Michael Greeson, Founding Partner, Research
December 9, 2011
Verizon is a company mutating before our eyes. Its FiOS rollout is nearing completion (15 million HHs passed of the planned 18 million); it is pushing into OTT territory, announcing a limited version of its FiOS TV lineup to the Xbox 360 (in-territory distribution only at the moment); and cutting deals with cable companies to purchase spectrum and sell cable PayTV services in its Verizon Wireless stores. To top this "all boats will float" strategy, this week it announced an OTT service to address markets outside of its home service footprint, thus reaching an additional 85 million potential customers.
This last announcement is of particular interest to TDG. For one, it represents a significant shift in how Verizon views its position in the video marketplace. Moreover, it is the first time a major PayTV operator (FiOS TV) has moved beyond talking about the promises of out-of-footprint OTT services and announced a tangible move.
But wait - the plot thickens. Verizon's initial partner in this effort is none other than Redbox, a would-be Netflix competitor long hoping to expand beyond its wildly popular disc kiosks and build its own OTT video delivery service. According to TechCrunch, this partnership will roll a service in May 2012 and offer both subscription and T-VoD streaming and downloads across the most popular connected devices and operating systems - all but PayTV set-top boxes, that is.
Could this new Verizon/Redbox service threaten the Netflix juggernaut? Perhaps, but no more so than any other subscription-based OTT incarnation (e.g., Amazon's 'Watch Instantly' service) - at least not initially. Despite its self-inflicted disasters, Netflix has been relatively bullet proof when it comes to new competitors. Any Netflix wannabe must deal with negotiating streaming rights (breadth and depth of content), setting the right retail pricing for the service, and reaching a large base of potential users. In Verizon's case, reach is not an issue: Verizon will make the service available outside its footprint to any and all broadband-connected consumers (how else can one compete with Netflix?). Negotiating distribution rights (depth and breadth of content) and pricing remain issues Verizon must address.
Longer term, assuming the Verizon/Redbox partnership is successful, this could put a dent in Netflix's dominance. For one, Verizon is a big brand name with major retail frontage (something Netflix does not enjoy). Second, Verizon can bundle all sorts of services and discounts to entice would-be users to jump ship from Netflix. For example, Verizon could give the service away for free if customers sign up for a mobile data plan or FiOS - a sort of loss leader for its more profitable services. This is common practice among both residential and mobile service providers.
For the sake of argument, imagine that Verizon (with or without Redbox) is able to build not just a Netflix competitor but a legitimate PayTV replacement service; one capable of competing head-to-head with cable and satellite. Now assume it is distributed through Xbox-enabled homes (Verizon's current OTT platform partner for FiOS programming). Microsoft is looking for a partner to help launch a full-fledge TV service and its Xbox 360 is now present in tens of millions of U.S. households. You follow?
At the moment, Verizon denies this is the objective of its efforts. At this week's 39th Annual Global Media & Communications Conference, Verizon's CEO McAdam tried to calm incumbent fears that a full-fledge PayTV replacement service is in the works - at least not for the time being. Such an offering, he said, is not yet plausible, a statement consistent with TDG's long-standing OTT evolution model. Then again, McAdam did not deny that, should material conditions improve (and they will), Verizon could expand its OTT offering to address such opportunities.
And it's the last part of that statement that gets me excited (yes, I'm easily amused). Verizon would be the first PayTV operator to go over-the-top with a full-fledged TV service outside of its predefined market space. Should Verizon do so, other majors will likely follow suit - a self-feeding process that ultimately brings greater choice and efficiencies. In other words, the long-standing monopolies that define today's PayTV market will give way to a truly open market, one that even Milton Friedman would appreciate. I'm a Chicago grad, what do you expect?
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