Verizon's Prelude to All-Out War

1:00 PM -- Verizon Communications Inc. (NYSE: VZ) and Redbox Automated Retail LLC are staying mum on the specific plans they have for the joint venture they announced Monday, but it's already becoming clear that they at least have ambitions to create a virtual MSO that could feed on-demand and live TV programming outside the FiOS TV footprint, and could also include a DVD rental option. (See Verizon & Redbox Target Netflix .)

Live TV would be an earth-shattering addition, and Verizon's done little to suggest that it won't go there ... someday. But Senior VP of Consumer Product Management Eric Bruno told Multichannel News that it's still "to be determined" whether the joint venture will include live programming.

I take that as code for "yes, if the programmers allow it," since there don't appear to be any major technical hurdles. But all the retrans headaches that go with adding live TV, local broadcast channels in particular, still make that a pretty big "if" for the immediate future.

But I think it would make perfect strategic sense for Verizon. After all, it's already made it clear that it won't deploy FiOS everywhere, and an over-the-top strategy would, in essence, give Verizon a national video footprint.

It's not like this idea isn't already underway at EchoStar Corp. LLC (Nasdaq: SATS), which is working on a platform that has the potential to spawn a great number of virtual MSOs, and perhaps give corporate cousin Dish Network LLC (Nasdaq: DISH) yet another video weapon. (See EchoStar Readies Over-the-Top Video Play.)

The proverbial fly in the ointment is obtaining the rights. And they don't come cheap. That's one of the reasons Sanford C. Bernstein & Co. Inc. analyst Craig Moffett is cool to the notion that virtual MSOs will be springing up like dandelions anytime soon. (See A Virtual MSO Shall Rise, Boxee CEO Says.)

He's not even sold on the idea that Verizon and Redbox will go in that direction. While the joint venture may pose a threat to Netflix and Dish's Blockbuster, "it almost surely is not the basis of a so-called 'virtual MSO' as some this morning have suggested," Moffett noted on Monday, wondering if the agreement is "another step in the transformation of Verizon into a marketing machine, à la its joint venture with the cable industry." (See Verizon Wireless: Cable’s New BFF.)

I agree that the virtual MSO concept isn't the goal early on. I suspect they'll try to out-Netflix an already wounded Netflix Inc. (Nasdaq: NFLX) and focus on new, premium content alongside a solid menu of oldies but goodies, alongside a bunch of plain ol' oldies.

OTT war
But I still think it's a matter of when, not if, they'll take that big step into live TV. And once that happens, all bets are off. It will be a free-for-all. It'll force Comcast Corp. (Nasdaq: CMCSA, CMCSK), Time Warner Cable Inc. (NYSE: TWC) and other MSOs to do the same (I think they'd have to be crazy if they didn't have such strategies already underway) and, as I've said before, it'll spell video Armageddon and the end of the pay-TV world as we know it because everyone (MSOs included) would end up competing with each other. The clearly defined boundaries of the franchise area would be a thing of the past. (See Signs of the Video Armageddon .)

That could take two years. It could take five. But I'm convinced that it will happen. And it will be messy. After all, the cable guys have lived as kinfolk since the dawn of the industry. Plus, they still have lots of joint ventures and partnerships that have made everyone part of a big, happy family that would be difficult, if not impossible, to undo entirely.

Divorcing a portion of that family history won't be painless. But it may be necessary, and it might happen sooner than some are expecting.

— Jeff Baumgartner, Site Editor, Light Reading Cable

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AESerm 12/5/2012 | 5:43:21 PM
re: Verizon's Prelude to All-Out War

As you and Craig and Phil note, content costs. So more services would be pricier to the consumer. But a limited channel lineup could still be cheaper than incumbent offering. Could end up a counter-cyclical move, positively correlating with unemployment rates. 

Jeff Baumgartner 12/5/2012 | 5:43:21 PM
re: Verizon's Prelude to All-Out War

I suppose I'm not surprised that a press release wouldn't spell out the  long-term, secret portion of what plans could be in store, but I agree  that the initial target will be less grand by starting off targeting Netflix's base by differentiating with price and, maybe, content. But I still see this as the foundation for something much, much bigger once they rights can be obtained.  JB


DCITDave 12/5/2012 | 5:43:21 PM
re: Verizon's Prelude to All-Out War

If a virtual MSO turned up at my door tomorrow -- or 40 of them -- I'm not sure I'd change anything. Changing TV set-ups is a colossal pain. 

Is there an assumption that a virtual MSO TV service would be less expensive than regular pay-TV? I'm not sure that'd be the case since the content companies would want to be paid no matter who is selling access to their shows.

AESerm 12/5/2012 | 5:43:21 PM
re: Verizon's Prelude to All-Out War

Looking over that VZ-Redbox press release again: "value-conscious consumers" "affordable way to access" "simplicity and value" "flexible and affordable." They're targeting a low-end market segment. But then doesn't the classic case of disruptive innovation (a la Clayton Christensen) start at the low end? And the times, they may just be changing. BSkyB's announcement last week that it was planning to go outside its footprint (it has a terrestrial b'band net as well as DTH service) is a similar move.

Steve0616 12/5/2012 | 5:43:20 PM
re: Verizon's Prelude to All-Out War

Booted cable 3 years ago. never miss it.  If I could point and click any program to watch for a penny a minute,  I might find something of interest every month or two.

DCITDave 12/5/2012 | 5:43:20 PM
re: Verizon's Prelude to All-Out War

I think you hit on something there. Virtual MSOs could have success if they don't try to be everything to everyone, as the pay TV providers are forced to do because of geography, network-reach, etc.

So a solid 15 channel line-up that I like might be more attractive than paying for a 200 channel line-up that I'm not crazy about. Of course, having a family and sharing the TV complicates that decision.

Oh, and I'm lazy. Did I mention that?

Jeff Baumgartner 12/5/2012 | 5:43:20 PM
re: Verizon's Prelude to All-Out War

I think that's one of the reasons why Boxee's CEO thinks the first virtual MSOs will come way of an incumbent pay-TV provider -- they know the business and would be the ones negotiating those costs/rights. But I am also assuming that a virtual MSO service would have to offer some packages that undercut incumbent pay-TV packages and lean on some of these new ESPN-free economy tiers that are starting to bubble up with some traditional MSOs.. But it's also been suggested to me that it would make sense for a Verizon or another big operator to target more rural markets early on with these OTT offers and go after  smaller incumbents that are probably paying higher programming rates.

But i see what you mean...winning a new pay-TV customer is not necesarrily easy, and there would be a cost of aquisition to consider, though it might make it a bit easier to unseat someone if the new service is an app delivered via a connected device that the consumer might already have.

And there's the cost of the broadband connection. that's not free, either. But I am starting to understand why MSOs like TW Cable and Charter are viewing themselves more as ISPs these days since the margins on broadband service are  so much better than what they are for the pay-TV business. JB


Jeff Baumgartner 12/5/2012 | 5:43:19 PM
re: Verizon's Prelude to All-Out War

And the timing on all of this is interesting in that the latest, greatest rumor about the purported Apple iTV sees Apple, a company that owns a cash geyser, looking to partner with pay-TV providers. Says a lot if Apple and Microsoft are shying away from the economics of creating their own pay-TV services, and pours a bit more cold water on the notion that some fly by night startup can just step in and apply a virtual MSO model without help from an incumbent that can get those rights. JB  

craigleddy 12/5/2012 | 5:43:17 PM
re: Verizon's Prelude to All-Out War

There are lots of predictions about existing service providers invading other provider's territories with OTT offerings, but these invasions could prove to be brutally expensive marketing exercises. They could be a company's Waterloo.

Verizon at least has a national brand and it looks like they'll use the Redbox brand to pick at pieces of the on-demand market. For MSOs and would-be virtual MSOs, it's really tough, because you have to establish brand presence in territories where you have no presence versus incumbent providers, leading consumers to ask, "Who are you and why should I care?"     

Jeff Baumgartner 12/5/2012 | 5:43:16 PM
re: Verizon's Prelude to All-Out War

But the beast must be fed. If MSOs have any interest in reversing video subscriber trends the ones that can afford it might have to go off-net to do that... seems as though they are trying to squeeze blood from a stone as they hammer away in  their home markets. But you're right...it won't be cheap, and Comcast has already stated that it thinks going out of market isn't economical right now. But the idea has to at least be tempting.

Speaking of branding, it would seem that Comcast is paving the way toward establishing a national brand with the Xfinity moniker, no? JB

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