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."

Conclusions:

• 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.

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).

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

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

• Parks, Strategy Analytics, iSuppli: penetration of connected CE devices is up.
• Ericsson ConsumerLab: share of broadcast TV is down.
• IMS: OTT revenues will go up.

Trend #6: Product development:

• TV: Sharp, Apple (rumor), Vestel,
• STB: Joysee Technology, Pace, CreNova Technology, Hama,
• DVR: EchoStar,
• Media streamer: Netgear, Philips, Philips Soundbar, Syabas/PopBox, Toshiba,
• Tablet: Vizio, 
• Middleware: NetUP, httv, Google TV coming to Europe, Pace, STM, ALi + Cubiware,
• SoC: Trident,
• EPG, remote control: Microsoft's TeleBing in Japan, ThinkOptics,
• DRM: NDS,
• Widgets/apps: Opera,
• Gesture-based control: eyeSight, 

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.

KPN's iTV Online is best described by what it is not

KPN's iTV Online app for laptop or iPad, although very sleek and simple to use, can best be described by what it is NOT:

1. TV Everywhere: access is restricted to in and around the home.

2. Companion screen: it is a second screen, but it doesn't complement whatever is watched on TV.

3. Connected TV: instead of bringing broadband content to the TV, all it does is liberate TV content from the big screen. It moves in the opposite direction.

Much has to do with rights holders. What is interesting is that it challenges the premise of connected TV: not all content needs to be seen on the best & biggest screen. And it's a bit embarrasing to the cable sector in that KPN beat them in bringing live TV to the second screen.

Read the full review here (in Dutch).

B4RN wants to bring customer-owned Gigabit to Lancashire

Another Gigabit initiative has launched: B4RN (Broadband for Rural North), in Lancashire, England. They are currently assessing demand and at a 50 percent take-up rate, the project will go ahead. B4RN wants to know by October 2011. In Phase 1, the network is to connect 8 parishes with 1,300 properties: Arkholme, Wennington, Melling, Wray, Tatham, Roeburndale, Over Wyresdale, Quernmore and Caton with Littledale (Littledale part only). This phase will cost GBP 1.86m (this includes some of the shared costs between all phases). There will be 3 phases.

Needless to say, Lindsey Annison of Fibrevolution is involved.

The specs:

• FTTH, 1 Gb/s symmetrical (and, depending on the electronics: more in the future);
• Aimed at Britain's 'final third': rural areas;
• Cost per home: GBP 1,000 at most, based on community co-operation;
• Financing through the issuance of shares; founding members invest a minimum of GBP 1,500; the Industrial and Provident Society (IPS), a non-profit, will own the network, shareholders are members; you can also earn a share by doing work for B4RN;
• Interested individuals outside the reach of the network can buy shares for a sum anywhere between GBP 100 and GBP 20,000;
• First year of service comes free (worth GBP 510);
• Normal price: GBP 150 connection fee plus a GBP 25 (excl. VAT) monthly fee;
• Femtocells may be added;
• B4RN will be the ISP, providing Ethernet IP; they are considering to provide access to other ISPs (using VLANs), but what's the point?

Some thoughts:

• Another Gigabit initiative, even in rural areas. Customer-owned is getting hot.
• Anyone can be a share owner.
• Will there be some form of co-operation with the Fujitsu initiative, that involves Virgin Media UK and TalkTalk?
• Just broadband + Internet access, no triple play. Over-the-top (OTT) services are recommended: a Gmail address, VoIP, YouView.
• Third-party ISPs could sign up to sell their well-known triple plays, it remains to be seen if this will be part of the plans.
• I wonder if they would be interested in speaking at our conference .....

TMG hiring Bain & Co to justify something dramatic

Telegraaf Media Group (TMG) has hired Bain & Co to assist in developing a strategy. It should be presented early 2012.

So what is that, is the 100+ years old TMG hiring an outside firm to tell them how to run their company?

In fact, it is really quite commendable. TMG is a more or less diversified consumer-oriented local media firm, that is being squeezed on all sides: dwindling circulation, adverse advertising markets, Internet substitution and competition from global (i.e. US-based) Internet services. Hiring a few experts isn't such a bad idea. The point is: there are two very different skill sets involved.

When I started as a financial analyst at an investment management firm, I knew nothing of telecoms, but was appointed 'telecoms analyst' nonetheless. That's how it works in finance. My chief said: "In five years time, you will start to understand how the business works". Sometimes this model works, sometimes it doesn't. Analysts are usually very young and don't get the chance to develop some industry insight before moving on to a different job. Still, there is not much wrong with the model: the job requires two very different skill sets, finance and telecoms, and its fine if you more or less control either one of them. The other you will grow on the job. And importantly: arriving at an investment firm, there is lot's of infrastructure: not just financial models and decision making systems, but access to the best research there is out there. It's a perfect playground for any devoted analyst to learn a new trick.

The same model is applied to politics. Our current government consists of politicians. They have learnt the skill of politics. And one would wish that they would draw on experts for making sound policies. Alas, that appears not to be happening. Time and again, expert advice is completely ignored, as the stupidest of all, Halbe Zijlstra, is not ashamed of to share with the world.

Back to TMG. TMG know all about traditional media, and Bain & Co will tell them to integrate the firm, increase synergies, reduce costs and find new revenue streams. They have six months and will claim expenses to the order of millions of euros.

All that can of course be thought of by the TMG management. Hiring Bain & Co is only done for one obvious reason: drastic measures. Watch out for TMG to announce something big, early 2012 - justified by the Bain & Co suits.

Versatel's Mesch brothers reappear at CityFibre

Here's a reprint of an earlier background article to be found here: http://goo.gl/149hN

Versatel founders pop up at UK's CityFibre

The founders of Versatel, Greg and Gary Mesch, have started CityFibre in the UK to roll out FTTH. Time for a short analysis of the power of challengers on the telecom market.

The telecom sector is dominated worldwide by incumbents, and only in mobile telephony has there been a definite breakthrough in the situation. The UK offers perhaps the most extreme example of this: BT sold its mobile activities (first called BT Cellnet, then mmO2 and now O2) in 2005 to Telefonica. On the fixed market, cable provides competition and in Europe unbundling has also been added, bringing new players and lower prices to the market and growing broadband penetration.

However, the eternal question is whether there is truly competition if vertically integrated companies compete with their own infrastructure? But then how many types of infrastructure can the market support? Doesn’t the existence of two or three networks lead to an oligopoly? Does mobile (4G) even figure in this? Is infrastructure not a natural monopoly, which as such can be best managed by the government, just as other utilities?

Challengers

However much sympathy you may have with the last point, which in Australia is more or less underway with the construction of the National Broadband Network, there are still a number of places in the world where challengers are shaking up the market with their own infrastructure. A few examples:

• Hong Kong: incumbent PCCW is under pressure from the newcomers City Telecom (of Hong Kong Broadband Network, HKBN) and Hutchison Telecom. The local market is relatively easy to cover with fibre due to its compact size and high density, making a FTTB network an obvious choice.
• France: a real FTTH market is in bloom, although limited to certain regions, including of course Paris. The latter makes grateful use of the easily accessible sewers network. In addition to France Telecom, Numericable, SFR and Iliad are active. Iliad, which operates under the brand name Free, has acquired a certain hero status, for keeping pricing simple (EUR 30 per month) while at the same time continuously expanding the range of services provided. The basis is its own DSL network, but a couple years ago it started rolling out FTTH. In addition Free develops its own software and hardware.
• Italy: FastWeb is one of the most important competitors of Telecom Italia on the fixed market. It started with its own FTTH network in Milan and later expanded to the DSL market. In 2007 the company was acquired by Swisscom, but it still has a minority stake listed on the stock market.
• Netherlands: Versatel was started already in 1995 in order to compete with KPN, focusing on the business market. In 2002 the company suffered a financing crisis and could no longer pay the interest on its accumulated debt. It started afresh, but fell into financial troubles again in 2004 when it bought the broadcast rights to the Eredivise football. Versatel wanted to launch a pioneering IPTV service, but barely had its network ready in time for the new football season. It failed to attract a significant number of customers and Tele2 acquired the company. In addition, Regggefiber is active on the FTTH market, although the company is largely in the hands of KPN since 2008.
• UK: the British broadband market is dominated by BT and its unbundlers on the one hand and cable operator Virgin Media on the other. Newcomers have largely limited their efforts to local projects. Among them is CityFibre Holdings, which acquired the assets of i3 Group. The assets include H2O Networks and FibreCity, which plan to roll out FTTH, partly through the sewers, in Bournemouth, Northampton, Dundee and other cities.

The common factor among all these is FTTH, but success is also clearly determined by good, innovative services at a low price. HKBN and Free have been the best at that. Versatel suffered from financial problems, and as part of Tele2 really only has much impact on KPN on the business market. With its Best Deal motto, its ambitions as well as its market share have stagnated on the consumer market. i3 Group was forced to sell its assets due to financial problems, and the new CityFibre has ambitious plans to roll out FTTH in a number of cities, starting with Bournemouth. CityFibre is led by a number of former Versatel people: the brothers Greg and Gary Mesch, Mark Collins, Chris Toller and Leo van Doorne.

Conclusions

FastWeb saw that it was too soon for FTTH and made an understanable shuift to DSL. Since then demand for bandwidth has been near insatiable, and FTTH has become profitable. HKBN and Free are examples of this, remarkably also with innovative and low-priced services. Financial problems are always lurking in the shadows, and too much debt becomes a problem when forecasts are too optimistic. Being acquired by Tele2 (Versatel), KPN (Reggefiber) or Swisscom (FastWeb) may provide for financial stability, but can also be a brake on ambition. CityFibre, for those who see the history of Versatel clearly, is therefore a company to keep an eye on.

KPN's new mobile tariffs bode ill for market share

KPN has announced new tariffs (from September 5) for its KPN and Hi brands on the Dutch mobile market (Telfort will follow at a later date), in response to the new Net Neutrality laws and decreasing revenues from voice and SMS. For our views on NN, see this post and this commentary.

It appears as though the new tariffs may need some tweaking:

• There is one bundle for voice, SMS and data. This is not what consumers want, now that voice/SMS are being replaced by data.
• If you buy more minutes/messages, you automatically buy more bits as well. Again, and for the same reason, this is not what consumers want. They want an inverse relationship, or even better: the ability to pick amounts separately.
• Nobody knows what an MB is, how much MBs are spent on a video clip, etc. Moreover: usage may vary wildly from month to month.
• Speeds are quite slow, not just the downlink (for some reason KPN's upper limit is 7.2 Mb/s, whereas other HSPA operators worldwide have arrived at 42 or even 84 Mb/s). At 0.1 Mb/s, the uplink will surely frustrate those trying to send an MMS.
• Both brands are now offering no fewer than 24 different subscriptions.
• The overage fees may not appear to be unusual, but in light of this, they are rather high for data. And KPN's 35 c/min for out-of-bundle minutes appears to be another rip-off, best to be avoided.

In fact, it looks like there is very little right about these new tariffs. Take a wild guess what will happen next to KPN's market share. And share price (down over 20% since the recent Investor Day). Add to that: deep trouble on the business market and a write-down coming for the shares bought back during the quarter.

The Q2 results are due July 26. We recommend you stay in bed and keep the curtains closed. That's what the marketing people did when they concocted the new tariffs.