Senior Wall St. Analysts Debate the Future of Pay TV

Spencer Wang, managing director, head of US Media & Internet Equity Research, Credit Suisse

Spencer Wang, managing director, head of US Media & Internet Equity Research, Credit Suisse

January 3, 2012 – One of the highlights of the Media Innovations Summit in Santa Clara last month was a discussion about the future of the pay TV business involving two senior Wall St. analysts, Spencer Wang of Credit Suisse and Laura Martin of Needham & Co., along with ScreenPlays editor Fred Dawson.
The wide-ranging conversation shows points of broad disagreement as well as where there’s some concurrence on topics like whether pay TV as we know it will survive, how the success of TV advertising can be extended into the OTT realm, what impact new creative ideas might have on the TV industry, how cable and other distributors will fare in their efforts to adjust to new trends, whether there will be cross-border competition among cable companies and much else.

Along the way the analysts share some of the feedback they’ve received on these issues from cable and content entities, providing some much-needed clues as to the internal thinking that will shape strategies in the year ahead.

ScreenPlays – Let’s begin by asking you what you’re focused on in your respective roles.

Laura Martin – I cover Silicon Valley companies as well as the old media cable and Internet companies. In these rapidly changing times I think it’s really dangerous to think you have answers. And so I actually don’t spend a lot of time thinking about answers. I spend a lot of time thinking about what the right questions are, and they change. That framework allows me to dynamically update data points and keep thinking about what the right questions might be.

So one of the questions I’m thinking about a lot right now is what are the implications of the fact that the media companies in the new world have market caps of $200-$300 billion dollars, which is more than the entire old economy entertainment companies combined. When we think about Apple at $365 billion of market cap; Facebook, which isn’t public now at $100 billion; Amazon at $100 billion; Microsoft at $200 billion; Google at $200 billion – any of those companies could actually buy the entire old economy – Disney, News Corp., CBS, Viacom.

What are the implications of that for the new world? And what does that mean for the competitive advantage for old media?

I’m also thinking about the changing nature of employees. One thing that’s happening is this definition of generation which used to be 30 years is now shrinking to 15 years, both in terms of how you target products but also in terms of how you hire people. Any of you that have 18 year olds, they’re an incredibly entitled group. They don’t want to start in the mail room, they want to be a vice president and get paid just to show up for work. What does that mean for the types of companies they are willing to work for, and what does it mean for companies like Comcast who really are engineers and they really do have ten-year horizons because they’re building out infrastructure?

So that’s actually really interesting to me, too, the changing nature of employees and talent that are coming into the work force and what that means for what kinds of products ultimately come to consumers.

And then on the consumer side I guess the question I’m focusing on the most is, where does the money come from? One of the most interesting changes happening in the world is when you and I used to talk about Nielsen and media delivery, we used to think about households – 85 percent penetration of multichannel video in 110 million households. All of the screens we’ve been talking about for the last three days are about personal. You’re going to deliver advertising targeted to me on those personal devices.

So we’re no longer thinking about households, we’re thinking about personal devices. Every one of these personal devices costs hundreds of dollars, and the network fees to keep them up is $100 a month. We have nine percent unemployment rates – the consumer is under cost pressure. Where is the money coming from to fund these new devices from a consumer-facing point of view? I’m really interested in that question.

Spencer Wang – I head up the Internet media and telecom team at Credit Suisse. But my personal coverage focuses on both large cap media and large cap Internet companies. I personally cover Google, Amazon, Yahoo!, eBay, Time Warner, Disney, Viacom, News Corp. and Discovery.

Over the past 18 months I’ve been super focused on the over-the-top video concept, and I’m probably one of the least popular people in the media industry, because our general perspective is the OTT video trend is here to stay and it will likely cause a slow unraveling of the pay television business over the next several years. Timing is hard to say, obviously. But the very simple belief we have is, number one, more and more video will be IP delivered; number two, consumers want their content on demand, and, number three, [they want it] across multiple different platforms.

While many years ago, the pay television subscription was a great value for consumers, we think that value proposition is eroding pretty quickly. So, just to share a few stats, ten years ago the average home in the U.S. could receive 63 channels; now it receives over 135. The problem is that the average person only watches 16 channels; ten years ago they watched 11. So there is this growing gap between what the pay television companies are offering consumers and what they’re actually consuming.

And on top of that they keep raising prices every year. The compound annual increase in pay television bills over the past 20 years is about seven percent. It’s actually been higher than core inflation and the general CPI in 15 of the past 16 years. So they’re basically offering people more stuff that they’re not consuming, and they’re making them pay more for it. And that’s what exposes the industry to disruption.

This is where our viewpoint is fairly nuanced. Some would interpret this and say, well, that’s not good for Time Warner Cable or Direct TV or DISH or some of the distributors. I actually see the biggest risk to the cable programmers. These are the channels like MTV and ESPN and CNN and Fox News, and the reason is quite simply they are the ones that are over earning the most from the current ecosystem. They’re the ones with 40 percent EBITDA margins, one to two percent cap ex-to-revenue ratios and generate a lot of free cash flow and generate super normal returns on investment.

That’s arguably not sustainable and what leaves them exposed to disruption over the coming years. So we’re not predicting that they’re going to go away per se, but we’re just predicting that the marginal economics are going to get worse and that they will likely be smaller businesses.

SP – Laura, let’s begin with what Spencer just said. We’d like to hear how you look at some of the same metrics and the extent to which you feel the marketplace is going to counter this or not. Are these trends locked in?

Martin – First, let me say that Spencer is doing some of the best work in this over-the-top space, and he’s hugely controversial. But I will tell you on Wall St. that’s what you get paid for. You don’t get paid to agree with your accounts, because you’re not adding value to their world. What Spencer and I do for a living is fight with the smartest people on earth all the time. Spencer is really doing excellent work here, and, again, I don’t believe in answers. So I think Spencer’s point of view is valuable because it’s a point of view, and we can all fight with him and that’s good, because it raises the dialog.

What I would say is this: the important point here is Spencer is focusing on the right ecosystem, because the TV ecosystem is three times larger than film, and it by far has the most constituencies with things at risk. It’s hundreds of companies, many of them enormous from the old economy point of view, and they have a lot at stake with different agendas.

The key three points I’d make about the TV ecosystem are, one, it is enormous, again, in the old world context, $150 billion in revenue a year and over $350 billion of public market cap a year – the same size as Apple, as I’ve noted. The point of that is there’s a lot at stake and therefore there are a lot of would-be competitors coming at it, because there’s all this money to be had. I agree with Spencer that the innovators in Silicon Valley and other entrepreneurs are going to keep nipping at the outside of the TV ecosystem because there’s so much money sitting there.

The second thing I’d say is that much of the TV ecosystem is governed by long-term contracts – long-term contracts with affiliates, long-term contracts with content owners, long-term contracts with people. Therefore change is slow. Their technology change is much slower than what the consumer wants, because content guys just can’t do X or Y. It’s unclear where the rights sit. These linear channels Spencer has mentioned, they can’t just put the linear channel on the Internet because they don’t have the rights for every other program to do that. So some of these changes are slow.

The other thing I’d say is the TV ecosystem has had the benefit of the complete annihilation of newspapers, yellow pages and music. And so it is very cautious. I would argue the reason music got destroyed was not theft; it was unbundling, because what theft allowed was perfect substitutes. You could steal the same song as the leading song on the Lady Gaga album, so why would you buy the song? So the iTune store sold that, you could buy it at 99 cents a song. Most people preferred to be legal; they paid for the one song; they didn’t pay for the CD. That unbundling is now bottoming, thank God, in the music business, but it destroyed the music business.

Guess what the TV ecosystem is? It is bundle on top of bundle on top of bundle. So, to Spencer’s point, these cable channels take a single great program like “Mad Men” on Bravo and they put crap around it and then they try to launch their next show. (Actually Bravo is doing a kickass job right now, and so is AMC right now at programming their networks.) But it is a bundle of shows, and then that owner walks in and he says, you can’t just buy MTV, you’ve got to buy Comedy Central, you have to buy Nickelodeon – this is Viacom I’m talking about – and there are like ten channels you don’t want. Time Warner Cable, here’s my bundle of 12 channels you don’t want.

They sell it to Time Warner [Cable], and Time Warner then bundles it to the customer, and you can only buy one of three bundles. So it’s bundle on bundle on bundle, which is one of the reasons it’s so economically profitable. Disengaging that really isn’t really in anyone’s interest.

Wang – I think Laura makes a good point, and, I think, it’s the ultimate point. If you take a step back, what has the Internet proven really, really good at doing?

Martin – Unbundling.

Wang – Thank you. And as you pointed out, the pay television business is predicated on the idea of bundles. When we talk to a lot of traditional investors they look at me like I have three heads when I walk them through why there’s so much risk in the business right now, but, if you take a step back and look at it that way and say, what has the Internet been really good at doing, it’s been really good at unbundling things and increasing transparency of value and price to the end consumer. All these things we hear from consumers like, I have 500 channels but I can’t find anything to watch, or why do I pay for all these channels I don’t need? Why do I pay for ESPN when I don’t watch sports? All of these things are indicative of the value proposition risk in the pay television business.

Martin – I want to build on something Spencer said. I think we’re all doing a bad job on Wall St., and Spencer is going to push us to do a better job. We talk about content. It’s a generality we should not be allowed to use on Wall St. I would argue that who benefits the most even in Spencer’s world is the guy who owns the rights to his content and has proven he can make hit content after hit content after content. Who is that? CBS. Who is that? In some cases, Fox. NBC and ABC should be able to do that. They should get new teams; they should make better content. Great.

And that’s a different kind of content, I would argue, than the guys who own content like Food Network, where they own the rights, but it’s reality content and the guys on the Internet can create generally substituted stuff – maybe. The guys who are in the worst position are the guys like TBS where all they do is buy somebody else’s content; they don’t have the right to resell it.

They’re going to become commoditized, because their competitive advantage is just bundling, or what we call programming a network and then selling it to somebody. That’s hugely threatened in Spencer’s world, because they actually don’t have a competitive advantage that they can sell internationally, that they can sell the rights to and can decide to sell to Netflix or not. So I think on Wall St. Spencer is going to force us to differentiate between types of content and what is more and less valuable in the new world as content goes.

SP – We have some agreement here.

Martin – Yeah, we do.

SP – And the main point of agreement is content is king. You talk about the capitalization of Google, Apple and all the rest you rattled off, and they’re huge, but it’s apples and oranges in the sense that these aren’t the content creators, they’re the content users. They’re exploiting content through the creation of new devices, new outlets, search, socialization – all the things they do, very innovative ways of creating value in their own right around what their core value proposition was in the first place.

I would argue that that’s not necessarily a competitive, threatening thing; that’s an opportunistic thing for smart content people. It seems to me the content people have an opportunity, and I think a lot of the foment we see right now is trying to figure out what that opportunity is without cannibalizing past revenue streams. But they have a tremendous amount of opportunity through creative inventive ways of doing things like we heard from [CSI creator and executive producer]Anthony Zuiker on our first day to change the game. I wonder if you can talk a little bit about where you some of those game-changing strategies to counter some of the risks we’ve talked about.

Wang – Sure. I think Laura raised a good point, which is that understanding the supply chain is really important. The content creators probably benefit the most from the emergence of Apple and these new technologies, because they’re new distribution formats. But it’s not all easy. People like to say content is king, as you said, Fred. But I like to say that’s not really true. Good content is king. There’s quite a lot of bad content out there, and the fundamental truth is it’s really, really hard to make really good content on a consistent basis.

What that means is the content business can benefit from all these trends. But you have to have the right content, and you have to be able to institutionalize making the premium best quality stuff, because the other impact from digital is that the barriers to content creation are declining very fast. Ten years ago the only companies that could create and globally distribute content were some combination or iteration of Time Warner, Viacom, Disney, News Corp. and CBS – it was pretty finite.

Now the simple fact of the matter is I can walk into Best Buy, buy a video camera, shoot some footage, edit with free software from Apple, upload it to YouTube, and I have instant global distribution. That doesn’t mean that anybody is necessarily going to watch it. But the reality is that what’s really scarce now isn’t distribution, it’s not content; there’s plenty of that now. But what’s really scarce is consumer attention. And that’s what I think a lot of people are going to have to solve for. The content business can benefit from a lot of these trends, but I’m not sure it’s going to be that easy.

SP – I mentioned Anthony Zuiker, who was our keynote on the opening day. This is a good talking point, because it goes to how content providers can leverage these opportunities and still maintain that traditional anchor position in traditional television series and programming for a mass audience in prime time. They’re building on that in a way that extends the value of what they’re creating by leveraging these other outlets.

So in Zuiker’s case it’s a matter of creating a series such as he’s working on with ABC right now, the “Chameleon” series that involves a story of a woman who’s with LAPD as a master of disguises. She’s very successful, out there beating the world week in, week out with the one-hour series, but, meanwhile, there’s this whole backstory that’s getting exposed online for the fans that’s about this woman’s private life and who she really is.

For those who want to engage and are passionate about that program series, if it ever comes to light, will have an opportunity to have a whole different experience of what is a very good show hour to hour, week to week, on the back channel and in that context gain access to it over multiple devices. There will be games built around it, social outlets, interactions with directors and actors, etc.

The idea is to bake that whole strategy in from the very pilot start of a program series so that you’re creating something that’s leveraging all these things to create a whole different environment for those who really like the program. And that, of course, creates more engagement, creates more eyeballs over a period of time. So no matter how fragmented the audiences get, if you capture that passionate audience for good content, you have them for more exposure for more advertising. So I’m just wondering, as a strategy totally apart from whether he succeeds or not, does that makes sense to you guys?

Wang – Sure, I think it makes sense. If you have a great piece of content, I think you probably want to super serve your audience and allow them to immerse themselves into that world or that story line. In fact, I think that’s a great way to evolve the linear story telling format.

That’s going to be the other interesting thing that I certainly have a less clear view on. I have a very clear idea of how the pay television business works out. I think I have a pretty clear view of how competition impacts the content production side. But when I talk to the artists and the creators in Hollywood, they’re doing the interesting exciting work, and they’re trying to figure out how to make their story telling more interactive and more engaging for consumers as in Anthony’s example. And that requires real creativity, which is way beyond my scope of knowledge.

So I’m just really excited to see how they take advantage of it. Nobody really knows. If you go back decades when television first came out, the first TV shows were just radio shows but you could see it. So it took people awhile to figure out what’s going to work in the new medium – sitcoms in the case of television, and one-hour dramas. So nobody knows, but it’s going to be really exciting from that perspective. If I knew, I’d invest in it.

Martin – What I would say is one of the most interesting things about the Internet is we get a lot of innovation. I’m talking to a company that’s stealing something from the Internet and bringing it back to the old world.

There’s a show that’s been sold to NBC called “Fashion Star,” which is kind of like the movie “America’s Next Hot Model.” It’s the same idea, about fashion. But here’s what’s cool and innovative about it. It’s on the old world platform, on the NBC broadcast network. It’s a prime time competition show. We bring in ten people. They do fashions. They have expert voters. They vote. They know who wins.

They then air it three months later, and the day they announce the winner on the NBC platform his or her goods are available in H&M, Macy’s and one other store that day. And, with everything that’s sold, a percentage of the money goes back to NBC and back to the show creator.

So this is a convergence of advertising, content and commerce put into the old world, and the old world has a lot more money, ten to twenty times more revenue. Believe me, if this works, watch it take off like wild fire at CBS, ABC.

So one of the best things I think you can do right now is watch who’s innovating. And the guys who are innovating are sitting on the youngest side of the TV demo. Watch what the CW is doing with content, social and commerce, what Fox with Glee is doing in real time social curated.

When you look at the Twitter charts, Twitter goes through the roof every time Glee is on. The joke is the script writer for the evil woman cheerleader actually writes more for Twitter than she does for the show, because they all repeat what she says. So the point is, this concept of engagement is really important, because you want to hold people longer.

There’s one statistic I’d really caution you about. I cover Yahoo! and AOL. When they say they have 100 million unique users a month, those users may come and spend 30 seconds, but when you get a rating of 20 for American Idol, that’s the entire hour’s average rating over which you sold 14 minutes of commercials. We only measure commercial ratings now, but you had 20 million people glued to a show for an hour. So elongating attention spans is really important.

Building on one point Spencer made about the challenge of the Internet is discovery. I wouldn’t call it consumer attention; I’d call it discovery. There’s so much junk out there in the real world that it is really hard to find the good stuff. And so Facebook creates discovery opportunities. This is the power of Facebook. Your social network says, read this book, don’t go see this movie. And that is a way to organize the world of information, and, therefore, it threatens Google, because what Google used to do for you is organize the world’s information. Now Facebook is creating discovery in a new way through your social. And Twitter does, too. You can follow people you like on Twitter, and they recommend things they saw, they did.

SP – I think these are great observations as to the opportunities that are out there for the content creators. Let’s shift to the distribution side where they’re joined at the hip whether they like it or not. What do you see that’s going on either through their interaction and work with the content providers possibly to get into the kind of low-tier bundling that Time Warner Cable and Comcast are experimenting with or through other means of somehow making sure the consumer stays with them?

Wang – I think Laura made a good point earlier, which is one of the reasons the media industry is so slow. They’re governed by long-term contracts. Those contracts prevent them from doing what would be logical, which is to offer thinner programming packages to consumers. When you’re reaching 85 percent, to have a largely one size fits all offering for your pay television offering when everybody has different household income levels, different amounts of television usage is kind of silly. But those contracts prevent them from doing that in a particularly aggressive manner.

However, I’m actually really excited by the cable industry right now if they can come to the realization that they’re not video companies. And what I mean by that is they are, in my opinion, broadband companies. And over time what’s going to happen is video is going to be just one more application they deliver over their IP network. If they can come to grips with that fundamental reality, then they have a great opportunity, because they have, with the exception of FiOS, the best pipe into the home and not much in the way of competition. If they choose to, they can reinvent themselves and take advantage of all these trends that we’re seeing toward convergence of devices, convergence of services and things like that.

SP – What you’re saying is exactly what’s happening in the cable industry with respect to all the technology foment. I was in Atlanta at the SCTE Expo show a couple weeks back, and it was amazing the change between just the NCTA show in June and what I saw in Atlanta from the standpoint of how far things have moved toward what you’re talking about – accelerating the migration to IP, turning everything into this converged experience from the end user perspective but also from the management perspective and the network operating perspective to accelerate their launch of services and applications.

Around that I want to ask a question as to the licensing issue you just mentioned. We’ve seen how hard it was for Time Warner Cable to get support for doing the iPad live streaming service and the showdown with Viacom and all that. But now things seem to have begun to move a little better. We have TV Everywhere which began as a PC access to premium content with very limited on demand. Now that’s starting to blend into the multiscreen environment, some of it live. So talk to me a little bit about what degree of cooperation you’re seeing around licensing to allow this kind of service to breathe and change.

Martin – There’s a bunch of things going on here. One of the important points is that Time Warner Cable just started streaming all the [cable programming] deals it had done over the iPad in the home and said, hey, we bought the rights. What’s the difference between an iPad screen and the third television in the house? The consumer is sitting there. He has the right to watch “X Factor” on Fox. What’s the difference if he’s watching it on his iPad?

Here’s the difference. Nielsen doesn’t measure non TV viewing – today – they will, but not today. But if a 12-year-old kid who prefers to watch it on the iPad, watches it here and not there and doesn’t turn on the TV set, suddenly they lost 12 minutes of advertising in that hour. They didn’t get any credit for the ads, and they didn’t play it back on their DVR because they watched it in real time. That’s a problem today. That is real money.

Part of this gets solved with time because Nielsen knows it has to move and measure these devices. So I would say that’s one of the reasons there was a strong reaction. But, by the way, a lot of the content guys said, we just want to be watched. So they said, keep it Time Warner, and we’ll just eat the money we’re losing.

I totally get both positions. But that is one of the things that’s slowing the migration of content guys to mobile devices. They lost the money when something is watched on an iPad or an iPhone. That’s a real economic hardship.

SP – There’s tremendous irony to that, given the extent to which metrics on the Web have become so accurate and good and this is delivered over IP, and yet because it doesn’t fall into the Nielsen basket it doesn’t count.

Martin –When you think of the TV ecosystem and you think about the fact there’s a $150-billion-a-year market, you know what the center point is that allows that? It’s something called a currency, and it is Nielsen. I hand you my ratings, you hand me the cash. We do not speak more; we go back to our core jobs.

You start using comScore, TRA, Rentrak data, we are all going to sit there and fight about what the discount is, what does it really mean, is it really representative of the sample. We spend hours fighting over the data and how much I should pay you for the data. So whether or not Nielsen is accurate, over the last thirty years it has become a currency over which the TV ecosystem has bonded. And as they ponderously go into this space, I bet that is the best chance the OTT guys have of monetizing, the day Nielsen arrives.

Wang – I think the question was around cooperation. I would say I don’t think there’s a lot of cooperation right now, quite frankly. TV Everywhere has taken a long time to get going and still is nowhere near a robust product, in my opinion. I think they can get there over time. But, as Laura alluded to, a lot of it is rights issues. But a lot of it is money. And that’s the heart of the issue where there continues to be a lot of tension.

Some programmers want to get paid to offer the authentication or TVE rights to the distributors, and at the same time they undermine the authentication effort by also licensing the content to OTT players, too. They want to have their cake and eat it, too. I think that’s what’s really interesting right now. In the old days the programmers and the cable distributors were highly aligned because they were battling a common enemy, which was the broadcasters. Back then the cable MSOs wanted to sell more subscriptions and so needed more content. And so Ted Turner and the cable industry got along fabulously, by and large. Now those interests are diverging. A lot of these skirmishes center around money and getting paid more.

SP – That all adds up to two major points. One is the need for an ad measurement currency to exploit the outlets that are beyond the traditional television measurement vein. And we’ve heard that point made other times at this show. And the other one, which reminds one of what’s going on in Washington, is everybody is talking about gloom and doom and the disaster that looms ahead, but everybody is taking divergent paths and not cooperating on getting a solution.

That leads to an interesting perspective on what the distributors might do and what actions they might take that may or may not be in their interests long term. A couple of things I want to address there.

One is the idea that’s been floated; we’ve reported on it from the perspective of what Verizon is talking about with FiOS. There are some rumors of Comcast looking in these directions, and others, which is to take their brands outside their territorial boundaries through broadband and offer a premium service subscription that would be going against their brethren in the telephone cable industries that they’ve traditionally not competed with. I wonder if each of you would just briefly address whether that has any legs, whether there’s any potential for that to actually come to fruition, and what its implications would be.

Wang – I’ve heard the same things about a large MSO going out of market with an OTT IP delivered offering. I’ve asked said MSO directly about it point blank, and their answer is no. That being said, I think there’s probably a 50-50 chance that that happens in the next couple of years.

I think it’s a really interesting idea. It’s probably the nuclear option for the distributors, because all of a sudden you have a lot of different distributors trying to get into each other’s market places and competition intensifies significantly. But I would think that if you’re the scale player in the business, it may actually make a lot of sense.

If you take Comcast as the biggest distributor out there, they have hundreds of people in Comcast Interactive Media running around Philadelphia developing stuff. They also have the biggest subscriber base to buy content most efficiently. In a world where it gets ultimately competitive, I could make the case that the scale player like a Comcast can do very well, because it’s going to be very hard for a, say, Charter that’s much smaller with fewer resources and buys programming at a higher per-sub rate to compete from that perspective. I don’t know if it’s going to happen, but I think it’s a distinct possibility. And I think the world gets really, really interesting, and it probably favors the scale player.

Martin – Okay, I’m going to give you an answer. In the next ten years no cable operator will compete out of market. Three key points.

One is the entire cable industry has collaborated through its entire history because it was capital intensive. Even today they all share best practices. As you guys probably know, Comcast is doing really cool things with its Xfinity on the iPad app. If Cox wants to come in and see it, they show it to them. If Time Warner wants to come in and see it, they show it to them. They split up litigation expenses. TVC, which is Cablevision, took on all the litigation expense around the network DVR. Time Warner Cable went to the content guys and negotiated Look Back; it was first 12 hours and then they negotiated 24 hours. It was like a network DVR idea. The minute one guy does all the work, the other guys become fast followers. They all have most favored nation in their contracts.

So, to date, the cable industry has been really collaborative. And until this set of CEOs turns over, I don’t see them undermining that. Another piece of evidence I’d use is when the telcos came in with broadband over DSL, which was better than cable’s in the beginning, the telcos took the price point down. All the cable guys had decided to price at $40, which, of course, is illegal. But it was an amazing thing. Across the entire U.S. everyone’s modem bill was $40 a month. The telcos said, oh, we want to buy share, we’ll do it at $25. The entire cable industry didn’t move. No one met the telco price, because they are owner operators generally. So they said, no, no, no, we’re not going to cut our price, there’s two competitors. And eventually the telcos after losing money for years said, okay, we’ll still be the price competitor; they raised it to $38.

So the cable operators have had very good luck working in tandem. The guys most likely to do this out-of-market stuff are the satellite guys, because they’ve always competed on a national footprint, and they are backed into a corner. If, as the three of us on this panel think, broadband is the future and video just continues to get margin compression, what in the heck do you do if you’re Charlie Ergen who owns EchoStar or if you’re DirecTV? They don’t have a bundled product. They only have video. And it’s under enormous margin pressure. Those are the guys to watch as the rats in the corner that are used to competing on a national basis, how they rebundle their product and sell vis a vis the cable industry. Until Brian Roberts drops dead, and he’s only my age, I don’t see the cable industry competing with itself.

SP – Well, that’s a pretty firm answer. I guess my pushback on that would be that irrespective of cable’s collaborative tendencies there are also some seriously centrifugal forces that have been pushing them apart on some issues. And then you have the telcos and you do have FiOS, who is willing to state publicly to at least us, and we’ve reported this in our magazine, that they are looking seriously – they haven’t committed to it – but they are looking to see if they can do this. My suggestion would be if they get the licensing permission to do it and they start making their FiOS offering that they’re giving to subscribers to access on their mobile phones anywhere that same access to mobile subscribers who aren’t in-territory subscription subscribers, that could just break things apart enough to force a Comcast or one of these other guys to move in that direction.

The other thing I wanted to mention is, we do have another set of distributors here, which is the local broadcast stations. They’re battling for their lives and they’re up against these same trends. The idea is how can they get involved to where they can serve their marketplace in a multiscreen environment using broadband? How can they use IP to give their constituency, which has free rights to view whatever they deliver on air, the same rights to view what they deliver on air over broadband t?

Syncbak, whose CEO was unable to be here to speak with us as originally scheduled, is all about creating a technology that makes sure no one watching a given local station who is not in that station’s footprint gets to their programming, but those that are get to view it online. So that becomes a licensing challenge if the technology really works. He has backing of NAB and the Consumer Electronics Association, and several station groups are in beta testing this idea.

So this is kind of about survival on the local level of the broadcast stations. But were they to get that opportunity, I would posit that would kind of change the OTT game, certainly from the standpoint of exposing material that otherwise you couldn’t get on broadband day and date as it appears on TV.

Wang – I think the broadcasters are just in a very tough position. I’d be surprised if they could negotiate those rights, especially with their network partners. I feel like confining services to geographic boundaries is not going to work. We talked about what the Internet is good at – unbundling things, increasing transparency of price. It’s also very good at breaking down geographic borders.

SP – They claim they have a technology that allows that to happen. Who knows? It becomes a licensing issue if the technology works.

Okay, I think we’ve covered the ground we wanted go over here. Questions?

Audience member – Spencer, I’m curious to know how your thesis about the inevitable degradation of the bundled TV model is influenced by this knowledge we’re starting to get that there’s likely to be the institution of a tiered broadband pricing approach as soon as next year. If the consumer starts to perceive the cost of Netflix streaming isn’t $8 a month but $48 a month, depending on how these bits are priced, how does that influence your feeling about the future?

Wang – We’ve done a lot of work on broadband pricing. I think there are two ways it can go. It can go tiered or it can go consumption based. I think it will play out differently depending on which path happens.

The conversation I had with a large MSO recently was, if you believe the premise that you’re a broadband company, your biggest challenge is making sure you can get people to pay more for broadband to offset your lost profits from video. So why would you not work with an OTT player like a Netflix, a Hulu or whoever, and offer $60 broadband and a free month of Netflix and something like that?

From that perspective they accelerate that migration to broadband, they can get a higher ARPU for broadband and also emphasize they have one of the fastest pipes into the home, certainly more so than LTE when that comes or even DSL obviously. So I think there could actually be a natural partnership there, because that creates the low-end offering they can’t create today. For the household in America that makes less than $50,000 a year, where everybody is working two jobs trying to pay the mortgage and the grocery, leaving aside they don’t want to pay $70 for TV, they can’t afford to pay it. But they probably still have broadband because they need it. So you layer on a lower end video offering for them.

So that’s one way I think it could play out and actually accelerate the trend. The second on consumption based billing I think is really interesting. Two things I would say about this. Politically it will be hard to go down that path. Number two, I would say, if you’re a cable operator not having consumption based billing is actually an advantage over wireless, because the battle that’s coming in the next couple of years is 4G against wireline broadband. How much does that nip at the base of cable broadband homes out there?

If I were a cable company, I wouldn’t do consumption based billing because I would want to say to my customer base, you can get all you can eat, it’s not metered. We can help you deploy Wi-Fi in your home, etc.

Martin – You know, marketing people are really important to this process. The minute you give a consumer more than three choices, it’s very hard for them to make a decision. It’s kind of silver, gold, platinum – done. And that’s what the cable industry has today.

I’m going to disagree a little bit with Spencer here. I really think to keep the infrastructure in tact you must charge on usage. The telcos are. Time Warner tried and got in trouble. They did it poorly. Comcast, being the big guy, can’t do it first. But the cable industry collaborates.

My guess is they’ll all sit around and they’ll get Cox or CVC, they’ll get one of the little guys to do it, usage-based billing, and they’ll say, look, the telcos are doing it. And then another little guy will do it, and Comcast will be last. But you must end up with usage-based billing, because the Internet can’t take this downstream video.

I watch a ton of Netflix as well as a ton of television. I slow the node for everybody in my node. I should be getting charged more. I think economically the world must move to usage based billing. I think it will be slow, because the politicians really don’t like it. But at the end of the day, watching video OTT is a luxury that should be paid for.

But the consumer cannot tolerate uncertainty; he cannot tolerate not knowing what his bill is going to be at the end of the month. It scares him to death. That’s why you end up in the mobile world with tiers. It ends up with tiers, but it’s based on usage.

SP – Smaller operators are already looking at that. They’re looking at ways to get competitive with what’s been happening against them on the DBS side with HD and with so much VOD now in the marketplace. They’re looking at usage- or tier-based billing on the broadband side as a way to leverage some deals and get the Netflixes of the world to play ball with them, aggregate around their service and get a much better viewing experience for their customers than they otherwise would if it were done in a best-effort way. And, given the customer is going to have to pay for that higher tier service on the broadband, then it becomes cost effective for Netflix to say I’d rather partner with you than lose my customers because they can’t afford the bandwidth premium. There’s a lot of planning going on to roll this thing out at the second, third tier markets.

Audience member – Spencer, if what you say about the coming battle is between 4G and wireline, what do you guys make of the announcement this morning that major cable operators are selling a bunch of wireless spectrum to Verizon to be deployed for 4G wireless presumably?

Wang – It’s an interesting choice and a really good question. I’m not sure what the motivation was right now for selling the AWS spectrum. But I think the cable guys will ultimately have to find some kind of wireless solution. I think it’s just too important. Maybe they just came to the conclusion that this was just a better MPV trade or that maybe Wi-Fi is a better technological solution. But I’m not sure.

SP – From my own knowledge of what’s going on technologically, the cable guys are being persuaded that the next-generation Wi-Fi and some of the use of their networks to support distribution like that is actually a very cost effective way to go.

Wang – And faster.

SP – And it’s much faster to deploy. They don’t have to do an entire infrastructure. It’s taken a long while for them to come around to that. Obviously they’ve gone through several permutations of trying to launch their own wireless services, and none of that has worked out very well. Clearwire is struggling for survival right now, and they’re hanging on to whether that works out. This other technological alternative, which Cablevision was the first one to jump into, and it’s showing that it works.

Wang – We had Boingo at our conference earlier this week. They obviously deploy wi-fi globally. You kind of wonder if they’re a potential partner for the cable guys as a wholesale supplier.