AT&T notified DISH Networks that it will sever their existing resale arrangement at the end of this year. AT&T has been reselling DISH’s video services since 2003 and expanded the relationship further after their Bellsouth acquisition. It’s widely believed that through this move, AT&T is forcing DISH’s hand into a bidding war with DirecTV for a long term resale arrangement with them. AT&T will need a DBS resale partner, just like every major telco in the U.S. currently has. Despite all the hype surrounding U-Verse, AT&T will need a DBS partner to field a competitive triple play bundle for years to come. Even after the current billions of dollars that are committed to U-Verse have been spent, it will still only reach a large minority of AT&T customers. The mid to long term strategy for AT&T and other telcos is to use DBS to fill the gaps. Of course, AT&T may have something else up its sleeve as well – a possible acquisition of DirecTV. Is this DISH development a pre-emptive merger move, with DirecTV being the acquisition prize?

DISH Networks reported disappointing results for the first quarter 2008 in a SEC filing. DISH indicated competition from cable and telecom carriers are main factors in their 89% decline in subscriber growth, which netted only 35K net subscribers. In the 10-Q filing DISH says, “We believe that this declining subscriber growth has been driven in part by competitive factors including the expansion of fiber-based pay TV providers, the effectiveness of certain competitors’ promotional offers, the number of markets in which competitors offer local HD channels, and their aggressive marketing of these differences.” This report offers a strikingly different result from DirecTV’s recent results which reported 275K net new subscribers, a 17% increase. DISH will officially report their quarterly results on Tuesday.

DISH appears to be falling victim to both telco and cable triple play success, and to DirecTV’s continued HD superiority. DirecTV is maximizing its HD lead over all competitors, and in DISH’s case, their advantage appears to be widening. Add telco and cable’s triple play competitive advantage, and DISH looks like it is in for a rough few quarters. They’ll have a difficult time reversing the trend, because their historical value play of low cost is vulnerable to the savings perception of the triple play bundle. Adding insult to injury, they have no trump card like DirecTV does with HD and high end sports programming. They even face a HD setback, whose timing couldn’t be worse, caused by a recent satellite launch mishap. It all adds up to an ugly situation from a DISH investor point of view. Their competitors are salivating at the prospects of luring DISH’s 13.8 million subscribers.

The march to video distribution over the Internet that rivals traditional subscription pay television continues. TiVo announced an agreement with YouTube that will bring YouTube content directly to the television through a TiVo DVR Series 3 set-top-box or better. In addition to viewing YouTube content, YouTube users will also be able to log on to their account through a TiVo box. The YouTube agreement expands TiVo’s Internet video content strategy, which also includes Amazon Unbox movie downloads and a variety of other content from various sources. TiVo is trying to position its solution as a gateway to web based content, in addition to a leading DVR solution for traditional linear television content. “Being able to make available YouTube videos to the TiVo subscriber base using one device, one remote and one user interface is another major step in our commitment to combine all of your television and web video viewing options in one easy to use service,” said Tara Maitra, Vice President and GM of Content Services at TiVo Inc.

One trend that is worth observing over the coming months and years is applying the “cut the chord” mentality to cable or IPTV services, where consumers decide they don’t need cable anymore because web distributed content is enough. As more and more compelling web based content makes it to the TV in acceptable formats and viewing experiences, many consumers will surely decide that their monthly video subscription bill may not be worth it. It’s definitely having an impact on the roll out of IPTV. I’ve personally spoken with several telephone company executives who have decided to stand on the sideline and observe these trends a little more closely before deciding to pull the trigger on IPTV and triple play. This is a complicated issue, and a variety of factors come into play that will impact these decisions, including HDTV availability, sports programming, etc. It's hard to imagine Internet video distribution completely replacing the subscription pay TV model. But it is pretty clear that any converged entertainment strategy needs to address web based video. In my humble opinion, “the genie is out of the bottle” with web based video and service providers and the vendors who serve them need to find a way to weave web video options into their entertainment packages. The experience that ultimately wins will probably offer a compelling mix of both traditional and Internet delivered content. At least until the day when it will be impossible to tell the difference. That day is coming too, we just don't know how far off it is. Any guesses?

Comcast Media Center and Motorola are teaming up to offer smaller cable systems a consolidated digital platform which allows for the deployment of advanced services including HDTV, DVR, VOD, and tru2way applications. The new platform will allow smaller cable operators with as little as a “330 MHz system [to] expand its service offering to customers by converting some of its analog channels to digital, utilizing programming on the HITS platform, and then using that reclaimed bandwidth to offer hundreds of additional linear HDTV and SD channels and a library of VOD programming with over 2,000 titles also available through the HITS platform.” It’s somewhat analogous to what Avail Media and IP Prime provide small telcos for IPTV.

This development could have implications on the competitive landscape. Smaller and rural cable companies have had a more difficult time upgrading their older plant to provide competitive triple play offerings than their larger MSO brethren. Small telcos have seized on that, and are launching IPTV powered triple play platforms to win over customers wanting a more robust video experience. In theory, this new Comcast/Motorola platform will allow smaller cable companies, who normally couldn’t afford to upgrade their plant, to now get in the two way digital, triple play game. If it gains traction, and quickly, the competitive landscape in smaller markets across the U.S. may begin to look very different.

Cox announced that 62% of their customers subscribe to at least two bundled services, and 30% subscribe to at least three services. Compare that with AT&T, who by our estimation, has about a 45% penetration for at least two bundled services. Verizon is a little more difficult to compare with because they really have two classes of residential subscribers – those with FiOS access and those without. Here are Cox’s reported subscriber counts with corresponding year over year growth rates:

• 5.96 million total residential customer relationships; 1.6% growth
• 3.7 million bundled customers; 9.0% growth
• 2.38 million telephone subscribers; 17.7% growth
• 3.7 million high-speed Internet subscribers; 11.3% growth
• 3.1 million digital cable subscribers; 10.8% growth
• 557,000 “non-video” residential customers; 24.5% growth

Cox has always been seen as a leader in the MSO industry for bundling. They were bundling voice service using traditional circuit switched service (as opposed to today’s cable VoIP service) long before other cable companies got in on the act. Part of the reason they can brag about these impressive bundling penetration figures is because they have been at it longer than probably any other national MSO or telecom carrier. Cox is projecting over 4 million bundled customers in 2008.

AT&T announced the launch of AT&T U-verse Voice, a VoIP powered primary line service for their U-Verse triple play bundle. The service was launched formally today in the Detroit market after trials began in December. The voice service is priced at $40/month for unlimited calling or $20/month for 1,000 long distance minutes, or can be bundled for lesser rates. By using VoIP, AT&T is integrating several convergence features into their triple play package, including an online call manager portal, unified messaging, click to call from the TV, and the simultaneous ring of up to four separate telephone numbers. Interestingly enough, there is no mention of the AT&T CallVantage VoIP service, which appears to be on its way out (or at least relegated to an unmarketed service).

This is an interesting development on a couple of fronts. One is the positioning of this voice product, which clearly is designed to meet cable voice products head on. AT&T is trying to create a “next generation” voice product with next generation features to counter the successful positioning of cable “digital voice” products. Cable’s strategy has been to create voice products with better features and unlimited calling that trump the “stodgy, old” local phone company’s boring POTS service. Secondly, AT&T is testing the concept of an all IP network, which has been the subject of many a PowerPoint presentation, but has seen little traction with incumbent telephone companies. By leveraging an all IP infrastructure, AT&T hopes to lower operational costs and leverage innovation for a more “digital” experience with their products. Convergence is easier with an all IP network and AT&T is testing the waters with this launch and with launches to come. Stay tuned.

In-Stat, an Arizona based market research firm, reports that its most recent cable MSO survey reveals 54% of cable operators face competition from telecom operators in the form of telcoTV. TelcoTV doesn’t always equate to IPTV. Verizon FiOS uses the same technology as cable companies for the video portion of their triple play, but delivers it over FTTH architecture. In-Stat postulates that this increased competition is driving cable companies to invest more in their networks and offer more competitive features. For example, In-Stat says that 90% of the cable companies participating in the survey report offering HDTV.

Competition keeps competitors honest. That’s what they are finding out in the Pittsburgh market. The local newspaper, the Pittsburgh Gazette, is running a feature that outlines how customers are taking advantage of the pitched battle between Comcast and newly arrived Verizon FiOS. In one instance, a threat to leave Comcast for FiOS resulted in a cable bill being reduced from $90/month to $46/month with new add on features including a HD DVR. Not a bad deal if you can get it.

This real world example demonstrates the real winners in competition – consumers. Smart consumers will play one competitor off of another to get the best deal. These types of opportunities will only increase as Verizon, AT&T, and others begin to ramp up their triple play bundles across wide footprints. As the Pittsburgh Gazette’s feature pointed out, every one won’t be so lucky. It almost appears as if your best deal is dependant on the aggressiveness of the customer service rep at that moment. Makes you wonder how service providers are training CSRs. I suspect it depends on the general manager for that region and the competitive pressures he/she is facing. You also wonder about the impact of these pressures on ARPU. Triple play is always cheered as having a positive impact on ARPU. But as competitors move in, ARPU is sure to suffer. After all going from $90 to $46 helps keep the customer, but certainly doesn’t look great on a financial statement.

Competition couldn’t be more evident this week. The poster child for cable’s triple play success, Comcast, announced lower financial guidance. The news pushed their stock price to a 20 month low. Comcast is feeling the heat from competitors, including Verizon and AT&T. Both Verizon and AT&T purport to be doing “thousands” of video installs per week. Those new installs represent both “churned” Comcast customers and potential Comcast customers who are no longer “available.” Both scenarios reduce Comcast’s growth and lead to the their sobering announcements of the week.

The Washington Post reports that Comcast is evaluating all of their options. They are even exploring marketing phone and Internet services to non-video customers. It represents a significant “cultural shift,” according to Comcast’s co-chief financial officer, Michael Angelakis. Indeed it is a significant shift, but one they will probably need to aggressively embrace. They are not alone. Telcos too will need to adjust their culture, and aggressively pursue non-telephone customers with attractive video and broadband options. Competition does that to you – it causes you to look in the mirror, and adjust accordingly.

Liberty Media CEO Greg Maffei offered these thoughts about DirecTV’s triple play future at the UBS Securities Media & Entertainment conference on Monday, as reported by Multichannel News. Liberty is taking a controlling stake in DirecTV. DirecTV has staked its interim future on HD and specialty programming like their venerable NFL Sunday Ticket. But really, what else is Maffei going to say? DirecTV is triple play challenged, with no easy solution in site.

Maffei and DirecTV have to put their eggs in the enhanced video value proposition basket. Perhaps history will show this strategy correct. Maybe enough consumers will decide to get services from multiple players, passing on the triple play. Cable’s triple play growth rates seem to be slowing (just ask Comcast), so maybe triple play’s best growth days are behind us. Or maybe the growth rates are simply shifting, with Verizon and AT&T’s best triple play growth rates ahead of them. Regardless, DirecTV seems focused on building competitive advantage around enhanced video features, and apparently are intending to ride that horse into the foreseeable future.