Published in COMMUNICATIONS & STRATEGIES No. 92, 4th Quarter 2013
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.
Interview with Craig MOFFETT
MoffettNathanson LLC, New York
Conducted by Raul KATZ,
CITI (Columbia Institute for Tele Information),
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
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COMMUNICATIONS & STRATEGIES
Director of the Telecom Strategy Business Unit,
DigiWorld Yearbook project leader, IDATE
Digiworld Yearbook 2013
What is the future of telcos Business models ?
Increasingly stiff competition, particularly in Europe, and the growing role of the internet and OTT (over-the-top) services, has upset the telco industry. Revenue from calling minutes is tumbling, data traffic is exploding and NGN (LTE and fibre) rollouts require massive investments. This is the backdrop, then, against which telcos are having to consider the future of their business models.
Creating more value from access
They do have certain leverage to deal with this change, starting with creating more value from network access now that OTT services are increasing user consumption. NGN technologies allow telcos to increase speeds (‘best network’ strategy) and to introduce noticeable quality improvements, both of which can differentiate their offerings. The challenge now is to increase data revenue, smartphone and tablet use and to extricate themselves from the price wars raging in certain national markets. So we are starting to see new pricing strategies emerging, with per-minute charging being replaced by new ways of creating value from access and data: tiered pricing based on speed and access quality, data-sharing options between multiple devices and/or users, and bundles that include optimised access for a group of applications.
Other than necessary investment in infrastructure, implementing these innovative approaches also requires significant effort in upgrading software tools (OSS/BSS) in order to control traffic and usage in real time, and to provide the flexibility required for policy management and real-time charging.
Also worth underscoring is that operators see the migration of IT architectures to the cloud and the proliferation of connected objects (machine-to-machine, the internet of things) as major opportunities to earn back on some of their spending on access.
Moving toward two-sided markets
Alongside this strategy, telco services can take two approaches:
• adding value to access and using a two-sided market approach, by enhancing wholesale services: telco CDN,
• API agreements (billing, geolocation and others)
• beyond access, by relying on certain assets that underpin their originality. For example, value can be created from the personal information available through their consumer relationship, either by optimising their own offerings (downstream side in the two-sided structure), or by selling analytics services to third parties (upstream side).
The challenge is therefore to find the right balance so as not to destroy the image—and the value that comes with it—of a ‘trusted third party’ that consumers have of them. There are also increasing opportunities with regard to services. Operators can harness the creativity found in start-up companies, as seen with Telefónica Digital) while managing the risks of destabilising agreements that would likely be signed with major OTT players. They can also enter into collaborative projects, with players from user sectors (particularly within vertical markets), or between themselves to define applications deemed strategic (NFC and payment) or related to traditional interpersonal communication (see joyn RCS services). In particular, this would involve challenging the proprietary solutions developed by device manufacturers.
Industry reorganisation in the medium or longer term
These changes to business models tailored to operators’ specific assets could be accompanied by a consolidation of the telecommunications landscape in the more or less long term, particularly in Europe which has been singularly hard hit by the economic crisis and by having an extremely fragmented market. It is possible that the new round of mergers in the US could make its way to this side of the Atlantic, or result in a series of infrastructure sharing and pooled investments.
Maintaining the status quo could, on the contrary, only speed up European telcos’ loss of power, impede the development of NGN and, ultimately, result in their being taken over by carriers from the US or one of the powerful emerging economies.
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