After about 30 years of writing about technology, you start to wonder if anything will ever surprise you again, but it always does. There are times of change, and times of things staying the same, and they have a knack, in technology, of changing when you least expect it.
There are two things which signal when something is about to change. One is when you are so used to something remaining as it is, that you have come to not expect anything to change, and the second is when a technology break through has been around for quite a while, and has yet to catch on. When these two things are in place, it means that things are about to change radically.
One way for the common man in the street to understand what is about to change is to look at the adverts on their TV screens. Big industries advertise a lot. So you will see car adverts now being overtaken by cellphone adverts, because while both services are large industries, ther is more profit generated on cellular services than on cars. Work it out.
In an average family you have perhaps two children spending $20 to $30 a month on top ups and one adult with a $50 a month contract and another with a $20 a month contract. Add that all up and it comes to around $120 a month, or $1,440 a year and $2,880 over a two year period in line with minimum contracts. They may also get a few penalty bills for too many calls and pay out extra to buy an iPhone or two. Call it $3,500 over two years. This, of course, is less that the money paid out on cars for the same family, but the profit is significantly more, with devices sometimes reaching 50% margins and services something less.
When this is true, everyone thinks about how to get their share of the action, as Apple has done with the iPhone and iPad, within cellular.
Now add up something that almost never advertises on TV, and that’s TV services. Specifically pay TV services.
There are about 70 million families paying about $120 a month on average for cable TV services in the US alone. About half of this month is for the TV part of the service, the rest is for high speed cable and fixed voice services. If you add 30 million more contracts for satellite TV, also paying $60 per home (actually ARPU at DirecTV is way above this), then the US pay TV market is worth at least $6 billion and potentially much more.
There is also the ability to virtually double that revenue by offering advertising, games or VoD services additionally and of course charging monthly amounts for broadband.
Globally that is likely to come to more like five times this amount and growing, with the world being 20 times the size of the US in population terms, but half the world unable to afford TVs and the half that can having about half the penetration of pay TV as the US.
So roughly speaking, and remember this is not a forecast here just an illustration of size, there is a $30 billion piece of cake to eat into, in terms of stealing a piece of this pie. A 10% slice of this in the US is worth $600 million, and globally around $3 billion.
There is a general rule of thumb in business that companies should not launch new initiatives unless that initiative can make up at least 10% of the company’s revenue in the foreseeable future. Apple will therefore be looking only at opportunities that are $5 billion and Google at opportunities potentially worth $2.7 billion.
So it is clear that we are in the ball park for pay TV services to become ‘significant’ contributors to Apple and Google ‘ both expected to launch adaptive streaming pay TV services this Summer. In fact applying this kind of logic and it is easy to see that there are precious few opportunities of that size around still left for these companies, so it was pretty obvious where they’d end up.
They might look to get that kind of penetration over a period of about 3 to 5 years, so be happy to start with a significantly smaller entry for the first year. But anyone thinking that they are looking for anything less than a 10% dilution of the spend that is currently aimed at conventional Pay TV services, is not clear about their level of ambition ‘ shooting for any less would be dumb, counter intuitive from inside the company and too hard to justify to investors.
But we can’t imagine it and everyone assumes that things have to be done the same way in Pay TV forever, and with good reason. Content has deep relationships with cable and satellite TV, most top line programming is paid for by cable or broadcast channels, who risk losing their advertising grip overnight if they dropped cable or satellite.
Now let’s apply our two rules. None of us expect pay TV, as it is currently practiced, to go away ‘ it is embedded in our daily lives and we have been led to believe that the ‘price of entry’ is like that paid by Verizon and AT&T, the cost of building a physical national network of either wiring or transmitters. Meanwhile the cable operators, not just in the US, but everywhere, charge more and more for their offerings, never quite sure how much the market will take. They only raise prices because they feel safe. Mostly the cable TV market is saturated in the US and only growing slowly in much of Europe, but the amount of revenue for TV services rises through price increase, and additional revenues from other services continue to rise and rise, as attach rates go up.
Pay TV has a tougher time in markets where free to air TV is better established, with more channels, but this market is currently in the doldrums, due to advertising weakness right now and it won’t be fully recovered for some years.
Content businesses, and that can mean studios who make programming, and TV channels which aggregate content – what US analysts call cable networks, are also starting to see internet TV distribution as a salvation for their currently weaker position. More and more people rely on other things for entertainment other than watching video. This varies from online gaming to Facebook to browsing YouTube clips, to watching DVDs. Viewing while on the move or away from home, might add back the viewers they have lost over the years, and with that the revenues which have been lost.
But today if a content business wanted to move lock stock and barrel onto the internet, how would it go about it? The channels or routes to market simply aren’t there. There’s YouTube of course, but most of them feel it is just inviting piracy. Content owners can build their own web sites, and put some advertising around this and give away content, but that’s not really enough, at least not until someone goes out and offers an industrial strength strategy that means that ALL TV can come from a different source and pay TV subscribers CAN cut the cord.
So right now, until a major or two offer a completely new way of absorbing video, content businesses cannot do too much about taking their proposition to the internet.
One thing that makes this a distinct possibility is the way in which Netflix has taken off in the US. The online Netflix service is enough for the movies side of the business to be catered for and later this will inevitably extend to popular TV series ‘ however that will usually be ‘after the fact,’ when the series has finished airing on TV. What will make a sea change in TV internet distribution will be when ‘made for internet’ programming can earn almost as much as made for TV or cable, can earn today. This is why it will take someone the size of Apple or Google to re-invent this business ‘ up front investment in content for their services needs to be stimulated, whether that’s with their own cash or the cash of their followers
So internet video has been slow to take off, partly because there was no route directly into the living room for internet content on a TV and partly because it has taken a while to attract content’s attention.
But what about there being a technology in place for some time? Successful adaptive streaming has been around, capable of delivering HD class content, for a couple of years. The broadband networks themselves, both in the US, in both telco and cable providing ISPs, have slowly upgraded technology until the point where 20 Mbps is no longer a rarity in US homes. The same is becoming true about parts of Western Europe as well, and it was true a long time ago in parts of the Far East like Korea and Japan.
Because adaptive streaming has been around a while, and because the broadening of home broadband has been going on for years, it has been possible for some time to calculate an interception point when 10% or 20% or 30% of the US market will be ready with sufficient bandwidth to have HD class TV viewing over the internet. Which means that both Apple and Google have been aware of the opportunity for at least two years and have had time to plan.
When their services come out, we expect them to be disruptive, so expect something which is half as good as existing Pay TV which starts for a fraction of the price. In Google’s case it could go the whole hog and make the TV delivery free, and rely on advertising to recoup payment for the content owner, and simply charge full price for the device as a consumer proposition.
It is little more than fun to try to guess what these services might be like. For instance might Google do an Apple and block iTunes from having access to YouTube, by killing the version of YouTube which runs on the iPhone, and instead use Adobe Flash only and incorporate it into its own service. We say this is little more than fun, because there are so many ways of going about this, and many decisions are dependent upon who hates whom or who partners with whom, that the outcomes are not always logical.
What business model for instance will Apple adopts? Will it charge for iTunes TV and additionally charge for advertising? Or will it make TV sets which can play Apple Apps, and then sell advertising from within the Apps? Will it introduce the new Flash alternative which leaked this week under the name Gianduia? In fact is this the main reason for its design?
Will Google put a search engine on every TV set and then drive the whole thing using search advertising in the Living room, or will it also charge for Pay TV services and add Android Market Apps with residual advertising?
Whatever they do, and they may not reveal the entire strategy when they first launch, they will be shooting in 3 to 5 years for a chunk of revenue that will equate to something close to a 10% dilution of existing Pay TV. They will EACH want 10% and if they BOTH get it, that will mean a 20% total dilution to existing pay TV services. Ask yourself how will US cable and satellite deal with that?
Comcast might re-arrange its charging mechanism so that less is charged for the TV portion of its services and more is allocated to fixed lines and broadband? The triple and quad play packages may be the same though. Initially tactics like this may work, as it holds these services at bay, but eventually the pincer movement of telcos also offering cheaper broadband and trying to win back their fixed line customers, will mean they simply have to begin reducing prices or risk accelerated churn.
You might think that what Apple and Google are doing will mostly be around PCs ‘ in which case why is Google working on a TV set top. Sure Apple will makes its offering dependent upon buying an Apple device, but one of these devices will be for the living room or it would risk Google stealing a march there.
We can see why Comcast is getting into content with its NBC Universal merger, and how important that its TV Everywhere strategy is to hold this at bay, and how its influence of Hulu becomes important. Its other tactic will be for US cable (and other cable and other pay TV) to huddle together for warmth and consolidate into fewer and fewer companies.
But it had better get on with that soon, because over the next two months the TV strategies of two of the most powerful brands in the world will suddenly be having a downward impact on share values across the entire pay TV landscape and it is going to create a radical new investment environment for video.