Nothing Neutral About Disney’s Bid For Fox

It was fitting, albeit likely coincidental, that the Walt Disney Co. announced its $52 billion acquisition of most of the movie and TV assets of 21st Century Fox on the day the Federal Communications Commission voted to repeal its own net neutrality rules, because the deal is very much about the future of content delivery over the internet.

Disney CEO Robert Iger

Under the deal, Disney would absorb the 20th Century-Fox film and TV studio and its library, including the first three “Star Wars” films; most of Fox’s cable networks group, including National Geographic, FX, and 300-plus international channels but excluding Fox News or Fox Sports; and 22 regional sports networks (RSNs). The deal also includes Fox’s one-third interest in Hulu, giving Disney majority control over the streaming service.

Assuming the deal passes antitrust muster — highly likely given Rupert Murdoch’s closeness to Donald Trump — it will give Disney control over vast new libraries of content as it prepares to significantly expand its direct-to-consumer streaming business. Strategic control over Hulu will also give Disney a solid foundation from which to challenge Netflix and Amazon directly as an over-the-top content aggregator.

Yet, while the coming showdown with Netflix has grabbed most of the headlines about the deal, there is another important streaming dynamic likely to play out that has gotten less attention but which could be directly impacted by the repeal of the net neutrality rules.

Whether, or not, the bulked up Disney succeeds in challenging Netflix and Amazon, its growing direct-to-consumer ambitions give the Mouse a major stake in the coming contest between programming services and broadband providers over the terms and conditions of engagement on last-mile networks.

The over-the-top streaming business has so far developed very differently from traditional movie and television delivery businesses. In the traditional TV business, the owners of the last-mile pipes — cable and satellite operators, local broadcast affiliates — pay program providers for access to their content.

Disney, in particular, has been successful in leveraging that dynamic, earning ESPN the highest per-subscriber carriage fees of any cable network.

Unlike a cable TV system, however, internet access networks have utility and value independent of any particular content, allowing access service providers to build their networks — and subscriber bases — without having to pay for the content moving across those networks.

If anything, the monopoly or duopoly status most internet access providers enjoy within their footprints has raised concerns that ISPs could use the leverage of their control over their networks to compel content providers to pay for access to their subscribers.

The FCC’s original Open Internet Order was designed in part specifically to deny ISPs that leverage, by prohibiting the blocking or throttling of data based on its source, or accepting compensation for favorable treatment of data from a particular source. Those rules left the status quo in place, at least for the time being. But they left open the possibility that the streaming business could eventually develop more like the traditional TV business, in which access providers are compelled to

The FCC has now voted to lift those rules — their ultimate fate awaits the outcome of inevitable litigation — potentially upsetting the current balance of power.

Determining who will ultimately holds the leverage in that balance remains a work in progress, however. One way to read Disney’s bid for Fox is as an attempt to position itself not only against Netflix but against last-mile network operators for the inevitable battles ahead.

From that perspective, the real trigger event for Disney was AT&T’s (still pending) acquisition of Time Warner. Assuming that deal goes through, it will mean that two of Disney’s (and Fox’s) major competitors — NBCUniversal, now owned by Comcast, and Time Warner — will be owned by major broadband providers. That could leave Disney at a disadvantage in the struggle for leverage over the terms of OTT distribution.

One option would have been for Disney to sell itself to a network operator. But the only one out there with the scale to do it and not already betrothed is Verizon, and Verizon execs have made it clear they’re not in the market for a major studio.

By buying Fox, Disney is hoping to gain enough scale as a content provider to treat with network operators on equal or better terms.


Amazon, Google And The Great Game

For the better part of the 19th Century, the British Empire and Czarist Russia (and for a while Napoleonic France) struggled for influence and control over Afghanistan and the broader Islamic Central-Asian region. Russia feared England’s growing commercial ambitions on the doorstep of the Russian Empire, while England feared that Russian control of Afghanistan would allow it to threaten India, the “jewel in the crown” of the British Empire.

Although the European powers never went to war against each other directly over the region, they engaged in a decades-long series of political and diplomatic moves and counter-moves (and occasional indirect military moves) that historian came to call The Great Game.

Something like a 21st Century version of the Great Game is now playing out among today’s digital empires for control over virtual territory on the connected devices and streaming services in Americans’ homes. Read More »

Pay-TV’s Rising Sea Of Troubles

Change comes slowly, and then all at once. And it’s coming now to the pay-TV business.

For years — even as technology-driven disruption ravaged the music, publishing, and other media industries — the traditional pay-TV bundle largely held together despite a trickling away of subscribers to cord-cutting.

A big reason it hasn’t fallen apart until now is that programmers and operators shared in interest in keeping it together, even as they regularly clashed over carriage renewals. For programmers, bundling channels into a single carriage deal brings in incremental affiliate fees and increases advertising inventory; for operators, the big bundle helps sustain high ARPU rates and long-term subscriber contracts. Neither side had an incentive to fundamentally alter the structure of the business.

Even the emergence of over-the-top “skinny” bundles proved less disruptive than many expected as programmers successfully pushed OTT providers to fatten up their skinny offerings and raise prices to levels nearly comparable to traditional pay-TV subscriptions.

But the trickle of cord-cutting has now become a flood. And as the water rises programmers and operators have begun to turn on each other in earnest. Read More »

Skinny Bundles vs. Set-Top A La Carte

Having resigned themselves to a future defined by cord-cutting, TV programmers are desperately trying to hold the line on bundling. The virtual-MVPD movement started by Dish Network’s Sling TV service began by trying to split the difference between the bloated traditional pay-TV bundle and true a la carte by offering a slimmed down package of channels at a lower price.

Since then, as more vMVPDs have launched to challenge Sling programmers have used their leverage to push up both the heft of the bundles and price tag, to where “skinny” bundles increasingly resemble what they aimed to replace, albeit at a somewhat reduced price.

That strategy isn’t cutting it with many cord-cutters, however. According to MoffettNathanson analyst Craig Moffett, virtual-MVPD subscriptions are so far making up only about 60 percent of the losses from consumers cutting the traditional cord, a trend Barclays analyst Kannan Venkateshwar sees continuing. Over the next decade, Venkateshwar projects, 31 million traditional pay-TV subscribers will cut the cord, but only 17 million will sign up for an internet-delivered bundle.

Assuming internet-delivered bundles are still around in a decade, that is. “Most of these [vMVPD] businesses are at best break-even or money losers,” Moffett told Bloomberg. “This is shaping up to be a truly lousy business.”

The a la carte on-demand subscription business, on the other hand, is shaping up nicely. Set-top streaming box maker Roku this month reported 15 million active monthly accounts, a 43 percent year-over-year increase and more than all virtual-MVPDs combined. The privately held company generated nearly $400 million in revenue in 2016 and reportedly is preparing to file for an initial public offering later this year at a roughly $1 billion valuation.

Notably roughly $100 of that $400 million in revenue last year came not from hardware sales but from its media and licensing business, which includes ad sales on Roku channels and fees it charges networks to be featured on the platform.

Roku isn’t alone on the set-top, either. According to eMarketer, Roku 38.9 million Americans will use Roku at least once a month in 2017 (including multiple users per active account), up 19 percent over last year, followed closely by Google’s Chromecast, at 36.9 million, and Amazon’s Fire TV, at 35.8 million.

One reason for that growth in connected-device usage is the growth in the number of U.S. households subscribing to more than one over-the-top subscription VOD service.

According to a recent study by Hub Entertainment Research 38 percent of U.S. TV households now subscribe to two or more SVOD services such as Netflix, Amazon and Hulu. That’s up from 26 percent last year. Some 14 percent of households subscribe to all three major services, up from 6 percent a year ago.

Not all of those SVOD subscribers have cut the cord, of course, but anyone who is subscribing to all three major services is paying about as much per month for them as they would for a skinny bundle. If consumers can be said to vote with their dollars they’re voting for a future that is on-demand and a la carte, not just over-the-top.

Hollywood’s Summer of Discontent

Hollywood has a long history of chasing too much of a good thing. Once a studio has a major hit with a certain kind of movie, every other studio copies the blueprint and starts churning out their own versions. Think disaster movies in the 1970s, or slasher films in the ’80s. Eventually, creativity gives way to formula, viewers grow numb from the repetition and audiences move on, leaving the studios facing a couple of down years as they clear their pipelines of genre pictures nobody wants to see anymore. The cycle then usually starts up all over again.

This summer, domestic audiences seem to have lost their taste for big-budget franchise films and sequels. Ticket sales were down 9 percent from last summer through the July 4th weekend as latest installments of aging franchises fell flat, from Pirates of the Caribbean: Dead Men Tell No Tales and Transformers: The Last Knight to Alien: Covenant and Universal’s The Mummy reboot. New would-be franchises, meanwhile, such as Warner’s King Arthur: The Legend of the Sword and Paramount’s Baywatch, never found open water. Read More »

High Court Of Canada Cooks Google’s Goose

When you think about landmark legal rulings affecting the internet you don’t usually look to the courts of Canada. But the Supreme Court of Canada this week sent shock waves through internet legal circles by issuing an injunction against Google requiring the search engine to de-index an allegedly infringing website everywhere in the world.

The 7-2 ruling was surprising on multiple levels, not least because Google is not actually a party to the litigation that led to the injunction. More surprising still was the court’s assertion of global jurisdiction over the internet. But for Google the worst may be yet to come.

The dispute involves Equustek Solutions, a smallish Canadian technology firm that sued its former distributor, Datalink Technologies Gateway, in 2011 alleging that Datalink was relabeling some of Equustek’s products and passing them off as its own. Then, according to the suit, Datalink used confidential documents and information it had obtained from Equustek to produce and sell competing products. Read More »

VidAngel Calls Hollywood’s Bet

The Hollywood studios have a fraught history with third-party services that re-edit their films, typically to remove the sort of content that had earned the film an R or even PG-13 rating.

Back in the 1990s, a handful of video rental store operators, mostly in conservative Utah, began manually editing purchased copies of VHS cassettes for their customers as a service, most famously with Titanic, to remove the the naughty bits. Studios and filmmakers grumbled but manual re-editing wasn’t exactly a business designed to scale so Hollywood mostly let it be.

In the 2000s, with the advent of the DVD format, some of those same entrepreneurs figured out ways to partially automate the editing process and tried to turn it into the business. In 2000, the Utah company CleanFlicks started producing cleaned up versions of DVDs created by muting the audio at key points or removing entire sections of the audio track, then offering them for sale and rental. Read More »

M&E Forecast: Slowing Growth, Tighter Choke Points

Two five-year forecasts issued this week together paint a picture of a much tougher business environment facing media and entertainment companies over the next half decade.

According to PwC’s annual Outlook report, the media and entertainment industries are nearing a revenue “plateau,” particularly video-centric industries, as many historical growth drivers are running out of steam. Worldwide, PwC expects M&E revenue to rise from $1.8 trillion in 2016 to $2.2 trillion in 2021, representing a compound annual growth rate of 4.2 percent– a ratcheting down from the 4.4 percent CAGR it forecast last year.

For the U.S., revenue is projected to grow even more slowly, increasing from $635 billion in 2016 to $759 billion by 2021, for a CAGR of 3.6 percent. Read More »

Fool Me Twice: How Spotify Could Become the New iTunes Store

Back in 2003, as the music industry was reeling from widespread, Napster-fueled piracy, Apple CEO Steve Jobs made the record labels an offer they couldn’t resist: Give me a license to sell individual tracks but let me sell them cheap enough to be a viable alternative to free, and I’ll wrap them in DRM for you in a way that consumers will accept, so they can’t be copied.

The labels leapt at the deal and the $1.00 download became the new atomic unit of the business.

Though thrilled at first to have an answer to piracy the record companies eventually came to rue the arrangement once they figured out that Apple was using those inexpensive downloads to supercharge the market for its high-margin iPods and later iPhone hardware, and was reaping far more of the value being created by their music than they were. By then, however, they had become captive to Apple’s ecosystem: Thanks to Apple’s proprietary DRM, the only way to sell music to iPod users — at the time the largest segment of the portable music-player install base — was through iTunes, under terms effectively dictated by Apple. Read More »

Get Ready to Rumble; FCC Launches Net Neutrality Rollback

Here’s how high tension is already running over the Federal Communications Commission’s proposal to undo it’s own net neutrality order: At Thursday’s open meeting where the commission voted 2-1 to proceed with the first phase of the rollback, with security on high alert over online threats aimed at commissioners, security personnel “manhandled” long-time Capitol Hill reporter John Donnelly and removed him from the building for approaching commissioner Michael O’Reilly in a hallway and attempting to ask him a question outside of an official press conference.

FCC Commissioner Mignon Clyburn

Tensions are only likely to get higher as the proposal moves forward. This week’s vote kicks off at least a three-month period of pubic comments, during which the commission can expect to be deluged with input, ranging from the substantive to he hysterical. Democrats on Capitol Hill, meanwhile, are vowing “all out war” to prevent any rollback. Read More »

Competing With Paid

The rise of subscription streaming services, in both the music and video industries, has given the lie to the old complaint that consumers won’t pay for content online. But to many in the music industry, to say nothing of streaming investors, too many of them still don’t.

Ad-supported free streaming services remain the bête noire of the record labels and music publishers. They rail against YouTube, even as they’re making deals with it, and have fought to restrict the copyright safe harbors that allow YouTube to profit from music posted without license by users. They’ve maintained pressure on Spotify to shift more of its free users to its paid subscription tier, a tune now echoed by potential investors as Spotify eyes an IPO or public listing of its shares, and have begun to restrict when new releases are made available on the service’s free tier. Read More »

The Other Pay-TV Bundle

Hulu’s virtual pay-TV service went live in selected cities this week, offering a basic bundle of 60 channels for $40 a month ($73 a month with enhanced DVR capability). The launch, still officially in beta, brings to six the number of live, multichannel over-the-top services now available, including DirecTV Now, Sling TV, Playstation Vue, YouTube TV, and Fubo TV. More are likely on the way.

But while Hulu was rolling out, many traditional pay-TV providers were rolling over. According to an analysis by MoffettNathanson analyst Craig Moffett, based on publicly reported results and estimated results for privately held companies, traditional pay-TV providers collectively lost at least 762,000 video subscribers in the first quarter of 2017, more than five times their losses in the same period last year.

“For the better part of fifteen years, pundits have predicted that cord-cutting was the future. Well, the future has arrived,”  Moffett wrote in his latest quarterly overview of the industry. “It leaves the Pay TV subscriber universe shrinking at its worst ever annual rate of decline (-2.4%). And it was the worst ever accelerate in the rate of decline (60 bps).”

The news spooked investors, who sent shares of media companies tumbling. Read More »

From Fake News to Real Murder: Facebook’s Incentive Problem

Fake news did not originate with Facebook, nor with the 2016 presidential campaign. Planting damaging stories of dubious provenance about a political opponent in the newspaper  is a tradition nearly as old as newspapering itself. And spreading false rumors is as old as human society.

But as we saw in last year’s election, Facebook and other social media platforms have elevated merely spurious information into a weapon of mass dysfunction. During the final three months of the 2016 campaign, the top 20 fake news stories circulating on Facebook racked up 8,711,000 shares, reactions, and comments on the platform, including such classics as “Pope Endorses Donald Trump” (960,000), and “FBI Agent Suspected in Hillary Email Leaks Found Dead in Apparent Murder-Suicide” (560,000).

BuzzFeed, which compiled those data, notes that those 20 fake stories attracted nearly 1.5 million more instances of engagement than the 20 top-performing stories 19 major news outlets over the same period. But the issue here isn’t so much real vs. fake but the role that Facebook’s massive scale played in encouraging the production of fake stories. Read More »

The Net Neutrality Paradox

One of the more unfortunate wrinkles in the long debate leading up to the Federal Communications Commission’s 2015 Open Internet Order, better known as net neutrality, was its increasingly commercial focus. There were important civil liberties issues at stake, to say nothing of the interplay of engineering and regulation of critical infrastructure and the private ownership of public goods. But much of the public debate boiled down to an argument over streaming — Netflix streaming in particular.

That was due in no small part to the efforts of Netflix founder and CEO, Reed Hastings, who made himself and his company the poster-children of the net neutrality cause by loudly proclaiming Netflix’s oppression at the hands of ISPs looking to impose interconnection fees on the streaming service.

Although net neutrality proponents eagerly embraced Netflix’s cause and Hastings’ pubic advocacy they worked to color the issue as essentially a commercial dispute between different types of service providers, which, paradoxically, is actually an argument against what the FCC did. Disputes between buyers and sellers are not really the FCC’s bailiwick; that’s more a matter for the Federal Trade Commission and the antitrust division of the Justice Department. Read More »