Virtual (OTT) MSO coming or not?

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    Two views on the feasibility of a scaled over-the-top (OTT) video offering appeared on the same day last week. One featured the views of Roku founder and CEO Anthony Wood; the other, research from IHS Screen Digest.

    Interviewed for aMultichannel News article, Wood said that within the next 12 months, U.S. consumers would begin to see a virtual pay TV Operator or MSO, i.e. “a pay TV package distributed over the Internet through devices like Roku.” To date, Roku has sold more than 3 million of its hockey-puck sized set-top boxes and plans to launch a streaming stick that plugs into a TV set’s HDMI port in October.

    As for who could assume the role of a virtual MSO, Wood said the likely candidates are well-financed incumbents with existing content rights. Prodding further, Multichannel’s Todd Spangler pointed out that Roku’s $45 million round of funding in July was led by News Corp. Participation also included BSkyB, which next year will use Roku devices to deliver Now TV, and (according to a Wall Street Journal report) Dish Network.

    The idea that a platform-agnostic OTT provider is a viable model for television, however, is being cast into doubt by a recent report from IHS. According to Guy Bisson, Research Director for Television at IHS, OTT costs rise to “uncompetitive levels” when the services are scaled to levels that are not even that high. In particular, the study found that the unicast streaming of just 8,000 simultaneous views—which Bisson called “a tiny amount compared to a typical primetime audience for linear TV”—is less cost effective than broadcast.

    “To serve the viewing needs of a mass-market audience, the content delivery network (CDN) costs for OTT streaming services would have to fall by a factor of as much as 25,000 just to reach parity with the most efficient broadcast technology,” Bisson said in a statement. Although disruptive technologies can achieve order-of-magnitude gains in efficiency, a factor of 25,000 is an astonishingly high barrier.

    Are these two outlooks contradictory? Or is there is some middle ground between the aspirations of a virtual MSO and the economic limits of existing streaming technology? On the one hand, Roku CEO Wood admitted that even with billion-dollar content rights, a virtual MSO video offering would involve “some reduction in the size of bundles” when compared to a traditional Pay TV lineup. And as for ways to scale up OTT, the IHS study points to possible CDN efficiencies that result from deploying edge servers for localized content.

    Building out caches within ISP networks is precisely what Netflix began doing this summer. It also launched Netflix Open Connect CDN as another to reduce further its transport costs. But to the extent that there are hard limits to unicast scaling (and others have begun acknowledging them) the vision of a virtual MSO will be constrained accordingly. In that case, incumbent broadcasters of linear television are likely to retain a strong competitive advantage.


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