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.


09 October 2013

Intel Media Lessons

Word has come out that Intel Media, which has hired some 300 people to work on its over-the-top (OTT) cable service competitor, is now looking to Samsung and/or Amazon to assist in the business. That doesn't look good for the first true OTT competitor to cable.


What have we learned here:
  1. To compete on the high end of the multichannel television business, you need to have all the channels. Having any significant gaps in the lineup means your product isn't meeting the expectations of consumers for a super-premium service. So, Time Warner Cable's Internet restrictions with some programmers, even if a super-premium service provider has networks 1-15, gaps in the coverage of networks 16-50 are problematic. TWC CEO Glenn Britt made these restrictions public at the Cable Show in June.
  2. To compete in the low end of the market, a new entrant must find a way to get more favorable pricing from programmers and there is little reason for the programmers to support such an effort.
  3. If the programmers require Intel to meet minimum subscriber guarantees, that creates additional risk for Intel to enter the business beyond the expense of creating the distribution system and marketing it. Perhaps the programmers are unwise to do this -- after all, if Intel doesn't launch, then the multichannel distribution market (buyers of programming) is less competitive than it is otherwise, and that's not good for the programmers (sellers of programming). On the other hand, the programmers all risk annoying/jeopardizing their relationships with the current customers by selling to an OTT provider -- this is new territory and this threat/potential threat has been recognized by distributors for at least a decade. If programmers are going to antagonize their core customers, they might reasonably expect that Intel makes it worth their while. Additionally, there may be incremental costs to distribute their service over the Internet -- programming costs, creating a separate feed with separate advertising, etc.
  4. The opportunity to compete with the multichannel incumbents may be smaller than Intel thought when they first pursued this effort. In the last year, it appears that the multichannel subscription television business has peaked, at least in terms of number of subscribers.
  5. Perhaps an executive with experience outside the US was not the best choice to lead this business. The media and television businesses are still highly provincial as opposed to international. All of the problems that Intel has encountered were well known to me and likely dozens of other people with long histories in the US multichannel business. For clarity, I don't know Erik Huggers at all and have never heard anyone speak ill of him in any way -- my point is based solely on his CV. Having lived in the UK, I can say that its television marketplace is very different from that in the US in a number of ways -- the huge role of the public broadcaster (BBC), the national orientation of the media as opposed to local, the dominance of DBS (BSkyB) over cable in market share, the requirement that facilities-based Internet providers wholesale their infrastructure to competitors.
  6. Any OTT video service faces the potential threat that limits on the amount of data a typical home broadband customer might consume could make using the video service (or using it extensively) impossible or cost prohibitive. This uncertainty certainly (pun intended) makes a big investment in a new business more problematic.
I'm sure there will be a more direct over-the-top competitor to multichannel subscription television someday, but that day looks further out now than it did a few months ago.

Updated (30 October 2013): According to Peter Kafka at AllThings D, Verizon is in talks to take Intel Media off of Intel's hands.
Updated (21 November 2013): According to Reuters' analysis, For Intel, Hollywood dreams prove a leap too far.
Updated (26 November 2013): According to Bloomberg, Intel is asking for $500 million for Intel Media/its OnCue assets

17 September 2013

Cox Has Shut Down Its OTT Service FlareWatch

Cox has abandoned its over-the-top service FlareWatch, which only launched around the start of July (link is to my initial post on Flare). The trial of the service ends 27 September 2013 and "Becky" from Cox Customer Care reports that the company will refund customers for their out-of-pocket costs for the service (e.g., equipment). Confirmation is in the tweet below. I believe this news has yet to be reported anywhere else.


A reader of this site and potential Flare customer, Teddy Wong, contacted Cox about subscribing to the service in early September and reported that his "order was cancelled without notice". Certainly not the response one would expect from the cable incumbent with the top reputation for customer service.

Prior to Cox's tweet, an attempt to access the website for the service, watchflare.com, yielded a page with the logo and the message "Service Unavailable", and a "503 Service Unavailable" error message, although through Google I can still reach the page with the Flare pricing and information about the service.
The Flare index page appears to have been taken down
But the detail and order pages are still accessible
Speculating, here's some reasons that Cox has pulled the service, quickly and in a seemingly unplanned fashion:
  • Broadcasters and cable programmers have notified Cox that they have not granted rights for such a service.
  • Cox has noticed that the lower-priced Flare service is cannibalizing their traditional cable TV service to a much greater extent than it is adding revenue to Internet-only customers
  • Cox is noticing technical problems delivering a high quality version of the service
As I noted in the earlier post, I believe that Flare is an unprecedented service. While many cable operators offer some, most or all of their cable TV lineup to devices other than traditional televisions (e.g., web browser, iPad, Roku apps), all of them are providing it as "added value" to cable TV subscribers who also subscribe to the operator's cable Internet service. None are offering it as an alternative. The major broadcasters and cable programmers like the current pay-TV ecosystem and could be threatened by (and unwilling to support) any new precedent.

The only over-the-top service from a traditional operator is Dish's DishWorld service which is delivered via the Internet to Roku boxes, Macs, PCs and several other devices. DishWorld, however, does not deliver any household name US cable or broadcast services. The closest thing to such a service on its lineup is Bloomberg TV, which itself is streamed online at bloomberg.com. Most of DishWorld's 13 English-language channels are all from international programmers (e.g., France 24, RT [formerly Russia Today], Euronews).

Update (3 October 2013): Erik Brannon of IHS speculates/calculates that Flare was shut down because it wasn't profitable enough. This theory does not ring true to me; Cox certainly knew the margin on the service before its launch and could have priced it higher to address this concern. Brian Santo's post in CED sees through the IHS analysis, and adds quotes from Cox which also deny Brannon's speculation.
Update (1 November 2013): Cox is evaluating a next-generation IP video service (like Flare) per Steve Donohue in Fierce Cable.
Update (4 November 2013): Donohue's interview with Cox's CTO Kevin Hart who said that Flare customers were buying the service in addition to Cox's video, which seems surprising and counter-intuitive.



12 August 2013

CBS-TWC Standoff Continues: New Yorkers Held Hostage


In nearly every programming dispute that arises and goes on for longer than a few hours, the distributor makes a public offer to restore the programming and make it available to customers on an a la carte basis with the programmer getting 100% of the proceeds. Time Warner Cable CEO Glenn Britt showed that he loves this old chestnut as much as the others, the full text of his highly disingenuous letter is here.

This tactic is a favorite of Cablevision. Here's a rundown of Jim Dolan offering it to the Yankee's YES Network in 2002. 

It didn't work then. It won't work now. It never works.

Almost all cable channels are bundled and the programmers and operators prefer it that way, these a la carte offers are just public relations tactics designed to make it appear to Time Warner Cable customers that they are doing something. After all, any serious business-to-business offers are not communicated via open letters to one party's customers. As the New York Times' David Carr noted in his commentary:
Leave us out of it. We know that you are fighting over lucre, not our inalienable rights as cable consumers. Pretending that you are fighting on our behalf rather than in the interests of your shareholders and executives is infantilizing and unbecoming.
More pictures from the front, these from the TWC iPad app, from a few nights ago.

The "slate" for CBS

The slate for Showtime, with the iPad guide on the left

The slate for Smithsonian, still without mention of its name :(
Starting Sunday, 4 August 2013, CBS has filled WCBS's usual channel 2 (702 HD) with Starz Kids & Family. Premium networks, particularly secondary ones like Starz often offer "free previews" to increase sampling for their channels; Time Warner Cable is likely paying little or nothing for this "substitute programming". The choice of the Kids & Family channel from the Starz multiplex likely reflects the fact that it is the only Starz feed without uncut R-rated movies. CBS is received by all cable customers, Starz only by those who make a specific decision to purchase it.

As expected, CBS didn't think much of the TWC proposal. Moonves' letter.

Variety (Todd Spangler) reports that Time Warner Cable's brand is suffering more than CBS's. Distributors always suffer more in these disputes, since the customer is paying the distributor. Also, his report that Under the Dome piracy is going up with the CBS-Time Warner Cable blackout.

CBS's exclusive, 4-days-post-air deal with Amazon for its summer hit Under the Dome appears to be a big stumbling block for TWC. It appears that in the expired retransmission consent agreement with CBS, Time Warner Cable had VOD rights to prime time shows. Those VOD rights in the expired deal might have been non-exclusive and might not have applied to all prime time programs, but, to the extent that CBS is looking to provide much less this time around, it is no wonder that TWC might object to the change, especially amid a much higher cash fee.

One sees reference to this in TWC's CEO Glenn Britt's public letter offer (not the non-starter a la carte offer I mocked above).
In the interest of getting CBS back on our cable systems today, we write to propose that CBS and Time Warner Cable immediately agree to resume carriage with the new economics TWC reluctantly agreed to during our negotiations, while employing all the other terms and conditions of our recently expired contracts. Although those terms are not ideal to CBS or TWC, and would leave TWC and our customers without the digital rights that CBS has provided to others, since both parties have lived under those terms productively for many years, we believe we should continue to live with them in the interest of restoring CBS immediately for the benefit of consumers.
The key phrase is "the digital rights that CBS has provided to others".

The other developments in this exceedingly predictable dispute are that over-the-air antenna sales are way up and local news ratings are down in the effected markets. Politicians, like new Massachusetts Senator Ed Market are upset that consumers are in the middle of this dispute, but, of course, that is a necessary consequence of the retransmission consent scheme that he helped write.

This has led to discussions about how the retransmission consent structure could be fixed. Rich Greenfield has a suggestion in his blog post today, but unfortunately, it makes little sense. In essence, he wants all the MVPDs in a market to negotiate retransmission consent jointly with a broadcaster, so that if the negotiation fails to reach an agreement, all of the MVPDs will be shut off. Essentially, his solution is that anti-trust laws are suspended to protect the MVPDs from competitive forces in the acquisition of this content.

The elimination of retransmission consent (while preserving must carry) seems simpler and more logical, if one were going down this path. Alternately, some sort of compulsory license could provide an additional revenue stream for broadcasters (if Congress feels that appropriate) and predictability to those in, or considering entry into. the MVPD marketplace. I am not advocating such structures, but they would be ways to move public blackouts out of the mix.

06 August 2013

A Milestone: An MSO's Broadband Subs Exceed Its Video Subs

For all the talk of how broadband has become the core service for cable TV operators, famously by Time Warner Cable CEO Glenn Britt in 2011, for many operators, the number of video subscribers has continued to exceed the number of Internet (or high speed data or cable modem customers). Charter, one of the largest US cable companies, hit a milestone in the second quarter of 2013. It reported 3.924 million residential high speed data customers and 3.917 million residential video customers. No other major publicly traded cable operator has ever reported that.


2Q13 Subs in 000       Video  Broadband   Broadband/Video
Comcast               21,776 19,986      0.92 
Time Warner           11,720 11,074      0.94 
Charter                3,917   3,924      1.00 
Cablevision            2,868   2,787      0.97 
TOTAL                 40,281 37,771      0.94 




02 August 2013

Pictures from the Front: CBS-Time Warner Cable

WCBS slate
As you may have heard, CBS is not being carried by Time Warner Cable, effective 5PM ET. These are my photos of the "slates" that TWC has put up on the channels for CBS, Showtime (including its sister services The Movie Channel and Flix) and Smithsonian Channel. For those scoring at home, CBS Sports Network (formerly CBS College Sports, formerly College Sports TV) is still on the cable system, apparently that deal is not coterminous with the others.
"No CBS for you."
On some level this is a very simple dispute: each side will be losing during the dispute, but figures that the other side will be hurting more. CBS will reach fewer advertisers and will not collect retransmission consent fees (per its expired contract which is at a lower rate than it wishes now). Showtime, of course, will not collect its affiliate fees, nor will the much smaller Smithsonian Channel. Some analysts, notably BTIG's Rich Greenfield think that CBS is vulnerable because the summer is full of reruns and football will not return for a few months. While it is true that high profile programming would improve CBS's hand, even in the summer, the weekly cume of a Big 4 network is over 90% of households, that is over 90% of households are watching it sometime during the week. That's a figure much larger than any cable network. A lot of people will notice CBS is missing. Greenfield's interview on CNBC is embedded at the bottom of this post.

Showtime slate 
Time Warner Cable, for its part, faces the risk that its customers will look upon it less favorably. Time Warner Cable's risk takes a few forms. Most prominently, customers may defect to other providers. Changing providers is not a snap decision for most consumers, however. The way this phenomenon tends to play out is more in concert with the natural churn in the business. If you are potential Time Warner Cable customer in one of the effected markets, would you sign up with a provider that doesn't have CBS and Showtime right now, or would you connect with Verizon or AT&T or DirecTV or Dish Network or Aereo right now. It is hard to believe that the lack of CBS would not put a damper on TWC's retention efforts and/or does not represent a marketing opportunity for its competitors (not that they will be free of the same sort of conflicts in the future, save Aereo, the point is that for people making a purchase decision now, this is a material and relevant issue). More broadly, Time Warner Cable will probably have a hard time upselling any of its new services (like Signature Home) when customers are, understandably, upset that their expect service is not be delivered the way that they expect.

Smithsonian slate -- how humiliating, it doesn't even get its name on the slate!
Ultimately, both sides will cut a deal. This is not one of those situations where maybe one party is better off not doing an agreement. However, if the dispute drags on for a while, the winners will be Time Warner Cable's competitors. The losers are likely to be both of the combatants and their customers who will endure, at a minimum, some inconvenience in finding the programming they expect (at most, they will not be able to find it at all). For CBS, the economic losses are mostly linear; for Time Warner Cable the economic losses from a short dispute are modest, but they will ramp up if it goes on longer.

The high profile of this dispute could bring some political urgency to make changes to the retransmission consent rules. Having been on both sides of the table for these sort of deals and disputes, I think it is fair to say that those rules were largely written by a very effective broadcast lobby during the sausage-making of 1992 United States Cable Television Protection and Competition Act; the NCTA, the cable lobbying organization, changed its leader shortly thereafter. One would think that the broadcasters may have more to lose from a revisitation of the rules than the distributors would. Consistent with that view, the broadcasters, through their lobby the NAB, have said they believe the system is working.

Update (3 August 2013): CBS has pulled access to full episodes of its shows on cbs.com for TWC customers (Deadline's story). Close viewers know that Fox tried this with Cablevision in their retransmission consent dispute a few years ago, but relented when it was pointed out that some of the customers denied access didn't get video service from Cablevision. Undoubtedly CBS knows this and figures the greater inconvenience it puts on TWC's customers (and hence TWC's management) is worth the public relations hit CBS will take for involving a larger group of innocents in the hostilities.
"No CBS for you" redux






23 July 2013

Nimble TV Hits Its First Roadblock - Dish

Nimble TV, a TV Everywhere-oriented startup, has just been cut-off by Dish Network from providing Dish's service via its service (FTABlog broke the story which went wide when All Things D picked it up).
"No Dish for you, Nimble TV", apologies to the Soup Nazi

In a nutshell, the concept of Nimble TV was that a consumer would use it to subscribe to an existing multichannel provider but get an enhance service over what the MVPD typically provides to its customers. Instead of having the consumer premises equipment (e.g., set-top box, satellite antenna) at your home, it would instead be at Nimble TV's location. The service would then be delivered by Nimble TV to you via the Internet and your DVR would be provided by Nimble TV in the cloud with its recordings similarly delivered to you via the Internet. This promised a number of advantages. First, your service and recordings would be available wherever you happened to be (e.g., at home, on the road, or at a vacation home). Second, Nimble claimed that you could subscribe to any multichannel provider, you would not be limited to the ones that provide service to your home. For this, Nimble would charge its customers an additional fee above and beyond the underlying multichannel subscription.
As I noted in my initial post on Nimble TV last year, I thought that the multichannel providers who would not allow Nimble TV to subdistribute their service without an agreement (and they may not even have the right to subdistribute their service in this way in their affiliation agreements with the programmers). Apparently this is exactly how Dish saw the issue when they cut off Nimble TV.

My assessment is/continues to be that the idea of providing an MVPD's service outside of its service area is doomed for the reasons outlined in my earlier post. More positively, the idea of a very high capacity cloud DVR that is available everywhere seems like a compelling benefit and live/VOD TV Everywhere functionality would be a nice thing to have.

On the positive side, Nimble TV's service is available direct to a television via a Roku box, making the use of the service in the first-screen setting relatively easy. This was not clear at the time of my first post, but the development was not unexpected.

Since my post about Nimble TV, it is clear that the value that Nimble TV is providing is less than what they had discussed at that time, prior to launch. Then Nimble TV was talking about a service with a 10,000-hour capacity DVR and its TV Everywhere features for "around $20" over the cost of the underlying programming package. Now, in reality, Nimble TV, per its website FAQ, offers packages that start at $29.99 including programming and a 90-hour DVR (presumably that service is solely over-the-air broadcast service similar to Aereo's $8/month 20-hour DVR service, since few MVPDs offer a service with many cable channels that price -- in any event Nimble isn't being transparent about which provider's service one might purchase ahead of time, but is once one is connected -- the items are billed separately to one's credit card). A 90-hour DVR is nice -- much higher capacity that the DVR's typically provided by MVPD's, but still a size that requires managing one's storage rather than having effectively infinite capacity. That's a big difference for a user -- the difference between having to think about saving things and not having to do so (akin to how Gmail's original 1GB storage offer revolutionized the web email marketplace).

In addition to the service diminution Nimble TV has experienced, it is also clear that the MVPDs are moving towards higher capacity cloud-based DVRs and making greater amounts of programming available "everywhere".  One gets the feeling that the window for the sort of service that Nimble TV might be able to provide with the cooperation of the MVPDs is shrinking as the MVPDs themselves roll out similar, if not identical services (Cablevision's new cloud DVR offering is 75 hours of HD storage and the ability to record 10 simultaneous programs for $12.95/month). Perhaps its technology is novel enough that it could be licensed, but to my eye, I think Nimble TV will be facing an increasingly difficult future trying to implement its current business plan.

Other takes: The VergeMultichannel News, Light Reading

Nimble TV's explanatory video

19 July 2013

Virtual MSO - A Look at the Opportunity

On the heels of the Needham analysts Laura Martin and Dan Medina's report "The Future of TV" (.pdf link) come stories about Apple and Google planning to offer something that sounds like a virtual MSO -- a plan to offer a bundle which includes live channels direct to end users over the Internet. As my friend and former colleague Will Richmond notes, this story has flared up many times over the past year or so, with Sony, Microsoft and Intel famously among the potential cable disruptors.
Hopefully new virtual MSOs will not represent a new path into the home for poltergeists.
The Needham report provides an exceptionally clear-eyed look at the television ecosystem and makes a few points that I had not seen made as clearly anywhere else. It also provides a useful context to consider the opportunity for a so-called "virtual MSO".
  • Multichannel television is about 85% penetrated to households.
  • Most of the popular cable networks are controlled by a relative handful of major programming companies (Disney, Time Warner, CBS, Viacom, Fox, Discovery, Comcast/NBCU, Scripps, A&E and AMC).
  • The programmers bundle their channels together for sale to distributors.
  • To the extent that programmers are willing to sell their services to new providers, they will expect the new provider to carry all of their channels in the "basic" package and pay full "rate card" prices.
  • The existing multichannel providers have
    • superior pricing on content, and
    • less restrictive packaging terms, and
    • a much more substantial local advertising sales business which can take advantage of the local avails that cable networks provide with their service, and
    • their own pathways to their customers, so they can provide a consistent service quality. 
  • The major programmers are not interested in seeing cable as a whole become unbundled. It is not unusual for a programmer to require that a new distributor sign up many other third party cable networks as a condition of an affiliation agreement with a major programmer. 
  • Some programmers have restrictions in their affiliation agreements with current distributors that do not allow them to sell their services to over-the-top providers (or provide disincentives if they were to do so).
So, where does this leave our potential virtual MSO?
  • Entering a possibly saturated market.
  • Signing on to higher content costs.
  • Receiving little or no packaging flexibility.
  • Having a minimal ability to offset content costs with advertising.
  • Being dependent upon a third party (the consumer's ISP) to deliver the service with acceptable quality.
  • Being dependent upon that same ISP to provide the consumer with service with no bandwidth cap so that the substantial use of the service (i.e., watching television) does not require the consumer to spend extra on its ISP service.
  • Likely having to launch without some popular channels.
Some of the issues the new entrants will face are temporary, but some are more fundamental. With scale, the new entrants will likely improve their content costs and advertising sales businesses. The packaging restrictions limit creating a significantly different content offering. The service quality and bandwidth cap issues look thorny.

Not surprisingly, given these difficult tasks, the virtual MSO business is only being stalked by companies with deep pockets -- Google, Intel, Microsoft, Sony and Apple fit that bill. Perhaps they are willing to run this business on little, or no, or negative margins for a good period of time to establish it.

That list of potential entrants dovetails nicely with the only obvious unimpeded opportunity for the virtual MSO: to improve the television interface. I think are opportunities in this and I am not alone in this feeling. Apparently Intel has made progress on this front. The incumbent distributors' widely deployed set-top boxes with their grid-style electronic program guides are not especially helpful for consumers navigating hundreds of channels. The widely deployed set-top boxes with DVR storage in the consumer's home have limited capacity, are subject to failure and can rarely be accessed outside of the consumer's home, often they can only be accessed on the single set to which the box is connected.

The skills that some of these new potential entrants have also dovetail nicely with this opportunity: Apple makes great interfaces, Google is the leader in running the sort of enormous data centers that a cloud DVR would require, Microsoft has some of Apple's advantages and some of Google's (both to a lesser extent). Sony still makes great consumer devices and Intel's chips undergird systems for all of these players. For each, that's a good start.

However the intersection of the opportunity and the constraints may be small. It doesn't make sense to make a first-class interface and launch it with a low-end product. Meanwhile launching a high-end product with uneven quality of service and lacking some top channels might also be problematic and the threat of future bandwidth caps doesn't help.

Fundamentally, to sort-of channel Steve Jobs, if you can't offer a product that is much better than what is out there already, why are you doing it?

At the same time, the multichannel interfaces are a moving target. It is clear that the distributors know that their interfaces are not-so-good and that the DVR would be better placed in the cloud than in the consumer's home. Comcast's new X2 guide software, unveiled at last month's Cable Show, is working on both of these issues. Other distributors are making similar efforts, like Cox's FlareWatch product/experiment (see my prior post).

The launch of iPad apps, led by Time Warner Cable and followed by many other distributors, are another way the distributors are updating their interfaces and, this also suggests another path for Apple, Google, Intel and the others.

These apps have been ported to devices beyond the iPad. In the case of TWC TV's app, it is available on portable devices such as the iPhone, Android phones and tablets and the iPod touch, but it is also available on the Roku, a television-connected box and Microsoft's Xbox game console and is rumored to be coming to the Apple TV. Clearly Time Warner Cable is more interested in making its service more available and hence more useful to consumers than protecting the revenue stream from additional set-top box rental and additional outlet charges.

But isn't carrying the cable operator's app on an Intel-powered box a tiny victory for Intel or Apple compared to the huge win of creating a virtual MSO?

Perhaps it is, but looking at Intel's issue more broadly, the creation of the virtual MSO seems much less important. Intel does not have a strategic need to distribute video content. Intel does have a strategic need to sell more of its chips, which by and large are not used in cable set-top boxes, nor in the Apple TV or Roku boxes. Similarly, Apple and Sony are primarily in the business of making consumer devices.

If the operators will create apps for the boxes of Roku, Apple, Sony and Intel, it would not appear that there is the same need for these companies to create their own services competitive with cable, particularly if they are essentially relegated to providing me-too services.

Under this scenario:
  • The multichannel operator wins by making its service available on more devices, which inevitably will compete to make their boxes and interfaces more attractive, reducing the distributors' dependence on expensive proprietary set-top boxes which much be purchased, inventoried and supported and whose software tends to evolve slowly. The interface is still controlled by the operator since it has to authorize the subscriber (and no software developer would release an app that the operator won't authorize).
  • The consumer benefits by having the option to buy a relatively inexpensive Internet streaming box (some Rokus cost as little as $50) and not having to rent a cable box (effectively $14.25 monthly for me on Time Warner Cable's system in Manhattan -- see picture below).
  • The consumer electronics company has an easier time getting its box into a consumer's home.
1 additional outlet costs almost as much as HBO
To the extent that there is a more promising virtual MSO opportunity available down the road, Apple, Sony, Intel or whomever can then use its installed base of boxes to jump start that business. Famously, Apple did not make the first MP3 player or smartphone, they waited until what they could make was a material improvement on the state of the art.

While the Google TV box could employ the same strategy, that may not be sufficient for the company. After all, Google is primarily a services provider rather than a device provider, it is already in online video via YouTube and it has the deepest pockets of all. As the Diffusion Group notes, Google's search expertise could be bring a new paradigm to television navigation. Also, Google's experience serving up more relevant advertising might give it a leg up over the incumbent cable ad sellers, once it had meaningful scale, of course.

Another view, not inconsistent with mine: Jeff John Roberts, GigaOm



01 July 2013

flareWatch: Cox Goes OTT on Itself

Updated (2 July 2013) with numerous details.

Cox, a major US cable operator, has launched something that I believe is without precedent: an IPTV service that competes with its existing traditional cable TV service (Todd Spangler's article in Variety). Here are the relevant details:

  • Customer must purchase Cox's cable modem service
  • Cost is $34.99 per month (incremental to the cable modem service cost)
  • 97 channels are included with 60 HD channels
  • includes all local broadcast channels (update: ABCCBS, NBC, Fox, Uni, PBS, Ion, CW, etc. and, it appears, all of the digital multiplexes carried on the system -- more than 25 channels)
  • includes a cloud or network DVR with 30 hours of storage; update: playback only within the home
  • works with Fanhattan's Fan TV set-top box
  • does not incorporate Netflix or Hulu Plus (at least not currently)
  • is not available outside of the home
  • does count against the cable modem service bandwidth cap
  • cable channels include: ESPN, ESPN2, TNT, Disney, ABC Family, Fox Sports West, TWC SportsNet, CNN, CNBC, Nickelodeon, A&E, Discovery, Bravo, USA, TLC, MTV, Fox News and Syfy (update: also FX, TBS, WGN, MundoFox, QVC, HSN, MSNBC, Headline News, Galavision, BET, VH1, Weather, Spike, Travel, Food, HGTV, Lifetime, E!, Comedy Central, History, Fox Sports Prime Ticket, AMC, TCM, TV Land, Cartoon, Animal Planet, Speed, CMT, Golf, TWC Deportes, C-SPAN, C-SPAN2, National Geographic, Palladia, Velocity, The OC Channel, Cox 3/California Channel). This lineup appears similar to a typical expanded basic with the addition of a few purely HD services that are usually bundled with expanded basic for customers with HD boxes, namely Palladia and Velocity.
  • update: free on-demand is "coming"
demo image of the flareWatch interface
Some thoughts:
  • Cox is certainly taking the position that the cable TV rights that it has are suitable for this IPTV service. While it is new for an operator to offer IPTV service as well as traditional cable on the same system; it is not unusual for operators to offer IPTV service (AT&T and Google Fiber offer IPTV service exclusively; many other distributors offer it on some systems).
  • Why are any of the channels carried in SD?
  • Typically cable operators break out the broadcast channels in a separate tier from the cable channels to minimize their copyright royalty payments (e.g., a $20 basic broadcast tier is available, then a $40 cable program service tier --that 90%+ of subscribers purchase -- is available above that -- copyright fees are based on the $20 price, not the $60 price). Is this package subject to a different (or no) copyright royalty payment scheme?
  • This package appears to contain most, if not all, of the most expensive cable channels -- usually cable operators are trying to create new packages which exclude those services (like Cox's own TV Economy package).
  • What is the complete channel lineup? (I have searched cox.com, but haven't been able to find reference to flare or flareWatch yet). Update: flareWatch has its own website that does not mention Cox, except in the fine print at the bottom. Is Cox's brand name an impediment to selling the service? The branding of the service is inconsistent. The URL for the site is watchflare.com. The service name is styled "flareWatch" on the site and simply "flare" on the demo.
  • If the target for this service is customers who have Cox Internet service, but do not have Cox TV service, why is the lineup so traditional in its selection of services?
  • Update: the consumer has to buy the box (and remote) for $99; live TV pausing is not a current feature of the service (from Rich Greenfield's blog post includes video demonstrating the -- notably easy -- sign-up process and captured video of the flareWatch promotional video)
screenshot of flareWatch sign-up screen with pricing

Update:
Cox's site for "flareWatch" -- watchflare.com (includes a :34 unembeddable video)
Michael Greeson's take (The Diffusion Group) with some interesting notes about the price point and services included

13 June 2013

ESPN 3D Is Dead, Here Comes Ultra HD

With the announcement yesterday that ESPN is shutting down its 3D service, it appears that any chance that 3DTV would catch on with consumers has bitten the dust.
My view is that what doomed 3DTV was less the glasses required for 3D viewing -- which are a significant issue -- but more the fact that 3DTV simply wasn't that compelling a viewing experience. 

I remember heading to the 2010 Cable Show in Los Angeles, convinced that I was going to buy a 3D TV upon my return home -- industry interest in 3D was sky high and it looked like a very promising new business opportunity. However, after seeing every single 3D demo on the exhibit floor -- maybe 25 in all -- I though that the experience was underwhelming, when it wasn't actually bad.
What is most interesting about the experiment with 3DTV is how it completely tracked the initial enthusiasm for 3D movies in the 1950s and then their subsequent fall from favor. Around 1980 or so I saw the 3D Creature from the Black Lagoon and Dial M for Murder, but they didn't make me wish that the big films of that period, like Jaws or Star Wars, were in 3D.
In contrast with that experience, this year I saw Ultra HD (also known as 4K) sets on the exhibit floor this year (in Comcast's and Samsung's booths) and both looked pretty spectacular. I don't know if Ultra HD's combination of price, content availability and quality will ever get sufficient traction to be successful in the market, but I do know that the quality is uniformly very good and readily apparent.
Ultra HD set from Samsung booth -- photo does not do it justice; Van Gogh's CafĂ© Terrace at Night
Interestingly, the content that might first make a difference on these sets may be consumers own still photographs. Still pictures of masterpiece paintings were used on the demo by Samsung. Consumers' photos are already available in resolutions far beyond that of a 1080p set. An Ultra HD Apple TV device might be a great early use case. Apple already has experience with greater than 1080p resolution displays from their experience with the "Retina" displays in both the iPad and certain MacBook Pros.

More on this: Brian Stelter, New York Times

04 June 2013

Cord Cutting Is Real and the Wisdom of Howard Beale

After a few almost breathless articles today about the "it's here, finally" prevalence of cord cutting (from Peter Kafka at AllThingsD and Todd Spangler at Variety), I felt it might be useful to pull back a little from the trees and look at the forest of multichannel television.
scissors are clearly not the right tool for this job
There are a two major points. First, the cost of the most popular cable packages (here meaning multichannel video whether from cable, DBS or telco providers) have increased for a long time at a rate much greater than inflation. Second, the penetration of multichannel television is very high -- 85-90% depending on who is doing the measuring. Both of these facts are acknowledged by everyone in the multichannel television industry.

In this context, the only ways for there to be no cord-cutting (defined here to mean someone who had a multichannel subscription and then gave it up -- whether or not he or she used online video as a substitute), would be if:
  1. the value of the multichannel subscription were going up faster than its price -- more and better original programming, HDTV, VOD, TV Everywhere and DVR do support this; and
  2. the price was still modest relative to household income -- uh, not so much; and
  3. few decent substitutes existed for the service
A lot of discussion of cord-cutting to date has focused almost exclusively on the latter point -- are Netflix, Hulu Plus and YouTube a good substitute for a multichannel subscription? The short answer is, it depends. If you are a big fan of live sports, the answer is "no" -- none of these outlets provide much high-value live sports programming. However, big sports fans typically represent less than 40% of all households, far less than the multichannel penetration level (SkySports is about 1/3 penetrated to Sky in the UK; as a premium service, NESN's peak penetration in Boston was similar).

Still that leaves pesky point 2 and the issue of the other 60% of households. Maybe they look at multichannel television a bit differently than sports fans.

Maybe they look at it a bit like anchorman-cum-showman Howard Beale in the movie Network: "we are in the boredom-killing business".

Boredom can be pretty effectively killed in 60%+ of households without live sports. On some level, it is that simple.

As the inspiration for the articles, work by analysts Craig Moffett and Bruce Leichtman very clearly makes this point -- the increasingly high price of multichannel television is the biggest driver for canceling a multichannel subscription. Even with all of the most devoted and price-insensitive sports fans in the world locked in, the multichannel business would look at a lot different without those simply seeking relief from their boredom, sometimes in "unscripted entertainment" often not that unlike Howard Beale's show.

03 June 2013

UK Retransmission Consent Dispute: BBC versus Sky


The BBC is in a retransmission consent dispute with British Sky Broadcasting in the UK which will seem positively quaint compared to the current status in the US. The BBC, which operates the most popular broadcast channel, BBC One which has an average viewing share of about 20%, actually pays Sky, the Murdoch-controlled dominant UK DBS provider £10m a year (approximately $15.3m at today's exchange rate) for the carriage of this service and its many other television and radio services on Sky. There are significant differences between the US and UK pay and broadcast television structures, but, taking all of them into account, the current arrangement seems incredibly favorable to Sky by the standards of the US.

  • Sky has approximately 10.36 million television subscribers (making the payment from the BBC to Sky approximately $0.123 pspm).
  • Sky has roughly two-thirds of the UK pay TV market; Virgin Media, the dominant cable operator has most of the rest.
  • The BBC used to pay Sky considerably more on an annual basis.
  • Virgin Media does not receive carriage payments from the BBC.
  • BBC One and BBC 2, which has over 5% of the viewing audience, are commercial-free services.
  • The BBC is funded by the public through a mandatory tax (on each UK household that has a television set) called the "license fee".
Sky's leverage over programmers is much greater than any US distributor's over any US programmer, still it seems hard to see how the UK consumers are well-served by a public service broadcaster funded by the taxpayers paying a for-profit pay TV company for carriage of popular services that clearly make its pay TV offering more attractive.

In the US, it is fair to say that the distributors typically are paying the top programmers more than double the amount that Sky is receiving from the BBC.

I found this an eye-opener about how much the business terms of pay-TV are determined by historical and regulatory legacy issues.

I originally stumbled across this story on the Media Talk podcast from The Guardian.


29 May 2013

Netflix Caching - Competition Breaks Out on a New Front

It is a well worn principle of management that if you want a problem to be addressed, start measuring it. When Netflix started its ISP rankings (see the current one here) it looks like they were following this advice. Once there was a measurement of which ISPs were doing the best job serving video to Netflix customers it would help define the goal (both for Netflix and for the ISPs).
An article today by Steve Donohue in Fierce Cable shows the business ramification of these rankings. Donohue notes that Netflix caching has emerged as a subscriber retention and acquisition tool, notably between Cablevision and Verizon FiOS in the New York metropolitan area. This is how it should be. Because cable operators are, by and large, not involved in acquiring content for their ISP customers, that certainly does not mean that content is unrelated to the reasons that a subscriber signs up for service or the experience that he or she enjoys. Video streaming -- in the forms of Netflix, YouTube, Hulu, and porn, not necessarily in that order -- are likely the biggest drivers for the sale of higher speed levels of Internet service by cable operators and telcos. To some extent, video streaming may be the only driver of the consumer's need for speed.

And the need for speed only increases as the technical quality of the content improves. There are already plans underway for 4K/Ultra HD episodes of Netflix's fine original series House of Cards.