The Fat Dumb Pipe – Why Comcast Needs NBC

Posted on: February 6, 2010
Posted in Strategy

To understand Comcast’s motivations for acquiring NBC, we need to understand the economics of the traditional TV model, along with how internet-delivered video is disrupting the cable companies’ incumbency advantage.

The term “pipe” refers to the cable running into your house – think of it as a water pipe, only carrying television and broadband internet. Subscribers pay based on how much they consume (speed of internet connection & number of channels).

Recently, a decoupling of subscriber revenue and traffic has been occurring in service provider networks (wireless, cable, DSL) – data traffic is now increasing exponentially while revenues are either flat, or increasing at much slower rates – see below.

This divergence is being hastened in the cable TV industry by a new competitive force – web-based video (also called IPTV or “over the top” video).

Cable companies have historically benefited from 2 important revenue streams:

1 subscription fees paid by consumers (your TV bill)

2 sale of advertising into the content

Delivering video via a web infrastructure disrupts this model. Not only do subscriber fees potentially go away (consumers equate internet to free, and they already pay for a broadband connection), but traditional advertising must also change.

Hulu was the first company to demonstrate a working model. Hulu was built from scratch for about $100M – though this is a good chunk of venture capital money, it’s trivial by Telco CAPEX standards. Hulu’s success proved that an internet upstart could succeed in offering TV on demand by forging direct relationships with professional content providers.

This process (Hulu bypassing Comcast and partnering w/ Fox and NBC directly) is known as disintermediation and is a massive threat to cable’s monopoly. Think about what Apple did in music, using the iTunes store to weaken the bargaining power of record labels and commoditize how music had traditionally been distributed.

So how do cable companies avoid getting commoditized into just a “pipe”? And how do content owners / networks ensure they will keep getting paid in the age of internet video?

The answer for Comcast is toget closer to the customer in the value chain by owning content networks like NBC. Trouble is this is bad for consumers.

For example, Comcast / NBC would be able to erect content barriers (e.g. block out-of-network access to its content) and disallow device manufacturers from embedding browser and navigation functionalities (see the Hulu / Boxee rift). By restricting how third party devices access web content, they could “lock” consumers into proprietary set top box devices (TiVo lost power to cable companies in this way).

There is also another important ramification to the merger, one which gives NBC an incentive to align with Comcast (aside from the M&A premium they will receive).

It relates to advertising: NBC wants to derive every last penny out of every piece of content on its network. User behavior and contextual information are very valuable to web-based advertising. By merging, a combined Comcast/NBC can better control advertising, since subscriber data is necessary to serve up relevant ads – imagine contextual/behavioral ads and location-based ads targeted at users, tracked from the living room to “4th screen” devices, etc. This is the future of web-based advertising.

But we have little reason to trust that Comcast won’t also create walls around its content which slow innovation, limit access to information, and increase prices for consumers.

Ironically, perhaps Apple will be the savior here – they recently pitched a $30 per month subscription TV plan to Disney and other networks that would work with iTunes (admittedly, not free like Hulu – but a perhaps a realistic compromise). No matter what people think of Apple, no one can argue that the iPhone didn’t massively disrupt the wireless carriers, benefiting consumers.

What we really need is for cable companies to evolve their business models to become more of an open transport system, and to offer new and innovative services layered on their network, instead of becoming anti-competitive pipes. Too bad there’s not much chance of it happening.

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