Already heated tempers reached a boiling point last week in the current mêlée between Fox's parent company, News Corporation and New York-based Cablevision. At issue is the question of "retransmission," the fees cable companies must pay networks to carry their programming in the line-up. In the latest salvo, News Corp elected to deploy a "nuclear option" of sorts--blacking out not just Fox channels, but also Cablevision subscriber access to sites such as fox.com and hulu.com. The access blocking, while short-lived, sent a clear message-Fox holds the cards. Was this move a shot across the bow of `traditional' cable, as some have suggested, or rather a shot in the foot for News Corp?

This Whole ‘Cord Cutting’ Thing?  Yeah, it’s Here to Stay

Dismissing or minimizing the severity of cord cutting has been de rigeur of late in the analyst community.  Many service providers and industry pundits alike have effectively buried their heads in the sand for the past 18 months over the issue, writing it off as “over hyped phenomenon.” Survey research we just fielded suggests that doubters might want to rethink their position.  According to the survey of 2,000 Americans in late Q3’10, 13% intend to drop their pay TV subscription in the upcoming year—and not replace it with another one.  We have long held that cord cutting is a very real problem, and what we’re seeing now is likely just the tip of iceberg.  What happens when today’s teenagers start controlling the pocket strings in five or ten years?

120 Channels and Nothing On

The average US household receives nearly 120 channels, though many would argue that they watch only a handful of those. Our survey found that, when asked to rank their five "must have" channels, Pay TV consumers chose the four "free networks" (CBS, ABC, NBC, FOX) as the top slots. ESPN rounded out the top 5. This is rather astonishing, and adds further credence to the notion of cord cutting.  After all, if  four of the top five channels an individual watches are available for free (either online or over the air), why on earth would one pay upwards of $70/month for a subscription?  Force of habit?  Because the cable company told you to?  To avoid having to switch an “input” button on the remote control?

Not the End for Pay TV—But Maybe Pay TV As We Know It

To be clear, we are in no way predicting the imminent demise of pay TV.  There will always be a market for premium content, and that customers will continue to be receptive to paying for content relevant to them. Rather, we believe that service providers must rethink business models. Some have already begun to do this, through initiatives like TV Everywhere.  That, however, solves only the where part of the problem.  Next to tackle is the what. A la carte?

In a report to be published in the few days, 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.

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.

Microsoft has announced that NBC Universal will provide movies to its growing catalogue of titles available for download through the Xbox Live service in France, Germany, Spain and the UK. The newcomer joins existing studios Warner, Paramount and MGM. The movie library will now total nearly 300 titles, and Microsoft claims that movie sales have doubled since the introduction of the new Xbox interface (NXE) late last year. Microsoft has brought over a team from the US to build up the Xbox Live activities in Europe, which are tracking somewhat behind what’s going on in the US. As I mentioned recently Netflix has had tremendous success with its movie rental service through the Xbox Live service in the US. Unfortunately Netflix doesn’t have a European activity yet, so until a deal with a European aggregator (Lovefilm?) can be signed, Microsoft is having to pull together its own movie deals. As with everything else in Europe, that’s no easy matter as rights have to be cleared in each country separately. Italy had to be excluded for the moment from the NBC Universal deal, for example, because of local exclusivity clauses. The Xbox Live library offers a mix of SD and HD movies, the latter in 720p. We are still waiting for the arrival of 1080p movies, both in the US and Europe. That will be a significant moment, because it will justify what Microsoft has claimed all along: that it doesn’t need to add Blu-ray capability in a world of online video. 1080p movies would obviously be a challenge in terms of file size, in terms of storage and network access, but it’s something Microsoft will have to address sooner or later, in spite of its claims that users can’t tell the difference between 720p and 1080p. Twitter: twitter.com/dmercer15 Client Reading: Digital Media Survey: An analysis of US Online Premium Video Users

...and not before time. The BT Vision Philips set-top box (V-box) has had HD capability built in from day one, as have most IPTV set-top boxes around the world. So it's taken more than 18 months since the launch of the service to offer HD quality. BT's first deal is with NBC Universal "for a broad selection of feature films" on the VOD service. Specifically, that means The Incredible Hulk, Wanted and Charlie Wilson’s War, alongside library titles such as E.T. – The Extra Terrestrial, Shaun Of The Dead and Miami Vice. Prices for new films will be £4.95 and library titles £2.95. BT says they are "competitively priced", but Sky HD Box Office movies are priced at £3.99 so users will soon decide whether £4.95 is too much for a recent release. BT's model for Universal movies is the usual "unlimited viewing" during a 48-hour period. It's good to see broadband television in the UK catching up with other European countries like France (though, as I have pointed out many times, BT Vision is not really "IPTV" - it's IP VOD combined with DTT). It will require a lot more choice of HD content for BT to start deploying its HD service as a marketing weapon, but this is at least a start. BT should also be commended for not falling into the "four-letter word" trap: there is no mention of "full HD" or 1080p. The BT Vision V-Box can present HD content in 720p and 1080i via HDMI. All HD content is encoded and delivered to the V-Box in 1080i. So the UK's Blu-ray fans can rest easy for now. Client Reading: Full HD: Blu-ray Camp Claims Broadcasters "Mislead" Consumers