Gary Kim
A new study by Edelman suggests U.S. consumers are are disenchanted with their entertainment choices. Only about 17 percent of respondents think entertainment sources today provide “very good” or “excellent value.” That should send up a warning flag about the latent potential demand for different video and other entertainment options. Declining entertainment value obviously creates a gap that competing providers might be able to exploit.
Unlike many other businesses, though, the video entertainment business is unusually controlled by content creators and distributors, rather than distributors.
DirecTV, for example, recently had unusual success with its “Sunday Ticket” service delivering National Football League games, says Michael White, DirecTV Chairman, Chief Executive Officer and President.
“Keep in mind though, our thinking had started with the change in the contract and the fact that I think I've said before, if you looked over the last several years, the product was maturing with about two million customers a year kind of flattish, and yet our contracted costs were going to go up over the next three years with the new contract we have with the NFL,” said White.
“Given the costs are what they are, we don't pay more if we have more customers,” said White. DirecTV quarterly earnings.
The converse also is true. DirecTV could stream content almost immediately, from a technology standpoint. “We can stream today from our head-end, our broadcast center and have a terrific product, just taking our in-home streaming product and turning on a switch,” said White. “But we can't market it because we don't have the rights.”
The point is that when people ask whether “cable is doomed,” that question often turns on some new use of technology, when one might argue the question is really about the willingness of content creators and rights holders to license the product in new ways.
In a similar way, some observers will logically conclude that Google’s consideration of providing video entertainment on its 1-Gbps fiber-to-home networks in Kansas City, Kan. and Kansas City, Mo. represent a revolutionary new development.
Google, reports the Wall Street Journal, is looking to add video entertainment services, and possibly voice, for customers of its 1-Gbps fiber to home network in Kansas City, Mo., and Kansas City, Kan. The moves would be logical, but are hardly “disruptive.”
Many observers have wondered how such a network, delivering only 1-Gbps Internet access service, at prices "comparable" to existing services provided by telcos and cable companies, could possibly generate enough revenue even to break even.
As it turns out, Google has no magic rabbit to pull out of its hat. The costs of its network are not dissimilar from the costs any other service provider would incur. And few service providers would contemplate building a fiber-to-home network with a single revenue stream, namely Internet access.
Of course, Google could have chosen to operate as a "wholesale only" provider of bandwidth to other service providers. It could still do so. But the few U.S. examples of access network providers who attempt to operate "wholesale only" have not proven highly viable, most would probably conclude.
The only way to approach break-even apparently is to operate the network the way all other such networks are operated, namely providing retail triple-play services to consumers.
Nobody expects Google to become a "service provider" in the traditional sense, with its own facilities, on a wider scale. Google does not suddenly “want to be a cable company,” in other words. The issue is simply that even its 1-Gbps fiber to the home experiment requires much more revenue than “Internet access” can provide.
Even to operate close to “break even,” Google needs much more revenue than Internet access service can provide. At least for the moment, that means entertainment video and voice.
But are there broader implications? Possibly. Once Google secures video distribution rights, could Google not create some sort of steaming service that replicates the traditional channel line-ups of services sold by DirecTV, Dish Network, telcos and cable companies? Possibly.
Would those services be licensed in ways that seriously undermine the terms and conditions under which all those other distributors get access? Undoubtedly not. Networks and studios are not about to undermine the rest of their business.
That has implications for retail buyers of any Google video service. It seems unlikely Google would get licensing rights that will immediately save consumers money. In fact, any video rights will likely include the normal clauses that require Google to pay as much as other video distributors.
Google might also find it only can get content rights if it agrees to bundle channels in the typical way cable, satellite and telco TV providers do, which would limit the amount of innovation Google, Dish Network, Hulu, Netflix, Apple, Amazon or any other provider could attempt. Google Ponders Pay-TV Business.
That is not to say consumers never will be offered services that retail for less. The reason is that content rights and marketing costs are only part of the cost of providing today’s video entertainment services.
From a return on invested capital perspective, the difference between Google’s current business model and that of a facilities-based wireline service provider like Verizon could not be starker,” say Sanford Bernstein analysts Craig Moffett and Carlos Kirjner.
“In 2011, we expect Google to post an ROIC of 56 percent, or 38 percent when including goodwill,” they say. “In 2010, Verizon’s wireline segment (which includes FiOS) sported an ROIC
“Including goodwill and similar intangible, and smoothed one-timers, it was minus one percent,” the analysts say.
Wireline networks have the weakest returns on invested capital with a 1.5 percent gain over the last decade, Moffat says Wireless networks had a meager return of 0.3 percent. Cable garnered a 2.5 percent return.
Satellite networks had the best return on invested capital at 5.5 percent. It’s no wonder that DirecTV shares have trounced other companies in 8-year returns. Others stocks—AT&T, Comcast, Dish, Sprint and Verizon—have negative returns.
In principle, a streamed service, with enough scale, might in principle be able to operate without all the sunk costs of owning an access network. That, and almost that alone, could be the difference in end-user retail cost.
Gary Kim is an active industry writer and analyst, editor of Mobile Marketing & Technology, Content Marketing News and Carrier Evolution. He is a frequent contributor to IP Carrier and TMCnet, and a good friend of Razorsight. Keep up with all his industry insight -- follow him on Twitter @garykim.
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