India’s cable company stocks have fallen by about 15%-25% since Reliance Jio, India’s largest telecom company by volumes, yesterday announced the commencement of its long-awaited fiber broadband and TV service from August 15.

It is feared that the company’s entry can lead to widespread shutdowns and losses in the cable and broadband industry, similar to what was seen when it entered the wireless industry.

However, not everything is lost if the smaller cable and broadband companies play their cards right to compete with Jio’s GigaFiber and GigaTV.

MASSIVE DISRUPTION

That Jio, led by India’s richest person Mukesh Ambani, was working on a broadband-cum-IPTV service was hardly a secret, but what seems to have rattled the investors in these stocks was the sheer scale of the project.

Against the 100 cities that Ambani had promised for an eventual scale-up two years ago, the billionaire announced that the service will start off with 1,100 cities from Day 1.

The true extent of Ambani’s broadband venture can be seen when compared with the 87-city footprint of Bharti Airtel’s broadband service and the 12-city footprint of India’s largest cable broadband operator Hathway Cable and Datacom.

ALL HOPE LOST?

However, not everything is lost for smaller cable and broadband companies.

This is because, unlike players like Hathway and Den Networks, Reliance Jio is almost certainly trying to replicate its ‘well-head to wall-socket’ strategy in its new entertainment and communication business.

The strategy involves controlling everything — from the the creation of content (News18, Colors etc) to its distribution (via Jio GigaFiber and 4G) and presentation (apps such as JioTV and JioCinema).

The key to surviving such a massive onslaught from a tightly organized, integrated system like the one built by Reliance will be the opposite — an open, inter-operative system comprising a variety of stakeholders, each of which supply what it is best at.

Broadly speaking, the content/entertainment ecosystem consists of four parts: a) content b) format c) pipe and d) terminal device.

At present, content is produced by companies such as Star India, Balaji Telefilms, Zee Entertainment, Netflix, Amazon, Sun TV and so on.

The primary format of consumption is in the form of channels, while apps like Hotstar, Sony Liv, and ALTBalaji are fast evolving.

The third part — the pipe — depends on the format. For TV channels, the pipe is provided by cable companies like Hathway and DTH operators like Tata Sky, while that for apps is provided by internet providers like Bharti Airtel, Vodafone, BSNL and Idea.

The final component is the terminal device, which too depends on the format. In the channel system, the terminal device is a set-top box installed by the pipe provider. In case of apps, it’s usually a smartphone or TV provided by a hardware specialist like Xiaomi or Lenovo.

FORMAT CHANGE

The emergence of Jio GigaFiber has to be seen in the context of rising popularity of the app- or software-based format.

Unlike the channel- or hardware-based format, the app format offers several advantages, the most important of which is ability to watch any program at any time.

TV shows, news videos and movies delivered on apps can be consumed at a time chosen by the viewer, instead of the viewer having to accommodate his or her viewing habit to the time chosen by the format operator, as is the case with TV channels.

It also provides much easier mobility compared to traditional broadcast consumption. One can watch app-based programs on the go, while it is almost impossible to watch broadcast channels on the go (except when they are delivered on app-based platforms).

It is expected that these two key advantages will ensure a victory for app-based format of content consumption, while channel-based consumption will eventually be restricted to news and live sports.

ADAPT TO SURVIVE

To survive in this changing scenario, any traditional pipe provider — such as a cable TV provider — must cater to the app-based format.

However, most cable operators have deployed copper cables and ‘dumb’ set-top boxes, which are suited to the channel format, but not to the app format.

Hence, they have to increase the share and penetration of fiber in their networks on the one hand, while on the other hand offering smart set-top boxes with support for apps, video-calling and so on.

If a cable operator can provide a bandwidth of even 5 mbps and support for all third-party apps (such as Netflix, Hotstar and Amazon), it can offer an experience that is potentially better than what a fully on-deck system (which Jio’s system is likely to be) can deliver.

This is because in the entertainment business, content is king, and anyone who offers a higher variety of content is more likely to win over the customer.

Of course, Jio GigaFiber too can offer a box that supports any app from the market place — such as Amazon Prime, Youtube and Hotstar. That is, however, the less likely scenario. At present, we’re more likely to see a curated list of allowed apps and content.

As far as cable operators are concerned, one of the biggest impediments to such a transition on their part is going to be their mentality.

Traditionally, cable operators have had two sources of income — reimbursement for the expenses incurred in creating and maintaining the cable network or pipe, and a ‘cut’ from money paid by the subscriber for the content (TV channel).

However, in a fully open app-based system, the second source of revenue is unlikely to work out.

In other words, if a cable operator says he will allow the customer to install only those apps that are willing to pay him a cut of subscription charges, the system is no longer open. It will be a walled garden, and therefore not necessarily superior to GigaFiber.

It should also be remembered that GigaFiber is likely to come with access to the open Internet and all kinds of apps, though not necessarily via the set-top box. A walled garden approach with no Internet access is therefore unlikely to work well.

NEW OPPORTUNITIES

The transition from channel- to app-based consumption opens huge business opportunities for savvy device makers and cable and internet providers.

In the traditional cable TV system, set-top-boxes of cable networks had to be sourced from the pipe provider. This was because the encryption system at the source of the content (head-end) had to be compatible with the decryption system at the terminal (set-top box).

However, in the app-based format, the encryption and decryption is handled by the software — deployed at the head-end (server) and the device (smartphone, smart TV, smart STB etc.)

This means that the pipe provider is no longer required to provide the consumption device. The device can instead be sourced by the customer from the open market according to his or her budget and requirements.

Some, for example, may want a set-top box with support for 4K, gaming, Facebook and video chatting, while others may be content with just watching content. Enterprising companies like Solid can be expected to cater to the demand for smart set-top boxes that work on any network.

At present, Android TV boxes are available for as little as Rs 1,000, with support for deploying any app.

An MSO or cable network can hire a software developer to create an IPTV application for as little as Rs 1.5 lakh. The app can then be deployed on these boxes and connected to a server located in their office using either traditional ethernet or fiber.

The server can optionally be connected to the Internet to enable customers to use apps like Netflix and Amazon, in addition to the cable network’s own IPTV app.

While bigger networks and MSOs will create their own apps, smaller networks are likely to tie-up with MSOs to redistribute these apps and connect their networks to those of the bigger MSOs’.

The costs involved in deploying an app & AndroidTV based system will be far less compared to the traditional system, because the subscriber can be asked to buy his device from the market. The MSO/operator is only giving the app, which can be done at zero incremental cost for each new subscriber.

The customer is also more likely to buy such a box because it can work with all broadband/cable networks, and can also be used to install games and other applications of his choice from the Internet, like a smartphone.

The biggest practical challenge in deploying such systems so far has been the reluctance of content companies to allow their content to be stored on such servers.

Companies like Zee and Star feared that storing programs on servers would lead to piracy and leakage. However, these companies now have their apps, and these apps can be used or integrated by the cable operator to get over this difficulty. They are also more likely to allow recording and playback of their programs now because of technological advances and competition from apps.

And early indicators point to such an evolution of the market.

For example, DTH provider Airtel Digital has already come out with a box that supports third-party apps such as Netflix and Amazon Prime, along with the traditional channel format beamed over satellite. The device is powered by AndroidTV, an operating system designed for smart TVs.

Tata Sky too has announced that it will introduce a smart set-top box with support for third-party apps. There are also preexisting devices, such as Amazon Fire TV Stick, that are in contention.

Similarly, there are also a wide range of affordably priced satellite receivers that come with Android TV operating system, as well as support for traditional DTH services such as DD Free Dish.

Finally, more and more televisions are coming with support for third party apps, which obviates the need for a separate end device totally.

GSM vs CDMA REDUX?

In a way, the emerging broadband ecosystem could see a repeat of the CDMA vs GSM battle of the 1990s.

On one side of the battle was Reliance, which controlled both the pipe as well as the device, and on the other were a host of GSM mobile operators that provided only the pipe, leaving the choice of the device to the customer.

Even though the voice quality of GSM service was clearly inferior to that of CDMA, GSM still prevailed over CDMA because of the freedom, variety and choice of devices that could be used on the network.

Similarly, an open wired-broadband ecosystem with support for third-party set-top boxes and apps could eventually turn out to be the winner in a fight with a closed system where the device and the apps are controlled by the pipe provider.

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