Running on futuristic electric batteries rather than gasoline, the luxury vehicles reflect the kind of business Layer3 wants to be: An upscale, next-gen TV provider. But the way the company is going about it may not be what you expect. It is betting big on an old-school approach, one where the traditional, fat cable bundle is king and the customers are TV die-hards who don’t buy into the newfangled streaming services flooding the market.
At a time when Americans are increasingly abandoning their cable companies — flocking to alternatives such as Netflix and Hulu — Layer3’s premise is that the big bundle of basic and premium channels that has sustained the industry for decades is still a viable formula.
“We're the first cable company in … 10 years to come that's brand new,” said Jeff Binder, Layer3’s chief executive. “Consumers haven't had a young innovative company to provide [pay-TV] services to them since the mid-1990s, when Dish and DirectTV came on the scene.”
That notion flies in the face of moves by major players — AT&T, HBO, CBS — that believe major industry change is afoot. These companies have embraced online streaming in a big way, launching flashy stand-alone apps that deliver content over the Internet and to mobile devices in a bid to compete with Netflix. Some, such as AT&T, estimate there could be 20 million U.S. households to win over that don’t currently subscribe to cable.
For mainstream TV firms, the right response to streaming is to start swimming with the tide. Layer3's first instinct is to swim in the other direction.
After several pilot projects in Texas and Illinois, Layer3 launched last summer in the District — its first official market — and it plans to expand into most major U.S. cities over the next two years. The company's standard package costs $79 a month and gives you about 150 channels as well as trial subscriptions to HBO and Epix; and optional add-ons include Showtime, Cinemax and Spanish-language content. The vast majority of Layer3's 250-channel lineup comes in high definition.
In interviews, executives declined to say how many customers have signed up. But they predict there may be as many as 35 million current cable subscribers who will not be lured away by online substitutes such as Dish's SlingTV or DirecTV Now, the new streaming service from AT&T.
But if the industry’s biggest players think streaming is the future, what makes Layer3 think it can survive for the long haul?
One way of answering this is by looking not at how many households are cutting the cord every year, but at how much they earn. It turns out that the most avid cord-cutters among us tend to be lower-income Americans. Does your household make $75,000 a year or more? You’re more likely to have stuck with your cable company than if your annual income is below $20,000.
Those findings from the Pew Research Center may sound familiar to those who’ve canceled their subscriptions because of rising bills. For many Americans, cable is just too expensive. But Layer3 is more interested in the other folks — the more affluent households that absolutely need their pay-TV and are still willing to shell out for it. This market may shrink as cord-cutting grows. But it’s still enormous, and it’s where Layer3 hopes to find its niche.
“It is certainly a counterintuitive strategy,” said Craig Moffett, an industry analyst at MoffettNathanson. “Theirs will be a high cost, and therefore high priced, alternative to a service that many believe is already too expensive. There’s a premium segment in any market, but what remains to be seen is whether they can capture enough of that premium segment.”
To help court those high-end customers, Layer3 is trying to improve on the reputation many cable providers have gained as stodgy, hulking corporations trying to nickel-and-dime their customers. It isn’t just rolling out red-carpet customer service in the form of fancy cars or a “white-glove” customer experience, such as your ability to text the company whenever you have questions or concerns. It’s also trying to lure subscribers with the promise of next-gen technology embedded in its product.
Layer3’s wireless set-top box supports 4K-resolution video. It offers a curated feed that automatically learns what you like to watch, and it has integration with Facebook and Twitter, along with a few other bells and whistles. Behind the scenes, the company manages a large backbone network that can pipe content all across the country; by year's end, Layer3 will control about 24,000 miles of fiber optic cable.
All of this is aimed at raising the bar for cable service, making it so that consumers feel they’re actually getting what they pay for — or more.
“It's no different than comparing an HTC to an Apple,” Binder said. “I think we can out-innovate. I think we can have a much better customer-relationship environment.”
Binder is fond of drawing the Apple parallel. He does it often, which is little surprise: The iPhone-maker’s reputation for ease-of-use, strong design chops and a history as a technological disruptor provides much for Layer3 to emulate.
There’s money to be made at the high end of the market, and Layer3 is figuring that out, just as Apple has.
But there’s a major difference between the two companies: Whereas Apple earns incredible margins on the iPhone thanks to the relatively low cost of producing one, analysts say being a cable company of Layer3’s size comes with steep fixed costs.
Those costs include what cable companies pay to various programmers and channels to carry their content. These rights fees can reach as high as $7 per subscriber per month, in the case of a highly lucrative channel such as ESPN. Having a large customer base can help spread out these costs, but a niche player such as Layer3 will not have that advantage, according to Moffett.
But Layer3 doesn't need to be everywhere to succeed, according to its chief executive, Binder. It just needs to take enough market share from the big players to win.
“Maybe you can't quite build the next Facebook,” he said, “but you can build something really, really substantial with solid, single-digit percentages [of market share].”
Other analysts say Layer3 could gain an early edge in usability. With its next-generation set-top boxes, Layer3 may be among the first to integrate on-demand content from streaming services with live cable TV in a way that really pleases consumers, according to Rich Greenfield, a media analyst at BTIG.
Other cable companies such as Comcast are working on similar platforms, he added, and it’s possible that well-resourced competitors could start chipping away at Layer3’s usability lead.
“But, given the slow pace of innovation in the TV industry, I'm not holding my breath."