Poof! Your set-top box has turned into a brick

Yesterday, Sezmi, a Silicon Valley-based video service provider, announced that it is discontinuing its services in the U.S. in order to focus on selling its platform to international service providers. Sezmi used a combination of an Internet connection and digital broadcast signals to provide a subscription package of broadcast, cable and Internet-only channels. While the service was eventually offered in 36 U.S. markets, the cable channels were never made available outside Los Angeles (even though customers in other markets were told they would get them), and the cable channels in Los Angeles were discontinued last December. Subscribers purchased a $150 package including a set-top box with a 1TB hard drive, and a digital antenna for picking up over-the-air broadcasts; the monthly price was $5 for basic service, and another $20 for the cable channels.

Sezmi's unique selling proposition was that it was a low-cost replacement for cable service, but once the cable channels went away, Sezmi lost its primary selling point. In addition, if subscribers lived too far away from local television transmitters to get a good digital picture, they couldn't use Sezmi, either. Sophisticated industry observers could see that Sezmi was doomed, but consumers didn't necessarily have that insight.

Consumers who bought into Sezmi are stuck with bricks that will be useless for anything except watching YouTube by November 1st. Sezmi isn't offering any refunds for hardware, no matter when it was purchased. Subscription video services fail all the time--for example, Cablevision's VOOM was the first HD satellite TV service, and lasted for approximately two years. The VOOM set-top boxes could also be used as ATSC digital receivers, so a few of them are probably still in use, but most of them ended up in the scrap pile.

The lesson is that consumers should beware when being asked to purchase a set-top box, especially an expensive one. If the company offering the service goes out of business, changes strategic direction or is acquired, its set-top box is likely to become a paperweight. Apple and Roku have the right idea--none of their set-top boxes are priced over $100. It's clear that no one feels any particular responsibility to their customers if they discontinue their services, so caveat emptor.

Sezmi drops basic cable channels

Sezmi, the hybrid broadcast/over-the-top Internet service, announced last week that it will discontinue its $19.99/month bundle of 23 basic cable channels. The cable channel service was only launched in a portion of the Los Angeles market, and Sezmi claims that customers didn't want it, although it was the only thing differentiating the Sezmi service from a good over-the-air antenna.

Now, Sezmi is falling back to a package combining broadcast TV, video-on-demand and Web content for $4.99/month. However, in order to use the Sezmi service, subscribers need a high-speed Internet connection and Sezmi's $150 bundle of a broadcast antenna and 1 Terabyte DVR. By comparison, consumers could subscribe to the ivi TV service for $4.99, which only requires a high-speed Internet connection and runs on most personal computers.

I don't think that lack of customer interest was the only, or even the primary, reason why Sezmi dropped its cable package. However, Sezmi now has an additional problem--many customers in its 35 other markets bought the Sezmi system with the expectation that they would eventually get access to the cable channel package. Now that the cable channel option is dead, I expect many users to discontinue the service or demand refunds.

Sezmi has changed its focus to providing IPTV services for telecom providers in countries with minimal infrastructure, such as the company's recent deal with Malaysian service provider YTL Communications, using YTL's LTE wireless network. As a result, the eventual discontinuation of its U.S. service may not be a big problem. However, Sezmi's problems once again illustrate the difficulties for new players trying to break into the U.S. multichannel video business.

TV Everywhere = restraint of trade?

I just finished reading BusinessWeek's article from a couple of weeks ago on TV Everywhere. It gives the history of TV Everywhere as essentially a deal between the two largest US cable operators, Comcast and Time Warner Cable, to control distribution of video content over the Internet by limiting its availability to existing cable subscribers only. It also documents the difficulties that alternate distributors such as Netflix, Boxee and Sezmi have had in striking deals for cable and movie studio content, and points out that Sezmi has actually had to pay more than the cable operators for some content, even though it still has miniscule market share. It wraps it up with a few quotes from content providers saying that they'd be crazy to do deals with alternate distributors for fear of angering their largest customers, the cable operators.

Anyone who knows anything about U.S. antitrust law would see a host of red flags in the first paragraph of this post. The two largest cable operators colluded to prevent competition from Internet content distributors. Brian Roberts, the head of Comcast, had to be dissuaded from trying to force the individual content providers to shut down their own distribution sites. Alternate distribution services are at a competitive disadvantage because they can't get most of the content available to cable operators and have to pay more than cable operators for the content that they do get. The content providers confirm that they're holding back their content from alternative distribution channels to avoid retaliation by the major cable operators. So we've got collusion, restraint of trade and price fixing.

Time Warner and Comcast don't get out of the collusion charge because they don't directly compete with each other, since they were working together to limit mutual competitors. The cable networks and movie studios are in it up to their ears, and Comcast is trying to buy control of NBC Universal, which will give them even more control over cable programming and, for the first time, motion pictures and over-the-air services as well.

If I were with the U.S. Department of Justice, Federal Trade Commission or one of the companies named in the article like Netflix, Boxee and Sezmi, I'd be salivating over the opportunities for criminal and civil antitrust action. TV Everywhere, initially envisioned as a technique for the cable companies to take over control of video distribution on the Internet, may end up being the "step too far" that ends the cable companies' monopoly over video content distribution to homes.