Interviews with Digital Media Thought Leaders
Cable Operators Will Abandon TV
Podcast Audio | Posted by Phil Leigh on December 5, 2009
Phil Leigh
If you would like to learn what will motivate the CATV and Telco industries to abandon traditional video services in favor of a video-centric Internet, this audio podcast is for you.
Since the release of our February ’09 Third Generation Television research report, we repeatedly emphasized that the future of television is Internet Video, period. Ultimately, the advantages to consumers, sponsors, content providers, and even network operators are simply too compelling.
Confessedly, many established media and CATV companies presently resist the trend. However, despite the recent Comcast-NBC combination, eventually the cable and Telco network operators will perceive that traditional video services are their least profitable businesses. Like the apostle Paul on the road the Damascus, the scales will fall from their eyes as they realize that most of their profit comes from Internet Connectivity and Telephone services. The epiphany will motivate them to divest the traditional video businesses by either selling them or spinning-them-off to shareholders. Bob Cringely concludes that this will happen around 2015 as the industry leaders prepare to pull the ripcords on their golden parachutes.
The single biggest cost to CATV and Telco companies providing conventional TV services is the monthly fee paid to content providers such as ESPN, A&E, Comedy Channel, and most every other cable network. Moreover, in recent years even the broadcast networks and local TV affiliates are “demanding” monthly payments. Finally, content providers are forever seeking increases thereby forcing the operators to raise the consumers’ monthly subscription rates. Unfortunately, subscribers tend to “blame” the higher monthly bills on operators instead of cable networks like ESPN.
In contrast, ISP and telephone voice services are highly profitable because operators are only selling access and not content. The chart below from the Time-Warner Cable annual report demonstrates the company’s ISP profit margins exceed 95%. Their direct ISP service costs dropped 12% last year even as revenues increased 11%. A similar analysis implies a gross profit margin of about 85% or more on Time-Warner telephone service.
Time-Warner Cable 2008 Broadband Stats
Furthermore, owing to Moore’s Law, bandwidth costs for telephone and ISP services should continue to drop. Right now the typical cable operator allocates the bandwidth of a single analog channel to Internet service. That’s only about one percent of the typical CATV analog system. Put another way, operators could instantly double available Internet bandwidth merely by dropping one unpopular TV channel.
Finally, the CATV industry’s central laboratory developed a modem technology called DOCSIS 3.0 which is now available. It can transform four analog channels into a single high speed pathway thereby enabling an approximate 100 megabit-per-second ISP service. Based upon the Speakeasy bandwidth meter the writer is presently only getting about 17.4 megabits-per-second in download speed from Brighthouse Networks. Thus, DOCSIS 3.0 could provide an improvement of nearly 600%. Readers may test their own ISP bandwidth speeds by clicking here.
In summary, within five years or so, CATV and Telco operators are likely to conclude that it is in their own best interests to divest traditional video services. Instead they will make more money by selling lightning-fast Internet access and telephony services where they don’t have to pay for content.
Categories: Podcast Audio
Tags: CATV, digital-media, FiOS, Future of Internet Video, Future-of-Television, Phil-Leigh
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As is the normal way on the internet, people love to read headlines. Of course they rarely read the substance of the article behind the headline. They take the headline and run with it as gospel. This is particularly true of internet video and the presumption by many that the internet will be so vast and powerful that its a foregone conclusion that video on the internet will replace traditional television delivery.
Aint gonna happen. I can go into depth about it, but my buddy Dan Rayburn does a far better job of it. He asks the simple question of “how is it the Youtube , with all of google’s resources,. cant solve their buffering problem ? ” Then he answers much of it.
Now maybe Youtube will fix their buffering problem someday, along with the other issues that Dan addresses, but it wont be easy and it wont be quick.
You can find Dan’s work here. Make sure to also read the comments. He does a good job there as well
Let me add a couple other thoughts. There are many that think that video over the internet will “set them free” from having to deal with a small number of big companies (think cable, telco). . If that is what you think, you better think again. There are maybe 3 companies that can stream to 1mm or more simultaneous users. Google, Limelight and Akamai. And that 1mm simultaneous users isnt just for your content. That is for EVERYONE’s content and they cant get much beyond 2mm without big problems. More importantly, if you want to stream your content to millions of users at once, its going to cost you an incredible amount of money.
Which leads me to a lesson for all you netizens who are jazzed up about over the top video. If you really believe the demand is there and your content will command 1mm simultaneous users , its probably cheaper to pay Directv, Dish Network and Comcast to create a channel for you and let your viewers watch it on tv.
Let that sink in. Its going to be cheaper to have the big traditional cable distributors offer your content to viewers than it will be to reach a large audience on the net. Thats for a one time offering. If you plan on doing it more than once or on a regularly scheduled basic, there is no question its cheaper to do it this way. And the picture quality will be dramatically better.
In fact, that is probably a great business opportunity for satellite, telco and cable companies. Open up times to bid to offer content over their networks. You want channel 1020 on Directv, its X dollars per hour minimum or the best price bid. Here is how you provide your content to us. You can buy marketing from us as well. Directv, Dish, Comcast could make a boatload of extra money offering this service.
And i can give you one more option. It may be cheaper to go to a movie theater chain and pay them to broadcast the content you want people to see via digital to their theaters. As long as its a slow night and they can sell popcorn, I can assure you it will cost you less than a content distribution network would charge to deliver to thousands of viewers.
Maybe someday over the top video will be a realistic alternative to traditional distribution of content, but its not now and its not this year or next or the next and probably not the year after that
by Mark Cuban
“ISP profit margins exceed 95%. Their direct ISP service costs dropped 12% last year even as revenues increased 11%. A similar analysis implies a gross profit margin of about 85% or more on Time-Warner telephone service.”
Video may be their least profitable business in % margins terms but it is still by far the largest contributor to $ margins. If cable operators are going to turn over content delivery to 3rd parties like Apple then they are going to have to make up for the lost margin $ by upping their broadband rates and introducing usage based pricing. Given the Net Neutrality debate and Obama’s broadband plans its hard to see consumers and politicians buying the argument that the cable operators need to make up the lost margin $ on video through very high % margin hikes in broadband charges.
And is telephony really an exciting source of margin $ in the future? In large part thanks to cable operators (as well as wireless substitution) landline voice rates have been only going in one direction.
Does Moore’s law really apply to broadband? It doesn’t address the cost of replacing physical infrastructure. The cost to dig a trench to lay fiber does not drop in half every 18months.
Right now Time Warner Cable is getting a little over one-third of its revenues from ISP and Telephony service. If profit margins for these sectors average twice those of the CATV service, then the profit contribution is 50%. If they average four times the CATV margin, the profit contribution is 67%. The available data seems to suggest that the profit margin on ISP and Telephony service is at least four times that of CATV service.
Moreover, the ISP and Telephony margins can go higher as TW offers even higher speed ISP service at higher rates. Just last week I opted-into a similar deal from my provider, BrightHouse. In contrast, CATV profit margins are not likely to improve.
You should have a look at Comcast’s results since they break out video, HSI and voice revenues and direct expenses. For Comcast in 2009, video produced $12.3B in gross margin (ie. revenue less direct costs like content) and had a % gross margin of 64%. HSI produced $7.2B with a gross margin of 93%. So yes, HSI has better margins but for HSI to make up the $12.3B gross margin dollars if they “abandoned TV”, Comcast would need to increase HSI revenues by about $13.2B (12.3/.93).
Since HSI produced $7.7B in revenue in 09, that would mean they would need to raise their rates by 170%.
I know you don’t mean this will all happen tomorrow but if it does it will take along time and be a difficult transition. Consumers would have to adopt a pay per use basis for IP delivered content (when in every other place they seem to want all-you-can-eat) and accept much higher broadband bills - again with usage based pricing.
Of course there is also Mark Cuban’s angle which - if it is THE Mark Cuban - is probably a well informed and quite different obstacle.
The $12.3 billion that your attribute to CATV gross margin as CATV revenues minus direct costs *like* content is a mis-statement. The $12.3 billion is CATV revenues minus *only* content cost. That means the gross margin you calculate *only* includes fees paid to the programming sources. Clearly, CATV operations have lots of other expenses such as Interest, Depreciation, Marketing, Customer Service, Administration, and a variety of other overhead expenses.
If the analysis is to include *only* direct costs then it can be viewed as follows:
Comcast reported pretax income totaling $5.1 billion in 2009. Internet and Telephony Services provided a gross contribution of $3.6 billion after deduction of the direct costs associated with those businesses. Thus, the gross contribution of ISP and Telephony Services account for over 70% of corporate pretax profits.
However, the percentage might actually be higher because the Comcast definition limits CATV direct costs to programming fees. On that assumption there should be *no* direct costs attributed to ISP and Telephony service because they don’t provide *any* programming services. On that basis they are contributing $4.7 billion of the $5.1 billion in total corporate profits. That translates to over 90% of corporate profits.
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