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?

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 New Video Service "Stream"

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

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

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

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

Unique to Stream:

• Includes live channels
• Includes broadcast channels
• Includes network DVR functionality
• Content from HBO

True for both:

• Available in Comcast's cable footprint
• Available to Comcast Internet subscribers
• Can be watched in-home
• Includes significant recent on-demand programming
• Can be watched on a computer, tablet, or phone
• Does not require a cable video subscription

Unique to Netflix:

• Viewable outside of Comcast's cable footprint (i.e., in any part of the US)
• Available to customers via any form of Internet access
• Can be watched in- and out-of-home (e.g., office, neighbor's house, mobile, coffee shop)
• Easily viewable on a TV
• Large library of movies and TV programs
• Some high profile original programming

Stream is a very different service from a Netflix.

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

In offering this service, Comcast gets the following:

• An up-sell service for its Internet service
• A press release -- "we have a strategy to address cord-cutters"
• A way to monetize TV Everywhere infrastructure (As Comcast's post notes, "Xfinity Internet customers can just sign-up online, download our Xfinity TV app and start watching." (emphasis added))
• A new service that should not cannibalize the core cable video business.

That's a solid list of benefits for Comcast without a whole lot of downside. Why not?

Is it a threat to Netflix? On some level, Stream is a threat. A lot of the viewing is at home and some of it is not on the TV. Streampix, a component of Stream, does include a library of movies and TV shows, so it is a poor man's Netflix on that dimension. The inclusion of the broadcast channels would appear to have a lot of value. However, if you are the sort of person who does not own a television, I wonder how much you would value broadcast content. Also, Netflix, starting at $7.99 per month, is materially less expensive.

Is it a threat to HBO Now? As an alternative way to get the content, sure. All that we know about the usage of Netflix suggests that vast majority of its usage is in the home. While Stream would not provide the benefit of out-of-home use (or on-TV viewing) that HBO Now does, it offers a lot of other benefits, that could make that trade-off attractive to some customers. Stream seems like more of a threat to HBO Now than to Netflix. Since the price of both services is the same, how do you value HBO Now's benefits (view on the TV, view out of home) vs. Stream's (get broadcast content, get DVR functionality).

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

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

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.

HBO Go Without Cable, Maybe

HBO has announced that it plans to offer a streaming service without a cable subscription sometime in 2015.

As way of background, to date, HBO's streaming platform, HBO GO, has only been available as "added value" to an HBO-on-cable-television subscription. (Cable, for these purposes, includes DirecTV, Dish, Verizon FiOS and AT&T U-Verse -- anything the FCC would call an MVPD).

For those who doubted that such a move was inevitable, you were wrong. For those who think this changes everything, I suspect you are also wrong.

Here's why: I strongly suspect HBO will be marketing the streaming service, let's call it HBO GO for these purposes (although it may be a "new" service with a different name and content) in conjunction with its distribution partners -- in this case, the ISPs who provide the nation's high speed home Internet access. And those companies just happen to all be distributors of HBO, the cable channel, on their multichannel television platforms.

After all, many "cable" operators have more broadband customers than video customers.

From the named providers on Leichtman Research's 2Q14 list of top broadband ISPs, exactly two of them, Windstream and Fairpoint, do not offer (yet) their own facilities-based multichannel television service (and both of them do on a non-facilities-basis via partnerships with Dish and DirecTV. respectively).

Much like the HBO with a cheaper smaller cable TV service offered last year (see GigaOm's article from December 2013), the customer will still have a relationship with a distributor. For the distributor, HBO GO represents an "upsell opportunity", something they don't currently have with Netflix, which sells its service direct to consumers.

To actually go direct to consumers would risk HBO's relationship with the multichannel television providers, who, it has often pointed out to the financial community, allow it to be much, much more profitable than Netflix. No need to kill that egg-laying goose.

HBO is here depicted as a woman wearing a purple suit. The MVPDs are represented by the fowl.

Perhaps HBO will offer HBO GO via ISPs that are not also multichannel television distributors, but, if HBO does not, they aren't giving up very much of the potential market. And HBO can always change its mind about that later.

The big losers in this are the multichannel video providers that are not ISPs: DirecTV and Dish Network.

Update (17 October 2014): More support for my view: It looks like the streaming-only HBO service may cost $15 per month, about the same as it costs as an add-on to basic cable.

Update (23 October 2014) via the Wall Street Journal: “Why is giving our distributors the opportunity to sell them an HBO subscription anything less than a win-win?” [HBO CEO] Mr. Plepler wrote in an email. “To us, that’s not cannibalization, that’s growth.” (full article --
subscription required)

Update (3 November 2014) via Multichannel News: About the new HBO streaming service, Richard Plepler said it "would at first be marketed to the 10 million broadband-only customers of its cable and telco-TV affiliates; operators would handle all billing, customer service and customer control; and the service would be sold in partnership with distributors." full article

Update (6 November 2014) via Deadline: Richard Plepler, HBO's CEO "aims first to go after 70M pay TV homes that do not get HBO. In broadband 'we think there’s 4 to 5 million that we can also get with our partners. I’ve talked to all of our distributors. We want to lean in with a new effort in the new year.… I see nothing but upside for us, for the consumer, and for the distributor.'” full post

Others on the news:
David Carr in the New York Times
Will Richmond on VideoNuze
Howard Homonoff on Forbes
Sahil Patel on VideoInk
Mike Farrell on Multichannel News
Peter Kafka on Re/code
Jon Russell on GigaOm
David Lieberman on Deadline
Joel Espelien for The Diffusion Group

Over-the-Top Video and The Innovator's Dilemma

Everyone in the ecosystem is wondering about the future of multichannel television and no one knows what to expect. A good theory can help sort out the unknowable. In this post, I will work through what The Innovator's Dilemma theory suggests for over-the-top video and multichannel television incumbents. The fit of theory and subject is pretty good and helpful for seeing the forces shaping offerings into the future.

"Prediction is very hard, especially about the future" - Niels Bohr, Danish physicist

Clayton Christensen's The Innovator's Dilemma is a highly influential book about business markets, particularly what happens when a disruptive new technology appears on the scene.

From Christensen's website:

An innovation that is disruptive allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.

Characteristics of disruptive businesses, at least in their initial stages, can include:  lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics.  Because these lower tiers of the market offer lower gross margins, they are unattractive to other firms moving upward in the market, creating space at the bottom of the market for new disruptive competitors to emerge.

The disruptive innovation definition above is a good fit for over-the-top video, notably YouTube and Netflix, but also Hulu, iTunes, Amazon Prime and Aereo. All these services are, in some form, arguably lower quality and, individually, less expensive relative to multichannel subscription television ("cable TV" for short). If you have cable and try to recreate cable TV by substituting one or several of them, you will probably be disappointed overall. (Many have tried cord-cutting and written about it.)

[The one part of the definition that does not fit is that it is not accurate to say that cable TV "was historically only accessible to consumers with a lot of money." It is clearly a mainstream service by any measure. The service that requires "a lot of skill"? -- that's probably BitTorrent.]

Christensen's theory is that eventually the improvement of the "inferior" new product gets a toehold in a small market that is ignored by the incumbent. Gradually the new product improves, largely through technological advances. Over time that product becomes a better and better substitute for the incumbent product and then, usually all of a sudden, the economics of the incumbent's business are destroyed by the newcomer.

Applying the theory to this case, the toehold market for over-the-top video may be mobile. Selling a separate mobile subscription was basically impossible, as Qualcomm found with its Flo service. However, multichannel television was (and largely is) unavailable on a smartphone and all of the top over-the-top services are easily available on such devices.

How does over-the-top video (OTT) become a bigger threat to the multichannel TV ecosystem:

1. The technical quality will improve (LTE, 802.11ac wifi, gigabit ethernet to the home)
2. The quality of the content will improve (YouTube's investments in channels, Netflix and Amazon's investments in original content, continued acquisition of quality library content)
3. The availability of the service will improve (Aereo's expansion to other markets, more ubiquitous public wifi)
4. The convenience of the service will improve (e.g., better interface design, more accurate recommendation engines, DVR in the cloud, etc.)

The frightening thing for the incumbents is that none of these developments above require OTT services to do anything other than what they have been doing. Notably, they do not have to take on the risk of making a frontal attack on cable and licensing the popular cable channels.

Even more frightening for incumbents is there is a strong recent history of mobile solutions devouring home-based solutions. More than half of households don't use a landline phone and portable digital audio has done a similar number on home high-fidelity equipment. It is lost on no one in the TV business that this happened without cellphones ever sounding as good as a landline nor an mp3 sounding as good as a CD.

The usual strategy for incumbents, well described in Mark Suster's excellent blog post Understanding How the Innovator's Dilemma Affects You. is that the incumbent provider increases "spending on features / performance / functionality. They gather with their cadre of high-requirement customers and have planning sessions about how they can make even more performant products."

Cutting the price is not an appealing option for the incumbents because they do not want to reduce their profits and cannot cut their prices (and costs) sufficiently to compete with the upstarts. After all, these are big, successful profitable business -- they can't throw that away. So, instead the incumbents respond to the competitive threat by improving the product. 

The problem with the improving-the-product strategy is that it does not work in the long term. As Suster puts it "customer requirements don’t grow exponentially relative to their existing line [i.e., current service]...over time to the new entrant's functional offering [gets closer to the incumbent's] and there is a huge and rapid sucking sound that pulls the bottom out of the market as waves of customers 'trade down.'” In other words, the multichannel distributor can add all the value it wants, but that doesn't mean the consumers will continue to see their expensive package as their best option in the marketplace.

[A multichannel distributor, of course, could always cut its costs by dropping channels, especially expensive ones. However, given the competition between cable, DBS, telco TV and upstarts like Google Fiber -- such a strategy would certainly hurt its attractiveness to the large mass of consumers who want multichannel television. Inviting current customers to shop for a new video provider by dropping their favorite channel might also lead to such customers finding a new broadband provider as well.]

So, that means OTT going to kill cable TV, right?

I don't think that is clear that cable TV is a goner. Unlike phones and stereo equipment, home TV screens have gotten much bigger in the past decade. High definition and DVRs have improved the in-home TV experience. If consumers have spent more on home entertainment gear, it seems somewhat incongruous that they would be willing to forego the premium television content that takes best advantage of it.

The role of content in this marketplace seems like a different factor than anything in Christensen's theory. There is nothing quite analogous (from the consumer's perspective) as a supplier of content for a disc drive or a piece of construction equipment.

OTT providers have some of the content from cable TV -- Aereo provides the live broadcast signals, individual programs are available on Hulu, Amazon, Netflix and iTunes. Live sports is available, via the "season ticket" out-of-market packages from MLB, NBA and NHL, but the more popular local teams and national games are not. There is a lot of original content available on Netflix and YouTube at various levels of quality. It is fair to say that the pay TV ecosystem has locked up the early windows on much of the best content that is available on TV and OTT might not be able to offer a material amount of that for a long time.

Still, as Howard Beale notes in Network, one of my favorite movies, TV is primarily in the boredom killing business, and at some price, not everyone needs a full package of first window premium content to kill their boredom.

What seems more likely than the decimation of the pay TV ecosystem, is its gradual move to become more of a luxury good, rather than a 90%-penetrated household utility. The opportunity for OTT video certainly increases as the spread between the cost of cable TV and the OTT alternatives increases. Netflix streaming (and Aereo and Hulu Plus) has held at $7.99 (each) per month for a while, but that might not hold in the future.

The more interesting question is: how do the programmers respond to the (inevitable) decline in the number of multichannel subscribers?

It seems unlikely that programmers will sell their linear services whole to the OTT providers, since the OTT providers probably don't want them [Aereo is the exception, since it is in the linear streaming business already. It will likely add some basic services to join last-year's addition, Bloomberg, and adding premiums that can be sold a la carte like HBO or Showtime or Starz would appear to be consistent with the Aereo model. It is less clear if those programmers would be willing to sell to Aereo, after all Starz famously stopped selling to Netflix because it was messing up its value proposition for pay TV distributors.]

What's likely is that programmers will sell greater amounts of individual programs to the OTT providers -- that is just a bigger play on something they are doing already. Disney's recent deal to send new, original Marvel programming to Netflix is a great example of this. In the past, Disney would have taken this programming -- which is not needed by its current cable channels -- and created a new cable channel.

Defining programming more narrowly -- around the cable networks' brands -- the picture gets fuzzier. The big distributors are not enthusiastic about paying higher license fees for cable networks, but the greater competition in the distribution market has led them to do so -- they can't afford to be without top channels for too long. While conceding the money, the distributors are looking for added value in those deals (e.g., TV Everywhere rights, expanded VOD rights) and one form of added value are longer windows in which the programming is exclusive to the cable network and does not appear on their websites, Hulu, Netflix, et al. After DirecTV settled its standoff with Viacom in 2012, its chief negotiator said “My expectation is that they will not increase the amount of free programming they have online.” The story after Time Warner Cable and CBS settled was similar -- digital rights was the contentious deal issue.

Since the movement of programming on a show-by-show basis is inherently fluid, the speed at which content goes from the cable TV ecosystem to the OTT ecosystem (and possibly back again, as in the Fox-Comcast library deal) can and will ebb and flow with the prices being offered.

This fluidity might suggest that the fit of The Innovator's Dilemma to the disruptive innovation of over-the-top video is not perfect. Cable TV is a mass market product, not an expensive, exclusive one, and it is not just a product, but also a distribution channel for content. This disruptive innovation may reorient the marketplace, but not lead to only a single winner.

Nimble TV's DVR Is More Interesting than Its TV Everywhere

TV Everywhere seems both wildly misunderstood and greatly overstated. In this post I will lay out what it is, why it makes sense, and how a startup announced today, Nimble TV fits into the TV Everywhere picture.

The general concept of TV Everywhere is that the multichannel television subscriber should be able to watch anything anywhere, not just at home via the set-top box provided by its MVPD (multichannel video programming distributor). A key question in understanding TV Everywhere is: What is the use case? Or, more precisely, since multichannel television is a household rather than individual subscription, what are the use cases?

1. In the car, young children in the back seat. Live Nickelodeon or Disney Channel or prerecorded programs (from the family DVR). This use may supplement or take the place of viewing DVDs on portable or car-based players. (Best Buy's selection of such products is extensive.)
2. Waiting for the bus (apologies to ZZ Top) or plane or train or whatever. There is dead time and while the smartphone has done an admirable job filling such moments with Angry Birds or podcasts or catching up on Facebook, sometimes watching a game, a bit of live news or part of the program on the DVR would be an attractive additional option.
3. A "second set" within the home. Several MSOs have created iPad apps that offer this functionality already -- Time Warner Cable, Cablevision and DirecTV among them -- and it seems to be pretty popular with everyone except Viacom. Oh, yeah, and there are people who have second sets connected to second set-top boxes, too.
4. Deep library. One of the appeals of HBO Go is the ability to watch things that no longer air on HBO, like earlier seasons of current shows (How did Game of Thrones begin?) and shows from HBO's past (The Sopranos).

TV Everywhere is added value to your existing multichannel subscription. Because it is not sold separately, it is not a substitute for it. It is "added value" rather than an extra cost service because few would likely pay for it and, more importantly, multichannel operators want to raise the cost of the package (in part because programming costs are growing faster than inflation). While everyone would prefer to create something that would inspire people to pay more for greater functionality, the last service to succeed with that model was the DVR. If the distributor does not charge a discrete amount more to the customer, the distributor has a good argument that it should not pay more to the programmer for these rights (and, in turn, the programmer has a good argument to its program providers that it should not and the program providers have a good argument that the members of the guilds who create the programs should not get anything more either). Presumably, if this innovation adds value to the system, that value will trickle down the food chain, enabling each seller to do a bit better upon the renewal of their deal with each buyer. While there will be the usual squabbling about the terms, TV Everywhere has a few real strengths as an addition to the pay-TV ecosystem.

1. It is easy to explain to consumers, since it is adding convenience to an existing service, rather than creating a new service.
2. It is not displacing a significant revenue stream for the programmers. In fact, all of the attempts to create additional TV subscription businesses haven't exactly been huge successes, with the exception of Netflix, which is only truly competitive with pay-TV on deep library (and which does provide some real money to a few programmers, most notably the CW.)
3. It enhances the value of the subscription and, thus, helps support price increases, in much the way that addition of channels to the basic package did a decade ago.

All of this brings us to Nimble TV, the startup du jour that looks to be about TV Everywhere. Nimble has an interesting business model. The concept is that it will subscribe, for a user, to a package of television service, of the user's choice, from a multichannel operator. Nimble TV doesn't need a deal with the programmer, the theory goes, it only needs a deal with the MVPD. Nimble TV will charge the MVPD's going rate for the package and then mark it up by "around $20" for the benefits that Nimble is providing. In that way, it is like buying stamps at the UPS Store; there is a markup for the convenience of purchasing them there instead of at the post office. 

The convenience, in this case, has a number of qualities:

1. The set-top box is not in your house, it is at Nimble, taking up their space and sucking down their electricity.
2. You get full-blown TV Everywhere. Every single program, including those on your DVR (more about that below) is accessible anywhere you have an Internet connection. Nimble TV will deliver a single stream of video from "your" set-top box to your iPad or web browser (the first two available clients) via the Internet. In this way, the functionality is similar to a Slingbox, but with the convenience of not having to buy the Slingbox. 
3. Instead of purchasing DVR service from your television provider or TiVo, Nimble TV will provide a DVR service with the storage of 10,000 hours (!) of your programs "in the cloud". 

Here's the issues that I see:

1. Multichannel operators may not be willing to allow a third party to have the billing relationship with one of "their" customers, particularly if it allows customers to switch providers more easily (more on that in a moment).
2. The value proposition for Nimble for a consumer may not be compelling. For subscribers who really value watching TV on their computers or other devices, Nimble does offer that. However, until it also provides service direct to the television (via a game console or Roku or some other box), it appears to offer a more compelling offering on secondary and tertiary viewing devices than it does on the primary device. Addressing this concern, however, should be trivial for Nimble, if they can make an iPad app, I'm sure they can make a Roku app. Getting onto the game consoles, which are far, far more penetrated in US households than Roku boxes, may not come as quickly.
3. The concept of a single-stream service seems not particularly useful for multiperson households. A Time Warner Cable customer with only one set-top box can still use an iPad as a a "second set" within the household (and a computer as a third set and smartphone as a fourth). While TWC TV's app does not have the same functionality as Nimble's, it does have a large portion of that functionality and Cablevision's app has more. These apps have also improved substantially in the short period they have been on the market. [I'm sure Nimble can provide more than one stream, but doing it with more than one-box would put the kibosh on using the Slingbox as legal precedent.]
4. The $20 monthly fee for TV Everywhere might not be compelling for many customers. To the extent that the subscriber is getting the DVR functionality from Nimble instead of the core provider, the savings on the television subscription might offset Nimble's cost, in whole or in part, especially as MVPDs raise the prices of their DVRs.
5. An increasingly large number of multichannel customers purchase more than television service from their provider (e.g., Internet, phone and/or home security service). If the customers takes off the video, substituting Nimble, the price of the other elements of the bundle may go up making the economics of Nimble for a customer a even more challenging.

In his highly recommended and thorough post on Nimble, I believe Rich Greenfield of BTIG Research, is mistaken in his belief that MVPDs will agree to work with Nimble and, if they do so, that the MVPDs will allow Nimble to ignore the geographic boundaries of their systems. Mr. Greenfield foresees a Nimble customers on Long Island, upset with an MVPD's drop of a popular channel during a carriage dispute (e.g. Fox-Cablevision during the 2010 World Series), simply switching to another provider's service. For the same reason that incumbent cable operators have generally not overbuilt each other, there is little reason to see why they would think they would benefit if Nimble facilitated such competition. Verizon and other overbuilders (and the DBS services) would have greater reason to sign up.

Even if the MVPD signed up to work with Nimble, it is impossible to imagine that the programmers and program providers (e.g., sports leagues, movie studios) would agree that the geographic restrictions in place when they license their programs all of a sudden do not apply to Nimble. Regional sports networks do not license their service to MVPD to provide it to customers outside of a defined geographic area and US cable networks that buy movies from the big studios usually do not have the right to distribute them in other countries. Someone else owns those rights. If Nimble does not think that ignoring these rights restrictions would be problematic, they are either hopelessly naive or woefully ignorant.

[One ancillary but related question that comes to mind is: if an MVPD is offering service via Nimble outside of its franchise area -- which community gets the franchise fees? Presumably it has to be the community in which the box resides, but the community in which the subscriber resides might not agree.]

Pulling back a bit, what seems truly compelling to me about Nimble TV is less the TV Everywhere part, than the very high capacity DVR part.  Certainly a large amount of DVR storage is a benefit that is difficult or expensive for consumers to create on their own (via a DVR Expander - 1TB of hard drive space holds about 150 hours of HD video and costs about $100; an individual DVR expander that would hold 10,000 HD hours would cost $6600, at that rate). In my household, managing storage on the DVR is a bit of a pain. While a consumer could add a DVR expander, those products have a reputation for flakiness, as do hard drives in general. Putting the DVR into the cloud, giving it a ton of capacity and making it available on my phone and iPad is something no cable operator is providing right now. However, to make that truly compelling, Nimble needs support for the TV and multiple streams to accomodate everyone in my household. Go down that path a bit and it starts to sound more and more like a service that the MVPD should be selling. Perhaps Nimble ends up going down that route eventually, being a vendor of services to the MVPD. [That was part of Sling's original plan, but being owned by Charlie Ergen didn't put Sling in a good position to be a vendor to its competitors.]

Other takes: GigaOm (Ryan Kim), CableFax (Steve Effros)

Wired Article on the Nimbleness of Cable

Tim Carmody has written an excellent article for Wired "The Nimble Empire: In Defense of Cable". He shows a keen grasp of the how the issues of the cable television and entertainment programming business models intersect with piracy and the Internet using HBO as a case in point. I had been searching for a way to incorporate Matthew Inman's brilliant cartoon I tried to watch Game of Thrones and this is what happened into a posting for this site, but now there is no need -- Carmody worked off of it and went further. I recommended both highly.

HBO Go - new info from VideoSchmooze:NYC

Eric Kessler, co-president of HBO, was the first speaker today at VideoNuze's VideoSchmooze:NYC and he shared a number of interesting facts and stories about the HBO Go service. (For those unfamiliar with it, HBO Go is an app or browser-based service which provides HBO subscribers with access to essentially all current series and movies on the service on an on-demand, Internet-delivered basis. The content offering is about 1600 hours and does not include the linear channel.) According to Kessler, the primary motivation was to extend the subscription term for an HBO subscriber. About 10 million people buy HBO each year. Some last for a few months, some stay on forever. The lower the churn (rate of disconnection), the better HBO's revenue and, since it is largely a fixed cost business, the increased revenue disproportionately drops to the bottom line. He put this in the context of HBO using technology in this manner before -- multiplex feeds (now 7 of them) and on demand (typically 150 hours of content).

• The app launched on May 1, 2011 and launched on the browser a year earlier.
• About 55% of viewing is on a computer; 45% is on a mobile device (e.g., tablet, smartphone, iPod touch).
• Of the mobile device viewing, 55% is on the iPad, 25-30% is on the iPhone and the rest is on Android phones (it is on 22 Android smartphone models, but no Android tablets).
• 70-72% of viewing on Go is to HBO original programs. On the channels originals are 30% of viewing; they are 43% of viewing on demand.
• The rest of the viewing (30%) is recent movies -- not library titles.

When the service launched on the browser, it only had 400 hours of content and the concept was that seasons of series would move in and out of the window (e.g., this month The Wire Season 3, Sopranos Season 4, Deadwood Season 1; next month The Wire Season 4...). It was well received, but the consistent feedback was "give us everything" -- expectations for online streaming and home video (set by Netflix) were to be able to get most everything in the catalog. You could start with Season 1 of a well-regarded but little seen show like The Wire at any time. Once HBO made this move, it greatly increased the value perception of Go.

One audience question was "does it cannibalize HBO home video?". Kessler laid out the following facts:

• 50% of home video is from HBO non-subscribers -- Go shouldn't have an impact on that
• 20% of home video is from HBO subscribers who want to have the physical disc - Go shouldn't have an impact on that
• subscriptions are 80% of HBO's business and home video is 20%, if some home video gets cannibalized (and DVD sales are declining systemically anyway), then it looks like the benefit is worth the cost

Kessler had little enthusiasm for separating Go from HBO subscriptions sold by multichannel distributors. "HBO customers watch 14% more television than average. They are the last people who are going to cut the cord." Of the 115-117 million TV households, 102 million are multichannel subscribers. "You don't want to undercut the affiliates for a few hundred thousand subs."

Kessler similarly had little enthusiasm for selling HBO programs to any other streaming provider like Netflix -- "It would be like selling to Showtime. They are our competitors."

HBO looks to be doing a great job of building a service that supports the core multichannel subscription television and also addresses that business's greatest weakness - a lack of direct connection with the consumer for the future time when working through the multichannel distributor might not be the only attractive option.

Interestingly, a panelist in a later session, Marcien Jenckes of Comcast noted that as many people watch Dexter via illegal BitTorrent downloads than on its TV home, Showtime. Showtime does have a video streaming service Showtime Anytime, but it does not appear to be as well regarded as HBO's Go.

Updated 1 December 2011 with additional coverage:
VideoNuze (focus on decision to work solely through multichannel distributors)
Multichannel News (focused on cable industry Go-related spats)
Paid Content (focused on impact on, and appeal to, cord-cutters)

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.

HBO GO - 1 million downloads in a week

HBO GO is an application for iOS (iPhone, iPad, iPod touch) and Android which provides access to HBO programs on a VOD basis as added value to those who subscribe to HBO (and whose multichannel provider have a deal with HBO to authorize GO). Unlike distributor TV Everywhere schemes where the multichannel provider still aggregates the content and has the direct relationship with the customer, HBO GO allows HBO a direct relationship with its subscribers and puts the HBO content in its own garden, so to speak. ESPN's WatchESPN app is similar in these respects. It is semi-over-the-top.

How significant is the one million download figure? HBO has about 28 million subscribers. The main distribs that do not have deals for HBO GO are Time Warner Cable and Cablevision, which represent about 16% of multichannel subs, so the HBO GO potential universe is about 23.5 million and 1 million of that is about 4%. iOS and Android devices are not 100% penetrated, however.  If we assume they are 50% penetrated (which feels high) then the one million downloads represents 8% penetration, if we assume they are 27% penetrated (smartphones were 27% penetrated in the US in December 2010, but a good chunk are Blackberries and other OSs and the 27% doesn't include the incremental penetration of iPads and other tablets -- let's assume they offset each other), then the GO app is about 15% penetrated...not a bad start, which suggests that 1400 titles is a pretty compelling content offering.

HBO Gets it Right (paidcontent)