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Is Dumb Pipe the Smart Move?

Pay-TV is far from cheap. Acknowledging this fact, a growing number of small operators are ditching the multi-channel TV business altogether in favor of Internet and phone services, according to The Wall Street Journal.

The WSJ cites two just two smaller companies that have dropped TV from their bundles entirely -- Ringgold Telephone Co. and BTC Broadband. But other cable operators, including mid-sized MSO Cable One Inc. , are listed as paring back their offerings because of escalating programming costs and growing consumer adoption of online video.

It would have been unthinkable in years past for cable companies to sell connectivity without the content that rides on top, but the economics of the video business have changed dramatically in the last decade. At the American Cable Association (ACA) Summit in Washington, D.C. in April, CEO Steve Weed of Wave Broadband went so far as to suggest that small operators should embrace the opportunity to get rid of TV service. "I want to be a dumb pipe," said Weed, "with a lot of good service."

Weed also described just how far higher licensing fees have eaten into operator profits. For Wave, when you take out the broadcast TV service tier, the rest of the video business only accounts for 14% of the company's gross margin. Internet service is far more profitable. (See Rep. Rips Retrans 'Racket' .)

Put another way, SNL Kagan estimates that cable programmers will rake in $35 billion in licensing fees in 2014. That means that cable operators are shelling out big bucks for the privilege of distributing content from companies like Walt Disney Co. (NYSE: DIS) and Viacom Inc. (NYSE: VIA).


Keep up with the latest in OTT video-related developments on our dedicated OTT video content channel here on Light Reading.


While programmers may be happy with the situation today, that could backfire on them if more operators ultimately decide the content isn't worth the price. Just this week, Suddenlink Communications dropped Viacom when its contract expired on October 1. The two companies couldn't reach an agreement on licensing fees.

There's another corollary here too. As the big pay-TV providers get bigger, they also have an impact on the cost of programming for smaller operators. At the ACAA Summit, Weed explained that big operators can negotiate lower programming fees because of their expanded customer reach. According to Weed, small operators are then forced to help make up the difference.

Maybe becoming a dumb pipe isn't such a dumb move after all.

— Mari Silbey, special to Light Reading

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mhhf1ve 10/6/2014 | 5:00:26 PM
All or nothing contracts for content? Do these dumbpipe providers have to forgo all of their content or are they just offering a new tier of "naked pipe" without content bundled?
eaojnr 10/5/2014 | 1:01:42 AM
Provocative but misses the point! You're right @dcharlap and that's the Telco case for Smart Pipe. The "pipe" is a finite resource/capacity, and without investing into means of enriching the value from it with differentation Telco's will be played out of the broadband market.

We need to recongnze that the pipe access is contested by consumers and service. Enabling smart pipes provide the opportunity for Telco's to offer real value beyond just data connectivity. That extra value has both extrinsic and intrinsic benefits over an above just initial contribution to just margins.

We already see the benefits in NTT, SKT, Vodafone etc who are all very successful in their approach to smart pipes. Perhaps the real argument is that in highly competitve markets with OTT, Cable, Content Players, Telcos et al heating up the broadband play, a bad "approach" to smart-pipe is worse of than dump-pipe. However, smart pipe has an essentially deeper value essence that Telco's realize in order to manage and grow not only revenue but also an important key angle as customer experience.
Mitch Wagner 10/3/2014 | 2:46:59 PM
Re: I approve jabailo - I expect the networks are concerned about jeapordizing their existing revenue streams and partnerships. Channel conflict. 
mendyk 10/3/2014 | 11:23:44 AM
Shades of dumb Network operators can make a decent business out of supplying bandwidth and connections, and leaving the risky stuff of content development and marketing to others. But it's not an excciting business, and it's not much of a growth business despite ever-soaring demand for more capacity. The operators that retrench to the "dumb pipe" model should do OK, but only OK. That works for some carriers, but not for those that have owners with grander expectations -- i.e., every publicly owned operator.
brooks7 10/3/2014 | 12:17:55 AM
Re: I approve  

jabailo,

They receive high revenue and then turn around and pay about 90% of that to the content guys.  That is why it is a very low margin business.  Having high revenue does nothing if the profit side is small.  And I think it is HYSTERICAL that you think that the guys who build networks are going to be good making content.  They don't even make their own products for their primary business, why are they going to be good at making products for a business that they know nothing about.

seven

 
jabailo 10/2/2014 | 8:40:32 PM
Re: I approve Because those "low margin" pipe businesses are really collecting very high monthly fees for doing very little and might end up eating their lunch by buying, producing and cutting around the big guys content?

 

 
brooks7 10/2/2014 | 8:30:48 PM
Re: I approve jabailo,

The Networks owned very few stations.  What they did is have affiliate stations that rebroadcast their content.  Affiliates pay to belong.  Just like Cable Cos pay to distribute content and in the long term, ISPs will pay to distribute Hulu.  If you own good content, you don't pay to be distributed.  You get paid to allow 3rd parties to distribute your content.

To be fair, Comcast owns NBC.  But in general why would you not outsource the low margin business?

seven
jabailo 10/2/2014 | 7:46:10 PM
Re: I approve In some sense I am surprised that the traditional TV networks haven't gotten into the game.

Say I'm CBS, ABC, FOX or NBC.  I'm producing or enhancing original content.  I'm creating the value.  Everyone beyond me is a re-marketer.  Everyone before me is raw material.

Why shouldn't I get into the Net-Com business and directly provide it all the way, like I used back in the 1950s-70s?

 
Mitch Wagner 10/2/2014 | 4:17:52 PM
Re: I approve With services like Netflix, Amazon Prime, and Hulu, consumers are still paying for the equivalent of a channel or package, and taking whatever the channel provides. When the dust settles, I'm not so sure the business landscape will be so much different than it is today. 
jabailo 10/2/2014 | 2:05:35 PM
Re: I approve It's already happening with Netflix.  Adam Sandler just inked a deal for creating four first-run movies..just for them.  Straight to the home, no theaters!  Announced today.

 

 
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