We noted two conflicting themes throughout the Connected TV World Summit in London this week, and being violently opposing views, they can’t both be true. You could sum them up as everything will stay the same, or no it won’t.
The first instance centered on the debate over whether or not the traditional set top box has a future in the face of OTT and other cord cutting trends. Nigel Walley, Managing Director of UK consultancy Decipher, made the case for Pay TV platforms, suggesting that unless you put broadcast at the center of the viewing experience you are simply ‘creating a peripheral.’
Walley leveraged some dubious statistics from his own survey regarding consumer viewing habits, which suggest that they rate broadcast top in a home even where that home has access to all forms of broadcast-avoiding technology. Second and third most popular functions are pausing Live TV and Record, neither or which make sense if you don’t actually have broadcasting.
His performance was full of these ‘self-fulfilling’ thoughts. We are asked to conclude that because people watch broadcasting linear TV now, it means it’s what they love and what they will always love and only a few of them use OTT services as much as broadcasting, so OTT is somehow fundamentally flawed or inferior. The only thing you could conclude from Walley’s and some of the other presentations on the first morning was that things will change, but we all have time to get used to them. We cannot agree.
Broadcasters, and especially consulting groups which are focused on the UK, often reach for this view of the world. Nothing will change, there will always be a set top and linear channels and that everything will stay the same. At Faultline we were shocked that this group espoused such a narrow view, a kind of mutually supporting cluster of the blind, trying to see into a murky future. And as such much of the Connected TV World Summit involved a kind of collective burying of heads. But not all of it.
Netflix will stumble, set tops are forever, smart TVs will never replace pay TV, and Apps on TV are just the next step, but hardly anybody uses them. One comment from a Samsung employee in the audience summed it up, ‘Surely the first thing that people love is their brand new large flat screen TV, and they should THEN decide what kind of pay TV platform they need.’ He was arguing for Samsung having multiple relationships with pay TV players in each territory. Obviously this is no longer the case if it ever was. This man has convinced himself that he lives in a world where you buy your TV first and then decide what programming is allowed to best adorn it. This is what happens when you send sales people to these events, instead of the underlying corporate thinkers. Thankfully not every company did this and the show was a complex interaction between people some of whom can glimpse the future and other who can barely remember the past accurately.
A large TV screen may be selected as a piece of furniture, to beautify a room and make the viewing experience huge, but it is not the first choice. People now stay loyal to pay TV providers on average for about 7.5 years (based on their churn). But TVs among the richest 50% of homes are now re-cycled every two years, or at least they have been during the past 5 or 6 years. Prior to that there was a clear 7 year cycle to replacing the Television set in each home, which means that just over 200 million devices are shipped each year, although this is once again going down.
To anyone who has seen the technology industry for long enough, it is clear that change does come. In the beginning there were mainframes, then there was distributed computing, then the PC was invented in 1980 and everything became PC focused. Smartphones and tablets made this an ever more distributed world. Then suddenly the cloud means that most processing is back in the middle of the network, and we are back to super servers once again and the Amazon elastic cloud, having gone full circle. Things change and sometimes they change back.
But when we heard comments like ‘No one over 30 subscribes to Netflix?’ we can’t conclude that as a result, that as people get to be over 30 they will stop subscribing. Instead we assume that as Netflix subscribers reach 40 the claim will be that nobody over 40 subscribes to Netflix, then over 50 and then 60 until that observation is no longer relevant.
You might have said 4 years ago that no one over 30 had a Facebook page. But they certainly do now. There was also prevalent at the show the notion that Netflix will have to increase its price to ever make money. It’s such nonsense. Facebook doesn’t make any money, but no-one says that it’s only a matter of time before everyone goes back to MySpace.
We have watched Netflix since it was only in the US and only did physical DVD rental, online. It knows how to go about a landgrab and it knows how to turn a profit, and when it needs to do each one, it can do this. The landgrab is operating under everyone’s eyes, and yet those in broadcasting cannot even agree it is happening.
Walley’s ideas seemingly met with a modicum of support from others at the event, there were some points that required a stretching of the imagination to fit with the wider pro set top argument. One suggestion was that the trend in the viewing habits of teenagers to use VoD in place of linear TV is simply down to an immature mindset and a lack of interest in watching sequential linear TV in the form of say, an adult drama.
We disagree with this idea and can see the growth of multi-screen VoD as signaling a change in viewing habits across all age groups. In the same way as music listening habits changed with the Sony Walkman, Apple iPod and mp3 players, which made listening a uniquely personal experience, instead of a shared family hi-fi experience. Funny that, and everyone says that video cannot go the same way, which is why they cannot see the collapse of large screen TVs in favor of tablet or Facebook viewing.
Regardless of accuracy, the vision of a future in which broadcast is happily embraced by the consumer is one which resonate nicely with the Pay TV community, and one directly contrasting with the media-hyped assurances we hear from the likes of Eric Schmidt and Reed Hastings that linear TV is dying, or even already dead.
Let’s take newspapers and how well they have survived the onslaught of free internet news. It has taken a generation before it is obvious that newspapers will not survive without joining the online era, and now the Kindle and other eReaders, and the addition of video to their web sites, and paid online content, has become their mantra as they strike out for survival. But Newspapers almost have to change their names, as they rarely carry news (mostly comforting opinion) and are no longer worth having on paper. So the poison of the internet can take a while to have an effect, but it begins working at once, and no-one has launched a major newspaper anywhere in the world, that has made anyone rich, in the last 20 years.
If all the wealth is created by something other than newspapers, then in a single generation, they lose relevance and that’s the way linear broadcasting is going. Taking the patient’s pulse and saying ‘He’s still alive’ becomes more meaningless every day and keeping it alive for another 20 years is all well and good, but it won’t make anyone rich.
On the other side of the equation and blowing the horn for OTT, and forecasting nothing but disruption for the current eco-system, was Jeff Binder of Genovation Capital.
Binder highlighted his view that above all, the size of the consumer electronics giants such as Apple and Google mean that they loom large in the ecosystem. They have the capital to severely disrupt the traditional Pay TV players, and we should expect them to do so, especially as consumers are sick of the traditional Pay TV companies. Binder quoted the American Customer Satisfaction Index report from June 2012 which found 5 Pay TV companies were among the most hated companies in the US ‘ naming Comcast, Charter, Dish, Cox and Time warner Cable.
It is this which gives the CE industry a chance to capture market share by appearing to be the greener grass on the other side of the tracks. People don’t like these companies because they don’t give value for money. They charge too much and have not fought against the large content companies to bring content pricing down ‘ instead they have colluded with them.
He also talked about Pay TV not being the best market right now, with its providers showing 6% to 7% profit margins, while broadband offered a 97% gross margin. Comparing gross margins with margins is always a bad idea, and we note that ARPU for broadband is lower and net margin is similar when you compare like with like, mostly due to the shape of capex spending across the two activities.
Binder claimed that US pay TV was in 100 million homes, around 85% of the total, and that it was a $90 billion subscription business paying $30 billion to the content industry and carrying another $30 billion in ad revenues. His point was the linear channels could not distribute their content over the internet as cheaply as cable companies distribute it for them now, his conclusion is that content cannot go direct, but we think he is missing a few tricks here, most importantly the impasse that content and cable have been recently reaching on renewal negotiations.
But Binder punctuated his speech with misinformation, stating things like Comcast having 10 X the amount of content assets as Netflix, when of course its VoD catalog had been a mere 2,000 when Netflix launched with closer to 30,000, and since then Comcast has been engaged in catch up. The big issue here being that the old Comcast, low innovation VoD showed a flat catalog with no recommendation system, an situation which meant that 2,000 items were too many.
Comcast may be about to fix that, but Netflix has managed to capture almost 40 million customers while it did not have it fixed and anyway with a monthly video ARPU of $156 at Comcast versus $8 at Netflix, Binder seems to be missing the point. If the richest companies always won, IBM would have beaten Microsoft, and Microsoft would have beaten Google, who in turn would have beaten Apple ‘ that’s not how innovation works.
He also talked about nPVR being about to go once again to the Supreme Court. Clearly that court has already spoken on the subject of nPVR and will not hear it again. He said that there was no economic benefit to nPVR as it was cleared by the Supreme Court, and that changes to channel unbundling (or ala carte as he called it) plus a wide definition of nPVR, so that a single image of a program could be held instead of one for each house hold, controlled directly by its remote control (which is how the Supreme Court passed it) is no cheaper than CPE DVRs. Binder was clearly wrong here ‘ and given that he is a professional investor in this kind of technology he really needs to subscribe to Faultline right now. Centralized storage or storage in large controlled silos is way cheaper than distribute CPE, and all the helpdesk, maintenance and support that it needs.
But perhaps we agree with his conclusion, that the next ten years will be the most disruptive ten years the TV industry had ever seen.
And it appears that Cisco also agrees in the form of Nick Thexton, VP and Chief Technology Officer, Service Provider Video Technology group.
Thexton’s presentation was entitled the Future of Pay TV and he spent no time talking about its past, unlike most of the people there. He came out of NDS, and wants to be all things to all people, he wants to offer TV quality, convenience and choice to consumers, but at the same time offers the same type of choices for pay TV operators regardless of their technology of choice ‘ cable, DTH, IPTV, DTT and OTT.
He described pay TV’s future with these four words, frameless, unobtrusive, ultra HD and ambient. What he actually showed was a framework for TV that took up not just one entire wall of a home, but a wall and a half, with multiple connected flat TV surfaces, with some showing a large ultra HD video image and a variety of social networking and control or recommendation screens, off to the side, as well as live action close ups on other screens on another wall. Subtly the wallpaper on the wall and the background of the screen showed the same pattern where there was no image, as if the wall had simply erupted into life. The people watching were also viewing a second screen on a tablet.
Here we see an acceptance that large TV screens are best made up of high yield smaller screens, in order to bring pricing down, something we have commented on ourselves. It also shows an understanding and a willingness at the high end, to take on the multiple concurrent screen types, such as a social media dialog for each person in the room, as well as embrace second screens.
While we don’t actually buy that future, and think this will be the preserve of the richest minorities, we can appreciate its implications for broadcasting and pay TV ‘ they need joined up thinking in order to create joined up experiences, and someone like Cisco (NDS) is just the right partner to help/make that emerge.
We happen to believe that these experiences will instead emerge through user and developer actions and that viewing everything on a tablet will become the de facto future for 75% of TV, because it is all software and so much cheaper than this Cisco vision.
Thexton’s view was that pay TV operators should not abandon the living room experience, but here he ignores that this is just what happened in music ‘ a shift to the personalized from the shared experience ‘ sure there are still shared music experiences, and they are better, but there are far more individual and personalized experiences with earphones and ear buds and we should look to history to guide our predictions, not the financial requirements of Cisco customers.
Thexton also declared cloud delivery of video was now a distinct possibility, and he meant video sent without a set top box, with everything generated in the cloud on the scale of millions, and he also meant to both large and small devices. He shared a DOCSIS forecast graph of access network bandwidth, where he forecast 1 Gbps to the home. But given that this is already in the CableLabs DOCSIS 3.1 standard, that was not such a clever feat. His point was the bandwidth is coming to the home, so people will watch in the home. And leapt to the conclusion that they would therefore be in the living room, without providing any extra logic.
We have criticized the NDS vision of the future before, and have been proved largely right. But Thexton pointed out that ‘every major content provider has already seen this demonstration during the past year,’ showing that not only does NDS under Cisco now have the power to offer this version of the future, but that if enough of them believe Cisco, it would be the de facto living room of the future, at least until consumers have the chance to rebel.
But the solid advice of Cisco was you should start from where you are today. If you have a massive installed base of set tops, then use them, if you want a hybrid OTT architecture, you can build one that leverages from what you have already and if you want to start from scratch, the elastic cloud was a viable way to start, without a set top in sight.
It may have been a sales pitch ‘ whichever version of the future you believe in, Cisco can deliver it – and he even had a name for it, Media Services Logical Architecture ‘ also internally called Project Bento, which is a way of mixing and matching the architecture a pay TV operator has now with cloud services to create identical appearance on a TV, as well as on a tablet or other device.
We were put in mind of IBM which used to announced massive new mainframes for delivery in 3 or 4 years’ time, by which time half the market had moved off mainframes.
The truth is that for the past year Cisco has been a licensee of ActiveVideo’s CloudTV solution and has always planned to use it as a front end which will cut through the device chaos created by diverse set-tops and other devices, which can now target pure HTML5 clients. So this strategy shows no surprises there really.