Not Feeling Ya FLO (TV)

Qualcomm's FLO TV service announced last week the launch of a new handheld device called the Personal TV.  This device is dedicated to receiving the video programming service provided by FLO TV, nothing else.  I understand why FLO TV launched the Personal TV device, I just don't think its a great idea, for a variety of reasons. First, FLO TV has had very little success in the roll-out of its service via Verizon's and AT&T's networks.  The company's 10Q does not provide subscriber numbers, but industry estimates place the number between 150k - 200k.  This is hardly a resounding affirmation of the idea and the business model, especially after Qualcomm has invested $1.2B  to build the infrastructure for the service.  In fact, Qualcomm's 10Q cleary states  "FLO TV does not fully control promotional activities necessary to stimulate demand for our services".  So launching your own device solves that problem?  I also find Bill Stone's (President of FLO TV) comment in the Personal TV press release odd, stating "we have heard from our customers that they want...a device that is easy to share with friends & family".  First off, the "customer" who currently uses the FLO TV service is owned by Verizon Wireless or AT&T, not FLO TV.  VCast, in the case of Verizon, is the FLO TV application Verizon's subscribers with VCast enabled phones can select for an additional monthly fee.  Launching a consumer Personal TV device, by a company with no experience managing a consumer product, is not a logical step to me, especially for a company whose core business is driving revenues from licensing IP for CDMA technology in mobile phones.

Additionally, functionality to perform a variety of tasks is converging into singular devices.  I now have a smart phone that can do what it took four devices to do 5 -10 years ago.  No longer do I carry a mobile phone, PDA, portable music play and portable DVD player when I travel.  I carry my smartphone.  The living room is converging as well.  Technology to permit consumers to download video from a variety of sources, and for Internet access, is being built into one device.  The TV.  Eventually the Cable MSOs will acquiesce and digital STB functionality will be built into the TV as well.  I assume two-way cable card functionality is required for this to occur.   We will all be buying "smart TVs" to go with our smart phones in a few years.  I don't understand the continued development of the next new VOD box to the home (Roku, Zillion TV, etc.) as much as I don't understand this move by FLO TV to launch their own Personal TV device.

On top of this, the service is dependent on content licensing deals from major entertainment companies.  I can tell you from experience, when the entertainment industry sees a deep pocketed industry coming with a business idea that is predicated on licensing their content for distribution they salivate.  Entertainment companies have found another way to generate revenue is by licensing the digital distribution rights to content on top of the traditional broadcast, Cable or VOD rights.  Aggregating content for a nascent video distribution service, with a limited audience, is no easy task and is not cheap.

The pricing for the device and service is a la a cell phone model.  The cost of the Personal TV is reduced if one signs up for a service plan of 1 to 3 years.  The TiVo model of a lifetime subscription for the upfront fee has not been a boon for TiVo (about 1.6M subs according to their last 10Q, which doesn't include the subs from cable systems, another 1.5M), why would it be for any other device?  And at $8.99 per month, the pricing is much less than the $15 per month charged by FLO TV's mobile phone partners.  

Next, is this really a good investment for Qualcomm?  Is there a better use for $1.2B?  The 10Q suggests the end game for FLO TV could be a spinout in a partnership with another company.  Does Qualcomm believe a major media company wants to buy, or create a JV with, a new distribution platform?  Entertainment companies are in the business of creating content, not distributing it.  Time Warner just spun out Time Warner Cable from its Media assets.  Perhaps Qualcomm should ask why.  A logical partner, or aquirer, would be a satellite TV company.  They have established distribution infrastructure in place, they own Ku Band satellite capacity, they have experince in B-to-C services and they have already licensed content for their service.  Qualcomm is trying to build all of this from scratch. 

I believe a better strategy for Qualcomm would have been a la Cisco's aquisition and partnering model.  Broaden your market by aquisition or partnerships that expand your areas of expertise and your patent portfolio into new devices, services and markets.  Cisco's core business is networking equipment and related software.  They wanted to expand into the home and have done so by acquiring companies who put them squarely in that position - Scientific Atlanta for set top boxes; Linksys for home wireless networking; Pure Digital for their Flip Consumer Video Recording device are examples.  To expand in the office they aquired video conferencing technologies for their Telepresence product and, most recently, announced the acquisition of Tandberg.  These represent strategic acquisitions that leverage core competencies and technologies to develop ecosystems that move the company into new market segments and offer existing customers a broader product portfolio from the same vendor, Cisco. 

I've worked for CEOs of major Telcos and Technology companies who have become enamoured with creating the next big, sexy, business based on distributing entertainment services over emerging technology platforms.  These grandiose plans were accompanied by an internal energy that is so captivating it becomes difficult to change course in spite of market evidence to the contrary.  Those initiatives where eventually shut down as fast as they were launched as market and technical realities, and competing investment options for the parent corporation, take precedence.  Reading the comments of Mr. Stone in the press release for the Personal TV Device made me feel another CEO was "caught in the spotlights".