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.
Statistics sourced: http://www.atlanta-business-directory.com/

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 »