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Analysis, Opinion, Telecommunications - Written by Renai LeMay on Wednesday, May 9, 2012 12:29 - 34 Comments
Reality check: ISPs do not understand content
opinion Australian ISPs, regulators and the Government need to take a step back and stop fooling themselves that future telecommunications competition will rest on ISPs’ ability to provide bundled video content services to users. The reality is that ISPs aren’t good at this task and customers don’t want them to do it.
Over the past few weeks, an old dream has begun to resurface strongly in the ongoing conversation around the future of Australia’s telecommunications industry. In this dream, ISPs and telcos are able to diversity beyond their roots providing telecommunications services such as broadband and telephony to customers. Under this so-called ‘triple-play’ vision, ISPs would add services further up the networking stack, providing video services such as films and television episodes on top of their network infrastructure.
The desire to realise this dream has become very evident in a number of comments made by industry figures over the past year or so.
In a briefing in Sydney yesterday, ACCC telecommunications commissioner Ed Willett said the nature of telecommunications competition could change as the powerful National Broadband Network rolled out, with ISPs competing with content providers for access to video streaming rights. This new world could see ISPs forced to compete with an emerging class of rivals such as Apple and Google for “the primary customer relationship”, Willett said, according to this article published by iTNews. The Australian also has more on this. One can’t help but feel the regulator already has its eye strongly on this new market opportunity, given the provisions it forced on Foxtel in its $1.9 billion buyout of Austar, which ensured some of the pair’s key content holdings would be unlocked for competitive use by ISPs.
Across town, the nation’s biggest telco Telstra was reportedly discussing its “media strategy” with the aid of ex-Television NZ chief Rick Ellis, with the idea raised that the company could make a bid to buy pay TV ConsMedia, which, along with Telstra, part-owns Foxtel and also has interests in Fox Sports Australia.
Meanwhile, at an investment conference held by Macquarie Bank, top-tier ISP iiNet was spruiking its growth strategy. In a broadband market which is experiencing negligible amounts of growth, a core plank of iiNet’s strategy — as with every other ISP — is getting its customers to buy more from it. This means, according to the company’s presentation, getting more people to sign up for its “TV Bundle” — the FetchTV set-top box through which iiNet can get its customers to pay for TV and movies delivered over their broadband connection.
And the nation’s number two telco Optus is also certainly taking the content opportunity seriously.
Like iiNet, the company is pitching the FetchTV offering to its customer. Its chief executive has publicly called for the Australian Competition and Consumer Commission to regulate content as it does telecommunications access, citing this area as the next major regulatory battleground. And of course the telco has over the past year taken the fight directly to the TV networks with its TV Now cloud-based personal video recorder, which the Federal Court unfortunately shut down last month.
Yes, yes, for Australian telcos at the moment, you can’t escape the feeling that the future is very much about content. Lovely, juicy, value-adding content, streamed on their networks, delivering extra profit margins and locking customers into triple-play or even quad-play (with mobile) bundles. It sure sounds like a lovely vision. But there’s just one problem: If you dig a bit beneath the surface a bit, it’s hard not to escape the conclusion that it’s a false hope.
For starters, it’s important to realise that the ISPs’ forays into content provision over their networks over the past decade have broadly failed.
In total, iiNet has approximately 860,000 broadband customers. But in the almost two years since it launched FetchTV, it has succeeded in converting only 20,000 (two percent) of those customers into FetchTV customers as well. With that abysmal run rate, it’s hard not to make a case right now that iiNet should simply abandon its FetchTV efforts altogether. The project certainly isn’t making iiNet any money. Optus, which launched its own FetchTV offering in Octover 2011, is no doubt doing no better than iiNet on that front right now.
Telstra, which has many millions more broadband customers than iiNet, has fared a little better; in late March this year, the company revealed that it had sold more than 300,000 units of its T-Box Internet video set-top box. Given that the company has some 2.5 million broadband connections using its network, that’s a much better sign-up rate than iiNet’s FetchTV service enjoys — about 12 percent. But it’s not enough to call the platform a success just yet.
But wait, there’s more.
The recent wave of Internet video services launched by the telcos are only their most recent foray into the area of content provided over their telecommunications networks. Before there was content on fixed broadband, there was content on mobile.
A July 2007 article published by the ABC chronicles how Telstra had then launched a service which would allow customers to watch television programs on their mobile phones — for a charge. At the time, then-Telstra executive Justin Milne, who was then in charge of Telstra’s BigPond ISP unit, hyped the device up as a revolution.
“We are inventing a new medium here and what I earnestly hope is that by giving them some slots and making them available to Australian producers to help us invent this whole short form of TV, that the folks will vote with their feet and they’ll buy those shows, and those will become the most popular shows and so we’ll produce more of them,” he reportedly said.
At the time, mobile television was all the rage. Telstra was doing it, Optus was doing it, Vodafone was doing it, and the then-separate Hutchison Telecommunications, developer of the ’3′ network in Australia, was doing it. You could buy individual ‘packs’ through the various companies which would give you access to various slices of content. The only problem was, these types of services never took off. For a time, Australians were interested, but after a while the interest dropped off and the various telco’s efforts to pump content through their mobile networks slowly failed and were largely abandoned.
It wasn’t the first time that this had been tried in Australia, either.
Those of you with slightly longer memories might recall that in late 204, Telstra launched what was then described as an ‘i-mode’ service (imported from Japan, where it was quite popular) through its mobile devices. At the time, the idea was that content providers like eBay, Citibank, CNN, Fox Sports, Whereis, Flight Centre and The Weather Channel would provide portals through Telstra’s mobile devices that would allow customers to buy content directly on their mobile.
But, just like the mobile content wave which would follow it a few years, later, i-mode bombed in Australia and is now remembered as one of Telstra’s greatest mobile-related failures locally.
Now, I don’t want to imply that every attempt by an Australian telco to diversify into content services has failed.
Probably the most high-profile success in Australia in this area — and, by now, you’re wondering why I haven’t noted this elephant in the room — is Telstra’s 50 percent investment in pay TV company Foxtel, and the provision of extremely profitable Foxtel services over Telstra’s HFC cable network. Formed in 1995 through a joint venture between Telstra and News Corporation, Foxtel has historically made a stack of money for both, and you can only get access to it if you have Telstra’s HFC cable running to your door.
Now, it’s true that Foxtel has been a success. But what’s important to realise is that Telstra has had very little to do with that.
Telstra’s role in Foxtel is essentially limited to two areas. Firstly, Telstra is a 50 percent investor in Foxtel, so it has put in a stack of money into the company. And secondly, Telstra maintains the HFC cable network over which the Foxtel services are provided. This is simplifying things a bit, given the complex relationship between Foxtel and Telstra, but when you break it down, you quickly realise that all of the content-related work that goes into Foxtel is done in a separate company to Telstra — one focused on content. The success of Foxtel is based on the fact that Telstra kept its nose out of the content and focused on what it does best — providing telecommunications carriage services to get that content to users.
And every other area where Telstra has attempted to leverage the Foxtel relationship itself, it appears to have broadly failed in.
Telstra’s attempts to provide access to Foxtel content through its mobile phones; Telstra’s attempts to provide access to Foxtel content through its T-Box platform — in short, Telstra’s attempts to leverage its Foxtel relationship through any other avenue than simply providing the telecommunications network for Foxtel to sell pay TV — have broadly failed. In fact, Foxtel is probably experiencing more success offering its services through Microsoft’s stand-alone XBOX 360 platform right now than it is through Telstra’s competing platforms.
Now that we’ve established that ISPs don’t do content very well, the key question which needs to be asked is why. On this front, I think it’s appropriate to go to a quote from Walter Isaacson’s Steve Jobs biography. This is vintage Jobs, speaking about the recording industry and why it couldn’t get its own online music store off the ground:
“When I went to Pixar, I became aware of a great divide. Tech companies don’t understand creativity. They don’t appreciate intuitive thinking, like the ability for an A&R guy at a music label to listen to a hundred artists and have a feeling for which five might be successful. They think that creative people just sit around on couches all day and are undisciplined, because they’ve not seen how driven and disciplined the creative folks at places like Pixar are.
On the other hand, music companies are completely clueless about technology. They think they can just go out and hire a few tech folks, but that would be like Apple trying to hire people to produce music. We’d get second-rate A&R people, just like the music companies ended up with second-rate tech people. I’m one of the few people who understands how producing technology requires initiation and creativity, and how producing something artistic takes real discipline.”
What’s happening right now in Australia’s telecommunications sector is that the ISPs and telcos are, as Jobs said about the record-labels, hiring second-rate people to enter industries which they don’t understand. The fundamental business of telcos is to provide telecommunications carriage services; not to provide content services. And consequently, telco people just don’t understand the content industry. Telco people think of everything through the lens of their network infrastructure; cables, routers, datacentres. But they don’t think about the content itself — the content, for a telco person, is just something carried on their network.
But providing content isn’t about getting a network right and bundling content onto it. It’s about making that content available wherever a customer wants it, in whatever format they want it; no matter what underlying network may deliver that content. The birth of the Internet has ensured that content has become disaggregated from the network layer that delivers it; and very few customers want to go back to the bad old days where the two are tied irrevocably together, as they are with Foxtel.
Now, I don’t want to argue that the content industry is getting this right either. It has been exhaustively documented right now that Australians are getting a rough deal when it comes to obtaining TV and film content on-line, on-demand and in a timely and affordable manner. But the answer to that problem is not going to come from Australia’s ISP industry.
As the US and UK have also exhaustively demonstrated with companies like Netflix, Apple and Amazon, the solution to that problem will come from a new category of companies which sit in the middle between content owners and consumers, with their service to be provided on top of telecommunications networks, but with no need for an explicit relationship with the providers of those networks. Quickflix founder Stephen Langsford, whose company sits squarely in the middle of this new industry category, nailed this concept in a speech last week; he’s perhaps one of the first executives in Australia to do so publicly.
The Quickflix executive said the best option for Australian consumers was a streaming platform which would offer an unlimited “all you can view” movie and TV streaming service for a single monthly price across any device or platform. This, he said, was an important point because currently in Australia, most companies locked customers in to a particular device, which he said limited the number of consumers who would take up such services. This is the model which has driven Netflix to a level in the US where it accounts for 20-30 percent of all Internet traffic in the country. And it is the model which will see paid Internet video succeed in Australia.
Ironically, Langsford’s speech was given at the same conference where iiNet and Telstra were hyping up their own Internet video options. I wonder if many in the audience appreciated the subtle difference — which will mean the difference between success and failure — between the different philosophies presented.
I suspect not.
Update: This article has been updated with correct T-Box figures. We had estimated about 100,000 sales over the past several years; the correct figure is 300,000.
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