TORONTO – The rumour mill in the TV business was spinning overtime on this one lately, but today Rogers Communications made it official – it is killing its long-awaited IPTV solution in favour of Comcast’s X1 platform.
The move means the company will take a pre-tax non-cash asset impairment charge in the range of C$475-$525 million in its fourth quarter.
Friday morning’s press saw Rogers tout a new “long-term strategic partnership” with Comcast to bring Rogers customers Comcast's X1 IP-based video platform. However, it will not launch until 2018.
As we have reported, Rogers was hoping to have its IPTV solution (built in house with primary vendors Ericsson and Alticast and dubbed “Eclipse”) in the marketplace by the end of this year. Rogers has been working on this solution in-house since 2012.
According to our sources, while the product performed very well in testing and had a clean, modern look on par with other IPTV providers, the company was having difficulty getting it to scale for large numbers of simultaneous users during its field testing with employees. Then, this fall, Ericsson, which purchased its Mediaroom platform from Microsoft in 2013 and had made that its TV focus, told Rogers it was pulling back on support for the purpose-built Rogers solution.
(Mediaroom is the TV delivery technology used by telcos Bell, Telus, AT&T, SingTel, Telefonica, CenturyLink and others.)
Finally, the video world has changed markedly in the past four years, in such that a company like Rogers is just too small to keep up with the rest of the world on its own. As slick as Eclipse was, Rogers doesn’t have the resources to keep up with the rest of the world – driven by Silicon Valley. Comcast has thousands of developers working full time on X1, for example (Ed note: We’ve seen it first hand and it’s a killer product) and according to insiders, the folks at Rogers “took a cold, hard look” at the road it could see in front of it, what it could do on its own and what it would take to keep pace with the world and it simply had to go with X1.
It also doesn’t hurt that Comcast is one of the few cable carriers in the world adding TV customers – primarily due to the X1 platform. Rogers is the fourth franchisee of X1, following Cox Communications and Shaw Communications.
Shaw executives admitted in 2015 that despite their size in Canadian terms, they aren’t big enough anymore to create their own technology in a globally competitive video world and cast its IPTV lot with X1, which is powering its FreerangeTV service. Shaw took a $55 million write-down that year after scrapping work on its own IPTV – and the western cableco will launch more Comcast-powered video enhancements in 2017.
Cogeco did the same in 2014 when it cast its video lot with TiVo and took a $30 million write-down.
"This partnership is great news for our customers," said Alan Horn, chairman and interim CEO, Rogers Communications, in the press release about the Comcast move. "We're bringing our customers a world-class IPTV service with the most advanced features available in the market today. On top of that, our customers will be future-proofed thanks to Comcast's innovative and robust product roadmap."
Rogers expects to launch the service in early 2018, continues the release. “In the interim, Rogers customers will continue to see further enhancements throughout the year to the existing TV platform, including more 4K content and 4K PVR. Rogers expects to see continued positive trajectory in its cable business driven by the strength of its superior Internet service,” it reads.
Some of Rogers advanced set top boxes currently being deployed will work with the X1 platform. A Rogers spokesman said no jobs will be affected by this as those working on Eclipse will be shifted over to work on the X1 integration. We asked Ericsson for comment and they, too, confirmed no jobs will be affected..
"We've seen growing desire of other operators to leverage the industry-leading innovations we've created at Comcast," said Neil Smit, president and CEO, Comcast Cable. "Comcast is excited to bring the experiences of the award-winning X1 platform to Rogers' customers in Canada."
Rogers decided to move to Comcast’s hosted platform “to ensure it has access to the scale and technical roadmap needed to meet the ongoing pace of IPTV innovation. In addition, Rogers customers will benefit from the substantial research and development investments Comcast has made to date and the company's continuing commitment to innovation,” reads the release.
As a result, Rogers will discontinue any further investment in the IPTV product it was developing and expects to take a pre-tax non-cash asset impairment charge in the range of C$475-$525 million in its fourth quarter ending December 31, 2016.
Bay Street's reaction was to say, essentially, that it was about time. "We view this as a negative development at Rogers but believe it is ultimately the right move," wrote BMO analyst Tim Casey in a note to clients. "Going with Comcast will avail Rogers to the economies of scale and future product/technical roadmap, which should improve the capex intensity of the video business as it notionally shifts dollars from capex to opex. Importantly, it is a lower risk strategy to ultimately deliver a competitive video product. Rogers' current video platform is weak (legacy cable) and is not competitive to Bell’s 'new generation' IPTV product, Fibe.
"That said, the aforementioned benefits of aligning with the industry leader were apparent for the last 24 months yet previous management at Rogers elected to go it alone," Casey continued. "This strategy belongs to the former management team. But we believe the buck has to stop somewhere and that it is ultimately the Board who bears responsibility for this development.
"Rogers will be roughly 18-24 months behind schedule with a competitive video platform, which is good news for BCE which is now likely to have continued operating momentum in Ontario and parts of Atlantic Canada for another year."
Added Canaccord Genuity's Aravinda Galappatthige added in his note to clients: "This now means that Bell would continue to have a superior TV product at least until 2018," and "the substantial write-off would have a negative impact on the market's confidence with respect to Rogers ability to execute on its initiatives, particularly on the back of the write-off of shomi and now IPTV.
"There is also a likely margin implication on the cable side due to both ramp up cost related to X1 (as we have seen with Shaw) and revenue share consideration," he wrote.
