Spectrum and U-Verse, Apple and Cable

The DoJ cleared the Verizon deal with cable companies for spectrum in return for joint marketing, but with conditions.  The primary fear of regulators at the DoJ was that Verizon might not roll FiOS as aggressively under a deal that let them co-market cable services.  FiOS, like all FTTH, is very sensitive to demand density and so might be marginal in some geographies; Justice wants Verizon to have as much incentive as possible to deploy FiOS.

Cable operators are, under the deal, free to bundle Verizon’s wireless services with their own cable offerings in areas where FiOS is deployed, and this is presumably another condition to encourage Verizon to differentiate itself with FTTH.  It’s clear that the DoJ is pushing the deployment of fiber as a matter of public policy.

Fiber to the home is a pet notion for FCC Chairman Genachowski, of course, and that makes it pretty likely that he’s going to get the deal blessed by the FCC, still a requirement for final approval.  Genachowski says he’s prepared a draft order for consideration by the full Commission, and I’m not hearing of serious objections being raised at the FCC.  The interesting thing is that the 4G spectrum parts of the deal may be less important to the Verizon/AT&T competitive dynamic than the implications of cable resale.

The focus on FiOS here obscures the fact that Verizon is free to market cable in areas where there’s no FiOS, thus allowing Verizon to break from DSL as a secondary broadband strategy.  The story is that Verizon and most operators have become convinced that DSL is not an alternative to fiber or cable in delivering video, AT&T’s U-verse notwithstanding.  People tell me that the cost of a DSL-IPTV approach isn’t going to be competitive and that the onrush of HD and possibly 3DHD will stress DSL loops to the point of unreliability or unsuitability.

I’ve never been a fan of U-verse and the slotted-DSL approach to video simply because I don’t believe you can push enough bandwidth on the average loop to support household demands, forgetting the cost of the IPTV.  The cable deal with Verizon thus sets up the possibility that telcos would cede areas to cable completely, or would settle on DSL as the low-end “universal service” of broadband.  There’s even the possibility, which I hear is being discussed at both AT&T and Verizon, of using a form of cable to replace copper loop in areas where fiber still won’t pay back.

All of this maneuvering is due to the simple fact that cable broadband costs less per household passed than either DSL at reasonable speeds or fiber, and that pretty much any form of broadband access needs to support video or it’s not likely to pay back on investment.  US operators have been losing DSL broadband customers to cable anyway.  They’ve also been losing traditional voice customers even for “home phones”, some to their own VoIP and some to other VoIP providers.  Thus, at least a few telco planners now believe it would be better to throw in the towel on wireline (in copper loop form) and embrace cable and fiber depending on the opportunity density.

Watch AT&T here.  A major access reprise would cost them a ton of money and put their wireless build-out at risk.  They’re almost forced to try to do their own deal with cable in most geographies and to deploy fiber where they can.  Either way this puts more pressure on non-wireless capex because money goes into access build-out.

Another video story is that Apple is trying to get MSO consent to include STB features in its Apple TV product.  This is a story I have some reservations about, because there’s a program from the FCC to open up the STB space and it’s far from clear to me that Apple would want to court MSOs to accomplish what the FCC is trying to do with a set of Orders.  The story has one logical element, though; the goal of Apple is to create an integrated channel guide that would let it present iTunes content as virtual channels.  All my work suggests that this is the real key to making streaming video a regular part of TV viewing.

But is all this negotiating and effort smart, or even necessary?  It’s possible, with a tiny infrared emitter, to tune a STB from an external device.  Most of the Windows Media Center PCs have come equipped with that feature, in fact.  Users don’t like it and rarely bother, but certainly Apple could figure out a way of making the thing look stylish (think Nexus Q).  That would bypass the MSO consent issue, and I really have a problem believing that the MSOs would want to consent on this one; they have nothing to gain.

What Apple needs to be working on is ad return for streaming video.  Unless you believe that pay TV will replace ad-sponsored TV, you have to believe that commercials will yield enough to pay for production and distribution whether you stream or view linear channels.  They clearly do pay for linear production and distribution, but streaming video commands 4% or less the ad value.  My model says that before you could cover even a third of the COST of current material, much less any profit, you’d have to stick so many ads in streaming video the users would rebel.  The challenge is that all anyone has worked on in the way of streaming ad differentiation is the proposition that it provides better targeting.  That translates to “lower adspend” to advertisers, which is how streaming ad value got compromised.  Can anyone make ads more effective while streaming?  Apple would be my bet, but they’ve not done it yet.


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