What Would Make “Virtual Cable” Work?

This is a companion piece to “When Will We See Virtual Cable?“

What would make “virtual cable” work as a legitimate alternative for cable customers?  In short, a competitive collection of content priced at a major discount to cable – probably in the $30-$40 per month range.  Of course, striking this balance between content depth and margins will be the primary difficulty all potential providers face.

The first challenge will be to bring on the major content owners – NBC, News Corp., Disney/ABC, the major film studios, etc. at the right price.  The key to making this content available may be comparable subscription fees for cable channels as well as subscription fees for broadcast content.  I believe another way to juice the deal would be to show a minimal amount of ads, sold via the provider’s own sales force, with a compelling revenue share for the biggest content owners.  The idea would be to provide content owners with similar base economics plus potential upside as the service matures, while also staking their long-term interest in the service’s success.  Advertisements could take the form of traditional display banners, short pre-rolls, branded integrated marketing, or units designed to drive traffic to content owners’ other properties.

It is crucial that the service includes both streaming and on-demand content.  Users must be able to experience the programming that is best viewed live – sports, reality, awards shows, etc. – live (more on this in another post here).  If that portion of the cable experience can be replicated, a virtual cable service can begin to differentiate itself by making everything on demand as well.  Make the DVR – and all the problems it poses for advertisers – irrelevant.  Programming is either streamed as it is aired, or on demand at any point thereafter – with all the advertising it was intended to contain (ideally less than cable).  ARPU (average user’s bill) could be driven further by making older content available on demand for a fee – think the last season or x episodes of Always Sunny available free on demand, plus all previous seasons available for a season pass or per episode price.  Further differentiation could come from the sea of decent web content out there that the cable providers don’t have.

Tight integration with a potentially subsidized set-top device could enhance the experience further, with interactivity, social networking features, content discovery tools, web browsing, etc.  The provider should also work to make the service compatible with as many streaming devices as possible.  I believe as long as the box is priced less than, say, $200, consumers would go for it – especially without a contract.  Bundle it with service for less, and you begin to have a compelling alternative. 

Of course, many content owners will be wary to rock the boat, but as more and more fee negotiations go hostile, they may come to see competing services as a hedge/diversifying tactic/bargaining chip.

There’s also the issue of bandwidth – which in many consumers’ cases, is likely to come from the very cable providers they would be ditching.  But that’s another issue entirely.  Let’s see a viable service offering first.

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