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.

DirecTV-parent AT&T warned in an SEC filing this week that it lost 390,000 subscribers from its satellite and U-verse fiber-optic TV services in the the third quarter — far more than even the most bearish analysts had expected. While the telco made up some of that ground with the additional of 300,000 subscribers to its DirecTV Now OTT service, that still represents a trading-down in ARPU and exposed a growing rift between programmers and operators over the future of the business.

Viacom this week which is locked in a carriage-renewal standoff with Charter Communications, accused the No. 2 cable operator of trying to prevent Viacom from making deals with over-the-top distributors that compete with Charter.

“Among the issues we face is Charter’s attempt to inhibit the creation of smaller, more innovative and less expensive packages of the networks customers want, by penalizing Viacom if it participates in new skinny bundles or OTT streaming platforms,” CEO Bob Bakish said in a memo to employees obtained by Bloomberg News.

Meanwhile, the American Cable Association, which represents small operators, is accusing Comcast of trying to prevent ACA members from creating their own, sports-free skinny bundles that exclude regional sports networks such as those owned by Comcast in Philadelphia, Boston, Chicago, and other markets.

“Those salad days of fat bundles, automatic carriage renewals and customary affiliate steps ups are long gone,” Citigroup Inc. analyst Jason Bazinet wrote in a note this week. “Today, every media and cable firm is jockeying for self-preservation.”

That’s just what disruption looks like.

The Great Re-bundling: The Wireless Future of Music and Video

Bundled media services are becoming table stakes in the wireless business. With plain old wireless service (POWS?) at or close to the saturation point in the U.S., wireless operators are increasingly fighting over slices of a fixed pie, and feel a growing need to differentiate from their competitors in pursuit of market share.

With the costly build-out of 5G networks looming, operators also need to increase ARPU by adding services.

Thus, it was no big surprise this week when Softbank-owned Sprint snapped up a 33 percent stake in Jay-Z’s Tidal music streaming service. Sprint already had a partnership with Tidal, but as MIDiA Research analyst Mark Mulligan noted in a blog post,  the bundling game has changed for wireless operators, and meaningful differentiation increasingly means having your own skin in it.

“The original thinking behind telco bundles was differentiation, but when every telco has got a music bundle there’s no differentiation anymore,” he wrote. “Additionally, if you are a top tier telco and you haven’t got Apple or Spotify, then partnering with one of the rest risks brand damage by appearing to be stuck with an also-ran. By making a high profile investment in Tidal, Sprint has thus transformed its forthcoming bundle from this scenario into something it can build real differentiation around.” Read More »

AT&T Prepares To Flex Its OTT Muscles

AT&T announced this week that it plans to take DirecTV over-the-top later this year through a multi-tiered streaming service that will be available to wireline and wireless broadband subscribers regardless of provider.

The top tier, to be called DirecTV Now, will feature “on-demand and live programming from many networks, plus premium add-on options,” which sounds more or less like Dish Network’s Sling TV OTT service. A mid-level tier, called DirecTV Mobile, will offer a stripped down video lineup and a “mobile-first experience.” A third, ad-supported free tier, called DirecTV Preview, will offer a “millennial focused” grab bag of digital-native content along the lines of Verizon’s Go90 service.

cable_TV_not1The announcement itself was no big surprise. AT&T obviously didn’t spend $48 billion to acquire DirecTV just to be in the satellite TV business — a business with little if any organic growth left in it — and extending DirecTV’s business onto broadband and wireless platforms is an obvious strategy. What is a bit surprising is the timing of the announcement.

As of now, AT&T has no programming lineups to announce for any of the tiers, no pricing information and no exact start date. And according to a Wall Street Journal report, negotiations with the networks to secure streaming rights have just begun. Read More »

Cable’s Q4 Bundle of Joy

Comcast, Time Warner Cable and Charter all reported strong video subscriber growth in the fourth quarter of 2015, adding 172,000 between them. That was a far cry from a year earlier, when they collectively lost 35,000 video subs.

The results led some to speculate that the worst days of cord-cutting are now behind the industry and that cord-nevers may be starting to change their minds about paying for TV.

Maybe, although the pay-TV industry as a whole continues to lose subscribers, at a rate of about 1 percent a year, according to an estimate by comcast_vanMoffettNathanson analyst Craig Moffett. Most of that shrinkage in the fourth quarter came from telco and satellite providers, as those two businesses undergo restructurings.

Between them, Verizon’s FiOS TV service and the combined AT&T/DirecTV lost 6,000 video subscribers in the quarter, as Verizon shifted its video focus to its new mobile streaming service Go90 while AT&T shed U-Verse subscribers as it prepared to swallow DirecTV.

In Comcast’s Q4 earnings call, CEO Brian Roberts acknowledged that some of cable’s gain last year probably reflected a market share shift, reversing several years in which cable was losing share to satellite and telco. Read More »

The Co-Dependent Marriage Of TV and Sports

According to a report released this week by PriceWaterhouseCooper, the revenue earned from media rights by the North American sports industry will surpass the revenue earned at the gate by 2018, when they’ll reach $19.95 billion and $19.72 billion, respectively, fulfilling the old adage that the sports business is really the TV business.

Increasingly, the reverse is also true: The TV business is really the sports business.

More than a third of all TV advertising in the U.S. today goes to live sports, and that doesn’t include ESPN, which shows a mix of live sports and sports-related programming. Add in ESPN and the share of advertising going to sport programming would top 40 percent, Advancit Capital partner and former Fox Digital president Jonathan Miller estimated from the stage at the New York Media Festival earlier this month. Franklin_Gutierrez_hitting_HRAt the same time, according to SNL Kagan, sports networks account for nearly 20 percent of the carriage fees paid by cable and satellite operators, and that doesn’t count the portion of the carriage and retransmission fees paid to broadcasters and general-interest cable networks that can be attributed to the sports programming they carry. According to an analysis last year by MoffettNathanson analyst Michael Nathanson, the aggregate of sports rights account for as much as 50 percent of the cost of the average cable bill. Read More »

Pay-TV Operators Eye Mobile Video To Reduce Subscriber Costs

AT&T officials offered some pretty eye-popping numbers this week on the impact of the DirecTV acquisition on the bottom line. Speaking at the Goldman Sachs Communicopia conference in New York AT&T CFO John Stephens said DirecTV pays $17 a month less per subscriber in content costs “on an apples-to-apples basis” compared to what AT&T has been paying per U-Verse subscriber.

AT&T is now working to “bring those prices in line” by moving everything to “the most efficient contract pricing in the house,” which is the DirecTV price. “So with 6 million U-Verse subscribers you can get your head around about $100 million a month,” in savings, he said, or $1.2 billion per year. “That’s sort of the easy math on iphone_TVhow you can conceptualize the scale” of the savings.

The math could soon get even easier for AT&T. “Right now we have 75 million smartphones and tablets and 50 million broadband locations that we don’t sell video to today,” Stephens said. “So we have 125 million locations we can take to the content team and say, let’s work together to sell something. It doesn’t have to be an adversarial situation, it’s here’s your growth and we built this integrated carrier model to take advantage of that.” Read More »

Retransmission Discontent

Last week’s meltdown among media company stocks seems to have subsided for now, but not before wiping out $60 billion in market value. Shares of Viacom fell 17 percent between August 4 and August 11; Discovery Communications and 21st Century Fox each fell 13 percent; Disney shares dropped by 11 percent; Time Warner by nine and Comcast (NBCUniversal), CBS and Starz all fell by mid-single digits.

Media CEOs complained, and many analysts concurred, that the sell-off was overdone, and that neither the actual earnings news that triggered it nor the underlying fundamentals of the business justified such a drastic repricing. It certainly wouldn’t be the first time that the market overreacted to events in the short term.

FCC_buildingIn fact, the stampede out of pay-TV stocks last week felt more like the release of pent-up anxiety among investors than a reaction to any particular bit of news. It began when Disney issued a small downward revision to its earnings forecast for its ESPN unit, which it blamed on “modest subscriber losses” from cord-cutting. The adjustment was a small one, but Disney chief Bob Iger has been among the most outspoken media CEOs in arguing that cord-cutting is a limited and manageable phenomenon, and that ESPN is well-positioned to profit from changes in the pay-TV business. If even Disney couldn’t paper over the impact of cord-cutting on ESPN, investors seemed to conclude, then maybe the problem really is as bad as we feared.

Similarly, ratings woes on linear TV channels are not new. But when Viacom reported a 9 percent drop in ad revenue from its cable networks investors seemed to take it as confirmation that even well-established media brands are losing pricing power in the advertising market. Read More »

The FCC’s Imperfect Path To Increased Video Competition

The conditions the Federal Communications Commission has attached to its approval of AT&T’s merger with DirecTV are being met with a predictably mixed response. Some groups, such as Comptel, a Washington-based lobbying group representing Netflix, Amazon, Cogent Communications, Level 3 and other network operators and service providers, praised the FCC for requiring AT&T to disclose details of its network interconnection deals. Others, such as Free Press, blasted the conditions for not going “nearly far enough” to address the problem of pay-TV consolidation.

Here’s what we know, from a statement issued Wednesday by FCC chairman Tom Wheeler:

An order recommending that the AT&T/DirecTV transaction be approved with conditions has circulated to the Commissioners. The proposed order outlines Federal Communications Commission (FCC) Chairman Tom Wheeler gestures at the FCC Net Neutrality hearinga number of conditions that will directly benefit consumers by bringing more competition to the broadband marketplace. If the conditions are approved by my colleagues, 12.5 million customer locations will have access to a competitive high-speed fiber connection. This additional build-out is about 10 times the size of AT&T’s current fiber-to-the-premise deployment, increases the entire nation’s residential fiber build by more than 40 percent, and more than triples the number of metropolitan areas AT&T has announced plans to serve.

In addition, the conditions will build on the Open Internet Order already in effect, addressing two merger-specific issues. First, in order to prevent discrimination against online video competition, AT&T will not be permitted to exclude affiliated video services and content from data caps on its fixed broadband connections. Second, in order to bring greater transparency to interconnection practices, the company will be required to submit all completed interconnection agreements to the Commission, along with regular reports on network performance.

Importantly, we will require an independent officer to help ensure compliance with these and other proposed conditions. These strong measures will protect consumers, expand high-speed broadband availability, and increase competition.

Read More »