The barbarian invasions
By Kate Bulkley
For Digital TV Europe.net March 01, 2011
There’s a war going on. Haven’t you heard? The cable and satellite industry is under attack. At stake are millions of pay TV subscribers and, after some surprising opening exchanges, the fighting is about to get bloody. The opposition is firing with some very heavy artillery and there is the potential that some big names are going fall on this battlefield.
A war, you say, what war? Well, that’s the problem. Hostilities have begun, but much of the cable industry seems to be in denial – and some see it as merely a light skirmish, one that the opposing side will lose when they recognize the power of their opponent.
I beg to differ and I’m in good company. Liberty Global’s chief strategy officer Shane O’Neill told February’s Cable Congress in Lucerne that over-the-top services are “an existential threat” to cable. “We need to innovate much more quickly than we have traditionally done. If we don’t, OTT could be a big, big thorn in our side,” said O’Neill, who believes that the threat is something that needs to be reckoned with right now.
Looking at the robustness of the debt and equity markets for the cable industry at the moment might lead you to disagree: last year’s successful IPO of Kabel Deutschland, the ongoing sale of Kabel BW (with an estimated €3 billion price tag), the possible IPO of Com Hem and a potential sale or flotation of Ziggo all point to cable’s rude financial health. “The market loves cable. I’m convinced that will continue,” Marisa Drew, managing director of investment banking at Credit Suisse told Cable Congress. She says she is able to raise long-term debt at less than 7% interest. “I don’t think the investor community sees OTT as a near-term threat,” said Drew.
That may be true for the next year or so, but markets are naturally short-termist and the pace of the OTT threat is heating up. If you don’t believe me, look at the latest development at Facebook. It might have seemed outlandish to think of Facebook taking on the pay TV industry a few months ago, but then, only weeks after the Cable Congress, Warner Bros did a deal to offer Facebook’s US users a chance to rent and watch The Dark Knight within the Facebook website. For a fee of US$3 (€2.15), Facebook users can watch the film and continue to chat with their friends.
Online video players are fast, inventive and they iterate their services all the time to try to please the consumer; cable looks traditional and snail’s-pace slow by comparison. O’Neill’s description is telling. The definition of “existential threat” is a threat of a “military or terrorist nature”, perhaps involving nuclear weapons.
When bankers say the OTT threat is probably long-term, maybe something to worry about in the next five to six years, I think they are ignoring how quickly a company such as Facebook can outflank an industry that is relying on the robustness of its network, rather than how it presents and markets its services to customers.
The progress of Netflix is a case in point. The US and Canadian service counts about 20 million subscribers and is set to grow to more than 30 million by the end of this year, according to Credit Suisse. It is writing big cheques for content and unlike cable, which is in the set-top box and network business, Netflix partners with hardware companies including Roku and uses the open internet to deliver its service. According to research from Sandvine, a firm that works with US internet service providers, Netflix now accounts for 20% of all downstream broadband internet traffic during peak hours in the US. The Netflix service is easy to use and cheap at a (streaming-only) cost of US$7.99 a month. Netflix has also entered the popular culture in the US with high brand awareness. UK Netflix lookalike Lovefilm was recently purchased by Amazon, another internet ecommerce giant with big ambitions for online video delivery.
Companies such as Netflix, Google and Amazon may not always get it right the first time round (just look at the clunky interface on the first version of Google TV) but they can deliver quick iterations.
O’Neill put it this way: “We think about four-year set-top box replacement cycles, or of having a significant upgrade in broadband every six years. These [OTT] guys are operating at light speed by comparison. We need to figure out how to innovate – not every four years but every six months.”
Cable needs to speed up its pace of innovation and that may mean thinking a bit differently about how it does business and with whom. Clearly the key to the future is providing customers with what they want, on the screen they want it. Adrian von Hammerstein, CEO of Kabel Deutschland, told Cable Congress attendees: “The TV experience in the home is cable’s to lose.” But as John Hahn, managing director of Kabel Deutschland’s part-owner Providence Equity Partners, told the event, cable has to start supplying services that are equivalent to and as attractive as those provided by Netflix: “We have all the weapons to do it: We just need to get on with it.”