Virgin Media joins the Netflix bonanza

Virgin Media is the latest telco to cash in on the aggregator trend, building on a partnership with Netflix to allow customers to pay for the streaming service through their Virgin Media bill.

Starting in October, builds on a partnership dating back to 2013, with Virgin Media claiming more than 700 million hours of programming have been watched through the Netflix app on Virgin TV’s platform. The team might be stating it was the first to lure the Netflix goldmine onto its platform, but it has turned into a fast-follower when it comes to integrating bills, after similar announcements from BT and Telefonica in recent weeks.

“Virgin TV has always been about giving our customers the TV they love all in one place,” said Jeff Dodds, MD of Consumer and Mobile at Virgin Media. “We were the first to embrace this open philosophy by embedding Netflix into our platform back in 2013 and it’s clearly something that our customers absolutely love. By expanding our relationship further we’re forming an even deeper relationship with our friends at Netflix and giving our customers a simpler way to pay for the service.”

Such partnerships are likely to become much more common as the telcos search for the much-hyped convergence business model. Content is seemingly a critical factor of this business, though attempting to compete with the traditional players in the content market by owning rights and distribution deals is a treacherous path; just ask the BT consumer business. Instead, providing a channel to the consumer, a content aggregator, is becoming a more popular idea.

As one of the most, or arguably the most, popular content streaming business on the planet, integrating the service into the media platform is a very sensible idea. It answers a frustration of the consumer, the increasingly fragmented distribution of content across different platforms, while also adding to the Virgin Media content experience, which could be deemed average at best. The more partners telcos like Virgin Media add into the mix, the more engaging the content platform will become, which in turn should reduce customer churn year-on-year.

The key word here is scale, as quality is unlikely to be a differentiator over the coming years. We suspect all major telcos with a content platform will have similar partnerships with the likes of Netflix before too long, therefore the differentiating factor for customers when choosing a telco will be simplicity. The more partners mean more bills which can be streamlined into one place. Unfortunately providing adequate breadth for the content platform will need a considerable amount of leg-work; it will be a long slog, but the rewards of the convergence business model are already beginning to become apparent for companies like Orange and Sky.

Could the future be one without mobile and broadband bills?

Seeing money leave your bank account is not something anyone likes, but how about a future in which mobile and broadband bills are a thing of the past?

Now before the telcos take to the streets in protest, hear us out because we’re not suggesting the internet becomes free. The idea here is connectivity is purchased by device manufacturers at wholesale prices, ‘embedded’ into said devices and used by the consumer in exactly the same way. The telcos will still get paid for their efforts, but the money will come from elsewhere.

Let’s talk about the positives of such an idea starting with the consumer. Right now for the consumer connectivity is one of the most important aspects of everyday life. It runs our social lives, banking, entertainment and work lives, as well as pretty much everything else. But the consumer does not care where connectivity comes from, just that it works.

But, when there are connectivity problems for the consumer, the world is going end. And with the mass market penetration of social media networks such as Twitter, don’t they let you know about it. Social media has given the masses a voice, and it can be deafening at times. By moving to the wholesale model, telcos would no longer have to deal with the demanding consumer, but instead single points of contacts at companies, who are likely to be a bit more rational.

Trading millions of customers for hundreds, while still delivering the same levels of connectivity is surely a benefit. The expense of customer services could surely be decreased, and the PR team would spend less time fire-fighting the divas on social media. Doesn’t sound too bad.

The second positive would be predictability. The consumer is unpredictable when it comes to demand on the network. Companies are more predictable and better at forecasting trends than Joe Bloggs. In such a wholesale model, of course there would be dynamic purchasing of capacity, but surely there could be a model where ‘connectivity contracts’ could be drawn out, allowing both sides to have a better view on how much ‘connectivity’ will be bought and sold.

This sounds very simple, but by having these contracts in place and managed properly, telcos should be better able to predicts spikes on the networks, better understand the flows of demand, and in a better position to manage such strain on the network. Such a set up could improve visibility, allowing the telco to improve overall performance and ultimately experience.

A final point for consideration is the financial side of things. Delivering the internet to the masses is expensive, that is probably not going to change, and the profit margins in the consumer world are only going to get smaller. The continued race to the bottom is ensuring profits are going to continue to erode. That said, moving across to a wholesale type model could offer financial gains.

Firstly, signing a contract with a device manufacturer could certainly be done on a longer term basis than with the consumer. Secondly, it could be done in a more consultative approach, where the telco is in on product development discussions to more readily hone the delivery of connectivity. And finally, it would remove the monstrous expense of trying to buy the loyalty of the consumer.

The advertising budget of the telcos must be substantial. The brands have to be everywhere online, in print, on radio and on primetime TV. Sponsorship of sports teams is also common, and experiential marketing initiatives will not come cheap either. Fighting for the consumers attention and preference is an expensive game.

The amount of cash generated through a wholesale business model would certainly be less be MB than selling directly to the consumer, but some might argue that due to the number exploding number of connected devices, the increased consumption might compensate for the decline in price. When you also remove the expensive consumer advertising budgets as well, the business case becomes clearer. The telcos might even become more profitable.

This is obviously a massive change. Not only in the operating business models of the telcos, but also in the way devices are manufactured, sold and delivered. Whether the device manufacturers (we’re also including products like TVs here as well) are happy to absorb the cost of connectivity is also unknown, but it could also create a new service business model for the manufacturers; a basic sell to the consumer could offer 10GB of data per month, but a premium model for £5 a month could offer unlimited.

Some devices manufacturers will be reluctant here, but the ambitious ones who can see the opportunity of moving into a services model could make cash. It would extend the relationship with the consumer and open up the idea of recurring revenue.

It would also mean the telcos would have to redefine themselves as an organization. This new wholesale model would commoditize data, it would move the telcos to another area of the value chain. Some telcos might be reluctant to move towards a commoditized business model, but we’re not too sure what the issue is there; if run properly, you can make a significant amount of cash out, just ask the oil companies.

Of course there will also be casualties. How will Kevin earn his bacon after EE tears up his contract?