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the Comcast change more likely highlights that the concept that HD is an "advanced service" is, to be kind, a little outdated and with the likes of YouTube TV bundling a somewhat-constrained DVR in its base consumer offering, a Comcast DVR is looking a lot less "advanced" than it once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.

AT&T's U-verse Withers Because of Physics

When I wrote this post (DirecTV is to AT&T as HITS Was to TCI) it was pure speculation.

When AT&T launched U-verse, which attempted to provide TV, Internet and phone service without a fat pipe (i.e., cable or fibre) into the household, I recalled that cable engineers said that it wouldn't work. I recall the quote from one. He described the problem as: "physics".

For a few years, however, it did. AT&T could provide TV, Internet and phone service via twisted pair (traditional telephone wiring), provided the Internet speeds were not too fast and the household was not watching or recording too many HD programs at the same time. Until a 2010 upgrade, a household could not watch more than 2 HD programs at the same time.

However, now the writing is on the wall. Since AT&T acquired DirecTV in July 2015, it has steadily deemphasized its newer U-verse offering (launched 2006) in favor of expanding DirecTV (launched 1990). U-verse lost 1.36 million video customers in 2016, while DirecTV added 1.23 million subscribers. Since the multichannel television market is not growing, but Internet access is, clearly moving customers off of U-verse TV service (and shutting it down) will allow AT&T to devote that bandwidth to offer faster Internet speeds on such systems without a complete rebuild. Reason: physics.

Today brings an article about the likelihood of shutting down the U-Verse website on which it markets the triple play.

DirecTV Now Renames DirecTV's DBS Packages

Unnoticed in the hubbub over its debut yesterday, DirecTV Now, the new over-the-top video service from AT&T, shares its basic packaging scheme with DirecTV's core DBS service.

• "Live a Little" is based on Entertainment
• "Just Right" is based on Choice
• "Go Big" is based on Xtra
• "Gotta Have It!" is based on Ultimate (apparently only spending $70 per month warrants an exclamation point)

Original marketing piece for DirecTV Now did not include many channels

There are some exceptions as noted in white (Crime & Investigation and FX Movie Channel do not appear to be in any DirecTV DBS packages) or blueberry (in the case of FXX, which is in the DirecTV DBS package "Xtra", not "Entertainment" as one would have expected) or light blue (in the case of Justice Central which is in the DBS package "Choice"). Source for the channel lineup list was Todd Spangler's article in Variety. The prices at the top of this chart are the expected retail; as per the marketing piece above, there is a $35 introductory rate for "Go Big" for the first 3 months.

There are some channels in DirecTV's DBS packages that are not in the corresponding DirecTV Now package. Among the more conspicuous absences: Aspire, INSP, ION, Mav TV, Ovation, Reelz, and the shopping services like QVC and HSN. All are independent programmers.

[Many of the channels are public interest channels, which DirecTV is required to provide space for on DBS by law (there is no similar law for over-the-top). Examples of public interest channels are BYU TV, Free Speech TV, and NASA TV; they are all non-commercial services.]

One note on the apparent loss-leader nature of parts of the offer: Prepaying $105 (3 months of Go Big at the $35 introductory rate and getting a free $150 Apple TV) is a good deal even if you don't want DirecTV Now. $105 is even less than the $129 that Apple charges for a refurbished unit.

Another take: Peter Kafka at Recode sees this is as "a national competitor" to the "regional fiefdoms" of cable operators with "more to come".

Another take: Todd Spangler at Variety quotes analysts saying DirecTV Now's most attractive package is a money loser. Earlier he wrote about skinny bundles potentially killing to pay TV ecosystem, back when he thought DirecTV Now was a skinny bundle.

Ultra HD Content Is Coming

With yesterday's announcement that DirecTV will carry 25 MLB Network games in Ultra HD (also known as 4K), it might be time to evaluate whether this format will be a paradigm shift (as was high definition) or not (as was 3D).

HD benefited from the following:

• Clearly better pictures
• Development of flat panel set technology allowing for big screens without the big bulk of earlier HD sets (rear projection or very heavy tubes)
• Digital transition, requiring stations to stop broadcasting analog signals in July 2009 and greatly increasing the amount of high profile native widescreen HD programming

HD was no more convenient to use than standard definition television before that.

3D, it is clear in retrospect, was more of a mixed-to-bad bag. The 3D effect could be compelling at times (like in Avatar), but, 3D had some considerable negatives:

• 3D effect did not work for many people or actually gave them headaches
• Glasses required for 3D made it less convenient to view
• No new desirable set technology was associated with 3D
• 3D content did not benefit by a change in the law regarding television broadcasting
• 3D content was difficult to produce -- it required more than simply higher resolution cameras and other equipment

Ultra HD avoids the 3D negatives. However, it is less than clear that Ultra HD's benefits are worth the cost to consumers. To a significant extent, all new television formats face an uphill climb. It is a very rare consumer who wants the obligation to buy a new set or other equipment.

Ultra HD feels more like the transition from DVDs to Blu-Ray discs, a technically better format that consumers are willing to buy as long as there is little cost premium associated with it. If Ultra HD catches on, expect a much slower adoption curve.

In contrast, the push for "smart TVs" with Internet connections to make it more convenient to get content is going strong.

Early HD sets:

2004 65 inch Sony rear projection HDTV set is 27 inches deep

Sony KV-40XBR800 FD Trinitron - weighs 325 pounds

Update (25 May 2016): This report from John Archer on forbes.com notes that Ultra HD sets have become the de facto standard for 50+ inch TVs, more because manufacturers are not making non-Ultra HD sets in that size, rather than consumers paying a premium to get UHD sets.

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.

DirecTV's Complaint Against Al Jazeera America Is Made Public

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

• Service definition (does the AJA service meet the definition in the affiliation agreement, which was done with its predecessor service, Current TV?)
• Most favored nation provision (did AJA, the company, offer more favorable terms to cable operators that it has to provide, but has not provided to DirecTV?)

The recourse that DirecTV is seeking is to terminate the affiliation agreement and both the service definition and the most-favored-nation provision could represent a way to do so. DirecTV claims that AJA is in material breach of the former.

"None of the proposed programming for the renamed Service fulfilled the Agreement's Section 1.2.1 requirement that the Service consist...[redacted]" [quoted from the complaint]

DirecTV also appears to be claiming that others had more favorable termination rights (e.g., Time Warner Cable, which famously dropped Current when its ownership changed hands), appears to have had a "change of control" termination right that DirecTV presumably did not. DirecTV hired PriceWaterhouse Coopers to audit AJA's compliance with its most-favored-nation provision.

"But AJA has refused to allow PwC to audit the necessary documents to determine whether AJA has complied with its MFN obligations in this regard, and is therefore in breach of the Agreement." [also from the complaint]

Making the proceedings more interesting is the lawsuit between Al Gore, the former owner of Current TV, and Al Jazeera about the money that Gore says Al Jazeera owes him (ironic link to Fox News!) and the countersuit that Al Jazeera filed against Gore as the seller of Current. It is beautiful, if you love chaos (or Kaos, in the world of Get Smart).

I do not claim to know who is right about what parts in any of these disputes. The dispute is notable because relatively few cable network affiliation disputes make it to court.

DTV_AJA

DirecTV Is to AT&T as HITS Was to TCI?

AT&T's U-Verse versus Verizon's FiOS is an interesting study in contrasts and those differences might be behind AT&T's recent offer to purchase DirecTV.

Both U-Verse and FiOS run fiber down the middle of your street. Fiber is the highest capacity wires for communications of any sort and, if new wires need to be run, they are always fiber. Cable operators also run fiber down the middle of the street for the same reason. The cost of running wires into each individual home is an incredibly costly endeavor and that cost is the labor to install it -- the wire itself, even fiber, is cheap.

Verizon's FiOS built a state-of-the-art fiber-to-the-home (FTTH, also known as FTTP for "premises") network, using the latest technology available and at a princely price. Specifically, this means that Verizon ran fiber from the middle of the street into the house of each FiOS subscriber. The alternative would have been to use its existing wiring into the home, the thin, low-capacity copper wires known as "twisted pair". (Cable operators, in contrast, run coaxial cable into the home, which has less capacity than fiber, but far, far more than twisted pair).  

Historically (and culturally) Verizon is used to competing on the quality of its network. This is the positioning that has made it a leader in the cellphone market. Verizon's wireless business represents a far greater portion of its value than its wireline business (comprised of the not-profitable FiOS and the declining twisted-pair business). It is perhaps not a coincidence that Verizon operates in the densely populated East Coast. The economics of building these networks are far less attractive when the population density is low.

Verizon deployed FiOS before AT&T launched U-Verse and, by going early, chose to deploy its video service using QAM, the same technology as cable uses, rather than the still-developing video-over-IP, the way that Internet video is delivered. I don't think this is a matter of vision, everyone probably saw that IP video was coming, but, again, an issue of quality. Everyone knew that QAM worked; Verizon didn't want to take the risk that it would build this state-of-the-art network and not be able to deliver top-notch service.

AT&T took a different approach and used its twisted pair wires into the home. The advantages of this approach is a much lower cost of deployment and a quicker deployment, since new wires do not need to be run.

At the time of its launch, there were skeptics that AT&T's approach would work -- that is, provide service of an acceptable quality. One of the limitations of U-Verse via twisted pair was that it could only deliver 3 HD signals into a house simultaneously. Another is that Internet speeds for its fastest level of service are 24 Mbits/sec, modest compared to the gigabit speeds that cable can deliver and Google Fiber is delivering but perfectly competitive versus today's average cable modem offerings.

AT&T didn't build U-Verse for the future, they built it for the present. If demand for faster Internet speeds (or more HD) didn't materialize, they were fine. When demand did materialize perhaps they would be saved by some superior compression technology (that could squeeze more bits through the twisted pair) or they would actually run fiber-to-the-home then or some hybrid system using wireless spectrum or...something else.

Perhaps DirecTV is the something else.

So here's the potential magic of AT&T's DirecTV purchase. If AT&T can take video off of U-Verse, then there is more capacity for broadband Internet traffic on that plant. Because U-Verse is IPTV, it is not a simple as saying that the capacity devoted to video could be redeployed to provide faster Internet service. To the extent that U-Verse is not providing video service, presumably all the bandwidth would be available for Internet access 24/7. Currently, even if the bandwidth is dynamically allocated between TV and Internet access, since the TV is on so many hours of the day, presumably the bandwidth being used to deliver ESPN HD live while recording AMC HD and HBO HD is coming at the cost of less-than-screaming Internet service. Of course, this is the exact opposite of what AT&T needs to say (and is saying) to get regulatory approval for the deal. Regulators do not look favorably upon removing a choice from the marketplace (see AT&T's failed acquisition of T-Mobile which, given T-Mobile's revival regulators must see as a success). Bear in mind, migrating U-Verse video subs to DirecTV would be a 5-years-out strategic move, not a near-term strategic move. (AT&T CFO John Stephens "This transaction is not based on freeing up any of the wired capacity.")

This is why buying DirecTV is may be a good strategy for AT&T, but buying Dish may not be necessary or desirable for Verizon.

This break seems analogous to one-time cable giant Tele-Communications, Inc., better known as TCI, and its decision two decades ago to start the Headend in the Sky (HITS, now part of the Comcast Media Center) to be able to provide hundreds of digital channels cheaply on its scores of small rural cable systems where there would be no positive returns on the capital required to rebuild them to the standards used in more densely populated urban and suburban areas (known as HFC for "hybrid fiber coax"). HITS was a cheaper alternative to a rebuild.

AT&T Buys DirecTV: Some Macro and Micro Thoughts

A few thoughts on the day after the big merger announcement:

Unlike the Comcast-Time Warner Cable-Charter proposed deal, AT&T's purchase of DirecTV "would eliminate a choice for pay-TV customers in some markets." In those areas where AT&T offers U-Verse service, a consumer likely has a choice of four competitive providers: the incumbent cable operator, Dish Network, DirecTV, and AT&T. If this merger goes through, the four choices go down to three and the new company includes one of the giant providers (as opposed to a combination of two of the smaller ones). While antitrust is far from my area of expertise, it appears that this is exactly the same outcome that doomed AT&T's attempted acquisition of T-Mobile.

While having AT&T and DirecTV under the same ownership would appear to facilitate bundling services for consumers (e.g., in non-U-Verse areas the combined company could offer phone plus DSL plus DBS plus cellphone), unless the DirecTV brand goes away, it would still appear to be the sort of shot-gun marriage that all current and prior telco-DBS "synthetic bundles" are and have been. It's not an elegant solution and "people are abandoning DSL in droves, and buying cable broadband".

When I've read of DirecTV's strong cash flow, but otherwise difficult strategic position (a TV-only provider in an increasingly bundled bustiness) and how AT&T could really use the DirecTV cash to fund its dividend, the story sounded suspiciously like Viacom's 1994 acquisition of Blockbuster to fund the acquisition it really wanted, Paramount Pictures. How did that one work out? Not that well.

Would AT&T apply the DirecTV brand to U-Verse video offering? Maybe that's a better idea. As AT&T's press release on the deal states: DirecTV is "the premier pay TV brand with the best content". The U-Verse brand is probably meaningless. Why anyone has a brand with a hyphen in it is beyond me. It is clunky and not web-friendly (the URL for the service is uverseonline.att.net, although u-verse.com does redirect to it -- why have consumers wonder if they include the hyphen or not. DirecTV's URL is simply directv.com).

This deal should seem like a homecoming for Dan York, DirecTV's chief content acquisition executive. It was just 2 years ago that he left that same role at AT&T.

Programming savings will not be as easy to come by as they are in a typical cable acquisition. DirecTV's distribution rights may be limited to its single DBS system and, if that's the case, would not have the right to simply add AT&T's systems to its affiliation agreements (and take advantage of DirecTV's greater purchasing power). Comcast, by comparison, would very likely have the right to do exactly that with the Time Warner Cable systems. It is always simpler if one does not have to negotiate. DirecTV already has relatively low programming costs as it is a giant pay-TV distributor; the programming cost savings would largely come for the much smaller base of AT&T U-Verse customers.

Could the NFL allow DirecTV to sell Sunday Ticket on U-Verse as well as DBS, but not provide it to other distributors? That could be interesting, but it would have to be negotiated. It is very unlikely that DirecTV would have the right to extend Sunday Ticket to additional platforms under its current (and expiring) deal. Would give U-Verse a leg up that it has never had before, but only a limited footprint in which it could take advantage of it. It would be an odd decision for the NFL: Sunday Ticket would be available from two providers in a minority of the country and one provider in the vast majority of the country. That's not an obvious thing to explain to consumers.

NFL Sunday Ticket is clearly on AT&T's mind. From its 8K filing about the deal: "The parties also have agreed that in the event that DIRECTV’s agreement for the 'NFL Sunday Ticket' service is not renewed substantially on the terms discussed between the parties, the Company may elect not to consummate the Merger, but the Company will not have a damages claim arising out of such failure so long as DIRECTV used its reasonable best efforts to obtain such renewal."

Packaging differences: Would DirecTV try to make the DBS and U-Verse packages of services more similar. Or would the combined company enjoy the dealmaking flexibility of having good-better-best on 2 different platforms and now have more ways to split the baby. In any event, the companies say they don't plan any large packaging changes.

Other perspectives:

• VideoNuze's Will Richmond is not a fan of the backward-looking deal.
• Howard Homonoff sees more work for the federal communications bar.
• Multichannel News's Mike Farrell sees 5 reasons the merger might not fly.
• The Diffusion Group's Joel Espelien thinks that AT&T needs DirecTV to have TV Everywhere video content for its wireless and broadband customers. I think he's totally off-base. TVE is a small portion of video content online and not even used by most pay-TV customers.
• Deadline's David Lieberman thinks Peter Chernin and over-the-top video is the key to the deal. I would tend to doubt that.

Counting Bulks with Comcast's CFO

In his opening comments on the Comcast 1Q 2013 earnings call, CFO Michael Angelakis made some curious statements about counting subscribers in bulk-billed accounts:

In addition, we implemented equipment price increases for [D to As] and HD DVRs to this larger base, which in combination negatively impacted our customer base during the quarter. However, about half of our video subscriber losses were due to the methodology we use to count [MDU] subscribers under our bulk contracts and the other half were primarily video-only customers.

As you may know, we count video customers that are billed under bulk contracts on an FCC equivalent or [EBU] basis, which results in fewer customers as rates increase. In order to improve our transparency in how we report and manage these bulk contracts, we’ll be changing our external reporting to a billable units methodology at the end of the year. We believe this change will reinforce our operational focus in this customer segment, and align our video customer account methodology with the rest of the cable industry.

Comcast's spiffy logo, NBC's peacock was added in December

Let's parse these statements. Comcast is changing its methodology used to count MDU (multiple dwelling unit -- e.g., apartment buildings) subscribers. The industry-standard method for paying programmers is that MDUs are paid on an "EBU basis". EBU stands for equivalent billing unit (or equivalent basic unit). The concept is that if a building gets a package of service that costs $15,000 per month and a residential subscriber with the same package would pay $100 per month, then the building has the equivalent of 150 residential subscribers, irrespective of the number of actual units in the building who are receiving service. Typically bulk-billed accounts get a rate break, in exchange for providing service to every unit (where the cost is bundled into the building's maintenance fees to the tenants), the cable operator will charge the building something less than the full retail price (since it doesn't have to market the service to each apartment individually). Historically for cable operators, the bulk discount was 30% -- a building with 100 units would be charged at the equivalent of 70 residential subscribers.

One of the most competitive parts of the multichannel television business is providing service to MDUs. Individual apartments face a host of issues subscribing to DirecTV or Dish Network, notably the need a place to put a dish antenna that can see the provider's satellites -- a challenge if one does not have access to the roof. The building itself, however, does not have this problem -- it owns the roof. Dish and DirecTV aggressively discount their services for apartment buildings -- as DirecTV notes on its website to building owners: "you can offer your residents the amenity of reduced package prices." Needless the say, bulk discounting often exceeds the old 30% amount. As Michael Angelakis notes, as the residential price goes up faster than the bulk price (which may not be going up at all), the EBU number is declining -- even as the number of units receiving service in the building is unchanged.

So, that describes the "old" method of counting subscribers in bulk accounts. What is the new way? Angelakis said that "we'll be changing our external reporting to a billable units methodology". This sounds to me like the count of actual units in the building getting service, irrespective of the discounting. One thing it definitely will be is a bigger number -- a great way to obfuscate the declining value of the bulk accounts. Comcast does have a history of liking to report bigger numbers. For many years it reported digital boxes it had deployed, rather than digital subscribers the way every other cable operator did. (Typically digital boxes were 40% higher than digital subscribers -- since many digital subscribers had multiple digital boxes. Note the Comcast's definition of a "digital subscription" in its 2001 annual report, it's in notes 5 and 6 on page 6.)

It is contrary to my experience that Comcast's move on counting bulks is "aligned" with the rest of the cable industry, I would have assumed the opposite. Perhaps Comcast is announcing this change now, three quarters before it plans to implement it as a way of enticing others to follow suit.

So, what have we learned? Comcast lost 60,000 basic subscribers in 1Q13 and it is attributing half of that loss, 30,000 subscribers, to lowering the cost of the video service it provides to MDUs, rather than actually serving fewer subscribers. Since we don't know how many Comcast subscribers are in bulk-billed arrangements, we don't know if that number represents a small or dramatic decline in the pricing of service to MDUs.

Updated (7 May 2013): Charter released its 1Q 2013 earnings today which included a few notes about bulks as well. This is the complete text of footnote (o):

Included within commercial video customers are those in commercial structures, which are calculated on an equivalent bulk unit ("EBU") basis. We calculate EBUs by dividing the bulk price charged to accounts in an area by the published rate charged to non-bulk residential customers in that market for the comparable tier of service. This EBU method of estimating video customers is consistent with the methodology used in determining costs paid to programmers and is consistent with the methodology used by other multiple system operators. As we increase our published video rates to residential customers without a corresponding increase in the prices charged to commercial service customers, our EBU count will decline even if there is no real loss in commercial service customers. For example, commercial video customers decreased by 10,000 during the three months ended March 31, 2013 due to published video rate increases.

Apparently, Charter is seeing the same drop in bulks due to effectively lower pricing in the MDU market that Comcast is seeing. Additionally, unlike Comcast, Charter sees counting commercial subs on an EBU basis as "consistent with the methodology used by other multiple system operators".

What Have We Learned About Over-the-Top Video and What We Can Expect To See

The fragmentation of over-the-top devices is a tremendous pain for programmers. Not only do Roku, Samsung Blu-ray players, Sony TVs, XBoxes and iPhones require separately produced apps, they often require separately encoded video. The implication is that only the most ubiquitous programmers (e.g., Netflix) will find it worthwhile to be on every platform and that the smaller programmers will go to the most open ("small" here, means, in part "can't afford the risk of having my app be rejected") and popular platform, which is probably very good news for Roku. This area of the business is bound for a shakeout.

Over-the-top programming is already very competitive with cable offerings in a few small areas of the business: new hit movies (can be rented from iTunes as easily as cable VOD), out-of-market sports packages other than the DirecTV-exclusive NFL Sunday Ticket (e.g., MLB Extra Innings) and adult video (see prior post on this topic). Over-the-top is least competitive with cable in offering basic and premium cable networks. Aereo, if it survives the legal challenges it faces, represents a portion of the package, for those who can not or do not want to use their own antenna to pick up free broadcast television.

It is difficult to imagine that over-the-top video will have the same access to "cable" content in the future than it had in the past. Cable programmers make too much money selling their services to multichannel distributors (and the advertising on such services to major national advertisers). Starz walking away from renewing a deal Netflix is the best example of this. As noted in a New York Times article about the 2012 DirecTV-Viacom deal "free access to people who don’t subscribe to DirecTV or another similar distributor is likely to become more restrictive, thereby fortifying the existing model of TV distribution." Someday over-the-top providers might be able to provide some programmers with enough money to make it worth their while to jeopardize their relationships with traditional multichannel distributors, but that day does not appear to be in the next year or two. Nothing -- short of new governmental regulation, that is -- can force a critical mass of cable programmers to sell to the potential disruptors of the multichannel ecosystem.

Over-the-top programming often requires juggling multiple devices and subscriptions. The most satisfying way to "replace" a multichannel subscription probably involves a combination of Netflix, Hulu Plus, iTunes rentals, Aereo, Roku services, over-the-air broadcast signals, etc. and none of them are available on any one device. (Although apps like Fanhattan could help consumer's manage the juggling).

Over-the-top content providers can and will develop their own original content, but it is unclear if this content will be a suitable replacement for a multichannel subscription. Netflix with its original content initiative and YouTube with its investment in original channels are pouring resources into original programming. If there is a return on this investment and it continues, it will make over-the-top more attractive. On some level it does not matter if the new content is a good substitute for what comes with a multichannel subscription, programming is rarely a zero-sum game. The growth of VHS rental didn't hamper the growth of cable subscriptions, but it did destroy the repertory movie house. One notes that the last attempt to enter the multichannel business head-on with original content was Cablevision's Voom and that didn't work out very well.

The rising price of a multichannel video subscription is the one given. With more distributor competition (hello, Google Fiber), the programmers are in a strong position to raise prices. Even Viacom (which "lost" the PR battle in its standoff with DirecTV), still managed to get a 20% price increase -- not bad for a losing effort, if not the 30% they had sought initially.

The distributors, resigned to paying more for content, are seeing what they CAN get at the negotiating table. Two things come to mind: greater TV Everywhere rights (an interesting #1 on this list) and greater restrictions on the amount and quality of content that cable programmers can put online for free or sell to over-the-top providers. Given the small incremental cost of the former and the relatively small revenue contribution over-the-top sources are providing today, these tradeoffs are not that difficult for cable programmers to accept.

The metaphorical "pricing umbrella"

As multichannel prices rise, to the extent that TV Everywhere is very valuable to the consumer, he or she will be content. To the extent that it isn't that valuable, he or she is a loser. However, the consumer facing a higher multichannel bill now has more incentive (and more money) to consider alternatives. In other words, the higher multichannel bill creates a pricing umbrella for over-the-top video.

This is NOT what I mean by over-the-top video

Inferences from the DirecTV-NFL Sunday Ticket Price Cuts

According to Bloomberg News, DirecTV is cutting the price of the out-of-market NFL Sunday Ticket package by 40% to existing customers ($200 instead of $325) and giving it away free to new customers.

What does this mean?

1. It is unlikely that DirecTV is paying for Sunday Ticket on a per-Sunday-Ticket-subscriber basis. That sort of structure would make a retail price cut extraordinarily expensive. Most likely DirecTV pays the NFL a flat fee or a share of the revenue with some aggregate minimum.
2. Competition among distributors continues to heat up. NFL Sunday Ticket may be the only marquee exclusive service in the multichannel marketplace. DirecTV clearly sees more to gain by using it to lure or retain subscribers than to increase average revenue per unit (ARPU). Sweet introductory offers are basically a form of price discounting (in this case the sugar is added programming value rather than a per se lower price). The flashing light is the warning that distributors' margins will continue to go down.
3. For all the discussion of the consumer appeal of a la carte, bundling is more powerful. New DirecTV customers are getting NFL Sunday Ticket as part of their bundle. Since only about 10-15% of DirecTV customers usually buy the package, that would suggest its appeal isn't that broad. Yet, here it is, front and center of a subscriber acquisition strategy.

Another wrinkle is that customers who want mobile, online and HD access to Sunday Ticket, whether they are new or existing customers, will pay $100 extra (last year that premium was $60). That's counter to the usual TV Everywhere approach where mobile and online access is included in the package as added value. The programmer charging extra for HD programming has also disappeared from the multichannel landscape. Mobile, online and HD fees may not be part of the NFL's flat-fee, yet. It seems that between the NFL and DirecTV they don't know how to value that TV Everywhere added value. As Mike White, DirecTV's CEO put it in an interview with Bloomberg “Charging for digital rights is an experiment. There aren’t great models in how you get your price elasticities right there. We’re all learning what will the market bear in terms of digital rights.”

Once they do, look to see mobile added to the bundle. As for charging extra for HD, at a time when the sets are 69% penetrated to households -- that just seems odd.

Intel-evision?

According to an article in the Wall Street Journal, Intel is looking to develop at web-based video service to compete with cable and satellite. Intel's plan is to create a virtual MSO, a business idea that many have been kicking around in one form or another.

Consumers would welcome another choice of video provider. As one measure of customer satisfaction, Consumerist's cheeky "Worst Company in America" 2012 bracket features eight providers of multichannel television (Comcast, DirecTV, Dish, Time Warner Cable, Charter, Verizon, AT&T and CenturyLink), among its 32 "contestants".

However, facts are stubborn things (hat tip, John Adams). Multichannel penetration is very high ~90% -- there are relatively few households who do not see it  as a worthwhile purchase, despite the fact that subscription prices increase every year. That suggests that the customer satisfaction issue is likely less the service itself (not that it doesn't have its frustrations - long times on hold, among them), than frustration with the price and general lack of choice. (If it didn't, Charter wouldn't be doing things like this.)

If Intel were to offer a me-too service (i.e., a comparable package of services) at a lower price, it would likely attract some customers. However, multichannel providers are already cutting prices in a de facto way, as they offer sweetheart deals for new customers, particularly in areas of high competition. It isn't easy to compete on the low end with customers churning through the introductory offers in search of the best deal.

The me-too offering would have a competitive advantage if its operating cost of delivering the service were lower than the incumbents. It won't be because of lower programming costs. A new entrant into the market, like Intel, can expect to pay 20% or more greater programming costs than the incumbents. Intel wouldn't have to build the expensive distribution system (laying cable, launching satellites) that the incumbents did, but would be on the hook for the variable cost of delivering bits to its customers. The jury is still out on how much less expensive that would be. However, that does make Intel, like Netflix, highly dependent on the ISPs (who are the cable and telephone companies) to continue to provide unlimited service to their customers.

There are alternatives to a me-too service, of course. A la carte offerings of channels is a popular request, but one that it is hard to imagine the programming community embracing. (LA Times: Don't hold your breath for a la carte cable -- is that clear enough?) Given the high penetration of multichannel television, there isn't much reason for the programmers to look at a different, potentially less lucrative business model, unless they have to do so (as the music industry had to, after rampant piracy ended their chokehold on packaging and pricing). However, the multichannel subscription television market probably has less piracy today than it did in the past, due to the changeover from less-secure analog systems to more-secure digital ones). So, it won't be driven by piracy, at least not today's piracy, but maybe tomorrow's.

This is not the first Intel over-the-top story. GigaOm reported earlier this year that Intel was "in talks to buy Roku". BTW, Roku is now looking to raise some $50 million to expand...hmmm.

It is always interesting to see new entrants to an industry as that's often the origin of the new ideas that shake things up (Walt Disney's theme parks, Apple's iPod, iPhone and iPad). If Intel has that sort of idea, there will be a place in the market for them. There is certainly room for innovation in the distribution of television.

Comcast, DirecTV No (HBO) Go on Roku

Comcast and DirecTV have decided not to authorize their HBO subscribers to use HBO Go on the Roku platform. They do have deals for HBO Go and they do authorize the app on other platforms (e.g., iPhone, iPad) and it would not cost the distributor or the customer any additional money.

There are two good reasons for this choice: they don't want the competition and don't want the strong programmers to find their own way to the television set, as per my earlier post.

Roku 2 XS with some of the services available on the platform

Below see Rich Greenfield's demo of HBO Go on the Roku box. It does an excellent job of highlighting the difference between HBO Go on the Roku and the lesser experience of HBO on Demand on Time Warner Cable, as seen in the second video.

NFL Sunday Ticket without DirecTV

DirecTV, which has exclusive rights to NFL Sunday Ticket, will be selling the subscription package to any non-DirecTV subscriber for the first time this fall.  In an interview with Multichannel News, Alex Kaplan, DirecTV's Senior Director of Product Management, said that "It's our attempt to open up the universe a bit to people that can't get DirecTV -- students, people who live in big apartment buildings and people who live in New York City -- and it's a new revenue stream for us."

NFL Sunday Ticket via the PlayStation 3 will be cost $339.95 for the season; the package sells for $334.95 on DirecTV.

Letting Others Get Your Crown Jewel - Is that Smart?

It is a widely held belief that the main purpose of Sunday Ticket exclusivity for DirecTV was to attract customers to its platform (instead of cable, Dish or telco video services.  It is well known that NFL Sunday Ticket is, if not a loss leader, does not generate a whole lot of margin for DirecTV.

Making Sunday Ticket available to non-subs, is, at least, a little odd.  It is hard to imagine Cablevision providing News 12 over-the-top to Verizon customers.

Cable operators have long coveted access to Sunday Ticket (no one likes to be the platform WITHOUT a top quality programming service). It seems that if the package is available to cable customers over-the-top, by definition it is no longer is as much of competitive differentiator for DirecTV.

DirecTV's Kaplan says the target is residents in cities like New York, where tall buildings prevent a clear signal for satellites, and video-game playing college students. “There are real revenue opportunities here from non-DirecTV customers, and while they won’t sign up for DirecTV right away, ultimately these people could move to the suburbs, and we’ll have a relationship with them that could lead to a conversion to DirecTV,” said Kaplan.

That sounds fine, if the PS3 is more penetrated in New York City or college campuses, but I think most of the PS3s are probably in the suburbs.

Why PS3?  What About Other Platforms?  We Are in an Experimenting Age

The NFL has argued that Sunday Ticket has a minimal cannibalizing effect on the viewership on the nationally telecast games because its availability is limited to DirecTV. That's important because the vast majority of NFL television revenue is from Fox, ABC/ESPN and NBC, not DirecTV.

However, if the goal was experimentation, the PS3 is an odd choice.  The PS3 accounts for more streaming hours for Netflix than any of its other platforms -- 30% of the total, according to an analysis by Sandvine; this choice was the not obvious toe-in-the-water play, that say, Roku, would have been.

Eagle-eyed observers will note that DirecTV has offered Sunday Ticket via broadband already with Sunday Ticket To Go, a $50 add-on for DirecTV Sunday Ticket subscribers that has been offered since 2008.  STTG is available on iOS, BlackBerry, Android, other consoles, etc.

DirecTV did make Sunday Ticket To Go available to DirecTV non-subscribers in 2009 (in Manhattan) and 2010 (everywhere), but this offer was only available to people who could not subscribe to DirecTV service.  In fact, a prospective customer would have to first sign up for DirecTV, then be rejected by a DirecTV installer.

DirecTV's Kaplan's other interesting comment in the interview is that "We're not going to let it [NFL Sunday Ticket subscriptions on PlayStation] go to an unlimited number.  We're trying to figure out what is the market for this at that price point."  Confusingly, in a later interview with Bloomberg, he added “If this test is successful, we have the opportunity to distribute ‘Sunday Ticket’ through various different devices, and we’re certainly open to relationships with other consoles and Internet-connected devices.”

Perhaps DirecTV thinks that they have already picked off all of the viable satellite television customers who really valued Sunday Ticket. It could be that the real test is less about the incremental revenue the broadband offering will bring, but whether the existing DirecTV Sunday Ticket subscribers will churn out at any greater rate if Sunday Ticket is available over-the-top.

Tangible Evidence of "Cord Shaving"

The title of this post is provocative, but it is not as provocative as the content that inspired it.

For many years, cable executives and some industry analysts have downplayed the impact of cord-cutting on the multichannel subscription television business. The arguments have some merits. Multichannel penetration continues to rise each quarter. Broadcast has been free competition for cable television forever. The most popular online video is YouTube, which, while a wonderful service, is not a substitute for a television subscription, except in the sense that people watch television and people watch YouTube. Netflix, even in its DVD-by-mail incarnation, got a lot closer to being a substitute. The programming (movies and TV series) was the sort of thing that people watched on TV. It did offer a large amount of choice -- one of the primary virtues of a multichannel subscription versus broadcast television. It was an all-you-can-eat subscription that offered a lot of value for heavy users (or multiple person households). Netflix was seen as a good service for "cord shavers" who might drop premium channels like HBO and Showtime and get their movie fix from the company with the red envelopes.

For those waiting for the multichannel television business to be roiled the way that the music business was, the first big cracks were admitted last week. The dirty little secret is porn.  Porn on cable was a wonderful business.  The retail prices were high, the marketing costs were low (consumers who want it seek it out) and the wholesale costs were modest (there are lots of companies that make porn and the cable companies easily pit them against each other; also there are few barriers to entry in the porn business and it requires little capital, so new suppliers are always entering the market).

Multichannel distributors never talked much about porn in their earnings calls before.  The subject was considered...in poor taste.

Time Warner Cable and DirecTV were forced to admit that the reason for the declines in their VOD business were large declines in the sale of porn.

It is no wonder that porn is the canary in the coal mine. Anonymity is a plus for consumers (no need to explain the VOD purchase on the cable bill is a plus in many households). Short form content is often a good substitute for long form content in this genre (most long form content could be considered a compilation of scenes -- the unit of payment for the performers). A relatively small amount of the porn market is branded (Playboy, which doesn't consider what it provides as porn, is the strongest brand name in "adult video"). Also, there is a tremendous supply of free content on the Internet.

What is the next genre to be cord shaved? Many categories of news seem to share these characteristics:  weather information, sports highlights, entertainment news are some of the more obvious examples.  These sorts of services (The Weather Channel, ESPNews, E!) do have the advantage of being bundled on the basic tier, rather than being a separate purchase, for consumers. These channels are also bundled with other channels for sale to the distributor. Therefore they are not easy to drop, even if their value to the bundle is declining. But it sure looks like their value to the bundle is, in fact, declining.

DirecTV 1Q11

Net sub additions 184K versus Dish's 58K.  DirecTV now has 57.9% of the DBS marketplace, the highest penetration since I started tracking this regularly in 1Q03.  DBS subscriber growth versus prior year was only 1.8% -- a new low.  The prior low was last quarter -- 2.1%.

DirecTV 10-Q