Selling services “out of market” is a relatively new development in the U.S. telecom business. Cable companies have local franchises and local access providers have certificates without which their businesses cannot be operated.

Wireless service providers traditionally have used a mix of owned spectrum “in territory” and roaming agreements to provide seamless coverage outside their footprints.

Geography has been destiny, in other words. But technology, regulation and business models now make other options possible and perhaps necessary. Hundreds of “local telcos” now operate “out of territory” as competitive local exchange carriers, for example. Up to this point, those efforts have focused on business customers, with voice and data access the key products.

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The new wrinkle is that it is possible video entertainment will be the lead service for consumer customers out of territory.

At a broad level, out of territory business models have been growing for years. Voice services provided “over the top” were the first widespread indications of a new approach. At least in principle, users can buy or use services from providers based almost anywhere in the world, using un-managed Internet connections.

Cloud-based computing, or “Internet apps,” create widespread new patterns of behavior. Any cloud-based service, ranging from messaging or email to audio, video, shopping, search or social networking can operate largely without physical limitations, the primary “in territory or out of territory” decisions being based on simple business considerations.

App or service providers often choose, for any number of business reasons, not to operate outside certain countries or regions, thereby creating voluntary and self-selected service territories.

In its February 2012 report “Incumbent Pay TV Operators Will Step Out of Bounds in 2012,” Yankee Group predicts U.S. video entertainment providers are about to begin a major wave of “over the top” services that break out of the traditionally geography-based entertainment video business.

As you might expect, the most aggressive moves will come from upstarts, albeit in many cases “upstarts” who are market leaders in related businesses. Verizon, for example, recently announced it would launch a nationwide streaming service in partnership with Coinstar, which owns the Redbox DVD rental kiosk business.

The business rationale for the out-of-market approach has several elements. First, firms such as Verizon, which can reach possibly 18 percent of U.S. homes by its fixed network, already operate mobile networks reaching 95 percent or more of all U.S. consumers. And about 40 percent of U.S. smart phone owners appear to watch video on their devices at least once a week. (Source: Yankee Group’s 2011 US Consumer Survey, December)”

The other consideration is that Verizon can operate “over the top” to reach customers on fixed networks outside its own territory, without building new facilities, just as Google or Netflix can do as well.

Also, since revenue growth is sluggish on the fixed networks, Verizon and others can tap into revenue growth outside the fixed network boundaries, in Verizon’s case the 80 percent of consumers who do not live in areas where Verizon operates fixed networks.

Strategically, over the top apps and services, based on owned mobile assets and over the top broadband, also might represent a key method for crafting services for younger demographics that have somewhat tenuous demand for fixed network services beyond broadband.

Also, the North American video entertainment business now is saturated, creating a tough, zero-sum game where growth primarily comes from taking market share.

Source: Yankee Group, ‘Incumbent Pay TV Operators Will Step Out of Bounds in 2012, February 2012

One would suspect that U.S. cable TV operators would not be among the firms looking at such over-the-top services, though, for institutional and other reasons. Cable operators just do not compete with each other out of territory, by informal and understood rules of engagement.

Satellite providers never had operated under such rules, and Dish Network already owns the “Blockbuster Video” brand, and operates its own streaming service.

But Amazon, Netflix, Google, Hulu and Apple are some of the other “brand names” already in the over the top video entertainment business, and Wal-Mart has signaled its own interest in the past, as well.

Microsoft’s Xbox Live also operates in the market. Nor is is clear how the various services might be positioned in the future. Were Apple to buy Netflix, the competitive dynamics could change substantially, and quickly. You can insert any number of other names in the equation, the point being that assets are likely to be shuffled.

The most unlikely development would be a move by a leading cable operator into the over the top business in a way that seriously competes with a fixed network video entertainment service. That would violate the industry’s “collegial” culture at the same time it undermines the core business.

Could that change in the future? Conceivably. But video would have to have become such a small revenue contributor that collegiality does not support the core business any longer.

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