I find that most engineers are afraid to say what they think. I have had that same fear. That all changed in 2011 when I started writing about my experience with cable companies, while working at a company trying to sell to cable companies. I found that everyone around me was so afraid to say these things, things that we all knew were true. And simply typing them out and sharing them nearly got me fired. I came away with two lessons. One, I will never work in an environment like that again, and Two, we have to be able to speak honestly if we really want to affect change around us.
Nearly everything I predicted (if not everything) has come to pass. And companies are just now starting to understand the shift. If we had spoken to our customer about where we thought they should be going, versus selling them the status quo, we would both have had a better relationship. I hope you enjoy the paper.
Here it goes:
The cable industry is the most dominant video and Internet provider in North America. Maturing from an industry that distributed analog channels, cable companies have built out their networks to enable consumers to receive advanced services such as High Speed Internet, Voice Products, Video on Demand (VoD), and hundreds of HD channels. However, there is a revolution happening in the way consumers are getting their video content. With the introduction of tablet devices, Internet enabled phones, and Internet connected TV/DVD players consumers are shifting their demands far from the set top box, and a new market is being created. As this evolves, the industry is watching all the underlying rules about how they produce, distribute, and monetize content change.
The effect of OTT and Cord Cutting on Pay TV
Over-the-top (OTT) video distribution has taken America by storm. More and more people are engaging in the practice of watching content from OTT providers like Netflix and Hulu and some are cutting the cord all together. At the same time the MSO video subscriber base is starting to erode, and competition for these customers is getting tougher with Telcos and now Google looking to wrestle them away.
The top 10 MSOs lost 1.8M video subscribers during 2010, according to Leichtman Research Group (LRG). The good news is that LRG also reported that the MSOs added 2.3M broadband subscribers during the same period, for a total of 41.5 million subscribers by year-end. What this means is that cord cutting, and OTT usage by households that keep their set top, could drastically change a pay TV industry that generates about $140 billion a year from ad sales and consumer subscription fees.
Netflix alone already accounts for over 20% of Internet traffic in the US and has more video subscribers than any MSO or MVPD in North America. They have shown that a company can put content in small clusters and make money thereby forcing MSOs to pay to expand their own network infrastructure in order to ensure that their customers have an enjoyable experience.
Other companies such as Hulu and Apple have demonstrated that a consumer can get the latest content for less than what they are paying their cable company while the content owner/provider makes more money going directly to the consumer. Television Apps or web pages written for Netflix, ESPN, iTunes, YouTube, Amazon, Vudu, CNN, Hulu Plus, Crackle and many others have also shown that whoever has the content can go directly to the consumer without any regard for the network that actually connects them to that consumer.
Seven companies — CBS, Disney, Discovery, Fox, NBC Universal, Time Warner and Viacom — account for about 90% of all the professionally produced video that people watch. Nearly all of these companies have content on iTunes, Netflix, and Hulu Plus. CBS recently broadcasted the whole NCAA men and women’s basketball tournaments over the Internet for free, and MSOs had to bear the cost of all this traffic without making a dime. While these companies want to protect the large amount of money they get from MSOs and other MVPDs, they can clearly see a path to higher profits through OTT delivery of all content.
The lesson, and opportunity, is that MSOs can radically change their business model to keep up with consumers’ needs and make their systems much more efficient. With the success of CDN deployments, such as Cablevision’s deployment of all live channels and VoD content to the iPad, MSOs finally have a path to converge all systems into a single fluid network. This allows them to move away from the old model they have been forced in to that made deployment of new services difficult, disjointed, and less profitable.
The Current MSO Business model
As we look at the current MSO business model, we find that costs are going to increase significantly in the near term while revenues begin a significant decline due to changing consumer demand. This is because the systems that have given MSOs the edge are now beginning to work against them.
Cable had the advantage of deploying channels very quickly due to the number of frequencies available on their RF network. They were able to quickly deploy cable channels that were never broadcast over the air. Consumers were willing to pay for the new channels like CNN, MTV, etc. When consumers wanted high-speed Internet access, cable companies were able to leverage their RF network to quickly deploy a solution that was faster than any other solution at the time. As the more people wanted HD digital channels and VoD, cable companies again used the RF network to quickly deploy systems that offered these services to customers.
The technologies that gave cable companies this edge didn’t come with out drawbacks. Other than the fact that all the services could be delivered over a single RF plant from the Headend to the home, none of the systems actually worked in unison. MSOs worked very hard to build out middleware that made VoD and live television look like one complete system, but there was never really a solution that joined the two, even when they started to digitally transform their networks.
Due to the limitations of the technologies available at when cable started to make its digital transformation, the industry had to deploy systems that continued to use RF frequencies with the majority of these frequencies going to support individual channels. The CMTS and Cable Modem systems usually only got one frequency or channel to operate in. In some instances cable companies have actually completely run out of frequencies to hand out for new channels or to use for DOCSIS 3.0 channel bonding. In fact, last year cable companies had to retire a less profitable channel to find space to deploy Oprah Winfrey’s Network.
As mentioned before MSOs are now to spending more and more to deploy network infrastructure to accommodate the increased network traffic from OTT service providers. Between the limitations of the RF plant, and the ever-increasing infrastructure burden, MSOs are starting to sense that a change needs to be made.
Now MSOs are deploying iPad apps to give customers the TV Everywhere experience. However these iPad delivery systems are another add on which uses the cable modem to deliver content, instead of an individual RF channel. This means that cable companies, for the first time, did not have to use or redeploy a 6.4mhz RF channel to enable a new service.
Unfortunately, the iPad apps cover only one device and the consumer has to continue to pay for traditional video services in order to use them. This simply subsidizes the old business model by keeping consumers tethered to the 6.4 mhz RF delivered set top box, while generating no new revenue and not paying for the costs generated by the continued growth required to support OTT and increased internet traffic.
In addition, there is the question of whether or not cable companies have the right to do this. Time Warner Cable has signed deals with Samsung and Sony to let them stream to the TVs directly, but content owners and providers are already signaling that they will take the cable conglomerate to court if this happens. What’s more, both Time Warner Cable and Viacom have sued each other over the iPad app.
The major shift in the way consumers are consuming content and the continued changes/developments they expect has exposed the inevitability of the current MSO business model giving way to a more profitable and streamlined one which delivers services over IP. Glenn Britt, CEO of Time Warner Cable, has said of full IP simulcast, "Over time, this may lead to a world without set-tops, which we think could enable a much better customer experience." The question is, how quickly do MSOs respond to this challenge? If MSOs do not change soon enough, we could see a similar trend as to that of print media, where old business models were rendered obsolete and unprofitable by new technology, leaving and entire industry scrambling for survival.
Internet vs. Cable TV
To further understand the problem, let’s look at what is happening from the consumer’s viewpoint. In December 2010 I started an experiment with my family to see what would happen if we tried to access everything we wanted via the Internet. Living in the DC area, we currently have 16 meg down 2 meg up cable modem service. As part of the experiment, we cancelled our TV service and waited to see how our data traffic rates would increase and how our access to content would be impacted. As a side note, we also do not currently have home phones.
We found that our access to content was not limited at all. Other than NFL and a majority of college football - which could be a real showstopper for some - there was nothing we were missing. We were able to watch every show over the top either through Netflix, Hulu, iTunes, Blockbuster, or Vudu. We could watch NBA and MLB games via our AppleTV. The added bonus was that we actually gained access to more content because we were now using radio stations and music plans like Pandora that we previously had not known existed and which are more customizable than the music channels provided by our cable company.
As working professionals, we are too busy to watch shows at the exact timeslot in which they air so previously – other than live sports - every show we would watch was recorded on our DVR. However, we have had several bad experiences with DVRs. For example, we missed shows because they were not tagged as “new” or the DVR would not record the end of the show because the time slot information was not exactly correct. With OTT services we can watch any show, see it all the way to the end, and not worry about the DVR “forgetting” to record it.
For football games we simply walked down to our local sports bar. However, ESPN has started airing all content over the Internet and I am hopeful for the day when we can watch all sports from around the globe over the Internet.
As far as quality, anything that we wanted to watch in HD was in HD, so the quality on our 50-inch plasma was fine. We even ran experiments in which I would watch something on the iPad, my wife would watch something on the TV, and then we would fire up a third show on the computer, and it all three displayed perfectly.
In terms of data usage, we intentionally streamed four SD shows a day, three HD shows a week, and left the internet radio on all day. We also had to watch at least three HD games in that month to break 101 GIG of downloading. The month in the diagram below, in which we downloaded 136 GIG, includes a download of 30 GIG of content from iTunes. (I had to re-download my entire iTunes library - apps, music, movies, and TV shows - because my computer was destroyed.) In April, with no intentional streaming and downloading the regular shows, movies, and music we watch in a month, we only downloaded 79 GIG.
Here is my data usage for the last 3 months:
In this situation the cable company I use has lost all my VoD revenue. They do not get revenue from my DVR rental, nor do they get special event revenue from me. They also cannot reach me for advertising, yet they are spending over 50% of their CAPEX and OPEX supporting - what is to me and a growing number of subscribers - a dead service: traditional 6.4 Mhz channelized video.
I pay Netflix and Hulu and have all the content I want for less than the cost of what I used to pay for renting one DVR from the cable company. My usual cable bill used to be ~$130.00 a month with all my VoD charges, but now that money goes to iTunes, VuDu, or Blockbuster. My family’s cable bill is now less than $70.00 a month. The net result for the cable company is a 46% decrease in revenue a month (about $60.00) from me because of the loss of my subscriptions and DVR rental.
So how do cable companies handle completely Internet based accounts?
My cable company, like most North American cable companies, has a cap of 250G. If I surpass the limit the company will warn me. If I do it twice in 6 months, they disconnect me. They have no system to make more money off me if I ever exceed the 250G limit, instead, they take a hit in revenue by disconnecting me. By contrast, the Telcos have either no cap or a monetized cap which charges a fee if I go over 250G.
The IP reality of tomorrow – A Radical Shift
The message in all of this is that the business models of cable companies must change dramatically. A 46% drop in revenue from a large amount of consumers in a compressed amount of time could seriously disrupt any business model.
Changing Channels: A new business case
To build the new business case we have to understand what we are removing from the old one. The MSOs are now freed of all the old proprietary systems they had to use. The RF delivery systems – the HFC plant, nodes, cable modems and CMTS – are all reused, but all of the closed systems that have cost cable companies so much money can be replaced. By removing the costs of the traditional set top box model - the many different versions of set top box, remotes, power cables, deployment support systems, maintenance, QAMs, Encoders, proprietary VoD systems, and the millions in reusable infrastructure – we find large amounts of CAPEX and OPEX that can be recovered.
So now that we know what we take out, what do we leave in, and how do we make it all work?
The cable business model of the future is built around enabling the network of the future and moving content as close as possible to the consumer, while monetizing not only their relationship with the consumer in new ways, but also with the content owner and advertisers.
In this business model timeslots become less important and advertising becomes more interactive and effective. The MSO is also able to consolidate focus on one network that delivers all services instead of having four or five overlay networks that are completely disjointed.
MSOs are now able to use any access method available (Ethernet, Cable, FTTH, 4G) to enable all services (voice, video, data, and CTBH) with less physical equipment required both at the customer’s location and in their network. They are also able to reclaim all the channels in their RF spectrum to enable much faster data rates – potentially one GIG - at the home though the use of channel-bonding. This allows them to better defend, and potentially win, customers from Telcos and Google.
Content that need to be distributed live – such as sporting events and news – can still be distributed at the time of the event, but a majority of content is available for consumers to get at their convenience. IP enabled systems mean that cable companies can now offer interactive and targeted advertising, which makes their advertising products more effective and more valuable to the MSOs advertising customers. Consumers watching time shifted content can now be presented with a different ad than what was previously aired during the live broadcast, again making ads more effective. To the consumer this means that they could actually watch less ads, making their experience much more enjoyable.
There could be usage-sharing agreements between MSOs, so while a consumer subscribes to a particular MSO, they can access all of their content on any other MSO’s network.
What this means in real terms is that cable companies will be smaller organizations with more focus on their networks, their software, and on customer quality - shifting away from the silos of the past. App development and cloud based services become crucial in this environment. Caching/CDN servers are now sending VoD content to the consumer, along with live content and event content, reusing the same infrastructure in each case to deliver all three traditional services.
On the consumer side, all services seem the same for a customer that chooses traditional TV and they are billed exactly the same way they are today, but the MSO is delivering the same content with much lower OPEX and CAPEX costs. Consumers that want an OTT experience can now choose individual channels or shows. They can also pay for content directly to the content owner, just like they do today in OTT, however now the MSO could charge the content owner for the number of streams they are supporting, and the amount of disk space they are using allowing them to finally monetize transactions that are happening on their networks.
To do this a MSO builds out their network and CDN delivery systems so that the consumer’s experience is enjoyable by deploying caching and streaming servers in places that meet the demand of local markets. For that the MSO bills Netflix, Hulu, and ESPN a certain amount per month per subscribed customer, and they bill iTunes per steaming movie download in which quality is a concern. This means that OTT providers do not have to build out their own networks, saving them money, and provides the MSOs with a new revenue source.
The MSO also collects revenue for internet access - keeping it all instead of paying licensing fees to the networks - and only pays for one system, freeing up more for profit.
If the OTT consumer decides that they want more content than what they can get from using an AppleTV or service direct from Hulu, then the MSO can offer an a la carte line up or a tiered set of channels using an App based service direct to the TV - or Internet connected device - or an IP enabled set top box, all while reducing overall system operating costs.
Finally, we get into mobility. There is a growing percentage of adults, under the age of 25, who have never owned a subscription service to anything and get everything delivered to their cell phone or a computer. They want their content delivered the same way everywhere, thus the success of web-based services like Facebook, Hulu, Youtube, and Twitter. Until now, cable companies have been unable to monetize those interactions happening on their networks and costing them money.
Because the MSO has monetized the network more effectively, and because everything is reachable by IP, the consumer can now watch all channels and order VoD like services and special events via any connected device, wired or wireless. This means the MSO does not have to subsidize their old systems with higher costs on Internet access or impose data caps that terminate a customer's access.
The MSO can now charge the consumer a monthly rate for a TV Everywhere service. This is a service that allows the customer to watch TV on any MSO’s network, and allows the MSO to pay money to the one on which the consumer is watching a given program.
This mix allows consumers to, finally, have their television experience on any device, in any format (tiered or a la carte), from any source.
As QoS and user experience on the residential IP network becomes more important, cable companies could even consolidate their disparate business and residential networks, freeing up even more capacity and lowering their overall operational costs, thus increasing profits.
This move would free MSOs from all the implementation constraints they currently have, allowing them to become more efficient and more effective in their ability to service their customers and their changing needs. While this shift will not be painless, it will lead to a much more efficient business model. Through innovations, there is the potential to reuse old RF set-tops in the new IP infrastructure, and there are efficiencies to be found in linking the old VoD system to the CDN deployment. There is also the option of a consumer purchased IP set top box for legacy TVs like the AppleTV or the Roku Player that removes the MSOs need to have set top boxes at all. All of these could lead to a much quicker transition.
However we get there, the truth is that MSOs really are experiencing a paradigm shift - one that could lead them to be the most formidable and profitable they have ever been.