JANUARY 28, 2013 — They’ve had it.
Independent cable and telephone operators in growing numbers are contemplating going over-the-top to deliver video entertainment to consumers who, like the operators themselves, are finding the costs of traditional cable and IPTV services to be too high. The question for these service providers is whether there’s a revenue upside to be found in this approach that produces a net gain over what they might achieve by offering traditional pay TV.
So far, the only independents known to have taken this course are telephone companies who have avoided going to the IPTV premium service model but want to be able to offer a value-added entertainment experience that surpasses the typical broadband OTT experience. “For a lot of smaller companies the MVPD (multichannel video programming distributor) model is getting to be a costly business to be in with relatively low margins,” says Steve McKay, CEO of Entone, Inc., a supplier of hybrid gateway solutions.
The same sentiment is being voiced in independent cable circles, where, unlike the telcos, the companies are already in the pay TV business but, for various reasons tied to individual cases, are thinking about capping their commitments to pay TV or getting out of it altogether. “We don’t see OTT necessarily as a threat but maybe as an opportunity for our customers,” says Matthew Polka, president and CEO of the American Cable Association.
ACA, representing 850 independent cable companies in their lobbying efforts with regulators, has been beating the drums for more FCC scrutiny over the business relationships that are driving programming costs, especially for sports, through the roof. “No matter who you are as a cable operator or even a satellite provider for that matter, you’re pretty much required by the major media conglomerates to sell the bundle of their services tied together with the services of their competitors,” Polka says. “They have provisions that say if our competitor’s channel is in this one tier than our channel has to be in this tier and so on and so forth.”
Consequently the association is entertaining discussions among members about alternatives to the traditional pay TV model that could leverage their advantages as providers of superior broadband services to deliver an OTT-based entertainment experience. “There’s a breaking point at some point in the future where consumers just give up because of the costs,” Polka says. “And so as a result of that our members and our board are beginning to look very carefully at what the future may hold and how our members may be able to interplay in that environment where we’re more broadband-based companies than we are linear video.”
He cites usage-based pricing as one way operators might benefit from offering high-quality viewing experiences with OTT content, possibly in the context of navigational systems that make it simpler for viewers to find what they want. Business models that would ensure a higher quality viewing experience for affiliated content providers might be viable options as well.
“I wouldn’t say that anybody has really figured out the best business cases,” Polka says. “And there might be multiple business cases that are appropriate for our members as they look at their future from a broadband perspective. The one thing we don’t want to do is approach these issues with a closed mind.”
Clearly, with consumers’ growing acclimation to the idea of getting long-form video via connected TVs, tablets, PCs and smartphones from an expanding range of options through aggressive players like Hulu, Netflix, Microsoft, Amazon and many others, the idea of replacing pay TV with an OTT option is not nearly as far-fetched for service providers as it was even just a year ago. The question is, what can operators offer as a value-added service to derive real revenue benefits from the OTT model?
Two companies who believe they’ve found such a model are independent telcos PC Telcom serving Philips County in Colorado and BTC Broadband, based in Bixby, OK. In both cases the key to the service model is deployment of the FusionTV solution offered by Entone, which allows them to offer a combination of off-air HD broadcast channels and OTT fare together with DVR support through a branded user interface.
“To retain and capture broadband customers in this fast-changing marketplace, we needed a solution that we can deploy quickly over our existing broadband network while also allowing us to deliver video at a competitive price,” says Vince Kropp, general manager and CEO at PC Telcom. “By bundling our existing broadband service with OTT, this takes the market appeal of our broadband service to a whole new level. Our customers get a cost-effective, personalized viewing experience that they can’t get from satellite or traditional TV services.”
Interestingly, BTC Broadband is taking this approach as well, even though it has deployed a fiber-to-the-home network with ample bandwidth to support a traditional pay TV service. “Our FTTH deployment is a key technological differentiator for our services,” says Scott Floyd, director of sales, product development and customer services at BTC Broadband. “With a product like Entone’s FusionTV we can leverage our high-speed network to bring next-generation, broadband-centric services to market while also increasing our overall customer satisfaction with a rich and compelling TV service.”
Entone’s FusionTV solution is a turn-key managed platform that includes software, equipment and service. McKay says the gateway captures off-air signals and seamlessly combines those viewing options with a cloud-based media service that includes the Vudu streaming library of over 50,000 titles and more than 50 popular online applications, such as photo sharing from Flickr and Picasa, and social media via Facebook and Twitter.
Since 2010 Entone has been promoting FusionTV as a way for operators to offer a unique video-centric broadband service that can increase the average revenue per user (ARPU) and strengthen subscriber satisfaction, without the upfront capital investment and content acquisition complexities of a full-scale IPTV system. But, McKay acknowledges, it’s not been an easy sell.
“Entone has been way out front on this,” he says. “It’s taken longer than we expected because none of us in the vendor community have really nailed it, although we’ve come closest.”
But the picture is changing, owing in part to the fact that other vendors are now in the hunt. “It’s easier now to go to an operator and say, buy our boxes instead of someone else’s, versus pitching an entirely new service they haven’t thought about,” he says. “Now it’s a nuanced conversation about how to go to market and all the things we offer to support that.”
Another issue has been the fact that operators don’t want to market a service touting a combination of off-air and OTT services when only customers within reach of the off-air signals can benefit from that component. “That’s something we’re working on,” McKay says.
One solution is to make the integration of live off-air TV with OTT through the FusionTV gateway and DVR an incremental option on top of a basic OTT service that leverages Entone’s aggregation of apps and content. Another possibility is to proactively enlist broadcasters’ participation in the service by offering them an OTT conduit to households in their service areas that can’t otherwise get the signals.
McKay is confident the market for what Entone is offering in this vein is about to take off. “It’s all about broadband, which is the highest growth margin service an operator provides,” he says. “We’re providing a platform targeting the fastest growing segment of the TV viewing population in America, which are the homes that get broadband and aren’t paying for pay TV services.”
Through the convenience and other benefits that come with integrated navigation across off-air and high-value OTT options operators are able to create a compelling service at an incremental charge of around ten dollars per months versus the costs of a pay TV service, he adds. “It’s an opportunity to address not only the pain points of the operators but also the pain points for consumers where, on the one hand, pay TV is too expensive and, on the other, the viewing experience without the integration of off-air and OTT is not satisfactory.”
Or, as Polka puts it, “It comes back to the point that we’ve got the broadband pipe and we want to maximize its benefits, because we know our customers want more of it going forward. And if they get greater choices and are happier, we’re happier, too, because we can begin to offload what is the very high expense of programming that’s forced on us.”