February 7, 2018

To Box or Not to Box

Interesting news out of AT&T this past week regarding its TV business. DirecTV Now, the company’s virtual pay-TV service, now has more than 1.2 million subscribers. Quarterly additions (368,000 in Q4) were enough to keep AT&T’s overall video subscriber numbers in the black despite the loss of more than 200,000 legacy pay-TV subscribers. CEO Randall Stephenson promised a “next gen” DirecTV Now offering in the spring with improved cloud DVR capability, as well as talk of a revamped legacy DirecTV offering with new hardware to boot.

This is a complex juggling act, and so far AT&T is managing it well, but what does it mean for the future of TV? Three thoughts….

1 Virtual Pay-TV Services Are Cannibalizing Legacy TV Services
Consumer media services are never static and equilibrium is more rare than you might think. More commonly, if a service is not gaining ground, it’s losing ground. This is true because households themselves are not static. People are constantly moving up, down, in, out, and on as the winds of change blow through their lives. This creates decision points with respect to services. Do I stay with the service I (or my parents or roommate) had before, or do I try something else? As a result, consumer services live on a treadmill in which they have to keep running just to stay in place.

Legacy pay-TV services are slowly starting to lose this battle. Where there is no exogenous change in a household, cord cutting remains fairly mild. With respect to moves, new households, and the like, however, I believe is that vMVPD services are gaining ground at the expense of legacy offerings. This is a question not just of cost but also of convenience. Today’s consumer is trained to adapt, be flexible, and (most importantly) keep their options open. Virtual pay-TV services — absent of contracts, credit checks, and truck rolls — speak to this zeitgeist much better than a dish that gets bolted on to your roof.

2. The Smartphone + Virtual Pay-TV Bundle Can Work At Retail
Pay-TV has long been tied, both physically and commercially, to residential broadband. In many homes  (including mine), both are tied to the same wire, owned by the same company, whether coax, twisted pair xDSL, or fiber. Of course, satellite services like DirecTV and Dish were always the exception to this rule, with operators forced to find different paths to the consumer pocketbook.

In the case of DirecTV, this path led straight into the arms of AT&T and its 140 million US wireless subscribers. Bundling residential pay-TV with mobile service is still a relatively new phenomenon, with only about a quarter of all DirecTV customers currently on a bundled AT&T wireless plan (some 6.5 million subscribers). Despite cannibalization, there are reasons to think this model can and will work for at least some segments going forward.

First, urban dwellers in multi-tenant residences (apartments or condos) are young, increasingly numerous, and culturally influential. Preferences and service choices that this group makes now will influence other segments of the population (by defining what is cool), as well this group’s own decisions in the future (through experience and force of habit). Increasingly, this group has little or no choice as to their residential broadband provider — it’s baked into their decision to live in a particular building. TV services, on the other hand, are largely up to the tenant, leaving residents without the need for a conventional broadband+TV bundle. Pay-TV may be included in such arrangements, but it’s never mandatory. As a result, there’s a certain logic in a tenant using the building’s/HOA’s broadband and then obtaining a mobile+vMVPD service on their own, along with Netflix and any other personal services that travel with people from place to place. This arrangement is both economically efficient (no one’s paying for unwanted or unused services), but it also makes any subsequent move to a different apartment a relative cinch.

Second, as people continue to watch more video on their smartphones, there is some appeal in walking out of the store with a new phone and the ability to watch TV (including HBO) right out of the box. This capability is, of course, not equally important to everyone. Older smartphone video viewers are far more likely to watch home videos of the grandkids than an episode of Game of Thrones. Bundling a virtual pay-TV service with a shiny new phone does provide a nice in-store experience, though, which is no small thing for players like AT&T that have 2,200 branded stores and retail partnerships with Best Buy, Walmart, Costco, etc. Retail matters for AT&T in a way that it never will for Amazon or Netflix, which brings us to our third point.

3. Boxless Pay-TV Solutions Are The Future, But Have Their Challenges
Proprietary set-top boxes are dead and the future of TV is an app, right? Well, yes and no. For pure-play OTT providers like Hulu, Netflix, YouTube TV, Amazon Prime Video, etc., our answer is and has always been an unequivocal ‘Yes.’ The days when OTT services forced users to buy a box in order to access the service (e.g., Vudu circa 2004) are dead and gone, and the industry is better for their passing. Three-fourths of US broadband homes now have at least one Internet-connected TV, with many households using multiple ‘screens’ to view video. For these consumers, TV-as-an-app is clearly the way to go.

That being said, exceptions exist. Customers 50+ who are “downsizing” from a legacy pay-TV service to an IP-based pay-TV service may need and want a box to help smooth the transition. I think this segment may explain (at least in part) why AT&T is contemplating an IP-based box strategy for at least some legacy DirecTV households. In such cases, it may be easier to replace one box with another (simpler, cheaper) box than it would be to eliminate the box altogether in one fell swoop. The customer-support questions alone could justify such a move. Anyone who has ever tried to walk an aging parent through the configuration of a new-fangled device or service (I plead the 5th Amendment so don’t ask), knows exactly what I’m talking about.

The requirements of such a device are:

  • Automatically find the home broadband network;
  • Automatically log on to the DirecTV service without a username or password;
  • Boot directly into a simple, familiar home screen every time the TV is powered on without the requirement of launching an app; and
  • Ship with a traditional TV remote that does not require any instructions whatsoever to use.

Obviously, such a device would be popular among the older set, if not every DirecTV viewer in the world.

What may not be so obvious is that such an approach is quite a bit much easier to sell and explain to consumers in a brick-and-mortar, face-to-face retail environment than are purely intangible software apps. Retail wireless sales people are trained to use a physical device (i.e., the phone) to sell an intangible service (i.e., the mobile plan). The customer can see, hear, and touch the device, and know exactly what they are getting before they walk out of the store.

Selling an app (even if a TV service) at retail is much harder. Will the app work on the consumer’s exact model of smart TV, Roku, or Apple TV? Who knows? What will the user experience actually be like to get into the service? Again, who knows?

Then again, wouldn’t it just be easier to buy/lease a simple, plug-and-play device from the service provider?

The bottom line: physical boxes are no longer necessary in a world of TV-as-an-app, but there are still situations where such devices are the perfect answer for today’s consumer.

All the big players (including AT&T) now understand quite well that the pay-TV landscape is shifting dramatically under their feet. The challenge lies in responding to new customer needs at a pace and in a format that the consumer can understand and accept. It is not as easy as it sounds.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to the video ecosystem and technology companies. He lives near Seattle, WA.

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