[opendtv] OTT is Dead * * Long Live OTT | Multichannel
- From: Craig Birkmaier <craig@xxxxxxxxxxxxx>
- To: OpenDTV Mail List <opendtv@xxxxxxxxxxxxx>
- Date: Tue, 4 Nov 2014 07:17:50 -0500
But Bert won't like this analysis...
Regards
Craig
http://www.multichannel.com/ott-dead-long-live-ott/385228
OTT is Dead * * Long Live OTT
With each new announcement of a service going “over the top” of traditional
cable systems, investors and consumers, persuaded by the national media, start
to believe the breathless confirmation that this time we are witnessing nothing
short of a TV revolution — a new way to buy and watch the medium.
When HBO and CBS recently unveiled plans, the august New York Times called the
moves “a watershed moment for Web-delivered television, where viewers have more
options to pay only for the networks or programs they want to watch.” Not
hardly.
The reality is much more mundane, and if the cable industry doesn’t make
strategic missteps, the bundle will continue to dominate the pay TV-buying
public’s appetite for years. The hopeful fantasy that somehow consumers can one
day choose to buy channels on their own at an affordable price is just that — a
fantasy. It’s not a real business that will rival cable operators.
Cracks are appearing in the bundle for sure, but the current spate of
pronouncements about OTT are simply defensive plays by programmers claiming
their space in the streaming future, not a sign of true disruption.
The appearance of cord-cutters (still at only 2% to 3%), is testament to the
changes coming in video-content delivery, but how fast and how much depends on
how you define OTT. Is over-the-top merely the delivery of video signals over
the Internet by services such as Netflix, Hulu and Amazon Prime, or is it
essentially a la carte TV fare over the Internet, where viewers who cut the
cord to their pay TV providers pay for only the programs they watch?
Companies like Roku and Apple have respectively sold 10 million and 20 million
streaming-media devices, which allow some form of OTT video to viewers. And at
press time, at least three services — from Sony, Verizon Communications and
Dish Network — are scheduled to be released over the next several months.
Indeed, the market for streaming media players is expected to grow from 24
million this year to 44 million by 2017, according to research firm IHS.
Although some of those offerings will provide lighter packages of programming
for lower prices, it won’t be true “a la carte” — the ability to select only
the channels you want. Dish’s OTT offering, expected to be introduced some time
next year, would cost about $30 a month for 30 channels, according to reports.
That’s not exactly a bargain — and it’s not a la carte, because it’s unlikely
consumers will be able to pick and choose between packages.
The debate over a la carte service has followed the cable and satellite
industries almost since their inception. But it is unfathomable, with the
oligopoly now in place, that one day a cable customer will be able to buy
Disney Channel but not ESPN, Comedy Central but not MTV, and USA Network but
not Bravo and keep the bill at a reasonable level. Giant cable programmers
won’t allow it. And MSOs will simply pass the costs along.
Moreover, cable networks would never — repeat: never — risk the hundreds of
millions of dollars in affiliate fees from pay TV distributors to make a few
bucks on the side via a new OTT player with a more limited reach. A la carte is
not here now, and it’s not coming for at least the foreseeable future.
What made the HBO and CBS announcements different is that they weren’t simply
carriage deals with a new OTT provider — Viacom already did that with Sony in
September — but were instead the first examples of individual networks selling
directly to the consumer.
Beyond the hype of those announcements, the offerings are actually quite
limited in terms of how they can be accessed and what they will offer, at least
at the outset.
Why will the OTT newcomers, buoyed by consumer antipathy towards cable and
satellite operators, fail to be a real business rival to the entrenched cable
and satellite and telephone monopolies? Here are five reasons:
OTT offerings will always be weaker. While HBO and CBS have unveiled offerings
that at first glance seem to be freeing, they are carefully geared toward
maintaining the status quo. In announcing the HBO OTT service at parent Time
Warner Inc.’s Investor Day earlier last month, HBO chairman and CEO Richard
Plepler said it was “time to remove all the barriers” to HBO. Problem is,
shortly after making that statement, Plepler spent a goodly amount of time
pointing out all of the barriers — it would at first be marketed to the 10
million broadband-only customers of its cable and telco-TV affiliates;
operators would handle all billing, customer service and customer control; and
the service would be sold in partnership with distributors.
The CBS offering has its own restrictions — there will be no sports available
through the service. And to get any live streaming, customers must live in one
of 14 cities with a CBS-owned-and-operated station. So, for $5.99 per month a
customer can get access to their local news if they live in a CBS market, can
watch next-day airings of 15 primetime shows such as The Big Bang Theory the
day after they air, access full past seasons of The Good Wife, Blue Bloods and
Survivor and stream 5,000 episodes of such older shows as Cheers and Star Trek
already available on other subscription-VOD services such as Netflix, Amazon
Prime and Hulu.
For other programmers thinking about going the direct-to-consumer route, there
are other barriers, mainly in the existing subscription VOD deals they already
have with existing OTT players for their library content.
According to Sanford Bernstein media analyst Todd Juenger’s recent report, The
Dawn of the OTT Era: We Think Not, consumer expectations for a
network-delivered OTT service are simple — they would receive everything that
is shown on the network, live and on-demand. “But most networks aren’t in a
position to offer anything close to resembling that,” he wrote.
Existing deals for library content with SVOD providers like Netflix could
restrict what a network OTT service could offer, creating gaps in the
programming day. Non-exclusive deals for content also could lose their luster
in the future.
“We doubt Netflix will have much interest in programming that is also available
on an SVOD platform directly from the network,” Juenger wrote.
An OTT a la carte service would cost too much. Were the pay TV industry one day
to magically convert to an a la carte business model, the annual revenue would
be cut in half, to $70 billion from $140 billion, according to Needham & Co.
media analyst Laura Martin. Others have said even that figure is conservative.
The problem with a la carte is that it completely unravels television’s
existing business model, currently anchored in the ability to sell networks to
a distributor for a fee based on the number of subscribers that distributor
has, whether individual subscribers watch the channels or not. For instance, in
an a la carte world, ESPN wouldn’t cost a consumer the $6.04-per-month license
fee paid by the local cable company — it would cost perhaps $30 per month. What
is often left out of the a la carte conversation is that networks aren’t going
to move to a model that makes them less money.
So ESPN, which is expected to receive an estimated $6.9 billion in affiliate
fees alone this year, based on the 95 million homes in which it is available,
will simply kick up that fee to more than $20 per month for the estimated 30%
of TV homes that would be likely to subscribe to the channel.
Add in another $10-per-month charge to make up for lost advertising revenue and
that’s already close to half an average monthly cable video charge of $75 per
month. And that’s just one channel. Add another $10 per month for regional
sports networks and so-called pricey networks like TNT, Disney Channel, TBS,
Fox News Channel and USA Network, and the price could rise to $50, not
including additional charges for lost advertising. The average cable package
has about 150 channels and costs about $75 per month.
“If you piece it out, it [the monthly charge] gets into triple digits,”
Wunderlich Securities media analyst Matt Harrigan said.
Robust network OTT services would destroy the very bundle programmers have
worked so hard to create. Giving consumers the ability to buy channels
individually would leave no incentive to keep a pay TV package with a
distributor, so that revenue would essentially evaporate.
Some cable operators have challenged the practice of bundling, in which a
programmer lumps lesser-watched networks together with more popular channels.
The programmers have countered by saying individual networks are available for
purchase by distributors, who say they are priced prohibitively — in some cases
buying a single network that was bundled with others would cost significantly
more than the whole package, according to some MSOs.
While some cable, telco and satellite-TV providers have said they would welcome
a la carte, they don’t want it either. As Juenger put it, why would a company
with high fixed costs like cable ever want to move to a model where those costs
stay relatively constant, but revenue is cut in half? While broadband has been
a profit center for years — margins for high-speed Internet service approach
90% in some cases — a full departure from the video business would commoditize
the industry. That would leave operators with only one arrow in their quiver to
compete with — price — and make them vulnerable to deep-pocketed competitors
that could drastically undercut their monthly charges. (Google, anyone?) While
some of the larger MSOs could weather that storm, smaller operators would
wither.
OTT a la carte would be too complicated. According to Sanford Bernstein’s
Juenger, OTT a la carte would create a “horrible mess of consumer interfaces.”
If you think consumers are confused by the TV apps available to them now, just
think how dumbfounded they would be if they had to sift through apps for every
network, or remember which networks were owned by which network group if they
were bundled together.
“There would be no unified search,” Juenger wrote. “No recommendation engine.
Compare that to Netflix or Comcast X1, with one unified search and
recommendation engine across all forms of content delivery. The a la carte, OTT
world would be horribly complex and frustrating.”
OTT a la carte might mean higher broadband prices and more regulation.
According to MoffettNathanson principal and senior analyst Craig Moffett, OTT a
la carte would require a huge amount of bandwidth, which could finally open the
door for usage-based pricing for the cable industry, or at least allow
operators to raise prices for broadband to make up for lost video revenue.
It could also give cable operators the green light to charge OTT providers and
aggregators for transport, something several operators have already done with
Netflix amid some controversy. While that would seem to be a benefit for
distributors, Moffett warned “there is a risk here that cable will win the
battle, but lose the war.” Higher prices and transport fees could force the
Federal Communications Commission to implement more onerous regulation.
“The prize is whether or not you can charge for the transport function in an
OTT world,” Moffett said in a recent call with clients. “And if you see OTT
start to accelerate, even a little bit, what’s likely to emerge from the
regulatory process is a limitation on the cable operator’s ability to respond
to OTT threats through the pricing of broadband. You can’t just jack up the
price to everybody because the price increases would be unsustainably high,
which would invite more regulation.”
That could include a move toward dreaded Title II regulation, which would
characterize cable companies as common carriers and would severely limit
further investment in infrastructure.
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