footprints but also have national wireless ones. Naturally, they are reluctant to make a compelling integrated offering for fear that it will simply reduce the competitiveness of their wireless businesses outside their footprints.

Cable operators have an advantage in that they've got the best physical plant (at least where there is no fiber-to-the-home alternative). So they've been able to bundle video and broadband, and even voice, as a retention strategy. That has proven very sticky. And by tilting the pricing of their services – higher for broadband and lower for video, at least on the margin – they can make it less and less attractive to leave.

And the cable operators have another advantage. It is easier to defend high bandwidth services than it is to defend narrowband ones. The key is whether the cable operators will be able to begin charging for broadband usage. If they can, defending against high bandwidth video streaming becomes relatively easy. Or rather, it becomes a moot point, since a carrier charging the right price for usage is economically indifferent whether video is delivered via traditional Pay TV or via internet-based OTT (over-the-top) alternatives. The question here is entirely regulatory. Whether they will meet regulatory resistance to their early trials is unclear.

Would any changes in the content arena (e.g. sports content) accelerate the cord-cutting trend?

In many ways, sports programming holds the key to how the ecosystem will evolve in the U.S. Today, sports are exclusively available via the traditional model. Cutting the cord is therefore appealing to a relatively smaller segment of the population. If the most popular sports events were to be made available over the Internet you would suddenly begin to see a much more rapid migration to video over the Internet.

Conversely, if traditional cable and satellite operators are ever able to force the unbundling of sports networks by putting them on a separate tier, they would relieve what is otherwise a tremendous pressure point on the system. In theory, that would slow down cord-cutting. Today, cord-cutting is primarily about cost, not technology. And the biggest driver of cost inflation is sports programming. Taking it out of the basic programming tier would lower the cost to non-sports enthusiasts, reducing their incentive to cut the cord.

Would you see that cord-cutting would trigger additional changes in the content value chain (e.g. backward/forward integration, M&A)?

For distributors, the key question is whether the economic value of the video transport function can be preserved in an over the top model. If it can, the distributors will fare relatively well. Even satellite operators would benefit, since the economic benefit of cord-cutting would be mostly eliminated, which would naturally slow down the migration. Again, the real questions here are regulatory, not technological or economic.

For programmers, the key question is whether cord-cutting will necessitate unbundling. Most consumers think that content bundling is driven by the distributors. It is not. It is driven by the programmers. The programmers sell bundles of cable networks to the cable operators, and their contracts require that those bundles be kept intact.

Cord-cutting is typically assumed to entail a move to unbundling, or a la carte, programming, but that doesn't necessarily have to be the case. One can imagine a model where video is delivered over the Internet in the same unwieldy bundles that are today delivered by cable and satellite operators. If things evolve that way, the implications for the programmers will be relatively modest. On the other hand, if programming is ultimately unbundled as it moves to the Internet then the value chain as we know it will be upended. Value in that model would move further and further upstream, ultimately to the actors and artists, accelerating a migration we've been witnessing in slow motion for years. The value of the media conglomerates would radically decline as their revenues declined and as their costs of content acquisition and production rose. At this point, it is too early to say whether this will happen in video. It already has in music, and the results haven't been pretty.


Craig MOFFETT is the founder of MoffettNathanson LLC, an independent institutional research firm specializing in the telecommunications, and cable and satellite sectors. Mr. Moffett spent more than ten years at Sanford Bernstein & Co., LLC as a senior research analyst. He was previously the President and founder of the e-commerce business at Sotheby's Holdings. Mr. Moffett spent more than eleven years at The Boston Consulting Group, where he was a Partner and Vice President specializing in telecommunications. He was the leader of BCG's global Telecommunications practice from 1996 to 1999. While at BCG, he led client initiatives in the U.S. local, long distance, and wireless sectors, in both consumer and commercial services, and advised companies outside the U.S. in Europe, Latin America, and Asia. He was the author of more than 20 articles about the telecommunications industry during the 1990s. He published analyses and forecasts

Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013

Sophie NIGON
Managing Editor


Interview with Henri VERDIER Director of Etalab, Services of the French Prime Minister

Published in COMMUNICATIONS & STRATEGIES No. 89, 1st Quarter 2013

Open Innovation 2.0
Co-creating with users

This issue of C&S analyses the thematic of open innovation with a focus on co-creation with end-users

Summary of this issue: Innovation has always been a central element of competition dynamics. During the last decades, globalization, deregulation, internet, new technologies, the digital revolution, and consumers' behavior have radically modified the innovation process and the competition structure. In many areas, the offer is rich and diversified: innovation is a unique opportunity to create competitive advantages necessary for growth. Among the general topic of open innovation, this special issue focuses on users' involvement in the innovation process. It offers a collection of papers providing interesting opinions, experiences, advances and evidence.

Henri VerdierExclusive:

Director of Etalab, Services of the French Prime Minister

Interview conducted by Gilles FONTAINE (IDATE, Montpellier/Paris)

C&S: Henri Verdier, you were co-author of L'âge de la multitude ['The age of the multitude'], which explains how individuals, outside organisations, are now crucial to creation and growth. Do they play a particular role in the process of innovation of products and services?

Henri VERDIER: Certainly.

Their first role, as we often forget, is to choose, from among all the inventions, the ones that they will make true innovations. That is to say, the ones that will be transformed into progress, both because the audience has adopted them and because of the uses it will make of them. It is in this sense that we speak of "use-driven innovations": not because they are driven by the value of use, as marketing sometimes imagines, but because they are driven by "usage patterns and customs", by the manner in which society organises itself with these innovations.

But this isn't something that dates back only to the beginning of the digital age - it is the common law of innovation in Humanity. What has changed of late is the number of individuals who are educated, equipped and connected, who, by virtue of the sum of their creations, or even their small contributions, can support radical innovations as we see on the Internet.

This is rather good news. But at the same time, we must be aware this "free labour" of Internet users, whether they are active (voluntary contributions) or passive (through data or even usage history), can also be monopolised by major platforms. Most of the time, Internet users feel that the service rendered to them by these platforms is only worth the contribution they are able to make. But it is clear that this can raise a few questions, in terms of protection of privacy and international taxation. Thus Nicolas Colin, co-author of L’Age de la multitude, was tasked with reflecting on the tax implications of this new means of creating value.

Are the social networks the nexus of this open innovation, driven by users?

Yes, if you accept a broad definition of "social network". The big social networks are of course major players in digital. But the phenomenon goes far beyond what happens on Facebook or LinkedIn...

It is quite easy to see that most of the major digital applications have a social dimension, even if you wouldn't call them "social networks" per se. Such is the case of Flickr, digital cameras that automatically connect to YouTube, Google searches, etc. The famous online teaching service, Coursera, probably owes its success not to the quality of its courses (other prestigious universities had already launched similar services), but rather to the power of interaction it affords among students. Someone had this say: "People had never seen an educational project that delegates part of the work to the students themselves."

More broadly, one could say that communities are the basic unit of the Internet. The fact that you have friends, belong to a community, share your interests, support a cause, etc. make you a stakeholder in the Internet. There are therefore social networks beyond the realm of Facebook and Twitter. The great experiences of crowdfunding, crowdsourcing, viral communication, etc. do not necessarily go through the social networks. So we mustn’t neglect any of the networks that emerge on the web: massively multiplayer games, virtual campuses, virtual currencies with their user communities, NGO activists – all of these have the potential to greatly empower the individual.

What is your take on the living labs, which hope to bring users together upstream in the innovation process?

It's an excellent approach when it doesn't get caught in the rut of being an overly utilitarian "test bench". Living labs, as with all those third-party spaces that are fond the digital ecosystem (coworking spaces, Fablabs, etc.) are fertile when they are alive. They must leave room for the unexpected, for creative randomness ("serendipity"), develop subtle listening, propose new formats of interaction, find co-creation strategies, etc.

You also presided over the "Cap Digital" Centre for Competitiveness. How can companies rethink their innovation processes to take advantage of this new situation? In particular, how do you see the future of R&D in big companies?

Firstly, I think it is essential that the major technology companies pursue and intensify their R&D efforts. The basic materials of innovation come from research and development, and if there is one characteristic of our times, it is that the pace of innovation continues to accelerate.

One should now, however, confuse R&D with innovation. Innovation is not the natural continuation of R&D. There are big innovative companies that do not have R&D, particularly in the fields of service, content publishing and communications. And where innovation is concerned, every company should learn to better harness the strength of the multitude. Such as by involving their own employees in the multitude. The formats of open innovation, listening and working with one's market, and incorporating design into the heart of the decision-making process are starting to become rather well documented methods.

Does this vision of "open innovation" imply a change in the way intellectual property is managed?

This is a complex question.

Since the Internet has become popularised, it is caught between the opposing forces of openness, open source, and being free, on the one hand, and closure, protection and privatisation on the other. This tension is structural. One the one hand, there wouldn't be any progress, perhaps even a company, without information commons (what would science be if the results of research weren't accessible to other researchers?). At the same time, we are well aware that most economic sectors need clearly defined assets to prosper. It is likely that the best answer is to strike a happy medium.

But, personally, I think nowadays there is a tendency to broaden the scope of application of intellectual property too much. Copyright was originally intended for intellectual work which was a creative expression of the author's personality. That is to say, work from his very soul, as it were. I'm not so sure that people have put their soul into all the creation for which this type of copyright protection is being claimed.

You are now the director of Etalab, the agency responsible for promoting open data in Fraance. Could one say that shared data is the prerequisite of open innovation?

Yes, that is what I believe.

This is not the only reason it is good to open up and share public data: citizens also have a right to demand the accountability of authorities, which is the hallmark of democracies. And there are innovation strategies for the administration itself, since creating large open repositories is often a guarantee of improving an organisation's efficacy.

But supporting innovation is clearly a key component of opening up public data. The services developed by citizens, individuals or companies using such data are impressive. We see them at every edition of the Dataconnexion event launched by Etalab, and they are really quite impressive.

The opening of public data will increasingly become a springboard for industrial policy. It will become a strategy for attracting innovation to one's territory (since these creators work in the territories that have published data), even transforming public action into a platform and preventing these innovations from becoming monopolised by other players.

Is the opening of data often associated with public data? Should companies be encouraged to share their data more? How?

In this respect, the State began before the business, which is understandable. The right of citizens to access public information dates back a long time. It is enshrined in the Declaration of the Rights of Man and of the Citizen, and has been part of French legislation since the CADA Law of 1978.

The debate on the opening up of public data has therefore not been too concerned with data held by companies. But I think the question will arise one day.

It will be raised because large companies too will discover the potential to boost efficiency by placing large repositories online and increasing their transparency. It will also be raised since companies will one day likely have to identify the "information commons" that it owns and which must be made accessible to all. This will probably happen when the big data collectors reach such monopolistic proportions that States are forced to require that they open up these new kinds of infrastructures to competition.


Since January 2013 Henri Verdier has been the director of Etalab (tasked with the opening up of public data), coordinated by the Secretariat-General for the Modernisation of Public Action, itself a part of the Office of the Prime Minister. An alumnus of École normale supérieure, Henri Verdier was the CEO of Odile Jacob Multimédia, where his work included developing a set of teaching materials for the educational programme La main à la pâte along with Georges Charpak. In 2007, he joined Lagardère Active as Director of Innovation. In 2009, he joined Institut Télécom as Director of Foresight, responsible for establishing the think tank "Digital Future". He is also co-founder of MFG-Labs. Founding member of Cap Digital Centre for Competitiveness, where he served as Vice-Chairmen from 2006 to 2008, before acting as Chairman of the Board from 2008 to January 2013. He is a member of the Scientific Council of Institut Mines-Télécom. He is also a member of the ARCEP Foresight Committee and the CNIL Foresight Committee. Henri Verdier is the co-author of L'Age de la multitude (Armand Colin, 2012).

Published in COMMUNICATIONS & STRATEGIES No. 89, 1st Quarter 2013

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Sophie NIGON
Managing Editor