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Too Many Paths for Content Service Providers or Not Enough?
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IPTV Feature Article

September 27, 2010

Too Many Paths for Content Service Providers or Not Enough?

By Jon Arnold, Principal, J Arnold & Associates

Pursuing a content acquisition strategy is a double-edged sword, and I’m sure service providers realize the limitations in terms of being a viable long-term solution. On the plus side, acquiring a content provider ensures a regular flow of content that subscribers are presumably willing to pay for. It alleviates the concern for keeping that pipeline full, so to speak, and at minimum you can keep pace with the competition.

In most cases, this also means you can maintain exclusive control and keep it away from your competitors. The concern, of course, is that this leads to walled gardens, which favors the operator but goes against the trend of openness that drives the Internet.

In the world of multimedia communications, keeping content exclusive is more difficult than scenarios where only one mode is involved. One example of the latter is satellite radio. When Sirius and XM Radio were going head-to-head, there was only type of service to be fighting over. In this scenario, exclusive content is really the strongest differentiator. At first, it seemed like a good idea, and each provider built subscriber bases that basically reflected the mix of programming they had on offer. It didn’t take long, however, for each to run up against the limits of this strategy. Consumer tastes can change quickly, and when big name radio stars fall out of favor, the subscribers who came to you so easily will leave the same way, especially if the competitor has the hot personality.

When most radio programming is free, the paid content has to be pretty specialized, and that makes satellite radio more of a narrowcasting service than traditional broadcasting. The economics here are very different, and despite offering hundreds of specialty channels, it’s still a form of narrowcasting. The market for paid radio services is limited, and there’s hardly any upselling potential beyond the relatively low monthly subscription fee. Howard Stern did very well here, but the market simply couldn’t support these two walled gardens, and now there’s just one satellite radio service that reaches a broader audience. This is just one example of the challenges of using content as a differentiator, especially in a walled garden environment.

Things are actually more complicated with telcos and cablecos. Every situation is different, but just consider a generic example – a cable operator acquires a content provider. The cable business has a regional footprint, but the content will typically have appeal nation-wide. There’s a great opportunity to maximize content revenues in your served market, but can you justify keeping it exclusive when operators in other regions don’t compete for your cable subscribers? Most of those operators will be cablecos, but some will be telcos using IPTV. That shouldn’t be a problem if that was the full picture. However, if you also have plans to offer mobile services, you’re more likely to compete with them if they have mobile offerings. Not to mention satellite TV, which is borderless.

So, in some cases, content can be shared out of region without competitive impact, but those scenarios are becoming increasingly rare. As operators move to converged services, and mobile broadband is layered on top of that, the odds of making a walled garden work get pretty long. Furthermore, the onus of monetizing content falls to your served market, which will always be smaller than the total available market.

On top of this, other operators who own content assets will do the same thing to you. This leads to a fragmentation of the market this is completely opposite to the elements that have made broadcasting such a successful model up until now. No operator can hold a monopoly on all the content their subscribers are willing to pay for, so something has to give along the way. In the US, this is the basic situation shaping up with Comcast (News - Alert) and NBCU, and there are all kinds of concerns here around Net Neutrality and the value of online content. Canada has long had a more complex mix of assets with Rogers, although most of the content is traditional media rather than being Web-based. The same applies to Videotron (News - Alert) in Quebec and Shaw in western Canada.

I realize these aren’t quite apples-to-apples, and I point back to my earlier comment about each situation being different. The more you look into the mixing of content with service providers the most complex things become. In terms of the latter, we know that it’s just a matter of time until all the major operators can provide voice, data and video, and often over both wireless and wireline. When that happens, content becomes paramount for adding value.

Now consider the definition of content. Since all forms of content are becoming digitized, the range of modes is quite broad. For traditional media there are newspapers, magazines, television and radio. For all of these there are local forms that only have appeal on a regional basis and are ideal for serving local subscribers. They also have broader-reaching versions such as network TV or national magazines that fit well with nation-wide subscribers, namely for mobile broadband services.

Stepping back further, we have movies, the most lucrative form of content. That’s much bigger game for service providers, but as the stakes get higher for winning – and keeping – subscribers, the importance of securing high demand content becomes pivotal. This is a whole other topic, as we’re now talking about the fourth screen – movie theaters – and not even HD TV can truly compete with that.

There’s one more form of content to consider, and it may well become the most important mode for service providers to master. Online is truly the next great frontier for content, and I’ll explore that further in a separate article. We all know that YouTube (News - Alert) created a monster that nobody has quite figured out yet, but once the right business models emerge, this will become very fertile ground for all service providers to explore. In terms of video content, television, movies and games are too costly and complex for service providers to truly excel at, but online content is totally open, and I believe ripe for service providers to exploit for competitive advantage. This also applies to TMC’s (News - Alert) audience, by the way, and I can see potential for business-focused content that is distinct from consumer-based content.

To sum up, my message here is that content comes in many forms, and I don’t think service providers can sustain their growth by owning traditional content assets. Eventually, once all the major content assets are aligned with the major service providers, this will become a zero sum game, and content sharing deals will be reached, taking us back to the starting line. That said, there is a lot of content out there, and to get past that stalemate, I think service providers will need to find ways to leverage online content. Just like radio and TV had their Golden Ages, I think that time is coming soon to the Web. We already have Cisco (News - Alert) TV, and I don’t think we’re far off from companies in just about every industry having an online TV offering of their own. And you thought there was nothing on TV!

Jon Arnold, Principal at J Arnold & Associates, writes the Service Provider Views column for TMCnet. To read more of Jon’s articles, please visit his columnist page.

Edited by Jaclyn Allard

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