The deal announced this week whereby Blockbuster has launched its own set top for what we presume to be the old Movielink business but which it now calls Blockbuster OnDemand, became a discussion about whether the service was cool and what it would do for Blockbuster.
While that’s interesting, there is a secondary discussion to have about what it does for 2Wire, the supplier of the set top in question.
The deal itself ‘ put up $99 and get the set top for free, with the $99 going towards 25 film rentals ‘ is a poor one in our view. The set top is clearly still being subsidized, but not to the point where it is really free. Sure the Movielink (excuse me ‘ BB OnDemand) films are reasonably current, and it might be worthwhile to take a deal like that ‘ but perhaps not in the current economic climate, with all that’s going on around digital TV and the imminent switchover.
The online options between Blockbuster and online DVD rental inventor Netflix are a new kind of war. The challenge and success of Netflix has eroded all investor confidence in Blockbuster, and changes of management have left its offering confused. Netflix gives away its online service (but practically hides it) to people who subscribe to its online DVD rental service where DVDs are delivered in the post. We always thought that Blockbuster would do the same, using it to prevent customer churn which is huge in the Online DVD rental market
But that tactic failed at Netflix, where churn has risen despite the online service being given away. So Blockbuster is trying this tangential approach to try to make the service appear free, and use it to attract new customers with its 3,000 plus online film portfolio.
The truth is that these Blockbuster films are usually $1.99 to $2.99 so by charging $4 for each of the first 25, and if we assume that Blockbuster is donating its own margin, there’s about $1.25 on average for Blockbuster to pay out to studios on each movie that is rented. So it’s getting a contribution right there of around over $65. While we acknowledge that a 2Wire device costs more than that, we don’t think that Blockbuster is taking much of a risk with this deal, and what it should have done (and may offer in future) is a bundled offering ‘ subscribe to the online DVD rental (plus a couple of dollars a month), commit for 12 months and get a free set top and a certain number of online rental credits. In fact it needs at least fie or six ways to give this box out, including if they watch a certain number of adverts a day, making it cheaper.
But turning to the other side of the equation, supplier 2Wire appears to have engineered this deal, primarily because of the potential closure of the AT&T Homezone service.
At one stage in its history, 2Wire was virtually an SBC company (now AT&T). Much of its business came from there and it has flourished from its involvement and from investment by AT&T, Alcatel and Telmex. It had two major contracts with AT&T, one for the provision of a hybrid box that merged satellite TV from Dish with broadband delivered VoD from Akimbo, and it also offered the Movielink service as part of that. The other contract is as one of the main suppliers of the home gateway for the AT&T U-verse IPTV offering (not the set top but the home router).
One of the company’s strengths is that it was part author of the CPE WAN management protocol, TR-069, which is now a global standard for remotely and automatically managing and installing home gateways, to cut down on the costs of deploying broadband for fixed line operators, which is why AT&T is attracted to its home gateway offering and probably helped design it.
It made sense for 2Wire to suggest to the new owner of Movielink that it takes the work that it had already carried out for AT&T, and which has proved fairly successful in all the markets where AT&T did not have U-Verse, as a way of keeping at bay the cable triple play offerings.
There is still a requirement within AT&T for Homezone and we would not be at all surprised if come January when its relationship with the Dish Network ends, it doesn’t just switch satellite TV suppliers to its new partner DirecTV and re-engineer the service. The technology is identical, even if the satellite supplier is different and the set top will have to have a new conditional access and EPG integration to make this possible.
But on the back of Alcatel’s 25% holding in 2Wire, the company has found new markets. The deal was something that we saw as forced upon Alcatel by AT&T, when it was announced back in December 2005, when it put in $120 million for its shareholding. In order to make good on that investment, Alcatel needed to help the company along, and by opening up international markets for 2Wire, the company has found major deals with BT, SingTel and Telstra to go with the ones it has forged for itself in Canada and Latin America.
The three most recent releases from 2Wire are about BT choosing its HomePortal to connect subscribers to BT’s new super-fast, fiber-based broadband network; the launch of the product Blockbuster is using, the
the MediaPoint media player, and an announcement that it has now shipped
20 million HomePortal gateways. That last announcement puts the private company on a run rate of 7 million a year, a considerable increase over previous years (although being a private company there is not too much data on this). That makes it one of the fastest growing home portal companies in the world, and no doubt it also has a claim to have delivered more devices which connect the internet to the TV than anyone in the world.
All of which begs the question ‘ how does a company like Alcatel (not to mention AT&T and Telmex) get their investment back. There are only two ways, 2Wire needs to go public or it needs to be acquired. Given the state of the financial markets now and into the near future, and how much help Alcatel appears to have given the business, it is more than possible that Alcatel will move to buy and integrate the business, taking it back into market areas that it moved out of many years ago when it sold its DSL client business to Thomson in 2001.
Our prediction for the Blockbuster offering is that it will have to massage and improve it before it can be talked about (as some people have already discussed it) as the salvation of the company, but it seems to be yet one more step in the quiet domination of broadband connected devices for its unassuming private US equipment supplier.