Monday, September 27, 2010

Who's afraid of the big, fat pipe?

Cable, satellite and IPTV services all do the same thing: They distribute video content to set-top boxes in consumers' homes, where the content is watched on televisions. If you suggested to them on the record that they get rid of the content, get rid of the set-top boxes and simply allow consumers to get content from wherever they want, their heads would explode like they did in David Cronenberg's "Scanners".

Last week, however, Ivan Seidenberg, the chairman of Verizon, suggested that the future of video is over-the-top content at a Goldman Sachs conference in New York last week, and that a transition from Verizon selling the content to consumers getting content from their own sources is inevitable. Service providers would offer very fast Internet service (100Mbps or more--some Asian service providers are offering 1Gbps), thanks in part to not having to reserve so much bandwidth for video, and would act as common carriers--their pipes would carry just about anything. The service providers would make money on the connectivity, not the content. Set-top boxes and a whole lot of infrastructure and truck rolls would go away.

One enormous thing that goes away in the common carrier model is the need for service providers to negotiate for and license content. Most cable operators would tell you privately that they'd rather have a colonoscopy without sedatives than negotiate with Disney for retransmission rights. Disney's ESPN is the "900-pound gorilla" of cable channels, and Disney uses it like a hammer to get concessions from service providers, from paying to retransmit their local ABC owned-and-operated stations to carrying all of Disney's sports and children's networks. And Disney is only one player: There's CBS, NBC Universal, News Corporation/Fox, Time Warner and many others, all demanding their own share of operator revenues and priority positions in bundles.

There are only two service providers in the U.S. with their own large stables of content: Comcast, which owns E! Entertainment, Versus, The Golf Channel and G4, along with regional cable networks across the country, and Cablevision, whose Rainbow Media subsidiary owns AMC, IFC, The Sundance Channel ad WeTV. (Since 2008, Time Warner Cable has been independent of Time Warner, which owns HBO, TNT, CNN, HLN, TCM and many other cable networks, as well as Warner Brothers.) Comcast, of course, is trying to get government approval to acquire NBC Universal, which will give it NBC, Telemundo, USA Network, MSNBC, CNBC, Bravo, Lifetime, SyFy, The Weather Channel, Mun2 and other wholly- and partially-owned cable networks, as well as Universal Studios.

Comcast and Cablevision can make money by licensing their content to other service providers. They sell themselves the content they need for their own cable systems through what's called "transfer pricing"--essentially, the money goes from one pocket to another. Thus, they have lower content acquisition costs and more control over their future outlook than other service providers.

But what if some of the larger service providers decide to go the common carrier route, or pursue a hybrid strategy of offering only local broadcast stations and a small number of national cable networks, with subscribers free to get anything else they want from anyone they want? To date, no one in the U.S. has had that option (legally), but it could happen. If it did, there would be a lot of cable and IPTV service provider executives who would sleep much better at night.
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