With respect to content, part 2

If there’s any question as to whether content is the key to value in the broadband world, consider some of the recent DSL service initiatives from major Telcos. Look at all those price discounts and bundles of wireline voice and non-wireline communications services. Many include Internet access, Web and email services. Some offer it all. Just this month, Verizon introduced its latest verations plan, which offers local phone service, $35-per-month DSL and wireless service and, according to one report, may save subscribers more than $1,000 per year. Some carriers are even discounting the monthly service fee for self-installation and are offering rebates on the DSL CPE.

The fact that telcos are practicing Marketing 101 in order to “buy” subscribers is good news for today’s fickle and cost-conscious consumers, tired of going from plan to plan in search of the best package deal; and of course it’s nothing new. Self-provisioning reduces the chance of a costly truck roll. So net-net, Telcos are growing the subscriber base and cutting costs. By doing so, telcos have it partly right, to be sure.

But let’s take a step away from the details and look at the big picture. Considering that the cost of acquiring a customer is probably somewhere between $500 and $750, is this the right trend for pricing?

Going from a cost-recovery/cost-minimization strategy to a true money-making strategy still requires something more than self-installation, special introductory rates and multiple-service bundles. Remember that the predominant mainstream content delivery services (aka cable and satellite) bring in anywhere from $30-75 per month just for TV programming. It’s my mantra: the addition of TV and related content-delivery services can dramatically increase revenue, thereby accelerating the payback.

The challenge facing Telcos and other broadband operators is the same as that facing the vertically-integrated media companies I talked about last time. No matter what the makeup of the network may be, all of them share the same basic goal: growing revenues profitably. If a single media conglomerate can integrate the entire value chain, from the creation of content, its delivery, consumption and even feedback to the owners and the programmers, then a Telco should be no different. Regardless of the network environment, the delivery systems can conceivably be fine-tuned to such a degree that not a nickel is left on the table. After all, with all of the corporate scandals in the media and telecom business, it’s revenue, not just the accumulation of assets and market valuation through mergers and acquisition, which will win our confidence as customers and as investors.

With this backdrop, how can a carrier maximize revenue? First, look at the business plan. A market-driven service lineup with one eye on cost containment and the other on customer satisfaction is key, as I wrote in my recent installment about product management. Given a clearly-defined set of requirements and goals, we can move on to the next steps: content-acquisition, content security and customer feedback.

Without compelling content, why bother? If you are to expect cable and satellite TV subscribers to drop their existing service and go to your service, you must meet or beat their service plans. Not just by offering the “triple-play” of voice, data and TV, a given, but by offering the best channel line-ups. This does not necessarily mean “five hundred channels,” but it certainly means local TV, regional programming, “cable” programming such as The History Channel and CNN, the many movie channels, and the premium movie services. Some service providers are now busy rolling out video-on-demand; because many of the Telcos I’ve spoken with are still in the midst of their TV deployments, they are waiting before they add the complexity of VOD (which I’ll discuss in a future installment).

OK, so now we have programming. We’ve found distributors for “cable” programming, we’ve negotiated contracts with individual stations and the national networks. We’ve joined the NCTC (National Cable Television Cooperative).

Next is the technology. We have a plan--or maybe have even acquired the infrastructure--to encode, transcode, protocol-convert, backhaul, etc., to build the headend, which is the facility that prepares programming for distribution in the carrier’s network. We’ve chosen the TV middleware that best fits our intentions for service offerings now and in the future. It can integrate with our billing system. All fine. But something very important is missing: security.

So, security, you ask? But, as point-to-point networks, aren’t telephone networks inherently more secure than cable, you ask? Well, yes, but regardless of whether the system is bus-based or point-to-point, IP or non-IP, the fact is that many existing protection schemes can be hacked, and it’s about to get even worse. With the advent of home networking, residential gateways and 802.11 wireless networking, the potential for content theft is sure to increase exponentially. If someone can steal and redistribute your signal, how many subscribers will you lose?

How does a carrier implement security? Because security has been an issue in the cable world for as long as there has been cable television, there have evolved a number of highly sophisticated systems, called “Conditional Access” systems (i.e., the system will give you access, under the condition that you can be authenticated as a legitimate subscriber). Some are from companies that specialize only in security, such as Nagravision and NDS (the latter being a division of a vertically integrated media company, News Corp., owner of Fox).

These systems manage subscriber databases and keys that ensure that the subscriber is legitimate. At the subscriber end, the set-top box has built-in security client capability in the form of software, on-board hardware, a smart card, or a combination of these. This protection does not come cheap – traditional, smart card-based conditional access systems can cost as much as $30 or $40 per subscriber.

Any carrier pursuing security would be wise to dedicate some quality time to the evaluation of security solutions before deciding which one to implement. Many of the traditional conditional access systems have been adapted to function in point-to-point and IP-based networks, but still use their traditional designed-for-cable approaches to security.

There are important questions for the carrier. Does the system integrate with existing subscriber databases, such as the TV middleware and OSS system? How much overhead does the system add to the digital content itself (an important consideration for those lower-speed ADSL deployments)? What is the incremental cost per subscriber and how much longer will it delay profitability? Does the system require a smart card (and does the set-top box you’ve chosen have a provision for one)? Are there less-costly alternatives to these smart card-based systems?

In summary, I would argue that content-protection and network security will be an increasingly important issue for all carriers, including telcos entering the TV business (especially them). Or to put it in business terms, the lack of a content security framework represents the potential for a significant loss of revenue through theft, and it’s incumbent upon the responsible carrier to add security in a cost-effective manner.

Leading by example, ever wary of theft themselves, and ever protective of their content assets, many of the content providers’ latest contracts are beginning to contain terms that require carriers to implement a content security system. As a carrier, one way or another, you will have to deal with security, and you will probably have to deal with it this year. Will you look at it as a benefit or as a tax?

Steve Hawley is principal consulting analyst of Advanced Media Strategies. He may be reached via his Web site, http://www.tvstrategies.com.