23 June 2018

What ESPN+ Says About the Multichannel Future

On April 12, 2018, ESPN launched its thoroughly pre-announced subscription video over-the-top service, ESPN+. The service is notable for ESPN trying to establish a beachhead in the direct-to-consumer video business and not distributing a video service primarily through MVPDs. It is a watershed for the most important programmer in basic cable.


It is not hard to see why. after decades if growth, ESPN has lost household reach for many years from its peak in 2011,


driven by higher basic cable prices and over-the-top video services, led by Netflix, have had tremendous growth during the same period.


To remain "The Worldwide Leader in Sports" ESPN has to follow the people.

ESPN has had an over-the-top video service before, ESPN3 provides additional games and other comments to authenticated ESPN subscribers. That service is distributed in coordination with its distributors: facilities-based MVPDs (multichannel video programming distributors - cable, DBS, telco - e.g., DirecTV, Comcast, Verizon FiOS) and, later, virtual MVPDs (e.g., Sling, DirecTV Now).

ESPN had never created a service to address the non-MVPD marketplace. Instead of addressing this growing market directly, they looked to support what the MVPDs were doing to improve the value of the multichannel video subscription as its retail price kept rising. This lead to WatchESPN (its app which distributed its TV Everywhere service ESPN3), ESPN video-on-demand, the short-lived ESPN 3D, etc. That strategy made a lot of sense for a long time.

As the most expensive service by far in basic cable multichannel video, ESPN is the biggest beneficiary of the basic cable TV bundle. The primary benefits of being part of the basic cable package are (1) distribution to consumers and (2) low marketing costs. With the MVPD as the primary marketer of basic cable video subscriptions, ESPN gets a largely free ride. For a cable network, this greatly simplifies the sales process, one needed/needs to get a few dozen key distributors to roll out the network, not millions of individual consumers to buy. Distributors also were keenly focused on selling it. Until the past decade, basic cable was the most compelling offering from cable providers. Now it is not the first priority, eclipsed for cable operators by cable Internet service. [And slightly marginalized by "skinny bundles" of channels that lack ESPN.]

ESPN+ allows ESPN to establish its a direct-to-consumer distribution and is starting from scratch on marketing a video service to consumers. [ESPN does have direct-to-consumer marketing experience with ESPN The Magazine.] There are product, price, promotion, packaging, and distribution issues to sort out. Given its strategic importance, it is not surprising that ESPN decided to go aggressive on price -- at $4.99 per month ESPN+ is materially less expensive than Netflix and Hulu.

The other priority for ESPN is to keep the positive relationships with the MVPDs, because the amount of money coming in via basic cable distribution -- both in affiliate fees and advertising on the TV services -- will likely dwarf the amount of money coming in on ESPN+ for quite a while.

During ESPN's long growth period, adding value for the cable operators was very important. ESPN's affiliate fees, for a long time, increased by an astounding 20% per year. Now, with more typical single-digit rates of increase on affiliate fees, the MVPDs cannot reasonably have the same expectations for added value in ESPN3/WatchESPN.

ESPN has always heavily invested in sports content and then figured out a way to best utilize it to enhance the value of the business. In the 1990s, when ESPN faced little immediate competition on the cable dial and there was no direct-to-consumer Internet video business, ESPN would buy up rights to college football and air few of the games, instead "warehousing" them. The benefit to ESPN was protecting the franchise by not allowing a would-be sports competitor to use this programming to launch or enhance its network. Later, ESPN used additional games to support the TV Everywhere effort -- instead of letting Tennis Channel license extra early round matches of the US Open, ESPN would put them on ESPN3. Now, the best business use of those "extra rights" -- rights not needed to program ESPN, ESPN2, ESPNU, or ESPN's other cable services -- is to build out the appeal of ESPN+.

ESPN going direct-to-consumers is a difficult thing for the MVPD to swallow. MVPDs are used to being the 800 pound gorillas of TV distribution and dictating the key business terms. Historically, the MVPD's only real beef in their dealings with ESPN was its high price -- few questioned its programming or alignment with MVPD objectives. However, all around the multichannel industry, the groundwork has been laid for this moment. Three key over-the-top subscription service launches have led this change.



Starting around 2012, WWE planned to launch a basic cable network, but found little interest from cable operators for more channels for their digital packages. So it launched over-the-top, on February 24, 2017. For WWE, this was, if not a bet-the-company move, something close to it. At first the new network got a tepid response and looked like it might be a disaster -- alienating distributors, like DirecTV, who did not like the impact of this new distribution on their lucrative pay-per-view event busines. Now it is clear that WWE Network was not wrong, and it wasn't even particularly early. The WWE network is clearly an economic success and many of the distributors, like Dish, have found a way to make peace with it.

CBS All Access launched eight months later, on October 28, 2014. Unlike the WWE Network, this was a much less risky endeavor; CBS didn't need the MVPDs in the same way -- its flagship channel's distribution was secure. CBS did need to figure out how to work with its affiliated stations, but both parties had a lot of motivation to sort that out and their interests were basically aligned. All Access turned out to be a brilliant strategic move by CBS to establish its own revenue stream and its own direct-to-consumer distribution. It also works well as a demonstration of the value of the network for retransmission consent negotiations with MVPDs. After all, if consumers are willing to pay $5.99 per month retail for CBS, it is hard for the cable operator to argue that CBS is not worth $1 or $2 or $4 on a wholesale basis. To further support the service, CBS spent money on additional unique promotable content to create some additional reasons for people to subscribe (e.g., its first, The Good Wife spinoff The Good Fight, and Star Trek: Discovery -- both targeted to superfans).

Since CBS All Access is completely under CBS's control, it does not need to work with joint venture partners to make changes to the service or experiment with it, as Hulu does. All Access can be expanded with additional programming and marketing if there is a return; can be scaled back or shut down if it is more profitable to distribute content through MVPDs or other distributors (e.g, Facebook, Apple). It can distribute a version through Amazon with no advertising. All Access is not yet financially material to CBS's business as a whole, but has significant strategic value in establishing a direct-to-consumer business and sorting out the technological, billing, marketing and other issues necessary to run that business should it be the horse that CBS wants to ride over the long haul.




HBO Now was the last big domino to fall when it launched six months after CBS All Access. More like ESPN, HBO's history was synonymous with the growth of early cable. WWE didn't have many direct relationships with MVPDs and CBS, had mostly contentious ones related to retransmission consent pricing. HBO, like ESPN, was a trusted vendor to MVPDs. However, after many fits and starts trying to find a way to launch its service OTT without alienating MVPDs, eventually it just moved ahead, the opportunity was too compelling. And this time, distributors also found a way to make peace with it relatively quickly, which they had to because is has become a material business for HBO it is not going away.

What these three offerings had in common (and how they are all different from ESPN), is that none of them were part of the basic cable bundle. HBO was always available on-top-of basic cable as an a la carte add-on. CBS was always available for free over-the-air. WWE Network was not an established, profitable basic cable channel; it was an aspiring new basic cable channel.

Direct-to-consumer video streaming is the new world, but what does this mean for the basic cable bundle? The conventional wisdom is that sports is the only thing keeping the basic cable bundle afloat, the sports represents unique content that drives all households to subscribe. I'm not sure that is the whole truth.

It has been well documented that core sports fans represent about one-third of cable subscribers, the other two-thirds is casual fans and non-fans. In the UK, where most of the high value sports programming -- Premier League soccer -- is available in a separate subscription, about one-third of customers sign up for it. When NESN, the regional sports network owned by the Boston Red Sox and Boston Bruins, was distributed as an a la carte premium channel, its subscription levels were in the same ballpark (moving up and down with team performance as well).

With the rise of virtual MVPDs, some of the underserved market segments may get services better tailored to their needs. The households with little or no interest in sports are one of them. Historically, there was great fear among distributors in not offering ESPN -- it has been the goose that laid the golden egg. To my knowledge the virtual MVPD Philo TV is the first mainstream service to launch without any major sports. It is a very small player, 50,000 subs at year end 2017 or about 1% of the still modestly-sized virtual MVPD marketplace.

Sports is unique relative to other programming. It is live, unlike most entertainment programs, so it is usually watched live. Unlike the other big category of live programming, news, it is not a commodity -- the audience that watches the NFL does not accept other sports, like soccer or Ivy League football, as a pretty good substitute.

Should MVPDs look on ESPN+ as an existential threat? Will it increase the attrition of basic cable subscribers? From a content perspective, it seems unlikely -- the best sports events are not available on ESPN+ and are only on ESPN and ESPN2. However, if ESPN+ does get established, ESPN will then have another significant outlet and could/likely will, over time, decide to make available some of its programming on ESPN+ in addition to ESPN and ESPN2, later, it might actually take content off the cable channels, in favor of putting it on ESPN+. It is unclear to me if ESPN has already moved content from ESPN3 to ESPN+, but it is clear that it has acquired new content exclusively for ESPN+ like the UFC.

Only a growing market can support additional programming investment. Programming investment is moving off of linear television, which cannot support the cost. The market for basic cable video subscriptions is declining and the market for television advertising is not growing any faster than inflation. We've seen this impact already at ESPN, it is rarely the first choice of TV executives to lay off high profile talent.

Fundamentally, ESPN+ is the hedge to protect Disney for the future in the event that the multichannel bundle declines or collapses. Philosophically, Disney has always been platform agnostic. It has never been allied with an MVPD and would take its high quality content wherever the market led it be that DVD or PPV or something else. Disney sees that it is a strategic priority to develop a direct-to-consumer streaming video platform and is investing heavily to do so. Whether or not it makes a ton of money in the short term does not matter (and it looks like it is not making a ton). That's what a hedge is. Like CBS All Access, ESPN+ is offering more for superfans, but unlike CBS All Access, it isn't offering the the main course. As currently structured, ESPN+ is a complement to getting ESPN in a basic cable subscription, but a poor substitute for it.

My view is that ESPN+ will not be a big success until it is a closer substitute for ESPN and ESPN2 via basic cable.

It is clear that ESPN needs to rationalize its business for the current and future video marketplace. ESPN+ is a shot across the bow of the MVPDs, but the multichannel television business has been under attack for many years now. It would be unreasonable for MVPDs to expect ESPN to go down with the ship. All that said, the ESPN business that comes out of this may not be nearly as profitable a franchise as the one powered by the economics of the basic cable bundle.




23 January 2018

Starz Dropped from Altice - Premium Channels Not on Consignment

In one of the first cable programming outages of 2018, the channels of premium TV provider Starz are no longer carried on the cable systems of Altice. Many cable programming affiliation agreements expire at year end and the one between Starz and Altice (the owner of the former Cablevision/Optimum and Suddenlink cable systems) is one such deal. What caught my eye about this dispute was a quote from Altice, emphasis added.
Given that Starz is available to all consumers directly through Starz's own over-the-top streaming service, we don't believe it makes sense to charge all of our customers for Starz programming, particularly when their viewership is declining and the majority of our customers don't watch Starz,” Altice said in its statement. “We believe it is in the best interest of all our customers to replace Starz and StarzEncore programming with alternative entertainment channels that will provide a robust content experience at a great value.
Of course, all Altice customers do not pay for Starz. Starz is a premium channel and is usually sold a la carte or in higher level cable programming packages. It is not provided to all cable TV customers like a broadcast channel (e.g., ABC, PBS) or virtually all customers like a widely-distributed basic cable channel (e.g., CNN, USA, ESPN). So, Altice customers do not all pay for Starz.
What this means however, is that Starz licenses its channels to Altice on a per-basic-subscriber basis, not on a per-Starz-subscriber basis. Starz doesn't share in the revenue that Altice generates from its service; it has effectively a marketing guarantee from Altice, which then can package the service in the way that it feels most benefits Altice's business.
Such per-basic licensing of premium channels is hardly new to the pay TV business; I first saw such a deal in the early 1990s. Such deals can benefit the cable operator -- instead of having a $10 premium channel subscribed to by only 10% of customers for which it pays 50% of revenue ($5 wholesale), and generates $0.50/basic subscriber in margin, the MSO can provide this "$10 retail value service" in lots of packages for effectively a lot less than $10 -- it can provide more value to more consumers with that kind of packaging flexibility and upside.

However, the revenue upside of earlier cable is well in the rearview mirror now. Cable programming at the retail level is too expensive in today's competitive world.

That the third-tier premium provider (Starz is well behind HBO/Cinemax and Showtime/The Movie Channel/Flix in market share; this is not a commentary on the quality of its programming) is licensing its content on a per-basic guarantee really shows how inverted the pay TV business has become. With the competition among distributors, the winners have been the programmers who can require terms of the MSOs that they cannot get in the over-the-top world (when the programmers sell direct, they don't get a revenue guarantee). In the over-the-top world, the programmer has greater costs to market the service themselves, not via the cable operator, and greater control (uniform national pricing) but in that distribution channel, the programmer keeps the retail revenue, not just the wholesale, and also has control of the packaging -- no leaving the smaller channels out..

Update: Starz asks FCC to intervene in its dispute with Altice (Sara Fischer article at Axios)

08 October 2017

Google Fiber Launching Without TV

Google Fiber isn't dead yet, but as yet another sign that its strategy at launch was, if not fundamentally flawed, at least, not where the market was going. Fiber's next cities, Louisville and San Antonio, are not getting the Internet and TV service, but only its Internet service. It turns out, cable TV is a hard business.

Google notes that there are now a wealth of over-the-top "cable TV" services that can ride over its laudable gigabit connections, and that is true. Its own YouTube TV is one of them.

04 September 2017

Google Fiber Stalled Out in KC

It is not exactly new news, but Google Fiber, which hoped to jolt the Internet access business with its signature $70 per month, 1 gig service, has hit the wall in Kansas City.

I have been involved in the cable TV industry for a long time and can safely say that it is exceedingly complex. The vast majority of cable operator employees do things like installations and customer service, which is really outside of Google's core competency. The packaging of programming involves business relationships with a handful of key suppliers (e.g., Disney, Comcast/NBC Universal, Fox, Discovery, CBS, AMC, A&E Networks) for whom there are typically no good substitutes. The business structure of the industry developed as a local monopoly (via exclusive franchises granted community-by-community). The early cable technology was very one-size fits all, not easily addressable to an individual house, which led to the big "basic cable" bundle. Despite all its assets, Google couldn't remake the television programmer-operator relationship with its small scale.

As an Internet access business, at $70 per month, it was simply a lot more expensive and powerful than a typical cable Internet service and naturally appealed to well-heeled early adopters, despite sincere efforts by Google to sell the benefits of high speed interest to less-well-off people. The analogy that comes to mind is selling higher-priced organic food to people who cannot afford it without sacrificing something else that they already buy -- not easy.

Google Fiber never made it to NYC, I would have liked to try it.

29 March 2017

AT&T's U-verse Withers Because of Physics

When I wrote this post (DirecTV is to AT&T as HITS Was to TCI) it was pure speculation.


When AT&T launched U-verse, which attempted to provide TV, Internet and phone service without a fat pipe (i.e., cable or fibre) into the household, I recalled that cable engineers said that it wouldn't work. I recall the quote from one. He described the problem as: "physics".

For a few years, however, it did. AT&T could provide TV, Internet and phone service via twisted pair (traditional telephone wiring), provided the Internet speeds were not too fast and the household was not watching or recording too many HD programs at the same time. Until a 2010 upgrade, a household could not watch more than 2 HD programs at the same time.

However, now the writing is on the wall. Since AT&T acquired DirecTV in July 2015, it has steadily deemphasized its newer U-verse offering (launched 2006) in favor of expanding DirecTV (launched 1990). U-verse lost 1.36 million video customers in 2016, while DirecTV added 1.23 million subscribers. Since the multichannel television market is not growing, but Internet access is, clearly moving customers off of U-verse TV service (and shutting it down) will allow AT&T to devote that bandwidth to offer faster Internet speeds on such systems without a complete rebuild. Reason: physics.

Today brings an article about the likelihood of shutting down the U-Verse website on which it markets the triple play.


29 November 2016

DirecTV Now Renames DirecTV's DBS Packages

Unnoticed in the hubbub over its debut yesterday, DirecTV Now, the new over-the-top video service from AT&T, shares its basic packaging scheme with DirecTV's core DBS service.
  • "Live a Little" is based on Entertainment
  • "Just Right" is based on Choice
  • "Go Big" is based on Xtra
  • "Gotta Have It!" is based on Ultimate (apparently only spending $70 per month warrants an exclamation point)
Original marketing piece for DirecTV Now did not include many channels

There are some exceptions as noted in white (Crime & Investigation and FX Movie Channel do not appear to be in any DirecTV DBS packages) or blueberry (in the case of FXX, which is in the DirecTV DBS package "Xtra", not "Entertainment" as one would have expected) or light blue (in the case of Justice Central which is in the DBS package "Choice"). Source for the channel lineup list was Todd Spangler's article in Variety. The prices at the top of this chart are the expected retail; as per the marketing piece above, there is a $35 introductory rate for "Go Big" for the first 3 months.




There are some channels in DirecTV's DBS packages that are not in the corresponding DirecTV Now package. Among the more conspicuous absences: Aspire, INSP, ION, Mav TV, Ovation, Reelz, and the shopping services like QVC and HSN. All are independent programmers.

[Many of the channels are public interest channels, which DirecTV is required to provide space for on DBS by law (there is no similar law for over-the-top). Examples of public interest channels are BYU TV, Free Speech TV, and NASA TV; they are all non-commercial services.]

One note on the apparent loss-leader nature of parts of the offer: Prepaying $105 (3 months of Go Big at the $35 introductory rate and getting a free $150 Apple TV) is a good deal even if you don't want DirecTV Now. $105 is even less than the $129 that Apple charges for a refurbished unit.


Another take: Todd Spangler at Variety quotes analysts saying DirecTV Now's most attractive package is a money loser. Earlier he wrote about skinny bundles potentially killing to pay TV ecosystem, back when he thought DirecTV Now was a skinny bundle.

15 September 2016

The Essential Truth of Licensing Cable TV Networks

Steve Burke, CEO of NBCUniversal, made a simple statement yesterday that underlies the future of multichannel competition.
“Our job at NBCUniversal is to license our products and maximize the cash flow of our individual channels. If people are interested in putting together OTT businesses, like Sling or the Hulu product or Sony or others, we are going to sell to those suppliers. We want to make sure that we make as much or more selling to an over the top supplier as we do selling to an MVPD.” (emphasis added)
The implication is clear and Burke's view is no different from that of the leaders of Fox, Disney, CBS, etc. Apple is not going to get to carry and pay for NBCU's popular channels, they are going to have to take the whole bundle or pay a premium for taking less. That's what Sony is looking at with PlayStation Vue.

Maybe Sling TV isn't taking the whole bundle, but thinking about it more broadly. If Dish Network rolls out a secondary Disney channel a bit more broadly to its 13 million DBS subscribers, Disney will certainly be willing to give up not getting the full bundle onto Dish's Sling TV service with its less than 1 million subscribers.

There is no good reason for the owners of the must-have content to support new competitors who give them worse economics than they get from the incumbents. New entrants to the market always pay more for the must-have programming. DBS paid more than cable. Telcos paid more than DBS.

If the incumbent's business is declining and the upstarts are growing there is even more reason to insist on the same or better terms. Unless somehow an upstart grows without must-have programming. At that point, it is no longer must-have content, of course.

Burke was speaking at the Bank of America Merrill Lynch Media, Communications & Entertainment conference in Los Angeles.

A previous post: Getting Content for Dish's OTT Service