Over-the-Top

October 10, 2011 World Screen

 

This article originally appeared in the MIPCOM 2011 issue of World Screen.
 
Over the Top TV
 
Elizabeth Guider reports on the effects that over-the-top (OTT) video services like Netflix, Hulu and others are having on the traditional TV model.
 
Sixty years ago, moviemakers in Hollywood were just as rattled as broadcast, cable and satellite players are today. Their business was declining and in disarray—5,000 theaters closed as the film-going audience dwindled from 75 million to 50 million a week over a five-year period ending in 1951, and many companies went to the wall. Show business suddenly found itself playing by a new set of rules as the once unassailable studios and a few intrepid indepen­dent producers had to grapple with a new technology and leisure-time alternative called television.
 
What started as a mechanical curiosity right after World War II became a consumer staple within a decade: a million sets flew off U.S. retail shelves in 1950, double that number just a year later. So, what did the movie moguls do in response? They variously resisted, griped, took advantage of the newfangled medium for their own purposes and reinvented their content to remain competitive and distinctive. A few admittedly fell by the wayside, but many others prospered, finding eventually that coexisting, even commingling and cross-pollinating the two businesses, made economic and creative sense.
 
Much has changed since the early days of television, when the upstart medium challenged the relatively cozy celluloid coterie. Today’s entertainment landscape is much more varied in its offerings, consolidated in its ownership, global in its reach and perspective, and merciless to those who cannot adapt quickly. Audiences and consumers are more immersed in it than ever before—in some cases for more hours a day than they sleep—but they are also, largely thanks to digital technology, much more fragmented, fickle in their tastes, and impatient to view and interact with what they want, when they want, on whatever device.
 
Not surprisingly, they are migrating to services where the user experience is enjoyable, easy to access, operate and share, and inexpensive. In doing so, they are beginning to cut the cord, as it were, with traditional multichannel providers—whether delivered by cable, satellite or telco—in favor of what’s being clumsily called over- the-top on-demand, via newly outfitted television sets or broadband Internet connections on computers and other devices.
 
SEISMIC SHIFTS
This cord-cutting—which some say is overblown and often doesn’t involve “cutting” anything—has media mavens wringing their hands. Making it more nerve-wracking, no one knows how much of a shift in viewer behavior will take place, and precisely for whom it will be problematic and for whom an opportunity. But since perception is reality, there is arguably reason to think that video-streaming online is, like the advent of television, cable, CDs, DVDs, VCRs, DVRs, the Internet, high-def, Blu-ray and Twitter before it, a new twist in the overall media narrative.
 
Consider this take on the phenomenon from Craig Moffett, an analyst at Sanford C. Bernstein who tracks the performance of a range of media players and cautions about bumps and byways along the road.
 
“Media stocks are story stocks. Ditto cable and satellite, where stocks seemingly rise and fall not based on changes to earnings and cash flow estimates but instead based on narratives about whether Netflix will or won’t spell the end of pay TV as we know it. All that makes the task of forecasting narratives just as important as the task of forecasting earnings,” he wrote in a recent research report. 
 
“I wouldn’t call OTT necessarily a big threat, but it is a significant change in the entertainment sphere which has to be part of any company’s thinking going forward,” says Bill Carroll, a VP and the director of programming at Katz Television Group who advises TV stations on content and other issues. The key question, Carroll says, is (still) how to monetize the Internet, and what the trade-offs are in terms of advertising density online.
 
“No one yet has the answer, but all the protagonists have to be there in order to figure out what’s the best formula for making money on these new platforms,” Carroll says.
 
Blair Westlake, the corporate VP of the media and entertainment group at Microsoft—who spent 18 years at Universal before joining the computer giant—adds, “Consumer habits are notoriously hard to predict. Witness the jaw-dropping falloff in just five years of the studios’ DVD business, from $20 billion in revenues a year to around $13 billion. More pertinent today, consumers online are opting to rent movies and TV series much more avidly than they are buying them. Inasmuch as the margin on electronic rentals (transactional video-on-demand—$3 to $6) is roughly 25 percent of what a content owner enjoys from purchase transactions (electronic sell-through—$15 to $17), coupled with the volume of rental transactions not even equaling, let alone exceeding, electronic sell-through and disc sales, content owners’ net revenues are in turn suffering. Technology has given consumers a very appealing, less expensive choice—to rent for a fraction of the cost of ownership, which works for the majority of people.” 
 
Don’t forget either, Westlake counsels, that consumers are not a monolithic entity all doing the same thing. “Yes, a narrow swath may want to watch only movies they choose now and again, and hence likely may become exclusive video-streamers, but they don’t represent the typical or majority viewer, who now watches on average five and a half hours a day.”
 
Consider the latest figures from SNL Kagan: a modest 4 percent of consumers have so far dropped their cable or satellite subscription in favor of direct access to content via one or another video-streaming service. Kagan projects that multichannel substitution via OTT delivery will grow from 2.5 million households at the end of 2010 to 12.1 million homes by 2015.
 
“The OTT substitution estimates account for nearly 10 percent of the occupied homes in the U.S. in the five-year forecast.”
 
Other entities, including the Consumer Electronics Association (CEA), put the forecast much higher: CEA claims that 10 percent of paybox subscribers plan to disconnect this year.
 
A cautious person would point out that what consumers say they’re going to do is notoriously unreliable. And yet, a modest uptick is undeniable, especially among young consumers, who are typically most receptive to the latest media advances.
 
CHURNING THE NUMBERS
Sanford Bernstein’s Moffett suggests, for example, that cord-cutting may actually not be the operative description: It should really be “cord-nevers,” in that many of these folks never had the need or the money to pay for a multichannel subscription to begin with. To his mind, the data on all this is ambiguous, in that the motivation for churn may be as much a financial issue—to most people the United States is still in recession and homes that have been foreclosed on likely had their wires pulled out—as a technology issue.
 
Another pay-to-view study, released back in the spring by J.D. Power & Associates, concluded that “the predictions of the demise of television subscription service are clearly premature. With 52 percent of television customers reporting that they still watch regularly scheduled programming as it is broadcast, the current model will remain viable for the next two to three years at a minimum,” wrote Frank Perazzini, the company’s director of telecommunications research.
 
And in August, the research outfit IHS weighed in, arguing that DVR, on-demand and other forms of nonlinear programming will account for 16 percent of television viewing in the U.S. in 2015, up from 10 percent in 2010, with the remainder made up by traditional linear TV watching. In the U.K., nonlinear will account for 13 percent of viewing in 2015, up from 8 percent in 2010, with other European countries trailing those percentages.
 
CBS Corporation’s chief research officer, David Poltrack, has long contended that it is the use of DVRs, now in a third of U.S. households, that represents the real challenge right now, since playback viewing hasn’t yet been fully monetized by the big content players because ratings aren’t extensive enough.
 
Nonetheless, were projections like Kagan’s and others to hold true, the falloff in subs for traditional distribution outlets could become a considerable concern, says Thomas Eagan, the managing director of media equity research for Collins Stewart. 
 
For one thing, the segment of the population that is most likely to be early adopters are single heads of households, who are generally young and, in this case, generally female—males are largely still in thrall to sports programming, and almost all the major games are viewable only via traditional distributors and not by online players. (All the top sports leagues have long-running contracts with broadcasters and cable networks, and hence the so-called disruptors will have little opportunity for a while to wrest such rights away from the traditional media.) Still, young, single females are a highly desirable advertising target and hence could spark accelerated outlays of ad dollars online. Already, advertising associated with most of the key “disruptive” services—Netflix, Hulu, Amazon, etc.—is growing at a considerable clip, though from a minuscule base. 
 
THE DISRUPTORS
On the other hand, these disruptors of the status quo aren’t necessarily having an easy time of it.
 
Yes, according to the J.D. Power survey they score above-average customer-satisfaction scores, which focused on six factors: variety of videos provided; ease of use; cost of service; customer-service experience; billing; and promotions. But they are facing headwinds of all sorts, including resistance to price increases by their customers, new online entrants popping up weekly, steeper licensing fees from content providers, and their inability to offer live events, not just sports but finales of reality blockbusters like American Idol, Survivor or Dancing with the Stars.
 
During a steamy summer, Netflix, for example, saw its second- quarter revenues just miss investor expectations, causing the stock (which admittedly had almost doubled over the past year) to take a hit. There were also jitters because of an eyebrow-raising 60-percent fee hike for those customers who want both DVD rentals and a video-streaming plan. In the immediate aftermath, a sizeable tranche of the Flix faithful announced that they were planning to jump ship. Just a couple of days later, Facebook revealed that it was partnering with Warner Bros. to provide pay-per-view offerings that could eventually affect Netflix’s core business. The social-networking giant boasts 500 million devotees (20 times Netflix’s universe), though for now those users aren’t in the habit of paying for anything on that site and Facebook doesn’t have wide distribution across devices that connect to the living room TV set. But, the future comes.
 
Netflix CEO Reed Hastings said while his stock was bumping around in late July that he was “feeling great” about the pricing decision for customers because the additional revenue would allow Netflix to pay rising licensing costs to stream films and TV series. He predicted that the service, which reported 25 million subscribers in the second quarter, could hit $1 billion in revenues in the fourth quarter.
 
But as HBO discovered 20 years ago, Netflix and its ilk may find that just being an aggregator of other people’s product—especially when others find they can aggregate content just as cleverly themselves—doesn’t cut it. In the end, it took top-notch original programming à la The Sopranos and Sex and the City to transform the Time Warner–owned paybox into a media must-have. Thus, the stunningly rich deal for a world-exclusive TV series called House of Cards to be directed by the film auteur David Fincher is, if all goes well, a harbinger of original commissions to come at Netflix.
 
THE HULU DANCE
As for that other pioneer in the streaming space, Hulu, its three broadcast-network owners, NBC, ABC and FOX, are still in the midst of trying to offload it, presumably because it’s more of a management headache than the three can jointly handle and because its value proposition is still iffy. Profitable it is, but apparently just barely. In late July, FOX decided to change the way viewers access TV episodes of hot shows like Glee and Family Guy online, extending the waiting period to eight days except for those who subscribe to a participating and authenticated video distributor (who would have next-day access). Word was that ABC was toying with a similar delaying tactic, which could further confuse consumers who say the pricing and inventory on Hulu are frustratingly illogical. (The 4-year-old service offers some episodes free and others for a subscription fee; some are available 24 hours after broadcast; others a week later or not at all.)
 
Hulu, too, is seeing the logic of undertaking original production, unveiling in early August its first- ever long-form nonfiction series, A Day in the Life, from docmeister Morgan Spurlock.
 
Meanwhile, other so-called disruptors—Amazon, Apple, Block­buster and Google—have been taking turns kicking the tires at Hulu, but also continue to refine, expand or upgrade their own video-streaming services. Google TV, for example, is focusing on building out and forking out for its own professionally produced content for the web, rather than just relying on other people’s back catalogues.
 
Not that other entrants are being deterred from their own forays. The world’s largest retailer, Walmart, which snapped up the fledgling online group Vudu 20 months ago, recently began streaming movies the same day they come out on DVD, in its own bid for a share of the disruptors’ pie. In keeping with its focus on a clientele of modest means, Walmart’s offerings can be rented for as little as $.99 (up to $5.99) and purchased for as little as $5.00. That model is not dissimilar to Apple’s iTunes, which charges $3.99 to rent current titles and upwards of $14.99 to buy. 
 
Other upstarts include the New York-based Bamboom, which is working to overcome hindrances (legal as well as technological) to broadcasting live signals to individual subs in a circumscribed geographical area. As Forbes magazine put it recently, “Bamboom has yet to expand beyond beta or into new markets and its founder, Chaitanya Kanojia, doesn’t have a clear idea of how he will make money. But if the company can avoid suits (or prevail), it will go a long way toward giving viewers the freedom to ditch their cable/satellite/telco providers.”
 
ORIGINAL PLAYS
So, are these disruptors really all that different from broadcasters and cable networks, and will their growth trajectories be any different? Just as the other two businesses went through distinct stages—from a mere utility to providing local access, to aggregating reruns, to becoming producers of original content—so, too, may online players evolve. The Internet started, after all, as a utility (allowing folks to do e-mail, get stock quotes, check the weather), and then provided for local access (as in user-generated content on YouTube and the like). It is now busily aggregating movies and TV shows and showing signs of moving toward original (and professionally supervised) content production.
 
Take the upstart Vuguru, jointly owned by Michael Eisner’s Tornante and Canada’s Rogers Media, which styles itself as an indie studio that develops and finances scripted content for new-media platforms. During the summer its first high-profile project, The Booth at the End, premiered in various formats on “new” (Hulu) and “old” (Citytv, FOX International Channels) platforms, cut up into mini episodes or stripped in five half-hour segments.
 
“We’re analogous to a Lionsgate,” Larry Tanz, the president of Vuguru, states, “in that we’re focused on producing scripted content but for new platforms, internationally as well as domestically. And yes, I think we will see others stepping up to produce original content in order to brand themselves in the online arena, just the way in the cable sphere HBO did a decade ago with The Sopranos or AMC did more recently with Mad Men.”
 
Tanz says his company has ten other scripted projects in the works, though budgets are nothing like what they are for a broadcast series such as, say, CBS’s The Good Wife or a cable drama like Mad Men.
 
However, if just one or two creates buzz and draws significant viewership, it could shift the dynamics of the company and affect perceptions of online’s artistic capabilities.
 
Meanwhile, the traditional cable- satellite-telco operators have no intention of ceding the field to these obstreperous upstarts.
 
COPYRIGHT COMPLICATION
Steve Effros, a cable industry veteran and the former head of the National Cable Television Association (NCTA), who is now a media consulant, is adamant that “cord-cutting” is a misnomer, and doesn’t reflect the fact that most viewers pay for a package of programming of some kind.
 
“Yes,” he says, “there is increased competition to deliver more customized packages and to accommodate newer platforms of delivery, but by and large all the cable MSOs are gearing up to do just that.” That’s what authentication and TV Everywhere are all about—for one subscription, a consumer can access content on any device he is connected to. “The real challenge for the industry,” Effros argues, “is copyright.”
 
Program providers are asking themselves (and not always coming to the same conclusion) how, say, video streaming of their content on an Apple iPad fits into their copyright structure and what should be charged for it. Increasingly the cablers are happily finding that apps for these mobile tablets are reinvigorating their VOD biz and are less cumbersome, and costly, than set-top boxes.
 
In short, Effros and several others in the cable/satellite trenches believe their industry can thwart any threat from Netflix or Hulu, but only if studios, networks and distributors work together to sort out copyrights and simplify licensing negotiations.
 
“The reason why there’s interest in these Internet video providers is that they’re deploying technology that’s making the experience better for consumers,” Time Warner Cable’s (TWC) CEO, Glenn Britt, told MarketWatch during the NCTA’s annual trade show in June.
 
The platform’s top executive went on to say that the biggest stumbling blocks to competing effectively against these disruptors are moving nimbly and untangling rights.
 
“Even amid signs that cable now has the technology and the interface to provide a consumer-friendly video-on-demand option, cooperation with the companies that make movies and TV shows remains an elusive target,” Britt says. “Copyrights are very complicated. Creating something like TV Everywhere for all of that programming is a nightmare of rights negotiations. Some content companies say it’s worth all of that; some say they don’t know if it’s worth all the time and effort.” (TWC itself did report strong Q2 numbers, by attracting, tellingly, more broadband customers and offsetting slowing demand for TV subscriptions.)
 
One thing cable and satellite operators are quickly getting better at is marketing their services and updating their images. Consider the latest packages and promotions they’ve been dangling in front of consumers.
 
DIRECTV is touting a two-year contract that offers discounts of a whopping $31 per month for the first year. Comcast is waving a $100 Visa gift card in front of new subscribers to its $99.99 triple-play package. Verizon is pricing its triple play at $84.99 for a year
(no contract), and is offering a DIRECTV/DSL double-play deal for $54.99 that includes free NFL Sunday Ticket.
 
“I’d say all the pay-TV operators are becoming more innovative and are bent on improving their users’ experience,” says Collins Stewart’s Eagan. Just one example he points to is DIRECTV’s customer interface, which he rates as “lightning-fast.”
 
Finally, what’s a provider of content to make of all this? A lot of moolah, eventually, provided its deals are innovative and flexible enough to account for unexpected shifts in the landscape.
 
LOOKING TO THE CLOUD
Seems the Hollywood studios already have an ace up their sleeve, or, as one pundit puts it, “They have their heads in the cloud.” Several of them are working on something called Ultraviolet, which, word has it, would be a rights locker in the sky to be accessed via cloud computing.
 
“Think of it as the digital equivalent of a DVD library, which consumers will soon be able to unlock as easily as they turn on a TV set,” explains one studio veteran close to the talks. Buying a movie online would give consumers the right to stream it from the cloud to any device of their choosing—a smart phone, a tablet computer, a PC, a gaming console, an Internet-enabled tele­vision set.
 
And even if the game is still in the early innings Stateside—and ideas like Ultraviolet remain just pie in the sky so far—all of the key U.S. players have extended their online deal-making sights abroad. Just to cite one example: CBS recently inked nonexclusive deals with Amazon and with Netflix that will bring an array of the Eye’s series to the former’s service in the U.S. and to the latter’s in Canada and Latin America. Leslie Moonves, CBS Corporation’s president and CEO, went as far as to single out those two deals for boosting the network’s revenues in the second quarter. Not only is Netflix flexing its muscles abroad, but so is Hulu, with a first subscription service agreement for the Japanese market. As Netflix, Amazon et al. gear up to expand in the most lucrative foreign arena, Europe, expect the Hollywood suppliers to gleefully strike other such catalogue-product agreements.