Media types are abuzz about the revelation that Disney and CBS are interested in partnering with Apple on its efforts to build a subscription iTunes offering. Following on the heels of rumors about a YouTube subscription service and paid Hulu, this development prompted a newly coined word that struck me the other day: the virtual MSO.
The concept is pretty simple in theory: a company – i.e. Apple, YouTube, Netflix, Amazon, Hulu, whoever – aggregates enough quality, digitally-deliverable content to replace consumers’ need for cable. One flat fee could get you all the shows and movies you want, and ideally enable a range of means to consume them – on your television, on the web, or on your phone or tablet.
The way I see it, there are two big hurdles here. The first is to actually aggregate enough content to provide a comparable alternative. To date, building a sizeable library has proved to be an uphill battle in movie streaming – Netflix has been at it the longest, and their selection remains laughable. Hulu’s movies section is basically a repository for older titles that can be monetized in nearly no other way. Apple has been able to put an impressive set of television shows on iTunes on a download-to-own (DTO) basis, but the price point is pretty steep, considering most users only watch a program once, and a season of their favorite series probably costs nearly half of the yearly television portion of their cable bill. At a couple bucks per episode or $30 or more for a season, it makes a lot of sense for content owners to put their material on iTunes.
An all-you-can-eat subscription offering is clearly going to be a harder sell, and I wonder what it’s going to take to move the content owners. Apple, or any other “virtual MSO” for that matter, would have to replace two streams of income: cable subscription fees (anywhere from a few nickels to a few dollars per subscriber per month) and advertising revenue. I believe the expectation is that a subscription service would be ad-free, but I could envision a subtly ad-supported service developing over time. Unfortunately, striking a balance between attractive value propositions for both content owners and subscribers may indeed be insurmountable in the short term.
The other major hurdle is a high-quality, user-friendly interface for delivering the collection of content to home televisions and displays. While the set-top replacement options currently available are underwhelming, and range from hard-drive to display interfaces (Western Digital’s WDTV, Apple TV) to more streaming-oriented devices (Roku, web-enabled TVs), I believe we will see these approaches converge (more on this in another post). More flexible and capable devices are necessary to make virtual cable possible, and subscription services will have to be deliverable to a broad array of devices to reach a substantial portion of consumers with a seamless experience.
Where do we go from here?
I believe we will see “virtual cable” services launched soon, but won’t see a viable replacement for cable for a couple years. The first iterations will have subsets of major broadcast and cable networks’ content and a cadre of smaller cable networks with less to lose. But the major content providers will demand comparable subscription fees, and eventually, the virtual cable company’s costs would add up to a number that won’t make for a price-based competitor to traditional cable. I would expect streaming devices to remain fragmented in their capabilities in the short-term, while Apple works to revamp Apple TV and tightly integrate it with any upcoming offering.
I hope I’m wrong, because I think it can work. Here’s how.
[...] What Would Make “Virtual Cable” Work? 27 12 2009 This is a companion piece to “When Will We See Virtual Cable?“ [...]