Tag Archives: OTT

The Non-boom of OTT Programming

Fatty_watching_himself_on_TVI recently looked back at research I did a year ago, and at that time there was a lot of press talking about how over-the-top video offerings were going to soon flood the market, leading to a boom in cord cutters. But in looking at the OTT offerings on the market today it’s easy to see that the flood of new OTT entrants didn’t materialize.

My look backwards was prompted by an article citing the CEO of CBS who said that his network had gotten requests from Facebook, Apple, and Netflix seeking the right for both TV shows and live broadcasts. Those are certainly some powerful companies, and other than Netflix, a company one would expect to be making such requests, it might portend some new OTT offerings. Many pundits in the industry have been predicting an Apple OTT offering for a number of years to go along with the Apple TV product.

I’m a cord cutter myself and so I’m always interested in new OTT offerings. But for various reasons, mostly associated with price, I am not very interested in most of what is out there today. We subscribe to Netflix, Amazon Prime, and I’ve tried Sling TV twice. But I have not seen any compelling reason to try the other OTT offerings. The list of pay OTT content that’s available is still pretty short, as follows:

  • Showtime: $11 per month with an Apple TV device (which I don’t have).
  • HBO Now: $15 per month with an Apple TV device, and coming soon to Google Play and through Cablevision.
  • CBS All Access: $6 per month but blocks sports content like the NFL.
  • Nickelodeon Noggin: $6 per month.
  • Sling TV: $20 per month. Mix of sports and popular cable networks.
  • PlayStation Vue: Starts at $50 per month. Includes both broadcast and cable networks. This seems like an abbreviated cable line-up, but at cable TV prices.
  • Comcast Stream: $15 per month, only for non-TV devices and must have a Comcast data product. A dozen broadcast networks plus HBO and Streampix.
  • Netflix: $8 per month.
  • Amazon Prime: $99 per year. Includes free or reduced shipping on Amazon purchases and free borrowing of books and music.
  • Hulu Plus: $8 per month with commercials and $12 without commercials. Mostly network TV series.
  • Verizon Go90: Free to certain Verizon wireless customers.

So why hasn’t there been an explosion of other OTT offerings? I think there are several reasons:

  • The standalone networks like CBS and Nickelodeon are basically market tests to see if there is any interest from the public to buy one channel at a time. These channels are being sold at a premium price at $6 per month and it’s hard to think that many households are willing to pay that much for one channel. Most networks want to be very cautious about moving their line-up online and are probably watching these trials closely. One doesn’t have to multiply out the $6 rate very far to see that any household trying to put together a line-up one channel at a time is going to quickly spend more than a traditional expanded basic cable line-up for a lot fewer channels.
  • HBO and Showtime have nothing to lose. The Game of Thrones has been reported as the most pirated show ever and so HBO is probably going to snag some of the cord cutters who have been pirating the show. The prices for these networks are just about the same as what you’d pay for them as part of a cable subscription. But there aren’t many other premium networks out there that can sell this way.
  • One has to think that the major hurdle to anybody putting together a good OTT line-up is getting the programmers to sell them the channels they want at a decent price. The programmers don’t have a major incentive today to help OTT programmers steal away traditional cable subscriptions. Whereas somebody like Sling TV might buy a few channels from a given programmer, that programmer makes more money when cable companies buy their whole lineup. So it’s likely that the programmers are making this hard and expensive for OTT companies. I’ve not seen any rumors about what companies like Sling TV are paying for content, but Sling isn’t like most OTT companies in that it is owned by Dish Networks who is already buying a huge pile of programming. It’s got to be harder for somebody else to put together the same line-up. The dynamics of this might change someday if there a true bleeding of traditional cable customers fleeing cable companies. But for now cord-cutting is only a trickle and most of these networks are still expanding like crazy overseas to make up for any US losses.

Programmers Hate Skinny Bundles

cable headendI read several reports from the current International Broadcasting Convention in Amsterdam that there is a lot of talk among programmers about a dislike of the skinny bundles that are being offered by companies like Sling TV. This is a convention of mostly programmers and companies that produce content. FierceCable reported on the convention and wrote an article titled Execs from Discovery, Roku and others warn the skinny bundle will hamper content creation.

I can understand the perspective of the programmers. Consider Discovery. They are one of the more egregious programmers when it comes to making cable companies take all of their content. Discovery benefits tremendously from the bundle because given a choice, many cable providers would elect to not carry at least some of the many Discovery networks.

There is no doubt that the move to skinny bundles is going to be bad for programmers like Discovery as they lose revenues on many of their networks. Discovery currently has 13 different networks in the US and a few more internationally. And obviously skinny bundles like Sling TV won’t elect to carry many, or even any, of them.

But Discovery and the other networks are trying to swim against the tide if they think there is any way to stop the move towards smaller line-ups. It’s what people want. Numerous studies have shown that most households only watch a very small fraction of the 200 or 300 channels that are delivered to them in the big bundles. And people in general are getting fed up with paying for all of them.

Netflix and Hulu got this all started by letting people watch individual shows rather than networks. And that is what people really want. They create a loyalty to a given show much more than to a network. Interestingly, Discovery takes advantage of this trend already and some of their series like MythBusters, How It’s Made, and River Monsters are available on Netflix.

The real question being raised in Amsterdam is if the trend towards skinny bundles is going to stifle the creation of unique content. It’s a good question and only time will tell. My gut says that it is not going to cut down on the making of good new content because there are profits to be made from coming up with a popular show.

What might change is who is making the content. There is no doubt that over time the move to skinny bundles will hurt traditional programmers like Discovery. They may have to shut down some of their networks if not enough people are willing to pay for them. But these networks were only created in the first place in the artificial environment where millions of homes were guaranteed to pay for a new network. One of the primary reason that the big bundles are breaking apart today is the greed of the programming conglomerates that created and forced numerous new networks on the cable companies. What we are now seeing is that with the Internet people have the ability to push back against the crazy big bundles they have been forced to buy.

So it is quite possible that a company like Discovery will lose a lot of money compared to what they make today, and perhaps as part of that transition they won’t produce as much unique content. But I think that somebody else will. We already see companies like Netflix producing new content. There are even rumors about Apple producing content.

As long as content can make a lot of money, people are going to take a chance for the big bucks. One has to remember that most unique content doesn’t make money today. Many movies don’t recover the cost of producing them if the public doesn’t like them. When these companies talk about creating new content, what they really are talking about is producing hits. One very successful series or movie can produce a huge profit for the producer of the content. As long as that big carrot is dangled there are going to be many who are going to chase the big dollars.

I really didn’t mean to pick specifically on Discovery and they are just an example. You could substitute any of the other large network conglomerates above and it’s the same conversation. The fact is, content delivery is changing and there is going to be fallout from that change. It’s likely over time that some of the existing large conglomerates might go under or disappear. That is the consequence of this kind of fundamental change. But it’s happened to many other industries over the last decades and there won’t be anybody lamenting the fall of a Discovery any more than people are nostalgic about Kodak. All people are really going to care about is that they can watch content they like and they aren’t really going to care much about who created it or who profits from it.

If All Programming Went Online

TelevisionRecently, in a comment made on one of my blog posts, somebody postulated that eventually cable lineups will get much smaller and cable companies will be reduced mostly to a platform to broadcast live sports events. That is a possibility because sports are clearly the most valuable programming asset that broadcasters have today.

But even in the sports world we have seen some experimentation with the web. On fall Saturdays, for every football game that is on one of the cable sports networks there are a lot more games that are only on ESPN3, the online channel from ESPN. For most of these games online is the only way to view them. And even ESPN itself has allowed their ESPN, ESPN2, ESPNU, ESPN Deportes and the SEC Channel onto Sling TV and it’s likely they are negotiating the same deal with others.

But let’s assume for a second that the more lucrative sports like pro football stay off the web. What might a world look like where most programming was streaming rather than broadcast?

First, this would create a huge increase in web traffic, particularly in the evenings in each time zone. According to Nielsen, in 2014 the average home watched broadcast TV for almost 143 hours per month while the average home watched streaming video on the Internet for 6 hours and 41 minutes. This means that less than 5% of video programming being watched is on the web. The companies that control the Internet have already been screaming about the impact of Netflix on their networks, and yet the web is still only carrying a small portion of the video content that people routinely watch.

There are certainly problems to solve before we can put most video on the Internet. One must first consider the difference between broadcasting live video versus streaming video like Netflix does. There is not a lot of live video on the web because the web architecture is not really designed to always deliver content exactly on time. I’ve reviewed Sling TV on my blog a few times and their live sports programming is so terrible that it’s basically unwatchable. Anybody who has watched ESPN3 will tell you a little better story, but even that is not great. ESPN3 mostly is made to work by sending out fairly low quality video to hold down the bandwidth demand. And unlike Sling TV, ESPN seems to have invested in carriers with a more robust backbone. The live streaming problem is not just about sports because many of the other popular shows that have been aired live on the web, like the Oscars, have been a debacle.

There is a huge difference between live shows and streamed video. Netflix can send out many copies of a streamed video at the same time because each end user is basically downloading a large file. As long as the download speed can stay ahead of where the show is being viewed then the viewer gets the intended quality. It doesn’t matter if the download process is erratic as long as the viewer stays ahead of the download. But live shows must be delivered immediately and to many homes at the same time. And when there is any glitch anywhere in the network, the live broadcast is going to hiccup or crash. If there is a local problem then only a few viewers have a problem, but if there are network delays then many viewers will suffer.

The results of moving everything to the web would be dramatic at the customer end of the network as well. The first issue would be all of the customers using DSL or slow cable modems that can’t easily receive multiple video streams. The FCC set the new standard of 25 Mbps download based upon homes wanting to watch 3 videos simultaneously as well as doing other normal web things. If you are sitting today on a 6 Mbps DSL line you already know that watching even one Netflix stream can sometimes be a challenge.

But even assuming that everybody gets upgraded speeds (which might be hard since most DSL won’t go much faster), I still have to wonder how the cable companies and telcos would handle a 10 times increase in video download demand. Almost all local networks have some sort of shared nature. In fiber-to-the-home networks a data stream is typically shared with up to 16 homes. But in cable networks that number can be greater than 500 homes.

You don’t have to remember back more than a few years when the speeds on cable networks almost died every night during prime time as most homes got on the computer. Cable companies have responded by increasing the size of the data path to the nodes and by cutting many nodes in half. But a 10 times increase in video volumes would bring every cable network to their knees. They would have to construct a lot more fiber and they would need to reduce the size of their nodes down to something a lot closer to the size of fiber systems. And they would have to do all of this without getting any additional revenue.

And rural folks would just be left out. All of the millions of homes that are being upgraded to 10 Mbps download by the Connect America Fund (and the tens of millions of other ones already with slow DSL) would be shut out in a world where most video was on the web rather than on the cable systems. I wonder if the politicians could ignore a rural TV gap in the same manner that they ignore the rural broadband gap?

Should the FCC Regulate OTT Video?

FCC_New_LogoA funny thing happened on the way to make it easier for OTT video providers to get content. Some of the biggest potential providers of online content like Amazon, Apple, and Microsoft have told the FCC that they don’t think that online video companies ought to be regulated as cable companies.

Of course, these couple of large companies don’t represent everybody who is interested in providing online video, and so they are just another faction to deal with for the issue. For example, FilmOn X recently got a court order allowing them to buy video as a regulated video provider and in the past Aereo had asked for the same thing.

A lot of the issue boils down to companies that want to put local networks online or else deliver them in some non-traditional way as was being done by FilmOnX or Aereo. These kind of providers are seeking to get the ability to force the local network stations to negotiate local retransmission agreements with them. Under current law the stations are not required to do so and are, in fact, refusing to do so.

The FCC is in a tough spot here because they don’t have a full quiver of tools at their disposal. The FCC’s hands are very much tied by the various sets of cable laws that have been passed by Congress over the years – the rules that define who is and is not a cable company, and more importantly, the rules and obligations of being a cable company. It will be interesting to see how much the FCC thinks it can stretch those rules to fit the situation of online programming, which was never anticipated in the rules.

I can certainly understand why the large companies mentioned above don’t want to be cable companies, because there are pages and pages of rules about what that means; the FCC is unlikely to be able to grant a company just a few of those rules without also requiring ones that these companies don’t want.

For example, the current cable law defines required tiers of service. Cable companies must have at least a basic and an expanded basic tier, and those are very narrowly defined. A basic tier includes all of the ‘must-carry’ local networks and the expanded basic carries all of the things we think of as cable channels.

I think what the FCC has in mind is a set of rules that require programmers to negotiate in good faith with online companies that want to buy their content. Certainly any company that wants to put content online today is completely at the mercy of programmers saying yes or no to giving them the content they want to carry. And there is nothing from stopping the programmers from changing their mind if they see an OTT company being more successful than they like.

So I would think that even Amazon, Apple, and Microsoft would like the ability to force the programmers to negotiate with them, but they obviously don’t want other FCC rules that they think will come along with that ability. Of course, these are very large companies with deep pockets and one has to imagine that they get a fairly decent hearing when they talk to programmers. The FCC’s real concern is not these giant companies, but companies smaller than them who don’t have any ability to force the programmers to even talk to them. I think the FCC believes that if online content is to be successful that there ought to be widespread competition and innovation online, not just content provided by a few giant tech companies along with other huge companies like Verizon.

Today the programmers have most of the power in the industry. They are making a huge amount of money from the mega-subscription models where all of their content is forced upon US cable companies. And they have no reason to become more reasonable because most of them are seeing gigantic growth in selling content overseas, so they have no real reason to upset the cart in the US market.

If online content is to become a vibrant alternative and not just be expensive packages foisted on the public by a small group of huge corporations, then something has to change. I just don’t know how much the FCC can do realistically considering how they are hamstrung by the current cable laws.

Court Jumps into OTT Fray

Fatty_watching_himself_on_TVIn a really surprising ruling, a federal judge has ruled that FilmOn X should be able to get access to local network programming like a cable TV company. US District Court judge George Wu ordered that FilmOn X be treated like a cable company and is entitled to retransmit broadcaster’s content.

For those not familiar with FilmOn X, check them out on the web. They have a huge amount of  on-line content that includes local TV from around the world as well as 600 other channels. There is a little bit of everything from non-traditional sports, music from around the world, and channels of almost any topic you can imagine. They also carry a mountain of for-pay video-on-demand content that ranges from music to major league baseball. All of the free content is ad-supported. Viewers can also create their own channels.

FilmOn X also had their own version of the Aereo model and they offered a premium subscription model in a few markets, which gave customers access to 120 HD channels on any computer or smartphone through the use of a dongle. Just like Aereo this was done from antenna farms.

The company has been in a battle with the major networks in the US since its inception. The company began carrying the local networks on the Internet in 2010. In 2011 they were ordered by a court to stop the practice. But in 2012, the local channels were all allowed back onto the system through a federal appeal and FilmOn X carried local content on its broadcast dongle product. But in 2013 the US District Court of the District of Columbia issued a nationwide injunction against the antenna service.

This latest ruling overturns that injunction and seemingly gives FilmOn X the same right to content as a cable company. Obviously this is going to be appealed further and one has to doubt that the networks are going to negotiate retransmission agreements with the company while the appeals are still being fought in court.

But the case raises serious questions. Although addressing a different set of issues than the Aereo case, it still sets up conflicting district court decisions. Aereo had taken the legal tactic of dancing around the issue of whether they were a cable company by concentrating on the issue of copyright infringement. FilmOn X took a more direct legal approach and argued that they had the rights to rebroadcast the content as a cable company. And apparently the court bought it.

Realistically nothing is going to happen in the area of on-line content until the FCC decides where it wants to go with this. Recall that in January of this year the FCC opened up a Notice for Proposed Rulemaking to look at the issue of on-line content. FilmOn X was mentioned several times in that document and the FCC is asking if on-line companies can have the same rights as cable companies to get content.

The FCC can put all of these lawsuits to rest by defining the rights, or lack of rights, of on-line providers. It’s fairly clear in reading the NPRM that the FCC has a bias towards allowing content on-line and is probably seeking a legal way to do that since they are required to follow the various cable laws that have been passed by Congress.

It’s hard to think that on-line content providers are ever going to be able to comply with all of the rules included in the current cable regulations. Those rules very rigidly define tiers of programming. They also define the retransmission process whereby cable companies can rebroadcast local content. But there are a ton of other requirements that range from closed captioning to emergency alert systems that also apply to cable companies. It’s going to be a challenge to give just a few of these rights to on-line providers while making cable providers continue to comply with all of the rules.

For now this ruling is just one more confusing court ruling that has defined the on-line broadcast industry so far. There have been several conflicting rulings as part of earlier cases with Aereo and FilmOn X that muddy the legal waters for the business model. But this is something that the general public very much wants and traditional cable will be in a lot of trouble if local content ends up on the Internet. It is that content along with sports that are the primary drivers behind maintaining the cable companies’ grips on customers.

The Power of the Bundle

coax cablesOne of the primary ways that the cable companies have built their market dominance is through bundling. We are all aware of the many bundles of cable TV, telephone, and Internet access that they sell, and for which they give you a discount.

But you have to wonder how much longer those traditional bundles are going to make sense. According to the American Cable Association, by 2020 most cable companies are going to be seeing zero profit margins on their cable product. And for many companies it’s not even that far away. I’ve done the math and many of my clients are already losing money on cable when you consider all costs of supporting the cable product.

I’m sure the very largest cable companies do a little better, but they can’t be making a lot of money on cable TV. They have economy of scale, which has to help, but other than Comcast who owns a number of the networks carried on their systems, the other big companies can’t be making a very big margin on cable.

The normal bundle discount works by providing a discount for buying multiple products. It’s not unusual to see a bundle discount of $20 for somebody buying the full triple play. Nobody outside the cable companies knows which products are discounted or how the cable companies count the discount on their books. I’m not sure that really matters to the companies, but it really matters to customers.

Bundles today seem to have become a tool for penalizing a customer for dropping a service rather than as a marketing tool to attract customers. Today most new customers at big cable companies are attracted by specials, and those specials then eventually revert to the bundle prices when the period of the special ends. So most new customers often don’t even know the bundle prices when they buy.

But you quickly learn the unbundled prices if you try to drop services. Let’s say you have cable and Internet product and are paying $69 for the bundle. If this bundle has a $15 bundling discount the products would cost $84 dollars if bought separately. If you want to cut the cord and cancel your cable, you will find that you will lose the whole bundling discount, and your remaining Internet connection might still cost you $45 or more per month, meaning that you save $24 or less from cutting cable. If you had planned on dropping cable and buying NetFlix and perhaps some other OTT service you might easily find yourself paying more after cutting the cord than you paid before with the bundle.

That is the power of the bundle. It is no longer a marketing tool to capture customers because the big cable companies only talk about their bundles prices in the very fine print in their advertising. Instead, the bundle is a way to penalize customers for cutting service. I see industry pundits wondering all the time why cord cutting isn’t happening faster. There are a lot of people in surveys who say they are going to cut the cord but then never do it. Since most cord cutters want to keep their Internet connection, I think a lot of cord cutters change their mind about cutting cable when they find out how paltry their savings are.

If anything, cable companies are probably going to have more opportunities to bundle in the future than they do today. People have been steadily dropping voice lines for a long time. And while cable cord cutting is starting slowly, it is picking up steam. But to offset these losses the big cable companies are adding new products like security, energy management, home automation and IoT, and WiFi phones.

The cable companies are probably going to have the opportunity to sell OTT cable packages. It seems likely that the FCC is going to give anybody the ability to sell smaller OTT products over the web, and one has to think that they are going to let the cable companies compete with the same smaller products. Today, cable companies have a regulated set of rules for how they must build their programming tiers. But I suspect that there is going to be more profit for cable companies to sell a 40-channel package than what they are making with today’s big 300-channel packages.

And so we are probably going to see a lot more bundling, but rather than the triple play bundle it will be Internet access bundled with these other new products. And certainly the cable company is going to continue to use the bundling discount as a way to make it hard for customers to drop their service. So my guess is that bundling is not only here to stay but that it has a big future as a tool for cable companies to continue to strong-arm their customers to stay with them.

Web TV Not Hitting the Mark

Old TVI am sure that the day will come when there will be OTT web programming packages that will be legitimate competitors to cable. But that day is not here yet. We are starting to see the beginning of web TV, but nothing out there is yet a game changer.

And that is not surprising. We still live in a world where content is under the very tight grasp of the programmers and they are not about to release products that cannibalize the cash cow they have from the cable providers. The early web products are being touted as attempts to lure in the cord cutters and cord nevers who no longer buy traditional cable.

Here is what we’ve seen so far:

  • Sling TV is certainly priced right, starting at only $20 per month. That price includes ESPN as well as a few other popular channels like the Food Network and the Travel Channel. They have a growing list of add-on bundles priced at $5 each. And they are just now launching HBO. But there are problems with the service. As I covered in a blog a few weeks ago, watching some NCAA first round basketball games on Sling TV was the most painful sports watching experience I’ve ever had. And it’s been widespread that they botched the NCAA finals. But there are drawbacks other than the quality. For example, you can only watch it on one device at a time, making it family unfriendly.
  • Sony Vue has two major limitations. First, right now it is only available through a Sony Playstation which costs between $200 and $400. And it’s not cheap. They have three packages set at $49.99, $59.99, and $69.99. Without even considering cable bundle discounts, these can cost as much or more than normal cable.
  • Apple’s TV product is not even on the market yet. Their biggest limiting factor is that it’s going to require the use of a $99 Apple TV box. That unit has been far less popular than the Roku. Apple says they will have ‘skinny’ pricing similar to Sling TV.

There are several major factors that will work against web TV for the foreseeable future:

  • Incumbent Bundle Discounts. All of the major incumbent providers sell bundles of products and they charge a premium price to drop the bundle and go to standalone broadband. That is, if they will sell naked broadband at all. For instance, Comcast has no option for standalone broadband faster than 25 Mbps. When people do the math for canceling traditional cable many of them are going to see very little net savings from the change.
  • Issues with Live Streaming. People have become used to a certain quality level of web viewing due to Netflix and Amazon Prime. But those services cache their product to viewers, meaning that when you first start watching they send a burst of data and they then stay about five minutes ahead of where you view. This eliminates problems due to variance in the Internet connections, making the viewing experience smooth and predictable. But there is a far different challenge when streaming live content, meaning shows that are broadcast at set times. Such shows are largely not cached, and thus are vulnerable to every little hiccup in a viewer’s local network (of which there are many which becomes apparent when watching live sports on the web).
  • Programmer Bundles. Programmers make a ton of money by bundling their content to the ISPs. Comcast, Verizon, and everybody else are not able to pick and choose the content they want. There are seven major program owners that control a big majority of cable channels, and when you want any of their content they generally insist that you take almost all of it. This lets the programmers force ISPs to take programs that they would likely never otherwise buy. Web TV is trying to differentiate itself by offering smaller bundles. But I am sure that programmers are making the web providers pay a premium price for choosing to take only a subset of their channels.

The FCC is currently looking at the issue of web TV and they might make it easier for web companies to obtain content. If they do so, one would hope that they also make it easier for wireline cable providers to do the same. Nielsen released statistics late last year that show that the average household largely watches around eleven channels out of the hundreds that are sent to them. Consumers and cable providers would all benefit greatly if the programming that is being forced upon us better matched what we actually want to buy.

The web TV companies are trying to do just that and put together packages of just the most popular content. But I laugh every time I see them talking about going after the cord cutters, who at this point are largely younger households, because the content they are choosing for the web so far is popular with people fifty and older (sometimes much older). I can’t see too many younger households being attracted to these first web TV packages. If the rules can be changed so that different providers can try different packages, then we might someday soon see a few killer web packages that can give traditional cable a run for the money. And perhaps what we are already seeing will be the wave of the future. Perhaps there will be numerous web TV offerings, each attracting its own group of followers, meaning no one killer package but dozens of small packages each with their loyal fans.

Are Customers Taking Charge of Telecom?

MD crowdThere has always been some uncertainty in the telecom industry and over my career I have seen some giant companies come and go from the scene. But as I watch the big companies today I am seeing more unease about the future than I can ever remember.

This unease is justified. And I think that perhaps this is due largely to the cumulative effect of the choices customers are making. In the past the large telcos and cable companies had a limited portfolio of products that they offered, with assurances that a significant portion of their potential customer base would buy them.

But in today’s world, customer choice is expanding rapidly. People have a huge number of options compared to the past, and as customers pick what they like we see winners and losers in the industry. This has to scare the big companies to death.

This happens at both the macro and the micro level. Let me start with the micro and look at programming choices. Recent Nielsen surveys show that the time spent watching traditional television programming, particularly on a real-time basis, is starting to decrease significantly. But the time spent by people watching some kind of content is increasing.

I’m not sure that older people understand how fundamentally differently our kids watch content than the way that we do. As an example, my daughter watches a lot of YouTube, in particular videos on how to make crafts. She has an artistic bent and she now finds content that pleases her rather than watching what some media company thinks that kids ought to watch. Basically, every kid is creating their own channel of content, and most of it is free.

As kids make these choices, and as that generation ages, traditional content is going to be in a world of hurt. For example, somebody you never heard of who goes by the name of Stampy Longnose started making Minecraft tutorials and walk-throughs and putting them on YouTube. He’s been a huge hit with kids under 10 and is now a millionaire due to his work on YouTube. We are now at a time when even 4 year olds are able to up-vote their favorite content. Certainly there will always be some content like Game of Thrones or House of Cards that grabs national attention and that gets millions of viewers. But over time a lot of the content that the various networks are putting together is going to go largely unwatched.

In this new world of micro-content, viewers find content by word-of-mouth. For instance, I have been watching a hilarious comedy on YouTube called The Katering Show that was recommended by a friend. This is a small budget ‘cooking show’ by two Australians that I have found to suit my own sense of humor (caution, it’s a bit bawdy). This is my first foray onto YouTube other than to watch music videos, but I know I will now be looking for other content there.

The same thing happens with cellphone apps. While there are a handful of apps that a whole lot of people use, over time we each go find things that please us. My favorite app is Flipboard; I get most of my news from it these days. Flipboard allows you to choose from a wide array of news sources and end up with a customized newsfeed. Every cellphone user has their own set of favorite apps. If enough people use a given app it succeeds, and if they don’t it fails.

On the macro level, there is a huge tug-of-war going on between platforms and devices. Anybody who is in those businesses has to be worried. For example, smartphones are becoming a serious competitor to PCs and tablets and even to televisions. My wife and daughter watch a surprising (to me) amount of content on their phones.

The industry still has some sway, of course, in the device market. They can make a huge marketing splash and get people interested in something new like wearables or smartwatches. But in the end, the public is going to pick the winners and losers in any new area. Countless companies have already come out with devices that they were sure would be a hit but that flopped badly.

Almost every segment of the industry is being tugged at by significant (or soon to be significant) competition. We are going to see WiFi battling it out with cellular, WebRTC battling for a big chunk of the voice business, OTT programming battling the cable companies, gigabit fiber networks challenging the incumbent ISPs.

In the hardware world we see cloud services going head to head with company routers and IT departments. Manufacturers of headends and cell sites are worried about software-defined networks that will eliminate the need for their equipment. Settop boxes are being replaced by smart TVs, Roku boxes, and game platforms.

It’s hard to find many parts of the industry that are not in turmoil in some fashion, though there are a few. Makers of fiber optic cables are working at a feverish pitch to keep up with demand. ESPN is making tons of money due to exclusive sports content. But more and more it seems that for the first time that I can remember in our industry, customers are picking the winners. That is something very new.

What’s Up With Cable?

Fatty_watching_himself_on_TVThe results for 2014 are in, so today I am going to take a fresh look at the cable industry. The largest nine traditional cable companies lost just under 1.2 million cable customers in 2014, an improvement over the 1.7 million they lost in 2013. But looking at the bigger picture, the top thirteen cable companies lost only 125,000 customers for the year, which is slightly higher than 95,000 in 2013. Within those numbers, Direct TV and Dish Networks together added 20,000 subscribers for the year and Verizon and AT&T added just under 1.1 million cable customers for the year, down from 1.4 million from the prior year.

The industry as a whole is hanging solid and these thirteen companies have 95.2 million customers. Hidden in these numbers is the growth of cord cutters. For a number of years running, the cable industry as a whole has been slightly shrinking even though there is roughly one million new households entering the market each year.

Of course, the growth for the cable companies is in broadband. The largest cable companies in the group added 2.6 million high-speed data customers in 2014, while AT&T added 1,000 and Verizon 190,000. Time Warner Cable said in their annual report this year that their data product has a 97% margin, a number that opened a lot of eyes.

There are two other trends that are not captured in these numbers. First is the growth in time spent by people watching online programming like Netflix and Amazon Prime; and with that a corresponding decrease in time spent watching traditional cable TV programming. The overall hours spent per viewer for traditional cable dropped 4.4% for the year, but Nielsen reported that this was accelerating at the end of 2014. The most shocking number published this year came from Nielsen which reported that over 10 million millennials had largely fled linear TV just in the last year. Primetime viewing dropped by 12% during 2014 as more viewers are changing to time-shifted viewing.

The other trend is in the continued increase in rates. Most of the cable companies are reporting profits up 7–9%, due in part to more data customers, but also due to continued rate increases. As an example, Cablevision raised cable rates by 5.3% last year, or $7.86 and their average revenue per customer is now up to $155.20. It’s a bit mind boggling to think that’s the average and that there are a lot of households paying a lot more than that.

For yet another year the largest cable companies came in dead last in nationwide customer satisfaction surveys. This puts cable companies behind banks, airlines, and large chain stores and the satisfaction scoring for the cable companies dropped significantly just since 2013.

There is anxiety in cable boardrooms. Just in the last weeks there have been mixed signals from Wall Street when some industry analysts downgraded cable stocks due to the FCC’s net neutrality ruling, while others said there would be no significant impact from it. I tend to side with the second crowd since the FCC has excused broadband from rate (and most other kinds of hands-on) regulation.

But the real anxiety comes from a look at the demographics supporting the industry. The average age of cable viewers is increasing quickly as younger people eschew watching traditional TV. The average age of viewers for many shows and networks is now over 55, up sharply from even a decade ago. This is already starting to be felt in terms of advertising revenues, with the pre-sale for the current ad season down sharply from 2013.

There is also a lot of anxiety over Over-the-Top (OTT) programming on the web. It seems like there are weekly announcements of new alternatives coming online. The biggest recent shocks were when HBO, Disney, and ESPN said they would have some product on the web. These have been considered the bedrock channels of the cable company line-ups. Sling TV seems to be doing well with an abbreviated line-up (but which keeps growing). Sony is supposed to be unveiling what they are calling a major new online product later this year, and there are another dozen companies trying to put together web TV packages. The FCC is also looking at changing the rules that might make it easier for online content providers to obtain programming. The feeling is that 2015 is possibly going to be a sea change year and that we will start to see major shifts in the industry.

Meanwhile, programmers keep raising the rates they charge to cable companies, and the rate of programming increases is accelerating. Many programmers don’t seem overly concerned about the problems faced by the cable companies because many of them expect to have content included in online packages, and many are seeing explosive growth internationally in subscribers.

Liberty Media chairman John Malone chastised the industry recently for not implementing TV everywhere fast enough. That is the product that lets customers watch programming on any device on their own time. He says that this is probably the number one reason why Netflix and others have fared so well (which does sort of ignore the cost issue).

The larger cable companies are putting more effort into this area as witnessed by the new X1 settop boxes that Comcast is deploying. They have reported that there is significantly less churn from customers who have the newer technology. What can be said is that the industry is in turmoil. It may not look so bad when looking at customer numbers, but everybody in the industry senses that things are going to start changing quickly.

As an aside, I know somebody with the new X1 box and they tell me a different story than what Comcast is publicly saying. They recently moved and were given the new X1 box and they hate it. It regularly won’t record shows, or it goes offline and they can’t access regular programming or their recorded programming. They’ve asked repeatedly to get back their old style of box. They instead have been given numerous credits and one manager, as he was giving them a credit, admitted that Comcast had rolled out the new box too fast and there were problems with it everywhere. They have called several times to cancel but have instead been given another credit. When I told them what I was writing, they speculated that there is less churn because Comcast is just not letting people go. I don’t know how widespread the problems are with the new box, but cable companies have been known to withhold bad news from investors in the past.

A Real Chance for OTT?

FCC_New_LogoOn Friday the FCC released an NPRM in Docket FCC 14-210 that asks a host of questions about allowing Internet content providers to be treated as cable companies. The NPRM contains a very thorough discussion of all of the rights and obligations of being a cable company, and anybody who doesn’t understand the regulation of cable companies can get a quick education just by reading the NPRM.

It’s obvious that by raising the issue that the FCC is in favor of promoting more competition for cable TV. This is something that the public obviously wants. But the FCC has to walk a fine balance with this issue. If they make it too easy for online content providers then they might accelerate the collapse of the traditional cable TV business. I know many would applaud that, but there are a lot of homes that can’t get cable over the Internet and who are not situated to get it from a satellite. On the other hand, if they make it too hard to qualify to deliver content online then not many companies will try and they will have accomplished little.

One might think that it’s an easy question to answer until you read the NPRM. There are some very tricky issues for the FCC to wrangle with:

  • For example, should somebody who only wants to deliver a package of a few channels be able to buy them? (Cable companies can’t do that).
  • Should they require an Internet provider to carry the major network channels like cable companies must do, and if so, would they be required to carry the channels in every market and have to swing deals with hundreds or even thousands of stations?
  • Can an Internet provider that only wants to deliver content on a delayed basis, like Netflix, be able to buy any programming they want?
  • Can a content provider like Disney offer a package of programming online that only includes content they own?
  • Do online providers have to provide services like closed captioning (for the deaf) and video description (for the blind)?
  • Would ad-based online companies have to comply with the rules about the loudness of commercials?
  • Does an online provider have to notify customers of things like weather alerts or other emergency announcements?
  • Can the FCC require content providers to negotiate with possibly thousands of new online market entrants? Even today many content providers send smaller providers to somebody like the National Cable Television Cooperative to get content. Would this mean that NCTC would have to accept online providers into the Coop?
  • Would online providers have the same restrictions against making exclusive deals with MDU owners?
  • What do they do about the more arcane rules such as cable cards, inside wiring and signal leakage?
  • Can a company with no business presence in the US become a US cable company since they have access to customers through the Internet?

I think it’s pretty obvious that the FCC is going to do something to allow online competition. But they are starting with a regulatory framework that was written specifically with coaxial networks in mind and that has many rules that don’t make sense for an Internet provider.

I think there are a lot of people who would become cord cutters if they could buy smaller packages of the programming they want online. I know I would personally be very happy with a package of Netflix, Amazon Prime, ESPN and the Big 10 Network. But I think a lot of people are going to be disappointed when the find out that online cable competition is not going to be the same thing as a la carte programming where subscribers can choose only the channels they want to buy. It might be that on-line packages cost as much as the ones from the cable companies.

Once a company qualifies as an online cable company they are going to be saddled with many of the same rules that apply to cable companies. And they are going to be in an industry where the balance of the power has swung very much to the content providers. For example, it’s common today that if a cable company wants to buy one channel from one of the big eight content providers that they have to take virtually every channel that the provider owns.

There is also an issue that is faced by many customers that is not addressed in the NPRM. It’s a very common trend these days for cable companies to require at least some bundling in order to buy Internet access. For example, in my town I can only buy Comcast’s slowest Internet speed without having to subscribe to at least some cable channels. But it’s doubtful that without considering Internet as a Title II service that the FCC can order cable companies to sell all speeds of broadband as a standalone product. This is one of the issue that is stopping potential cord cutters. So here is yet another issue that is tangled up in in the Title II regulatory debate along with net neutrality.