The Weight Of The World

Shares of Netflix touched $349.29 this week, raising its stock market value to $153 billion, eclipsing Disney’s $152 billion and making the streaming service, briefly, the most valuable entertainment company in the world.

Netflix’s stock has been the top performer in the S&P 500 so far this year, surging nearly 70 percent since January. But a bullish forecast put out last Friday by Bank of America analyst Nat Schindler suggested the peak is yet to come, fueling this week’s rally.

“We believe Netflix still has a considerable opportunity ahead if it can achieve reasonable penetration levels internationally,” Schindler said in a note to clients. “Netflix will face varying levels of competition, regulation and economic conditions in each individual market it participates in, but its content scale should allow it to become the dominant streaming player in virtually all markets.”

Schindler predicts that Netflix’s global subscriber base can continue to grow by 8 percent annually, reaching 360 million by 2030, as consumers in a growing number of markets get access to broadband. Netflix currently pegs its global subscriber rolls at 125 million. Read More »

Comcast And Netflix: We’re Chill

A story appeared this week in the the music trade Digital Music News claiming that Comcast had coerced Netflix into their recently announced agreement to bundle the streaming service in with Comcast’s pay-TV offering by threatening to impose “paid prioritization” charges on Netflix for delivering its streams to Comcast broadband customers.

The story cited an anonymous source, who pointed to a paragraph in the press release announcing the deal, which reported that “Netflix-related billing will be handled directly by Comcast, giving customers one, simple monthly statement,” as evidence of Comcast’s arm-twisting. Read More »

Set-Top Rapprochement

Back in 2012, writing for the now-defunct GigaOm, I predicted that peace would eventually breakout between pay-TV operators and over-the-top services, a process I dubbed the set-top rapprochement (I was able to find one archived example of my musings still available online).

As OTT services evolved into ever-more viable substitutes for traditional TV, pay-TV providers, I assumed, would eventually realize they were better off embracing the enemy that fighting him, lest they be displaced altogether. OTT services, I imagined, would eventually see the benefit to getting their service onto TV-input 1 in households that held onto their pay-TV service, which is to say most of them. Read More »

Mirror Mirror

Netflix’s content chief Ted Sarandos once famously quipped that his goal was for Netflix to become HBO “faster than HBO can become us.” By that he meant, for Netflix to establish itself as a high-end global TV content brand before the reigning high-end global TV content brand, HBO, could un-tether itself from the legacy pay-TV ecosystem.

So far, Netflix is winning that race. The streaming service now reaches over 100 million subscribers worldwide, more than the entire U.S. pay-TV universe, and will spend upwards of $8 billion in 2018 producing 700 original series.

What’s more, Netflix has successfully colonized HBO’s home turf in the living room. Although today you can watch Netflix on virtually any connected device nearly anywhere in the world, the company reported this week that 70 percent of its streams are delivered to a stationary TV set, either directly via smart TV app, via streaming box, or via its growing number of integrations with traditional pay-TV platforms. Read More »

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.

 

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.

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 »

Apple TV Needs To Get Off The Couch

Earlier this month Apple poached Timothy Twerdahl from Amazon, where he had headed up the Fire TV unit, to serve as VP in charge of Apple TV product marketing, raising hopes that Apple is gearing up for another try at transforming Apple TV from a hobby into a meaningful product line. But if so the transformation won’t be immediate.

Apple is reportedly testing the next iteration of the Apple TV set-top box, which could be released later this year. But early indications are that it will be another study in incrementalism, adding support for 4K streaming but no groundbreaking new functionality.

Apple is also rolling out two new original TV series, a long-form version of James Corden’s Carpool Karaoke segments from the “Late Late Show,” and reality TV-type series called “Planet of the Apps.” But neither series is being launched under the Apple TV banner. Instead, as Apple content chief Eddy Cue explained at the Code Media conference this week, both will be made available through Apple Music in a bid to boost subscriptions to the music streaming service. Read More »

Have Netflix, Will Travel: EU Digital Single Market Inches Closer

Negotiators for the European Commission, the European Parliament, and European Union member countries this week reached agreement on new rules that will allow citizens from one EU country to access digital services they subscribe to, such as Netflix, Spotify, and sports live streams, when traveling in another EU country starting in 2018.

Up to now, exclusive territorial licenses between rights owners and online services, as well as other rules, have generally prevented services from granting access to subscribers from outside their home country.

“Today’s agreement will bring concrete benefits to Europeans. People who have subscribed to their favourite series, music and sports events at home will be able to enjoy them when they travel in Europe,” EU vice-president in charge of the Digital Single Market Andrus Ansip said in a statement. Read More »

Netflix Ponders Life Without Net Neutrality

Netflix CEO Reed Hastings did as much as anyone to shape the Federal Communications Commission’s net neutrality rules. CEO Reed Hastings’ aggressive public lobbying for what he termed “strong” net neutrality, after Comcast and AT&T successfully forced Netflix to pay for access to their last-mile networks, was largely responsible for putting interconnection arrangements between ISPs and edge providers at the center of the debate and helped persuade former FCC chairman Tom Wheeler to push through reclassification of broadband access as a Title II telecommunications service, which gave the commission jurisdiction over those deals.

Yet, as Republicans in Congress and on the commission sharpen their knives to disembowel Wheeler’s hard-won rules Netflix says it no longer needs the protection.

“Weakening of US net neutrality laws, should that occur, is unlikely to materially affect our domestic margins or service quality because we are now popular enough with consumers to keep our relationships with ISPs stable,” Hastings said in his Q4 letter to shareholders this week.

Translation: we’re too big now even for Comcast to push around, a point Comcast itself obliquely acknowledged in November by integrating Netflix into its flagship X1 set-top box. Read More »

Apple Tip-Toes Into Original Video

The Wall Street Journal reported this week that Apple has begun talks with producers in Hollywood about buy rights to original TV series and movies. If true it would represent at least the third attempt by the iPhone maker to crack the TV code, so far without notable success, although its strategy this time appears to be different from its previous efforts.

I say “appears” because, according to the Journal, Apple itself  “is still working out details of its business strategy built around original content.”

The new shows, which could begin appearing by the end of this year, will reportedly be made available to subscribers of Apple Music, suggesting this isn’t an attempt (yet) to build a direct competitor to Netflix and Amazon Prime. The fact that Apple is targeting individual movies and TV series rather than networks suggests this is also not some sort of skinny bundle play to compete with Sling TV and the new Hulu service. Read More »

A Measure of Success: Frank Ocean, Netflix and the Value of Data

Frank Ocean’s surprise release “Blonde” debuted at No. 1 this week on the Billboard Top 200 album chart, racking up sales of 275,000 units, despite its not being released as an album in any physical format.

frank-ocean-blonde-x750So what were those 275,000 units? Some 232,000 of them were paid digital album downloads, according to Nielsen Music. The other 43,000 consisted of “equivalent album units.”

Say what?

An “equivalent album unit” (shouldn’t that be “album-equivalent unit?) is a metric devised by Billboard in 2014 to accounting for streaming activity and individual track downloads for charting purposes. Ten individual track downloads from an album as measured by Nielsen, or 1,500 on-demand streams of individual album tracks as reported to Billboard by the major streaming services, are counted as an equivalent album unit. In the case of Blonde, individual track downloads were not available at the time of the albums initial release, but they accrued 65 million streams. Dividing that 65 million by 1,500 yields 43,000 equivalent units. QED. Read More »

X1 Marks the Spot for Comcast

Comcast and Netflix this week confirmed an agreement to incorporate Netflix’s streaming service into Comcast’s X1 video platform, signalling a dramatic shift in what has long been a contentious relationship between the companies.

“Comcast and Netflix have reached an agreement to incorporate Netflix into X1, providing seamless access to the great content offered by both companies,” the two said in a joint statement given to Recode.  “We have much work to do before the service will be available to consumers later this year. We’ll provide more details at that time.”

netflix_blockThat’s a far cry from a few years ago when Netflix CEO Reed Hastings was working overtime to turn Comcast into public enemy number one in the net neutrality fight and Comcast was imposing interconnection fees on Netflix for access to its last-mile network.

But the shift is more likely the result of a change in circumstances than a change of heart. Read More »

We’re All Netflix, Now

On April 10th Showtime will make all 13 episodes of its new Steven Soderbergh series “The Girlfriend Experience” available on its VOD platform in a single, binge-ready dump. So too will Starz, with all six episodes of the new Andrew Dice Clay comedy “Dice,” as the pay-TV networks increasingly ape the strategy pioneered by Netflix.

They don’t have much choice. Bingeing is how Americans watch TV now. According to Deloitte’s latest Digital Democracy survey, 70 percent of viewers admit to binge-watching, defined as viewing three or more episodes in a single sitting, and one in three say they binge at least once a week. The average number watched during a single binge, fact, is an astonishing five episodes, which in the case of a drama series could easily eat up four or five hours. Millennials in the survey average six episodes per sitting.

We binge-watch so much TV in fact that we’re making ourselves anxious, depressed and lonely, according to a separate study by researchers at the University of Toledo. Yet our appetite is only growing. According to Deloitte, all age groups in its study binged more in 2015 than they did in 2014.

The seemingly irresistible trend, however, poses a dilemma for traditional linear networks. Making new series or seasons available for bingeing risks undercutting primetime ratings. Read More »