21 November 2014

10 November 2014

DirecTV's Complaint Against Al Jazeera America Is Made Public

Today, the Hollywood Reporter and Courthouse News Service reported that the judge hearing DirecTV's claim against Al Jazeera America, Judge Elizabeth Allen White, believed that the complaint should be made public (see the complete albeit redacted version at the end of this post). In essence, DirecTV's claims cover two topics:

  • Service definition (does the AJA service meet the definition in the affiliation agreement, which was done with its predecessor service, Current TV?)
  • Most favored nation provision (did AJA, the company, offer more favorable terms to cable operators that it has to provide, but has not provided to DirecTV?)
The recourse that DirecTV is seeking is to terminate the affiliation agreement and both the service definition and the most-favored-nation provision could represent a way to do so. DirecTV claims that AJA is in material breach of the former.
"None of the proposed programming for the renamed Service fulfilled the Agreement's Section 1.2.1 requirement that the Service consist...[redacted]" [quoted from the complaint]
DirecTV also appears to be claiming that others had more favorable termination rights (e.g., Time Warner Cable, which famously dropped Current when its ownership changed hands), appears to have had a "change of control" termination right that DirecTV presumably did not. DirecTV hired PriceWaterhouse Coopers to audit AJA's compliance with its most-favored-nation provision.
"But AJA has refused to allow PwC to audit the necessary documents to determine whether AJA has complied with its MFN obligations in this regard, and is therefore in breach of the Agreement." [also from the complaint]
Making the proceedings more interesting is the lawsuit between Al Gore, the former owner of Current TV, and Al Jazeera about the money that Gore says Al Jazeera owes him (ironic link to Fox News!) and the countersuit that Al Jazeera filed against Gore as the seller of Current. It is beautiful, if you love chaos (or Kaos, in the world of Get Smart).
I do not claim to know who is right about what parts in any of these disputes. The dispute is notable because relatively few cable network affiliation disputes make it to court.

15 October 2014

HBO Go Without Cable, Maybe

HBO has announced that it plans to offer a streaming service without a cable subscription sometime in 2015.

As way of background, to date, HBO's streaming platform, HBO GO, has only been available as "added value" to an HBO-on-cable-television subscription. (Cable, for these purposes, includes DirecTV, Dish, Verizon FiOS and AT&T U-Verse -- anything the FCC would call an MVPD).
For those who doubted that such a move was inevitable, you were wrong. For those who think this changes everything, I suspect you are also wrong.

Here's why: I strongly suspect HBO will be marketing the streaming service, let's call it HBO GO for these purposes (although it may be a "new" service with a different name and content) in conjunction with its distribution partners -- in this case, the ISPs who provide the nation's high speed home Internet access. And those companies just happen to all be distributors of HBO, the cable channel, on their multichannel television platforms.

After all, many "cable" operators have more broadband customers than video customers.

From the named providers on Leichtman Research's 2Q14 list of top broadband ISPs, exactly two of them, Windstream and Fairpoint, do not offer (yet) their own facilities-based multichannel television service (and both of them do on a non-facilities-basis via partnerships with Dish and DirecTV. respectively).

Much like the HBO with a cheaper smaller cable TV service offered last year (see GigaOm's article from December 2013), the customer will still have a relationship with a distributor. For the distributor, HBO GO represents an "upsell opportunity", something they don't currently have with Netflix, which sells its service direct to consumers.

To actually go direct to consumers would risk HBO's relationship with the multichannel television providers, who, it has often pointed out to the financial community, allow it to be much, much more profitable than Netflix. No need to kill that egg-laying goose.
HBO is here depicted as a woman wearing a purple suit. The MVPDs are represented by the fowl.

Perhaps HBO will offer HBO GO via ISPs that are not also multichannel television distributors, but, if HBO does not, they aren't giving up very much of the potential market. And HBO can always change its mind about that later.

The big losers in this are the multichannel video providers that are not ISPs: DirecTV and Dish Network.

Update (17 October 2014): More support for my view: It looks like the streaming-only HBO service may cost $15 per month, about the same as it costs as an add-on to basic cable.

Update (23 October 2014) via the Wall Street Journal: “Why is giving our distributors the opportunity to sell them an HBO subscription anything less than a win-win?” [HBO CEO] Mr. Plepler wrote in an email. “To us, that’s not cannibalization, that’s growth.” (full article --
subscription required)

Update (3 November 2014) via Multichannel News: About the new HBO streaming service, Richard Plepler said it "would at first be marketed to the 10 million broadband-only customers of its cable and telco-TV affiliates; operators would handle all billing, customer service and customer control; and the service would be sold in partnership with distributors." full article

Update (6 November 2014) via Deadline: Richard Plepler, HBO's CEO "aims first to go after 70M pay TV homes that do not get HBO. In broadband 'we think there’s 4 to 5 million that we can also get with our partners. I’ve talked to all of our distributors. We want to lean in with a new effort in the new year.… I see nothing but upside for us, for the consumer, and for the distributor.'” full post

Others on the news:
David Carr in the New York Times
Will Richmond on VideoNuze
Howard Homonoff on Forbes
Sahil Patel on VideoInk
Mike Farrell on Multichannel News
Peter Kafka on Re/code
Jon Russell on GigaOm
David Lieberman on Deadline
Joel Espelien for The Diffusion Group

06 October 2014

An OTT Watershed Moment

We could soon be looking at the watershed moment for over-the-top video: According to a Multichannel News posting, that the FCC is considering making "being a multichannel video program distributor" (MVPD) an option for online video providers (the conclusion is implied from the actual FCC .pdf release). To date, online video providers have not been able to be considered MVPDs because they do not own the facilities that transmit channels of programming to end users.
Sony's OTT video offering will be delivered to its PlayStation game consoles

In one fell swoop, this could clear up three big issues for potential OTT providers who are direct MVPD competitors, offering a package of linear "cable TV" networks.

#1 Access to top name-brand broadcast and cable network programming

Much like cable and DBS, any MVPD would have the right to negotiate with broadcast TV stations over retransmission consent and the stations would have the right to demand must-carry. For example, Aereo, which the Supreme Court declared was not legal because it distributed programming like an MVPD, but was denied the right to be an MVPD when it used the Supreme Court's argument at the US Copyright Office, would no longer be in a legal no-man's-land. Clarity on this point is overdue, as David Oxenford in BroadcastLawBlog notes, the Sky Angel case has been before the FCC for a long time, long enough, it turns out, for Sky Angel to go bust in its over-the-top incarnation.

#2 A way around online streaming restrictions in MVPD affiliation agreements

Restricting the distribution of cable programming on some "other" technology was a backdoor way to get some exclusivity, now the other MVPDs will have to negotiate exclusivity versus other MVPD competitors through the front door and many programmers have, not unreasonably, been historically reluctant to do exclusive deals that reduce MVPD competition.

#3 A way around rights issues for cable TV programming and advertising (e.g., SAG members get paid differently for commercials produced for the Internet than for those produced for TV)

Right now, only companies that explicitly clear "Internet rights" are allowed to put the programs on their TV channels on the Internet. Once an online video distributor is an MVPD, the linear stream of programs, as presented on a cable program service like Lifetime, can go to any MVPD.

[If the programmer owns the program and all its rights, like Major League Baseball, one can find MLB Extra Innings on cable TV or DBS (with internet streaming as added-value for "authenticated" subscribers), or as a stand-alone OTT offering at mlb.tv (although the TV commercials are usually not included in the Internet stream as the advertisers do not want to pay the performers for both the TV and Internet exhibition).]

Unfortunately for the soon-to-be-nascent-direct-MVPD-competitor, the over-the-top business still has two big remaining issues:

#1 Bandwidth caps

It might be politically poisonous for a cable MSO facing a direct competitor delivering "cable TV service" over-the-top to announce bandwidth caps that would make it uneconomic for any of their customers to use such a service. That said, the cable industry, like many other industries, has historically looked to protect its business against competition. Certainly that's what Netflix thought Comcast was doing when the streaming performance of Netflix customers using Comcast as their ISP declined in late 2013. Bandwidth caps would be great protection for MSOs against online video competition.

#2 The reality of the marketplace

This combines several issues: Is the consumer offering attractive enough? Are the programmers willing to negotiate with these new MVPDs? Are there terms that the programmers will find attractive enough that create a business opportunity for the new MVPDs? On the first one, Sony's rumored $80 per month offering is considerably more expensive than many had hoped.

Cable TV programmers have been supportive of new, clearly legal entrants to the program distribution business. More competition among distributors is always good news for the program suppliers who now have a new set of customers. Viacom certainly thinks so. Going over-the-top and preserving the existing pay-TV packaging (and business model) appears to be more attractive than going over-the-top on one's own like World Wrestling Entertainment's $9.99 monthly offering.

Rather than going-head-on against the pay-TV incumbents, it would seem that a more prudent course for new MVPDs would be to find a segment of the marketplace that is un- or poorly-served by the incumbents, but which also has high broadband Internet penetration. That may be a difficult combination to find.

My earlier post: The Virtual MSO Opportunity (19 July 2013)
Update (14 October 2014): Aereo asks the FCC to classify it as an MVPD (via Deadline), Brian Fung in the Washington Post thinks Aereo is making this request only in the short-term
Update (29 October 2014): FCC Chairman Tom Wheeler makes his views explicit in an FCC blog post "Tech Transitions, Video, and the Future". In short, he supports OTT video providers getting the rights that MVPDs have, believing that it will foster competition.

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: