MSOs and OTT: Best of 'Frien-emies'

July 30, 2014
The general sense is that the intense competition between cable operators and over-the-top (OTT) providers is starting to give way to a ...
The general sense is that the intense competition between cable operators and over-the-top (OTT) providers is starting to give way to a "frien-emy" relationship in which the competing sectors rely on each other for elements that they believe make their success more likely.

The transition from sworn enemies to grudging partners is not uncommon in industry. It is not easy, however. In the case of the OTT players and MSOs, the catalyst to the evolution of the relationship is simply that the OTT players have proven that they are here to stay.

A few years ago, the OTT players were entrepreneurial startups with a bit of money, but not much programming and few back office assets. At that point, the prudent move by cable operators was to try to nip the upstarts before they gained traction. Even if there was little they could do to hurt their prospects, it was clearly silly to help them.

That situation has changed, of course. the NetFlixes (NASDAQ:NFLX) and Hulus of the world are big businesses. They are stable, producing their own programming, and taking at least some viewership away from cable companies. Their content is sent to an impressive array of in-home devices. "Two years ago, you might be asking whether they are friend or foe," said Ron Miller, the vice president of product management for ARRIS (NASDAQ:ARRS). "Today, it has slid [more to] the friend side."

Like it or not, OTT is here to stay. This has an upside for operators: The OTT operators have more in terms of deals that can add to MSOs' bottom lines in real ways. "There is more of a mutual defined need for each other," said Brad Ferris, the vice president of technology and portfolio management for Ericsson (NASDAQ:ERIC) in the United States.

Cable operators are responding by offering the OTT providers better access to their subscribers. The operators' goal is either to present the OTT provider's content through the MSO's set-top-box or to send its own branded programming over the device used by the OTT provider.

One of the biggest challenges to the video entertainment industry as a whole - cable operators and OTT providers - is finding the most efficient way of getting viewers to what they want. Having a coordinated approach to this vexing problem almost by definition will yield better results than the sectors' working at cross purposes. That fairly obvious idea is a driver of agreement between ARRIS and Wurl to create ARRIS Market, a platform combining OTT and cable programming on the traditional cable vendor's set-top boxes.

The goal of working together to help subscribers find what they want has a back-end element. Increasingly, programming is stored in content delivery networks (CDNs) and other cloud-based repositories. There is a great level of development around the best ways to plan and structure these networks. Reducing congestion in this increasingly frenetic environment is one goal of a transparent caching solution for OTT content announced this month by Concurrent(NASDAQ:CCUR).

One very important element is working out a system for efficiently managing "long tail" from commonly used content. In short, a top 10 movie will be treated differently than an art house flick released 15 years ago. There is no reason that cable operators and OTT players can't work together on this important task. Exactly how that is broken down - which organization is responsible for what content - can be part of the negotiation between the two players.

What the ground rules will be for the future will depend to a great extent on the results of the evolution of the Net Neutrality rules. It seems clear at this point that OTT players, in some form or fashion, will be able to pay for faster and more direct access to viewers than in the past.

Precisely how this is codified into law no doubt will impact the nature of the kinds of deals that OTT and cable operators can enter into. In real terms, what still is in play simply are the details. It seems unlikely that the industry ever will return to the old status quo.

"I think it will influence how the problem is solved, but the problem will be solved in any case," said Jim Brickmeier, Concurrent's senior vice president for strategic marketing.

Business is full of compromises. Cable operators no doubt were unhappy to see the OTT players arrive. But once they arrived and established themselves, it became clear that being "frien-emies" engaged in "coop-etition" is a far better than a scorched earth policy that rules out working together.

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