IPTV

Rumor Mill Roundup: The Rise of Virtual MSOs?

We’ve been hearing a lot about “virtual MSOs” lately – companies developing payTV subscription plans to be delivered exclusively over the Internet, as an alternative to the traditional payTV infrastructure.

Virtually every tech giant explored, or is rumored to be exploring a virtual MSO model. Microsoft, Google, Apple, Sony, Intel — the list keeps on growing, but we’ve yet to see a content deal nailed down.

The first real development (allegedly) came from Sony: In mid-August, we heard that they inked a preliminary deal with Viacom. Of course, we’ve got no confirmation of this from either party, and Sony hasn’t even officially announced that it’s working on a virtual MSO service. So there’s that.

We’ve also heard a lot of buzz about Intel over the past year. Intel’s service, supposedly called “OnCue,” is due to launch by the end of this year – though we can’t help but notice that the days are getting shorter, and still no announcement of content agreements or possible release dates.

Intel’s service will run on an Intel-powered set-top box, and also boasts a server farm with the ability to record every piece of content for 3 days, storing it in the cloud so viewers can go back and watch their shows without ever setting the DVR.

However, it’s not clear how (or if) this is going to work for the content providers, which typically require that there be a copy in the cloud for each subscriber, as with Cablevision’s remote DVR service. So essentially, Intel would need to record every piece of content for 3 days, multiplied by the number of subscribers – or perhaps work out something more along the lines of a VOD agreement.

Regardless, it’s going to be expensive. Because new virtual MSOs like Intel are just starting out, their content costs will be spread out across fewer subscribers. Intel reportedly offered to pay 75% more for the same content compared with cable operators, and the company remains optimistic despite not having any confirmed deals. In an interview with Barron’s back in June, Intel Media head Erik Huggers said, “We see incredibly serious engagement on the part of every programmer we talk with. I feel very good about our ability to get the right terms to move forward.”

Other wannabe MSOs are trying new approaches to get content, too: Apple is said to be developing a service in which viewers are allowed to skip ads, and Apple pays programmers for each ad skipped.

But despite all the buzz, it seems these companies are still having trouble obtaining the content that they’ll need in order to compete with existing MSOs. Contracts between MSOs and content providers, some of which have clauses preventing content from being licensed to any company that “does not control its own infrastructure,” may have something to do with this.

When (or should I say if?) if happens, the first virtual MSO will be a big deal for a variety of reasons. For me, living in a rural area, it means I might finally have a choice for payTV other than satellite (though what I could really use is a faster internet connection, so here’s hoping they get the adaptive streaming right).

For existing MSOs, it could have an even bigger impact. Assuming that a new virtual MSO is able to lure customers away from existing cable operators, we’ll probably see a big shift towards usage-based pricing for broadband service. Why: Because overall broadband consumption has been growing at a compound annual rate of more than 50% since 2009, and somebody has to pay to make sure capacity stays ahead of demand.

Many operators are already trialing usage-based plans, ostensibly as a cheaper option for light bandwidth users – but this will also give MSOs an opportunity to charge more to heavy bandwidth users (for example, people getting their TV content over the Internet).

It’s also important to note that at this point, the big operators spent the last 60 years building and maintaining (read: paying for) franchise agreements, town by town by town. As such, they tend to stick within their traditional geographic footprints and don’t typically compete with one another. But as more virtual MSOs and operators roll out IPTV services, those territory lines may start to blur – if that happens, you can bet we’ll see the competition heat up overnight.

This is Leslie’s observation, in proofing this blog: “MSO” stands for “Multiple System Operator.” The “system” part of that acronym points to the fact that cable operators spend billions of dollars every year on the physical plant that drops off all that services to subscribing homes. Unless Apple, Google, Intel, Microsoft, Sony and any of the other shaker-uppers own infrastructure, they’re really more accurately a “ZSO” — “Zero Systems Operator.”