10 December 2015

Apple Will Not Be Disrupting the Pay TV Market This Year

Yesterday, Bloomberg reported that Apple had planned to shelve their long-rumored service to compete with cable/DBS/telco video. It turns out that there isn't a lot of appetite among the top basic cable programming services to break the bundle that they have prospered in for decades.

Close observers of this scene are not surprised by this development. Competition to the pay TV programming continues, but except for PlayStation Vue and Sling TV it is not direct competition. It is indirect, disruptive competition from Netflix, YouTube, and Hulu.

The strong basic cable programmers probably see these three things:

  1. The growth is gone from pay TV subscriptions.
  2. Supporting the strongest over-the-top video competitors to the pay TV ecosystem (like Netflix) that yield far less value to the programmers than the pay TV incumbents probably isn't a wise move. That's what Time Warner thinks. If there is a way to sell these rights to one of the pay TV incumbents, that would probably be best and keep value in that ecosystem.
  3. If there isn't an appetite among the pay TV incumbents for those rights, and the programmer needs the money from an over-the-top video distributor, it is better to take money from the smaller over-the-top video competitors like Amazon, as HBO did, rather than build up the leader.

What about HBO Now and CBS All Access? HBO, Showtime, and Starz are not in the basic bundle, they are available a la carte. CBS is already available for free to anyone with an antenna. They are never sold a la carte or for free and thus don't have the same place in the cable bundle as ESPN, CNN, or Lifetime.

24 November 2015

The Media Sector Meltdown

August 2015 saw the emergence of a new narrative about the cable-oriented media: the sector is doomed to suffer from cord-cutting, It was the media meltdown.

The triggering event was Disney's earnings report, with CEO Bob Iger reported declines in the number of ESPN subscribers.

The retail price of basic cable goes up every year, so, unless there is a substantial amount of additional value being provided by the cable/DBS/telco operator, the service become slightly less attractive than it was the year earlier. Additionally, even with enhancements to the service itself (e.g., more and better original programming, VOD and TV Everywhere access to more and more programming), at a certain price level, the service is simply unaffordable to some segments of the market.

The substitution effect is another part of the story. Every year the Internet-delivered video options for consumers have improved. In the last year, HBO Now and Showtime over-the-top services brought content previously available only via a multichannel video subscription to customers without such a subscription.

Theoretically ESPN could do the same, but the economic model for it is not the same. HBO and Showtime are sold a la carte by all distributors and carry no advertising, ESPN is sold in the basic package and generates a lot of advertising revenue. If ESPN sells itself direct to consumer, it won't be in a big, broad package, it will be effectively a la carte-ish (maybe packaged with the other Disney-owned channels) and not everyone who wants CNN, USA, and A&E will get it, as they typically do now, with a basic cable package. That's not good for ESPN either as its ability to collect license fees and generate advertising from the casual- or non-sports fan, the core of its business model, will be put in jeopardy.

ESPN arguably is the biggest beneficiary of the basic cable bundle. It should be the last service to explore leaving it.

While the returns from YouTube's investment in original content are mixed, at best, the content on that platform is not going away and some stars have emerged, even if they don't look like what we have been used to.

Pewdiepie, the most popular star on YouTube, takes viewers through his video game play
Netflix's original content continues to get good press and high marks from viewers, with new seasons of House of Cards, Orange is the New Black and the unlikely series prequel to cult movie Wet Hot American Summer.

Add to this story two high profile affiliate relations debacles: Viacom's disappearance from Suddenlink and Weather Channel's exit from Verizon FiOS. While these stories appear similar, they are very different.

The programming on the Weather Channel is simply increasingly irrelevant with the availability of its core functionality readily available on both computers and phones (often from the Weather Channel's own apps or weather.com or weatherunderground.com). Before ubiquitous internet access, a dependable destination for weather information on cable TV was pretty valuable. Now, not so much.
The Weather Channel or The Weather Channel app?
However, an even bigger issue for the Weather Channel in its dealings with the MVPDs is that it is on its own. While managed by Comcast's NBCU, it is not bundled with their must-have networks (NBC, Telemundo, USA, Syfy, MSNBC, CNBC, E!, Bravo). So, while Weather Channel is arguably more valuable than NBCU's second tier networks (Oxygen, Chiller, Cloo, Esquire, Sprout), none of those networks have to negotiate on their own. Not coincidentally, none of them have been prominently dropped by MVPDs either. It would not be surprising if Comcast buys out its Weather Company partners -- in one swoop it could solve Weather Channel's fundamental problem (as could any other large programming company. Weather Channel would be a fine fit for Fox, CBS, Disney/ABC or Turner Broadcasting as well; all of them distribute 24/7 live programming services similar to Weather. Bundling is very powerful.
it can work wonders with your customers as well!
Viacom's departure from Suddenlink is harder to explain, but explainable nonetheless. While Viacom critics believe that its programming is not that important and/or that it sold too many of its reruns of its children's programming to Netflix, the fact is that Viacom has a number of attractive, high profile original programs on Comedy Central, Nickelodeon, MTV, VH1 and  TV Land. While its programming has had considerable problems of late, it has a broad enough portfolio of channels that it shouldn't be that vulnerable.

What may have happened is that while its programming was much hotter, Viacom got good deals out of larger cable operators who dominate the large markets (e.g., Cox, Charter, Comcast, Cablevision, Time Warner) and, when it got to Suddenlink offered them the same deal even though a few years later its content had considerably less appeal. especially in Suddenlink's smaller, rural areas.

Still, the people at Viacom are not stupid and less money is always better than no money. It is, unless, it costs Viacom, via most-favored-nations "give backs" with the big operators, more than it would collect from Suddenlink in both its affiliate fees and the advertising that it can generate from its viewership in Suddenlink markets -- which, of course, is 0 if the Viacom channels are not carried. Since Suddenlink represents only about 1% of multichannel households, it is likely that is the underlying issue for Viacom.

However the numbers line up, the other aspect of being part of the basic cable package is the belief among the distributors that your channels HAVE to be in the basic cable package. Suddenlink is now providing data to the industry of exactly how important the Viacom channels have been to them. There is the possibility that, while Suddenlink may be ahead losing some of its video subscribers without Viacom, the loss would be greater for other distributors who operate in markets where Viacom programming is more popular and/or who have greater margins on their video customers than Suddenlink does on its video customers. Local cable advertising, for example, is considerably more lucrative for the major-DMA-covering large operators than for a single system in a non-major DMA.

Changes in TV watching behavior have not caught up with the TV measurement. Everyone knows that younger people are watching TV programs on tablets and computers -- whether through password sharing, Netflix, or actual TV Everywhere use. Yet Nielsen only counts viewership on these platforms if that program is being watched live, even though a disproportionate amount of the viewing on these platforms is likely VOD.

Young people are not, generally speaking, abandoning multichannel television to watch original content on YouTube and other web sites. However, some big changes are taking place. Young viewers' tastes turn on a dime and they have definitely turned away from some of the services they used to lap up (and toward...zombies). Also, the ways that they are watching programming are shifting significantly. When you've got a strong, significant, profitable business, change is scary and two kinds of change are scarier still.

Update (25 November 2015): Eric Jackson's email newsletter details the enormous cost to Disney of ESPN's drop in subscribers. There are some issues with using Nielsen and paid subs interchangeably (they measure slightly different things and Nielsen's numbers are typically 10% higher for a cable network), but the underlying point is on-target as is his "follow the money" approach.

20 July 2015

Comcast's New Video Service "Stream"

Last week Comcast announced a new service for streaming video and DVR service not-very-creatively named "Stream". Priced at $15 a month, it seems like an incredible value, at first.

"With Stream, Xfinity Internet customers can watch live TV from about a dozen networks - including all the major broadcast nets and HBO - on laptops, tablets and phones in their home." according to a Comcast blog post by Matt Strauss.

Inattentive reporters may lump this with Netflix as a service for cord cutters. but that's very far from accurate.

Perhaps the best way to see how this service compares to Netflix, the 800 pound gorilla of over-the-top video, is to use an analysis that I learned from a great architectural historian. In the three-column analysis, the left side has the things unique to the first building, the middle has the things the buildings have in common, and the right has the things unique to the second. Given the horizontal constraints of this blog, I've transposed the analysis to top-middle-bottom.

Unique to Stream:
  • Includes live channels
  • Includes broadcast channels
  • Includes network DVR functionality
  • Content from HBO
True for both:
  • Available in Comcast's cable footprint
  • Available to Comcast Internet subscribers
  • Can be watched in-home
  • Includes significant recent on-demand programming
  • Can be watched on a computer, tablet, or phone
  • Does not require a cable video subscription
Unique to Netflix:
  • Viewable outside of Comcast's cable footprint (i.e., in any part of the US)
  • Available to customers via any form of Internet access
  • Can be watched in- and out-of-home (e.g., office, neighbor's house, mobile, coffee shop)
  • Easily viewable on a TV
  • Large library of movies and TV programs
  • Some high profile original programming
Stream is a very different service from a Netflix.

I believe the target market for this product is customers who don't buy cable video service and customers who don't have a traditional TV set, but are interested in TV programming. I don't know how many people fit in this group, but Comcast clearly will have an easy time finding its Internet customers who don't buy TV service from them. Easy targeting allows for efficient marketing.

In offering this service, Comcast gets the following:
  • An up-sell service for its Internet service
  • A press release -- "we have a strategy to address cord-cutters"
  • A way to monetize TV Everywhere infrastructure (As Comcast's post notes, "Xfinity Internet customers can just sign-up online, download our Xfinity TV app and start watching." (emphasis added))
  • A new service that should not cannibalize the core cable video business.
That's a solid list of benefits for Comcast without a whole lot of downside. Why not?
Is it a threat to Netflix? On some level, Stream is a threat. A lot of the viewing is at home and some of it is not on the TV. Streampix, a component of Stream, does include a library of movies and TV shows, so it is a poor man's Netflix on that dimension. The inclusion of the broadcast channels would appear to have a lot of value. However, if you are the sort of person who does not own a television, I wonder how much you would value broadcast content. Also, Netflix, starting at $7.99 per month, is materially less expensive.
Is it a threat to HBO Now? As an alternative way to get the content, sure. All that we know about the usage of Netflix suggests that vast majority of its usage is in the home. While Stream would not provide the benefit of out-of-home use (or on-TV viewing) that HBO Now does, it offers a lot of other benefits, that could make that trade-off attractive to some customers. Stream seems like more of a threat to HBO Now than to Netflix. Since the price of both services is the same, how do you value HBO Now's benefits (view on the TV, view out of home) vs. Stream's (get broadcast content, get DVR functionality).

Certainly Comcast benefits strategically by creating a threat to any of the threats to its core video business. A good offense is a good defense. By utilizing its existing infrastructure and customer list, the incremental cost of this service should be modest. If it turns out that Stream is cannibalizing the core video business, Comcast can always pull the plug, like Cox did with its OTT service FlareWatch.

In the future Comcast could also address the most ridiculous limitation of Stream and let people watch it on a TV. The limitation is ridiculous because it is so clearly self-imposed and so clearly designed to protect the core video service. While I understand that as a 20-year veteran of the industry; it is exactly the thing that people hate about their cable company. As Wired's headline put it: Comcast's Streaming Service Sounds As Bad As You'd Expect. It hurts because it is true.

05 March 2015

Hi! My Name Is "HBO Now"

The long buildup to the launch of the HBO over-the-top service has passed another milestone. The service has a name: "HBO Now".
The forthcoming HBO service will not share a name with Eminem's alter ego.
Michael Learmouth in the International Business Times reports that HBO Now will cost $15 per month and be available exclusively through Apple at its launch in April.

It is probably not a coincidence that Game of Thrones will premiere its fifth season on April 12.

Others seem less certain that a pure over-the-top offering is the plan. As Todd Spangler notes in Variety: "it’s still not clear if HBO Now will be available to consumers only via broadband providers in a bundled offering — or if anyone with a high-speed Internet connection could sign up." This is a point that many seem to have missed, but consistent with my original post on the subject.

We have a name for the service, but no logo for HBO Now, yet.

Update (9 March 2015): HBO CEO Richard Plepler confirms to Recode's Peter Kafka that going with the cable ISPs is Plan A for the distribution of HBO Now.
Update (10 March 2015): One group that $15/month HBO Now definitely makes look bad -- the distributor charging $17.99/month for HBO.
Update (16 March 2015): Cablevision is the first ISP to sign on to offer HBO Now. "Cablevision plans to provide pricing and other particulars for HBO NOW in the coming weeks." So much for HBO going direct-to-consumer. In the words of Pete Townshend, "meet the new boss, same as the old boss".
Update (20 March 2015): The Wall Street Journal reported that HBO and others were talking to cable ISPs about managed services (a/k/a fast lanes) -- a no-no under net neutrality. Tiernan Ray figured out that does not make sense -- good reporting, something far from common in the coverage of over-the-top video.