Last week I talked about how Denmark’s TV2 is facing up to the global SVOD challenge. Local content is a key part of the strategy. It could also be the key to how local network operator in the U.S. survive in a very hostile video service market.
Local operators in the U.S. are struggling with pay TV services. Many entered the market in the last decade, deploying IPTV services on their DSL and fiber networks. Today, that business looks far less attractive than it did back then.
The toxic environment for pay TV services
Escalating content costs are a problem for all pay TV operators. Consider what has happened to Comcast’s content costs over the last seven years. In 2010, 39% of video revenue went to pay for the television channel license fees. In 2016, 52% of video revenue went to cover those costs. Few businesses could withstand a 13% reduction in margin.
For smaller operators, the problem is even worse. Lacking the huge bargaining power of Comcast, they likely have gotten a much worse deal from behemoths like ESPN. In other words, they have almost certainly seen an even bigger reduction in margins since 2010. For many, this has turned a marginal business into an unprofitable one.
Make no mistake, a video service still provides value to an operator as part of the triple play mix. The multi-service approach helps cement the customer relationship, and is a very effective churn reducer. However, the prospect of further above-inflation increases in content costs threatens the viability of the triple-play approach.
At the IP Vision Conference & Expo in St Louis Missouri this week, those smaller operators were looking for an alternative video strategy. According to Mark Chambers, Director of Sales, Telco for the National Rural Telecommunications Cooperative (NRTC), there are 800 rural broadband providers and half them offer video services. As in the rest of country, rural providers are seeing their customers spend increasing time with services like Netflix. They’re also watching as virtual MVPDs like Sling TV and PlayStation Vue start to pick off dissatisfied pay TV customers.
Don’t exit the business, evolve!
With all the online competition and horrible pay TV margins, who could blame rural providers for simply abandoning video altogether. However, that was not the advice offered by panelists at the conference in a session entitled Your Video Future: Don’t Exit, Evolve. Mark Chambers was joined by Bruce Churchill, Sales Director at Ericsson, and moderator Daniel Brashear, Network Manager, Plateau Telecommunications. They discussed several options open to operators to evolve their video service. For example, operators can work with Roku on a white label streaming media player, or strike a co-marketing agreement with one of the new virtual MVPD providers.
But the one idea that most caught my ear was what the panelists called becoming “hyper-local”.
Mr. Churchill emphasized that local content is still highly desirable to viewers. He suggested several innovative, and cheap, ideas to bring a strong local angle to operator video services. For example, he suggested setting up a traffic cam on main street in the local town. Adding the feed to a video services allows neighbors to see what’s happening, who’s in town, even what the weather is like. He also suggested adding other hyper-local features including school lunch menus and local events.
Mr. Chambers urged the conference audience to lean on local broadcasters. The big pay TV providers mostly ignore them, yet they provide very important services to the community. Bundling these channels inside a video service could be a win for everyone concerned.
This hyper-local approach reminded me of the strategy adopted by regional broadcasters like TV2 in Denmark. These broadcasters are looking to use local content to help fend off the challenge from global SVOD providers like Netflix.
Why it matters
Local U.S. service providers are facing the double threat of escalating TV channel licensing costs, and increased competition from online providers.
They will need to evolve these services to ensure they remain viable.
Local content could allow rural operators to sharply differentiate these evolved services from the competition.