Sezmi? Says Who?

By Michael Greeson

Sezmi--an emerging TV service provider that combines over-the-air (OTA), cable, and web video content into a single integrated TV service--is set to launch service in the L.A. area.  If all goes well, it hopes to expand nationally. With more than $75 million in investment to date, Sezmi appears to have convinced a number of heavy-hitters that this model will work; a model that depends on a (ridiculous) upfront hardware fee of $299 plus monthly subscription revenue from a "TV service" that differs little from basic cable or satellite TV service.

Are the investors at Sezmi drinking the proverbial Kool-Aid or is there more to this than meets the eye?

The basics

The Sezmi TV service is different from regular cable and satellite TV in several ways:

• It uses over-the-air (OTA) broadcasts of local channels, supplemented with a mix of cable network and web content (good move);
• It charges an upfront fee of $299 for the required hardware (stupid move);
• It offers dramatically lower monthly subscription fees (good move); and
• It provides dramatically less content than a regular cable subscription (not inherently good or bad, but whether it offers the right content mix).

So for $299, you get a Sezmi-branded HD DVR that blends live, recorded, on-demand and online content and can store up to 1,400 hours of programming, plus an over-the-air receiver that brings in broadcast and cable signals. Once Best Buy has your $299, you can choose from two tiers of service:

• The entry-level Select package ($4.95/month) offers more than 50 local channels from the L.A. area, including the major broadcast networks such as ABC, CBS, Fox, NBC, MyNetwork, PBS, Azteca, Telefutura, Telemundo and Univision (all of which are free via OTA). Select customers also will receive ongoing guide updates, Web video additions, and enhancements to the HD DVR.
• The premium Select Plus package ($19.95/month) includes cable TV from TBS, TNT, USA Network, Bravo, CNN, Headline News, Discovery Channel, Comedy Central, Planet Green, MSNBC, VH1, Cartoon Network, Oxygen, CNBC, MTV, Nickelodeon, TLC, Science Channel, Syfy, Animal Planet, TruTV, Boomerang and TCM.

Show me the market!

Okay--got it.  But here's the rub: Where is the audience of users waiting to jump onboard this type of service, upfront fee and all? 

Let's start with the basic Sezmi service. For $4.95/month service, a Sezmi subscriber in L.A. can enjoy more than 50 local channels, plus access to an array of on-demand movies and TV shows, some free, some at additional cost.  What type of consumer would buy into this basic offering?

Perhaps Sezmi is going after some of TiVo's 1.5 million subscribers who currently enjoy a combination of OTA broadcasts and broadband video via the $14.95/month TiVo service. Then again, most TiVo subscribers use the service merely to supplement their PayTV subscription, not to replace it. Perhaps Sezmi believes it can convince some of TiVo's subscribers that using its lowest tier will get them OTA plus broadband content at a cheaper price.

Perhaps Sezmi is going after the dwindling number of OTA-only users. But aren't these the same folks that for years have resisted paying for PayTV? Does Sezmi really expect these folks to agree to pay a $299 upfront fee, a monthly service charge of $5, plus additional fees for specific on-demand content?  Really?

By the way, any would-be Sezmi subscriber must also pay for a home broadband service (another $25-$50 for most people). For the OTA-only folks, this means $299 upfront plus $5/month for the Sezmi service and another $25-$50/month for broadband service. Ouch!

The $20 tier, on the other hand, more obviously targets current PayTV subscribers by adding a limited amount of cable content. However, it still begs the question whether this content assortment will be enough to get consumers to ditch their PayTV service. With only 13 cable channels, the upper Sezmi tier will leave many PayTV customers without some of their favorite channels. And this isn't just my opinion.  When TDG asked adult broadband users which 10 channels they believe to be "must haves" for any new TV service, the results were as follows:

Sezmi covers the first four (as does OTA TV access, which is free) as well as Discovery (ranked fifth) and Comedy Central (ranked ninth).  That's seven of the top 10 "must have" channels--not bad. However, the offering lacks high-demand cable anchors such as ESPN, HBO, The History Channel, and The Food Network.  Independent of the upfront fee (which will kill the deal for most consumers), the absence of these channels could prove to be Sezmi's Achilles' Heel. 

The real cost of expanding content

Of course, Sezmi will argue that this is only the initial content lineup that, over time, will expand to include all sorts of cool content. However, with new content comes an increase in subscription fees. For example, cable operators pay ESPN around $4.50 per sub, meaning adding ESPN to the Sezmi mix would increase the price of the Select Plus tier 25 percent (from the current $20 to more than $25 per sub).

Sezmi also seems to ignore the fact that incumbent PayTV operators such as Dish Network today provide customers with all the hardware needed (included a DVR) and a much wider array of content for only $25 per month. In other words, there are incumbent services available that deliver a much better value than the Select Plus tier without the hefty upfront fee. Moreover, if Sezmi is actually successful in the L.A. area and becomes a legitimate competitive threat, rest assured incumbents will respond by adjusting their own pricing and packaging.

Does Sezmi truly believe its VOD and web content will make up for the lack of cable content? Doubtful, for that would require denying the fact that every MSO in the U.S. is expanding its VOD offerings and adding web content to the TV mix. As well, TV Everywhere efforts are pushing high-value cable content to the web so that subscribers can access their favorite TV content on any Internet-connected device at any time they chose.

Consumers today have a wide variety of sources from which to select their TV content. From Hulu to Netflix, iTunes to TV Everywhere, every business model, price range, and content niche is already being exploited. Sezmi brings nothing new to the table. Further, by setting itself directly against PayTV it must meet a much high bar in regards to consumer expectations. With its current formulation, it provides neither good value for the money nor a sufficient array of compelling content.

Michael Greeson is a Founding Partner of The Diffusion Group, an analyst and market strategy firm focused on the emerging digital media ecosystem--from the broadband connection to the home network to the devices and services being enabled.