Broadband at the core
What started as a trickle a few years ago is increasingly looking like a steady flow away from television subscription. In the 3rd quarter of 2013, 113,000 people switched off their cable or satellite TV service. The number may be small but when compared to the 80,000 people who had turned off similar service over the previous year, it seems to represent a substantial acceleration in the process. Yet, the cable providers do not seem to be overly worried as this loss of customers doesn’t seem to translate into any direct impact to their bottom line.
While TV subscriptions were being turned off, cable and telcos added over half a million new high speed internet customers in the last quarter. While Comcast (18 million subscribers), AT&T (16 million), and Time Warner Cable (10 million) sit at the top of the industry, the vast majority of other providers in the space have under 5 million high speed internet subscribers, creating a space that is rife for consolidation.
One of the chief proponent of this consolidation, John Malone, is a cable industry veteran who built TCI, a cable giant that was bought by Charter Communications and Comcast. He is now looking to use Charter, the 6th largest provider of high speed internet service in the US (3.6 million subscribers), to launch that consolidation and turn the company into one of the next big internet providers.
One may wonder how the 6th largest company would look to jump several places by acquiring the number 3 in the space. The answer comes down to geographic concentration. According to the national broadband map, the areas Charter and Time Warner Cable occupy are physically close without being directly competitive, which could simplify physical integration and upgrades. The technology stack they use are similar and both in need of an upgrade if they want to compete for the next generation of subscribers.
And then comes the question of bandwidth regulation. Time-Warner is currently tied to a model where unlimited bandwidth was provided to users, a descendant of the all-you-can-eat offering that was created around internet access in the 1990s. As Charter came to the market later, it charged on a different model, providing some caps on the amount of bandwidth a user can eat up. These small changes allow the company to charge more for the same amount of bandwidth: in a world where Netflix, YouTube, and others provide video services that eat up large portions of internet traffic, that small difference can translate into richer revenue for a combined entity.
TV channels are apps
But why are people leaving TV for the internet? Is Netflix the only company that can be blamed for this? And is it just a temporary? To understand this, it is important to talk to upcoming generation. For example, kids under 12 have less of an understanding of TV channels than they do of TV shows: in a world where Netflix provides a kid-friendly interface, the focus is on the shows and the characters and the offerings are always on-demand. This will present a generational challenge in a decade or so as those individuals make buying decisions on cable and internet service.
Combine this with the increasing offerings from individual channels as apps and you can easily see where this is going: TV is increasingly getting unbundled, as channels are now only loosely associated to the underlying cable package. Aereo, for example, has been bundling live over-the-air TV into a convenient app; Netflix, Hulu, Apple and Amazon have arisen as aggregators of content that are now starting to produce some of their own offerings; HBO has created a successful app that provides its shows on-demand; and increasingly, TV station are debuting new shows in mobile apps. Add all those pieces together and the pattern that emerges is that TV channels are increasingly becoming apps. Those apps can then either be bundled and sold as packages as cable TV operators have done, or a la carte, over any internet provider.
Where is the box?
While this may all be fine when it comes to looking at a show on a tablet or a smartphone, people may feel that the experience of a large screen is substantially better, which has brought forth a number of offerings: today, you can watch Netflix or Hulu either through smart television or through boxes that attach to you TV. Those boxes from providers like Apple (AppleTV) and Roku, and enhanced TV allow you to get access to a limited set of offering but may not fully present what the future has to offer because they require that individual channel create a separate app for each device. In all of this, Google has taken a more intriguing approach in that it now sells Chromecast, a small device you attach to your TV’s HDMI port, for $35. The device in itself doesn’t do much but when it is paired with an app on your smartphone, it can turn magical as it allows you to use your smartphone app essentially as a remote for your TV, giving you access to all the content that exists in the app but sending the video stream to the TV screen. This reductionist approach means that any app provider can easily add functionality to their app and not worry about the type of TV on which it will run. And considering the price at which the device sells, we might see the company license the technology to embed it directly into TVs.
Once you remove the set-top box from your TV and turn every channel into an app, the only thing the cable companies have to offer is those big pipes that come into your house. And consolidation of those pipes can make a big difference when negotiating with equipment providers or trying to eek out profit from customers. Viewed through this lense, it becomes increasingly clear that the cable consolidation has little to do with TV and everything to do with cable.