The Changing Economics of Video Delivery Services

When it comes to delivering video services today, it’s a whole new world. Not too long ago, programming was determined almost exclusively by networks and advertisers. Viewers had limited choices about where, when and how they could consume content. Cable disrupted this reality, then satellite disrupted cable, and then OTT video disrupted…everything.

Now, consumers are behind the wheel. And increasingly, they want to map their own unique content journeys. What tends to still surprise people in the industry is the pace of ongoing change.

If you’re a Pay TV operator, you already know this story very well. You face unprecedented competition from traditional providers on the one hand and new players on the other. Consumers’ habits are changing moment to moment, as are technologies, which continually offer new ways to meet consumer demand at ever-lower cost points.

So what’s the best way for your company to adapt and evolve? What approach will allow you not just to survive but to grasp the unprecedented opportunities that new markets and technologies offer? The answer has two parts: innovation and economics. Innovation is the secret sauce that supports ongoing competitiveness—but first, let’s delve into the economics you should keep in mind as you evaluate your business strategy.

"What do we want to watch?Everything!How do we want to watch it?Our way!"

To react effectively to fundamental changes in the industry and maintain your competitive position, you’re faced with the prospect of making significant investments, which may have you

fundamentally reassessing your investment strategy.

The options?

The Investment Dilemma

The dilemma is deepened by the fact that video services offer a very direct way to interact with consumers. Your logo and branding are highly visible. You can creatively and proactively promote content and services in a way that you can’t with high-speed internet and mobile services alone. And video is an important competitive aspect of the bundle offer for consumers, together with

broadband and/or voice. How do you balance risk, reward, costs, and revenues?

Or you can deprioritize the video business altogether

and miss out on the opportunities

it offers.

You can focus on costs and margins, reducing

investments to manage and slow declines.

You can invest in Pay TV to retain and grow subscriptions or as part of your

broadband bundle.

DIS

RU

PTI

ON

: RIS

E M

EETS

REA

SON

DISRUPTION:

Risk Meets ReasonTVaaS (Television-as-a-Service) is a fully managed video services model. You outsource your software, hardware, services, and 24/7 management to experts rather than taking on those asset and resource management costs on premise. The experts take care of it all for you. This model is truly disruptive, allowing you to maintain a close relationship with consumers through video services delivery while reducing investment costs. And as with any good disruption, it takes on risk intelligently—keeping up-front costs low while boosting your ability to grasp new revenues.

Let’s start with a quick overview of the two major economic models available to operators: Traditional and TVaaS.

TRADITIONAL:

Control— For a PriceThe traditional cost considerations for full in-house delivery of video services center around the platform lifecycle costs of technology investments, maintenance, innovation, and obsolescence or renewal.

Initial investment 1

Typically make a very significant initial investment, running to millions of dollars.

Expect a time-to-revenue after initial investment of between 12 and 24 months.

Manage organizational decision making and contract-ual overhead across multiple vendors for a complex web of ecosystem components that must work together.

OPERATOR M US T:

If project fails to drive returns, take on significant financial losses—as we’ve seen in the last 5 years with two major operators who lost more than 30 million dollars in one case and 500 million dollars in the other.

2 Maintenance

Take on staffing costs for 24/7 monitoring, software upgrades, reporting, etc.

Accommodate support for multiple versions and operating system changes to consumer devices deployed from Google, Apple, Roku and others.

Support service growth by extending hardware, software and operations.

Manage security: ongoing server and client operating system patches and updates.

Take on costs for space, power, cooling and management of infrastructure.

Take on costs of performing continuous testing, field roll-out and system integration.

Manage the product lifecycles of multiple products from multiple vendors (e.g. hardware and software updates and upgrades; API changes, hardware obsolescence and product end of life).

OPERATOR M US T:

3 Innovation

In addition to maintaining the service, must continually innovate to maintain competitiveness—for example, by introducing new services and enabling consumer access across a range of devices and interfaces.

Make continuous innovation investments in new user experiences, features, new devices, improved analytics, continuous test automation, new business models and changes to packaging and pricing.

OPERATOR M US T:

A WORD ON STB AND IP STB COSTS

Traditional cable’s home deployment model includes total consumer premise equipment (CPE) costs that are 4-5 times higher than IP home solutions. The traditional deployment consists of a gateway with multiple tuners, hard disk drive for DVR, as well as multiple players that play live and DVR content from the gateway. By contrast, IP home deployments use cloud storage instead of hard disks; wireless connections instead of multiple tuners; and a mix of operator-provided and customer-owned devices—creating better performance at a fraction of the cost.

This dramatic cost savings, along with a TVaaS, allows cable operators to transition to a new technology, provide a superior service, and dramatically reduce total cost of operation. It simply costs less for the operator to transition to a TVaaS technology than to maintain their existing technology.

In addition to allowing cable operators to significantly lower their home deployment costs, moving to IP video frees up QAM spectrum for broadband, so operators can keep up with the ever-increasing thirst for bandwidth.

Finally, IP video allows operators to use additional delivery models to target market segments and further reduce device costs. Consumers can buy Roku, AppleTV, or Amazon Fire sticks to deliver video via IP, eliminating the costs of STBs entirely.

4

Maintain ongoing systems refreshes as hardware becomes obsolete or inefficient, or software lacks the features and capabilities necessary to stay competitive.

Typically make a major re-investment every 5 to 7 years.

Obsolescence or Renewal

OPERATOR M US T:

Our industry is filled with acronyms and concepts that can cause confusion. It's important to really understand what you're being sold. Is a solution simply offering an alternative investment structure or implementation model, or is it offering a way to truly shift your business model?

SaaS, for example, refers to both a commercial model and an implementation model. In some cases, operators are simply swapping in SaaS subscriptions for outright purchase of software. The implementation model remains unchanged, but Finance considers the costs OpEx rather than CapEx. This approach is otherwise no different from the traditional model we’ve described above.

The same can be true even with a cloud-based implementation of the SaaS model. An organization will gain some economic

and implementation advantages from using cloud technologies, but this approach is not truly disruptive. Most of the costs and risks associated with the traditional model remain.

The only way to truly disrupt the economics of the traditional model is to not only leverage SaaS pricing and cloud delivery technology but also mitigate traditional costs and risks by outsourcing operations, updates, maintenance, and even innovation to experts with deep experience in the delivery of Cloud IPTV.

This model, referred to as TVaaS, offers fully managed services. Moreover, multi-tenant TVaaS in particular offers even greater disruption because the costs are shared among multiple operators, lowering the overall investment while creating faster innovation at disruptive cost points.

SAAS MODELS AT A GLANCE: WHICH SERVICES ARE MANAGED?

TVaaS SaaS Pricing Only

Cloud** Implementation Only

Pricing X X X

Software X X X

Hardware X X

Support X

Operations/Monitoring X

Scaling X

Maintenance X

Innovation X

Renewal X

SOFTWARE-AS-A-SERVICE (SAAS)/TV-AS-A-SERVICE (TVAAS):

Pinpointing True Disruption

**operator often has to pay for cloud.

Traditional TVaaS

Investment model CapEx OpEx

Where solution is installed On premise On the cloud

Who hosts and manages the solution Operator Solution provider

Investment size and ongoing costs

Large up-front investment that diminishes until refresh (5 – 7 years)

Low up-front investment that grows with demand and revenues

Effort required to ensure scalability

Operator must manage scale to meet peak demand up-front

Solution automatically scales with demand

Technical resource load

Operator must maintain:

• Development lab to test, develop, and debug capabilities

• Staging lab to test new software prior to deployment

• Production lab system to support deployment

Included with the service

Infrastructure requirements Space, power, cooling Included with the service

Monitoring effort

Operator must conduct 24/7 monitoring of the service with triage, troubleshooting and recovery of issues

Included with the service

Solution maintenance effort

Operator must continually update the service as security issues or vendor lifecycle management demands require

Included with the service

Updates - Server side Operator must install and test software for fixes and features Included with the service

Updates - Client side

Operator must track and handle OS and other changes to consumer devices, and make the necessary updates to ensure they are supported

Included with the service

Innovation effort

Operator must work with internal resources and partners to implement and deploy innovative new services and capabilities

Included with the service

Time to market / time to revenue 18 - 24 months 40 days

SUMM A RY:

Traditional Versus TVaaS

IN 2017, MORE THAN THREE MILLION CONSUMERS IN THE U.S. LEFT PAY TV. On the other hand, demand for multiple feeds on multiple devices from multiple sources is nowhere near its end point. At the end of the day, viewers want to watch what, when, and how they want.

The industry is changing quickly. You need to invest wisely to match its agility. A consolidated platform that incorporates OTT applications as programing packages alongside Pay TV services gives users all of the options they want within a single environment.

Facing an ever-more knowledgeable, demanding, and price-conscious consumer, which model will give you the agility you need to fight churn and increase ARPU?

Test your options using our modeling tool. The Espial Total Cost of Ownership Calculator models your costs for implement-ing a video solution using a traditional model versus a TVaaS model. This sophisticated tool calculates multi-year cost scenarios associated with hardware, software and people, based on extensive industry analysis over a six-month period.

NEXT STEP:

Find the Model That's Right for Your Organization

Contact us today to explore the specific economics of your

organization’s video delivery services and pinpoint an approach

that will optimize costs, services, innovation,

and revenues.

ESPIAL.COM | 1 .888.4.ESPIAL