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Viodi View Newsletter - February 16th, 2005 Issue

Indie Telco Local Content Workshop Advertisement

Digital Must-Carry & USDTV

By Ken Pyle, Viodi, LLC

As follow-up from last month’s article regarding the opportunity for telcos to exploit the recent FCC order that frees cable companies from the mandatory carriage of local broadcasters secondary digital program streams, this article will delve a bit further into the sort of content that might be on those streams. Specifically, it assumes a worse case whereby the local broadcasters have entered into a program agreement with an aggregator, such as USDTV.

As a bit of background, USDTV is a service that effectively leases bandwidth from local broadcasters to create a virtual cable television line-up. USDTV needs agreements from multiple broadcasters in order to secure enough bandwidth to broadcast 20 or channels. They offer a discount cable line-up that includes several of the most popular cable channels, including Fox News, ESPN and Disney.

At first glance, the USDTV service could be thought of as competition to the independent operator. After all, with USDTV, a customer can receive a limited set of cable channels plus their off-air channels for the low-price of $19.95 per month (with no additional franchise fees). This clearly appeals to a certain portion of the populace as USDTV signed up 10,000 subscribers in their first six months of operation [note, USDTV is only in three markets, Las Vegas, Salt Lake City and Albuquerque, as of this publication].

It doesn’t seem obvious, but a compelling case could probably be made as to why independent telcos and USDTV could make for a mutually rewarding partnership. First, the independent telco represents a way to spread USDTV’s footprint beyond the urban areas. Next, independent telcos offer another method for USDTV to get their product in front of customers. Lastly, the independent telco could potentially remove some of USDTV’s capital expenditure burden.

Rural areas are often beyond the broadcast contour where a customer can reliably receive signal. It is conceivable that a rural USDTV customer might be able to receive some, but not all, of the off-air channels associated with USDTV. This would create a situation where customers at the fringe might have poor quality and reliability. In this scenario, USDTV would probably decide not to serve the rural customers. An independent telco could easily extend the USDTV offering using a simple headend and fiber/copper distribution system.

Given the strong relationships with the community, an independent telco could provide a great sales channel for the USDTV product. Bundled with the telcos’ Internet and phone offerings, the USDTV product has much greater value. Another advantage for USDTV is the telco would eliminate USDTV from having to supply a set-top box; a substantial savings to USDTV.

What Is In It for the Telco?

USDTV has the potential to allow the telco to provide a set of packages that is truly differentiated from the incumbent operator and, because of the MSO’s network architecture (as discussed in the previous article), could not be easily duplicated. For instance, one such package would fit between the traditional basic and expanded basic tiers, as shown in table 1:

In this scenario, it is assumed that USDTV effectively wholesales their offering to the cable operator for approximately $11 per month. This discount reflects the costs borne by the telco in selling and marketing the USDTV service, billing for the service providing set-tops and being the first line of customer service.

Alternatively, for smaller telcos, it might be possible to structure some sort of deal with USDTV, whereby USDTV would be carried as an “information service”, avoiding the need for franchise and, possibly, a traditional headend.

Some Questions Regarding this Approach:

As far as I know, no one has proposed what has been discussed herein. There could be a number of reasons for this:

• USDTV’s willingness to work with independent telcos – their focus is signing up broadcasters. At this point in their brief history, USDTV might not be ready for the sort of model described at this point.
• USDTV’s long-term model is somewhat questionable. It seems like they have a challenging model, based upon costs I estimate they have. They probably require a fairly significant number of subscribers in major markets to reduce programming costs and generate ancillary revenue, such as advertising.
• Content providers, such as ESPN, may have not given USDTV “rights” to distribute their content in this manner.

These are some high-level questions that I will try to have USDTV address in the coming months. If possible, I will sign USDTV as a speaker at an upcoming event, so that we can all hear from their viewpoint. In the meantime, please email with me any comments.

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