A Crisis of Consolidation

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On May 2, 2010, United Airlines and Continental Airlines announced their decision to merge. In March 2012, less than two years later, the companies effectively completed the consolidation. While both United and Continental had historically expanded through mergers and acquisitions, the merger was not without its share of missteps due to the need to merge equipment, personnel (including deeply rooted corporate culture and staff seniority), routes, airport lounges, flight reservation systems and flier loyalty programs. With a target on their backs and competing airlines trying to steal passengers, routes and perception, only time will tell if United will continue to thrive in the eyes of both passengers and shareholders.

I bring up this tale of two airlines and their complicated marriage because, over the past weeks, Bloomberg Terminals have been buzzing with rumors of consolidation between some of the major cable operators. Most notably, a play by Liberty Media (via its stake in Charter) to gobble up Time Warner Cable and potentially roll up smaller pay television providers has been generating buzz. Any overture could stir the belly of consolidation across the pay television landscape. Comcast sits as king of the hill with its ~22MM subscribers, but it has a target on its back from fellow cable and satellite providers. The over-the-top providers that only need small changes in the landscape to increase the cord-cutters, cord-shavers and cord-nevers are also eager to take Comcast’s business.

While this chapter is far from over, consolidation at this level highlights two paths.

Is It Value Creation …

With consolidation of two (or more) providers, we can envision multiple opportunities to create long-term value for the ecosystem.

TV Everywhere continues to face multiple obstacles. With a consolidation of providers, this could help reduce the issue of fragmentation and TV Everywhere “isolation” — those cases when consumers are not able to access a specific service because the pay television provider isn’t available as part of the programmer’s offering. Even a high-profile service like WatchESPN (launched in 2010) supports dozens of providers but is still missing the largest satellite providers. With larger, and fewer, pay television providers, it could be easier to drive awareness of TV Everywhere, reduce the cost and effort for integration with programmers and focus on the original goals of TV Everywhere. At its core, TV Everywhere seeks to enable consumers to access content (that they already access via broadcast with a paid subscription) in a truly mobile fashion — anytime, anywhere and on any device.

Comcast made waves with its introduction of X2 at The Cable Show. Of equal interest to the propeller heads last month and at The TV of Tomorrow Show last week in San Francisco was Comcast’s RDK, already licensed by other providers. There were many doubters that “cable operator” could be used in the same sentence as “open source,” “royalty free,” “WebKit,” “Flash” and “Smooth Streaming.” With what has been presented thus far, Comcast has set a high bar but has given the industry a step ladder to reach similar heights.

Pay television providers typically receive the brunt of criticism for bundling. But the practice actually stems from the desire for programmers to bundle together their channels for cross promotion, upsells and trials. As a result, many consumers pay for channels they rarely — or never — view based not just on the proliferation of channels, but also on viewer interest.

Sports is the most salient example. ESPN charges providers about five dollars per month per subscriber (but the network needs it to support shows like “Monday Night Football” which costs almost two billion dollars per year in licensing). While some consumers would be willing to forgo ESPN in exchange for five dollars per month, there are others (myself included — Go Tree!) who would likely pay much more — for that specific channel — if unbundling were an option. While the debate and economics around content rights (especially for sports) will not be solved today, being able to resurface the issues around bundling without resorting to verbal jabs with politicians or lawsuits against programmers is preferable.

Cable providers don’t just provide our weekly fix of sports, news and guilty primetime pleasures; cable providers also provide the pipes that serve up digital bits. While there have been previous concerns over issues surrounding net neutrality, consolidation of providers could — in the theme of standardization and scale as larger providers subsume smaller ones — enable better usage of digital services for consumers by enhancing TV Everywhere services from the pay television provider, reducing the cost of delivering digital content, increasing broadband capabilities (the United States averages only 7.4Mbps) and increasing the in-home television experience through a unification of experiences across the traditional set-top box and mobile devices.

The hope is that consolidation will bring forth the best in all participants, thus reducing complexity and friction, and increasing the velocity of technical innovation and consequent value to the consumer.

… or Protection of the Status Quo?

The fear is that consolidation is simply a mechanism to manipulate inefficiencies in the marketplace. While this is inherent in an efficient market, consolidation could result in a defensive strategy that sacrifices long-term innovation and value creation.

We should be wary of consolidation as a mechanism for aggregating subscribers to drive down subscription costs purely for negotiation with programmers. Programmers could relent, but would that result in less revenue to invest in quality content? Would programmers subject viewers to more advertising or higher prices of goods, a “trickle up”?

Pay television providers are forced to assess how they deliver value to consumers despite the landscape that is changing month by month. While the industry hasn’t faced its Napster moment yet, the threats are severe distractions. Barry Diller’s Aereo continues its growth, expanding to Chicago this September. While broadcasters have prevailed against Aereokiller in California and sued in D.C., Aereo hopes its — somewhat precarious — victory in the Second Circuit Court of Appeals is enough to support its ambitious plans. While broadcasters have been directly engaged with Aereo until now, the spat has only shone a light on the often missed concept of over-the-air. GfK’s recent report highlighted that 22.4MM households watch over-the-air television. The report’s author, David Tice, makes an interesting observation:

Few broadcast-only homes report Internet service connected to their TV set; when asked why they cancelled TV service, the overwhelming majority (over 60 percent) cited cost-cutting; far fewer mentioned cord-cutting because of online viewing options.

In this case, consumers are not running to OTT providers, they are running away from pay television providers. This should sound the bell louder than Aereo, louder than Netflix’s resurgence and success with original programming. While pay television providers should be analyzing the longer-term strategies of Microsoft’s Xbox One and Intel’s OTT offering, pay television providers must not be caught flat-footed with consumers who can’t rationalize the monthly subscription. While these deserters may flee to an OTT provider, it may be out of necessity, not desire.

While it’s likely we’ll land somewhere in the middle of these two scenarios, my hope is that through these moments, opportunity will be born. At these crossroads, the marketplace is given the chance to create more value for the entire ecosystem, from pay television providers to programmers to consumers like me who send a check to our provider every month — but in doing so suffer a crisis of confidence.

Albert Lai is CTO for Media and Broadcast Solutions at Brightcove. He has designed, developed and deployed digital video and e-commerce solutions for over 13 years. Prior to Brightcove, he worked at SnagFilms and at Maven Networks (acquired by Yahoo) architecting and implementing video platform solutions for FOX Business Channel, Fox News Channel, TV Guide, Scripps Network and other brands.


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