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Forget Netflix: For Pay-TV Operators, Google Fiber Could Be the Real Threat

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August 13, 2012

Forget Netflix: For Pay-TV Operators, Google Fiber Could Be the Real Threat

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By Tara Seals
TMCnet Contributor

There’s much ado about cord-cutting, but recent signs point to traditional pay-TV as a category triumphing over over-the-top (OTT) competition, eventually. Olympics success in TV Everywhere is a big proof point, as is the second-quarter earnings season, which showed no more dismal results than usual, considering that Q2 is TV’s traditionally weak quarter.


However, this month a bigger disruptive force has emerged, one which threatens to shake the legacy cable and satellite model in new and different ways by taking IPTV (News - Alert) to its most next-gen iteration: Google Fiber.

“A wild card is on the horizon…Google Fiber bears watching,” said Jim O'Neill, a research analyst at Parks Associates. “Google is using a combination of social media, gamification and community rewards as it builds ‘fiberhoods’ in Kansas City.”

Indeed it is. And as a facilities-based play, it has the potential to pose more of a threat to MSOs and direct-to-home (DTH) operators than any under-$10 subscription video on demand (VOD) play ever could.

Second-Quarter Subscriber Results Show IPTV Ascendent (News - Alert)

U.S. basic video subscribers to pay-TV services amounted to 100.9 million in the second quarter of 2012 – down 348,000 from 101.2 million in the first quarter, according to IHS Screen Digest. And without a doubt, cable TV has the biggest subscriber problem. Since 2008, cable has lost 4.5 million subscribers in the U.S. And Parks Associates estimates that MSOs are likely to lose another 1.38 million by the end of the year, in what he calls a conservative estimate.

Cable during the second quarter shed about 600,000 video subscribers, making it once again top of the heap for churn. But satellite also fell, down by 62,000 – that's the first contraction since the second quarter of 2011. DirecTV (News - Alert) was the culprit there, losing 52,000 subscribers in its first-ever decline.

Parks Associates estimates that cable numbers are going to continue to erode through 2017, losing at least another three million subscribers. Said O’Neill: “The high-flying days of satellite could be coming to a close as well.” Satellite as a category has added 2.55 million subscribers between 2008 and 2010.

Going forward though, DISH Network and DirecTV could see subscriber losses of 1.3 million or more, he noted.

Are these indications that consumers are cutting the cord, fleeing to cheaper online options? Not really, analysts say. “In the current market, it’s really competition that’s driving the shift in customers,” O’Neill said. “So, rather than cord cutting, the reality appears to simply be ‘cord switching.’”

Switching to IPTV that is. AT&T (News - Alert), Verizon and other IPTV providers actually increased their net subscriber adds in the second quarter, adding 312,000 subscribers and offsetting the declines for cable and satellite. Parks Associates expects AT&T Inc. and Verizon (News - Alert) Communications to  keep the trend going, adding 10 million new subscribers between 2011 and 2017.

Historically speaking, U-verse and FiOS services have always been bright spots, with IPTV adding some 5.5 million new subscribers between 2008 and 2011.

So in general, it would seem that households are comfortable with paying a monthly subscription for a traditional channel package, as long as they feel they’re getting value for the money.

"While OTT presents a challenge to pay-TV, the magnitude of the threat is largely overblown," said IHS Screen Digest Analyst, Erik Brannon. "Pay-TV losses in the second quarter of 2012 were only slightly worse than the second quarter of 2011, largely due to seasonality, and also the economy."

Ultimately, IHS believes that the number of pay-TV video subscribers generally will remain flat to slightly negative through the remainder of 2012, lasting through 2016 and beyond. So, operators are looking to supercharge their value propositions by leveraging TV Everywhere, hybrid TV plays and more to bolster customer retention. That effort and investment could turn current forecasts around.

"Pay-TV players are betting that by adding extra value for their subscribers—with new offerings like TV Everywhere, faster Internet speeds and deep discounting promotions," Brannon said. "Our view that the business will remain sound has not changed. However, it is important to note the widening gulf in the number of TV households vs. pay-TV households."

Those results are slightly worse than the 340,000 decline the sector saw during the same period in 2011.

"Poor economic conditions played a role in declining subscriber additions for pay-TV operators in the second quarter," said Erik Brannon, analyst for U.S. television at IHS. "

TV Everywhere Marks Big Olympics Success

As part of the push against OTT competition and competition from each other, cable, satellite and IPTV have been working very hard to promote TV Everywhere, which allows existing pay-TV subscribers to authenticate into the service using their cable credentials, in order to access the full suite of live and on-demand subscription content on tablets, smartphones, connected TVs, gaming consoles and computers. 

The idea is to leverage all the current-season and sports content for which Netflix can’t afford to contract.

NBC used just such a scheme for the London 2012 Olympics, delivering more than 100 million video streams, including 45 million live video streams, in just the first 10 days of the Olympics. Almost 10 million U.S. pay-TV subscribers authenticated in to watch the coverage live.

Alan Wurtzel, president of research and media development at NBCUniversal, said that NBC's figures for the London Olympics beat those of the Beijing Games across the board, with average viewership coming in at 32.5 million per night and live streaming far and away overshadowing the 14 million streams it delivered for the Beijing Games, when access was open to anyone regardless of pay-TV subscription.

Prior to the Olympics, HBO GO was the darling of the TV Everywhere landscape. Recent research from NPD Group shows that subscribers watch more than three times the minutes per viewing session than Netflix. HBO GO viewers tend to watch full episodes, averaging 50 minutes per session. Netflix viewers on the other hand clock in at just 15 minutes per session.

Google Fiber: The Next Big Threat?

IPTV seems to be the growth agent in TV, while the OTT threat seems to be fading despite hype to the contrary. But there’s a new competitor in the market, one that’s testing the waters in a very real way.

Google is taking pre-registrations for its fiber-fed Gigabit + TV residential package slated to launch in September in Kansas City. The package retails for $120, and offers 185 channels, Gigabit Internet for broadband (that’s a speed that bows the competition away) and a new Nexus 7 tablet, which doubles a remote. It also includes a DVR with 2TB of storage that can record up to eight shows at a time for no extra charge. Google is also waiving the $300 construction fee for new sign-ups.

This week, Google sweetened the pot with three new add-on packages: two movie options and one targeting the Hispanic population.

"Our TV service already offers some great Spanish-language programming," said Larry Yang, senior product manager for Google Fiber, writing in the Google Fiber blog. "But we’ll also have some additional popular Hispanic channels available for an additional $5 per month." Univision tlnovelas, FOROTv, Telehit, Bandamax, Ritomoson Latino, De Película and De Película Clásico are all included in the add-on package.

For the premium movie options, Google has turned to subscription cable nets. Customers can add on 17 Starz channels or 11 Showtime channels for an additional $10 per month each.

"For our TV customers who are also movie fans, there’s more," said Yang. "We’re excited to offer both Starz and Showtime as optional add-on packages. Both packages are full of popular HD movie channels, with enough action, drama and family-oriented programming to keep movie lovers happy for years."

Google is trying to beat the economics of fiber – a nasty and brutish business involving extreme capex, construction projects, public utility permits and more. The cost of taking fiber all the way to the home is usually prohibitive; the FCC notes that an average FTTH deployment costs a provider a bare minimum of $2,500 per subscriber. That means it takes just under two years to break even on the build given a $120 per month ARPU.

So instead of taking a “trench it and they will come” approach, Google is asking subscribers to pre-register for the service, using peer pressure to move things along. If not enough people sign up for it in a given neighborhood, it’s not going to bother. However, if you make the quota for Google to turn up your “fiberhood,” the benefits can be myriad, beyond that delicious-sounding 1Gbps broadband speed on offer.

“If you get enough of your neighbors to pre-register for Google’s fiber products (the progress of which you can track on a website), Google will provide your local school, community or medical center with free Internet access. Wow,” said O’Neill.

Google Fiber is for now an experiment, a pilot project for all intents and purposes. But Google owns dark fiber in a number of markets – it started buying up significant quantities of the stuff back in 2005 – and one would expect an expansion in the residential service if uptake is in line with expectations in Kansas City.

In fact, back in 2010 it said it hoped to light up 100 cities across the United States.

Given the fact that IPTV is appealing more to consumers than any other category of pay-TV, and given Google’s ability to shake the model with a community angle and some very above-and-beyond bundling techniques, it bears watching if you’re a legacy TV operator. Netflix who? Google Fiber could be what the future of competition looks like.


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Edited by Braden Becker


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