Virtual MVPDs Join the Race

Will New Entrants Transform The Pay TV Business?
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The cloud is ready to rain down some new video providers to take on cable TV.

Using the unwieldy moniker of “virtual multichannel video programming distributor,” these new services, despite their relative tiny size, are trying harder than ever before to gain traction with consumers.

Sony’s introduction last month of PlayStation Vue, a cloud-based pay TV offering, was a watershed moment in the “virtual” MVPD era, picking up where Intel Media left off after the unit got cold feet and punted its “OnCue” assets to Verizon Communications.

A wave of over-the-top services, including new entrants and veteran players, is ready to crash various pockets of the pay TV market, presenting everything from full-freight off erings to trimmed down, personalized packages tailored for the small, but growing crowd of costconscious but still tech-savvy cord-cutters.

While the notion of the virtual MVPD has been percolating for years, several stars have aligned to make the idea a reality. The continual increase in speed and reach of broadband services, combined with the proliferation of IP-connected video devices have set the stage for an increasing number of programmers to embrace new over-thetop distribution models.

Meanwhile, help is also coming from regulators as the Federal Communications Commission pursues new rules that would define some online video distributors as MVPDs and make it easier for these new competitors to negotiate for coveted distribution rights.

But even those factors won’t guarantee that virtual MVPDs will be successful, let alone shake up the pay TV market. Still lacking are details on pricing and packaging, making it difficult to predict how well these new OTT services will perform in the already saturated market for TV viewers.

“It’s like having a cake in the oven and guessing how good it tastes,” Bruce Leichtman, president and principal analyst of Leichtman Research Group, said.

Still, analysts agree that smart pricing paired with a service outfitted with intuitive features (but mostly pricing) will help to determine the future of this new breed of MVPD.

“The technology will not be enough of a differentiator to get people to move [providers],” Colin Dixon, founder and chief analyst of nScreenMedia, said.

And there’s no uniform way to approach the market, as there appear to be some material differences in how these virtual MVPD services will be priced, as well as the size and scope of the audiences they will target.

The anticipated price of Dish Network’s coming over-the-top service will be about $1 per day, making it particularly appealing to cordcutters, college students and a broader group of millennials.

But millennials won’t make for easy prey. nScreenMedia found in a survey that 19% of consumers in that age group have never subscribed to a pay TV service, and just 2% of that group said they are considering subscribing in the next three months.

Sony, meanwhile, appears to be gunning for a fuller pay TV service that more closely mimics traditional offerings.

While Leichtman believes Sony’s large embedded base of PlayStation consoles gives it an important advantage, the company will likely need to find a way to offer more for less than its well-entrenched cable, telco and satellite-TV competition.

“Trying to do the same thing that an existing service already does obviously is going to be a greater challenge,” Leichtman said. “The industry is changing, but not by doing the same thing. The question is, what’s going to be the glue for the new services?”

That’s where new technologies and features will come into play. If that glue involves the integration of apps such as Netflix and the use of more intuitive interfaces, many incumbents are already doing that now or have it on their roadmaps.

“The problem [for new entrants] is companies like Comcast with X1 are already claiming a lot of these advanced features,” Dixon said.

The task ahead for these new MVPDs won’t be easy. Here’s a glance at some that will be taking their shot at pay TV glory.

Sony: A New ‘Vue’ on Pay TV

Sony hasn’t revealed pricing and packaging for its new service, called PlayStation Vue, but the initial invitation-only offering will feature about 75 channels per market, a number that’s expected to increase as the CE giant inks more programming deals.

Notably, PlayStation Vue will feature a fancy user interface that supports catch-up and video-on-demand services, and a helpful component that will make the past three days of “popular programming” available without the need to schedule individual recordings.

Sony is also putting a unique twist on the cloud digital video recorder, freeing customers from having to worry about storage and recording conflicts, with the trade-off that recorded shows won’t be kept longer than 28 days.

Sony has put a clear focus on its initial targets — the more than 35 million PS3 and PS4 owners in the U.S. who like video and are also looking for a new and potentially better pay TV experience.

“We know that highly engaged gamers are entertainment junkies that spend a lot of time using their PlayStation, and increasingly for other entertainment including SVOD services rather than watching traditional cable TV,” a Sony o cial said, noting that the company has seen video streaming on the platform surge 40% each year for the last three years, and that the average user watches three hours of video per session. “They want the same great PlayStation experience with their live TV content, but with a better user experience and less hassle.”

Dixon said he believes that Sony, despite the new features and capabilities that will grace PlayStation Vue, will need to undercut the incumbents on pricing, at least by a little bit. “It cannot announce the same price or be more expensive and in any way be successful,” he said.

Todd Juenger, a senior analyst at Bernstein Research who got an early look at the PlayStation Vue service, took an educated guess on how Sony might price its service.

Given the networks that have been announced, Juenger said he doesn’t see it fetching anything less than $30 per month — and likely more than $35 — based on estimates that Sony’s affiliate fees will be in the range of $23 to $28 per month. As Sony looks to flesh out its programming lineup, those fees could rise to $45 to $50 per month.

That, Juenger wrote, could put PlayStation Vue’s retail service in the neighborhood of at least $60 per month, resulting in a “razor-thin margin, especially after including operating costs.”

Sony, he wrote, “faces the same catch-22 as every other MVPD. The more networks included in the service, the more appealing it will be … On the other hand, the more networks it includes, the more expensive the product will be.”

Sony has not yet outlined its strategy for homes with multiple TV sets. However, PlayStation Vue will eventually be made to work on devices other than the PS3 and PS4.

Dish Network to Serve Up Skinny TV

Rather than cannibalizing itself with an OTT offering that would replicate its primary satellite-TV service, Dish Network’s plan is to expand the pie by targeting consumers who aren’t current pay TV subscribers with slimmeddown programming packages that will cost about $30 per month.

Dish declined to comment for this article, but the service it is developing is sometimes referred to as a “personalized subscription service” because some programming will be limited to a single stream per subscriber, and because it will look to drive value using targeted advertising.

“We know that [consumer segment] is growing by 4 [million] or 5 million a year, and probably will continue to grow and probably accelerate,” Charlie Ergen, Dish chairman, said on the company’s recent third-quarter earnings call, confident that the company will meet its self-imposed deadl ine to launch the OTT offering by year-end.

Dish expects the coming service to appeal to consumers who are 18 to 35 years old, and skew toward a male audience and sports enthusiasts.

“We’re not going after the guy who spent $100 a month and has got a house and four TVs and three kids, and he’s 55 years old. That is not the target market,” Ergen said.

Dish appears to be willing to experiment and give its new OTT offerings time to find its niche. “I don’t think it’s going to change the world in the first few months,” Ergen said. “But I think that it’s something that has a long-term path trajectory.”

Ergen also expects the OTT product to carry a smaller margin and a higher churn rate than Dish’s core business, but counterbalanced by materially lower subscriber acquisition costs, certainly well below $800.

“When you look at total return, we … would anticipate that it would be as good or better than our core business,” Ergen said, believing that the advertising piece of an OTT offering will be “materially higher” than what Dish gets now with regular linear TV. “When you run all the numbers, to the extent that you’re getting incremental subs, it makes sense.”

Layer3 TV: Cryptic Video Plans

Layer3 TV, a Denver-based startup made up of cableindustry veterans from companies such as Comcast, Motorola and Time Warner Cable, bills itself as a “next-generation cable operator,” but has kept mum on its specific plans, including whether it will look to pair up with an existing MVPD or strike out on its own.

But the types of jobs it’s been trying to fill (senior director of customer care, senior user experience designer, embedded application developer and digital rights management and content security engineer, among them), as well as its development of a distribution center in the Denver area, appear to show that Layer3 TV’s intentions are to create a service almost from scratch, enabling it to go direct to the consumer over broadband.

While Layer3 TV’s still being secretive about its specific service plans and which markets it might target first, CEO Jeff Binder did confirm that the company, which has raised $21 million so far, intends to launch sometime next year.

Despite its relatively low public profile, Layer3 TV has been bending the ear of the Federal Communications Commission in meetings that indicate that its product will indeed be delivered over-the-top.

According to ex parte filings about recent meetings with the FCC, Layer3 TV hasn’t taken a position on Comcast’s proposed acquisition of Time Warner Cable, but has been discussing network-neutrality “safeguards” and conditions that the FCC might consider if it were to approve the deal.

Among Layer3 TV’s suggestions: the ability to interconnect, “for a reasonable price,” at locations close to the customer base a company is trying to serve; while also presenting the position that data caps, while “appearing to safeguard a network from overload,” also create challenges for companies that serve video streams to consumers.

Layer3 TV also suggested that the FCC should think about “some cap on peering charges based upon the total payload in a given month whereby the costs are not so prohibitive as to prevent potential video competition.”

Wireless Wildcards

Next year is also expected to be a big one for some of the nation’s largest mobile service providers as they prepare over-the-top services that will give them a foray to the TV.

One company that will help them make that jump is MobiTV, which is developing a “white-label” streaming stick that will connect to TVs via the HDMI (High-Definition Multimedia Interface) port and deliver video over WiFi.

No wireless carriers have announced plans for such a virtual MVPD service, but likely candidates are MobiTV’s existing carrier partners, which include AT&T, Sprint, US Cellular and Verizon Wireless.

And as timing goes, there’s an expectation that more details about those plans could emerge at next month’s Consumer Electronics Show in Las Vegas, the site where Sony announced that it would begin to test a virtual MVPD and set this trend in motion.

Sony PlayStation Vue

Launch date: Invite-only beta debuted in November in New York. Commercial service launches are slated for the first quarter of 2015 in Chicago, Philadelphia and Los Angeles.

ANNOUNCED PROGRAMMING PARTNERS:

CBS: CBS’s live linear feed in owned-and-operated TV markets, plus video-on-demand.

Discovery Communications: Discovery Channel, TLC, Animal Planet, Investigation Discovery, Science, OWN: Oprah Winfrey Network, Discovery Family Channel and 11 more brands.

Fox: Fox’s O&O TV stations; Fox Networks Group’s portfolio of national entertainment programming services, including FX, FXX, FXM, National Geographic Channel and Nat Geo Wild; Fox Sports’ national and regional programming services (Fox Sports 1, Fox Sports 2, Big Ten Network; Fox’s regional sports networks, including YES Network and FS Prime Ticket).

NBCUniversal: All local offerings from NBC, Telemundo and regional sports networks; as well as Bravo, CNBC, E!, NBCSN, Oxygen, Sprout, Syfy, USA Network and others.

Scripps Networks Interactive: HGTV, Food Network, Travel Channel, DIY Network and Cooking Channel.

Viacom: BET, CMT, Comedy Central, MTV, Nickelodeon, Palladia, Spike, VH1 and others.

Advantages: Out of the chute, Sony can wield its well-known brand and target a base of 35 million PlayStation 3 and PlayStation 4 customers, offer a broadband-connected video platform that has already been integrated with Netflix, Crackle and many other popular over-the-top apps and deliver everything off of an agile, cloud-based architecture. No truck rolls.

Disadvantages: If the plan is to match up with a lineup that’s very similar to what competitors offer, the challenge early on will be to fill programming gaps and add channels from The Walt Disney Co., A+E Networks, Time Warner Inc., and Turner Broadcasting System. To undercut incumbent pricing, Sony will likely have to buy share by sacrificing service margins.

For Sony, like all virtual MVPDs, the quality of the video service will depend on the quality of the subscriber’s broadband connection.

Dish Network

Launch date: Before the end of 2014. Dish hasn’t named the service, but Dish Digital LLC has registered the “NUTV” trademark.

Announced programming partners:

The Walt Disney Co.: For ESPN, ESPN2, ABC, ABC Family and the Disney Channel networks.

A+E Networks: For A&E, Lifetime, History, LMN, FYI, H2, History En Español, Crime + Investigation and Military History.

Scripps Networks: For HGTV, DIY Network, Food Network, Cooking Channel, Travel Channel and Great American Country.

Advantages: Dish has a core pay TV business with millions of customers to fall back on, giving it the ability to experiment with new types of programming packages, pricing and targeted advertising systems that would appeal to cord-cutters and millennials.

Disadvantages: Narrow market focus and limited programming lineup could prevent the new OTT offering from extending beyond a small, niche audience.

Layer3 TV

Launch date: Sometime in 2015.

Announced programing partners: None. But it’s looking to change that following the recent appointment of Lindsay Gardner, the former Fox Networks and Cox Communications executive, as content advisory chair.

Advantages: Flush with startup specialists, as well as seasoned MVPD operations and engineering talent.

Disadvantages: If Layer3 TV’s plan is to pursue the market without MVPD partnerships, it will start with zero subscribers, providing a challenge to sign up customers without an established consumer brand.

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