TV TECH’S X1 FACTOR
In fight to win back audience from telcos, Canada’s cablecos look to innovative platform
Shaw Communications Inc. knew by mid-2014 that it needed a new television product, and fast.
Customers were questioning the value of bundled services, the broadcast regulator was talking about mandating skinnier, cheaper TV packages and à la carte channels, and online streaming trailblazer Netflix Inc. was gaining traction.
More critically, Shaw was losing conventional cable customers to Telus Corp., its chief western Canadian rival, which had an innovative internet protocol television (IPTV) platform that customers seemed to like.
“We were in fairly urgent need to replace our platform, because the video product from our main competitor was, in fact, a very good product at that time and they were using it effectively to steal share and to win customers from us,” said Jim Little, Shaw’s executive vice-president and chief marketing and culture officer.
Getting share back from Telus was “Job No. 1,” he added.
Shaw already had sunk millions into developing its own IPTV product by the time Zoran Stakic, its new chief technology officer back then, met Comcast Corp.’s chief technology officer Tony Werner at a CableLabs meeting in 2014. Comcast had recently launched a cloud-based TV product called Xfinity X1 and was in the early days of licensing the technology to other companies.
Their interaction led to Shaw becoming the first international player to licence the X1 platform. Three years later, Rogers Communications Inc. and Quebecor Inc.’s Vidéotron — Canada’s second- and third-largest cable providers after Shaw — have since followed in partnering with Philadelphiabased Comcast to use X1.
As the three largest cablecos phase out their legacy systems and switch to X1 over the next few years, Comcast’s technology will be in millions of Canadian homes. More than five million customers subscribed to the trio’s cable packages as of June 30, about 45 per cent of Canada’s TV market.
Canada’s cable companies decided to Buy American after they collectively lost at least $571 million trying, and failing, to invent madein-Canada products. And while foreign ownership rules prevent U.S. cable companies from directly setting up in Canada, these licensing agreements expand Comcast’s reach to nearly half of Canadian television subscribers if, of course, they adopt the new technology.
As Little said, “Comcast is certainly a major technology partner to Canada now.”
None of the cable companies has released the financial details of their deals with Comcast, but it’s safe to say it’s big business. The sale and rental of set-top boxes pulled in $830 million for TV providers in 2016, about 10 per cent of the industry’s total revenue, according to data from the Canadian Radiotelevision and Telecommunications Commission.
Comcast on Thursday reported that an increase in revenue from its X1 licensing agreements is primarily responsible for boosting “other” revenue to US$712 million in its most recent quarter, up 7.8 per cent from $659 million in the same period last year.
Comcast is coming to small screens north of the border at a tough time for TV providers, whose revenues have shrunk over the past two years, partly due to cord-cutting customers. Overall revenue dropped 2.1 per cent to $8.7 billion and subscriber volumes dipped 1.1 per cent to 11.1 million in 2016, according to CRTC data.
But Comcast’s X1 platform brings sorely needed innovation to Canada’s cable industry, which hasn’t been able to keep up since traditional telephone companies figured out how to sell TV over their internet wires about a decade ago.
BCE Inc.’s and Telus’s IPTV services had more capacity than traditional cable companies, which were constrained to broadcasting over coaxial cable networks. The cable giants started upgrading their networks with DOCSIS 3.1 technology to increase capacity, but they couldn’t immediately match Bell Fibe TV or Telus Optik TV.
Between 2012 and 2016, Bell overtook both Shaw and Rogers to become the largest TV provider, gaining nearly 640,000 subscribers for a total of 2.7 million subscribers, according to the CRTC.
Telus, meanwhile, nearly doubled its subscribers to one million in the same period. Shaw lost its top spot and 655,000 customers and Rogers fell to third with 400,000 fewer subscribers.
In June 2015, when Shaw announced its partnership with Comcast, it booked a $55-million writedown for abandoning its IPTV assets.
“We made the decision that being a big western Canadian cable company in the big scheme of things felt too small to be the inventor of all of our stuff,” Little said.
“(Comcast) had a roadmap that you just had to bet on it because you loved what they were doing with it there … we made that call when all the details around how it would be and what it would look like weren’t actually clear, so it was a bit of a brave decision.”
It took Rogers another year and a half to reach the same conclusion. In December 2016, it killed its in-house IPTV development and signed up to use Comcast’s platform, which it plans to launch in early 2018. The decision cost it $484 million in writedowns alone.
In August 2017, Vidéotron announced that it, too, had chosen Comcast as a partner for its IPTV product. It has not yet released a timeline for launching X1. This spring, chief executive Manon Brouillette told analysts that Vidéotron had the luxury of taking its time to pick a new technology given that it had already deployed a hybrid platform, but that it recognized the need to go full IP.
“We have to, everybody has to,” she said. “We have to maximize our network capacity.”
Cogeco Communications Inc., Canada’s fourth-largest cable company, chose instead to partner with TiVo Corp. It took a $32-million hit when it canned its in-house IPTV project in fall 2014.
Revitalizing the cable business is just the beginning of what Comcast hopes to offer over the X1 platform, known for its voice remote and use of machine learning and artificial intelligence.
Comcast, envisions X1 as the hub for smart home technologies such as security and monitoring. In this arena, it will compete with major players like Google Home and Amazon.com Inc.’s Alexa.
Comcast executives were not available for an interview, but Comcast’s Werner, now president of technology, has previously called Xfinity X1 a game-changer.
Canadian executives emphasized X1’s features when explaining why they chose Comcast.
“When we looked at Comcast, what we were looking at was a company that had a proven track record in innovation,” said Eric Bruno, Rogers senior vice-president of product management. “It was literally the best available option.”
Comcast has thousands of engineers working on the product and a critical mass of customers that makes continuous innovation even more attractive, he said.
Critically, X1 pitches itself as a solution for the entire home, Bruno added, opening up the door to new revenue streams. It also lets users switch seamlessly between Netflix, YouTube and the closed cable system. (Telus, Bell and Cogeco TV systems also do this.)
“My belief is it will slow down cord-cutting,” Bruno said, adding that consumers can get everything they want from one set-top box instead of navigating between systems.
In a conference call with analysts this month, Rogers chief executive Joe Natale said X1 will be able to curate all the content a customer could want. He plans to strike agreements to add other streaming services to the platform.
“I really want to be Switzerland when it comes to inviting and integrating streaming platforms into our X1 capability,” he said.
“I think that’s the future of video, where we have to be the purveyor of choice for customers and the destination for all their video consumption needs.”
When we looked at Comcast, what we were looking at was a company that had a proven track record in innovation.