Matthew Strauss, executive VP and GM of video services for Comcast Cable (NASDAQ: CMCSA), describes the creation of company's X1 platform as a "big moment" for Comcast. He said the X1 takes "all the learnings we had from mobile and all the learnings we had from on-demand, and brings it back to the television."
At a time when many of its smaller rivals are retreating from the competitive video landscape into broadband connectivity, Comcast is trying to offer a user experience that's better than that being delivered by OTT players like Netflix, Hulu and others. Comcast believes X1 will be so sticky that consumers will happily pay $200 cable bills and stay in the pay-TV ecosystem.
All of this is, of course, predicated on the bulk of Comcast's 22.3 million subscribers ever getting their hands on X1. Indeed, the platform may be enduring the longest launch of any media technology product in history. And that's leaving a lot of questions unanswered.
It's been 39 months since Comcast announced at the Cable Show in Boston that it was officially rolling out its advanced, cloud-based X1 video platform. It's been 10 months since Comcast announced any deployment benchmarks for the platform. In October 2014, the MSO said it had deployed a modest 5 million X1 set-tops across its footprint. Comcast didn't reveal how many of its subscribers actually have the platform, and it hasn't announced an update since.
Even with rollout accelerating to a current level 30,000 X1 boxes per day, the platform still doesn't appear to be in the hands of even half of Comcast's pay-TV footprint.
More than three years in, we still don't know if cable's most advanced TV platform will be the answer to the intuitive, algorithmically driven interfaces of highly popular OTT services like Netflix (NASDAQ: NFLX). We don't know if it will keep Comcast in the video business for the next 10 years.
Further, we don't know whether Comcast's strategy to license X1 to other operators -- so far Cox Communications and Canada's Shaw Communications have agreed to license X1 -- will make it the industry's dominant video system. And we don't know if recent upgrades to the X1, such as the ability to play EA video games on the platform, will turn into ample revenue streams.
Also yet to be answered is whether Comcast's X1 strategy -- which relies on expensive, high-end hardware -- will be surpassed by cheaper, cloud-based video technologies like Charter Communications' (NASDAQ: CHTR) Spectrum Guide.
Superior user experience meets super-sized expenses
During its second quarter earnings report, Comcast praised its X1 video platform. The MSO said VOD buying rates are 20 percent to 30 percent higher on the platform. The company also said its X1 average revenue per user is higher than on its other, legacy systems.
About a third of Comcast's most lucrative "triple-play" customers are hooked up with X1, and the platform represented 50 percent of the company's new connects in the second quarter.
"We want to get X1 into every one of our homes," Strauss told FierceCable. "We have every incentive to get X1 deployed. It's the best video product in the market."
From voice-controlled remotes to nifty interface and content recommendation features, Comcast seems to upgrade the platform and the resulting user experienced on an almost weekly basis. One recent upgrade makes the top 100 rated shows, according Nielsen, available on VOD. There is no equivalent on-demand feature in the OTT universe.
"When Empire on Fox became a phenomenon, our viewers were able to go to X1 and it was just there," Strauss said.
The MSO is also finding ways to build revenue streams on top of the platform. It has had success recently with transactional distribution of Universal Pictures movies, stealing away business from the likes of Wal-Mart's Vudu and Apple (NASDAQ: AAPL).
And, in a deal with EA, Comcast just added a feature -- albeit one that's been poorly reviewed -- that lets users play video games on the platform.
X1 is also being developed as a hub for Comcast's emerging home-automation ambitions.
"We're really starting to rethink the TV as this connective fiber to everything in the home," Strauss said. "X1 is the platform that brings it all together."
There is also significant revenue potential for Comcast in licensing X1 technology to other cable operators. Both Cox and Shaw are in trials with the platform, and Strauss said his company is also talking to other operators about licensing the technology.
Cox spokesman Todd Smith told FierceCable that his MSO has started employee trials in two markets and that early results have been encouraging.
Shaw, for its part, announced in June it would begin testing X1 after abandoning plans to create an advanced video platform based on IPTV technology.
Neither Shaw nor Cox has said when they might actually deploy the platform commercially, however.
"Those conversations will continue," Strauss said, "but right now, we're very focused on getting X1 deployed across our own subscriber base."
Like painting the Golden Gate Bridge
While the X1 offers a wide range of services to customers, and new potential revenue streams to Comcast, the platform is expensive. Each unit costs around $300 to install and requires a lengthy truck roll, according to analysts. "If it's a box that Comcast spent $200 on, and then it has to also spend money installing and servicing it, that's a major capital expense," said Alan Wolk, analyst for The Diffusion Group.
Strauss said Comcast CTO Tony Werner and business development chief Sam Schwartz initially came up with the idea of the X1 a decade ago. They realized that "giving the customer a way to personalize and customize their experience and manage how they consume entertainment" was going to be key to winning the video consumer of the future.
According to one report, Comcast started the development of X1 with around 100 engineers, a number that expanded to 250. Today, Comcast said it counts fully 1,000 engineers working on services including X1 and cloud offerings -- an expensive proposition.
The high cost associated with the platform, and the sheer manpower needed to install it, have impacted X1's rollout rate, which, in turn, has created the technology equivalent of painting the Golden Gate Bridge. Painting the bridge takes so long that workers must immediately start over again from the beginning when they finish the job.
X1 isn't even halfway deployed, but the Pace and Motorola set-tops subscribers received in the early wave of the deployment are nowhere near as advanced as the new Cisco-made, 4K-capable, DVR-less Xi4 set-tops Comcast is getting ready to trot out later this year.
"The problem with hardware-based anything is that it becomes outdated in four or five years and then needs to be replaced," Wolk said.
As X1 has embarked on its painstaking rollout, another cloud-based video platform, Charter's Spectrum Guide, has captured the hearts of investors. Since Charter has yet to deploy Spectrum Guide across its entire footprint -- let alone the footprint of those cable companies Charter is trying to acquire -- it remains to be seen whether Spectrum Guide will deliver the same kinds of churn and ARPU benefits as X1, let alone allow Charter to launch new businesses.
Charter's Spectrum Guide
But investors have taken a shine to the much lower cost of a cloud-based platform that uses legacy CPE and requires no truck rolls to deploy.
Beyond fears of technological obsolescence, analysts also wonder if the closed nature of X1 will ultimately limit is proliferation.
"The future of TV is an app," Joel Espelien, another TDG analyst, told FierceCable. "X1 does not support third party apps, and I don't see how it ever competes with Apple or Google (or even Microsoft) on that front. As a result, I don't see what problem it solves, or how it can possibly win in the marketplace."
Notably, the issue of X1 being a closed platform was broached by federal regulators during the review that ultimately scuttled Comcast's attempt to buy Time Warner Cable (NYSE: TWC).
"It wasn't instrumental" in the feds scuttling the deal, Espelien said, "but it certainly didn't help."
Of course, from Comcast's perspective, its TWC run is behind it, so who cares if regulators aren't into X1. And thriving assets like NBCUniversal are providing the company with plenty of free cash flow, which could help it fund its continued X1 rollout.
But ten years after Comcast's top executives first envisioned X1, the company is still trying manifest that vision on a wide scale. The way Strauss spins it, X1's paleolithic-speed rollout is all part of a "very calculated" strategy to get X1 into the right customer hands at the right time, so that the platform achieves critical distribution mass "right at this point where we're hitting our stride and firing on all cylinders."
He said that time is finally here. "We're in a really good position to both surprise and delight our customers."