Wednesday, September 21, 2011

Netflix: can growth be restored?

Will Netflix spiral downward, or will it find the way back up? That is the question, after its latest not very well received step. Let's first look at what is going on over the recent past:

  • Decoupling the pricing for the Watch Instantly (streaming) and the DVD-by-mail service to 8 $/mo each. This effectively amounted to a price hike (from 10 to 16 $/mo) for the people taking both, roughly half of all subscribers.
  • International expansion. First Canada, next latin America and Europe set for 2012.
  • Ongoing distribution deals, such as Netgear (for the NeoTV 200 streamer).
  • Content deals (such as Discovery and Lionsgate for the UK), but Starz was lost.
  • Netflix lowers its 11Q3 guidance by 1m subs
  • The DVD-by-mail business will be split off into Qwikster, which adds games. No spin-off/IPO or sale yet.
The market responded in a very negative way, claiming that customers will be frustrated because they like to subscribe to a bundle of physical and digital delivery. DVDs aren't going away that quickly after all. The share price is down around 60 percent from its July high at $305.

Here's one of the rare positive comments It's from one Mark Suster and his views can be summed up as this:
  • Netflix rightfully breaks through the 'innovator's dilemma' "to attack his core assets by building new ones". They had already done that.
  • "Focus". Same.
  • "DVDs won’t die quickly". Not sure why this is put forward as a reason to split the business.
  • "Charge the right prices for the right services". Again, doesn't look like a reason to split because Netflix had already put separate pricing mechanisms in place.
  • "Transparency for investors". As long as there is no spin-off or sale of Qwikster, this doens't make much sense.
  • "Positioning for the Future". Same.
All in all, it looks like textbook arguments ('innovator's dilemma', 'focus') that analysts like to put forward, but as long as there is no sale of Qwikster, adjusting the pricing mechanisms appears to have been enough.

Now look at the other side, for instance Will Richmond's views here, that is hard to argue with:
  • "... first shot itself by announcing an onerous price increase without any real attempt to explain itself or soften the blow"
  • "Rather than separating streaming and DVD, Netflix should be doing the exact opposite - integrating them as tightly as possible."
  • "My sense is that Netflix has too quickly fallen in love with streaming, and forgotten how critical DVDs still are to their current and future success."
  • "Without DVDs Netflix is going to going up against far bigger competitors without much of an advantage. As to Qwikster's prospects, marketing a DVD only service in the digital media era? Good luck with that."
  • Defending Netflix' split plan using analyst speak ('focus') makes little sense. The arguments for keeping the businesses together are stronger.
  • Qwikster is not actually being sold off. Possibly not much will change after all. And there is still the possibility to have the customers experience little or no difference. The combined company can even decide to (re) introduce a discount for customers taking both services. The split-up can be limited to the back-end operations.
  • The Q3 results will give limited insight into further subscriber erosion, because the price hike kicked in late in the quarter. Watch out for between the lines statements and further unexpected moves.
As always: the proof of the pudding is in the eating, and it looks like it will take a while before we can see if growth will be restored. In the meantime, competition increases (Amazon, Blockbuster, Google, Apple, Redbox, Hulu, even Facebook), connected TV expands and content producers are finding new ways to the consumer. But you never know if Reed Hastings has a brilliant new move up his sleeve.

Wednesday, September 14, 2011

How to sell the highest speed tier

RCN says it sees limited demand for higher speed tiers, such as 60 Mb/s. If you check pricing, you will see that 5 Mb/s comes at 30 $/mo, 15 Mb/s at 40 $/mo, 25 Mb/s at 50 $/mo and 60 Mb/s at 80 $/mo.

Basically, the situation is the same at most ISPs. More speed, higher prices. They are addicted to this business model. Profitability of the higher tiers is ridiculous, because costs are hardly different from the lowest tier service. Customers don't know this and some (few) are willing to pay more for faster services.

But is this the only possible model?

If all prices were equal, it would save the ISP a lot of money spent on marketing. There would only be the need to sell one speed tier: the fastest the network can handle. This would be priced at a level close to the level of the lowest tier available now. People would not only be extremely happy about their fast connections, but also save some money that they can then spend on value-added services, better hardware (to take out any bottlenecks in their connection) and content (no incentive left to do illegal downloads).

Tuesday, September 13, 2011

Motorola adds OTT exposure through Ooyala

Motorola Mobility Ventures invests in Ooyala ('more than 1,000 customers delivering over one billion streams to over 100 million consumers per month'). Customers include Telegraph Media Group, Martha Stewart Living Omnimedia, Dell, General Mills, ESPN and TechCrunch. Ooyala Social is to be used by Miramax, Warner Brothers, and Netflix.

So it's not Google, but looking at it as a Google takeover, the question is: Is Google going from retail (YouTube) into wholesale online video services? Or is it vertically integrating? Or, in different telecoms terms, does Google need to apply some form of voluntary separation between its consumer and business activities in order to prevent issues between its own retail business and its wholesale customers? (As is the case with Motorola/Android).

Also: with Ooyala, Motorola finds a way to access the OTT market, hedging its broadcast postion through the STB business.

Here are Google's video-related acquisitions so far (total cost: about $2bn, excluding Motorola Mobility's $9.5bn excl. cash):

  • YouTube: video sharing
  • Omnisio: online video
  • On2 Technologies: video compression
  • Episodic: video hosting platform
  • Bazaar Labs: social TV
  • Quicksee: online video
  • Widevine: video optimisation, DRM
  • Next New Networks: web video production
  • fflick: movie recommendations
  • Green Parrot Pictures: digital video
  • SageTV: home theater & DVR software
  • Motorola Mobility: STBs

Monday, September 05, 2011

Connected TV boosted by IFA

Short overview of recent (IFA) developments around 'Next-generation TV', which encompasses:

  • Connected TV, hybrid TV;
  • Multiscreen, second screen, companion screen;
  • TV everywhere, place shifting;
  • Social TV, companion screen, interactivity;
  • Personalisation, targeted ads, t-commerce.
(A comprehensive primer is available here.)

The easy conclusions:
  • OTT TV is finding serious adoption.
  • Second scree is rising.
  • Standardisation may help.
  • The software and hardware market is highly fragmented. Product development at break-neck speed.
  • True interactivity (beyond VOD and pausing live TV) must be complicated to develop (and sell).
  • Content deals are difficult to negotiate.
Trend #1: Operators launching OTT TV
  • Vectra, the #2 MSO in Poland, uses the Xbox 360.
  • Grande Communications, a Texas-based MSO, uses the TiVo Premiere.
  • ONO (Spain) will launch its TiVo-based solution in October.
  • TCT in Wyoming is using the Entone solution.
  • Waoo!, a fiber-based provider in Denmark, uses RGB.
  • Mobistar in Belgium added VOD.
  • Numericable (France) launched an in-home developed service.
  • Vodafone Iceland is launching with Espial, Amino and SecureMedia.
  • DirecTV (DSB) allows anyone out of reach of its satellites (i.e. non-subscribers) to watch NFL games over broadband
Trend #2: Second screen
  • ANT launched Galio Move, which streams content from the STB over WiFi to any other screen in the home.
  • KPN launched something just like it: iTV Online.
Trend #3: Interactivity
  • Miso is providing DirecTV with a Social TV solution that synchronises iPhone content with what is being watched on TV, as long as both connect to the same WiFi network.
  • MTV has a similar service, the WatchWith app, also for iPhone (and iPad, computer). Technology from Rogue Paper.
  • Ensequence and Zeitera partnered to synchronise TV content with a companion screen, for all sorts of applications: social networking, voting, behind-the-scenes content, coupon services, product placement, content discovery.
Trend #4: Standardisation
  • 3-D active shutter technology: an initiative from Panasonic and XpanD, followed by a long list of manufacturers. Toshiba keeps making noise about glasses-free 3-D.
  • The CEA wants to move to the 21:9 aspect ratio.
  • HD is rapidly becoming the de facto 'standard', but 4K and now 8K are on the horizon (2020?).
  • HbbTV is finding some adoption lately, mainly from German, French and Spanish broadcasters and manufacturers.
  • Philips, LG, Loewe and Sharp partnered to standardise app development for multi-platform Smart TV apps.
Trend #5: Connected devices up, broadcast down
Trend #6: Product development:
Trend #7: Content deals
  • Samsung: HBO Go in the US, MTG's Viaplay in Scandinavia
  • Sony: Bandeirantes in Latin America, NFL in the US.
  • Sony, Samsung, Philips, Toshiba: INA
  • Onkyo: Spotify
  • Roku: Epix, Funspot
  • Panasonic: FetchTV portal
  • Wyplay: YouTube

Come meet the Fiber Ring: October 12 in The Hague

Our next conference, Broadband 2011, is taking shape. In fact, just a single slot is pending. The program is quite interesting. It contains international speakers and has execs from several real-world initiatives, as well as from start-ups. It is light on incumbents and heavy on challengers. Focus is on rural FTTH and cloud services.

Block 1: General introduction/Rural fiber
In-home contributions from our CEO and Coastas Troulos, who needs no introduction. Costas will talk about the NBN in Australia. Rabobank will talk about financing rural fiber.

Block 2: Broadband in the UK: City versus rural
We will have Gary Mesch from CityFibre, Lindsey Annison from B4RN and Jelcer, which has the sewer link.

Block 3: Broadband challengers in NL
LomboXnet is a live network in Utrecht. GlasOperator is a dedicated layer 2 active operator and we are anxious to hear what Online, the unbundler owned by T-Mobile NL, has to announce.

Block 4: Cloud services
Enterprise (Eurofiber), consumer (Microsoft) and security (F-Secure) focus.