Ultra HD Content Is Coming

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

HD benefited from the following:

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

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

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

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

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

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

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

Early HD sets:

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

Sony KV-40XBR800 FD Trinitron - weighs 325 pounds

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

Fox Breaks Dish's Auto-Hop

Today Fox and Dish announced the settlement of Fox's lawsuit over Dish's Hopper which dates back to late 2012. The Hopper, for those whose memories have faded since 2012, is a DVR with two main features:

1. It automatically records all of the Big-4 networks' prime time programs; and
2. with a single selection by a home user, can automatically skip over all of the commercials in the recorded shows. Dish calls this feature "Auto-Hop".

Parsing the features, the first, automatically recording a program, is only a negative to the network in the event that not having the recording makes the home viewer more likely to watch the show (and the commercials within it) on a live basis. I don't think most networks are fighting that fight.

The second, however, is the real fight and the basis of the settlement. Dish agreed to disable the Auto-Hop functionality for the first seven days after a program is recorded. This preserves the "C7 Rating" for Fox -- the measure of how many viewers watch a commercial within the first 7 days that a program airs. C7 is a bit of an aspirational goal for the networks; the most common currency is C3 rating -- viewership in the first 3 days after airing. (CBS settled its complaint against Auto-Hop similarly in December 2014).

Fox is certainly a winner here, negotiating for something that has some clear economic value. More precisely, Fox was able to to stop a feature that might have threatened the advertising business model more than the DVR fast-forward button does. (Note that when networks license content to MVPDs for VOD services, they often insist that fast-forwarding is disabled altogether -- that's the power of being able to withhold your content.)

Dish is also a winner here in that they were able to survive the challenge to the automatic recording complaint, although, it sure seems to this analyst that Fox may have been on thin legal ground trying to stop a feature that simply put, simplified DVR recording.

The loser, naturally, is the viewer who loses some convenient functionality. On the bright side, she gains additional exercise for the finger pushing the fast-forward button (unless the cat knows how).

Previously on peterlitman.com: CBS Hates on the Hopper Some More, Claims Fraud (25 January 2013)

Charter Switches from EBUs to Billables for Subscriber Reporting

Close observers of cable MSO financials noted a significant change stuck in the footnotes of Charter's 4Q15 and year end financial statements:

(e) Charter revised its methodology for counting customers who reside in residential multiple dwelling units ("MDUs") that are billed under bulk contracts.  Beginning in the fourth quarter of 2015, we count and report customers based on the number of billed units within each bulk MDU, similar to recent reporting changes at our peers and reflecting the completion of all-digital which requires a direct billing relationship for all units which receive a set-top box.  Previously, our methodology for reporting residential customers generally excluded units under bulk arrangements, unless those units had a direct billing relationship.  Prior year information has been revised to reflect our revised methodology.

emphasis added to highlight the following: The use of billable subscriber counts -- pioneered by Comcast in 1Q2013 -- leads to generally higher numbers than EBU counts. It is a rosier picture to investors.

The corresponding footnote in 3Q15 read as follows:
(h) Included within commercial video customers are those in commercial structures, which are calculated on an equivalent bulk unit ("EBU") basis.  We calculate EBUs by dividing the bulk price charged to accounts in an area by the published rate charged to non-bulk residential customers in that market for the comparable tier of service. This EBU method of estimating video customers is consistent with the methodology used in determining costs paid to programmers and is consistent with the methodology used by other multiple system operators.  As we increase our published video rates to residential customers without a corresponding increase in the prices charged to commercial service customers, our EBU count will decline even if there is no real loss in commercial service customers.

Charter reported residential basics 4,322,000 up from 4,293,000 at year end 2014 under the billable methodology. However, at year end 2014, Charter reported only 4,160,000 EBUs, so the Residential Basic subscriber count for billable subs was 3.2% higher than for EBUs. That seems a bit odd. Residential subscribers shouldn't vary much from EBUs. The reason that comes to mind of why residential billables would be higher than residential EBUs is if a material portion of the residential subscribers are seasonal accounts who pay a much lower rate in the off-season. However, Charter isn't in most of the big seasonal markets (e.g., Florida with its snowbirds).

Commercial basics were 108,000 up from 104,000 at year end 2014 under the billable methodology. At year end 2014, Charter reported 133,000 commercial video EBUs, so the billable subscriber count was 21.8% lower than the EBU count, which makes sense, since commercial accounts include multiple dwelling units and those typically get a "bulk discount". [In a bulk arrangement, 100% of a building's units get the service -- usually billed through their maintenance -- so that there is no reason for a unit to turn down the service and little churn for the cable company. For that benefit, the cable company provides a price break over the cost of all of those units subscribing independently, and potentially disconnecting.]

As Charter pointed out in 3Q15 "As we increase our published video rates to residential customers without a corresponding increase in the prices charged to commercial service customers, our EBU count will decline even if there is no real loss in commercial service customers." Looking at it from the other side, when bulk rates decline (due to furious price competition from DBS and telcos for these MDU accounts) EBU counts go down even if the MSO holds onto the business.

There is no misleading going on here. The revenues of the companies are not affected by this subscriber-counting change. This is investor spin. As there has historically been so much focus on subscriber growth, it isn't entirely surprising that the biggest MSOs have decided to deploy a measurement system that paints their results in a better light than the one that they used historically (and is still the one that they prefer to use when paying programmers like ESPN and was part of a joint industry consensus in 2002 -- clearly another time).

File Under "Duh"

The surprise is not really that Al Jazeera America is shutting down (my link is the Glenn Greenwald's excellent and extensively linked-out article), but that it ever existed in the first place. The multichannel TV dial has a number of fully distributed news services of one flavor or another:

• CNN
• MSNBC
• Fox News
• HLN
• CNBC
• The Weather Channel

As well as less-than-fully distributed channels like:

• Bloomberg TV
• CNBC World
• Fox Business
• BBC World News
• France 24
• RT
• Fusion
• One America
• Newsmax
• Accuweather
• WeatherNation
• The Blaze
• Free Speech TV
• Univision Noticias
• CNN en Español

An Internet-distributed news channel:

• CBSN

And lots of regional news networks like:

• NY1
• News 12 Long Island
• NECN

In short, this isn't a market segment with a lack of programming.

It is also hard to imagine that branding the channel "Al Jazeera America" was what US news consumers wanted. Irrespective of the quality of the programming on the channel (which I thought was good, from the little I saw, if somewhat stilted in a PBS/BBC kind of way), the name "Al Jazeera" was most closely associated with the co-owned Arabic-language Al Jazeera news service made famous as the preferred outlet for Osama bin Laden's videos during the post-9/11 era. As the proud possessor of a marketing degree from arguably the finest school for brand managers, I believe that's too much to overcome.

Welcome to 2016, Here's Your Price Increase

The headline on Karl Bode's story in TechDirt really grabbed me: "The Cable Industry's Response To A Banner Year For Cord Cutting? Massive Across The Board Price Increases For 2016" which goes on to decry the stupidity of cable TV executives.

I'm not sure that's the story here. I have worked in the cable TV industry for many years and, by and large, my experience has been that the cable companies are run by pretty sharp people.

So, why, given "rampant cord-cutting" would a cable company "pour gasoline on the fire" by raising prices?

The logical reason would be that it is better business. Multichannel penetration peaked in 2010 at 88% of US TV households. This figure was up from 82% in 2005 because many people who previously used an antenna to watch TV found cable a more attractive solution than buying a new TV or a converter box to deal with the digital TV transition.

Americans certainly love television, but is there any reason on God's green earth why 88% of them would be unsatisfied with the over-the-air broadcast offerings and feel compelled to spend hundreds of dollars per year on additional television? The broadcast channels have most of the top-viewed shows and are available for free in the overwhelming majority of homes (they are not available for free in rural and mountainous Arkansas, Oregon, and Pennsylvania, where the cable TV industry was founded).

If you don't know who this is, you are probably not a young person (click here for the answer)

It is abundantly clear to anyone in the television business that multichannel penetration will continue to decline as it gets more expensive. There will be more and better content on YouTube (itself now 10 years old) each year, particularly for young people who don't hear their voices represented much on television. Netflix and Amazon have created a lot of attractive original programming. That may continue or it may go the way of Yahoo's original programming. It is unclear to me how much money there will be to support how much TV. FX CEO Jon Landgraf said last year that "there is simply too much television"; he may be right.

However, what do you do if a whole lot of people have been buying your service even though it probably didn't make a ton of sense for them to do so and there are more decent cheap alternatives available to them in the "boredom killing business"? It would seem rational to write off these customers and reposition your service as a premium offering. Maybe you would roll out something like Time Warner Cable's Signature Home. Or to put it more into cable programming, maybe you would pursue the strategy Rachel Menken put forward on Mad Men.

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.

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.