12 August 2016

Hulu Puts Down Its Free Service - The Evolution of Broadcaster Streaming

Word came last week that Hulu is dropping its free service of fresh off-broadcast programs. It is hard to overstate how big a change this is.

The change has not gone unnoticed. When Seventeen magazine publishes a story "Hulu is Getting Rid of the One Thing You Love About Hulu"...well, having multichannel business issues show up in Seventeen...that isn't something this blog has ever seen before.

What it means to me is that the original motivation for the formation of Hulu by NBC and Fox (later joined by ABC and recently by Time Warner) -- the fear of piracy is now much less of a concern for these companies and the potential of creating a subscription revenue business is a much greater one.

At the time of Hulu's launch, it solved a few problems for its owners:


Because they controlled Hulu, they had opportunity to revise program licensing terms (if business conditions change/require it). Because the partners were all in the same business, they knew that they were all facing the same types of issues.

In the event there was a business in this, that would play out over time and the big networks didn't have to worry about valuation issues since they were equal partners (and were licensing programs to Hulu on similar terms).

Hulu launched to the public in March 2008 and was rightly declared a success within a year per Forbes. The successful launch decimated the market for pirating the programs available on Hulu.

And then the business evolved...

In 2009, Fox CEO Chase Carey said Hulu would need start charging for some content. Presumably there wasn't enough ad support to be attractive. Hulu Plus (a service at the time without ads) launched in 2010; Netflix was on the radar screen.

When Hulu launched retransmission consent revenues were a small part of the business of most broadcasters. When that revenue stream started growing, the multichannel providers (cable, satellite and telco) wanted something in exchange for their higher payments. Since the broadcasters couldn't shut off over-the-air access to their shows, they offered the multichannel operators a "window" of exclusivity in online access to their shows. If a viewer wanted to watch the program online during the week after it aired, the viewer would need to "authenticate" that he or she had a multichannel subscription.

Comcast bought control of NBC in 2011. Part of what made NBC attractive to Comcast was the growing retransmission consent revenue stream for the broadcast network.

In 2011, Fox changed its Hulu policy to push its most recent episodes of its network series behind the paywall for one week after airing. The impact on piracy was swift and dramatic. According to TorrentFreak pirate downloads of two representative Fox shows went up over 100% following the change.

When Hulu launched on the Apple TV in 2012, there was no free service only Hulu Plus was available.

As Netflix's growth exploded and its valuation followed, Hulu's owners saw the market making the investor case for a video streaming subscription service. Being ad-supported had become passé.

Some might see the change at Hulu cynically. Recode's Peter Kafka writes that Hulu's network owners "have been uncomfortable with the notion of putting all their stuff up for free on the web. And they’ve been trying to back away from it for many years." To my eye, the story is a bit more nuanced. The owners were always looking for the money and didn't have any idea where it was at first. Since they found the money, they have been following it.

In some ways, this latest change -- to exit free -- may be all about branding. As Seventeen notes, free streaming from Hulu will still exist, but not on hulu.com. The new streaming service will be called Yahoo View. I supposed branding a free service as from Yahoo is as good a way to kill it as any other.




06 July 2016

Opening Up the Set-Top Box

With yesterday's announcement of an agreement between Comcast and Netflix to make the leading SVOD service available on the largest cable operator's set-top boxes, we are starting to see the regulatory "sausage get made".
Ma Bell would rent you a Princess phone

As you may recall, in late January FCC Chairman Tom Wheeler announced a plan to open up the cable set-top box marketplace, drawing an analogy to an earlier time when the FCC opened up consumers' ability to use their own phones on Ma Bell's telephone network. It is not a terrible analogy, although the actual proposal may not have been the most well thought through idea with National Cable Telecommunications Association CEO Michael Powell, himself a former FCC Chairman, leading the chorus of boos and the cable industry responded by saying the proposal was ridiculous or worse

No, it doesn't make sense that a third party can reconfigure a "cable TV package" for which it has not negotiated without the permission of the programmers (who own the channels) or the distributor (which licenses them and delivers them to consumers). Also a third party shouldn't be able to insert its own ads into such programming either. As I said, it wasn't the most well thought through idea.


In early June, the cable industry put together its own proposal to address the issues raised by the FCC - "Ditch the Box". While that didn't make everybody happy, it was clearly a step towards what Wheeler had laid out as goals.

With Comcast's agreement with Netflix, the cable industry is providing an example that it can and will work with over-the-top programming sources. Would Comcast had done this without the threat of Wheeler's proposal? Maybe not.

Having seen deeply stupid cable regulatory schemes in the past, from this observer's view, it looks like there is something to be said for this process this time.  Let's see how this plays out.

Update (8 July 2016): It looks like the FCC is receptive to some parts of the cable operators' proposal. The process is moving along.

02 May 2016

Revisiting The Innovator's Dilemma and OTT Competition with Cable

Over two years ago, in November 2013, I wrote one of the most popular posts on this site, Over-the-Top Video and The Innovator's Dilemma. In the wake of a Wall Street Journal article on Hulu's plans to offer a cable competitor service with live streams of certain channels controlled by its owners, Disney and Fox, I thought it worth revisiting that post. Where was the analysis on target and where did it miss? More importantly, what really changed?

What Changed?



The Hits



The Miss
  • The availability of over-the-top services didn't happen in one form that I expected -- the roll out of Aereo to additional markets. 
  • I made no mention that over-the top services would expand, but they have. PlayStation Vue, Sony's over-the-top service, not mentioned in the original post, launched in a handful of markets, then went national this year. Hulu's build-out of a service with streams of linear channels would be another expansion geared to the mass market. There have also been all manner of subscription video on demand services for niches by major companies like NBC Universal's SeesoWorld Wrestling Entertainment), and Crunchyroll for Japanese anime (its backers). In an earlier time, each of these would have been a cable program service.


    Unclear


    The Innovator's Dilemma continues to be a useful lens through which to look at the development of over-the-top video, finding its purchase in markets/use cases not central to the big screen at home. Unlike other innovations, however, the role of content makes the video distribution system unique. Some holders of high profile content can make more money going direct to consumers than through the cable bundle -- adult video made the leap a long time ago. The next ones to prosper over-the-top are the new services that probably couldn't get carried by distributor's protecting their margins (Crunchyroll, WWE), followed closely by those that are already sold a la carte (HBO, Showtime, and Starz). Those left are the basic cable channels, whose play in over-the-top is focused on their library content (like Lifetime Movie Club) and may be for a long time.

    13 April 2016

    Ultra HD Content Is Coming

    With yesterday's announcement that DirecTV will carry 25 MLB Network games in Ultra HD (also known as 4K), it might be time to evaluate whether this format will be a paradigm shift (as was high definition) or not (as was 3D).

    HD benefited from the following:

    • Clearly better pictures
    • Development of flat panel set technology allowing for big screens without the big bulk of earlier HD sets (rear projection or very heavy tubes)
    • Digital transition, requiring stations to stop broadcasting analog signals in July 2009 and greatly increasing the amount of high profile native widescreen HD programming
    HD was no more convenient to use than standard definition television before that.


    3D, it is clear in retrospect, was more of a mixed-to-bad bag. The 3D effect could be compelling at times (like in Avatar), but, 3D had some considerable negatives:
    • 3D effect did not work for many people or actually gave them headaches
    • Glasses required for 3D made it less convenient to view
    • No new desirable set technology was associated with 3D
    • 3D content did not benefit by a change in the law regarding television broadcasting
    • 3D content was difficult to produce -- it required more than simply higher resolution cameras and other equipment
    Ultra HD avoids the 3D negatives. However, it is less than clear that Ultra HD's benefits are worth the cost to consumers. To a significant extent, all new television formats face an uphill climb. It is a very rare consumer who wants the obligation to buy a new set or other equipment.

    Ultra HD feels more like the transition from DVDs to Blu-Ray discs, a technically better format that consumers are willing to buy as long as there is little cost premium associated with it. If Ultra HD catches on, expect a much slower adoption curve.


    Early HD sets:

    2004 65 inch Sony rear projection HDTV set is 27 inches deep
    Sony KV-40XBR800 FD Trinitron - weighs 325 pounds
    Update (25 May 2016): This report from John Archer on forbes.com notes that Ultra HD sets have become the de facto standard for 50+ inch TVs, more because manufacturers are not making them, rather than consumers paying a premium to get UHD sets.

    11 February 2016

    Fox Breaks Dish's Auto-Hop

    Today Fox and Dish announced the settlement of Fox's lawsuit over Dish's Hopper which dates back to late 2012. The Hopper, for those whose memories have faded since 2012, is a DVR with two main features:
    1. It automatically records all of the Big-4 networks' prime time programs; and
    2. with a single selection by a home user, can automatically skip over all of the commercials in the recorded shows. Dish calls this feature "Auto-Hop".
    Parsing the features, the first, automatically recording a program, is only a negative to the network in the event that not having the recording makes the home viewer more likely to watch the show (and the commercials within it) on a live basis. I don't think most networks are fighting that fight.

    The second, however, is the real fight and the basis of the settlement. Dish agreed to disable the Auto-Hop functionality for the first seven days after a program is recorded. This preserves the "C7 Rating" for Fox -- the measure of how many viewers watch a commercial within the first 7 days that a program airs. C7 is a bit of an aspirational goal for the networks; the most common currency is C3 rating -- viewership in the first 3 days after airing. (CBS settled its complaint against Auto-Hop similarly in December 2014).
    Fox is certainly a winner here, negotiating for something that has some clear economic value. More precisely, Fox was able to to stop a feature that might have threatened the advertising business model more than the DVR fast-forward button does. (Note that when networks license content to MVPDs for VOD services, they often insist that fast-forwarding is disabled altogether -- that's the power of being able to withhold your content.)

    Dish is also a winner here in that they were able to survive the challenge to the automatic recording complaint, although, it sure seems to this analyst that Fox may have been on thin legal ground trying to stop a feature that simply put, simplified DVR recording.

    The loser, naturally, is the viewer who loses some convenient functionality. On the bright side, she gains additional exercise for the finger pushing the fast-forward button (unless the cat knows how).

    Previously on peterlitman.com: CBS Hates on the Hopper Some More, Claims Fraud (25 January 2013)


    04 February 2016

    Charter Switches from EBUs to Billables for Subscriber Reporting

    Close observers of cable MSO financials noted a significant change stuck in the footnotes of Charter's 4Q15 and year end financial statements:
    (e) Charter revised its methodology for counting customers who reside in residential multiple dwelling units ("MDUs") that are billed under bulk contracts.  Beginning in the fourth quarter of 2015, we count and report customers based on the number of billed units within each bulk MDU, similar to recent reporting changes at our peers and reflecting the completion of all-digital which requires a direct billing relationship for all units which receive a set-top box.  Previously, our methodology for reporting residential customers generally excluded units under bulk arrangements, unless those units had a direct billing relationship.  Prior year information has been revised to reflect our revised methodology.

    emphasis added to highlight the following: The use of billable subscriber counts -- pioneered by Comcast in 1Q2013 -- leads to generally higher numbers than EBU counts. It is a rosier picture to investors.

    The corresponding footnote in 3Q15 read as follows:
    (h) Included within commercial video customers are those in commercial structures, which are calculated on an equivalent bulk unit ("EBU") basis.  We calculate EBUs by dividing the bulk price charged to accounts in an area by the published rate charged to non-bulk residential customers in that market for the comparable tier of service. This EBU method of estimating video customers is consistent with the methodology used in determining costs paid to programmers and is consistent with the methodology used by other multiple system operators.  As we increase our published video rates to residential customers without a corresponding increase in the prices charged to commercial service customers, our EBU count will decline even if there is no real loss in commercial service customers.

    Charter reported residential basics 4,322,000 up from 4,293,000 at year end 2014 under the billable methodology. However, at year end 2014, Charter reported only 4,160,000 EBUs, so the Residential Basic subscriber count for billable subs was 3.2% higher than for EBUs. That seems a bit odd. Residential subscribers shouldn't vary much from EBUs. The reason that comes to mind of why residential billables would be higher than residential EBUs is if a material portion of the residential subscribers are seasonal accounts who pay a much lower rate in the off-season. However, Charter isn't in most of the big seasonal markets (e.g., Florida with its snowbirds).

    Commercial basics were 108,000 up from 104,000 at year end 2014 under the billable methodology. At year end 2014, Charter reported 133,000 commercial video EBUs, so the billable subscriber count was 21.8% lower than the EBU count, which makes sense, since commercial accounts include multiple dwelling units and those typically get a "bulk discount". [In a bulk arrangement, 100% of a building's units get the service -- usually billed through their maintenance -- so that there is no reason for a unit to turn down the service and little churn for the cable company. For that benefit, the cable company provides a price break over the cost of all of those units subscribing independently, and potentially disconnecting.]

    As Charter pointed out in 3Q15 "As we increase our published video rates to residential customers without a corresponding increase in the prices charged to commercial service customers, our EBU count will decline even if there is no real loss in commercial service customers." Looking at it from the other side, when bulk rates decline (due to furious price competition from DBS and telcos for these MDU accounts) EBU counts go down even if the MSO holds onto the business.

    There is no misleading going on here. The revenues of the companies are not affected by this subscriber-counting change. This is investor spin. As there has historically been so much focus on subscriber growth, it isn't entirely surprising that the biggest MSOs have decided to deploy a measurement system that paints their results in a better light than the one that they used historically (and is still the one that they prefer to use when paying programmers like ESPN and was part of a joint industry consensus in 2002 -- clearly another time).


    13 January 2016

    File Under "Duh"

    The surprise is not really that Al Jazeera America is shutting down (my link is the Glenn Greenwald's excellent and extensively linked-out article), but that it ever existed in the first place. The multichannel TV dial has a number of fully distributed news services of one flavor or another:
    As well as less-than-fully distributed channels like:
    An Internet-distributed news channel:
    And lots of regional news networks like:


    In short, this isn't a market segment with a lack of programming.

    It is also hard to imagine that branding the channel "Al Jazeera America" was what US news consumers wanted. Irrespective of the quality of the programming on the channel (which I thought was good, from the little I saw, if somewhat stilted in a PBS/BBC kind of way), the name "Al Jazeera" was most closely associated with the co-owned Arabic-language Al Jazeera news service made famous as the preferred outlet for Osama bin Laden's videos during the post-9/11 era. As the proud possessor of a marketing degree from arguably the finest school for brand managers, I believe that's too much to overcome.