IPTV is stupid (as a business model for independent ISPs and CLECs)
Sunday, July 6th, 2008I’m more than a little bewildered by all the rumblings in the CLEC/ISP community in the last year or two in favour of IPTV, or IP-based television content delivery.
For those not familiar, it is basically the same service as that of your cable or satellite provider; channels of television content beamed into a set-top box. Except, instead of using the traditional HFC and/or waveguide and QAM transport infrastructure that cable uses, it is prospectively delivered (1) over a variety of last-mile infrastructure in telecom companies’ incumbent plant, such as copper ADSL2 loops, direct fiber to the premise (a la Verizon FiOS), and (2) it comes as an IP-based data stream, leveraging a variety of approaches that seem to suit this aim — e.g. multicasting.
I think that in general, IPTV is a dead-end business model for ISPs and CLECs to pursue.
As is widely acknowledged to happen from time to time, I did not consciously arrive at the conclusion suggested in the title until stumbled into a recent debate on ISP Planet’s isp-clec list about affordable and/or partly open-source driven head-end equipment for IPTV and associated accoutrements for the required network build-out. It’s something that came to fruition as a realisation as I devoured the exchanges about encoding gear, GPON vendors, etc.
Having bared that thesis, I will attempt to indemnify myself with the disclaimer that I am not a full-time market analyst, do not work in the video space, and know relatively little in detail about the technology. Additionally, I do not watch TV. I have not even had cable for many years now. And in general, television, the film industry, and entertainment as a whole are at the absolute dead-bottom of my list of personal or professional interests. So, I cannot possibly claim much credibility or authority here even if I harboured such designs.
It’s just a gut feeling. But gut feelings carry a frequently under-acknowledged significance in the anatomy of business decisions.
The first and most principal problem: TV is obsolete. No, I am not saying that nobody watches TV anymore; that is rather self-evidently not the case, and it seems implausible to even imagine American society without one of the most critical elements of its vitality–if that is the appropriate word to use. Indeed, the seemingly inextricable relationship of television to the basic respiration of American society — at least, on a pedestrian level — is one of the best known things about American society.
What I mean is that the traditional, incumbent nature–and particularly, the format–of broadcast television is on the decline. Television conceptualised hitherto, as a one-to-many broadcast network offering a fixed selection of professionally prefabricated content interspersed with frequent advertising, is not a growth industry.
The leading cable networks’ viewership has been consistently falling for several years now. Hollywood is beset by successive, protracted strikes of the various writers’ and actors’ unions, contributing to a blight of new and original content as well as a commonly acknowledged tendency to recycle, rerun and reuse. New shows are crafted according to predictable and overused formulas to — at least, I think — a previously unseen level, as epitomised by the bromidic “reality” genre. A study released just over a week ago suggested that the median age of habitual American TV viewers is now 50. Advertising revenue has plunged. The news channels part with growing segments of audience as more and more people–most especially the youngest demographics–move to the Internet to get their news.
Of course, this assessment falls short in its failure to consider certain lopsidedness in the trends. Various pay-per-view and on-demand movie channels, and other accessories of the technological upgrades heralded by digital cable, have actually registered modest gains.
All the same, I can’t see how anyone could be moved to suggest that these market conditions are investment-grade. Far as they may be from a proclamation of TV’s imminent demise, the stench of decay and obsolescence seems to be in the air.
That’s not to say that consumption of the essential phenomenon of the moving picture has abetted, although that may be the case with categories of younger viewers who have switched to the textual realm of the Internet to obtain their news–and increasingly from non-traditional media outlets, to boot.
Rather, the medium and the basis of the content has shifted increasingly in favour of online video content such as YouTube. As with the challenge to traditional corporate media posed by blogging, more and more video content that is considered entertaining and defining in popular culture is becoming user-generated and collaborative–”amateur,” if the terminological preference of the incumbents is to be respected. Perhaps more significantly but less overtly, there is a plethora of commercial (and some free) sites offering streaming feature-length movies, comprehensive archives of TV show episodes, and much more. Some of them are probably legal and have content licensing arrangements with the industry. Most, I imagine, are not. I can’t really say, as I am not a consumer thereof.
Even among those whose consumption of the boob tube has not significantly diminished, TiVo appliances have become commonplace. They conveniently defeat intrusive advertising and dutifully record shows to be watched later, according to the viewer’s own schedule and preference.
All this points to the irreversible trend that people are no longer satisfied with bulk, canned streams of content, or anything resembling “channels.” The next generation of video content is something like YouTube, if not necessarily identical. It my involve a marriage of the YouTube paradigm with a number of other presentation formats, technologies and approaches, including ones that may not have been conceived or applied yet. But essentially, something that carries its click-and-pick spirit forward.
It’s no different than where the music industry has been headed, where, aside from the more publicised and prolific lamentations about CD prices and labels screwing artists and so forth, the critical - if understated - key factor is that people want to cherry-pick their songs. Nobody wants to pay $16 for a CD where they won’t like all - maybe even most - tracks. But they are quite happy to pay $.99 for a single track from the iTunes store. It’s because they want that specific track, right here, right now, easily and quickly. And they want to amass it into a large, portable collection on the device of their choice (which, in light of the DRM restrictions, makes market acceptance of the Apple approach somewhat curious, if not necessarily beyond the reach of explanation).
And then, of course, there is the woefully limited landscape of choice offered within the RIAA production and distribution cartel, and the incredibly high financial barriers to entry it carries. How are you going to get your band’s album into the Barnes & Noble music section? Online music distribution democratises the playing field considerably, if not perfectly.
This is where things are headed. Toward openness, clips, bites - all on-demand, and bolstered by the convergence of digital delivery features with the interactive possibilities offered by computer interfaces, fed by the Internet — so much as that remains possible in light of the vicious hostility displayed by the telcos and MSOs alike toward net neutrality and all the issues surrounding that.
(By the way, the cable companies know this. That doesn’t mean they like it. That is why they have lined up to impose bandwidth and data transfer limits on customers once again - once thought to be a tired anachronism of a previous generation of the Internet economy’s evolution. It’s because they assume–not without some justification–that if you’re transferring 60-80 GB/month or more, you are either a prolific BitTorrent pirate or you’re watching a lot of streaming video, which means you’re not watching TV, which is a terrible, terrible thing indeed.)
Rome is burning, and you want to build a telco-cum-cable company providing what can and should be properly called legacy broadcast content in the middle of it? I’m not in MENSA, but if someone tries to take your money to invest in something like that, I’d say don’t fall for that scam. Run for the hills!
The second issue is with the technology, marketing, costs, and competency of the sort of organisation that a telco-land network service provider (CLEC / ISP) is.
Who said the head-end technology available within an independent CLEC’s budget works well, and is reliable or mature? Nobody I’ve spoken to who has tried it. Of course, I could just be speaking to the wrong people.
A friend of mine, who works with MSOs for a large vendor, has informed me that a lot of the gear typically found in major MSOs’ head-ends is overpriced, overrated, and suffers from egregious duplication and wastefulness stemming from lack of interoperability. But, I am not persuaded that anything built out there to replace it for a CLEC’s build-out budget actually works. Mind, this isn’t really my area of technical expertise, so I just don’t know. But nothing I have heard has been particularly encouraging. If anything, it’s been abusive and disdainful of Mickey Mouse solutions.
Who said last-mile broadband delivery infrastructure in the US, particularly copper or hybrid ADSL2, can handle high-definition, full-motion digital video streams with the level of robustness TV viewers take for granted with conventional digital cable, or that the equipment and technology necessary for delivering it over IP has those qualities either?
I know that a lot of the distribution infrastructure feeding the MSO head-ends has been IP-based for a while. But the last-mile portion is done with QAMs and RF. Are you sure you’re going to match that consistency with New Age ADSL2–still a largely uncharted province in terms of its rollout in North American telco plant and all of its idiosyncrasies, most notably a lack of fiber to the premise–and IP-based decoders?
If my experience of the extreme sensitivity of users to the quality of service issues (read: the way it’s inferior to the PSTN experience) in residential VoIP delivery is any indication, the Monday Night Football crowd will probably lynch you. Yes, I know a lot of that has to do with the feebleness of delivering carrier-grade voice over the Internet, which isn’t how IPTV would work at all, but that is not a hinderance to the point.
The network build-out, presumably involving some combination of copper ADSL2, fiber to the premise, and various hybridised transport, is a very capital-intensive undertaking. And as if the regulatory and bureaucratic burden on CLECs isn’t enough already, franchising agreements and content licensing enter the picture as significant CAPEX. I don’t know how much any of that costs, but I have a hard time imagining that an independent CLEC can get it the same breadth of it, on the same terms, as the large cable MSOs.
Third, to harness an insight of Clint’s: video is hard. Let alone to do right. No, it’s not insurmountable, but it is fraught with considerably more technical and logistical complexity than, say, voice or data. As Clint has remarked, it is relatively easy for a cable entity to enter the telephony space, especially as they already do data, making VoIP a logical, ostensible proposition. The synergy in triple-play is there for them. But telcos trying to reform their competency upward from voice/data into the video space is much harder. The synergy in triple-play is there for the MSOs because it’s a downhill battle — they already have the hard part. Telcos, institutionally, would have to fight an uphill competency battle.
But if that’s not discouraging enough, the real question is — where’s the elusive value proposition, the uniting elixir that is going to bring all these customers and the windfall profits for the enterprising CLEC?
What is being sold?
Something that people don’t already have, like … cable TV? Very funny. Perhaps rural areas not covered by cable might be a candidate, as relatively few as they are, but it is a stretch of the imagination to consider that the infrastructure there - i.e. the copper plant - is ready to support a brand new ADSL2 roll-out. Sure, remote DSLAMs with their fiber tails can be intrepidly built, but if the cable company doesn’t think there’s any ROI in building out their plant to the area because of population density or demographics, you must know something they don’t.
You might try for rural areas that have inferior, legacy local-yokel cable with a narrower range of features and content access, but you’ll have to conveniently ignore the existence of satellite–and hope your customers do too.
Aside from that, what’s the value? A little bit of bundled savings on triple play? Using New Age, avant garde technology that is unlikely to work as well as the perfectly good cable TV that is fairly ubiquitous, over experimental delivery mechanisms? And to suppose that your cost structure — and urgent need to recoup the cost of the build-out you just did and that the MSOs already have — is going to allow you to offer that competitively? CLECs/ISPs are often straitjacketed from even offering voice and data competitively with the ILECs unless they’re simply willing to take a margin hit; how did TV get to be the manna from the sky?
Marketing this type of stuff with any significant conversion rate is hard enough as is. It’s going to be even harder if you have nothing superior to offer. This is a good time to brush up on the subjective theory of value: just because television may be a novel, interesting business for a telco doesn’t mean its customers will think — or experience it as — a novel, interesting product. Well, they might think that, but the correlation between thinking certain things and voting with dollars would prove disappointingly low.
Having said all that, there are probably a few niches here and there where going into the TV business might make sense, such as multi-tenant buildings (MDUs). Or maybe if you’re fortunate enough to get a shot at a free and clear monopoly on a small (but growing) rural municipality if you do the trenching. Well, okay. That could work pretty well. But then the question arises: Why not do that from the cable side, instead of the telco side, from an infrastructural perspective? Get stuff that already works well.
In any event, I’m not prepared to condone a business model based on the theoretical possibility of making it work with a set of highly specific, contrived artifices. I’m sure there are circumstances in which there may be an extremely compelling business case to offer janitorial services or lawn care, too — maybe do a deal with Blackwater in Iraq or something. Pockets of the extraordinary notwithstanding, it doesn’t count.
The news is not all bad. As I mentioned above, TV may be dying, but consumption of video content is not. If what you’re interested in is capitalising on the possibility of offering the next generation of computer-convergent set-top boxes with access to all sorts of newfangled content options whose market share and significance is likely to meteorically rise, that’s not such a bad idea.
But in that case, concentrate on rolling out the next generation of high-speed broadband access and customer premise equipment, especially as much of it is likely to be Internet-driven. If it turns out that this is not the case, you can add distribution and plant to drive new content models later. Why on earth would anyone want to get quagmired in the business of television as such? Why the stampede to imitate what the cable companies have been refining for decades, and provide an alternate distribution mechanism for the exact same content?
It’s time CLECs, Wall Street, and vendors got off this insipid IPTV bandwagon. Independent CLECs need to find something better to do.
