Cox’s OTT Service Shows the Way to Revive US Cable TV Industry
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EL SEGUNDO, Calif. (July 31, 2013)—By taking a page from Netflix—and by settling for lower profit margins—Cox Communications’ new flareWatch over-the-top (OTT) TV service could show the entire pay-TV industry how to mitigate the threat from OTT, according to information and analytics provider IHS (NYSE: IHS).
FlareWatch is the first U.S. pay-TV operator-provided OTT subscription TV service that is not tied to a concurrent cable TV video purchase, but it does require a subscription to Cox’s high-speed data service. However, to Cox's benefit, it does offer an opportunity to up-sell non-cable video subscribers some form of video service. The service, now in the beta-test phase in Orange County, Calif., comprises nearly 100 popular channels and includes a network digital video recorder (DVR).
FlareWatch is comparable to Cox’s traditional TV service with two notable exceptions: There are no premium channels and no “TV Everywhere” solutions that allow content to be consumed on computers, smartphones and tablets. And at a monthly service fee of $39.99, flareWatch is significantly cheaper than an average cable rate of $63.99.
FlareWatch represents Cox’s attempt to regain business lost to a new generation of “cord-cutters” and “cord-nevers,” which are consumers who have eschewed traditional pay-TV in favor of Netflix and other OTT services. Because of these types of consumers, growth in U.S. pay-TV subscriptions has stalled, and penetration has begun to decline, and is expected to fall to 81 percent in 2017, down from 86 percent in 2009, as presented in the attached figure.
“U.S. cable operators desperately want to return to subscriber growth,” said Erik Brannon, analyst for television research at IHS. “Cox’s flareWatch is likely to be the first of a new generation of products from other cable operators that will take a ‘if-you-can’t beat ‘em-join-‘em’ approach to tackling the OTT challenge, i.e., providing video service over the Internet. These types of services may be successful for the cable operators, but the accomplishment may come at the cost of significant reductions in margins.”
No such thing as a free lunch
A review of flareWatch ‘s lineup indicates that Cox is willing to accept a significantly lower profit margin on OTT-delivered video than it does with its current cable video offering, although it is intended for a different audience that is never likely to be cable video subscribers.
IHS estimates that if Cox is paying a similar carriage fee for flareWatch as for its existing cable video tiers, then its monthly carriage fee load is more than $31 per subscriber per month. At that price, the carriage fee load on flareWatch doesn’t offer much room for profit, but any positive margin is better than no margin when customers purchase a video product.
“With the carriage fees, Cox may be loss-leading its way back into cord-never homes,” Brannon noted. “Cox originally launched flareWatch at $34.99, and shortly thereafter—less than one week—increased it to $39.99, allowing for a more comfortable gap from the carriage fee load of more than $31. There is likely enough headroom to be profitable, but not on par with typical cable margins. It is likely that the company recognizes that the future of video content delivery is going to be involved with the open Internet.”
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