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.

10 January 2014

Aereo Get Its Betamax Moment

If word of this has not found you already, the United States Supreme Court has agreed to hear the major broadcasters' case versus Aereo, the streaming video provider. Perhaps the most surprising thing about the Aereo case is how quickly it has made it to the Supremes.
Not these Supremes
Less than two months ago, at a dinner filled with media folk, I had shared that I thought Aereo was the most interesting media business development to expect in the next 12 months. Later that evening, an experienced FCC lawyer told me that the Aereo case would never be resolved in the next year. I figured he knew better than I and filed the thought away.

I wish that I could claim that I had great insight into Aereo's legal battles, but it appears that the reason my lucky pronouncement proved accurate was an unusual decision made by Aereo.

Typically in such cases with new technologies winding their ways through the court system, the defendant, provided is allowed to offer the service, wants the case to make it to the Supreme Court as late as possible. The theory is that once there are lots of users of the product, shutting down the new service becomes a political issue. (Do you want to take away someone's Betamax?)
Sony's Betamax, the Aereo of its day, as noted by the Los Angeles Times
Since Aereo is launching in many new markets, it would certainly have more customers a year or two from now. However, the wild card in the Aereo case is that there is another company offering what appears to be a similar service, FilmOnX, which has faced similar legal actions by the major broadcasters. FilmOnX has been much less successful making its cases than Aereo has. FilmOnX has lost in court in California (when it operated under the name "Aereokiller" - clever) and lost in court in Washington, DC.
United States Supreme Court, as rendered in architecture
It is not clear to me if FilmOnX uses the same technology as Aereo. Film On X is run by erratic billionaire Alki David. The background of the Aereo CEO, Chet Kanojia, is straight up tech startup guy (link is to a .pdf). The idea that an erratic billionaire built an equivalent system seems dubious to me, but maybe it is less complicated than I imagine (although that would be consistent with Aereo's claim that it can breakeven in a market with only about 6,000 subscribers).

It appears that Aereo faced the following choice:

Allow time to pass. Sign up more subscribers. Possibly win at lower courts. Certainly take the risk that Film On X will be involved in other cases that may hurt Aereo's ultimate position, an argument well articulated by my former colleague Howard Homonoff.

OR

Save the time and legal fees and try the case now. 

One business factor that may have led Aereo to make the choice to get to the Supreme Court as soon as possible is the fact that it very well may not have that many customers. Whether Aereo has 1,000 or 10,000 or 100,000 customers may not matter in terms of the political dimension of a court decision. It seems pretty clear that whatever the size of Aereo's customer base, it isn't in the millions. Meanwhile, as a cash-burning tech startup -- it has spent at least $65 million -- the shorter the cash-burning portion, the better for the investors. If Aereo loses its case, the investors have found out a few years and many millions of dollars sooner -- perhaps the company can employ its technology in some other, legal way to find a business with returns to its investors. If Aereo wins its case, one risk in the business would be eliminated and it would likely be able to raise its additional funds on much more favorable terms than it has achieved to date.

Also:
Another take, which has a nice discussion of the cloud computing issues at stake in the case (The Vertere Group)

11 December 2013

Comcast's Xfinity Store: Looking Deeper on the Despicable Me 2 Headline

I was surprised by the reports of the strong showing of the Comcast's new Xfinity TV Store in the sale of Despicable Me 2

A strong start for the Xfinity TV Store is counterintuitive in several ways:  Apple's iTunes Store or Amazon.com, the big sellers of downloadable content, are generally considered good retailers of content. Xfinity's brand is not known for downloadable "owned" content. Usually sales for a new business are pretty modest as potential customers wait to see if the vendor is reliable, etc.

Comcast, which is always aggressive in playing up its good news, issued a press release that its new store sold more downloadable copies of the title than iTunes or Amazon or Walmart's Vudu or anyone else. There is another data point in support of a strong start for the Xfinity TV Store: Todd Spangler reported in Variety that the Comcast store was also the top seller of The Hunger Games for its first 2 weeks of release.  While Despicable Me 2 is from Universal Studios, which is owned by Comcast (and may have gotten some extra promotion for that reason), Lionsgate, the studio behind The Hunger Games, is a true third party. Is it possible that Comcast is already an important outlet in the electronic sell-through market? If so, how and why?
 
While the Xfinity store is available to all US Internet households on the web, there was probably little awareness of it as a purchase option outside of the 20% or so of the households that are Comcast subscribers. When I searched for "Xfinity Store Despicable Me 2" I did not find the sort of product index page like one finds for Amazon or iTunes, I found this -- no download to own online link at all under "Available Online". Instead, the circled text says "The full movie is currently not available Online."
It doesn't appear that Xfinity is providing any special value to consumers. The Xfinity-purchased Despicable Me 2 is not offering any better/different features than those available from other sellers of the title. If anything, Xfinity's TV Store page to market the title is much weaker.

Clicking on the "Available on TV" button on the Xfinity Despicable Me 2 page yielded this screen: As you will note, at this time there is no online rental option, only a purchase option (see inside the marked oval) and no mention at all that consumers making this purchase can also view it online, download to other devices, etc. So the big innovation does not appear to be the play anywhere feature of the purchase, but simply that Comcast is effectively using the pay-per-view movie rental store to sell movies before they are available in the rental window. Comcast isn't doing something better than Amazon or iTunes, they are doing something different.


Upon close inspection, the Xfinity store does have two clear advantages over iTunes, Amazon and Vudu. First, the store is available in the cable system's electronic program guide, the primary place viewers search for something to watch. Second, purchases from Xfinity are integrated into the cable set-top box's navigation; the viewer does not have to switch his or her TV to input 2. 

In contrast, purchases from Amazon or iTunes require a separate search (on a computer or tablet or phone) and typically require the use of a separate device (Roku or Apple TV or blu-ray or Chromecast) for viewing on the household's main TV. Also, that TV has to be switched to another input. While switching inputs might not seem like a big deal to many, only 2 of the 4 members of my household can do it reliably and Bright House, the cable MSO, offers a tech support page devoted to the topic

Strategically, if the MSOs enter the electronic sell-through business in a bigger way and these movie-rental-searching-during-the-sell-through-window and "input 1" advantages are borne out, the cable distributors could become even more important purchasers of content. The last decade has seen MSO's bargaining power eroding with strong basic cable programmers and top broadcast stations. Being a force in electronic sell-through would not change that. However, on a more macro level, strength in electronic sell-through would tend to improve distributors' bargaining position with content suppliers. For that alone, this is a development to monitor. 

Update (10 Feb 2014): Lionsgate's CEO stated on 7 February 2014 that Comcast represents 15% of the US electronic sell-through market and that he expects other MVPDs will enter the market.
Update (10 Mar 2014): Netflix's House of Cards will be sold in the Xfinity store, which Comcast Cable CEO Neil Smit notes "has surprised us" in how well it has done.



12 November 2013

Over-the-Top Video and The Innovator's Dilemma

Everyone in the ecosystem is wondering about the future of multichannel television and no one knows what to expect. A good theory can help sort out the unknowable. In this post, I will work through what The Innovator's Dilemma theory suggests for over-the-top video and multichannel television incumbents. The fit of theory and subject is pretty good and helpful for seeing the forces shaping offerings into the future.
"Prediction is very hard, especially about the future" - Niels Bohr, Danish physicist
Clayton Christensen's The Innovator's Dilemma is a highly influential book about business markets, particularly what happens when a disruptive new technology appears on the scene.

From Christensen's website:
An innovation that is disruptive allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.
Characteristics of disruptive businesses, at least in their initial stages, can include:  lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics.  Because these lower tiers of the market offer lower gross margins, they are unattractive to other firms moving upward in the market, creating space at the bottom of the market for new disruptive competitors to emerge.
The disruptive innovation definition above is a good fit for over-the-top video, notably YouTube and Netflix, but also Hulu, iTunes, Amazon Prime and Aereo. All these services are, in some form, arguably lower quality and, individually, less expensive relative to multichannel subscription television ("cable TV" for short). If you have cable and try to recreate cable TV by substituting one or several of them, you will probably be disappointed overall. (Many have tried cord-cutting and written about it.)

[The one part of the definition that does not fit is that it is not accurate to say that cable TV "was historically only accessible to consumers with a lot of money." It is clearly a mainstream service by any measure. The service that requires "a lot of skill"? -- that's probably BitTorrent.]

Christensen's theory is that eventually the improvement of the "inferior" new product gets a toehold in a small market that is ignored by the incumbent. Gradually the new product improves, largely through technological advances. Over time that product becomes a better and better substitute for the incumbent product and then, usually all of a sudden, the economics of the incumbent's business are destroyed by the newcomer.

Applying the theory to this case, the toehold market for over-the-top video may be mobile. Selling a separate mobile subscription was basically impossible, as Qualcomm found with its Flo service. However, multichannel television was (and largely is) unavailable on a smartphone and all of the top over-the-top services are easily available on such devices.

How does over-the-top video (OTT) become a bigger threat to the multichannel TV ecosystem:
  1. The technical quality will improve (LTE, 802.11ac wifi, gigabit ethernet to the home)
  2. The quality of the content will improve (YouTube's investments in channels, Netflix and Amazon's investments in original content, continued acquisition of quality library content)
  3. The availability of the service will improve (Aereo's expansion to other markets, more ubiquitous public wifi)
  4. The convenience of the service will improve (e.g., better interface design, more accurate recommendation engines, DVR in the cloud, etc.)
The frightening thing for the incumbents is that none of these developments above require OTT services to do anything other than what they have been doing. Notably, they do not have to take on the risk of making a frontal attack on cable and licensing the popular cable channels.

Even more frightening for incumbents is there is a strong recent history of mobile solutions devouring home-based solutions. More than half of households don't use a landline phone and portable digital audio has done a similar number on home high-fidelity equipment. It is lost on no one in the TV business that this happened without cellphones ever sounding as good as a landline nor an mp3 sounding as good as a CD.

The usual strategy for incumbents, well described in Mark Suster's excellent blog post Understanding How the Innovator's Dilemma Affects You. is that the incumbent provider increases "spending on features / performance / functionality. They gather with their cadre of high-requirement customers and have planning sessions about how they can make even more performant products."

Cutting the price is not an appealing option for the incumbents because they do not want to reduce their profits and cannot cut their prices (and costs) sufficiently to compete with the upstarts. After all, these are big, successful profitable business -- they can't throw that away. So, instead the incumbents respond to the competitive threat by improving the product

The problem with the improving-the-product strategy is that it does not work in the long term. As Suster puts it "customer requirements don’t grow exponentially relative to their existing line [i.e., current service]...over time to the new entrant's functional offering [gets closer to the incumbent's] and there is a huge and rapid sucking sound that pulls the bottom out of the market as waves of customers 'trade down.'” In other words, the multichannel distributor can add all the value it wants, but that doesn't mean the consumers will continue to see their expensive package as their best option in the marketplace.

[A multichannel distributor, of course, could always cut its costs by dropping channels, especially expensive ones. However, given the competition between cable, DBS, telco TV and upstarts like Google Fiber -- such a strategy would certainly hurt its attractiveness to the large mass of consumers who want multichannel television. Inviting current customers to shop for a new video provider by dropping their favorite channel might also lead to such customers finding a new broadband provider as well.]

So, that means OTT going to kill cable TV, right?

I don't think that is clear that cable TV is a goner. Unlike phones and stereo equipment, home TV screens have gotten much bigger in the past decade. High definition and DVRs have improved the in-home TV experience. If consumers have spent more on home entertainment gear, it seems somewhat incongruous that they would be willing to forego the premium television content that takes best advantage of it.

The role of content in this marketplace seems like a different factor than anything in Christensen's theory. There is nothing quite analogous (from the consumer's perspective) as a supplier of content for a disc drive or a piece of construction equipment.

OTT providers have some of the content from cable TV -- Aereo provides the live broadcast signals, individual programs are available on Hulu, Amazon, Netflix and iTunes. Live sports is available, via the "season ticket" out-of-market packages from MLB, NBA and NHL, but the more popular local teams and national games are not. There is a lot of original content available on Netflix and YouTube at various levels of quality. It is fair to say that the pay TV ecosystem has locked up the early windows on much of the best content that is available on TV and OTT might not be able to offer a material amount of that for a long time.
Still, as Howard Beale notes in Network, one of my favorite movies, TV is primarily in the boredom killing business, and at some price, not everyone needs a full package of first window premium content to kill their boredom.

What seems more likely than the decimation of the pay TV ecosystem, is its gradual move to become more of a luxury good, rather than a 90%-penetrated household utility. The opportunity for OTT video certainly increases as the spread between the cost of cable TV and the OTT alternatives increases. Netflix streaming (and Aereo and Hulu Plus) has held at $7.99 (each) per month for a while, but that might not hold in the future.

The more interesting question is: how do the programmers respond to the (inevitable) decline in the number of multichannel subscribers?

It seems unlikely that programmers will sell their linear services whole to the OTT providers, since the OTT providers probably don't want them [Aereo is the exception, since it is in the linear streaming business already. It will likely add some basic services to join last-year's addition, Bloomberg, and adding premiums that can be sold a la carte like HBO or Showtime or Starz would appear to be consistent with the Aereo model. It is less clear if those programmers would be willing to sell to Aereo, after all Starz famously stopped selling to Netflix because it was messing up its value proposition for pay TV distributors.]

What's likely is that programmers will sell greater amounts of individual programs to the OTT providers -- that is just a bigger play on something they are doing already. Disney's recent deal to send new, original Marvel programming to Netflix is a great example of this. In the past, Disney would have taken this programming -- which is not needed by its current cable channels -- and created a new cable channel.

Defining programming more narrowly -- around the cable networks' brands -- the picture gets fuzzier. The big distributors are not enthusiastic about paying higher license fees for cable networks, but the greater competition in the distribution market has led them to do so -- they can't afford to be without top channels for too long. While conceding the money, the distributors are looking for added value in those deals (e.g., TV Everywhere rights, expanded VOD rights) and one form of added value are longer windows in which the programming is exclusive to the cable network and does not appear on their websites, Hulu, Netflix, et al. After DirecTV settled its standoff with Viacom in 2012, its chief negotiator said “My expectation is that they will not increase the amount of free programming they have online.” The story after Time Warner Cable and CBS settled was similar -- digital rights was the contentious deal issue.

Since the movement of programming on a show-by-show basis is inherently fluid, the speed at which content goes from the cable TV ecosystem to the OTT ecosystem (and possibly back again, as in the Fox-Comcast library deal) can and will ebb and flow with the prices being offered.

This fluidity might suggest that the fit of The Innovator's Dilemma to the disruptive innovation of over-the-top video is not perfect. Cable TV is a mass market product, not an expensive, exclusive one, and it is not just a product, but also a distribution channel for content. This disruptive innovation may reorient the marketplace, but not lead to only a single winner.