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3 reasons Layer3 will fail, and why it may succeed anyway!

Layer3 TV

Layer3 TV is a three-year-old start-up bent on taking on established pay TV operators with a new more advanced service. The company believes it can wield a significant advantage with an all-IP infrastructure and a brand new approach to service delivery based on innovation. Founder and CEO Jeff Binder believes this gives his service an advantage over cable providers:

Here’s the problem those companies all have. They’re big and generally slow. And then there’s their compute platform. It would be like using an iPhone 4 versus using an iPhone 6.”

Mr. Binder says Level3 needs 1 million subscribers to turn a profit and he will need every ounce of this advantage if the company is is to be successful.

There are some formidable obstacles that must be overcome for the company to achieve that goal.

IP is not a sustainable advantage

LightReading’s Mari Silbey says that the advantages endowed by embracing an all IP infrastructure are temporary. She points out a large proportion of Comcast’s X1 service is already IP, and the company has already launched a fully IPTV service, Stream. Many other operators are headed in the IPTV direction too. For example, Cox Communications and Shaw Communications have both licensed the X1 platform from Comcast, and Cox has already deployed it.

Evidence is that Comcast already has all the speed it needs to innovate its X1 in order to remain feature competitive. It is making daily updates to client software and regular updates with major functionality like voice control and network DVR storage.

It could be that an all-IP implementation is no advantage at all of the likes of Comcast X1 and its licensees.

Pay TV isn’t as important as it used to be

160418 Facebook use for news among millennialsI have reported extensively on the decline in television watching in the US. Among millennials, the Internet has already supplanted the television as the main place they get their news. According to Pew Research 61% of millennials use Facebook to get news, while only 37% turn to TV. Many children do not watch traditional at all.

New data from Croatia illustrates the consumer reliance on pay TV is waning worldwide. 61% of Croatians now use the Internet as their main source of information, compared to 29% that use the television. 45% say they use the Internet for more than 4 hours a day during the week, with just 10% using television that much.

Costs and Margins

Level3 service will cost the same, in the region of $80-$150, as cable service. Certainly Comcast is proving with X1 that an advanced TV experience can help attract and retain customers. So a tangibly better experience can be a real differentiator with customers. That said, it should be noted that Comcast is still losing pay TV subscribers overall.

As I pointed out last week, the economics of running a pay TV service are heading in the wrong direction. Content fee increases are consistently outpacing an operator’s ability to raise prices, diminishing profit margins. And these dynamics look even worse for small operators like Level3 that lack the negotiating power of a big operator like Dish or AT&T.

These are some substantial problems that Layer3 must face, but can it still be successful? If we define success as Mr. Binder does (gaining 1 million subscribers) yes it can. Digitalsmiths says that 7.8% of pay TV customers changed their operator in the last quarter of 2015. With 8 million homes a quarter up for grabs, many could be enticed to try a new service like Layer3. But only if the company can rollout service widely and quickly.

To be successful, Layer3 will need to execute flawlessly and quickly increase the homes it can actually reach with service to the something like 5 million. And that’s a tall order given that Chicago is the only announced launch market. With consumer interest in pay TV waning, does Layer3 TV have the time it needs reach the 1 million subscribers it needs?

Why it matters

Launching a traditional pay TV service today sounds like a crazy idea.

The market for pay TV is declining, profit margins are falling, and consumer interest is waning.

That said, a new company like Layer3 could still be successful if its goals are modest and execution flawless.

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(9) Comments

  1. The biggest challenge is their name. Everyone calls them Level3, including the author, twice (once in each of the last two paragraphs).

  2. Google has announced it will cease installing fiber for a “next generation” service delivery”. Is this packet delivery using cell phone technology for the last mile?
    Comcast has proven itself to be an untrustworthy service provider to the consumer, and it will eventually pay the price in the marketplace.

  3. I checked out layer 3 and think its inventive. Only issue is you would need Comcast internet to use it and the price is what I pay now as I have premier package and layer tv does not offer all movie channels. Comcast is set to launch HDR box and 4K box as HDR is expensive and more peeps are going to 4k UHD as they are more affordable. Comcast is also set to launch wireless boxes after the 1st of the year per my sales rep. So Layer 3 is good idea but since they only offer TV and not internet and phone service does not make sense for me to switch.

  4. i have it and i game online and i’m hitting the data cap with a week left to billing period

    its new so i was taping too much but still there is no cap or speed issue with sat

    dish is the deal

    its also very glitchy

  5. After putting in my zip code in Chicago area the good news is Layer3 is available but the bad news is that I still need to pay COMCAST for my internet connectivity. Once I drop down to high speed internet only with Comcast PLUS add back Layer3 with boxes, the price is actually more than current Comcast service. Service with Comcast is reliable but the biggest complaint with them is tech support and in home service….If Layer3 is just competing with better service, I think they will fail. The price needs to be cheaper once internet connectivity is calculated in. I was prepared to switch even if the costs were the same or maybe $5 a month more…that is how much I hate COMCAST, but unfortunately I don’t hate them enough to spend $30 a month more.

  6. I’m watching less TV now than I’ve ever watched in my life and I don’t see that trend changing any time soon. The price that I pay for television service needs to scale with the value that I get from it, whether it be a usage-based model, an ala carte model or some other variation. More compute in the set-top box isn’t a selling point, a selling point with regards to the STB would be an ‘HDMI Stick’ form factor that doesn’t double as a space heater and/or take up limited real estate around the television.

  7. So if I am hearing the conversations above correctly, Layer3 is a box that requires a wireless Internet connection. Still trying to figure this out. Now I see why Comcast decided to start billing for Internet usage overages. They are sticking it to people like Layer3 customers so they will stay on their TV package opposed to switching. Comcast is a bunch of crooks that cornered the market and continues to raise rates. They will eventually get run over ad the market becomes more competitive. Hats off to Layer3 for taking a leap of faith! I might switch just for that reason.

  8. Actually Layer3 is available in Washington and now LA. I live in Longmont, CO and our little city was wired totally for Fiber Optic. My speeds are 1 Gig. Layer3 came in and offered a very attractive TV package and I bit on it.

    So glad I did, so far no glitches and it performs with high speed and a beautiful picture. Customer service is really good too.

    I hope they can make it a solid business.

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