P&F 2011 Broadband Outlook Examines Over the Top Video vs Pay TV services

Disclaimer: This author has no business relationship with Pike and Fischer and receives no compensation from that firm. Based on our objective evaluation, we do recommend this report and respect the firm’s research methodology and fact finding.

Pike and Fischer’s new Broadband Competition Outlook 2011 report states that broadband service providers are rushing out new service enhancements and applications to keep the existing customers they have and to draw the attention of (hard-to-attract) new subscribers. The research firm notes that growth in subscription based pay TV, Internet and telephone customers are all on the decline (most people don’t realize how hard the global economic slump has impacted telecom subscribers).

The P & F report states, “Beginning in 2009, the RBOCs saw net growth in on-network video customers begin to level off significantly. Verizon, for example, began to struggle with sustaining growth in its FiOS TV service and scaled back its planned deployment in order to maintain fiscal discipline. Verizon had more than 940,000 FiOS TV subscribers in 2009, but that number is likely to have dropped to below 600,000 when the full-year 2010 results are released in late-January 2011. As a result of subscriber attrition, new revenue sources are urgently needed by broadband providers inorder to be profitable. In 2011, service providers will see net growth slow, with customer additions for the year anticipated to fall below 4 million. The year-end total of high-speed Internet households will near 82 million, representing 70% of total U.S. households.”

The P & F report examines the latest strategies of the major broadband service providers, including Verizon, CenturyLink, Time Warner Cable, Qwest and AT&T. In 2011, P & F analysts expect to see service providers experiment heavily with tiered pricing and new features as they try to determine just how much consumers are willing to spend for the latest advances in home communications and entertainment. In this report, P & F offers more details on these trends and provide forecasts on customer growth for new multichannel video services, residential high-speed Internet, IP telephony, and broadband wireless services — including “4G” connectivity.

With consumers looking for more efficient ways to spend their money, 2011 could be the year when so-called over-the-top, network-agnostic services become the low-cost or free alternative, rather than adjunct, to pay TV and even home phone service. Although online content distributors such as Hulu and Google’s YouTube are shifting from an all-free business model to adding some premium tiers, those options are still far less expensive than a monthly cable or satellite TV subscription.

DVD-rental service Netflix is also making pay TV providers nervous with its new $7.00-per-month streaming-only option, a move the company made after discovering that its subscribers spend more time watching content streamed over the company’s Web site than via DVDs. P &F notes that over-the-top services, like those offered by Netflix (and similar companies), heighten the value of a robust high-speed Internet connection. Who will benefit from that dynamic remains to be seen!

One aspect of this P & F report we found intriquing was the assertion that Verizon and DirecTV are testing a residential LTE based broadband Internet and entertainment service, which would certainly compete with MSO/CableCo triple play offerings. The report states, “As fourth-generation wireless service evolves over the course of 2011 and beyond, consumers may find other ways to bypass the traditional communications services and associated fees. Verizon Chief Executive Officer Ivan Seidenberg predicts that the recently launched LTE wireless service could encourage cable customers to drop their digital phone subscriptions and just use their cable providers’ broadband service to make over-the-top voice- or video-over-IP calls. In fact, Verizon Wireless and DirecTV are reported to be quietly testing an in-home LTE-based broadband and entertainment service near Erie, Pa. Of course, some of those users will represent cannibalization of Verizon’s own lower-speed wireline services.”

The research firm provides forecasts on customer growth for new multichannel video services, high-speed Internet, IP telephony, and the features and applications that ride on those technologies. While the tumultuous economic conditions have made forecasting the growth in broadband adoption unusually difficult, the firm has incorporated publicly available projections on housing, unemployment, and other economic indicators into their 2011 competition forecasts, In particular, projections are given for:

-Multichannel Video: Cable, DBS and Telco
-High-speed internet
-Cable Commercial Services

For more details please visit www.broadbandadvisoryservices.com. To order Broadband Competition Outlook 2011 visit: www.broadbandadvisoryservices.com or call 1-800-255-8131 ext. 248

0 thoughts on “P&F 2011 Broadband Outlook Examines Over the Top Video vs Pay TV services

  1. We wonder where the additional revenues will come from with consumers ever more carefull in spending money on non essential services. And who besides Netflix will benefit from the OTT video trend?

  2. Thanks for reviewing this comprehensive report, Alan. As mentioned in the article, the use of new enhancements to broadband, whether home security, home theater installation or smart energy management, will be critical to retain and gain new subscribers.

    Particularly interesting in this report is the the testing Verizon is doing with DirecTV in Erie,PA over their LTE network. Of course, this may be used to overbuild their own networks, but it could also be used to overbuild the networks they sold to Frontier. And the services they are developing transcend their networks, as mentioned in this video interview – http://www.viodi.tv/2011/02/08/verizon-smart-grid/.

    Rumor is that Comcast will also begin offering their services beyond their existing infrastructure. Other rumors have suggested that Amazon will bundle movies with their “Prime” offering. 2011 should be interesting!

  3. One thing I don’t understand is this one sentence that is direct from the report,

    “Verizon had more than 940,000 FiOS TV subscribers in 2009, but that number is likely to have dropped to below 600,000 when the full-year 2010 results are released in late-January 2011.”

    Since Verizon currently has 3M+ subscribers, do the above numbers indicate new subscribers and not total number of subscribers?

    1. While I can’t address Ken’s question, I have one of my own:

      What will happen to Broadband network infrastructure companies, which seem to be either losing money or exiting the business. This includes the big three of Alcatel-Lucent, Nokia-Siemens and Ericsson, but also a whole lot of niche market players that have been around for a very long time, e.g. Fujitsu, NEC, Hitachi, ADC Telecom, ADTRAN, Ciena, etc.

      The telecom infrastructure market seems to be dominated now by Chinese upstarts Huawei and ZTE, with UT Starcom not too far behind them.

      Many companies that were keen on telecom have quit. After making many acquisitions in the late 1990s, Cisco has pretty much exited the telecom transmission business (they still sell some optical network gear and switches + routers to telcos). Intel spent over $10B on telecom equipment company acquisitions but sold those all off at a loss. Motorola Networks is being sold to NSN, but that’s being contested by Huawei. The smaller players have just disappeared.

      Bottom line: Will Chinese companies totally dominate telecom equipment sales in coming years?

      1. Hi Alan and Ken.

        Scott is out of pocket today so I thought I’d get back to you with a response to the questions here.

        I think it is not really accurate to talk about networking companies exiting the market. Some vendors have reduced their efforts in the space, in part because the market is extremely competitive and margins are tight, forcing a focus on core markets and on promising emerging areas.

        And, it has been a very tough couple of years, for everyone, and all the larger players need to find a way to keep improving efficiencies and cutting costs (A-L in particular has struggled ever since the merger to achieve some of the synergy benefits they used to sell the merger).

        Still, both A-L and NSN reported profitable 4Q.

        Ericsson turned in strong results, with notable traction in China.

        Adtran just reported profit up 93 percent and record revenue for the fourth quarter.

        Similarly, Ciena also reported strong revenue, but came in at a loss for fiscal 2010 mainly on the costs to integrate their chunk of Nortel.

        With increasing activity in mobile broadband over the next few years and the resultant demand for backhaul, distribution, and core networking capacity, it looks to me like the stronger players should achieve growth over the next few years.

        As for the constellation of smaller guys that have disappeared, that has mostly been a function of large carriers wanting the security blanket of large suppliers. Few companies simply closed up shop and went home. The technology was acquired and continues life under new brands as part of end-to-end portfolios.

        And certainly Huawei and ZTE are making huge strides, but they are not yet ready to take over the world. Aside from the fact that they have to compete on innovation and quality, they also face protectionist/national security barriers in many countries with home grown technology companies headquarters. (Huawei may contest the Moto sale, but I doubt the company has the political juice in either the U.S. or E.U. to scuttle the deal).

        To the other commenter asking about where does revenue come from in this environment, business services, advertising and content are primary drivers. Value added services (see Time Warner Cable’s Signature Home for an example)will also help keep ARPU and margins healthy for now. Over the longer term, operators hope to themselves ride the OTT wave by attracting users through exclusive content, ease of use, seamless multi-screen capabilities, etc.

        As for companies that benefit, in addition to Netflix there are new, small players like Roku and Boxee, and much larger enablers like Google, Apple and others. The business models are evolving incredibly fast, creating both huge opportunities and massive disruptions. The smart companies will find ways to take advantage of the opportunities and mitigate the disruptions.

        At least that is how it looks to me here at the beginning of 2011.


        Tim McElgunn
        Chief Analyst
        Pike & Fischer

  4. Great article! I’d like to echo Alan’s question: where are new revenues going to come from with broadband subscribers decreasing?

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