Pay TV operators face a dichotomy between content and infrastructure investment as the best way to gain customers and grow revenue.
This can be called the pipes versus poetry dilemma, the question being whether to focus resources on having the largest and best performing infrastructure (the pipe) or the most compelling content (the poetry). There are plenty of successful models of both, particularly in Europe, where the issue has come to the fore recently amid a bout of consolidation.
For Liberty Global, now the world’s largest cable TV operator after final closure of its acquisition of Virgin Media for £15 billion (around $23 billion), the focus has been increasingly on pipes. The takeover was a natural move both by aiding Liberty Global’s pan European ambitions and also indulging a shared love of pipes over poetry. Virgin Media had earlier dabbled in content, but then withdrew after selling that part of its operation to arch rival BSkyB to concentrate on upgrading its HFC infrastructure and lure broadband customers on the basis of headline speeds, while also building out its footprint through deals involving fiber deployment. In parallel, Liberty Global has been homing in on infrastructure and providing the best experience when accessing other people’s content, as witnessed by the roll out of its Horizon hybrid TV platform, mirroring Virgin Media’s deployment of its hybrid box which it co-designed with TiVo.
Liberty Global does still retain some content interests that it will keep up its sleeve for possible future expansion in that area, but for now it is drawing back while seeking a buyer for its channel and content arm, Chellomedia. This would leave mainly just a smallish rump of online video channels on the content front through its shared ownership of Telenet in Belgium.
On the other hand, DTH operators have tended to major in on content as their perceived lead in terms of video quality and capacity has been eroded first by the cable and then IPTV sector. For them, content has become king, as it has for the Sky group of companies, BSkyB in the UK, Sky Deutschland in Germany and Sky Italia in Italy, all either partially or wholly owned by News Corp. While it may be a stretch to call the mix of sports and movies purveyed by these operators poetry, that is how they portray it.
Both strategies, however, have their pros and cons. The poetry approach work, as Sky has shown gain and then retain a large subscriber base, which can then be tapped for healthy revenues via a blend of premium packages. But, the ability of Sky to milk content distributors that focus just on pipes through wholesale deals has been curtailed by regulatory action, while its content hegemony is also being increasingly challenged by both IPTV and OTT operators.
On the other hand, a focus on pipes can be successful in gaining customers, but a lack of content perhaps limits options for then milking the expanded subscriber base and opening up new revenue streams. And again, the technological lead can quickly be eroded. In the UK, Telco BT has shown that a single operator can make up ground on both fronts. By investing in fiber to the curb and home, along with VDSL2, it has closed the gap with Virgin Media over broadband delivery. At the same time, it has also spent heavily on content, notably with its acquisition for around $1.1 billion of rights to almost one-third of English Premier League football matches for the three seasons 2013/2014 to 2015/2016. BT then followed this gamble through by offering its premium content free to its broadband customers, in a sense trading poetry for pipes. This recent move has been interpreted as a direct assault onSky, which saw its share price slumped 5 percent by over $1 billion on the day of the news.
BT is enabling anyone paying just £10 a month for its cheapest broadband package, plus a further £15.45 for line rental (about $40 overall) to watch all 38 EPL games free. But, this is only over the Internet and people wanting to view the games on their main screen will either have to hook their TV up to a connected device such as a PC, or subscribe to the BT Vision pay TV service. The intention, then, is clearly to expand in broadband, where BT is the leader with over 6 million subs, rather than pay TV, where it is a poor third with around 750,000 subs, trailing well behind number two Virgin Media on 3.7 million and BSkyB at 10 million. In broadband, BT is in a four-way fight also involving BSkyB, Virgin Media and ISP Talk Talk, which are all around or just over 4 million customers there. BT’s thesis is that the broadband winner will take all, or at least be in a strong position to cash in. This would appear to veer towards a pipes strategy, but BT also believes that there is little point in broadband dominance without compelling content and services to offer.
Yet, while BT’s twin focus on poetry and pipes might seem to make obvious sense, it also represents a calculated gamble in that it has involved huge investment that has yet to be paid back.
