Insiders View Legacy Pay TV Model to Be Shakier than Ever

Anthony Wood, CEO, Roku

Anthony Wood, CEO, Roku

April 3, 2012 – An intensifying sense of instability wafting through the pay TV business is prompting more speculation than ever among major players as to which of many potential scenarios will prove to be the undoing of the old foundation.
In these discussions the focus isn’t on whether a major restructuring of the business is inevitable but on what the triggers might be that would push the market beyond the tipping point toward what is universally assumed to be an Internet-based distribution model, albeit with far greater end-to-end control over the user experience than is typically the case in today’s over-the-top environment. “OTT is kind of a silly name,” asserts Jon Cody, a former Fox executive who led the launch of Hulu and other digital projects and is now preparing to introduce his own company in this space. “Really, this is the next phase in the evolution of TV.”

Broadband TV, as Cody calls it, far from being the Wild West of the early emergent OTT market, is rapidly being positioned by market forces to become the successor to pay TV where, as in all previous transitions of the TV industry, existing players adapt to and drive the new model into the mainstream. “The broadband TV industry is real, definable and ultimately predictable,” he says.

Cody and others point to many developments that buttress that statement as leading entities from the pay TV content and distribution sector join with Internet upstarts to capitalize on the advantages that come with breaking with dependence on geographically defined walled gardens. These include anytime, anywhere, any device access to consumers; globalization of content and advertising reach; expansion of consumer choice and engagement stemming from the ability to leverage very long-tail niches as revenue-driving complements to mainstream programming, and freedom to personalize everything, including ads, content discovery and premium packages to individual tastes.

One harbinger of things to come, says Eric Goldstein, senior director of digital video distribution at Disney ESPN Media Networks, is Disney’s carriage renewal deal with Comcast in January, which includes licensing rights to distributing premium programming from ESPN and most of the other Disney networks to tablets and smartphones. “This was a groundbreaking deal,” Goldstein says. “It offers great value to all partners.”

One big value to all concerned is the opportunity to get non-TV watchers to purchase subscription services. “Putting aside the issue of cord cutting, the question is whether we want to use the Internet to bring this programming to the ‘cord-never-hads,’” Goldstein observes.

The Disney-Comcast agreement is strictly a TV Everywhere type deal limiting access to live and on-demand Disney content to authenticated Comcast subscribers, but it extends access beyond the home, which by various analysts’ accounts, required Comcast to pay more for the rights than would be the case with more limited distribution. The next step in this evolution will be “OTT without authentication,” predicts Roku CEO Anthony Wood.

“People will be able to sign up on the iPad and get traditional cable,” Wood says. “It probably will happen this year.”

As previously reported, some service providers, including Verizon, are giving serious consideration to extending their subscription TV services via the Internet beyond their traditional service territories. Raising the question rhetorically, Goldstein asks whether deals like Disney’s with Comcast portend the transformation of MSOs into digital virtual MVPDs (multichannel video programming distributors).

“You could argue the industry wouldn’t want to go there because people want to conserve the present revenue model,” he says. But he and others close to MVPDs’ thinking aren’t so sure.

For example, Sam Chang, general manager of innovation and smart TV at LG Electronics cites his company’s deal with Verizon to provide access to FiOS TV through LG TVs within the FiOS operating territories as a possible first step in this direction. “My guess is they will go outside their regions,” Chang says.

“Overbuilding is going to happen,” says Richard Bullwinkle, chief evangelist at Rovi Corp. “We’re going to see consolidation. There’s no way Tier 3 or 2 cable companies can keep up with the Tier 1s.”

That doesn’t mean Tier 1s will buy up all the smaller MVPDs, he adds. “They’ll retain their access networks and the relationship with their customers and will make service agreements with Comcast and other Tier 1s,” he says. “When we talk to the big content distribution companies, they make very clear to us they’re interested in a lot more than bundling and preserving their brand.”

Moving on a parallel track is the explosion in OTT streaming services now available to users everywhere whether or not they’re subscribers. So far, Comcast with its Streampix service and Verizon in its deal with Redbox, are leveraging the same types of delayed-window content availabilities for OTT delivery that Netflix, Amazon, CinemaNow, Hulu, Vudu and many other entities are offering users in various on-demand purchase and ad-supported models. DISH Network, through its Blockbuster brand, is already in this game as well, and DirecTV is set to join the fray later this year.

And then there are the Web and CE behemoths – Apple, Google, Microsoft and the top smart TV manufacturers – all of which are seeking to aggregate and offer content that comes closer to competing directly with MVPDs’ pay TV services. Is there really any reason to assume that among all these OTT streaming players there won’t be enough money in play to draw the major TV program suppliers away from strict allegiance to the cable TV model?

Referring specifically to the clout of Apple, Google, Microsoft and Amazon, Rovi’s Bullwinkle says, “At any moment any of these companies could do something completely disruptive. If Apple wanted to spend $15 billion on NFL rights [approximately the amount Disney just spent to re-up with the league], they could change the world. If Microsoft decides to go against the [MVPDs], they’ll change everything.”

Indeed, says Scott Mirer, director of product management at Netflix, “Microsoft is very serious” about playing in the TV space, as evidenced by its fall announcement of deals with some 40 companies worldwide, including Comcast, Verizon and HBO GO in the U.S., to offer premium content licensed by these entities to their subscribers on the Xbox. “I’ll say Microsoft might surprise us,” he says.

Boxee vice president of marketing Andrew Kippen also sees reasons to anticipate Microsoft could choose to revise its fortunes by making a direct MPVD play in TV. “They have the wherewithal, including the market footprints with Xbox and MediaRoom, and they have the three biggest data centers in the world,” Kippen notes.

Whether it’s Microsoft or others, the point made by these executives is that money has the power to shake the content kings from their traditional pay TV moorings. But it’s not just money to be gained from licensing fees. The emerging broadband TV era offers many revenue-based incentives to break with the old ways, notes former Fox exec Cody, and it opens the door to entry for competitors to the established titans of pay TV.

“Distribution can be worldwide, and programmers have unlimited capacity,” Cody notes. As for newcomers, “today it’s almost impossible to launch a pay TV channel. But now you can launch a channel worldwide, and the cost of production has fallen dramatically.” Moreover, he adds, “Hungry new broadband TV distributors [meaning OTT players like Netflix, Amazon, et al] want content.”

The breakout of established programmers into this global distribution model for live as well as time-shifted premium content “is coming faster than people thought,” says Roku’s Wood. “Everything is a mess now, but the picture is changing. Netflix is going to pass the 50-million subscriber mark at some point, and as that happens the DVR is going away. At the end of the day, programmers will be able to reach any person on any device in any language anywhere.”

The ability to access subscriptions to pay TV on devices other than set-tops creates a lot more value for programmers, he adds. And it creates new revenue opportunities for distributors. For example, he notes, sophisticated discovery-based navigation systems across all viewing options like the new user interface introduced by Microsoft with its new Xbox partnerships allow distributors to offer promotional space for content constituents on their navigation systems.
None of this means the bundle is going to disappear, Wood hastens to add. Instead, subscribers to bundles will realize greater value from the prices they pay by virtue of having ubiquitous access to content.

“When will ESPN be available at $9.99 a month a la carte?” he asks. “Almost never. There may be a fraying of the bundle because the Internet allows companies to offer many different kinds of packages. We’ll see a lot of testing along these lines over the next couple of years. Prices will come down, but bundles will remain.”

Indeed, where Disney is concerned, such testing has begun, albeit with alternative versions of branded network content which allow the company to offer first-run programming over the top without conflicting with cable-delivered versions of the networks. “Windows can be shifted around, as Disney has just done with ABC Family,” Goldstein says. “Once something is in the authenticated window you provide different content because it has different value than content you offer free online. But with so much content available that you can’t do on air, the bandwidth and resource constraints make us smarter about what goes where.”

This content abundance clearly applies to ESPN, he adds, noting the international distribution rights ESPN has to off-shore sports events like soccer and cricket which can be delivered in the U.S. “There’s a ton of content at different levels,” he says.

Moreover, in reference to initial signs of premium live content breaking into broadband distribution, Goldstein notes the deal DirecTV has struck with the NFL for distributing its NFL Sunday Ticket package to consumers over the Sony PlayStation3 without requiring them to subscribe to DirecTV services. “That’s a significant development, and it has done extremely well,” he says.

LG Electronics’ Chang cites another example, this one involving Disney in the type of trial of new ideas that’s increasingly showing up in markets outside the U.S. (see October, p. 18). “We’ve done interesting things outside the U.S.,” Chang says. “In South Korea Disney offered electronic rental with release of the 3D version of Beauty and the Beast at $20-$25 per view.” Such first-run offerings are being tested over satellite and cable pay TV networks in the U.S., but, so far, not through broadband delivery to smart TVs.

The ability to reach audiences everywhere in the world with distribution of content in native languages to all devices opens up an entirely different advertising model for premium content suppliers, Chang adds. “We’re seeing the concept of the international advertiser starting to emerge,” he says. “P&G, for example, is focusing on social networks as a way to reach audiences worldwide.”

Moving away from U.S.-centric advertising models through international programming reach is an obvious next step, he suggests. “The TV market in China is now a $100-billion-plus advertising business, versus $70-$80 billion in the U.S.,” he notes. Moreover, along with international reach, the IP-based environment gives these advertisers an opportunity to do a “lot more local targeting.”

In light of all the motivations, from big licensing fees paid by OTT players to international ad revenues to greater exposure of more content, Colin Decker, senior advisor for media and telecoms at The Virgin Group, which operates U.K. cable giant Virgin Media among many other properties, suggests it won’t be long before the damn breaks. “I’m interested in seeing when one of these guys will go nuclear,” Decker says. “We see big players being willing to take the body blows. At some point services may not be about [traditional] pay TV anymore.”

Meanwhile, as the heavy hitters weigh the risks, early movers are likely to be non-pay TV players with deep enough pockets to challenge dominant players. “We’re going to see an explosion in demand for non-rights-encumbered product,” Decker says. “There’s a massive opening for others to take the lead.”