Revisiting The Innovator's Dilemma and OTT Competition with Cable

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

What Changed?

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

The Hits

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

The Miss

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

Unclear

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

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

The Media Sector Meltdown

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

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

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

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

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

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

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

Pewdiepie, the most popular star on YouTube, takes viewers through his video game play

Netflix's original content continues to get good press and high marks from viewers, with new seasons of House of Cards, Orange is the New Black and the unlikely series prequel to cult movie Wet Hot American Summer.

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

The programming on the Weather Channel is simply increasingly irrelevant with the availability of its core functionality readily available on both computers and phones (often from the Weather Channel's own apps or weather.com or weatherunderground.com). Before ubiquitous internet access, a dependable destination for weather information on cable TV was pretty valuable. Now, not so much.

The Weather Channel or The Weather Channel app?

However, an even bigger issue for the Weather Channel in its dealings with the MVPDs is that it is on its own. While managed by Comcast's NBCU, it is not bundled with their must-have networks (NBC, Telemundo, USA, Syfy, MSNBC, CNBC, E!, Bravo). So, while Weather Channel is arguably more valuable than NBCU's second tier networks (Oxygen, Chiller, Cloo, Esquire, Sprout), none of those networks have to negotiate on their own. Not coincidentally, none of them have been prominently dropped by MVPDs either. It would not be surprising if Comcast buys out its Weather Company partners -- in one swoop it could solve Weather Channel's fundamental problem (as could any other large programming company. Weather Channel would be a fine fit for Fox, CBS, Disney/ABC or Turner Broadcasting as well; all of them distribute 24/7 live programming services similar to Weather. Bundling is very powerful.

it can work wonders with your customers as well!

Viacom's departure from Suddenlink is harder to explain, but explainable nonetheless. While Viacom critics believe that its programming is not that important and/or that it sold too many of its reruns of its children's programming to Netflix, the fact is that Viacom has a number of attractive, high profile original programs on Comedy Central, Nickelodeon, MTV, VH1 and  TV Land. While its programming has had considerable problems of late, it has a broad enough portfolio of channels that it shouldn't be that vulnerable.

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

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

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

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

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

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

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.

Pictures from the Front: CBS-Time Warner Cable

WCBS slate

As you may have heard, CBS is not being carried by Time Warner Cable, effective 5PM ET. These are my photos of the "slates" that TWC has put up on the channels for CBS, Showtime (including its sister services The Movie Channel and Flix) and Smithsonian Channel. For those scoring at home, CBS Sports Network (formerly CBS College Sports, formerly College Sports TV) is still on the cable system, apparently that deal is not coterminous with the others.

"No CBS for you."

On some level this is a very simple dispute: each side will be losing during the dispute, but figures that the other side will be hurting more. CBS will reach fewer advertisers and will not collect retransmission consent fees (per its expired contract which is at a lower rate than it wishes now). Showtime, of course, will not collect its affiliate fees, nor will the much smaller Smithsonian Channel. Some analysts, notably BTIG's Rich Greenfield think that CBS is vulnerable because the summer is full of reruns and football will not return for a few months. While it is true that high profile programming would improve CBS's hand, even in the summer, the weekly cume of a Big 4 network is over 90% of households, that is over 90% of households are watching it sometime during the week. That's a figure much larger than any cable network. A lot of people will notice CBS is missing. Greenfield's interview on CNBC is embedded at the bottom of this post.

Showtime slate 

Time Warner Cable, for its part, faces the risk that its customers will look upon it less favorably. Time Warner Cable's risk takes a few forms. Most prominently, customers may defect to other providers. Changing providers is not a snap decision for most consumers, however. The way this phenomenon tends to play out is more in concert with the natural churn in the business. If you are potential Time Warner Cable customer in one of the effected markets, would you sign up with a provider that doesn't have CBS and Showtime right now, or would you connect with Verizon or AT&T or DirecTV or Dish Network or Aereo right now. It is hard to believe that the lack of CBS would not put a damper on TWC's retention efforts and/or does not represent a marketing opportunity for its competitors (not that they will be free of the same sort of conflicts in the future, save Aereo, the point is that for people making a purchase decision now, this is a material and relevant issue). More broadly, Time Warner Cable will probably have a hard time upselling any of its new services (like Signature Home) when customers are, understandably, upset that their expect service is not be delivered the way that they expect.

Smithsonian slate -- how humiliating, it doesn't even get its name on the slate!

Ultimately, both sides will cut a deal. This is not one of those situations where maybe one party is better off not doing an agreement. However, if the dispute drags on for a while, the winners will be Time Warner Cable's competitors. The losers are likely to be both of the combatants and their customers who will endure, at a minimum, some inconvenience in finding the programming they expect (at most, they will not be able to find it at all). For CBS, the economic losses are mostly linear; for Time Warner Cable the economic losses from a short dispute are modest, but they will ramp up if it goes on longer.

The high profile of this dispute could bring some political urgency to make changes to the retransmission consent rules. Having been on both sides of the table for these sort of deals and disputes, I think it is fair to say that those rules were largely written by a very effective broadcast lobby during the sausage-making of 1992 United States Cable Television Protection and Competition Act; the NCTA, the cable lobbying organization, changed its leader shortly thereafter. One would think that the broadcasters may have more to lose from a revisitation of the rules than the distributors would. Consistent with that view, the broadcasters, through their lobby the NAB, have said they believe the system is working.

Update (3 August 2013): CBS has pulled access to full episodes of its shows on cbs.com for TWC customers (Deadline's story). Close viewers know that Fox tried this with Cablevision in their retransmission consent dispute a few years ago, but relented when it was pointed out that some of the customers denied access didn't get video service from Cablevision. Undoubtedly CBS knows this and figures the greater inconvenience it puts on TWC's customers (and hence TWC's management) is worth the public relations hit CBS will take for involving a larger group of innocents in the hostilities.

"No CBS for you" redux

Over-the-Air Broadcast TV Down to 9%, Maybe Cable Is Just That Good

One of the interesting facts from the recently released Nielsen media infographic (below) is that only 9% of US households rely solely on over-the-air television (i.e., do not have a cable, DBS or telco subscription). This figure is down from 16% in 2003.

On one level the decline in over-the-air household is counter-intuitive; the price of multichannel television has gone up much faster than inflation over the last decade. Higher prices usually lead to lower sales for the same product. I see the three factors -- two external to the multichannel value proposition and one internal -- that supported the decline in the use of over-the-air television.

First, the conversion of broadcast TV to digital made decades of analog-only TV sets obsolete for receiving TV stations (or required a digital converter box to make broadcast TV signals usable by these sets). In contrast, all of the top multichannel subscription services work just fine with an analog TV set (without even the need for a set-top box on many cable systems).

Second, the number of households with high speed Internet connections has dramatically expanded since 2003 and such households have a large amount of video content available to them both for free (e.g., YouTube, Hulu) and for pay (e.g., Netflix, iTunes). A light TV viewer might get all the video he or she needs from the Internet and not bother with an antenna and/or converter box.

Finally, a strong argument can be made that the content available via multichannel television has advanced faster than its price, rendering it a better value than it was earlier. In 2003, the top college bowl games were on broadcast television as were virtually all of the top dramas. By 2012, all of the top college bowl games were on ESPN networks (well, all but 3 of the top 36 bowl games, per this link), AMC's The Walking Dead was the top rated drama on television and cable networks like Food, E!, History and Showtime were attracting significantly more viewing and this was no accident as they are all spending significantly more on original programming. Not to mention that the multichannel subscription is much more likely to include VOD, HD and online streaming/TV Everywhere access to substantially more content than it did in 2003.

Click the graphic to see it in its full sized glory

There are a lot of fascinating data on the graphic. One of the not surprising, but striking points is that 56% of mobile phone subscribers now use smartphones, 44% use "feature" phones. That split was  18 smart to 82 feature in 2009.

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)