Is Comcast Right to Reject OTT?

During its earnings call yesterday, Comcast Corp. (Nasdaq: CMCSA, CMCSK) CEO Brian Roberts questioned the economics of OTT services, saying that offering an OTT service wasn't the right strategy for the MSO.

Given the furore over over-the-top (OTT) in the past few years, that is a bold statement.

But Roberts makes some strong arguments in favor of steering clear of an OTT service. Firstly, he points out that Comcast's value proposition is based on aggregated services. It's the relationship with subscribers across a number of different services leveraging Comcast's network and technology that create an economic value proposition for the company. Simply offering content on the Internet would not fit this approach. As Comcast Cable CEO Neil Smit put it, Comcast wants to be the "aggregator of aggregators." He was talking specifically about the recent integration of Netflix into Comcast's X1 platform, but even that deal underscores the focus on becoming a digital content and communications supermarket for consumers.

As Mari Silbey at Light Reading pointed out in her coverage of Comcast's earnings, it also has 22.4 million video customers, 23.9 million high-speed internet customers and is the owner of NBCUniversal LLC , which in turn owns a major broadcast network, several cable networks and a major movie studio. And all this is in a business where scale really, really helps. (See Comcast: X1 Strong, No Need to Go OTT Today.)

Comcast is also performing well. It managed to hold on to its subscribers, losing only 4,000 video subscribers in the second quarter, which is quite impressive under the circumstances. Operators usually see a spike in disconnects in Q2, and given the growth of OTT video and cord-cutting, I would have expected considerably more.

But while Comcast may be able to keep churn within limits, not all operators can say the same. Dish Network LLC (Nasdaq: DISH) lost 281,000 subscribers in Q2 2016. Research firm MoffettNathanson LLC believes that number was actually 330,000 subscribers, but Dish was helped by an increase of 49,000 subscribers to its OTT service Sling TV. (See Is Dish Going Down the Drain?).

Similarly, Verizon Communications Inc. (NYSE: VZ) lost 41,000 video subscribers this quarter, and said 40% of its new Fios TV subscribers went for its slimmed down service, Custom TV. AT&T Inc. (NYSE: T) plans to launch its OTT service, DirecTV Now, later this year. Meanwhile Sony's OTT pay-TV service Vue has gained an estimated 100,000 subscribers, many in the past three months as the service has been rolled out nationwide.

Elsewhere in the world, the Viu OTT video app from Hong Kong incumbent PCCW Ltd. (NYSE: PCW; Hong Kong: 0008) has racked up 1.6 million downloads, while UK satellite provider Sky won't disclose how many of its 11 million subscribers come from its OTT service Now TV, but concedes it accounts for the majority of the business's growth.

So is Comcast taking a bit of a gamble by not launching an OTT service? It does seem so, given the trend towards cord-cutting and the steps other providers are taking. At the same time, it's worth noting that the TV continues to be the dominant media device for the vast majority of households, and approximately eight out of every ten US households still subscribe to pay-TV service. Given Comcast's extraordinary collection of assets, maybe it's worth trying to keep customers on high-margin "full-fat" TV packages rather than give way to OTT.

It's also worth noting that Comcast is somewhat hedging its bets, at least in my opinion. The operator has rolled out its own slimmed-down TV service, called Stream. It's only offered in a few markets today, but there are plans to roll it out nationwide. This is not an OTT service; it is delivered only to Comcast high-speed Internet subscribers. There are also plans to extend it to Comcast subscribers who get Internet from another provider in the future, though that is likely a small number of homes. Most subscribers who get TV or phone services from Comcast will also get internet.

But Stream can be offered over-the-top comparatively easily should Comcast see changes in its subscriber numbers. So while there are no plans to offer OTT today, Comcast has developed a service that allows it to move quickly if it needs to.

At the INTX event earlier this year, Roberts also said Comcast had no plans to offer an OTT service. But he then added, "The world always changes, so these answers are good for this moment."

That seems like a fine example for everyone to follow: Offer Zen soundbites, and have a backup plan.

— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation