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?

Revisiting The Innovator's Dilemma and OTT Competition with Cable

Over two years ago, in November 2013, I wrote one of the most popular posts on this site, Over-the-Top Video and The Innovator's Dilemma. In the wake of a Wall Street Journal article on Hulu's plans to offer a cable competitor service with live streams of certain channels controlled by its owners, Disney and Fox, I thought it worth revisiting that post. Where was the analysis on target and where did it miss? More importantly, what really changed?

What Changed?

• In terms of the players in the market, the biggest change was the exit of Aereo. What might have been a leading company in over-the-top video ended up in bankruptcy after a loss at the Supreme Court that invalidated its business model.
  
• The impact on cable, DBS and telco multichannel subscribers played out almost exactly as I had predicted -- in a gradual attrition. The big multichannel providers lost 385,000 subscribers in 2015, about 0.4%. Cable One, a small cable operator who dropped Viacom's channels after a pricing dispute, saw its video subscriber base decline in 2015 by 19%, as it "pivoted" away from video to focus on high speed Internet service. One of the strategies related to this pivot was raising video prices by $10. None of the largest cable TV operators are following Cable One's strategy.
  
• The decline in cable TV subscribers is showed up in a bigger way on the programmer's side. ESPN's Nielsen subscriber count declined by 7 million in the last 2 years which did not go unnoticed by the investment community. ESPN's numbers are tied up in a few issues, falling cable TV subscribers are one part, "skinny" packages which don't include ESPN are another, and the biggest one may be that Nielsen's own estimates of cable household counts may have been too high in the past.

The Hits

• The technical quality of over-the-top streaming has continued to improve. LTE has become widespread and 5G wireless is on the way. 802.11ac wifi is far more common. Gigabit ethernet to the home has also become more common, although it is hardly ubiquitous. Gigabit is coming from Comcast and AT&T, as well as pioneer Google Fiber (pioneer, that is, if you don't live in Chattanooga)
• The quality of the over-the-top content has continued to improve. Netflix and Amazon were winners at the Emmy Awards in September 2015 garnering kudos for House of Cards and Transparent, as well as a decent collection of other shows. Broadcasting & Cable described a the television production boom triggered by the success of the streaming outlets as creating "a run on talent" in a recent cover story (but put the story itself behind its paywall).
• The availability of over-the-top services would expand. They did, and in ways that I had not described -- HBO, Showtime, and Starz all went direct-to-consumer (not too suprising a development) and Amazon embraced a model to bundle individual OTT services with its Streaming Partner Program (a development that was non-obvious).

The Miss

• The availability of over-the-top services didn't happen in one form that I expected -- the roll out of Aereo to additional markets. 
• I made no mention that over-the top services would expand, but they have. PlayStation Vue, Sony's over-the-top service, not mentioned in the original post, launched in a handful of markets, then went national this year. Hulu's build-out of a service with streams of linear channels would be another expansion geared to the mass market. There have also been all manner of subscription video on demand services for niches by major companies like NBC Universal's Seeso, World Wrestling Entertainment), and Crunchyroll for Japanese anime (its backers). In an earlier time, each of these would have been a cable program service.

Unclear

• YouTube's stopped highlighting its original content channels on the same day as my original post, although its interest in originals morphed into content for YouTube Red. YouTube isn't following the big name Hollywood path to video competition, it is carving out a different one. This strategy is a bit harder to evaluate -- the proof would be in YouTube's views and advertising sales. The former are transparent, but not easy to interpret, and the latter are not visible at all.
• I forecast that the convenience of OTT service would improve based on better interfaces, DVR in the cloud, better recommendation engines. There have probably been some incremental improvements here, but nothing that seems to have changed the nature of competition in a big way. PlayStation Vue reviews praise its more Netflix-like interface, but it isn't clear if this is driving its adoption. Meanwhile, Comcast has licensed its cloud-based X1 navigation software to Cox and others, improving some cable interfaces faster than OTT interfaces, in those places that actually got it.

The Innovator's Dilemma continues to be a useful lens through which to look at the development of over-the-top video, finding its purchase in markets/use cases not central to the big screen at home. Unlike other innovations, however, the role of content makes the video distribution system unique. Some holders of high profile content can make more money going direct to consumers than through the cable bundle -- adult video made the leap a long time ago. The next ones to prosper over-the-top are the new services that probably couldn't get carried by distributor's protecting their margins (Crunchyroll, WWE), followed closely by those that are already sold a la carte (HBO, Showtime, and Starz). Those left are the basic cable channels, whose play in over-the-top is focused on their library content (like Lifetime Movie Club) and may be for a long time.

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.

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.

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

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 affected 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.

If Cable Costs $200 in 2020 Penetrations Are a-Gonna Fall

According to a provocative study/press release from the NPD Group, the average US multichannel television subscriber paid $86 for "basic pay-TV service" and "premium-TV channels" in 2011 and that figure is going to hit $123 in 2015 and $200 in 2020. NPD Group says that pay TV monthly rates have risen an average of 6% per year while consumer incomes have remained essentially flat. Keith Nissen, research director of NPD sees this trend as "unsustainable in the long term" and concludes "Much needed structural changes to the pay-TV industry will not happen quickly or easily; however, the emerging competition between S-VOD and premium-TV suppliers might be the spark that ignites the necessary business-model transformation of the pay-TV industry".

Dos "Benjamins" para cablevisión

Hmmm. Let's do some analysis of these figures. According to Multichannel News, the $200 is really $196 and that breaks down to $110 for basic and $86 for premium. Filling in the rest of the numbers (hat tip, Todd Spangler for doing the reporting) and looking at the growth rates, we can prepare the following table.

NPD Group Actual/Projected Average Cable Subscriber Monthly Bills with Compound Annual Growth Rates

The current 6% basic package price increases will continue forever; that's straight-line trend extension more than analysis, but not necessarily a bad place to start. Basic rates have grown faster than inflation for probably two decades now and basic penetration is now 86% per NPD's reckoning. A rational explanation would be that  consumers are must be finding value in basic cable television, particularly with the recent stagnation in household incomes. If they didn't value it, they certainly wouldn't keep buying it. If you don't believe that, you haven't seen the data of how cellphones have eroded the market for landlines.

A further rational explanation would be that the program quality of basic cable has increased dramatically by any reasonable measure. Regional sports networks have more pro games than they used to have, typically at the expense of broadcast carriage. Entertainment networks are putting greater resources into original programming and have turned out some real quality stuff (e.g., 4-time Emmy-winning Best Drama Mad Men). Up-the-dial channels like Bravo which ran older art movies and whose marquee show was Inside the Actor's Studio developed a slate of...watercooler favorites (if you must know, see this). Less commercial concepts like The Nashville Network and America's Talking gave way to the more-commercial stylings of Spike TV and MSNBC. This bounty is now spread across dozens of additional channels (Style!, Tennis!, not just one but two food networks!), almost all of which are in high definition which is not just good but necessary because 65% of households now have sets that a 15 years ago were primarily found in the high-end room at Best Buy.

Will that all continue? It sure could. More investment in programming, more channels, TV Everywhere would allow people to use their subscription in more places on more devices, maybe a technological advance like 3DTV -- all these elements could increase the value of the basic service. In fact, I think it could grow faster than 6%.

The interesting part of the NPD analysis to me is that premium programming retail pricing will increase much faster than basic, no less than 17% annually over the next 9 years. At first blush, that makes no sense at all. Basic programming is a take-it-or-leave-it bundle and that gives it a lot of pricing leverage. If you need ESPN, you need to take the whole package. Ditto for Disney Channel or MTV. We know that basic is a fairly low-churn subscription service.

Premium television, in contrast, churns all the time (HBO churns 10 of its 28 million subs annually) and the channels are often sold a la carte, not benefiting as much from being bundled with others. If HBO is too expensive, or if the season of Game of Thrones has ended, subscribers drop it. This happens all the time. [Even premium services that are not sold a la carte (e.g., Verizon packages Showtime and The Movie Channel in a third level basic tier with a dozen or so ad-supported channels, but the premium services provide most of the value of the tier) it is hard to argue that the packages in which they reside are "basic".]

The other part of premium television is transactional -- pay-per-view movies, events and things like out-of-market sports packages (e.g., NFL Sunday Ticket, MLB Extra Innings). Many of these offerings have substantial competition from over-the-top players.

The only way that premium television retail pricing will go up by 17% annual leaps (and bounds!) is if the cable operators are tapping other revenue streams (e.g., DVD purchases, movie theatre tickets) and that will only happen if the service itself becomes much more compelling that it is today. If that happens, it is more than likely that the program quality of these offerings will have increased and/or the convenience of using the service will increase (for example, the highly compelling HBO Go) or both. In short, if the average bills are going up this much, that's probably very good news for viewers of premium television.

[If NPD is considering DVR service to be part of premium television, that's another element that would support an increase in the average bill. DVR penetrations are going up even as operators have raised the prices for it. It is simply a very compelling service.]

So, at second blush 16-19% annual increases in premium television revenue still don't seem to make sense. I would be very surprised if the average bill for premium services from a multichannel provider will grow by that much over the next decade unless...the business is very different from what it is now. [Hold that thought.]

If the average bills go up that much, it also means that Netflix, Amazon, Xbox, Vudu and iTunes are not providing as much competition for the video dollar as it appears that they are currently. One notes that result would be the exact opposite of the conclusion from an earlier NPD study on the results to date in that area of the business (my earlier post on that study). It isn't impossible to imagine pay-TV service improving over the next decade, but it is pretty hard to imagine that it will improve faster than over-the-top delivery of video. [Unless the cable/telco ISPs defang OTT video via broadband caps, throttling or price increases.]

So how do we reconcile these conflicting projections? The way that I see it is that multichannel television may longer be a 90%-penetrated service, but will morph into more of a luxury good as the prices go up. There is a nugget of this point-of-view in the NPD study findings:

"In fact, 59% of pay-TV subscribers preferred having one single provider for their pay-TV services, compared with 21% who desired multiple providers, and 21% who expressed no preference. Sixty-two percent of subscribers wanted premium TV either delivered by their pay-TV provider directly, or from a service affiliated with their pay-TV provider."

The key word here is "preferred". Consumers would "prefer" to get everything from one provider (less technical hassle, fewer bills to pay, etc.), but if the cost differential is significant..."the lure of convenience may not be enough if the content is available and people can access it without going over some set broadband cap." (well put, Stacey Higginbotham in GigaOm's The cable industry isn't stupid, is it?).

This is the future that I see for multichannel television, because the cable industry is many things, but stupid is not one of them. The cable guys will choose to hold onto the high-quality, high-price segment of the market and effectively give up the lower end to alternative solutions in whatever forms those solutions may take. Right now 14% of households rely on antenna service for television. Maybe 10-20% of the multichannel households leave the increasingly spend-y pay-TV market  That's a business different from the one now, but consistent with the major driving economic factors.

Another Wrinkle in Over-the-Top Competition: Second Set Set-Top Box Costs

This recent Multichannel News article about Verizon raising the price of its DVRs and set-top boxes made me think: why do these boxes still cost so much and is that a good thing for cable?

In the early days of digital cable, the late 1990s, a set-top box cost a cable operator about $300. Since that time, the price of the components of a box have likely gone down quite a bit and the boxes have gained some capabilities (decoding HD, better graphics, new connectors like HDMI and, the big change, DVR capabilities). The price of cable modems has dropped from $400 in its early days to $54 (when I last checked this one at Amazon). I would imagine the digital cable box hasn't fallen, that much, but it sure has fallen.

On my system, Time Warner Cable New York City, any set-top box (whether SD or HD or DVR) rents for $10.00 per month or $120 per year (pricing schedule). To have digital cable on a second set ("digital program duplication") I pay an additional $4 per month, bringing the total to $168 annually.

I was thinking about this issue recently from the perspective of the opportunity it presents for over-the-top.

From the standpoint of the primary set, OTT alternatives have a lot of shortcomings, notably the lack of the name brand cable channels and, without an antenna or a service like Aereo, the major broadcasters.

However, consumer expectations of service on the second set might not be as high.

• Option 1 is to pay $168 per year and enjoy the same service on the second set as the first.
• Option 2 is to pay $50 for a Roku box and use the second set to watch HBO Go (if your operator permits it), Netflix, Amazon Instant Video, Roku Newscaster and the like. While that's not everything, it might be plenty to kill time while on the treadmill or for a little entertainment before sleeping, for example. (This assumes that the household already has a broadband Internet connection and that that service is effectively unlimited). This amount drops to $0, if your second set is an Internet-connected set from Samsung, although Comcast does not want HBO Go on that either.

The much-considered threat of OTT competition has not to date played out as an either/or situation with cable. DirecTV, Dish Network, Verizon FiOS and AT&T U-Verse are head-on competitors offering the same services in essentially similar bundles. No OTT player yet has pursued that strategy, likely because the content to do so is not available to them.

But the lack of a head-on threat does not mean that OTT is not a real threat to traditional multichannel offerings. The multichannel distribution players do recognize this -- TV Everywhere became a whole lot more important when Netflix demonstrated that part of the value of its service was that it was broadly available -- it wasn't that iPad viewing was that big a threat on its own.

That said, as the set-top box expense example demonstrates, there are lots of places for OTT video to worm its way into consumers' hearts, or, as Clayton M. Christensen puts it in The Innovator's Dilemma, find a protected foothold from which they can launch their attack on the main market.

Over-the-Top Competition for Multichannel VOD

A new study by The NPD Group estimated that US Internet-delivered VOD (iVOD) $204 million last year, up  while paid movie rentals via pay-TV/multichannel VOD was $1.3 million. The big players in the Internet movie rental business are iTunes, Amazon, Vudu (Walmart) and Cinema Now (Best Buy), and there are many others. (Netflix and Blockbuster's streaming services are not considered part of this market; they are subscription video on demand services, rather than transactional/one-shot/pay-per-view).

The big news is that among the iVOD users, usage of pay-TV VOD declined 12% and the size of the pay-TV user base is declining.

Often lost in the discussion of cord-cutting and cord-shaving in the pay-TV market is that the different segments of the market have very different competitive dynamics.

• Until Aereo, broadcast signals were essentially not available via the Internet (although programs are via Hulu, CBS's tv.com and the network web sites). (Of course, in some ways broadcasters are the most promiscuous of all in terms of distribution, after all, they do broadcast their signals for free to all with an antenna.)
• Cable services are even less likely to be available. This makes perfect sense given that those channels rely on multichannel television for both distribution to reach viewers and license fees. Some of their programs are available via Hulu, Netflix, and their websites, but typically episodes that are not that recent and often not that many of them.
• Recent movie VOD is one where the Internet-delivered selection (the subject of NPD's study) is very competitive with the pay-TV offering, particularly in the easy of navigation of the available choices.
• In adult video, the Internet offering trounces pay-TV's (more selection, lower cost, more salacious content) and the revenues have followed, as I described in an earlier post.

The other segments of the pay-TV video offering are smaller and include foreign language services and out-of-market sports packages. It is hard to generalize about the Internet availability of the former. With respect to the latter, the MLB Extra Innings and NBA League Pass  are available on Roku, Apple TV and many other Internet platforms. NFL Sunday Ticket is available only on the Sony PlayStation 3 and DirecTV. NHL Center Ice is available only through pay-TV providers.

One thing that seems clear from the results to date is that, to the extent that the Internet-delivered services have similar access to content as the pay-TV providers, their offerings are pretty competitive and they have often been quite successful. It is doubtful that this message is being missed by any of the players in the content business. Still, there are pretty compelling reasons for certain content providers to tread carefully or slowly in this direction.