It’s a shame that the general public usually can’t read industry reports from Bernstein Research’s Craig Moffett. When he’s on, which is frequently, his stuff is as thought provoking and engagingly written as anything you’d see in The Atlantic or The New Yorker. So I’ll consider it a public service to summarize his compelling effort this morning to bust one of the tech world’s most fervent beliefs: that that some company — perhaps Google, or Apple, or Netflix — will topple the pay TV oligopoly by offering cable programs or channels, possibly a la carte. Microsoft recently backed away from its dream of offering a cable-like service through its Xbox game console. Others will also give up, Moffett says, because the problem isn’t that Comcast or DirecTV are ignoring consumer demand to break up the expanded basic package. Six companies — Disney, News Corp, NBCUniversal, Time Warner, CBS, and Discovery — account for 90% of all viewing hours. They demand that their channels be sold in packages, “and only that way,” Moffett writes. Didn’t the music industry try to do much the same thing with CDs before it had to back down and sell individual tunes for 99 cents? Yes, but the music industry had to respond to Napster offering songs for free. The danger of that happening to TV channels “is nothing like what the music industry faced ten years ago (at least, not yet),” Moffett writes.
Well, then what’s to stop an online service from creating a virtual cable company — offering packages of channels via the net but for less than current pay TV providers charge? You’d think there’d be room for someone to do that considering that that consumers pay Comcast about $79 a month for programming that costs the company about $29. The first obstacle is that Hollywood studios would only help a new competitor if it offered to pay more than the current pay TV guys do. “A subscriber lost to Comcast or DirecTV is also a subscriber lost by News Corporation and Disney,” Moffett says. The second is that streaming video entails “huge and very real infrastructure costs associated with the massive server farms, transport costs, and hosting fees…For a large scale startup, the cost could run into the billions.” And here’s the real show-stopper: The cable guys can upend the economics of online video just by adopting usage based pricing for their broadband services. Cable operators “would simply get paid in their left pocket instead of their right,” Moffett says. At the same time it would “undermine the fundamental premise of the [online provider] – that it is cheaper….Any owner of Netflix lives every day terrified that usage based pricing will become commonplace.”
The upshot of Moffett’s analysis: You can probably forget the idea of Verizon buying a company like Netflix, which the analyst dismisses as a “odd rumor.” As a major broadband provider, “Verizon obviously can’t put itself into a position where it would have to argue against usage based pricing.” He’s open to the possibility that YouTube’s new collection of channels with professionally produced content “will grow up to challenge the current hegemony.” But the more likely outcome is that “video over the Internet will remain what it is today – a supplement rather than a replacement for the existing business model. With all its flaws.”