25 June 2014

SCOTUS Rules Against Aereo 6-3

Broadcasters rejoice! The full description is here (link is to a .pdf) The decision is well worth reading. The short version:

  • Justice Breyer, writing the majority opinion, believes that Congress intended to capture things like Aereo in the Copyright Act of 1976, which directly addressed the legal issues raised by cable television.
  • Justice Scalia, in the dissent, believes that the matter should be decided by Congress now, not by the courts by interpreting what Congress in 1976 might have thought about what Aereo represents today.

23 May 2014

DirecTV Is to AT&T as HITS Was to TCI?

AT&T's U-Verse versus Verizon's FiOS is an interesting study in contrasts and those differences might be behind AT&T's recent offer to purchase DirecTV.
Both U-Verse and FiOS run fiber down the middle of your street. Fiber is the highest capacity wires for communications of any sort and, if new wires need to be run, they are always fiber. Cable operators also run fiber down the middle of the street for the same reason. The cost of running wires into each individual home is an incredibly costly endeavor and that cost is the labor to install it -- the wire itself, even fiber, is cheap.

Verizon's FiOS built a state-of-the-art fiber-to-the-home (FTTH, also known as FTTP for "premises") network, using the latest technology available and at a princely price. Specifically, this means that Verizon ran fiber from the middle of the street into the house of each FiOS subscriber. The alternative would have been to use its existing wiring into the home, the thin, low-capacity copper wires known as "twisted pair". (Cable operators, in contrast, run coaxial cable into the home, which has less capacity than fiber, but far, far more than twisted pair).  

Historically (and culturally) Verizon is used to competing on the quality of its network. This is the positioning that has made it a leader in the cellphone market. Verizon's wireless business represents a far greater portion of its value than its wireline business (comprised of the not-profitable FiOS and the declining twisted-pair business). It is perhaps not a coincidence that Verizon operates in the densely populated East Coast. The economics of building these networks are far less attractive when the population density is low.

Verizon deployed FiOS before AT&T launched U-Verse and, by going early, chose to deploy its video service using QAM, the same technology as cable uses, rather than the still-developing video-over-IP, the way that Internet video is delivered. I don't think this is a matter of vision, everyone probably saw that IP video was coming, but, again, an issue of quality. Everyone knew that QAM worked; Verizon didn't want to take the risk that it would build this state-of-the-art network and not be able to deliver top-notch service.

AT&T took a different approach and used its twisted pair wires into the home. The advantages of this approach is a much lower cost of deployment and a quicker deployment, since new wires do not need to be run.

At the time of its launch, there were skeptics that AT&T's approach would work -- that is, provide service of an acceptable quality. One of the limitations of U-Verse via twisted pair was that it could only deliver 3 HD signals into a house simultaneously. Another is that Internet speeds for its fastest level of service are 24 Mbits/sec, modest compared to the gigabit speeds that cable can deliver and Google Fiber is delivering but perfectly competitive versus today's average cable modem offerings.

AT&T didn't build U-Verse for the future, they built it for the present. If demand for faster Internet speeds (or more HD) didn't materialize, they were fine. When demand did materialize perhaps they would be saved by some superior compression technology (that could squeeze more bits through the twisted pair) or they would actually run fiber-to-the-home then or some hybrid system using wireless spectrum or...something else.

Perhaps DirecTV is the something else.

So here's the potential magic of AT&T's DirecTV purchase. If AT&T can take video off of U-Verse, then there is more capacity for broadband Internet traffic on that plant. Because U-Verse is IPTV, it is not a simple as saying that the capacity devoted to video could be redeployed to provide faster Internet service. To the extent that U-Verse is not providing video service, presumably all the bandwidth would be available for Internet access 24/7. Currently, even if the bandwidth is dynamically allocated between TV and Internet access, since the TV is on so many hours of the day, presumably the bandwidth being used to deliver ESPN HD live while recording AMC HD and HBO HD is coming at the cost of less-than-screaming Internet service. Of course, this is the exact opposite of what AT&T needs to say (and is saying) to get regulatory approval for the deal. Regulators do not look favorably upon removing a choice from the marketplace (see AT&T's failed acquisition of T-Mobile which, given T-Mobile's revival regulators must see as a success). Bear in mind, migrating U-Verse video subs to DirecTV would be a 5-years-out strategic move, not a near-term strategic move. (AT&T CFO John Stephens "This transaction is not based on freeing up any of the wired capacity.")

This is why buying DirecTV is may be a good strategy for AT&T, but buying Dish may not be necessary or desirable for Verizon.

This break seems analogous to one-time cable giant Tele-Communications, Inc., better known as TCI, and its decision two decades ago to start the Headend in the Sky (HITS, now part of the Comcast Media Center) to be able to provide hundreds of digital channels cheaply on its scores of small rural cable systems where there would be no positive returns on the capital required to rebuild them to the standards used in more densely populated urban and suburban areas (known as HFC for "hybrid fiber coax"). HITS was a cheaper alternative to a rebuild.


19 May 2014

AT&T Buys DirecTV: Some Macro and Micro Thoughts

A few thoughts on the day after the big merger announcement:

Unlike the Comcast-Time Warner Cable-Charter proposed deal, AT&T's purchase of DirecTV "would eliminate a choice for pay-TV customers in some markets." In those areas where AT&T offers U-Verse service, a consumer likely has a choice of four competitive providers: the incumbent cable operator, Dish Network, DirecTV, and AT&T. If this merger goes through, the four choices go down to three and the new company includes one of the giant providers (as opposed to a combination of two of the smaller ones). While antitrust is far from my area of expertise, it appears that this is exactly the same outcome that doomed AT&T's attempted acquisition of T-Mobile.
While having AT&T and DirecTV under the same ownership would appear to facilitate bundling services for consumers (e.g., in non-U-Verse areas the combined company could offer phone plus DSL plus DBS plus cellphone), unless the DirecTV brand goes away, it would still appear to be the sort of shot-gun marriage that all current and prior telco-DBS "synthetic bundles" are and have been. It's not an elegant solution and "people are abandoning DSL in droves, and buying cable broadband".

When I've read of DirecTV's strong cash flow, but otherwise difficult strategic position (a TV-only provider in an increasingly bundled bustiness) and how AT&T could really use the DirecTV cash to fund its dividend, the story sounded suspiciously like Viacom's 1994 acquisition of Blockbuster to fund the acquisition it really wanted, Paramount Pictures. How did that one work out? Not that well.

Would AT&T apply the DirecTV brand to U-Verse video offering? Maybe that's a better idea. As AT&T's press release on the deal states: DirecTV is "the premier pay TV brand with the best content". The U-Verse brand is probably meaningless. Why anyone has a brand with a hyphen in it is beyond me. It is clunky and not web-friendly (the URL for the service is uverseonline.att.net, although u-verse.com does redirect to it -- why have consumers wonder if they include the hyphen or not. DirecTV's URL is simply directv.com).

This deal should seem like a homecoming for Dan York, DirecTV's chief content acquisition executive. It was just 2 years ago that he left that same role at AT&T.

Programming savings will not be as easy to come by as they are in a typical cable acquisition. DirecTV's distribution rights may be limited to its single DBS system and, if that's the case, would not have the right to simply add AT&T's systems to its affiliation agreements (and take advantage of DirecTV's greater purchasing power). Comcast, by comparison, would very likely have the right to do exactly that with the Time Warner Cable systems. It is always simpler if one does not have to negotiate. DirecTV already has relatively low programming costs as it is a giant pay-TV distributor; the programming cost savings would largely come for the much smaller base of AT&T U-Verse customers.

Could the NFL allow DirecTV to sell Sunday Ticket on U-Verse as well as DBS, but not provide it to other distributors? That could be interesting, but it would have to be negotiated. It is very unlikely that DirecTV would have the right to extend Sunday Ticket to additional platforms under its current (and expiring) deal. Would give U-Verse a leg up that it has never had before, but only a limited footprint in which it could take advantage of it. It would be an odd decision for the NFL: Sunday Ticket would be available from two providers in a minority of the country and one provider in the vast majority of the country. That's not an obvious thing to explain to consumers.

NFL Sunday Ticket is clearly on AT&T's mind. From its 8K filing about the deal: "The parties also have agreed that in the event that DIRECTV’s agreement for the 'NFL Sunday Ticket' service is not renewed substantially on the terms discussed between the parties, the Company may elect not to consummate the Merger, but the Company will not have a damages claim arising out of such failure so long as DIRECTV used its reasonable best efforts to obtain such renewal."

Packaging differences: Would DirecTV try to make the DBS and U-Verse packages of services more similar. Or would the combined company enjoy the dealmaking flexibility of having good-better-best on 2 different platforms and now have more ways to split the baby. In any event, the companies say they don't plan any large packaging changes.

Other perspectives:







23 April 2014

Getting Content for Dish's OTT Service

According to a report by Alex Sherman and Edmund Lee for Bloomberg, Dish is planning to launch the first mainstream* Internet-delivered "cable TV" service sometime late this summer. The long-rumored over-the-top cable service may finally emerge after lots (Intel) and lots (Sony) and lots (Microsoft) and lots (Apple) and lots (Google) of rumors.
OTT probably won't involve an ethernet cable running straight into your set; it probably will use a Roku-like box
The report states that Comcast's NBCUniversal (USA, Syfy, CNBC, MSNBC, Bravo, E!, among others), A&E Networks (A&E, History, Lifetime, among others), Turner Broadcasting (TNT, TBS, CNN, Cartoon, TCM among others) and CBS (the CBS broadcast network, Showtime and the relatively small CBS Sports Network) have been approached about providing content for the service.

As followers of the industry know, Dish and Disney/ESPN entered into a ground-breaking deal a few months ago that would permit the distribution of several of the Mouse's marquee service on an OTT service. I posted about it here. While the deal was conceptually ground-breaking, however, no ground has been broken to date.

As I noted in the earlier post, it is not unusual in such an agreement that Disney would insist on a "critical mass" of other programmers also be included in any such efforts. (If there is nothing else in the package, then the package would effectively be an a la carte offering of Disney's networks.). The Bloomberg article confirm's my suspicion:  "The largest content providers have placed several conditions on Dish’s service before they’ll agree to deals, according to two people familiar with the matter. At least two of the four major broadcast networks -- ABC, CBS, Fox and NBC -- must be included in the service, and at least 10 of the highest-rated cable networks must also be part of the package."**
An older graphic with the NBCU brands at the time of the merger -- Daily Candy, Sleuth, Style and Versus are all no longer; Cloo, Esquire and NBC Sports Networks replaced the latter three
NBCU represents a particularly interesting potential content provider for the Dish OTT. As part of the Comcast acquisition of NBCU, the company is subject to a consent decree that, among other things, requires NBCU to sell similar programming to an online video provider that some of its competitors are selling and do so under comparable terms to which the competitor got. The recourse for the potential licensee (Dish, in this case) is that if it doesn't think it is getting a fair shake from NBCU, it can submit the dispute to the Department of Justice for arbitration.

What that means in this context is anyone's guess. If I were advocating for NBCU, I would hold that the restrictions on the Hopper than Dish agreed to with ABC would have to apply to NBC as well. My guess is that Dish is willing to go there. The agreement that Dish made to launch Disney Junior, Fusion (the English-language news service targeting Latinos), Longhorn Network (University of Texas sports service run by ESPN) and the upcoming ESPN Southeast Conference network appear to this observer as a substantial portion of the overall package that Disney received in conjunction with its grant of the OTT rights. I think it is less likely that Dish would be willing to launch and/or favorably retier virtually everything in the NBCU stable of networks to get the OTT rights; certainly Dish won't start the negotiation there.

For those unaware, Dish is a company known for using the legal process aggressively to try to gain an advantage at the bargaining table. If I were advocating for Dish, I might take the position that NBCU has to give up OTT rights to Dish only for the consideration that is explicitly tied to such rights (e.g., fees and packaging provisions for OTT customers) not consideration that Dish provided to Disney for its DBS customers.


* non-mainstream over-the-top Internet-delivered cable TV services have existed for a while including Dish's own DishWorld (mostly foreign-language international services) and Sky Angel (mostly religious-oriented services)

** The required inclusion of broadcast channels in the package could complicate things considerably -- the broadcast networks do not control all of their affiliates, they can only grant retransmission consent for their owned & operated stations (NY, LA, Chicago and a handful or two of other large markets) which would make the OTT service something only available in certain markets. Including some broadcast channels but not others (e.g., not the weaker stations which have "must carry" rights on DBS and cable) might lead to complaints to the FCC from them. Again, complications.

03 March 2014

Dish-Disney Deal: Parsing the Press Release

MY COMMENTARY IS INLINE, BELOW IN RED

The Walt Disney Company and DISH Network Sign Groundbreaking Long-term, Wide-ranging Agreement

  • New Multi-Year Deal to Deliver Best in Sports, News and Entertainment to DISH Customers, In and Out of the Home
  • DISH First to Secure Rights to Carry Disney, ABC and ESPN Networks for Over-the-Top, Personal Subscription Service
  • Landmark Deal Adds Disney Junior, Fusion, Longhorn Network, ESPN3, To-Be-Launched SEC ESPN Network and the Full Suite of Authenticated WATCH Services
  • Expanded Video-On-Demand Content Available to DISH Customers at Home, On-The-Go
  • Dismissal of All Legal Proceedings Between the Two Companies
Englewood, Colo. and Burbank, Calif., March 03, 2014 — The Walt Disney Company (NYSE:DIS) and DISH Network Corporation (NASDAQ:DISH) today announced a groundbreaking, long-term, wide-ranging distribution agreement that will provide DISH customers with access to Disney’s robust lineup of top quality sports, news and entertainment content across televisions, computers, smartphones, tablets, gaming consoles and connected devices.
The renewal agreement supports the companies’ mutual goal to deliver the best video content to customers across multiple platforms by strengthening the value of the multichannel video subscription today and by creating the opportunity for DISH to deliver new services in the future.
A KEY PART OF DISNEY'S LEVERAGE IS THE RENEWAL OF ESPN, THE MOST VALUABLE CHANNEL IN MULTICHANNEL TELEVISION.
The extensive and expanded distribution agreement grants DISH rights to stream cleared linear and video-on-demand content from the ABC-owned broadcast stations, ABC Family, Disney Channel, ESPN and ESPN2, as part of an Internet delivered, IP-based multichannel offering.
THIS APPEARS TO BE THE REALLY NEW STUFF. FROM THE SOUND OF THIS SENTENCE, DISH COULD OFFER THESE CHANNELS AS PART OF AN OVER-THE-TOP OFFERING. DISH MAY NOT BE OFFERING THESE CHANNELS ON SUCH A BASIS FOR A WHILE; DISNEY MAY HAVE INSISTED ON SOME "CRITICAL MASS" OF OTHER TOP SERVICES BE INCLUDED IN ANY PACKAGE WHICH INCLUDES THE DISNEY SERVICES. STILL, HAVING ESPN IN THE FOLD MAKES GETTING DEALS DONE FOR OTHER SERVICES MUCH EASIER FOR DISH. THIS IS A MAJOR GET FOR DISH. MORE ON THIS FROM PETER KAFKA AT RE/CODE.
Additionally, for the first time, DISH customers will be able to access Disney’s authenticated live and video-on-demand products, including WatchESPN, WATCH Disney, WATCH ABC Family and WATCH ABC using Internet devices in the home and on the go.
THIS IS STANDARD STUFF -- "TV EVERYWHERE" TO SUBSCRIBERS WHO HAVE AN EXISTING DISH SUBSCRIPTION OF VALUE TO BOTH PARTIES, BUT PROBABLY SLIGHTLY MORE VALUABLE TO DISH.
The agreement will result in dismissal of all pending litigation between the two companies, including disputes over PrimeTime Anytime and AutoHop.  As part of the accord, DISH will disable AutoHop functionality for ABC content within the C3 ratings window.  The deal also provides a structure for other advertising models as the market evolves, including dynamic ad insertion, advertising on mobile devices and extended advertising measurement periods.
THIS IS A BIG DEAL. THE COURTS WERE UNLIKELY TO HELP DISNEY GET RID OF THE AUTOHOP AD-SKIPPING FEATURE, BUT DISNEY WAS ABLE TO NEGOTIATE AWAY AT LEAST A SIGNIFICANT CHUNK OF ITS FUNCTIONALITY. THIS IS A BIG GET FOR DISNEY. LOOKING AT IT MORE BROADLY, DISH CHAIRMAN CHARLIE ERGEN LAUNCHED A FEATURE THAT HE KNEW WOULD UPSET PROGRAMMERS, THEN HE TRADED AWAY PART OF IT TO GET A DEAL DONE. SAVVY GUY. MORE ON THIS FROM JANKO ROETTGERS AT GIGAOM.
“The creation of this agreement has really been about predicting the future of television with a visionary and forward-leaning partner,” said Joseph P. Clayton, DISH chief executive officer and president. “Not only will the exceptional Disney, ABC, ESPN entertainment portfolio continue to delight our customers today, but we have a model from which to deliver exciting new services tomorrow.”
Anne Sweeney, Co-Chairman, Disney Media Networks, and President, Disney/ABC Television Group, said, “We knew early on we had a responsibility with this deal to not only do what was best for our business, but to also position our industry for future growth.  After months of hard work and out-of-the box thinking on both sides, led by Bob Iger and Charlie Ergen, this agreement, one of the most complex and comprehensive we’ve ever undertaken, achieves just that.  Not only were innovative business solutions reached on complicated current issues, we also planned for the evolution of our industry.”
Added John Skipper, President, ESPN & Co-Chairman, Disney Media Networks: “We worked with DISH to smartly address the future of the multi-screen world on several levels.  Together, we are adding value to the traditional video subscription by making great content accessible across platforms and delivering new products, including our WatchESPN authenticated networks, the highly anticipated launch of the SEC ESPN Network, expanded distribution for Longhorn Network, and a reimagined ESPN Classic video-on-demand channel.  At the same time, we are creating opportunities to add new subscribers and introducing the value of a multichannel subscription to a small subset of broadband-only consumers.”
“This agreement allows us to bring more innovation to the customer experience, including new marketing, packaging and delivery options,” said Dave Shull, DISH Executive Vice President and Chief Commercial Officer. “This paves the way for more customer choice and control over the viewing experience.”
DISH will make available Disney Junior, Fusion, ESPN Goal Line, ESPN Buzzer Beater, as well as Longhorn Network and the upcoming SEC ESPN Network upon its launch. In addition, DISH, ESPN and ESPN Deportes customers will have access to the live and video-on-demand channel ESPN3.
THESE ARE ALL BENEFITS FOR DISNEY AND THINGS IT IS FAIR TO SAY THAT DISH CONCEDED, PARTICULARLY EXPANDED CARRIAGE OF THE CHANNELS DISH WASN'T ALREADY CARRYING OR CARRYING IN HIGHLY PENETRATED PACKAGES: FUSION, SEC ESPN, LONGHORN NETWORK AND DISNEY JUNIOR LAUNCHES ARE ALL SIGNIFICANT GETS FOR DISNEY. IF THE SERVICES ARE LAUNCHED IN DISH'S MORE HIGHLY PENETRATED PACKAGES (E.G., AMERICA'S TOP 120 AND AMERICA'S TOP 200), THESE LAUNCHES ARE VERY VALUABLE FOR DISNEY AND PROBABLY REPRESENT DISH'S MOST VALUABLE ECONOMIC CONCESSION.
As part of the agreement, DISH will launch ESPNEWS, ESPNU, Disney Channel and ABC Family in high definition. ESPN Classic will be reintroduced as a video-on-demand channel.
IN OTHER WORDS, ESPN CLASSIC HAS BEEN TAKEN OFF THE LINEAR LINEUP. ESPN HAS "DEALT OFF" CLASSIC TO GET MORE DISTRIBUTION FOR ESPNU AND OTHER SERVICE FOR NEARLY A DECADE NOW. THE LACK OF CARRIAGE OF THE HD FEEDS OF DISNEY CHANNEL, ABC FAMILY, ESPNU AND ESPNEWS WAS PROBABLY HURTING DISH MORE THAN THEY WERE HURTING DISNEY. 
The extensive and expanded rights package gives DISH customer access to video-on-demand content at home, on computers and on-the-go through the DISH Anywhere app for tablets and smartphones, including:
  • ABC On Demand, a fast forward-disabled service that features a selection of top-rated primetime entertainment programming, including episodes of such popular current ABC shows as “Scandal,” Castle,” “Grey’s Anatomy,” “Once Upon A Time” and “Revenge.”
  • ABC Family On Demand, which features a variety of top-rated full episodes, refreshed monthly, from such popular millennial favorites as “The Fosters,” ”Switched at Birth,” “Baby Daddy” and “Melissa & Joey.”
  • Disney-branded On Demand offerings, including Disney Channel On Demand, Disney Junior On Demand, and Disney XD On Demand.  Refreshed each month, the Disney Channel On Demand offering will include episodes from such series as “Mickey Mouse Clubhouse,” “Sofia the First” and “Jake and the Never Land Pirates” for preschoolers, as well as variety of episodes from “A.N.T. Farm,” “Liv and Maddie,” “Jessie” and other popular series for older kids.  Select episodes featured on Disney Channel On Demand will be available in innovative new offerings, such as playlists and monthly programming blocks, in addition to a number of episodes available in multiple languages.  A variety of Disney Channel Original Movies will also be available. Disney XD On Demand features a selection of episodes from such series as the Emmy Award-winning animated hit “Phineas and Ferb,” “Pair of Kings” and “Kickin’ It.”
  • Expanded On Demand content from ESPN, including content from ESPN Deportes and ESPN’s award-winning original content from ESPN Films.
THIS IS ALSO STANDARD STUFF THAT DISNEY HAS DONE WITH OTHER DISTRIBUTORS. IT IS OF VALUE TO DISH, BUT NOT OF EXTRAORDINARY VALUE.
The companies also renewed carriage agreement for ABC’s eight owned local stations, including WABC-TV in New York City, KABC-TV in Los Angeles, WLS-TV in Chicago, WPVI-TV in Philadelphia, KGO-TV in San Francisco, WTVD-TV in Raleigh-Durham, KTRK-TV in Houston, and KFSN in Fresno.
THIS WAS A BIG SOURCE OF DISNEY'S LEVERAGE. RETRANSMISSION OF ITS STATION GROUP IS THE ONLY WAY TO GET ABC FOR DISH CUSTOMERS IN APPROXIMATELY 20% OF THE US. THIS WAS A LARGE SOURCE OF DISNEY'S LEVERAGE.
About DISH
DISH Network Corporation (NASDAQ: DISH), through its subsidiary DISH Network L.L.C., provides approximately 14.057 million satellite TV customers, as of Dec. 31, 2013, with the highest quality programming and technology with the most choices at the best value. Subscribers enjoy a high definition line-up with more than 200 national HD channels, the most international channels, and award-winning HD and DVR technology. DISH Network Corporation is a Fortune 200 company.Visit www.dish.com.
About The Walt Disney Company
The Walt Disney Company, together with its subsidiaries and affiliates, is a leading diversified international entertainment and media enterprise with five business segments: media networks, parks and resorts, studio entertainment, consumer products and interactive. Disney is a Dow 30 company and had annual revenues of $45 billion in its Fiscal Year 2013.

28 February 2014

What If Aereo Prevails at SCOTUS?: Some Q & A

Would a cable operator deploy its own Aereo-style service with an antenna for each customer delivering individual streams for each from its own antenna?

Once (and if) the Aereo service is found to be legal by the Supreme Court, it would represent an attractive alternative to the operators' current options for carrying broadcast channels, which are: (1) pay higher retransmission consent fees, (2) do without popular broadcast channels, and (3) hand out antennas to customers.

It may not be the case that cable operators create their own Aereo-style service. At a recent meeting, an investor interested in retransmission consent told me something that surprised me: cable operators can't deploy an Aereo-style service without negotiating retransmission consent agreements with the broadcasters. Cable operators are considered Multichannel Video Program Distributors (MVPDs) according to the law, however, I assumed that classification applied only to their cable television services, not necessarily to other services that they might offer (e.g., online streaming video services).

Researching the topic further, I learned that cable operators are named specifically as MVPDs in the 1996 Telecommunications Act. As an MVPD, the operator gets certain benefits and takes on certain obligations, one of those obligations is that it is subject to the must carry/retransmission consent structure when dealing with local broadcast stations.

So, by a strict reading of the law, operators may not be able to offer their own Aereo-style service.
One Aereo Antenna, dime for size comparison
So Aereo is of no consequence and an Aereo victory at the Supreme Court would not change anything for cable operators?

I would not move so quickly to that assumption.

An MVPD could enter into an affiliation agreement with Aereo (or an Aereo-style provider operated by a third party) to provide access to its customers via its set-top boxes and apps. Since all modern cable boxes are capable of decoding IP video streams and their software is updated regularly, it appears that an Aereo solution could be rolled out relatively easily. Aereo becomes another app on the box, much like Pandora.

If you think this work-around is "too cute" to be viable, I suggest you read about Dish Network and its relationship with NPS.

Certainly Aereo and likely Aereo-style competitors will exist if the service is found to be legal. Cable operators already affiliate with third-party services for several online streaming video services. ESPN3 is probably the best known example with unique content.

An Array of Aereo Antennas
If Aereo is another app on the box is that really better than giving customers an antenna and telling them to switch inputs to watch the station that isn't being carried?

The Aereo solution offers several benefits versus the clearly-has-been-found-to-be-unattractive antenna option:

  • The customer does not have to pick up an antenna (at the operator's office or a store).
  • The customer does not have to switch inputs.
  • The quality of the signal received by the customer should not vary with the customer's location, the way over-the-air reception from an antenna at his or her premises would.
  • The operator does not have to maintain an inventory of antennas

Furthermore, the Aereo app could be integrated into the cable video service in a much more complete way than as a wholly separate app.

 A cable operate could offer the following to its Aereo-style affiliate:
  • bundle your service with certain cable TV packages
  • integrate your offering with the cable TV electronic program guide
  • not count bandwidth usage by customers to view your services against any bandwidth cap we may have with customers (the elimination of the network neutrality rules would allow operators to favor certain IP traffic over other traffic -- this is an obvious place that flexibility could manifest itself)
  • incorporate your service with our billing system
  • pay you a flat rate for providing us the service or share of the revenue attributable for your service or compensate you on a per-subscriber basis
The cable operator could affiliate with more than one Aereo-style provider to offer additional choices to consumers, for example, perhaps one offers no cloud DVR storage, but a lower cost.

What might be a wise plan for a cable operator?

A cable operator should launch/affiliate with an Aereo-style service well before the expiration of their current retransmission consent agreements.

  • This service is an upsell opportunity for the operator's broadband-only customers.
  • The process of integrating the Aereo-style app in the set-top box will take some time, better to start the process well before it is "mission critical".

The downside to doing things early, of course, is that it will give the broadcasters more time to plan their response, whatever that may be.

Could an Aereo-style solution replace the carriage of broadcast stations by cable systems?

The short answer is no. The cable operator is still an MVPD and still has to offer the Basic Service Tier (BST). It is a legal requirement that cable operators must sell the broadcast tier to all customers who receive video service. For example, a customer who calls up the operator and just wants HBO or the expanded basic package (i.e., the package with ESPN, CNN, Lifetime, USA) must buy the BST as well.

However, the NCTA is lobbying to change this mandatory buy-through and their argument on this is a strong one. There is no mandatory buy-through for customers of DirecTV or Dish Network.

Furthermore, PEG (public, educational and government) channels are required to be carried in the BST by law. Additionally, broadcast stations which elect "must carry" (typically the less-viewed stations in a market) are guaranteed carriage on the cable system.

To address the concerns of local franchise authorities, cable operators could still provide the PEG channels to all video customers even if they eliminated the BST. Since those channels do not carry a license fees, the cost of doing would be negligible.

How would a cable operator drop a major broadcast affiliate?

The mechanism of retransmission consent is independent of any of the issues raised by Aereo. At some point, the current retransmission consent agreement between a station and the operator will expire. The station will make an offer for a renewal, usually with an escalating per-subscriber retransmission consent license fee. The two parties negotiate. If they can't reach agreement on terms, the operator cannot carry the station. All the Aereo-style-option does is create an alternative for the cable operator that's better than its current alternatives (BATNA in the parlance of Fisher and Ury). It would likely still be more attractive for the operator to negotiate a retransmission consent agreement than not.

Sometimes there is more in the negotiation than just the retransmission consent. For example, some broadcast stations provide the right to carry their local news programs on VOD as part of a retransmission consent agreement. Without such an agreement, the cable operator would not enjoy those rights.

Could the impact of Aereo go further?

Taking the broadcast service out of the cable TV ecosystem, in addition to sidestepping retransmission consent fees, would also appear to sidestep copyright fees payable for the distribution of such signals. Copyright fees are calculated as a percentage of revenue from the tier in which the signals are carried. If we assume that the current BST costs $20, then the copyright fee an operator would pay is a percentage of that amount times 100% of subscribers.

In the event that an Aereo-style service is available on the cable system and we assume the system is currently paying about $2 in retransmission consent fees, the system could reduce its BST retail price to $18 without harming its gross margin and then would also reduce its copyright fees for the broadcast stations by 10% as well.

Furthermore, if customers do not have to buy through the BST -- which presumably at this point only has the weaker TV stations the $18 tier may not offer a good programming value -- then the number of subscribers on whom copyright fees are payable also goes down. A win all around for the cable operator on the cost side.

Alternately, the cable operator could drop the retail price of the BST, now that it is missing its strongest programming. Since the copyright fees are based on a percentage of revenue, that cost would go down even if the number of subscribers did not.

Furthermore, cable customers would have the option of affiliating directly with Aereo (or an Aereo-style service) for their broadcast stations and use the cable operator only for cable programming services. At a certain price the benefit of doing so would outweigh the hassle to the customer of having to switch inputs.

So Aereo is a big deal for broadcasters?

As one lawyer very familiar with the retransmission consent scheme and its impact on broadcasters told me: Aereo is an existential threat.

I'm not sure that I would go that far, local broadcasters were still profitable before they started generating large retransmission consent fees.

What happens on the broadcast side if Aereo wins?

The broadcasters will lobby to change the law to define Aereo as an MVPD (and as such subject to Must Carry/Retransmission Consent)

If that doesn't work, the broadcasters will threaten to move the broadcast network channels to cable. Actually, Fox's Chase Carey has done this already. There are political issues associated with that -- broadcast licenses were granted for free, political figures would not look kindly on such a move.

If the whole channels are not moved off free-to-air television, the big programming companies will do what they always do, look at where their programming investment will get the best return. If the returns in the broadcast business go down (because there is less retransmission consent money there), more programming will appear on cable channels -- continuing the trend we've seen over the last 30 years anyway (e.g., ABC's Monday Night Football is on ESPN). In Australia, there is a law requiring some sports events to be on free-to-air television.

13 February 2014

Comcast's Offer for Time Warner Cable



A few quick notes about the proposed transaction:

  • Comcast's offer of $159 per TWC share is very close to TWC CEO Rob Marcus's proposal to sell the company to Charter for $160.
  • Comcast's offer has no break-up fee for either side, Comcast can abandon the deal at any time and Time Warner Cable, presumably, can entertain a better offer from Charter or someone else
  • Comcast has also offered to divest 3 million TWC subscribers, presumably to address concerns that the merged company would be too big; the "cats & dogs" of TWC's former national division would be likely divestiture candidates, unless some of them are contiguous to existing Comcast systems.
  • Comcast has made bold offers before and walked away when investor support for the deal was not there (its 2008 offer for Walt Disney)
  • Because Comcast and Time Warner Cable have few systems which compete directly with each other, there would be little direct impact on consumers -- their number of choices of providers would not be reduced. Consumer Reports looks at it this way. Comparing the impact on competition to the stillborn AT&T T-Mobile deal is off-base.
  • The deal is good news for the channels of NBC Universal, which now are more likely to gain carriage on Time Warner Cable's systems. NBCSN and Golf Channel, which are carried on digital in Time Warner Cable's New York City system (link is to .pdf), will likely end up with parity (expanded basic) carriage with ESPN.
  • The vendors that sell to the companies (non-NBCU programmers, hardware companies, billing systems providers) who will now be dealing with a larger customer and fewer attractive alternatives if they say "no" are the biggest losers if the deal goes through.
  • Charter is likely a loser if the deal closes. If it sees increasing its scale a business imperative, the biggest available target will be off the market. Cox and Cablevision are the next biggest available companies and they have rebuffed multiple offers to sell. The cable companies smaller than them (e.g., Mediacom) are much smaller with fewer than 2 million subscribers. Charter would have to buy nearly all of them to increase its scale as much as a Time Warner Cable deal would have.
  • Another loser might be Apple. TWC appeared to be creating an app for the Apple TV box; Comcast hasn't been, seeing its X1 guide as preferable.
  • Closing price of CMCSA on 13 Feb 2014 (the date the deal was announced) = $52.97. TWC = $144.81. CMCSA x 2.875 (stock exchange ratio) = $152.29. Implies some uncertainty about the deal closing.
  • Cablevision will still be the largest cable operator in the New York DMA by subscribers, but the combined Comcast-Time Warner Cable will be a major player in New York and the dominant provider in virtually all of the other top 25 DMAs (exceptions: Cox-Phoenix #12, Charter-St. Louis #21, see Rich Greenfield's chart @ https://twitter.com/RichBTIG/status/433960562309861376/photo/1
  • Slate's take on the deal negotiation -- it's not very different from any other time you call the cable company
Update (14 Feb 2014): Mark DeCambre on the website Quartz quotes a Gekko-like Goldman Sachs research note praising the deal for giving pricing power to the new company with the charming pull quote "M&A that drives an industry toward oligopoly is the good kind."
Update (16 Feb 2014): Paul Krugman's column in the New York TimesBarons of Broadband. Pull quote: "The truth, however, is that many goods and especially services aren’t subject to international competition: New Jersey families can’t subscribe to Korean broadband."
Update (18 Feb 2014): Another likely loser with this deal is Netflix. TWC was in talks to carry/sell Netflix to its video customers, something Comcast has rejected. Now, per Bloomberg, "the talks are on hold".
Update (19 Feb 2014): As my former colleague Howard Homonoff astutely notes, Google Fiber's announcement that it will enter additional markets is very good news for Comcast in securing government approval for the deal.
Update (19 Feb 2014): Another loser in this deal may be CBS which would see the TWC systems move from the recently-and-contentiously-negotiated deal to an older, more distributor-favorable Comcast deal, according to this LA Times article. It is standard in cable affiliation agreements for the acquirer to have the right to add one or all "after-acquired systems" to its affiliation agreements and delete the systems from their prior agreement. In fact, Comcast would likely do this for all its agreements that are more favorable than TWC's (and should TWC have any more favorable deals than Comcast, Comcast might be able to move its incumbent systems to those newly-acquired deals).
Update (20 Feb 2014): Bill Niemeyer of The Diffusion Group believes that John Malone may not have really wanted Time Warner Cable for Charter because the Comcast/TWC merger noise creates an opportunity for Charter to act under the radar. Maybe, Dr. Malone does prefer to be out of sight of the regulators, but I find it hard to think that anything Dr. Malone does will go unnoticed.
Update (20 Feb 2014): DirecTV's CEO thinks the deal should get "appropriately scrutinized". In the past, DirecTV has criticized Comcast's dealmaking for its regional sports networks.