Recently, I’ve been talking  a lot about how, in all aspects of our daily lives, nickel and diming is getting out of control.  It seems to be going from bad to worse.  I’m a capitalist by nature,  and fundamentally take no issue with “bear market pricing,” that is, enterprises have the right charge what the market will bear.  What gets me—and most consumers—is the relatively recent phenomenon of collection of fees for zero added value services. 

$25 checked bag fees, $5 potato chips on airplanes, $12 “convenience charges” on concert tickets, and of course, the laundry list of fees and up-charges—often dressed up to look like taxes--on pay television bills are becoming commonplace.  I’m convinced that this pettiness will ultimately backfire on those who have elected to benefit from it.

And, as Martha Stewart would say, that’s a good thing.

A report we just published  analyzes the findings from a nationwide survey of 856 US Digital Pay Television consumers.  In it, we look at satisfaction for key performance  metrics, analyze customer willingness to churn, and look at the role of the bundle in mitigating churn.  This is presented at both an overall and platform-level (including Cable, Satellite and TelcoTV / IPTV).

A few key findings from the report:

Digital Television Satisfaction is High Overall, but Cable is Still Vulnerable

Seventy-one percent of respondents in the survey reported to be "somewhat" or "very" satisfied with their current service. While this may seem like positive news for the digital television industry, the story changes somewhat when viewed at the individual platform level.

The differences among Cable, Satellite, and IPTV were impressive, with  Telco/IPTV customers reporting 95% overall satisfaction, compared to 67% for Cable. Cable underperformed in virtually every satisfaction metric.

Low Perceived "Value for Money" among all Digital Pay TV customers

Virtually across the board—and irrespective of platform—respondents reported low satisfaction in the metric of `Value for Money.' There was very little measurable difference by platform among respondents, and in all cases, fewer than 22% of respondents felt the service "exceeded" or "greatly exceeded" expectations of value for money.

This is among the most important findings of study, as it underlines the vulnerability of pay television in its current state. Indeed, in a report published in 2008, we found that over 50% of US digital pay television customers would be willing to scale back or completely drop their television service if household budgetary circumstances dictated.

Cable Customers Most Willing to Jump Ship

Despite a high stated satisfaction rate, digital television respondents displayed relatively high price elasticity. A somewhat surprisingly high percentage of respondents indicated a willingness to switch providers when offered a competitive deal 10% or 20% cheaper than their current spend.

Cable customers displayed the highest propensity to churn, with 47% saying they would switch for a 10% price discount. When the price discount was raised to twenty percent, over two-thirds (68%) said they were willing to jump ship.

Malaise?  Angst?  Ennui?

Whatever it is,  it doesn’t feel good.

Despite a rather high stated satisfaction level, pay television customers in our survey indicated a substantial willingness to churn, and a general feeling that they were not getting high value for money from their television service provider.  Both of these factors further underline the threat that Over-the-Top (OTT) distribution poses to traditional service providers.

Among platforms, IPTV appears to being doing best in terms of satisfaction and anticipated growth.  Its success, however, is not a foregone conclusion.

In a report we recently published, my colleague Martin Olausson and I talk about the new challenges facing France Telecom (Orange), in light of a recent ruling by the French Competition Authority.

According to a commission appointed by France's Competition Council, Orange’s exclusive carriage of channels on its “Orange TV” IPTV platform “has drawbacks in the short, medium, and long-term,” rendering it “undesirable to maintain.” This decision could potentially have repercussions on the entire industry, and Orange will need to fundamentally alter its marketing strategy to stay in the game.

A few thoughts…

If not content, then what?

Strategy Analytics has long held that content—particularly exclusive content—would be a key differentiator and driver of IPTV uptake. Recent developments in the hyper-competitive French market threaten to change that model. 

Orange, which was unable to differentiate itself on the basic services level, has pursued an aggressive content strategy in recent years, spending over €200 million to acquire exclusive rights to sports and other content, packaged under its Orange Sport and Orange Cinéma Séries brands. The strategy has worked quite well for the operator, and utilizing exclusive content to market its pay TV services has led to rapid growth of its pay TV segments.

Now all of that is in limbo, and the operator will need to find other ways to stand out.

Pricing matters…but differs by region

One of the takeaways of a report we published back in September was that platforms don’t matter to customers—features do.   Well, features and price.

Further customer survey work we have just completed confirms that price as a churn motivator depends largely on the individual market. Our research shows French consumers to be the least motivated by price, and those in the UK most influenced.

Much of this has to do with consumer perception. In France, all the major triple play service providers offer very similar packages at essentially the same price. Our interpretation is that the typical French consumer might not feel it worth the time to make a switch—even for a 20% discount. The perceived disparity is much greater in markets such as the UK, where pricing and bundling disparities are much more pronounced.

Challenge is in finding ‘non-content differentiators’

The recent ruling by France's Competition Council suggests that the “traditional” differentiation through content may not be viable for much longer. As such, operators will be forced to find other ways to differentiate and “own” the customer. The easiest way to do this, in our opinion, is to control the gateway into the home and offer a better QoE, and more value for money (i.e. better bundles) for the consumers than the competition.

I’m just back from four days in Las Vegas, which is usually about three too many for me. From all accounts, attendance and spirits were up at this year’s CES, with 3D chatter dominating the halls and booths of the Las Vegas Convention Center.

The story is 3DTV…Again

3DTV clearly dominated as a theme. Nobody can question whether or not is real—according to my colleagues David Mercer and Peter King, it’s not a terribly expensive nor complex “feature” to embed in a television. Rather, its adoption will depend on two factors: the availability of content, and the willingness of customers to invest in hardware…again. Didn’t we just all buy HDTV sets?

CES: Consumer Experience Show?

Cisco Chairman John Chambers hosted a small (by CES standards, anyway) cocktail party for press and industry analysts Thursday night in the swanky Chairman’s Suite in the Venetian. He suggested that the role of CES has been changing, moving away from solely a device-centric show, and more to one of an overall customer experience--similar to the way Cisco is broadening its focus

Pay TV’s Future

I sat in on a rather interesting panel discussion of the future of Pay TV as a model, including Jim Denney , VP of Product Marketing at TiVo. The basic conclusion from the session was that, despite what some like to say, pay television as a model is not going away any time soon. Rather, the model is likely going to change. We’re already starting to see examples of pay tv operators embracing (or at least addressing) the issue.

One interesting point that was raised in the session: early on, there was much talk of voice ultimately becoming a free application. While one could argue that its role in the bundle has declined greatly, the pay-model has not disappeared completely.

Nor is it likely to happen in television.

When I switched my home television service  from DirecTV to Comcast last summer, the slick sales guy on the other end of the line promised me that I would be receiving an identical channel lineup to the one I was currently receiving.  “Apples to apples,” he promised. “Only cheaper.”   What’s not to like?

You’d think that I, someone who gets paid to research and write about digital television, would have done more due diligence on his own account. 

I didn’t.

So, when it became apparent that two “must have” channels for me (NatGeo and BBC America) were not in my Comcast tier, I called again to inquire.  Seems that to get those, I would have pay an additional $15 a month to buy up to the next highest tier, one filled with numerous channels of no use or interest to me.   Suddenly the calculus changed.  This was no longer a good deal.  

This time, it’s not coming from the FCC

Recent movements suggest that change may be afoot. 

No sooner had Comcast announced the launch of its OTT-mitigating Fancast Xfinity TV service than rumors started circulating about Apple’s talks with CBS and ABC.  Seems the folks in Cupertino are mulling a subscription-based video service, obviating the need for iPhone/iPod users to depend solely on the Apple iTunes service for downloads.

If the Apple service is successful at elegantly bridging  the '’screen gap,” and delivering compelling online content to the tv screen, it could fundamentally alter the way MSOs sell content.  The much maligned “bundled” system currently in place, whereby consumers are required to purchase content in blocks of channels--rather than individually--could finally be on the chopping block.  And that’s good news.

What is interesting, though, is that the catalyst for this change will be the market—not a government mandate as previously feared.

A la carte used to be somewhat of a cause célèbre in the television world, and one that the FCC has been wrestling for years. It was only the more recent emergence of “net neutrality” that has stolen the spotlight from the issue.

Former FCC Commissioner Powell’s administration commissioned a 2004 report finding that, under an mandated a la carte scheme, customers would end up paying more.  That report has since been largely discredited and found to be riddled with misinformation and half-baked analysis.  Successor Kevin Martin embraced “cable choice,” though apparently more for the way it allows parents to monitor and block channels, than for household consumer budgetary reasons. One analyst firm  rather dramatically predicted ‘economic ruin’ if the FCC went ahead with its plan.

Who moved my talking points?

Government-mandated a la carte is bad for cable consumers, who would wind up paying higher prices to receive the same level of service and fewer channels than they receive today.”-NCTA Issue Brief, January 2009

The National Cable Television Association (NCTA ) talking points were crafted to respond to a possible “government takeover” of television.  In the context of a market driven change, the memo reads somewhat differently.  Most of the arguments fly out the window, and the market will call the cable industry’s bluff on the supposed technological barriers to offering personalized programming.

As usual, the problem does not lie in the technology, but rather in the business model

The very nature of cable advertising is in flux, brought upon largely by digital television.  The 30-year old model in place today, whereby flagship channels lead certain tiers and support fledgling new ones, could be facing some changes.  While the NCTA estimates that half of cable companies’ revenues come from national ad sales, this is certainly shifting.  Intelligent two-way networks will herald in addressable advertising—the next step in demographic targeting.

Indeed, vendors I spoke with only months ago alluded to some “user identification” scenarios that could pinpoint actual viewers within a household, based on their “jitter signature.”  Seems that we all shake and tremble in our own unique ways, and it is possible to use these signatures like fingerprints, and serve up completely targeted advertising. 

To be sure, , vendors will need to overcome the “creep out” factor first, but the general idea is the same.  Linear advertising as we know it is going the way of the dodo, and the MSO’s ‘old math’ will need to change.

It’s not about choice…it’s about the illusion of choice

Our research shows time and time again that consumers are tired are feeling that they are being screwed by their pay television providers.  The nickel and diming in all aspects of consumers’ lives has grown out of control.  Our latest survey work (to be published in Q1) found that only about 20% of pay tv customers felt that the ““value for money” they were getting from their pay television operator exceeded expectations.

Part of the issue is consumers’ feeling that they have no control, that they are somehow being  taken advantage of..

Choice—or more importantly, the illusion of choice—is an extremely powerful tool.   Think of the immensely popular Build a Bear Workshop franchise, whose stores dot shopping malls across the world.  BABW allows customers to design and personalize their very own stuffed creatures by visiting eight “stuffed animal-making stations,” where they can choose (and buy) everything from stuffing to clothing.  The concept has been a huge hit, and the company is now a $300 million/year concern, with over 400 stores worldwide. 

What is the secret to the company’s success?  Certainly not selling adorable plush animals; anyone can do that.  Rather, BABW has perfected the illusion of choice and flexibility.  All customer start at the same default position: buying a bear.  The trick is, they end up paying more for the additional  features relevant to them.

How about “Build a Bundle?”

What prevents MSOs from employing a similar strategy—allowing customers to design their own bundled offerings?  All would start at the same default position, the $XX/month basic tier.  The real money comes in the add-ons.  Critics say this is not how advertising works in the cable industry.  Guess what?  It’s about to change.

My (still untested) hypothesis is that, if customers were given the choice to “personalize” a  television bundle, ARPUs would actually increase--or at least stay the same.  Allowing them to configure a package conveys the illusion of choice and control, and makes customers think they are in the driver’s seat.

Sounds like a great project-opportunity…phone lines are open if someone out there wants us to test the concept.

Comcast’s (CMCSA) “TV Everywhere” initiative has been christened with a snazzy new name—perhaps a little too snazzy? Fancast XFinity TV went live this week to an estimated 14 million Comcast double (cable+HSI) and triple play customers.

First things first: the name needs work

Did nobody in Comcast’s marketing department catch the similarity to Dunder Mifflin Infinity-- the scandal-prone online division of the fictional paper company on NBC’s  ‘The Office?” Coincidental—since “The Office” on its way to becoming a Comcast asset.

Regardless of the branding, the idea is, on its surface, solid.

Comcast’s Model Makes Sense

Comcast is essentially  doing what other industries in the past have failed to do: addressing and embracing disruptive technology head on. Rather than burying its head in the sand and ‘hoping away’ alternative distribution models, the company has recognized that its customers want the freedom to view content on the screen and device of their choosing.

I often cite the examples of the music industry and print journalism as two cautionary tales of industry approaches to technology. While these may be slight oversimplifications, they are still illustrative of the high cost of early missteps.

One could argue that the recording industry elected to ignore the power of the Internet completely, and insisted that the existing distribution and value chains would remain unchanged. When things ultimately pear shaped, instead of adapting to the new reality, they sued their customers. Makes sense, right? Goodbye Tower Records.

The print journalism industry initially embraced the Internet, and tried to charge for content (remember the pay per article model?), Eventually, though, it too caved to customer pushback. Readers showed a preference for consuming their news online at a price point of…guess what…zero. The ad-supported model proved unsustainable. The reality? Print newspapers are, as one politician recently said “endangered species.”

“Anywhere” may be important, but content still rules

To be sure, there remain kinks to be worked out of the system. Early reviews talk about long buffering and other pesky problems. As a Comcast customer, I downloaded and logged in today, only to find that the “Beta” label remains on the landing page—perhaps this is some sort of intentional insurance policy?

“Any screen, any device” is a laudable goal—but it’s only half the battle. Customers need compelling content to complete the package. It doesn’t matter where I can watch content, if I don’t want to see it in the first place.

That’s where the NBCU deal comes in. Once the deal is consummated, content from NBCU’s cable assets could theoretically help to beef up the content library, offering a wide selection of both free and paid-for selections.

Could this be the first real pass at a viable (read”monetizable”) OTT business model?

And oh yeah, what about Hulu?

We’ve just published our European Broadband Tracker for Q3, focusing this month on the happenings in the UK market—a market that witnessed a significant change in landscape in the third quarter.  With its acquisition of Tiscali for a “fire sale price,” Carphone Warehouse now finds itself in the number two slot in the UK.  Three providers in the market now claim over 4 million subscribers; however, BT Retail still maintains a commanding 780,000 subscriber lead ahead of its nearest competitor. 

Sky remains the fastest growing broadband service provider in the UK, though the company’s quarterly growth has slowed down from double digits a year ago to half of that this quarter. Nonetheless, Sky is poised to potentially approach three million subscribers by the end of 2010.

While Orange’s subscriber loss in the UK market persists, we believe that the impending Orange and T-Mobile merger—reported to be on fast track from the Office of Fair Trading (OFT) –could potentially help to stave off further subscriber churn, through a combination of multiplay bundling and innovative service deployments.

Indeed, we  expect to see accelerated M&A activity in the UK market in the upcoming year, with Carphone Warehouse a potential acquisition target.

                                                                                    Source: Strategy Analytics, Multiplay Market Dynamics

I’m just back from a ten-day vacation in Buenos Aires.   Had a wonderful time, though the 11pm dining hour probably wouldn’t be sustainable long-term for a “closer to 40 than I’d like to admit” guy like me.  In any case, while the purpose of the trip was relaxation, I couldn’t help letting a bit of research get in the way.  A few observations from my trip:

WiFi is ubiquitous

Recent research shows that Buenos Aires has the highest WiFi penetration in Latin America, with one hotspot for every 2,620 people.  More interesting is how many are free.  While the “muni WiFi” model has never seemed to make much sense in other corners of the world, BA may have found an interesting solution—corporate goodwill sponsorship.  To ensure that residents are not without broadband even in the city’s cavernous “Subte” metro system, Cisco kindly offers a free service. 

In fact, corporate sponsorship seems to be the way in Buenos Aires—even street signs are sponsored by the likes of Mobile operator Claro, Nokia, Cisco, American Express, and Broadband Service Provider, Arnet.

Packages are cheap, but service is s-l-o-w

In the fully-furnished apartment I rented for my stay in Buenos Aires, “broadband” was touted as a perk.  While it was, indeed, present, the actual achieved data rates walked the spider silk thin line between “broadband” and “not quite broadband.”  From the best I could tell, Arnet’s premium service maxes out at about 5Mbps.  I was getting just shy of 1Mbps. 

Competition seems to be heating up. 

Smaller players such as metrotel are taking on behemoths such as Arnet, blanketing Buenos Aires’ billboards with advertisements for their VoIP product, iVoz.  The company has claims a 200km MPLS fiber optic backbone in greater Buenos Aires, as well as 60 nodes and a data center.

I’m ready to do some more “field work.”  Perhaps some on-site research in Brazil?

Fala sério!  (“Talk seriously!,” “You must be kidding!”) is likely one of the only remnants of my two semesters of university Brazilian Portuguese—well, that and the ability to sing “Happy Birthday."  Nonetheless, nobody in that classroom years ago would have believed that major companies, namely Vivendi and Telefónica, would one day be fighting for ownership of a Brazilian Telco. 

In an escalating price war that has repercussions on three continents, French media giant Vivendi and Spanish Telco Telefónica have been bidding up Brazilian operator GVT--the country’s fourth-largest high-speed Internet provider.  In a somewhat surprising move, Vivendi bought out 37.9% of GVT with the option of buying another 19.6% so it can have total control of the broadband telco.  The price tag?  A cool $4.2 billion.  Telefónica sources said the Spanish telco will not pursue any further counteroffers.

The move is noteworthy for a few reasons:

It underlines the strategic  importance of Brazil as an emerging market

In a report we published recently, we talk about the importance of Brazil as an emerging powerhouse.  Our base case model predicts broadband subscriptions growing to nearly 20 million by 2013, implying a 15% CAGR.  Broadband sub and revenue growth is largely predicated on increasing importance of IP-delivered video content, as well as the expected surge in IPTV providers in the Latin American region.  By hitching its wagon to an established player at this point in the game, Vivendi has the opportunity to establish a beachhead in a key emerging market--one whose tv market is expected to grow faster than Western Europe.

It’s a direct challenge to Telefónica in its “home turf”

Telefónica, through its Telesp subsidiary , has enjoyed a nice piece of the Brazilian fixed broadband market--market share is estimated to be around 28%. Vivendi’s takeover of GVT challenges Telefónica’s position in the Sao Paolo market, puts it on the defensive, and further limits its ability to expand outside of the Sao Paolo metro area.

It further paves the way for an eventual Comcast NBCU merger

Vivendi’s move is a clear and final signal that the company is ready to sell its 20% ownership of NBCU, valued at approximately $6 billion.  Indeed, it will need to in order to finance the GVT purchase.   This freeing up of ownership will pave the way for an eventual takeover of NBC Universal by Comcast.

I expect we'll be seeing more of this type of emerging market "pre-positioning" going on the next few years.

I’m on my way back to Boston,after spending 2 days at the Telco TV event in Orlando, a somewhat small--but nonetheless impressive--show focused on the IPTV space.  I’m posting this online at 35,000 feet, which is one of the few places I don’t particularly mind (or at least won’t audibly complain about) paying for connectivity.

My overall takeaway from the show is that IPTV still has a long way to go--and I feel like I say that every year at this time. A few notes and observations from the keynote sessions, workshops, and meetings:

What have you done for me lately?

For years, we’ve been hearing about the promise of IPTV, and the jaw-dropping array of services and applications it will ultimately deliver. The potential and promise of IPTV has been widely hyped. Jeff Weber, VP of Video Products at AT&T, suggested that IPTV’s upside is “beyond our understanding.” The question remains, though, what has the technology delivered?

Research we recently published confirms the strong growth opportunities for IPTV in the US—that growth, however, is dependent on a few basic conditions, including sustainable customer take up, and achievable and meaningful differentiation. The “me too” services won’t cut it anymore.

Um…the datestamp on that slide is “2005”

Sadly, the slideware on display at this year’s keynotes and sessions might as well have been from five years ago. The same tired slides and examples keep showing up again and again, presented as “innovative” and “new.” These include on-screen Caller ID (a curious notion in the first place, given the rapid decline of residential landlines, and the inherently personal nature of telephone communication), customizable EPG skins (really??), multiview, and remote DVR programming.

Not exactly earth shattering stuff.

Is there an app for that?

While IPTV may not fully realize its full potential for several years, the general consensus seems to be that the likely path to innovation in the space may come through the open “widgetization.” Drawing parallels to iPhone apps, proponents of this theory foresee a flood of new applications migrating to the television screen. Whether or not these can be (or should be) monetized remains another question. It does loop back to the fundamental question: how to compel a consumer to move to IPTV.

No first mover advantage

IPTV represents the first time in the Telcos’ history that they have been second to market…indeed, they enjoyed near or complete platform monopolies for decades. Television has a long and storied past, and consumers have developed a set of expectations and quality thresholds. Having to build to a set high-water mark is no easy task. And they have to do more than replicate what the cable companies are offering—to be successful, they have to surpass it.

What the Telcos have in their favor, however, is a long legacy of delivering “five nines” quality to consumers; an established brand and existing customer base.

The challenge is in meshing the two pieces together: harnessing the experience and success of the past, while simultaneously changing the fundamental Telco mindset from one of a monopolistic utility provider to that of a competitive provider of services.

We’ve just published a report on broadband opportunities in the BRIC (Brazil, Russia, India and China) countries, estimating that broadband revenues in the four-country region will reach $46 billion by 2013.

The BRIC designation, attributed to Goldman Sachs analyst Jim O’Neill, captures the commonalities shared by the four countries, including  rapid economic growth, burgeoning middle classes, and increasingly sophisticated communications marketplaces. 

Just as the BRIC countries are expected to be a dominant force in the global economy in the next decade, so too will they become important leaders in broadband consumption. The bloc’s still somewhat young and immature broadband consumer base, rapidly growing upwardly-mobile middle class, and increasingly important consumer purchasing power all point towards substantial opportunities in the upcoming years.

We see the region as one of the next broadband frontiers, more than doubling its number of broadband connections between 2009 and 2013.

While there are some positive commonalities shared among the four countries, there are likewise some negative aspects which may ultimately hamper their success. Widespread and institutionalized corruption, social and political instability and inefficient bureaucracies all make for a less-than-ideal environment in which to do business.

Nor do we see the BRIC countries necessarily marching in lockstep. In many ways, the four countries are more different than similar, and it would be unwise to expect them to follow exactly the same path.  Rather, we think broadband adoption will play out quite differently in each.