Will 2012 be the year of the virtual MSO? Don’t bet on it
For years, we’ve been wondering how long it would be before someone created a virtual MSO, or online cable company, that would offer an over-the-top alternative to traditional video offerings from the likes Comcast, Time Warner Cable, Dish and DirecTV. Well, it might be sooner than you think: In an extensive blog post today, (subscription required) BTIG analyst Richard Greenfield lays out why he thinks one or more virtual MSOs will pop up over the next year.
There’s been no shortage of rumors about over-the-top video bundles emerging over the last few years, and a number of huge companies have been linked to talks with programmers to bring these services to market. Apple, Microsoft and Google have all at various times reportedly been in discussions to create virtual MSO offerings. But now, all the pieces are finally starting to fall into place in a way that might make a streaming bundle of channels an actual reality.
For one thing, broadband is finally strong and pervasive enough to support the type of streaming service that these companies would like to launch. Netflix and others have shown it’s possible to build ubiquitous access to streaming services through a vast and growing number of connected devices. Consumers are showing a willingness and desire to watch over-the-top video on their broadband-connected TVs, game consoles, Blu-ray players, tablets and other devices. And programmers are increasingly comfortable with their programming appearing online and on these devices, as long as they’re getting paid for it.
So what’s stopping a company like Apple or Microsoft from building a virtual MSO? Mostly economics.
In his note, Greenfield notes that most cable companies pay about $30 per subscriber for the packages of content they’ve assembled, with more recent IPTV entrants like AT&T and Verizon paying in the mid-$30s per subscriber. Due to a lack of scale in the number of subscribers at start, a virtual MSO would probably be paying upwards of $40 per subscriber for content — and that’s before all the actual infrastructure costs for transcoding, storing and delivering video over the Internet are taken into account. A virtual MSO would have to operate at “razor-thin” margins to offer a competitively priced package of channels.
Anyone attempting to build a virtual MSO could offer a cheaper bundle if they did so without some key pieces of programming, like ESPN, or if they used hybrid over-the-air and over-the-top set-top boxes to deliver broadcast channels without paying retransmission fees for them.
Still, the price to consumers for a streaming bundle from a virtual MSO will likely come in at $50 or more, which is only a slight discount from the average $75 that consumers now pay for cable — and that’s before you take into account the cost of broadband. Due to bundling, those who chose to go with a streaming bundle might actually end up paying more.
On the broadband front, there’s also a question of bandwidth caps, which could come into play if consumers watch streaming channels with the same frequency they watch traditional TV. Greenfield notes that viewers watching eight hours of streaming video a day at the relatively low bit rate of 2 Mbps would use up 220 GB of bandwidth in a month, which doesn’t give them much wiggle room for other applications or services.
Greenfield lists a large number of possible virtual operators, including all the usual suspects: Amazon, Apple, Google, Microsoft, Netflix, Sony, Yahoo and Walmart, as well as social networking companies Facebook and Twitter. He also notes that traditional pay TV providers like AT&T, Comcast, DirecTV, Dish Network and Verizon might consider over-the-top offerings as a way to differentiate their services.
But looking over that list, it doesn’t seem like anyone stands out as a real possibility. That, combined with the fact that a virtual cable offering wouldn’t come in at a huge discount for most potential customers, leads us to believe the outlook for such services aren’t very good — at least not in the short term.
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Comments
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FeedbackI agree. What’s an MSO though?
Multi-Service Operator
Multiple System Opertator – The traditional name/description for large cable companies operatiing in many different cities ala Comcast, Time Warner, Charter, etc.
Let’s hope SOMEBODY sets up a system that doesn’t ship ESPN (Exceptionally Stupid People’s Network) and make us eggheads pay for it.
I think the thinking is completely wrong here. The cable model is dead. Why would broadcasters keep that same model when they can just sidestep it altogether and stream their content themselves. What is to stop anybody now from becoming their own broadcasting company. Why would anyone want or need to be a part of a “bundle” package any more. Television viewing is just going to be another web page.
“Why would anyone want or need to be a part of a “bundle” package any more?”
The answer to your question comes down to the fact that there is a strong financial advantage for cable networks, the content creators, to be bundled with each other. As a potential cable company subscriber to Comcast or Time Warner, if I want to order broadcast television I can only do so if I agree to pay for all 100 channels spanning multiple networks. I cannot, as you were beginning to reference to, order specific channels à la carte. This is great for the cable networks as a whole (i.e.: CNN, Discovery, ESPN) because all the networks benefit even if I only wanted to watch CNN and Discovery and not ESPN. Why is this? Affiliate fees.
Cable companies pay a per subscriber fee to the networks (I’m making these numbers up: $1.50/sub to ESPN and $1.25/sub to CNN). So if I purchase a cable package, every network in that package earns a per subscriber fee from the cable company. Even if I didn’t really want to watch half of the networks in that package, guess what, those networks still make money off of me.
My belief is that networks are afraid of coming off of this business model because there is the potential to see a decline in revenues. Using CNN as an example, they would lose revenue from all those people who prefer to watch Fox News by going à la carte. No longer would a Fox News viewer need to pay for a package that includes CNN. Therefore, CNN would no longer receive affiliate fees due to Fox News viewers being forced to subscribe to a package that includes other news channels they don’t want. Take this example and apply it to any cable network and you can begin to see what is at stake.
“So what’s stopping a company like Apple or Microsoft from building a virtual MSO? Mostly economics.”
But when a company like Sony decides to release an “over the top” basic cable channel, economics isn’t an issue. The new version of the Crackle app is just that– An over the top basic cable channel with awesome (Sony) content. Isn’t Sony perfectly positioned to create a virtual MSO?