MVPD Transformation in 2017

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Telco and Cable Embrace Multi-Prong Strategies to Succeed

“In a recent survey (September 2016), J.D. Power found that some 63% of customers surveyed have used an alternative video service in the previous year, up from 58% in 2015. Additionally, 73% of customers who plan to cut the cord on TV service in the next year indicate they will use an alternative video service.”

The Multichannel Video Programming Distributors (MVPDs), including telcos and cable companies, are increasingly having to navigate a highly competitive market, with drastically changing customer behavior and
expectations, driven by an abundance of choices for consuming video.

Increasingly, customers are “cutting the cord” or “shaving the cord” as they see less and less value in the large content bundle that they typically get from their video service provider. They are turning to alternative sources for their content viewing, and increasingly expect to consume content on their terms, anytime, anywhere, and on their preferred device. Furthermore, consumers have a plethora of options including OTT video, Netflix, Hulu, social media, and skinny bundles, to name but a few.

These trends are causing the MVPDs to lose video subscribers. Cable companies had a relatively good quarter in 2Q16, where they lost fewer video subscribers than before, but Verizon and Dish had a difficult quarter. To be sure, their high-speed data business is growing at a fast clip, but is not making up for the shrinkage of the video business. (See Figure 1.)

Figure 1. Video Subscribers (Source: Broadband TV News 8/17/2016)

In a recent survey (September 2016), J.D. Power (www.jdpower.com) found that some 63% of customers surveyed have used an alternative video service in the previous year, up from 58% in 2015. Additionally, 73% of customers who plan to cut the cord on TV service in the next year indicate they will use an alternative video service. Furthermore, a recent report by Nielsen (http://www.nielsen.com/) found that on average, adult viewers watched 9.6% of television channels that are part of their cable lineup, down from 10.6% in May 2014.

At the same time MVPDs are losing subscribers, the demands on their data networks are increasing exponentially, because video consumption is growing and increasingly shifting to IP. This growth is driving them to spend to add network capacity while at the same time their revenue is under pressure.

Furthermore, MVPDs are facing regulatory pressure and uncertainty, driven by FCC initiatives such as Network Neutrality and the recent drive by the FCC to cause them to open access to the set-top box (STB), long a source of revenue for them through monthly rental fees.

Strategic Decisions
This challenging environment is causing MVPDs to adopt a number of strategies to remain competitive and retain their subscribers.

The past year has seen a significant amount of consolidation. AT&T completed the acquisition of DirecTV in a deal worth $49B; Charter closed its acquisition of Time Warner Cable and Brighthouse in a deal worth $71B, and Altice finalized its acquisition of Cablevision, following the acquisition of SuddenLink. The added scale provides better negotiating power with content providers and with vendors. For AT&T, the acquisition of DirecTV solidifies its bet on video, while the U-verse® business, which was largely based on VDSL in the Last Mile, is being retired.

AT&T also increased its investment in Gigapower (recently renamed AT&T Fiber), its initiative to deploy fiber in the Last Mile, which enables gigabit speeds to the home. AT&T plans to bring gigabit service to over 67 metro markets. Furthermore, in March 2016, AT&T announced an OTT service called DirecTV Now, slated to be introduced later this year. AT&T’s OTT service will include over 100 channels, at a “very, very aggressive price point”, according to the company’s CEO, and will be zero rated for the firm’s wireless subscribers, in an effort to differentiate it from the competition.

In launching its OTT service, AT&T is joining a large group of MVPDs, who have introduced or announced OTT services, in an effort to capture the group of customers who prefer to stream their video “over the top”. This group includes Dish’s SlingTV, CenturyLink’s Prism Stream, and Cox’ Glosi (targeted at Hispanics), to name a few.

Verizon has taken a different approach. An early pioneer of fiber-to-the-home, under the FiOS brand, Verizon has sold a large number of its FiOS markets to Frontier, retaining a focus on dense metropolitan areas. In the words of Lowell McAdam, its CEO, Verizon wants to become a “global mobile media company”. Its acquisition of AOL in 2015, and its proposed acquisition of Yahoo, would make Verizon a key player in the online content industry; they would expand Verizon’s online content and enable it to better monetize its video, by strengthening its ad targeting capabilities.

While Verizon has reduced its FiOS assets, it has emphasized its mobile video capabilities, primarily by introducing Go90, a mobile-only, ad-supported video service mainly targeted at the younger generation. Verizon is rumored to be interested in Vimeo, a video sharing platform with strong appeal among the Millennials, in an effort to increase the appeal of Go90. Furthermore, Verizon has recently made a solid bet on IoT with their purchase of Fleematics and Sensity.

For their part, cable companies (MSOs) are pursuing a number of strategies in an effort to stay in competition and to meet market demands.

Comcast, via its NBC Universal acquisition back in 2011, has placed a solid bet on content. Comcast also introduced the X1, a video on demand (VOD) platform that offers search and personalized recommendations through Comcast’s Cloud computing infrastructure. Cox and Canada’s Shaw have elected to deploy the X1 platform in their footprints.

It’s STILL About Infrastructure
In addition, Comcast and its MSO peers have embarked on a multipronged strategy to evolve their infrastructure. They have started to roll out DOCSIS 3.1, which promises download speeds in excess of 1 Gb/s, enabling them to compete with the telcos and with Google Fiber. Comcast expects DOCSIS 3.1 to be rolled out to their entire footprint within 2 years. Other MSOs are following close behind.

The exponential growth of IP video is forcing MSOs to rethink their access architecture. Traditionally, they have delivered video over eQAMs and data over the CMTS (Cable Model Termination System). Now, Cablelabs, their standards development body, has specified the Converged Cable Access Platform (CCAP), which essentially combines video, voice and data over the same platform. The CCAP is now the upgrade path of choice for MSOs, replacing the CMTS. While in the majority of the cases the CCAP is only carrying data to date, operators are beginning to use the CCAP to carry video and voice as well.

For now, the CCAP being deployed is an integrated element. However, MSOs are evaluating strategies to distribute the functionality of the CCAP, by moving some of its functionality from the headend to a remote location, such as the Fiber Node, which is deeper in the network and closer to the customer. Among the many benefits of such an approach are increased performance and capacity and reduced power consumption.

There are 2 main approaches to the distributed CCAP:  1) remove PHY, where the physical layer of DOCSIS moves to the node, enabling deeper fiber deployments, and 2) the Remote MAC-PHY, where the MAC capability also moves to the node. At the recent SCTE Tech Expo in Philadelphia, many vendors announced Remote-PHY based products, with the notable exception of Gainspeed, which is now part of Nokia, and who has staked its claim on Remote-MAC-PHY.

Virtualization Is Here
DAA is the cable industry’s pathway towards network virtualization, a trend that all service providers are increasingly adopting. As the CTO of Liberty Media recently put it during a panel at the SCTE Tech Expo, the industry can no longer continue to spend at double digits to keep up with demand, while revenue is growing in the 6% range. Furthermore, virtualization enables service providers to speed the development and introduction of new services, a must in this very dynamic market.

AT&T, Verizon, and their peers have announced their strategies for SDN and NFV. AT&T is viewed as the most advanced, with Verizon close behind. Capabilities that service providers are looking to virtualize in the near term include managed software-defined WAN, network security, and cloud interconnect.

Service providers are also beginning to use data analytics to better manage their networks, improve customer experience, and gain better insight into customer behavior. This data, if harnessed properly, will give them a competitive advantage in designing products and services that better suit their customers’ needs and wants, superior monetization capability via ad targeting, and more leverage with content providers.

So whether it’s telco or cable, the players in the MVPD market are aggressively making changes to transform their business models to succeed in an industry where change is the norm.

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About Author

Liliane Offredo-Zreik is ACG Research Video Technology Analyst. She is responsible for video and media technology syndicated and consulting division. She has more than 25 years of industry experience across many segments of the industry in roles including marketing, technology strategy, product development, and financial analysis. For more information, please email loffredo@acgcc.com or visit www.acgcc.com.

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