Getting Content for Dish's OTT Service

According to a report by Alex Sherman and Edmund Lee for Bloomberg, Dish is planning to launch the first mainstream* Internet-delivered "cable TV" service sometime late this summer. The long-rumored over-the-top cable service may finally emerge after lots (Intel) and lots (Sony) and lots (Microsoft) and lots (Apple) and lots (Google) of rumors.

OTT probably won't involve an ethernet cable running straight into your set; it probably will use a Roku-like box

The report states that Comcast's NBCUniversal (USA, Syfy, CNBC, MSNBC, Bravo, E!, among others), A&E Networks (A&E, History, Lifetime, among others), Turner Broadcasting (TNT, TBS, CNN, Cartoon, TCM among others) and CBS (the CBS broadcast network, Showtime and the relatively small CBS Sports Network) have been approached about providing content for the service.

As followers of the industry know, Dish and Disney/ESPN entered into a ground-breaking deal a few months ago that would permit the distribution of several of the Mouse's marquee service on an OTT service. I posted about it here. While the deal was conceptually ground-breaking, however, no ground has been broken to date.

As I noted in the earlier post, it is not unusual in such an agreement that Disney would insist on a "critical mass" of other programmers also be included in any such efforts. (If there is nothing else in the package, then the package would effectively be an a la carte offering of Disney's networks.). The Bloomberg article confirm's my suspicion:  "The largest content providers have placed several conditions on Dish’s service before they’ll agree to deals, according to two people familiar with the matter. At least two of the four major broadcast networks -- ABC, CBS, Fox and NBC -- must be included in the service, and at least 10 of the highest-rated cable networks must also be part of the package."**

An older graphic with the NBCU brands at the time of the merger -- Daily Candy, Sleuth, Style and Versus are all no longer; Cloo, Esquire and NBC Sports Networks replaced the latter three

NBCU represents a particularly interesting potential content provider for the Dish OTT. As part of the Comcast acquisition of NBCU, the company is subject to a consent decree that, among other things, requires NBCU to sell similar programming to an online video provider that some of its competitors are selling and do so under comparable terms to which the competitor got. The recourse for the potential licensee (Dish, in this case) is that if it doesn't think it is getting a fair shake from NBCU, it can submit the dispute to the Department of Justice for arbitration.

What that means in this context is anyone's guess. If I were advocating for NBCU, I would hold that the restrictions on the Hopper than Dish agreed to with ABC would have to apply to NBC as well. My guess is that Dish is willing to go there. The agreement that Dish made to launch Disney Junior, Fusion (the English-language news service targeting Latinos), Longhorn Network (University of Texas sports service run by ESPN) and the upcoming ESPN Southeast Conference network appear to this observer as a substantial portion of the overall package that Disney received in conjunction with its grant of the OTT rights. I think it is less likely that Dish would be willing to launch and/or favorably retier virtually everything in the NBCU stable of networks to get the OTT rights; certainly Dish won't start the negotiation there.

For those unaware, Dish is a company known for using the legal process aggressively to try to gain an advantage at the bargaining table. If I were advocating for Dish, I might take the position that NBCU has to give up OTT rights to Dish only for the consideration that is explicitly tied to such rights (e.g., fees and packaging provisions for OTT customers) not consideration that Dish provided to Disney for its DBS customers.


* non-mainstream over-the-top Internet-delivered cable TV services have existed for a while including Dish's own DishWorld (mostly foreign-language international services) and Sky Angel (mostly religious-oriented services)

** The required inclusion of broadcast channels in the package could complicate things considerably -- the broadcast networks do not control all of their affiliates, they can only grant retransmission consent for their owned & operated stations (NY, LA, Chicago and a handful or two of other large markets) which would make the OTT service something only available in certain markets. Including some broadcast channels but not others (e.g., not the weaker stations which have "must carry" rights on DBS and cable) might lead to complaints to the FCC from them. Again, complications.

Aereo's 22 Market Expansion - A Necessary Step

Yesterday at CES, Internet-delivered TV provider Aereo announced plans to launch its service in 22 additional markets this year (All Things D story). Currently, Aereo provides service only within the New York City DMA. Not coincidentally, Aereo announced an additional $38 million in financing.

The expansion of Aereo's footprint makes it more competitive with the incumbent pay TV providers (cable, DBS, telco), but the nature of its product makes it a relatively poor substitute for the multichannel service to which most households subscribe.

Aereo's current service has the following characteristics:

• includes all the broadcast channels
• provides DVR functionality
• includes Bloomberg TV
• is delivered devices with a web browser (e.g., computer, tablet, phone) via HTML5
• can be delivered to a traditional television set via Aereo's Roku channel or via AirPlay functionality (from iPhone, iPad, iPod touch or Mac) using an Apple TV

Aereo is a pretty attractive alternative to the consumer options which provide the most similar viewer benefits:

• broadcast television with an antenna
• a stand-alone DVR (e.g., Tivo, Windows Media Center)

Tivo's monthly fee is $15. There is no recurring monthly fee for an antenna or the DVR functionality of Windows Media Center, although there is an upfront cost to both of them, which might be substantial, particularly in the latter case if one needs to buy a computer (rather than repurpose one he or she already has). In this context, Aereo's $12 per month cost is reasonable. The easy delivery to browsers rather than TV sets is, right now, probably a significantly smaller segment of the market than the alternative, but it is not hard to imagine that there are some customers who might prefer it and that group is certainly growing.

The other "cable alternative" would be to subscribe to DVR service and the basic tier of service from your cable company. The basic tier (a/k/a lifeline, broadcast basic, or in the FCC patois Basic Service Tier)  typically runs in the ballpark of $18 per month and DVR service is likely around $20 including the cost of the rental of the DVR itself (this combination is never marketed by a cable/DBS/telco provider, but it is at least theoretically possible to buy it if one were to call up, ask for it specifically and be persistent). Aereo's $12 service looks like a pretty good value relative to this, especially for the computer and tablet-oriented.

As a substitute for a traditional multichannel subscription, Aereo's offering is a poor fit. Despite the rapid growth of TV viewing via computers, tablets and phones, the vast majority of viewing is still on a television set. Alos, a key part of the value of a multichannel subscription is the availability of basic (ESPN, TNT, USA, Fox News, etc.) and premium (HBO, Showtime, etc.) cable programming. I believe that fewer than 10% of customers who have a multichannel subscription only have the most basic level of service or what could be considered "antenna service" (a lot of these customers may be in "classic" cable markets -- places where getting a decent broadcast signal with an antenna is difficult or impossible -- e.g., the valleys of Pennsylvania, rural areas in Oregon, Manhattan). 90+% of customers buy multichannel television to get additional viewing options.

All of this is not to say that Aereo has no future. The addition of Bloomberg TV to the lineup shows that Aereo is open to offering additional channels. However, the choice of Bloomberg, which is live streamed 24/7 at http://www.bloomberg.com/tv/ , doesn't add as much value Aereo's subscription as a service that was not otherwise so available -- e.g., Food Network or Lifetime or E!, much less the proverbial 800 lb gorilla of cable programming, ESPN. I would be stunned if the Aereo folks do not know this.

However, none of the major cable programmers are ready to sell their services direct to Aereo whether it is because 

• they fear upsetting their primary customers (cable, DBS, telco), or 
• they are restricted from selling to an internet-delivered service because of "streaming restrictions" in their affiliation agreements with one or more distributor-affiliates, or
• they do not have the rights (from their program suppliers) to distribute one or more programs via the Internet.

There are a few things that could change the situation for Aereo:

1. As the FCC clarifies the definition of Multichannel Video Program Distributor, it is possible that online video providers like Sky Angel (whose lo-o-ong simmering case is pending) will be considered MVPDs. This would effectively render the "streaming restrictions" and rights issues highlighted above moot.
2. As time passes, the regulatory apparatus is likely to make "streaming restrictions" illegal (rationale: they are anticompetitive) even without a wholesale redefinition of MVPD.
3. Aereo's subscriber base could grow, making the risk of alienating their incumbent customers (i.e., cable, DBS and telco) more worthwhile for certain programmers.
4. Research could show that Aereo's subscriber base is not competitive with the incumbent providers, but is tapping a different market which would make the incumbent providers slightly less uncomfortable about the competition.

In any event, part of the equation for Aereo to becoming an attractive business (or at least a viable one) is to create enough scale to cover the likely considerable fixed cost of developing their system and company. Being in more markets is a necessary next step to doing so.  

some prior posts about Aereo:
Aereo Adds First Cable Channel - Bloomberg TV (14 Dec 2012)

Dog Bites Man - Broadcasters Sue Aereo (2 Mar 2012)
Aereo (Beta) Arrives in NYC - Broadcasters Likely Peeved (15 Feb 2012)