Google developing an Uber competitor - a defensive move for the future of driverless cars

Bloomberg is reporting that Google is developing a service to compete with Uber, Lyft, and others:

'Google is preparing to offer its own ride-hailing service, most likely in conjunction with its long-in-development driverless car project.

Uber executives have seen screenshots of what appears to be a Google ride-sharing app that is currently being used by Google employees.'

The article is subtitled 'The two companies are going to war over self-driving taxis', which was my first thought even before I read the subtitle.

If driverless cars can be mass-produced at a reasonable cost in the future, most people in urban areas will have no need to own a vehicle. It won't make sense to own a vehicle capable of driving itself when it sits in a parking spot 20+ hours per day. It will be less expensive and more convenient to use a service like Uber.

If Uber continues to grow and dominate the taxi/ride-hailing industry, they would be a huge (if not the largest) purchaser of driverless cars. Google does not want a single customer with that much purchasing power to influence the market for driverless cars. Perhaps this move is all about influencing a more competitive market for driverless cars in the future.

Why do we hate the cable bundle but not other content bundles?

Many Americans seem to dislike cable TV quite a bit: in 2014 21% of people said they would probably or definitely cancel, up from 17% a year earlier (although very few people follow through). Pay TV companies are perennially at the bottom of customer satisfaction ratings. I would guess that the cable bundle is a big reason for this. I commonly hear the argument that people pay for a ton of channels they don't watch, but I don't hear the same argument for other bundles of content. I don't hear many people complaining about all of the Netflix titles they don't watch or songs on Spotify they don't listen to. I also don't recall my parents' generation complaining about paying for sections of the newspaper they didn't read.

To be fair, there are some major differences between these bundles. The average pay TV service costs $85 per month, while Netflix is only $9. People may feel 'forced' into paying for cable, because it is the only way to watch live sports, the local news, HBO, etc. Everything on Netflix but a few original shows is available elsewhere (and earlier). Furthermore, most Americans only have a choice of 2-3 pay TV providers in their area. Other content bundles tend to have greater choice of providers and little to no popular exclusive content. Sure, the local newspaper's content may have been 'exclusive' but there were other ways of getting the daily news, seeing sports scores, and other sources of classified ads.

Pay TV has done a wonderful job of growing the number of channels in the base bundle and passing increases in programming costs onto consumers. Also, there is essentially no choice between a basic package with a dozen or so local channels and a bundle with hundreds of channels. Netflix and Spotify are perceived as great values now, but their natural instinct is to grow their subscriber base by appealing to a broader and broader audience by acquiring or creating a wider variety of content. (For example, Netflix could add nightly news shows or live sports and Spotify could add comedy or talk radio programming.) If the existing audience doesn't find this new content compelling but is still forced to pay for it, Netflix and Spotify could find themselves where the pay TV industry is right now.

Questions about the future of television and where the Apple TV fits in

Television is changing. It wasn't too long ago that the structure of the industry was pretty straightforward: TV studios and networks created the content, which was distributed by cable companies or broadcast over the air to antennas. Viewing was typically live on television sets in the home. But viewer preferences started to change enabled by new products and services such as the DVR, cable boxes with on-demand features, YouTube, and Netflix. Americans, especially younger ones, are replacing and supplementing live television with streaming and on-demand options. A recent study by Forrester reports that only 40% of Americans aged 18-34 watch live linear TV in a typical month (although live viewing may still command a higher share of total hours viewed). To meet these evolving needs, new services are emerging. A new breed of 'cable company' is forming, one that owns no infrastructure but licenses content to distribute over the internet. Dish's Sling TV and Sony's Playstation Vue will launch in the US this year with a focus on smaller bundles of live and on-demand content. Netflix and Amazon Prime focus on licensing large libraries of back-catalog content in addition to some first-run movies and financing and producing exclusive content. Hulu aggregates current-season and back catalog TV programming and also finances exclusive content. Meanwhile, several TV networks are or will soon be offering their own programming over the web for a monthly subscription (CBS All Access, HBO, Showtime, Nickelodeon, and likely more to follow).

What's interesting about all of these services are they change the idea of what TV is: no channel numbers, no clunky remote controls, no special equipment needed, no installation appointments, and painless cancellation.

For now, each of these offerings has major holes when compared to the traditional cable TV bundle, but that may not matter to an individual viewer. Question is, how many of those viewers are out there. Some viewers may combine multiple services, but then the question becomes whether or not they'd be better off with a cable TV subscription.

So how do the Apple TV, Roku, Chromecast, etc fit into this world? The market for these products has been growing, likely due to the popularity of streaming services and the desire to occasionally/frequently watch content on a big screen. Other devices typically connected to a TV are building in streaming services, such as game consoles, DVR's, and blu-ray players, as have the TV sets themselves. The Xbox One has perhaps the most advanced set of features, but in their review The Verge says: 'The TV integration is an awkward hodgepodge of menus and overlays and dead ends' and published another article with the subtitle: 'Microsoft learns nothing from Google TV's mistakes'.

Apple has never been hesitant about introducing forward-looking products. For example, they were early to introduce laptops without optical drives, completely skipping over blu-ray drives. If Apple does radically redesign the Apple TV, it would seem the time has passed for it to hook up to (or replace) a cable box or include a hard drive for a DVR.

So what will be at the center of the TV experience in the future - a set top box, a TV set, a smartphone? I believe content and convenience will be the driving factors of how the TV landscape evolves. Viewers clearly prefer to consume their content when it is convenient for them on whatever screen they choose, just as they do with Netflix and Hulu today. For some people these apps are already the center of their experience. But as more of these services proliferate how will viewers find something to watch? This may not be a problem for the Netflix subscriber today, but I can see a future where I subscribe to Netflix, HBO, and Sling TV (for ESPN), in addition to free options and a la carte movie and TV purchases. What will become my 'TV guide' or replace channel-surfing?

In his biography, Steve Jobs was famously quoted speaking about television:

'It will have the simplest user interface you could imagine. I finally cracked it.'

That was over three years ago, and it seems very fitting today. He could have been referring to a service that Apple was building, or building a better interface for the apps already on the Apple TV.

When thinking about Apple's plans I try to think product-first. A full TV set from Apple still doesn't make sense to me from a financial point of view, but perhaps it does from a user experience point of view. If they think in order to make the best product it needs to be a TV set then they will, regardless of the market size or how much it might cost. However, it would seem a disservice to make that interface Steve Jobs was referring to exclusive to a TV set or set top box. Is the future of TV just an app or collection of apps or is it something more?

Apple should change its name to 'Apple Mobile'

In early 2007 Apple Computer dropped the 'computer' and simply became Apple Inc. At the time Steve Jobs said 'Mac, iPod, Apple TV and iPhone. Only one of those is a computer. So we’re changing the name'. Now, they may as well change it to 'Apple Smartphone' or 'Apple Mobile'. I've written before how financially important iPhones are to Apple. Yesterday's earnings announcement, which included the first full quarter of iPhone 6 and 6 Plus sales, further highlights Apple's dramatic shift from a computer and music player company to a mobile phone company. The iPhone now accounts for 68.6% of Apple's revenues (up from 55% just six months ago in August, 2014). This is before accounting for revenue contributions from the App Store, iTunes, Apple Pay, and accessories that could be attributed to the iPhone. Clearly, the iPhone 6 and 6 Plus have been a huge hit, and are more important than ever to Apple.

Survey says HBO will spur cord-cutting - a huge problem for the pay TV industry

Re/Code, reporting on a new survey from Parks Associates claims that the coming HBO streaming service could lead to 6.8 million Americans ditching pay TV. For the moment, let's excuse the fact that pricing or other details of the HBO service have yet to be announced (the survey appears to have assumed a $15/month price tag). This survey highlights a problem for the pay TV providers and TV networks. According to my own research, the average pay TV bill in the US is about $85 per month. That means for every 1 million people that cut the cord the cable industry loses about $1 billion in revenue per year, a large portion of which will go straight to the bottom line. Cable operators run a very capital-intensive business with a lot of fixed costs. Said another way, if someone on your block cancels their TV the cable company still has to maintain the lines running to all of the other houses. The cable company is making less money to do essentially the same amount of work. (The TV networks face the same problem since they will make less money from advertising and future subscriber fees.)

The pay TV system in the US has been on an unsustainable course. The average bill has gone up 63% in the last decade, but consumers are given no choice between a full-priced bundle and a basic package of a dozen or so channels. The whole system may be one big house of cards ready to come tumbling down when the pillars such as HBO and ESPN are liberated from the bundle. It will be very interesting to see how Dish's Sling TV, Playstation Vue, HBO, and other standalone or 'skinny bundle' services perform.

Why is Google launching its own cell phone plans?

The Information is reporting Google will launch its own wireless plans:

'Google plans to shake up the U.S. wireless market by selling voice plans to consumers, through expected deals with T-Mobile and Sprint. It’s the latest example of how Google tries to prod incumbents to change their business to benefit Google.'

Pricing or other details aren't available at this time. If accurate, Google will be what is called an MVNO (mobile virtual network operator), meaning they will lease bandwidth from other companies and won't actually own any wireless spectrum or cell towers. MVNOs have a mixed track record in the US with many high profile failures such as Amp'd Mobile and ESPN MVP. More recently, several carriers have acquired or started MVNOs to serve as their low-price prepaid option (Virgin Mobile and Boost Mobile are owned by Sprint, T-Mobile bought MetroPCS, AT&T bought Cricket and merged with its Aio subsidiary).

Google's goal has long been to get as many people online as possible so that they can make money from their ubiquitous web services. I believe they are now applying the same reasoning to wireless plans. They can use an MVNO to promote new pricing of wireless plans that better matches modern smartphone usage (light on voice and heavy on high-speed data). They could also use this initiative to offload traffic to wifi whenever possible to keep data usage down and plans priced more reasonably. Another more extreme possibility would be to get rid of voice and texting altogether and rely on Hangouts for messaging and VoIP calls.

I doubt Google has ambitions of becoming a wireless operator, but they could use an MVNO to influence the wireless carriers to their advantage, just as they have done with Google Fiber to improve broadband speeds. If it works I won't mind having a lower wireless bill that better matches my usage.

Will the iPad Mini die or evolve?

Rumors are pointing to a larger iPad (iPad Pro?) this year and an uncertain future for the iPad Mini. The Mini was only given a minor update (essentially Touch ID and a new gold color option) last Fall while the larger Air received a full spec update and slimmer design. The Mini is being squeezed between larger iPhones and the technically superior iPad Air 2. The iPad Mini 3 (or 2) is still an attractive option for people that want a small tablet, but I believe there are less of those people than there were in 2012 when the Mini debuted. Furthermore, the $100 difference between the Air 2 and Mini 3 isn't as much of a value as it was a year ago and there isn't much room to lower the price further because the Mini's margins are already tight. Tablet sales are flat overall, and the same is true of the iPad. Tablets under 8" make up approximately 50% of the tablet market, at least partially due to their lower cost. Perhaps larger phones is dragging down sales of small tablets. If so, it seems plausible that Apple would try to reinvigorate the iPad lineup with a larger model targeted at professionals and creatives with new features such as split screen multitasking and new input methods. Smartphones are getting bigger, why not tablets too? Just a year or two ago a 12-13" iPad would have been too heavy and bulky to hold for extended use, but after seeing the Air and Air 2 a larger model seems possible.

So, where does that leave the Mini - will it die or evolve? I've always been curious about using the Air suffix in the naming of the iPad. Was it a familiar name used to make it distinct from the Mini? Or was it carefully planned years in advance of a shakeup in the iPad lineup? It just doesn't make much sense to me for the Air be the largest iPad. If Apple does launch a larger and more capable iPad Pro, would they keep or discontinue the Mini? There is another option I see: resize the Air to about 9" (keeping the screen resolution the same), splitting the difference between the 8" Mini and original 10" iPad size and discontinue the Mini. I think the new 9" Air would be a nice compromise of portability and utility, while filling a nice space between large phones and an iPad Pro or MacBook. This would also allow Apple to maintain their pricing convention while getting rid of the low-margin Mini.

The cable TV industry by the numbers 3Q14

I wanted to take a look at what's going on in the pay TV industry in the US, so I charted out some data from the top providers over the past ten years. A few caveats before we get to the data... I looked at the 13 biggest providers as of today, which represent approximately 93 million of the 101 million total pay TV subscribers. These were not the 13 largest 10 years ago (in fact some did not exist), so some of the older data may be a bit misleading, especially as it pertains to cable providers (as opposed to satellite or teleco providers). Unless otherwise noted, all data was taken from SEC filings.

The total number of pay TV subscribers is roughly holding steady as a percentage of total households over the past few years. It seems pretty clear that satellite and telco (AT&T and Verizon) providers have been taking share away from cable providers. Again, the older data under-represents the total number of cable subscribers, and therefore total pay TV subscribers. Total household data is from the US Census.

We can clearly see the growth of the individual satellite and telco providers here. Some of the sharpness in changes to Comcast's and Time Warner's subscriber numbers are due to acquisitions and to a lesser extent divestitures. The smaller cable companies all seem to be slowly losing share to the larger companies.

ARPU (Average Revenue Per User) is the average revenue providers receive from video services alone, and does not include internet or voice revenue. I was only able to calculate ARPU for companies that reported revenue from video services separate from other services. AT&T, Verizon, and Cox do not report this, along with a few of the smaller cable providers, but over 80% of the total subscribers represented in the previous chart are included in the ARPU calculation.

I've seen many news articles that mention rising monthly pay TV bills, but the dramatic rise in prices over just ten years was still a surprise to me. Over the past ten years rising prices can be partially attributed first to the analog-to-digital cable TV transition, and then more recently additional fees for HD boxes and DVR's. The pay TV providers have also passed along higher costs from the TV networks, in part due to higher prices for premium programming such as live sports and high-budget original content. This explains why many providers are reporting record revenues even as their subscriber growth slows or turns slightly negative.

Finally, I wanted to see how the number of subscribers to various video services compares to pay TV subscribers. HBO/Cinemax and Netflix numbers are both reported in SEC filings. Hulu is a privately held company, but they occasionally report paid subscriber numbers on their blog. Although it is not a fair comparison, Netflix and HBO/Cinemax now have more subscribers than Comcast, the largest pay TV provider. However, their ARPU is a fraction of the pay TV providers'.

I plan to regularly publish updates to these charts as more numbers are released and provide some insights into what is going on in the industry. If you'd like access to the raw data I used or have any questions or comments feel free to email me.

PlayStation Vue feels like the future of cable

PlayStation has revealed the first details of its upcoming streaming TV service. It will include about 75 channels and features live broadcasts, popular content will be available on-demand for 3 days, and a cloud-based DVR where content can be stored for 28 days. It will initially be available on the PS3 and PS4 before rolling out to the iPad and other devices. See the full press release. The service is missing a few key channels (ESPN, ABC, Disney, AMC, TNT, CNN) and no pricing info has been released. It is essentially a cable TV bundle (minus a few channels) delivered over the internet to devices consumers already own. Yet it still feels like the future of cable TV to me.

Sign-up and cancelation

This service should be incredibly easy to sign up for and begin using compared to cable TV. No scheduling an appointment, waiting around for hours, installation fees, or new equipment to hook up and learn how to use. Vue will be another app on the PlayStation or iPad, just like Netflix or Hulu. They could even offer free trials if they wanted to. There are no contracts so you can cancel at any time, which Sony pledges to make an easy process. There won't even be any equipment to return. This should break down the barriers for customers wanting to try the service or switch to competitive services.

User interface

It's about time the TV interface gets a makeover. Time will tell, but it looks like Sony is moving in the right direction. Vue will group your favorite channels and shows on the startup screen for easy access. There won't be any channel numbers to memorize. Hopefully no more lists of channels that you may or may not receive, terrible on-demand menus, and remotes with hundreds of buttons.

Live vs time-shifted content

The service provides access to about 75 live streaming channels, but recognizes that many viewers prefer to watch time-shifted content. Popular content will be available on-demand for 3 days without any need to schedule DVR recordings. A cloud-based DVR is also included in the service, but content can only be stored for 28 days due to agreements with the TV networks.

It would be nice if the on-demand content was available much longer essentially making the DVR useless. This should still be an improvement over the cable companies' terrible on-demand user interfaces. A cloud-based DVR is another welcome addition, no word on storage limits though. Hopefully Sony can work with the TV networks on these issues for a better user experience in the future.

TV as an app

I like that the service will essentially be another app on existing hardware. No need for an extra box hooked up to the TV or clunky remote. Hopefully the user interface is similar across devices so there's no learning curve when moving from a PS4 to an iPad.

One thing to note is that some shows won't be available on mobile devices. I believe this is at least partly due to existing agreements the TV networks have in place with cable companies and other video services.

Competition for the regional monopoly

Vue will be delivered over the internet, so anyone in the country with broadband internet is a potential customer. This may bring competition to cable providers who have a regional monopoly or near-monopoly. If Sony is able to deliver this product at a competitive price (and they should since it doesn't include the highest-cost cable channel - ESPN), it may finally push the cable and telco companies into actually competing for business.

Wrap-up

This feels like the future of TV to me: an app that delivers live and on-demand content in a modern interface across all of my devices. Even better that it is available without a contract and can be canceled at any time. I can't wait to try it out. Hopefully lots of people do and it pushes the cable industry forward.

The US will have streaming a la carte cable in 2015 (almost)

By the end of 2015 the US will effectively have streaming a la carte cable, with one huge exception - sports and other live events. Let me explain. HBO announced it will launch a streaming service available without cable in 2015, and Showtime and Starz said they would do the same. Assuming those announcements pan out, US TV viewers will have access to every major TV network without a cable TV subscription. All of the broadcast and basic cable networks already sell individual episodes of their shows online the day after they air through iTunes, Amazon, and other online stores. The premium cable networks (HBO, Showtime, etc) previously resisted this, but now appear ready to change course with subscription streaming services. Most shows from broadcast networks are also available free online with ads, with an antenna, or on Hulu Plus. CBS has also launched a streaming service with access to all of their current shows.

This means that programming from every major TV network will be available within one day of airing without a cable TV subscription. The huge lone exception is live programming, such as sports, news, awards shows, and other live events. Some of this programming is available through the aforementioned methods, but most of it is locked behind the cable TV paywall.

We will be able to get our programming a la carte if we want it, and the reasons to keep cable are slowly evaporating. However, there are still several strong reasons not to cut the cable cord:  sports and other live events, same-day access to shows, and it’s still a great value for people that watch a lot of TV. Sports will be the last type of programming to break free from the cable TV bundle because they are the most valuable and benefit the most from the economics of the bundle model.

It remains to be seen how much these standalone streaming services will cost. It may be very easy to spend $50 or more per month on Hulu Plus, HBO, and buying a few shows on iTunes, but it will be possible next year.