November, 2009

Selectable outputs, or selectable logic?

The long-running battle at the Federal Communications Commission over the MPAA’s petition for a waiver of the rules banning the use of selectable output controls on devices that can receive TV signals is turning into a textbook example of how regulation can distort business decisions. I almost hate to write that sentence because I don’t want to sound like some sort of Cato Institute ideologue with a jones for deregulation. But the SOC debate has become terminally absurd.

And petty. Just before Thanksgiving, the MPAA filed an ex parte brief with the commission in which it called Public Knowledge legal director Harold Feld, in so many words, a liar.

First and foremost, MPAA would like to respond to certain Public Knowledge statements about the waiver request that, quite frankly, constitute blatant untruths. MPAA appreciates that different parties can reach different conclusions about matters of public policy. Indeed, MPAA has welcomed the opportunity to engage with Public Knowledge and its allies in an honest and open debate about the merits of the SOC waiver request. Regrettably, however, Public Knowledge, apparently having determined that its arguments on the merits have failed to gain traction with the Commission, has resorted to outright distortion and falsehoods. In particular, MPAA believes that the Feld Video Blog contains statements that are simply and irrefutably untrue.

 That drew a sharp retort from PK president Gigi Sohn, and a melodramatically “more-in-sorrow-than-anger” reply from Feld in a subsequent video blog post.

fcc-sealFor those joining us late, the MPAA’s petition has been pending before the commission for more than two years, but was victim of a pocket veto by the previous FCC chairman, who refused to put it before the other commissioners for a vote. With the Barack Obama Administration now in charge, however, there is a new FCC lineup and new chairman, and the studios have tried to capitalize on the changes to breathe new life into the old petition.

In very broad strokes, the MPAA argues that its member companies would like to introduce a new high-definition video-on-demand window for movies immediately following the theatrical window and before those movies are released on DVD and Blu-ray. The new window, according to the MPAA, would allow consumers to watch movies on their home theater systems earlier than they can today based on the current sequence of rlease windows, which generally doesn’t make movies available for home viewing until three to six months after their theatrical release when they come out on DVD. But the studios would only do that, the MPAA argues, if they’re allowed to remotely disable any analog outputs on receiving devices by inserting the appropriate “flag” into the VOD signal.

Why? Because analog outputs on HDTV sets and other devices do not support digital copy protection encryption like the High-bandwidth Digital Copy Protection (HDCP) system supported by HDMI and certain DVI connections. The studios fear that permitting their “high-value” content to travel over unprotected outputs would allow users to record the movies and then redistribute them over the Internet.

Public Knowledge and other opponents of the waiver argue that allowing the studios to turn off analog outputs would “break” as many as 25 million devices by preventing them from receiving or displaying the content and and is therefore anti-consumer. (There are also technical arguments over whether the MPAA has met its legal burden of proof to qualify for a waiver and other super-wonky issues that even The Media Wonk won’t delve into here.)

Here’s the problem: Because the debate is occuring in a public-policy context the MPAA is playing what it considers to be its best public-policy card: fear of piracy. We would only be too eager to offer this shiny new benefit to consumers, the studios say, if  we could just do something about the terrible scourge of piracy. But there’s a far more compelling business case for granting the SOC waiver that the studios are not making.

For its part, Public Knowledge is offering counter-arguments that, while they may address  the public-policy questions at issue, are utterly naive as to the business considerations distributors face when releasing a movie.

The studios know perfectly well that turning off the analog outputs for the proposed VOD transmissions will have little effect on the broader piracy problem (or, I should say, some people at the studios know that, some of them really are crazy). The reason they need to do it is to give themselves cover with Wal-Mart and other large DVD retailers who would raise holy hell over a new “unprotected” window ahead of theirs. Of course, they, too, know the piracy argument is a feint. But they would nonetheless use it to squeeze the studios on shelf space and price at a time when the studios can ill-afford to lose more DVD business.

Theater owners would also squawk, of course. But the studios have no doubt calculated that there is nothing the theaters can really do about it. They need Hollywood’s movies far more than Wal-Mart does.

Cable operators, who would benefit from the new window, have predictably come out in favor of granting the waiver. But they, too, would be all too happy to turn around and use “piracy” during the new window to squeeze the studios on licensing fees in the traditional VOD window. It’s business, after all. not a morality play.

And that, ultimately, is the flaw in Public Knowledge’s case against the waiver. To argue, as it has repeatedly, that the fact that a few independent distributors like Magnolia and IFC have released movies on VOD ahead of their theatrical or DVD release proves that piracy is not a real problem, and that the studios could release movies the same way now, is simply a non sequitur. Independent distributors are in a different business from the major studios. They do not have business relationships with Wal-Mart and Best Buy to protect.

family-watching-dvdAs things now stand, routinely releasing movies on VOD ahead of their DVD/Blu-ray release would not be a sound business decision for a studio to make, given all of the considerations that must go into the distribution of movies, and no business person answerable to shareholders is likely to make it. Would the use of SOC change that? It might, but not because it would do anything to prevent piracy. It might because it would give the studios a tool to manage their business relationships through a period of technological and industry transition.

That may not sound very noble (or compelling to regulators), but I don’t find it particularly nefarious, either. Making and distributing movies is a business, and expecting that it would operate on something other than business principles is absurd.

For similar reasons, I don’t find the “breaking 25 million TVs” argument very compelling, either.

Public Knowledge and the Consumer Electronics Association complain that “allowing the MPAA to shut off analog outputs will leave over 20 million TV sets and downstream devices like Slingbox unable to receive the MPAA’s content.” That may be so, but it’s also so that NO TV sets or downstream devices can receive the MPAA’s content in the proposed window as things now stand. And they’re simply not going to start receiving it just because Public Knowledge and CEA think they ought to be able to because it’s not in anyone’s economic interest to let them.

Granted, it may be that the likely consumer benefit of the new window is not a sufficient trade off for changing the rules that have governed TV receivers up to now. But “no one should have it if some people can’t” is not an argument to that point one way or another. In fact, it’s not really an argument at all. It’s an attitude.

And it’s not a sound basis for either business or public policy decisions.

The TV Everywhere MacGuffin

psychoI wrote a long-ish post for GigaOm Pro the other day on TV Everywhere headlined, Split Decision on Paying For TV Everywhere. Most of the post is behind a pay-wall but nothing in the analysis it provides would be unfamiliar to readers of The Media Wonk. The post drew an interesting response from GigaOm subscriber MichaelMcNabb. In it, McNabb offers four predictions:

 1) TV Everywhere is available as an add-on to your basic cable subscription and free for premium subscribers;

2) Hulu goes behind a paid wall;

3) Cable programmers significantly restrict availability of free content in return for an increase in affiliate fees;

4) Free to air Networks agree not to increase re-transmission fees in order to participate on new On Demand networks – including network DVR’s.

 Net result – continued shift from linear to On Demand model leaving linear channels as “barker” channels for on-demand platforms.

I have no idea who McNabb is (his subscriber profile is a blank slate). But I wouldn’t argue with any of his prognostications. Much of what we’re seeing in the debate over TV Everywhere is a business negotiation among incumbent service providers and programmers over how to divide the revenue pie as its ingredients shift. As is usually the case when incumbents are driving “innovation,” the object is the preservation and enhancement of the incumbents’ leverage, rather than actual innovation, with its potential to disrupt established business models.

“TV Everywhere,” as first articulated by Time Warner and now taken up with gusto by Comcast, is not so much an example of geniune innovation as what Alfred Hitchcock called a MacGuffin: a plot element that drives the story forward but is ultimately irrelevent to the drama. Think: the stolen cash in Psycho. It’s the reason Janet Leigh ends up at the motel. But it’s not the reason for the shower scene.

TV Everywhere needs a better Mouse trap

The Media Wonk was attending the NewTeeVee Live conference in San Francisco this past week wearing his GigaOm Pro hat, where much of the discussion focused on TV Everywhere. Comcast Interactive Media president Amy Banse made news by announcing on Thursday that On Demand Online, Comcast’s “expression” of TV Everywhere, will be available to subscribers at no extra cost “by Hanukkah,” which begins on December 11 this year.

hanukkah_dancing_sevivons_16At nearly the same moment, however, just down the coast in LA, Walt Disney Co. CEO Bob Iger was tossing a turd into the TV Everywhere punch bowl during the Mouse House Q4 earnings call by explaining to analysts that not charging consumers an extra fee to access their TV content Everywhere is a non-starter as far as ABC, ESPN, The Disney Channel and ABC Family are concerned. Disney, he made clear, expects to be compensated by Comcast and every other MSO and satellite provider for the right to distribute Disney’s cable networks over broadband:

Look, TV Everywhere is maybe an example of what we have talked about often, and that is digital technology providing us with more opportunities to reach consumers and consumers more opportunities to consume our product. And to the extent that TV Everywhere serves consumers better, we are in favor of it. However, when you serve consumers better, when you provide more convenience or more utility, you should be able to charge for that and charge an appropriate amount. And some of what we have heard about TV Everywhere suggests that interest in charging the consumer for greater access is not necessarily a priority and we believe it should be.

What’s more, he added, Disney does not intend to be bound by any subscriber authentication system distributors might come up with and will retain the right to make its cable properties available online to non-subscribers as well as Disney sees fit:

We also believe that we should still have the ability if we go to a world where there is authentication and TV everywhere for the multi-channel subscriber, we should not be precluded from offering our product directly to consumers who may not be subscribers to multi-channel services, because we believe that would — and even though there aren’t many of them, that wouldn’t necessarily be good for consumers and while we realize we are trying to serve many masters, the master that is most important to serve for us is the consumer.

The Media Wonk isn’t exactly surprised by the message. Iger had been making Disney’s lack of enthusiasm for TV Everywhere clear for months. But I hadn’t expected the gauntlet to be thrown down quite so pointedly, quite so soon, either. I had expected programmers to let MSOs get a bit more invested in TV Everywhere before springing the retransmission trap on them. But with Hanukkah less than a month off, perhaps Iger felt Comcast was far enough down the TV Everywhere road that there was nothing to be gained by waiting.

What the contrast between Banse’s comments and Iger’s reflects, it seems to me, is the potentially fatal flaw at the heart of the TV Everywhere vision: The interests of the programmers and the cable/satellite service providers are not quite aligned.

For service providers, TVE is essentially a defensive strategy: an effort to forestall cord-cutting and competition from over-the-top delivery platforms by enhancing the value of a basic subscription by including broadband access as part of a package. For programmers, on the other hand, the real upside of TVE is the opportunity it presents to squeeze the MSOs for higher affiliate fees in exchange for the expanded distribution rights. If they’re successful, that would dramatically alter the economics of TV Everywhere for pay-TV providers, and not for the better.

True, there are some programmers who seem genuinely concerned with preserving the cable networks’ dual-revenue stream business model (advertising + affiliate fees) by enhancing and protecting the value of subscribing to a pay-TV service. But that call has always been theirs to make: If you’re worried about over-the-top distribution undercutting the value of a pay-TV service don’t make your content available to over-the-top distributors. TV Everywhere is not a necessary condition to decide not to go over the top. It’s only a necessary condition if you’re goal is to scare pay-TV providers into paying you higher affiliate fees by threatening to go over the top. In organized crime circles they call that a protection racket.

Disney at least is being honest about its intentions.

amy-banse-ntvlAll of which is not to suggest that Comcast is without wiles of its own in its approach to TV Everywhere. As Banse noted at the NTVL conference, On Demand Online users will be able to register up to three different authenticated devices as access points for subscription content. That means subscribers will be able to register their laptop so they can access On Demand Online content while traveling, for instance (or, as one wag whispered to The Media Wonk at NTVL, “I’m going to bring my laptop when I visit my mother over the holidays because she’s a Comcast subscriber and she’ll never register anything, so I’ll just register my laptop with her subscription”).

The three-device rule will certainly make On Demand Online more attractive to subscribers. But it’s also a neat way for Comcast to colonize a bunch of mobile devices before some over-the-top distributor can claim the same turf with the same content. Once you’ve registered your smartphone with On Demand Online, why bother with someone else’s app, especially one you might have to pay for? TV Everywhere, in other words, is likely to set off a device-focused land grab, and it’s a shrewd move by Comcast to get a stake in the ground first.

Can TV survive TV Everywhere?

One of The Media Wonk’s day jobs is as an analyst and curator at GigaOm Pro, the subscription-based offshoot of the popular GigaOm web site (to which I also occasionally contribute some blatherings). On Monday, the Pro site is issuing a new report The Media Wonk wrote (subscription required) on TV Everywhere, the effort by leading cable MSOs as well as some cable programmers to make pay-TV content available online to cable and satellite subscribers.

TV-EverywhereFor those of you in the Bay Area, The Media Wonk will also be appearing on some panels at the NewTeeVee Live conference in San Francisco, where the TV Everywhere report will be distributed free to attendees. Come one, come all.

The report is a good read (if I do say so myself) on the nuts, bolts, whys and wherefores of TV Everywhere. But there’s one question I didn’t really discuss in it because anyone professionally interested in TV Everywhere has probably already answered it to their own satisfaction, and it sort of would have obviated the need for the report in the first place.

First proposed by Time Warner CEO Jeff Bewkes and quickly taken up by Time Warner Cable (soon to be a separate company), along with Comcast and Verizon FiOS, TV Everywhere is self-consciously an effort to preserve the traditional pay-TV business model as viewership shifts irresistibly away from  traditional pay-TV platforms.

Multichannel News, earlier this month:

At a National Association for Multi-Ethnicity in Communications Conference general session Wednesday, panelists said operators and programmers need to find a solution quickly, as consumer demand to access content on multiple platforms continues to grow.

Mark Garner, senior vice president of distribution, marketing and business development for A&E Television Networks, said the industry continues to face a challenge in finding the right business model to offer content on multiple screens. The current strategy taken by some networks to offer content free on their Web sites jeopardizes the current affiliate fee-based distribution model with operators that, he says, represents 45% of A&E Networks’ overall revenue.

“There’s a lot of enthusiasm for maintaining the current business model,” Garner said.

And from September:

“TV Everywhere is an all-around win for those of us who love television,” Time Warner Cable chairman, president and CEO Glenn Britt said in a statement. “It will give our customers more control over content and allow them greater access to programs they are already paying for, while enhancing the distributors’ and networks’ robust business model that encourages the creation of great content.”

Fine. But how many cases can you point to in other media businesses wherein the incumbent providers were able to sustain their traditional business models with respect to digital distribution? Not many, I’d venture to say.

Bob-IgerMusic? Fuhgetaboutit. If “record companies” survive in something like their current form (which I would call a long-shot in itself) the single revenue-stream model of selling high margin “albums” containing 10-15 songs will not be how they do it.

Movies? Ask Bob Iger.

Broadcast television? As I wrote last month for GigaOm Pro:

In addition to his Hulu comments, [News Corp. COO Chase] Carey also suggested last week that News Corp. is laying the groundwork for a battle with cable operators over retransmission consent for Fox Broadcasting content. “We need to move that business [broadcasting] to a place where we are getting fair value,” he said, according to a report on the SportsBusiness Daily web site. “You have to have conviction and do what’s necessary to do.”

What’s necessary to do, in Carey’s view, is to get cable MSOs to pay for the right to retransmit free broadcast programming. “It’s about trying to get our business to a place where it can be a healthy, long-term business,” he said. “It starts with making dual revenue.”

Newspapers? Please.

Books? Too early to tell but the pricing structure emerging for e-books suggests publishers are going to need to start thinking in terms of multiple revenue streams.

If the pay-TV companies manage to pull it off it will be notable not just for their own sake but because it would mean they had bucked the tide of both history and technology.

Apple still messing with people's heads on video

For a company that has never been terribly friendly toward ordinary press coverage Apple has had a remarkably sophisticated media operation over the years when it suits Apple’s purposes. They’ve been masterful at winking, nodding and leaking just enough juicy bits to the fanboy sites and a few carefully selected mainstream outlets to get everybody hyped up ahead of new product announcements, often managing to turn not much into big news. But it has been outdoing itself lately in its manipulations around online video.

Apparently unsure what it wants to do itself in video, Apple seems to want to make sure no one else figures it out first.  So it’s sowing FUD about video industry initiatives by leaking “news” of purported video plans of its own that borders on vaporware.

apple-tv-2Last month, the Wall Street Journal broke the “news”of iDisney’s Keychest technology that will supposedly let consumers buy permanent access to movies and then retrieve them from the cloud using a variety of devices. “People in the entertainment industry,”  told the Journal “it would be reasonable to infer that Apple would cooperate with such an initiative.”

And The Media Wonk is telling you it’s reasonable to infer that it was Apple who told the Journal that. It is also reasonable to infer that the story’s appearance on the eve of the Digital Entertainment Content Ecosystem discussions in Seoul was not a coincidence. Neither Apple nor iDisney are members of DECE, which is attempting to devise a system to let consumers, well, buy permanent access to movies and then retrieve them from the cloud using a variety of devices. And it’s certainly not in Apple’s interest for DECE to succeed.

But if Apple is really on-board with Keychest, it’s a fair bet the system will be limited to Apple devices, using Apple DRM. The alternative would be for Apple to design its devices to be interoperable with others, and with other online services. I’ll believe that when I see it.

Today, Apple struck again, once more in the Wall Street Journal. This time, we’re being told that Apple is shopping a plan content owners to create a $30 per month subscription video service through iTunes “if Apple is able to get enough buy-in from broadcast and cable TV programmers.”

I’m willing to bet no actual “broadcast and cable TV programmers” have really been pitched on the idea, apart from iDisney’s ABC and ESPN networks, who I’m sure were enthusiastic. And I’m also willing to bet that the timing of the trial balloon is related to Comcast’s recent announcement that it plans to rollout its On Demand Online (i.e. TV Everywhere) service to all 24 million subscribers by January. Comcast has had strong support from the pay-TV networks for its ODO trial in 5,000 homes, but a number of those networks are on the fence about whether they want to be part of the broader rollout. Hey, maybe they should see what Apple is offering before signing up with Comcast. No wonder Comcast is so anxious to buy NBC Universal. At least then it can play the same game Apple is playing. (Does it need saying that Disney has been cooler toward TV Everywhere than other pay-TV programmers and is not involved in the Comcast test?)

Everyone would be better off if Apple just figured out what it wants to do in video so the rest of the industry can get on with business.