12 December 2020

HBO Max and Warner Brothers Collapsing the Theatrical Window

The big recent development in the media and entertainment world was the December 3 announcement by Warner Media that the Warner Brothers Studios' entire 2021 theatrical slate, 17 movies, would be released simultaneously on HBO Max and in movie theaters. Typically theatrical movies play in cinemas on an exclusive basis for a period of thirty to ninety days, then enter other "windows" of exhibition -- pay-per-view, premium television (e.g., HBO, Showtime, Starz), broadcast television, basic cable, etc. The metaphor used to describe this financial system is a "waterfall" -- from the highest price/best viewer experience ($12+ ticket, uncut, no commercials, giant screen and multi-speaker audio) down to "free" media with smaller screens, edited to be advertiser friendly, and interrupted by commercials.  

The reaction from the people who worked on these movies was quick and unfavorable: the director of the upcoming Dune hated it, the director of the recent theatrical pandemic release Tenet hated it, the head of a huge talent agency hated it, the union of directors hated it, and the head of another huge talent agency hated it

To my eye, there are six issues that have been raised:

  1. Movies are meant to be seen first in theaters on the big screen. These movies are meant to be enjoyed first that way and only that way.
  2. This is a poor strategy financially, as it devalues the first tier on the waterfall, and that may devalue the subsequent tiers, and the value of these movie franchises in the future.
  3. The compensation that participants will receive will be lower with this approach.
  4. We were not consulted about this change; it was presented to us without our participation and that shows a lack of respect.
  5. The contracts that we have give us approval rights on distribution strategy and choices and you have ignored those rights.
  6. By selling the movies to your co-owned HBO Max you have engaged in self-dealing, rather than seeking out whether other streaming services might be willing to pay more for those rights.

The first concern is the easiest one to dismiss. All of these movies are being released to theaters, so those who want the full cinematic experience can get it. A movie doesn't play any differently to a moviegoer in the theater because it is on a streaming service on the same day.

Whether the second concern is true seems to depend on how things actually play out. One thing is certain, if these movies were released with exclusive theatrical exhibition windows, there is little chance that they would attract cinema audiences the same size as they might have absent the pandemic. A movie available on HBO Max at the same time it is available in the cinema might be expected to be less of a draw at the box office, although one notes that's not true of professional sports -- TV exposure seems to promote the live event business. Depending on how and how much these movies are promoted in the media, they might do more or less business than they would as exclusives. 

As to the third point and the subsequent points, the compensation of the participants is not a matter on which this writer can opine with public data available. If the participants will be getting less pie -- because the pie is smaller -- and the contracts they signed permit the studio to do this (which no one has contested yet), it seems like that's one of the issues talent face about having revenue or profit participation in the first place. If you don't want that kind of deal, negotiate for a flat fee. 

I do understand that scoring things are more complicated without apples-to-apples theatrical grosses to look at. To that I can only say, welcome to the new digital world, movies -- Netflix shows don't get apples-to-apples Nielsen ratings with cable and cable Nielsen numbers aren't 100% comparable with broadcast numbers...and everyone in the ecosystem has figured out a way to work together without relying on the historical currency. 

One participant beef that I am quite sympathetic to is that all of these arrangements contemplated a world where both sides had an incentive to maximize the theatrical window revenue. To the extent that Warners is now generating value for itself (via its ownership of the presumably more valuable HBO Max) and the talent don't get a piece of that, they have a fair concern, even if they may not have legal recourse via their contract (shame on their lawyers if the big fish didn't have it). The record labels shared the benefits they got in Spotify stock with their artists, whose work they licensed at lower prices than that work probably would have fetched without that "equity kicker".

That Neflix offered a big price for Dune, perhaps larger than what HBO Max will pay, is, to be charitable, not a good look for Warner Brothers living up to its fiduciary duty to its partners.

Regarding the lack of respect of unilaterally making such a change on their professional partners, I do understand it. Given that Warners probably knew this move would be controversial, they might have figured out that they had more chance to make such a bold move work this way than by having a lot of private conversations that would leak out. This follows the strategy of "better to ask forgiveness than permission", especially if you aren't going to be given permission. That said, I have little faith that AT&T is a particularly savvy understanding of Hollywood relationships or the value of distribution, given their substantial overpay for DirecTV.

The reaction to this news on the tech side was a lot more favorable. In its usual fashion, anything "disruptive" to "the old way of doing business" is good. I find that simplistic. Certainly, the movie studios didn't fully see Netflix streaming business model coming on as fast as it did. However, these studios aren't run by dopes. The system of windows that they have constructed may be frustrating to a viewer (where is that movie playing?), but it probably does a good job of maximizing revenue from the available buyers in the world of yesterday. If it didn't, it would have been jettisoned long ago as too complicated. That said, I'm less certain that's true for the world of tomorrow.

There are not a lot of other media products like big Hollywood movies. TV shows are windowed -- fetching one price for their initial network runs, then fetching another price in syndication. Most high profile books are windowed, released first in hardcover and later in less expensive paperbacks, but that's about it. Amazon doesn't complain that books are available free in public libraries. There have been a few examples of music that was released exclusively to one platform for a short amount of time, but generally that doesn't work well -- the industry is built around non-exclusive listening as a shared experience. 

The film business has mistaken the future engine of growth for an existential threat before.

"'I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.' Jack Valenti [then head of the Motion Picture Association of America] said this in 1982 in testimony to the House of Representatives on why the VCR should be illegal. He also called the VCR an "avalanche" and a "tidal wave", and said it would make the film industry "bleed and bleed and hemorrhage". 


The winner in this is HBO Max. It has a lot of high profile content to attract viewers that it wouldn't otherwise have (or even be able to make given the way the pandemic shut down movie and TV production). Even if this year's slate is not very strong, it probably has some significant hits. If this moves HBO Max closer to being Netflix, that's a pretty important strategic step for the company to take.

It's not clear to me that the participants are going to be losers in this ultimately. First, it looks like the discussion about money hasn't happened yet and the participants have some cards to play in that negotiation. Second, it is unclear if the exposure the work will get via this release pattern will be better or worse than what would have happened otherwise. Some film franchises started on TV -- like Star Trek. If the participants in the theatrical revenue have the basis to make a legal claim (or lean on the relationship), they might get a bit more consideration than the minimum Warners might be able to get away with paying. It is often said that Hollywood is a relationship business. If that's still true, Warners will have to pay something more to fix/maintain/replace the talent relationships they have clearly injured.

Similarly, I'm not sure it is clear that the movie theaters are the losers with this change even though they think that they are and so does Wall Street. I'm not sure there were going to be any big movies for these theaters to show anytime soon, so they now have "access to product" and that's a plus at getting someone to come out of the house. And the cinemas are likely to get much more favorable splits of the COVID-diminished box office receipts because they don't have an exclusive window on these movies. With the growing competition from in-home entertainment options in general, the movie theater business looked challenging before "losing" its exclusive window...which is another way of saying that it was probably going to lose its exclusive window anyway. And, if theatrical exhibition exclusivity clearly makes the studios more money -- for example, if the vaccines are a success and everyone celebrates by going to the movies -- well, the empire can strike back as quickly as AT&T can fire its Warner Media executives (which it has already done a few times). 

The big loser in this are the ones not being written about in the press coverage. The more attractive streaming services like HBO Max become, the worse basic cable TV packages look. Basic cable used to be a great consumer value for in-home entertainment -- it offered more choices and quality content that broadcasters didn't provide at a reasonable price. But has cable prices have risen over the last four decades, now the value isn't so great. The significant innovations of the DVR and HD are effectively replicated by streaming platforms at a far lower starting ticket price. The cable resisters of the 1990s were older people; the non-cabled households of today are young people. 

Even before Warner Brothers' move, programming investment has been leaving the cable ecosystem for the streaming video ecosystem -- Disney has shifted programming investment from Disney Channel, ABC, and Freeform to Disney+ and so have all of the other big players in cable programming (NBC Universal to Peacock, Discovery to discovery+). If basic cable TV subscriptions are a declining business -- which they are, and have been for several years -- the basic cable TV channels could, probably will, become hollowed out services with less and less marquee original programming and more and more reruns (because they still have 168 hours to fill every week). Higher prices and less value could spell a death spiral.

20 May 2020

Since we were so rudely interrupted, a summary of the last year's developments

The impact of the coronavirus and the changes to daily life in response to trying to slow the spread of it need no further discussion from me, hence a short list:
  • movie theatres closed
  • sports suspended at all levels
  • lots of people at home
  • much more online shopping
  • nearly complete shutdown of typical professional television and movie production
In my professional neck-of-the-woods, there's three big things to talk about:

  1. The continued ascension of non-linear Internet-delivered video
  2. The resultant continued demise of "cable TV" (a/k/a "pay TV" or multichannel subscription video) be it delivered by a cable, satellite, telco or "non-facilities-based" provider like Sling TV
  3. Perhaps the most interesting -- how the coronavirus lockdown has forced experimentation with new forms of video production

Streaming video

These last fourteen months have shown continued big subscriber growth by Netflix, and much bigger growth since the pandemic was declared, but that's just the start of the streaming video developments.

Disney+ launched on November 12, 2019 at a price of $6.99 per month (less than Netflix's cheapest plan) and showed better-than-expected take-up right away. Disney programmed the new streaming service aggressively. Its billion dollar first year original programming budget is considerably more than an entertainment basic cable network would spent. And that expenditure showed up right away to consumers in the form of Star Wars spin-off The Mandalorian, a project that in earlier times would have found its way to theatres or home video or ABC. Disney+ was marketed aggressively as was expected. The consumer take-up with strong right out-of-the-box with 26.5 million subscribers by December 28. Less expected was the Black Friday discount offer $60 for one year. 

The quick take-up of Disney+ thoroughly demolished the theory that streaming is a special business that the incumbents cannot be competitive in. In retrospect, perhaps it shouldn't have been a surprise -- none of the tactics that Disney employed were significantly outside its core competence in marketing movies and cable TV networks.

Hulu joined Disney with a very aggressive Black Friday discount offer -- $1.99 per month for 12 months (versus regular retail of $4.99 per month).

AT&T saw Disney's successful launch of Disney+ and looks to be following its playbook. It started with aggressive pre-launch pricing by HBO Max -- $11.99 per month for 12 months (versus typical retail of $14.99 per month for HBO alone). As noted in Multichannel News, this is $1 per month less than the most popular Netflix service package. It probably puts a lot of pressure on incumbent cable operators, as it offers more content than the cable version of HBO at what is in most cases a lower retail price. As we get closer to HBO Max's launch on May 27, we'll see if AT&T manages a programming splash as big as The Mandalorian. It doesn't look like any of their launch shows have that kind of profile and the shutdown of production due to the pandemic is probably part of that.

Part of the success of Netflix is that it has expanded the range of its offerings. It has had significant success expanding into unscripted entertainment - lowbrow, middlebrow, and high(ish)brow: Tiger King, Tidying Up with Marie Kondo, Salt, Fat, Acid, Heat. As a Netflix subscription is a household subscription, having a greater variety of programming should lower churn, as dropping the service affects more people in the household (and/or the children away at college who use the household login).

Amazon made its number of Prime subscribers public in 2018 (100 million! considerably more than analysts had estimated) and by year end 2019 it was over 150 million. At a retail of $119 annually, that's an annual revenue stream of nearly $19 billion dollars. By media standards that's a lot of money, even if most of its value for customers is in free shipping, rather than video. However, for some perspective, in 2019, Comcast's cable unit had just over $22 billion in video revenue, and that represented a slight decline from the prior year.

Pulling back, the big advantage that Netflix and similar streaming services have with consumers relative to cable TV is that they are, still, much, much less expensive than the incumbent service. The big basic cable package provides good value to a household that wants and uses all of that programming, but at $75 or so, it's price dwarfs Netflix at $8 (for a single person household). No one has time to watch all of the programming on Netflix, so the greater volume and variety of basic cable is simply expensive overkill for many households, particularly those of young people, who, at least in the recent past, go out a lot. Add in an antenna (or Locast) to get the major broadcasters and that's a very attractive offering for young adults or households that don't highly value cable exclusive national and regional sports services like ESPN/Fox Sports 1/NBCSN and YES/NESN/MASN.

It's unclear if the availability of these streaming services on computers, tablets, and phones is a big deal or not, but it is certainly a plus.

The Achilles heel of these services was thought to be bandwidth caps from Internet Service Providers (typically the cable operator), but these haven't shown up that widely or onerously. As the cable operators know better than anyone, steaming video helps sell a fast Internet connection and their business delivering that service is far more valuable than the legacy business of delivering packaged video services as it has both faster growth and higher margins.

Changes with cable TV subscriptions

Continued video subscriber losses by MVPDs (multichannel video programming distributors a/k/a cable and satellite TV providers). It is ugly. vMVPDs growth slows, then the leaders, DirecTV and Dish's Sling start losing subscribers. One analyst described the possibility of "a rapid death spiral for the category", with the category being "linear subscription TV".

Given that people are spending much more time at home and are bored, these should be the best of times for cable TV. So, why the potential death spiral? Cable TV has always been positioned in the market as a premium product -- something you buy if you want more/better than what you can get free over-the-air. Now, it is considerably less premium on two fronts:

First, new high-profile programming by cable networks is being cut back (because of declining numbers of cable subscribers) and a lot of those marquee new shows are...going to streaming instead. Television producers see streaming providers (Netflix, Amazon Prime, Apple TV+, HBO Max) as a more attractive destination for a new show than cable network -- they may pay more in license fees and they definitely support the shows with a lot of off-air promotion (e.g., billboards in NYC). 

Second, losing sports is painful. It is a key driver of the cable bundle's value and there may be no good programming substitute. We'll see how the Korean Baseball Organization fares on ESPN. Even if the games are compelling, it's hard to imagine there's a way to instantly have a country develop a rooting interest in the Korean teams. Baseball, among all major sports, is the one whose interest falls off the most below the top professional level. College football is nearly as popular as the NFL. College basketball and the NBA have a similar relationship, but that's far from the relative popularity of college baseball or minor league baseball relative to MLB.

What have we learned?
  • Stock market valuations of streaming (i.e., Netflix) created huge economic incentive for Disney and others to get into streaming, even if it will cost significant short term profitability, the public markets will reward it. 
  • It is unlikely that net-net that Disney will come out ahead during this crisis since coronavirus may have a great negative impact on so many of its lines of business (theme parks, movies in cinemas, sports, and advertising). No other media and entertainment company may be hit on so many fronts, as Rich Greenfield of LightShed describes very well.
  • Retransmission consent fees may be going up dramatically -- mostly from deals negotiated over the preceding years, but the decline in multichannel subs is a threat to that revenue stream
  • Locast's free broadcast TV service is still operating and has expanded into new markets. It has also finally been sued by broadcasters and sued back. Its existential question remains: will it win its case or lose and suffer the fate of Aereo?
Changes in video production

To me the most interesting development in the TV industry in the last fourteen months is less what we don't have, than the new things that we have gotten. We've had a crash course in new ways of producing television (at home instead of on a set in a studio, using a webcam or phone in lieu of a multiple pro camera setup) and most of it is pretty OK. Local news doesn't seem to suffer a lot by having their anchors at home instead of bantering at a desk. And that's also revealing -- making a more personal relationship between viewer and "talent", as noted in Vogue (with its first link from this blog).

The NFL draft, which for years has been in a dogged pursuit to amp up its production values -- they were planning to use boats to ferry the picks to the stage this year, really -- actually got some great reviews of its home-based draft this year, probably in part to the fact that the stars of that show are regular people (as far as TV skills go) and seeing them in a home environment made them more relatable to the audience, especially NFL Commissioner Roger Goodell who appeared largely human. This fascinating Forbes article, by my friend and former colleague Howard Homonoff, describes the very interesting and innovative video production tech the NFL used.

Seeing musicians perform at home had much that same charm, irrespective of the genre of the music. Billie Eilish in her bedroom with her brother from iHeart's concert of pop stars to a show tune reconceived for Zoom in broadway.com's Sondheim concert.


    full clip of Billie's performance is no longer available on YouTube, sadly

    full disclosure: that's my office chair that Ann Harada is sitting on in this clip
The music videos produced during this period -- I'd put forward CHVRCHES "Forever" (Separate but Together) as an archetype -- remind me of the simple and fun music videos of the early video age...and we get to see the artists in their homes (or something like it) and that's often fun.



There will be a huge impact on commercial production as well. Given the upheaval in consumer's lives, the advertising messages suitable for before the coronavirus are often ill suited to our lives now (sometimes frighteningly so).

Producing new commercials without the usual camera and sound crew creates new challenges. One actor of my acquaintance shared that she was being asked to film herself at home -- for a national commercial with a DSLR or other similar high end, but decidedly consumer video equipment. (Having the performer supply more of the means of production, apologies to Karl Marx is nothing new -- newspaper reporters don't have to go into the office to type up their stories on the newsroom computer system, and many, perhaps most, audio books are made by voice artists working in home studios. The costs are much lower and the quality difference is much smaller than it once was. Workers' might be a step closer to...emancipation with this ownership.)

So, what's new with you?

29 April 2019

Financial Reporting Changes for AT&T, Comcast 1Q19

One of the little joys -- at least one of my little joys -- of reading the earning releases of the pay TV companies is watching when the metrics change (and how precious little reporting there is of it in the trade press).
No longer U-Verse and DirecTV subscribers, they are now "Entertainment Group premium TV" subscribers
Starting with this quarter, AT&T decided not to report separately the number of DirecTV and U-Verse video subscribers, despite the fact that the platforms are entirely different in terms of technology, programming, relationship to a broadband service, ARPU, and just about everything else. It did report that it lost 544,000 "premium TV" subscribers, but did not feel a need to break those out between the platforms, both of which have long operating histories. It did feel a need to provide that detail for its DirecTV Now business (lost 83,000 subscribers), although its ARPU is lower, its operating history is much shorter period, and its results are much more erratic. What does this lack of information mean mean? Lack of detail usually means that the story is not good. For the curious, AT&T's earnings call shed no light on this topic. Also, premium TV is usually the term of art for another offering of the multichannel landscape, the category led by another AT&T unit, HBO.

Comcast also eliminated one of its usually-reported cable video metrics this quarter. Alone among cable operators, Comcast reported "Advanced Services Customers" -- customers which had either an HD set-top box or a DVR or both. At least, Comcast had reported this number, which represented 70.4% of video subscribers at year end 2018. For 1Q19, this number is gone. Unlike the AT&T story, the Comcast change more likely highlights that the concept that HD is an "advanced service" is, to be kind, a little outdated and with the likes of YouTube TV bundling a somewhat-constrained DVR in its base consumer offering, a Comcast DVR is looking a lot less "advanced" than it once was.


09 February 2019

Google Fiber Retrenches

With the recent announcement that it was pulling out of its latest market, Louisville, Kentucky, it seems that Google Fiber has learned what anyone in the cable business already knew, delivering this kind of service in the real world is difficult.

There was great hope for what Google Fiber might do to the residential broadband business when it launched in 2012. The cable business had a less-than-stellar reputation for customer service. The marketplace for better-than-DSL Internet speeds was not very competitive. Broadband service was more penetrated among the wealthy, giving rise to the digital divide. 

Even leaving aside its groundbreaking search service, Google had been audacious and truly innovative in a number of areas. In the virtual world, its Gmail, Maps, and News services were huge improvements over the incumbent providers of such services at the time of their launch. In the physical world, its approach to data centers exhibited what one hoped to see from Google Fiber. The conventional wisdom was that data centers needed reliable (and expensive) chips, but instead it used more-failure-prone cheap hardware combined with custom software that handled errors better. It set up data centers in places with cold outside air which eliminated the need for as much air conditioning. It aggressively pursuing cheap electricity when siting data centers. There was hope that it could bring that level of innovation to providing cable services.

My experience in the cable business showed me that the folks who run cable television systems are smart and entrepreneurial. Providing service to thousands of communities meant that they learned to overcome millions of obstacles and had the opportunity to run many experiments with different approaches. Compared to the phone companies that had to navigate similar circumstances, there was no pricing regulations that guaranteed a return. The companies were built with mountains of high-interest debt, there was not much margin for error. And cable television was competing with a free service, broadcast television. If it wasn't worth buying, people wouldn't. Google may have underestimated its competition.

Cable operators had local franchises and had worked through local political issues. They couldn't redline a big city and only serve the most profitable customers, to get a city franchise they would have to build out every neighborhood.

Alas, Google Fiber's service delivery innovations may not have been that innovative. By "auctioning" off providing service to the "fiberhoods" where the most people signed up, Google de facto redlined. Its experiments with fixed wireless to avoid the costly build from the street to the home turned out to be, at best, an idea before its time. In Louisville, its innovation -- microtrenching -- shallow trenches to hold the street-to-home fibers -- doesn't sound like something that the cable incumbents would not have tried and utilized, if they worked. However, microtrenching has its problems and as it proved in Louisville.

Google Fiber may not have generated much of a return for Alphabet shareholders, but the impact of the gigabit per second speed offering and the attention on it on the incumbent providers, certainly was a benefit to the consumer internet access marketplace. By that standard, it was a very successful failure. Still one thinks of what might have been had Google Fiber been able to create the kind of competition that it set off in a few markets in many more markets across the country.

23 June 2018

What ESPN+ Says About the Multichannel Future

On April 12, 2018, ESPN launched its thoroughly pre-announced subscription video over-the-top service, ESPN+. The service is notable for ESPN trying to establish a beachhead in the direct-to-consumer video business and not distributing a video service primarily through MVPDs. It is a watershed for the most important programmer in basic cable.


It is not hard to see why. after decades if growth, ESPN has lost household reach for many years from its peak in 2011,


driven by higher basic cable prices and over-the-top video services, led by Netflix, have had tremendous growth during the same period.


To remain "The Worldwide Leader in Sports" ESPN has to follow the people.

ESPN has had an over-the-top video service before, ESPN3 provides additional games and other comments to authenticated ESPN subscribers. That service is distributed in coordination with its distributors: facilities-based MVPDs (multichannel video programming distributors - cable, DBS, telco - e.g., DirecTV, Comcast, Verizon FiOS) and, later, virtual MVPDs (e.g., Sling, DirecTV Now).

ESPN had never created a service to address the non-MVPD marketplace. Instead of addressing this growing market directly, they looked to support what the MVPDs were doing to improve the value of the multichannel video subscription as its retail price kept rising. This lead to WatchESPN (its app which distributed its TV Everywhere service ESPN3), ESPN video-on-demand, the short-lived ESPN 3D, etc. That strategy made a lot of sense for a long time.

As the most expensive service by far in basic cable multichannel video, ESPN is the biggest beneficiary of the basic cable TV bundle. The primary benefits of being part of the basic cable package are (1) distribution to consumers and (2) low marketing costs. With the MVPD as the primary marketer of basic cable video subscriptions, ESPN gets a largely free ride. For a cable network, this greatly simplifies the sales process, one needed/needs to get a few dozen key distributors to roll out the network, not millions of individual consumers to buy. Distributors also were keenly focused on selling it. Until the past decade, basic cable was the most compelling offering from cable providers. Now it is not the first priority, eclipsed for cable operators by cable Internet service. [And slightly marginalized by "skinny bundles" of channels that lack ESPN.]

ESPN+ allows ESPN to establish its a direct-to-consumer distribution and is starting from scratch on marketing a video service to consumers. [ESPN does have direct-to-consumer marketing experience with ESPN The Magazine.] There are product, price, promotion, packaging, and distribution issues to sort out. Given its strategic importance, it is not surprising that ESPN decided to go aggressive on price -- at $4.99 per month ESPN+ is materially less expensive than Netflix and Hulu.

The other priority for ESPN is to keep the positive relationships with the MVPDs, because the amount of money coming in via basic cable distribution -- both in affiliate fees and advertising on the TV services -- will likely dwarf the amount of money coming in on ESPN+ for quite a while.

During ESPN's long growth period, adding value for the cable operators was very important. ESPN's affiliate fees, for a long time, increased by an astounding 20% per year. Now, with more typical single-digit rates of increase on affiliate fees, the MVPDs cannot reasonably have the same expectations for added value in ESPN3/WatchESPN.

ESPN has always heavily invested in sports content and then figured out a way to best utilize it to enhance the value of the business. In the 1990s, when ESPN faced little immediate competition on the cable dial and there was no direct-to-consumer Internet video business, ESPN would buy up rights to college football and air few of the games, instead "warehousing" them. The benefit to ESPN was protecting the franchise by not allowing a would-be sports competitor to use this programming to launch or enhance its network. Later, ESPN used additional games to support the TV Everywhere effort -- instead of letting Tennis Channel license extra early round matches of the US Open, ESPN would put them on ESPN3. Now, the best business use of those "extra rights" -- rights not needed to program ESPN, ESPN2, ESPNU, or ESPN's other cable services -- is to build out the appeal of ESPN+.

ESPN going direct-to-consumers is a difficult thing for the MVPD to swallow. MVPDs are used to being the 800 pound gorillas of TV distribution and dictating the key business terms. Historically, the MVPD's only real beef in their dealings with ESPN was its high price -- few questioned its programming or alignment with MVPD objectives. However, all around the multichannel industry, the groundwork has been laid for this moment. Three key over-the-top subscription service launches have led this change.



Starting around 2012, WWE planned to launch a basic cable network, but found little interest from cable operators for more channels for their digital packages. So it launched over-the-top, on February 24, 2017. For WWE, this was, if not a bet-the-company move, something close to it. At first the new network got a tepid response and looked like it might be a disaster -- alienating distributors, like DirecTV, who did not like the impact of this new distribution on their lucrative pay-per-view event busines. Now it is clear that WWE Network was not wrong, and it wasn't even particularly early. The WWE network is clearly an economic success and many of the distributors, like Dish, have found a way to make peace with it.

CBS All Access launched eight months later, on October 28, 2014. Unlike the WWE Network, this was a much less risky endeavor; CBS didn't need the MVPDs in the same way -- its flagship channel's distribution was secure. CBS did need to figure out how to work with its affiliated stations, but both parties had a lot of motivation to sort that out and their interests were basically aligned. All Access turned out to be a brilliant strategic move by CBS to establish its own revenue stream and its own direct-to-consumer distribution. It also works well as a demonstration of the value of the network for retransmission consent negotiations with MVPDs. After all, if consumers are willing to pay $5.99 per month retail for CBS, it is hard for the cable operator to argue that CBS is not worth $1 or $2 or $4 on a wholesale basis. To further support the service, CBS spent money on additional unique promotable content to create some additional reasons for people to subscribe (e.g., its first, The Good Wife spinoff The Good Fight, and Star Trek: Discovery -- both targeted to superfans).

Since CBS All Access is completely under CBS's control, it does not need to work with joint venture partners to make changes to the service or experiment with it, as Hulu does. All Access can be expanded with additional programming and marketing if there is a return; can be scaled back or shut down if it is more profitable to distribute content through MVPDs or other distributors (e.g, Facebook, Apple). It can distribute a version through Amazon with no advertising. All Access is not yet financially material to CBS's business as a whole, but has significant strategic value in establishing a direct-to-consumer business and sorting out the technological, billing, marketing and other issues necessary to run that business should it be the horse that CBS wants to ride over the long haul.




HBO Now was the last big domino to fall when it launched six months after CBS All Access. More like ESPN, HBO's history was synonymous with the growth of early cable. WWE didn't have many direct relationships with MVPDs and CBS, had mostly contentious ones related to retransmission consent pricing. HBO, like ESPN, was a trusted vendor to MVPDs. However, after many fits and starts trying to find a way to launch its service OTT without alienating MVPDs, eventually it just moved ahead, the opportunity was too compelling. And this time, distributors also found a way to make peace with it relatively quickly, which they had to because is has become a material business for HBO it is not going away.

What these three offerings had in common (and how they are all different from ESPN), is that none of them were part of the basic cable bundle. HBO was always available on-top-of basic cable as an a la carte add-on. CBS was always available for free over-the-air. WWE Network was not an established, profitable basic cable channel; it was an aspiring new basic cable channel.

Direct-to-consumer video streaming is the new world, but what does this mean for the basic cable bundle? The conventional wisdom is that sports is the only thing keeping the basic cable bundle afloat, the sports represents unique content that drives all households to subscribe. I'm not sure that is the whole truth.

It has been well documented that core sports fans represent about one-third of cable subscribers, the other two-thirds is casual fans and non-fans. In the UK, where most of the high value sports programming -- Premier League soccer -- is available in a separate subscription, about one-third of customers sign up for it. When NESN, the regional sports network owned by the Boston Red Sox and Boston Bruins, was distributed as an a la carte premium channel, its subscription levels were in the same ballpark (moving up and down with team performance as well).

With the rise of virtual MVPDs, some of the underserved market segments may get services better tailored to their needs. The households with little or no interest in sports are one of them. Historically, there was great fear among distributors in not offering ESPN -- it has been the goose that laid the golden egg. To my knowledge the virtual MVPD Philo TV is the first mainstream service to launch without any major sports. It is a very small player, 50,000 subs at year end 2017 or about 1% of the still modestly-sized virtual MVPD marketplace.

Sports is unique relative to other programming. It is live, unlike most entertainment programs, so it is usually watched live. Unlike the other big category of live programming, news, it is not a commodity -- the audience that watches the NFL does not accept other sports, like soccer or Ivy League football, as a pretty good substitute.

Should MVPDs look on ESPN+ as an existential threat? Will it increase the attrition of basic cable subscribers? From a content perspective, it seems unlikely -- the best sports events are not available on ESPN+ and are only on ESPN and ESPN2. However, if ESPN+ does get established, ESPN will then have another significant outlet and could/likely will, over time, decide to make available some of its programming on ESPN+ in addition to ESPN and ESPN2, later, it might actually take content off the cable channels, in favor of putting it on ESPN+. It is unclear to me if ESPN has already moved content from ESPN3 to ESPN+, but it is clear that it has acquired new content exclusively for ESPN+ like the UFC.

Only a growing market can support additional programming investment. Programming investment is moving off of linear television, which cannot support the cost. The market for basic cable video subscriptions is declining and the market for television advertising is not growing any faster than inflation. We've seen this impact already at ESPN, it is rarely the first choice of TV executives to lay off high profile talent.

Fundamentally, ESPN+ is the hedge to protect Disney for the future in the event that the multichannel bundle declines or collapses. Philosophically, Disney has always been platform agnostic. It has never been allied with an MVPD and would take its high quality content wherever the market led it be that DVD or PPV or something else. Disney sees that it is a strategic priority to develop a direct-to-consumer streaming video platform and is investing heavily to do so. Whether or not it makes a ton of money in the short term does not matter (and it looks like it is not making a ton). That's what a hedge is. Like CBS All Access, ESPN+ is offering more for superfans, but unlike CBS All Access, it isn't offering the the main course. As currently structured, ESPN+ is a complement to getting ESPN in a basic cable subscription, but a poor substitute for it.

My view is that ESPN+ will not be a big success until it is a closer substitute for ESPN and ESPN2 via basic cable.

It is clear that ESPN needs to rationalize its business for the current and future video marketplace. ESPN+ is a shot across the bow of the MVPDs, but the multichannel television business has been under attack for many years now. It would be unreasonable for MVPDs to expect ESPN to go down with the ship. All that said, the ESPN business that comes out of this may not be nearly as profitable a franchise as the one powered by the economics of the basic cable bundle.




23 January 2018

Starz Dropped from Altice - Premium Channels Not on Consignment

In one of the first cable programming outages of 2018, the channels of premium TV provider Starz are no longer carried on the cable systems of Altice. Many cable programming affiliation agreements expire at year end and the one between Starz and Altice (the owner of the former Cablevision/Optimum and Suddenlink cable systems) is one such deal. What caught my eye about this dispute was a quote from Altice, emphasis added.
Given that Starz is available to all consumers directly through Starz's own over-the-top streaming service, we don't believe it makes sense to charge all of our customers for Starz programming, particularly when their viewership is declining and the majority of our customers don't watch Starz,” Altice said in its statement. “We believe it is in the best interest of all our customers to replace Starz and StarzEncore programming with alternative entertainment channels that will provide a robust content experience at a great value.
Of course, all Altice customers do not pay for Starz. Starz is a premium channel and is usually sold a la carte or in higher level cable programming packages. It is not provided to all cable TV customers like a broadcast channel (e.g., ABC, PBS) or virtually all customers like a widely-distributed basic cable channel (e.g., CNN, USA, ESPN). So, Altice customers do not all pay for Starz.
What this means however, is that Starz licenses its channels to Altice on a per-basic-subscriber basis, not on a per-Starz-subscriber basis. Starz doesn't share in the revenue that Altice generates from its service; it has effectively a marketing guarantee from Altice, which then can package the service in the way that it feels most benefits Altice's business.
Such per-basic licensing of premium channels is hardly new to the pay TV business; I first saw such a deal in the early 1990s. Such deals can benefit the cable operator -- instead of having a $10 premium channel subscribed to by only 10% of customers for which it pays 50% of revenue ($5 wholesale), and generates $0.50/basic subscriber in margin, the MSO can provide this "$10 retail value service" in lots of packages for effectively a lot less than $10 -- it can provide more value to more consumers with that kind of packaging flexibility and upside.

However, the revenue upside of earlier cable is well in the rearview mirror now. Cable programming at the retail level is too expensive in today's competitive world.

That the third-tier premium provider (Starz is well behind HBO/Cinemax and Showtime/The Movie Channel/Flix in market share; this is not a commentary on the quality of its programming) is licensing its content on a per-basic guarantee really shows how inverted the pay TV business has become. With the competition among distributors, the winners have been the programmers who can require terms of the MSOs that they cannot get in the over-the-top world (when the programmers sell direct, they don't get a revenue guarantee). In the over-the-top world, the programmer has greater costs to market the service themselves, not via the cable operator, and greater control (uniform national pricing) but in that distribution channel, the programmer keeps the retail revenue, not just the wholesale, and also has control of the packaging -- no leaving the smaller channels out..

Update: Starz asks FCC to intervene in its dispute with Altice (Sara Fischer article at Axios)

08 October 2017

Google Fiber Launching Without TV

Google Fiber isn't dead yet, but as yet another sign that its strategy at launch was, if not fundamentally flawed, at least, not where the market was going. Fiber's next cities, Louisville and San Antonio, are not getting the Internet and TV service, but only its Internet service. It turns out, cable TV is a hard business.

Google notes that there are now a wealth of over-the-top "cable TV" services that can ride over its laudable gigabit connections, and that is true. Its own YouTube TV is one of them.