Big news today as Cisco announces its intention to acquire NDS for $5bn. Both company boards have approved the deal which is expected to close during 2H 2012. NDS is currently owned by News Corp and Permira.

Cisco made headlines last year for most of the wrong reasons, including famously pulling out of most of its consumer-facing businesses such as the Flip camcorder. Acquiring NDS puts it firmly back on the acquisitions radar, and confirms what John Chambers told me during our analyst roundtable at the 2012 CES: “the consumer still remains a key element in Cisco’s strategy”. Cisco supports service providers who support consumers, and NDS fits nicely into that positioning. According to Chambers during the financial analyst call today, NDS’s strength in software is exactly what Cisco’s customers have been looking for.

NDS helped create the pay TV industry. Originally developed out of the News Corp organisation, its smart card technology was a critical element in the development of Sky in the UK, and from that base it expanded into many pay TV operators around the world. Along the way it expanded into interactive (now more fashionably known as smart TV middleware and many other components of the television technology chain. And while the company’s charismatic leader, Abe Peled, used to make great play of the longevity and importance of the smart card/set-top box model, his company nevertheless has been preparing the way for the OTT/connected TV era. The fact that News Corp is willing to sell NDS is another sign (after Sky recently announced its own independent OTT service) that media companies see their subscription businesses as less reliant on the television set-top box, instead moving towards a multi-device, software and network based model.

If anyone doubted Cisco’s seriousness about the consumer video space (rumours about the future of its Scientific Atlanta business regularly resurface), this acquisition confirms it still intends to play a critical role in television’s transformation over the coming years. Assuming that the transaction goes ahead and NDS can be successfully integrated, NDS’s operator relationships, R&D strength and technology visions should help Cisco’s service provider and media customers make better sense of the value chain disruptions which lie ahead.

David Mercer

Former President of the European Parliament Pat Cox closed this morning's keynote at Cable Congress 2012 in Brussels by alluding to Roman Emperor Seneca the Younger's warning: "if man does not know to what port he is sailing, no wind is favourable." He was speaking in reference to the never-ending travails of the European Union as it seeks to resolve its financial problems. But he might as well have been commenting on the state of the European cable industry.

Europe's cable TV subscriber base has been flat for many years, although it has had some success in growing TV ARPUs. According to this morning"s press conference at Cable Congress in Brussels the fastest growth is now in broadband data, at least in the German market, where cable broadband had a very slow start.

Manuel Cubero, COO of Kabel Deutschland, made a telling remark when he said that the German cable industry now thinks of broadband customers using OTT video services as its own video customers, and in that context the cable industry’s video or TV customer base is growing.

Cable has always been the original broadband pipe, with the potential to offer video, television, communications, data and advanced services like smart home, all using the same network access platform. But while this inherent multi-service capability has always been seen as a strength, has it also obscured the industry's direction? If cable operators are now happy to accept customers who only pay for data as though they were video customers, what business is cable in?

As our research has shown, cable TV is caught in a pincer movement between higher value, technology-leading satellite services, and free DTT. It’s understandable that cable operators want to emphasise broadband as their growth opportunity, but at the same time I have heard a lot today about video being central to their future. Messages do seem to be somewhat mixed.

During the next panel discussion Mike Fries of Liberty Global touched on the old question of whether cable operators are in the content business. He indicated that cable certainly intended to expand its presence in content. He made the interesting point that cable's primary competitor, in all markets including the US, is free-to-air. So as cable navigates stormy seas, if it is defined primarily in relation to its main competitor this suggests that cable's port can be described as simply getting people to pay for something, or possibly anything.

That conclusion is clearly unsatisfactory so I am on the lookout for further guidance on cable's strategy and direction over the next couple of days. In the worst case perhaps we will just conclude that the sea fog is so thick that we can't even see where we are going, never mind know where and when we are expected to arrive.

David Mercer

As we approach next week’s important Cable Congress event in Brussels, we went to our ConsumerMetrix survey of 2700 television households to see what European cable customers are saying about their television service in relation to cable’s major platform competitors, satellite and DTT. We are pleased to present the results of this analysis in a complimentary report to coincide with the Cable Congress, which is now available for download from the Strategy Analytics website.

Clearly broadband and other services are also on cable’s agenda, but in this report we’ve focused on television services. Unlike the US, where cable has long been established as the primary television access platform, its availability and customer base across Europe is much more of a patchwork quilt. For a number of historical and structural reasons, both satellite and terrestrial providers have established stronger relative positions in Europe than in the US.

Satellite’s advantages are clear to see from our survey. We asked customers whether their television provider gave them access to advanced services and features such as programme guide search, series recording, and live TV pause. In every case satellite customers were more likely to have access to these capabilities than cable customers. Often the margin is significant: 59% of satellite customers get HDTV channels, compared to 50% of cable; 53% have series recording on satellite services, and only 36% on cable.

 Remarkably perhaps, more satellite customers claim to get VOD from their satellite provider than cable customers: 44% v. 43%. Satellite clearly lacks the integrated pipe required for a true VOD service, although hybrid internet and push-VOD DVR services are available. Nevertheless, the fact that cable’s one big technical advantage has not been maximised demonstrates how much catching up the cable industry has ahead of it. Or is it just that cable customers don’t know what their cable provider offers?

While satellite leads in technology rollouts, digital terrestrial television has also had a major impact on Europe’s landscape. Not surprisingly, given that these are often free services, DTT lags behind both cable and satellite in feature availability and performance. But the flipside is that DTT is most highly rated on overall value for money, not surprisingly. In times of economic uncertainty the threat of customer defection to a lower cost option is very real.

This satellite/DTT pincer movement presents cable TV with a dilemma: should it concentrate on the innovation threat from satellite (and potentially other new entrants), or try to resist the allure of free digital terrestrial services now widely available across Europe? Can cable meet both challenges, and how can its broadband advantage be used to best effect?

I’m looking forward to getting further insight into these and other questions from the senior executives who will be speaking at Cable Congress. I’d also welcome any feedback on our survey findings and invitations to discuss industry issues and strategies during the event.

David Mercer

A common theme during last week’s excellent Future TV Ads conference in London was the battle between “platforms” (TV service providers) and broadcasters. Platforms such as Sky and Virgin gave upbeat assessments of the opportunities presented by IP technologies to improve the power and value of advertising. Broadcasters, on the other hand, were markedly more nervous about the impact on their own businesses.

Virgin Media is currently gung-ho about its TiVo boxes: 220,000 households (6% of Virgin’s TV customers) were using these devices by the end of October and we were assured that the number is already “much higher”. 79% of those households are accessing an average of 4.5 “apps” each week.

By deploying more advanced technologies such as TiVo, Virgin has been able to trial new advertising models, and claims that they have “all been highly successful”. While this somehow doesn’t quite ring true, Virgin believes it is in a good position to “create the next generation advertising marketplace” and furthermore that “apps will be a fundamental and significant part of the television advertising toolkit”.

Sky’s Jeremy ester (director, brand strategy) highlighted two key challenges for advanced advertising: ad serving technology, and measurement. Sky is helping to address the latter challenge by finally fulfilling the potential of its interactive set-top boxes to develop improved advertising research. The company already has 20,000 households in its SkyView customer panel, which have opted in to sharing set-top box-based information about viewing patterns. Sky plans to expand this panel towards “hundreds” of thousands of homes over the coming year or so, and in fact Tester suggested there was no reason why the base should not ultimately comprise millions of households. Sky’s strategy is leading towards the deployment of Sky’s AdSmart targeted advertising service on set-top boxes by spring 2013.

Another important piece of BSkyB’s strategy is SkyIQ, a subsidiary which evolved out of the acquisition of a division of Experian in 2010. SkyIQ supports advertisers with database and customer intelligence services, and, according to Tester, is offering advertising research which is “better than anything seen before”.

 Sky’s counterparts around the world may be curious how the company is managing data privacy issues, which can be notoriously stringent in many countries. Sky contacted its customers earlier in 2011 seeking permission to collect anonymous customer data, and claims that “very few” of its customer households did not give their consent. There seems to be a lesson that if data collection is presented as offering clear benefits, many customers do not see it as a problem.

In response to my question about social networking, which Tester had not mentioned during his presentation, he admitted that Sky is seeing a “huge impact on viewing behaviour” from social networking apps and services. I did sense a slightly defensive stance, since Tester was quick to reassure us that Sky “did not want to get left behind” and was developing its own social networking tools. It sounded as though that was a little bit more than Sky’s corporate communications team wanted to be publicised, so we can assume significant announcements in this space over the coming months.

The “battle” was certainly raging during my own panel at the end of day two. Decipher’s Nigel Walley stood up for broadcasters “vigorously”, let’s say, in the face of questioning about the supposed threat from Google, Facebook et al. I just hope Videonet, the conference organisers, have invested in a bleep machine before they edit the videos for online availability.

The bottom line, as GroupM’s Simon Thomas noted, is that advertising expenditure as a whole can not be expected to grow very much over the coming years. While there is a great deal of advertising experimentation, advertisers, like every business in tough economic times, have to quantify ROI before investing in new solutions. “If we can’t measure it, we don’t get paid by the advertiser.” And as ITV’s Eric Guillaume admitted, broadcasters are “really bad” at understanding customer data. As we’ve seen, that is a huge contrast to what’s going on at Sky, Virgin and the TV platforms in general, and explains why broadcasters have a great deal of catching up to do if they are to thrive in the new interactive television era.

David Mercer

Reuters is reporting that cable operators are working on a plan to allow customers to purchase channels on an individual basis, also known as à la carte. This represents a 180 degree change in strategy and position, from an industry that has long held that established advertising models preclude any departure from the 'tiered' channel system. 

Glad to see you're finally coming around, Cable.

Not that you had much choice. And not to be uncharitable, but golly, it feels good.

You see, our camp (those who have been citing the need for à la carte bundling for the past 4+ years) has been rather sparsely populated of late. In countless reports, presentations and one-on-one meetings with Cable executives over the years, we have pointed out that à la carte is not just a consumer preference, it is a Pay TV imperative. Meanwhile, through industry blowhards and paid quote-models, we have been told that it can't work, that it won't work.

Our response has always been that it has to work, if Pay TV is to survive.

And after years of dismissing it out of hand, of categorically rejecting any survey data or consumer insights contradicting their established talking points, Cable is finally listening, the wires and airwaves are filling up with the sounds of pundits finally changing their tunes.

"There is a growing recognition that the current model is broken," one epically overexposed talking head quipped yesterday.

How's that for groundbreaking insight?

US Pay Cable operators posted net subscriber losses for the 15^th consecutive quarter in Q2'11. For fourteen of those fifteen quarters, the industry has regularly pivoted on its explanation.

First, they said net losses were just a 'blip', an anomaly. When losses persisted in sequential quarters, the stagnant economy and high unemployment were to blame. When that no longer held water, the talking point morphed into a we didn't want you anyway argument, that those churning or dropping were low value customers. A report we just published completely discredits that explanation as well.

Fresh out explanations, and having bled 400,000 subscribers in Q2'11, Pay TV really has no choice.

For as long as I've been covering this space, I've cited survey after survey confirming a strong consumer preference for à la carte and indeed, a willingness to pay MORE for à la carte. Consumers feel ripped off, they want to feel that they are in the drivers' seat. They need choice or the illusion of choice.

And contrary to what some suggest, money is not the primary motivator for consumer churn, it's about perceived value. It's about control of content.

Indeed, our latest report, which draws on a recent survey of of 2,000 US households, further confirms this notion. It shows that 21% of American Pay TV subscribers would be willing to pay more than they currently do if it means they have some say in what channels they get.

Glad you've seen the light, Cable. What took you so long?

Executives from Alcatel-Lucent (ALU) presented the company's latest technology roadmaps and innovations at its recent Technology Symposium in (and just outside) Paris. Stephen Carter, Chief Marketing, Strategy & Communications Officer, described the six key trends as ALU sees them:

• Wireless
• Cost Experience Transformation
• The Apps and Content Value Chain
• Cloud
• Critical Network Infrastructure
• Internet of Things

 None of these is a particularly new idea but they neatly sum up the key battlegrounds for ALU’s core customer base, the network service provider industry.

The continued evolution of wireless technologies is well documented, as global 4G rollouts will be the focus of attention for the next few years. But ALU has a key interest in the transformation of fixed line broadband as well, having played the leading role in establishing the dominant xDSL technologies over the past couple of decades. In spite of the global predominance of wireless access technologies, it may come as a surprise that fixed access still has a vital role to play, in mature markets at least.

For many years there has been much talk of fiber-to-the-home as the ultimate fixed broadband solution, but the relatively limited commercial deployments of such solutions (such as Verizon’s FioS) have been slow to emerge and, if anything, are showing signs of plateauing rather than becoming de facto alternatives. BT is the latest telco to stumble on its plans for FTTH (or FTTP – Premises – as it prefers to call it): installations during the trial phase are taking seven hours on average, against a target of four, and it is reported that a quarter of installations are taking as long as two days to complete.

There just doesn’t seem to be any obvious solution to the dreaded last mile challenge, which is less about developing ever more advanced communications technologies than about the need to invest in shovels and spades to dig up roads, pathways and gardens. The labour required for such “replacement” wires is pretty much fixed cost, unless anyone is suggesting an unlikely collapse in labour rates; and, as BT is demonstrating, you just never know what physical or organisational obstacles will lie in the way of new wire installations.

ALU thinks it has come up with a viable alternative to FTTH. As part of its High Leverage Network architecture, for which video services are seen as a major driver, it believes that the established copper access infrastructure can be upgraded to support speeds of up to 900Mbps. Key enabling technologies behind this transformation are vectoring (involving the removal of crosstalk), as well as quadruple bonding of copper pairs. Four pairs are not commonly available, but the technology would still provide bandwidth of nearly 400Mbps over two pairs over a distance of 400 metres.

ALU’s major challenge is to convince its service provider customers that any such next gen network investments will generate sufficient return from new service and application revenues. However positive a spin ALU puts on the potential for new data-sapping video services, our reading of service provider strategies is a high degree of caution about any significant net revenue growth impact from such services. As Telefonica noted recently during its investor day, incumbent telcos are projecting very modest revenue outlook (1-4%) for the foreseeable future, in spite of accounting for new service growth globally across wireless and wireline businesses. New network investment will continue but it is driven by competitive dynamics rather than the expectation of discovering a new pot of gold. Whether regulators decisions on next gen network policies, in Europe in particular, can have any impact on the established trendline seems doubtful at best.

David Mercer

Client Reading: Broadband Service Provider Performance Benchmarking: Europe Q4 2010

At this year's CES, we said that 2011 would the year of the Smart Home Applications. To be sure, tablets took the forefront at the show, but the "smart home" could not be ignored. We estimated the US market value alone to be on the order of $5.6 billion by 2015. While the term "Smart Home Applications" could conceivably a variety of services, in our analysis, we included Remote Energy Management, Broadband-enabled home security, and Telepresence

Up until now, despite what seems like years of trade show mockups, demos, and media hype, Smart Home Applications have failed to garner the attention of Service Providers on any measurable scale. In 2011, market conditions and consumer interest appear to be finally aligning.

Two recent Service Provider announcements suggest momentum:

AT&T and Xanboo

AT&T's acquisition of its longtime home monitoring and smart home application partner, Xanboo late last year garnered some brief media attention, then quickly receded below the radar. AT&T was and continues to be reluctant to disclose their plans with regards to the acquisition. A March 31^st letter sent by AT&T's counsel terminating dealer relationships effective July 2011 suggests that the company may be preparing to rebrand and relaunch in the near future.

Verizon's Moves in MDU

Verizon last week announced a partnership with Healthsense to provide remote health monitoring to senior communities another indicator that years of industry talk is finally being converted into action. Penetrating the target-rich MDU (multi-dwelling unit) market is one way to reach CEO Ivan Seidenberg's stated goal of 40% takeup of the FiOS service. Adding Cisco's umi Telepresence to the mix could make virtual doctor consultations a reality though, as always, pricing is an issue.

Recent talks with clients confirm this renewed interest in the Smart Home area Service Providers are clearly eager to uncover new revenue streams, and view Smart Home Apps (SHAs) as a new and uncluttered adjacent market.   They are likewise keen to mitigate churn, and our research has consistently shown that bundling provides some "insulation" against churn. Manufacturers see SHAs as a potential "hook" into the home, and are just as interested in how this plays out.

The past two years have been tough on Pay Cable TV. In 2010 alone, the industry saw over two million video subscribers drop their subscriptions. While certainly not great news, there was a silver lining. In the same seven quarters, Cable High Speed Internet (HSI) gains more than compensated for Pay TV losses.

Has Cable been in the wrong business all these years?

Following that same trend, Time Warner Cable today announced that it had lost another 66,000 Pay TV subscribers in the first quarter. The good news? It added 177,000 broadband subscribers.

We've heard (and indeed, have been saying) for so long that traditional Service Providers were threatened with "disintermediation" and risked being relegated to the role of a "dumb pipe." I, along with many analysts, have advised Service Providers to avoid this trap at all costs.

But in retrospect, is being a "dumb pipe" such a bad idea?

High Growth, High Margin

As Pay TV subscribers (and margins) continue to dwindle, Cable Broadband profitability is growing. Our analysis shows that HSI margins are anywhere from 70% to 110% higher than Pay TV (depending on whether or not advertising is included in the calculation). Broadband is likewise changing the face of the "traditional" Cable bundle. In 2008, Video contributed 59% to Cable's Revenues. In 2010, the number was 53%.

TWC's CEO Glen Britt told analysts on the company's Q1'11 earnings call that the company is rethinking the role of broadband in the company's portfolio. "High-speed data is quickly becoming the anchor product in the eyes of our customers," he said.

Don't reprint those business cards quite yet

While on the surface it may seem like a no-brainer, doubling down on broadband may not be the best long-term strategy for Cable.

As a highly commoditized consumer offering, it is extraordinarily challenging to differentiate, and is one easily duplicated by competitors. Furthermore, prospects for increased ARPUs in fixed broadband are decidedly limited, as few have been able to successfully monetize incremental bandwidth offerings.

To be sure, it's doubtful that any MSO would abandon its core TV offering. But as Cable ponders its next move on the OTT front, it should be of some comfort that broadband continues to take up the slack.

-Ben Piper

The UK’s telecoms regulator, Ofcom, has announced the results of its latest survey of broadband speeds. But it has again failed to recommend the main policy which would help consumers: minimum broadband speeds. As I posted last July this is the only way that BSPs will be forced to give broadband customers the level of service they are entitled to, and at the same time create a more level playing field for broadband providers.

Instead, in a response to a review by the Advertising Standards Authority into broadband advertising practices, Ofcom recommends that BSPs should be forced to publish a “Typical Speeds Range”. This is described as “representing the range of speeds actually achieved by half of customers”.

Ofcom also recommends that “If a maximum ‘up to’ speed is used in an advertisement, then the TSR must have at least equal prominence. Furthermore, the theoretical maximum ‘up to’ speed stated must be a speed actually achievable by a material number of customers.” This is particularly odd, since DSL technology simply cannot deliver the theoretical maximum (as advertised) in real life.

Finally, Ofcom has finally agreed with something I have been calling for since 2006, namely “a move away from advertising ‘up to’ headline speeds”. Well, that’s not quite as strong as banning this useless phrase, but we should be thankful for small mercies.

Whether any of these recommendations is ever implemented, and in what form, of course remains very much open to question. It would be surprising if, even after several more rounds of recommendation, review and procedural drafts circulating between the various regulatory and government bodies, that BSPs and their advertising partners were not able to neatly sidestep the key issues and keep consumers just as confused as they always have been.

The TSR idea sounds persuasive at first sight, but in reality, if implemented, is likely to do little to make broadband services clearer to consumers. BSPs will find all sorts of ways to obfuscate what TSRs really mean, there will be endless arguments over how they should be calculated, and in any case, if the TSR has as much prominence as the “Up To” speed in advertising, this is likely to be even more confusing to end customers.

It seems almost as though Ofcom got half way towards recommending Minimum Speed guarantees, and then pulled back, for what reasons we can only surmise. After all, a true TSR would include both a “minimum” and a “maximum”, at either end of the “range”. But if it only applies to half the customer base, it is as good as useless.

As I have pointed out many times, the background to this debate is the universal broadband commitment, which is itself an outcome of the misguided attempt to avoid talking about the politically incorrect “rural divide”. We need to get over this – it’s the nature of the technology and there’s nothing anyone can do about it until we run fibre to every doorstep in the country. It’s the poor souls in the 5-10% of the country who live too far from exchanges and out of cable coverage who are the reason we have to have these fruitless debates. If the government and regulator did the decent thing and put those homes, however many there are, into a special “rural broadband” category, the rest of the population and the industry in general could get on with talking about broadband in grown up language. Advertised minimum speeds would be perfectly feasible and DSL services could be banded into packages consumers could understand.

Too little, too late; but now that Ofcom has finally bitten the bullet on “up to”, here’s something else it needs to get stuck into: anecdotally I am seeing increasing numbers of friends and family getting frustrated with switching broadband providers. In particular the issue seems to come down to where responsibility lies for any problems with the line or broadband service. I am aware of several cases where AOL (TalkTalk) broadband customers have had problems getting acceptable service, either as new customers or when they upgrade for some reason; AOL/TalkTalk is unable to help, BT is unable to help, and the customer feels that they “may as well” go with BT because they know BT owns the network and will get the problem sorted out.

There are too many conspiracy theories to start thinking about, but there seems little doubt that it is too difficult to switch and many consumers consider it too much hassle. Our own survey of UK broadband customers (admittedly carried out in late 2008) showed that “hassle of scheduling connection/installation” and “inconvenience of cancelling service” were the single most important reasons why consumers would avoid switching to a new BSP. Ofcom may eventually get the advertising sorted out, but that will have little impact if consumers still feel it just isn’t worth trying to change providers.

David Mercer

Client Reading: Broadband Service Provider Performance Benchmarking: Q3 2010 (Europe)

Followers of the industry will no doubt recall the unstoppable buzz at the 2010 CES Show in Las Vegas, where the story was 3DTV, and how it was poised to overtake the American living room. In the ensuing 12 months, though, it seems that much of the excitement around the technology has subsided?if not evaporated.

Indeed, we shared our views on the 3DTV opportunity at this year?s IBC in Amsterdam: essentially saying that consumer excitement around the technology was quite high, but that translating that enthusiasm into a viable business model would be a challenge. Our feelings in that regard haven?t changed substantively.

Content and the Indelicate Topic of Money

What we have seen in the past five months, however, has been a swift roll out of 3DTV programming worldwide. Two notable examples are 3net, the joint venture of Sony Corporation, Discovery Communications and IMAX Corporation, as well as ESPN?s announcement of its dedicated 3DTV channel.

Now Cable and Media behemoth Comcast has announced the launch of its 24/7 3DTV Xfinity 3D channel for next week, focusing, it says, on ?music, sports, movies and original programming.?

A crucial, and often over-looked, question is: who will actually pay for this? There are significant premiums associated with producing content in 3D compared to 2D. Our estimates based on industry interview set the premium in the range of 80% to 100%. In the theaters, it is the moviegoer who pays the premium to see the latest 3DTV release?indeed it is evident in the ticket price.

The question is, who pays at home?

Market for 3DTV: It?s The Cube Tubers

As we have pointed out in the past, our US consumer survey research and forecast modeling suggest only a relatively modest opportunity for 3DTV in the home. Overall, fewer than half of respondents showed a willingness or expectation to pay any premium for 3DTV.

We have, however, identified and isolated a group of consumers we believe to be most likely to actively view (and more importantly, pay for) 3DTV services.

This group of individuals, whom we dub ?Cube Tubers,? represents between 8%-10% of the overall population. Cube Tubers are unique in their intentions to purchase a 3DTV in the upcoming year, and to be active premium/HD customers.

Compared to overall survey respondents, Cube Tubers exhibit a much higher interest in receiving 3DTV programming at home, with 74% saying they are ?somewhat? or ?very? interested, compared to 36% in the overall sample. Likewise, they were significantly more likely to expect to pay some sort of monthly or one-off premium than the general sample.

Content aside, 3DTV still faces an uphill battle in other respects. Perceived health risks (true or not) will stifle widespread takeup, as will the need for specialized glasses.

Despite impressive demonstrations of ?Auto-stereoscopic? 3DTVs by vendors at recent trade shows, we don?t expect to see a commercially viable ?glassless? solution any time soon.