KUHN CAPITAL Saturday, February 24, 2018
Dispatches from the front

Remember VOD? Well, It's Back Big Time

More than a decade ago, when the Internet was just a baby, the big telecom carriers made an abortive play to install video-on-demand (VOD) or interactive TV services.

Urged on by advisors like Bain & Company, they become convinced that to succeed they must operate a massive “silo” of proprietary content combined with broadband distribution. Having one or the other wouldn’t be sufficient: you must own both and be prepared to do battle against other silos in the future's grimly medieval competitive landscape . See this Time, Inc. piece for a glimpse into the antique urgency of those days.

But, after the industry spent millions chasing content deals and laying fiber, no one-stop-shop silo ever emerged. VOD technology just wouldn’t economically cooperate, the regulators frowned on entrepreneurial carriers, and to this day the strategic value of owning both content and conduit has yet to be proved.

If anything, the experience of Time Warner and Primedia tends to support the argument that there is little if any synergy between content and distribution, or even between one type of content and another, especially general entertainment content. Rare exceptions exist, of course: Bloomberg operates a very successful “closed” system of specialized distribution hardware combined with proprietary content. In that case, the user experience is optimized by an efficient hand-in-glove relationship between how the hardware is used and what content is delivered. But telecom carriers don’t operate specialized hardware for niche markets.

Now, however, some recent developments support the idea that at least the day of the VOD is upon us. Carriers are entering a bewildering world of “bundled” digital services (wireline, wireless, broadband, IPTV, VoIP, WiMax, etc.) where strategists are arguing that he who bundles the most wins.

In contrast to arguments supporting the old content/distribution silo model, the need to bundle looks convincing. That’s because carriers seeking to put all their end-users’ communications needs under one roof makes sense and because – importantly – the technology is finally really here, though it’s hardly cheap. The carriers will spend billions, as will cable companies. Global competition won’t give them a choice.

Outside of the money already being invested in digital network upgrades, we’re seeing a spurt of related partnership and M&A activity:

• Back in February 2005, network equipment vendor Alcatel partnered with Microsoft to market IPTV products worldwide.

• Last May Amdocs bought QPass, a digital commerce software vendor for $275 million.

• Last July Motorola agreed to buy Broadbus Technologies, provider of VOD solutions, also for an undisclosed sum.

• This August, “Video transport infrastructure specialist” Harmonic said it will acquire the IPTV networking software business of Entone for about $45 million. In the same month, Tandberg Television agreed to buy Zetools, a developer of IPTV software for an undisclosed price.

• Finally, Cisco, the leading telecom switch vendor, just agreed to buy Arroyo Video Solutions for $92 million in cash. The 44-employee AVS produces software that facilitates network VOD delivery.

• In sum, the carriers will have their hands full with bundling tasks over the next decade. Now if they can just resist the urge to spend even more trying to develop attractive proprietary content…

Ryan Kuhn

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