I Was a Cord Cutter … But I Fell Off the Wagon
I was given an ultimatum by my wife several weeks ago. “We really need to talk,” she said emphatically one night. Cue my putting down the iPad in response. She continued, “It’s really frustrating.” Pause. “There’s so much going on … this season with ‘Mad Men’ and I can’t discuss it with you because you’re a season behind … so, can you do something about that?” Oh. My response? I picked up my iPad, and in a few swipes and taps, I was watching Season Five, Episode One “A Little Kiss” via Netflix.
As a child, watching television (as digital was defined by the greenish dots emanating from an Apple IIe) was limited to four-ish broadcast channels — NBC 3, ABC 5, CBS 8 (when it didn’t rain) and syndication on 43 — on a three-and-a-half-inch black-and-white television in the kitchen. Despite the constrained display, I was a voracious consumer of syndicated dramas and comedies, from “MASH” to “The Greatest American Hero,” offering no judgement on the quality — just reveling in the availability. The living room television — a glorious twenty-plus inch color CRT — was reserved for “premium” viewing experiences: “20/20” with Hugh Downs and Barbara Walters on Friday nights or — connected to a Sony Betamax — watching “Popeye” Doyle racing down the streets of Chicago, Jack Walsh trying to get “The Duke” back to Los Angeles, and Chuck Yeager pushing the edge of the envelope.
Fast forward to 2000 when I began a new phase of my life: Cord-cutting. I paid my last bill for landline service and never looked back. I paid my last bill for cable television service, but my alternative methods — DVDs via Netflix, trips to the theater on 23rd Street, watching postage-sized video via V CAST, early on-demand services from ABC.com — were obstacles in understanding the watercooler chat around shows such as “24,” “Lost,” “Arrested Development,” “The Sopranos” and “Six Feet Under.”
Six years later, it was time to rekindle my relationship with the pay-television operator. Each year — and recently, each month — the internal debate continues: The necessity of the pay-television operator vs. the future of the OTT provider. At the CTIA Show in May, I participated in a panel to discuss that very same issue.
Have Pay Providers Already Lost?
Recent industry data from Leichtman Research Group reported that for the first time, the pay-television industry had a net subscriber loss over a four-quarter period. This data added to the argument of the growing — albeit small on an absolute scale — population of cord cutters and “cord nevers.” Nielsen began tracking a group that doesn’t subscribe to traditional cable and satellite options. This Zero-TV group currently numbers more than 5,000,000 households in the U.S., up from 2,000,000 in 2007.
Have the pay-television operators already lost the living room? Or are they — as stated during a session at OTTCON — dinosaurs with lasers?
Pay to Play
In thinking about the “Mad Men” experience from earlier in the post, over the next several days I was able to watch on multiple devices (iPad, iPhone, Xbox, Apple TV) and in multiple locations (living room, bedroom, garage, backyard). Netflix has done a tremendous job in establishing a level of digital ubiquity that not only differentiates them from ostensibly other OTT alternatives from Hulu and Amazon but has created an expectation of digital ubiquity within the mind of the consumer. I would argue that this ubiquity has been a core enabler of their current relevance in the marketplace, as important as their focus on content aggregation and discovery. Just as it took research and innovation to scale and optimize their physical distribution, they executed successfully in digital distribution.
However, as the pay-television operators were well aware, content is still king and consumers follow the content — legally or illegally. Initially, their digital content acquisition strategy emphasized quantity over quality, but as the entire industry began to take notice — and those early content licensors began to think more strategically about how and to whom they wanted to license film and television content — Netflix shifted course and began trimming its library (bye-bye thousands of titles from Sony, Warner, MGM, Universal, WB, Viacom, Starz, etc.) and investing heavily into original content (“House of Cards,” “Arrested Development,” “Hemlock Grove,” “Sense8,” “Lilyhammer,” “Orange Is the New Black”) with plans to double the number of original programming series in 2014. With a renewed focus on programming — especially pricey original programming on the order of $100 million for “House of Cards” — it’s no surprise that Netflix has content liabilities on the order of multiple billions of dollars over the next five years. However, Netflix’s announcement in April that its 29 million domestic subscribers surprised HBO for the first time only bolstered the believers in the company’s strategy and execution and added more questions to the debate at hand.
In one regard, it’s encouraging to see a company like Netflix take the initiative (read: risk) in producing content, whether it’s creating a series from scratch or reviving one that ended its run on broadcast or pay television. While there may seem to be “obvious” candidates like “Arrested Development,” there are likely as many rabid fans of “Battlestar Galactica,” “Southland,” and “Fringe” that would carry the torch for reviving these series but likely without a material increase in subs. And for every “Sopranos,” there’s the $35 million loss with duds such as “Luck.” The broadcast networks go through this song and dance every year, with the fate of pilots and series left to the fickle, multi-tasking, multi-screen consumption behavior of the everyday consumer.
If Netflix’s strategy is viewed as the bellwether for the OTT landscape, we will continue to see OTT providers:
- Focus on their strength by increasing digital ubiquity
- Differentiate their offering through content (e.g., Amazon’s content deals with CBS, Twentieth Century Fox or their own original programming) or digital commerce bundling (e.g., Amazon’s bundling of Instant Video with Prime).
With the growth trend of original programming and exclusive content deals, doesn’t it feel like OTT providers are beginning to remind you of pay-television providers?
OTT providers can maintain their advantage in ubiquity as device and platform fragmentation will continue to plague all players within the ecosystem for the foreseeable future. We won’t see the demise of pay-television providers anytime soon. We’re more likely to see OTT augment pay television as an additional method of video consumption, and based on the continued success of OTT providers, pay-television providers will be faced with improving their digital capabilities, changing their business model and embracing the mobile lifestyle to reverse the subscriber erosion or risk a fundamental collapse of the industry.
Content Rights (And Wrongs)
Pay-television providers aren’t going away anytime soon, but it doesn’t mean that they don’t have a lot of work to do to placate their customers.
I doubt my situation is uncommon:
- As a satellite subscriber, I pay over a hundred dollars a month for over six hundred channels.
- My household watches about a dozen or so channels on a regular basis.
- While we rent an occasional PPV film, it’s typically not something that is unavailable on a digital platform (e.g., iTunes).
- While I am aware of offerings that are enabled by TV Everywhere, my pay-television provider is not supported on many that are of interest to me (e.g., Watch ABC, WatchESPN, Pac-12 Networks, etc.).
Fundamentally, pay-television providers must cater to the mobile lifestyle of today’s consumer. I’ll touch on the topic of the “mobile lifestyle” in a future post, but the core tenet is that consumers have had 1) access to a wealth of digital content (e.g., from services such as Netflix and iTunes); 2) access to devices that free them from the living room (e.g., smartphones, companion devices that need just a monitor and Wifi). As a result, consumers expect to consume anytime, anywhere and from any device.
From the perspective of the content programmers, they have a proven business model with the (contested) ability to bundle channels (to the chagrin of most consumers, including John McCain), leveraging popular channels to promote new or struggling sister channels.
From the perspective of the pay-television providers, they are burdened with an issue the OTT providers were fairly quick to resolve: Content rights. Pay-television providers have multi-year content deals with content programmers based on a cost per subscriber. As part of these deals, content rights limit how, when and where customers can consume the content. For example, my pay-television provider has an iPad application that includes digital simulcast and on-demand viewing. However, when viewing on the local Wi-Fi network, only a handful of channels are available for simulcast. And when viewing away from home, almost every channel is restricted. As for the on-demand digital content, it’s only a fraction of what’s available via the television VOD option. Even though many services offer TV Everywhere authentication, my pay-television provider is missing from many of the more popular.
From the perspective of the consumer, we don’t care about the content rights; we only know that we’re not getting the content when, where and how we want it.
One of my fellow panelists at CTIA stated that rights are typically 4 to 5 years in length and can be changed, modified and updated. But, I countered, the iPad is only three-and-a-half years old. The entire landscape has changed faster than the duration of the content window.
A European colleague of mine once remarked, “What’s so special about TV Everywhere? We already have TV everywhere.” The concept of TV Everywhere authentication is a U.S.-centric model, a convoluted video experience born in 2009 as a reaction of the existing broadcast model to the growth of OTT services. I’ll reserve a future discussion for a more in-depth analysis of the state of TV Everywhere, but a number of issues continue to plague its future:
- Awareness: The industry continues to struggle with educating consumers with the value of the service given its complex origins in content rights and the awkward linking of pay-television providers with content programmers. The rollout of TV Everywhere has been slow and inconsistent, as consumers are forced to navigate seemingly competitive offerings from their pay-television providers and their content programmers.
- Authentication: Authentication — the simple act of logging in with a username and password — continues to be an obstacle for adoption. As most consumers relate access to content with the programmer (i.e., network/channel) rather than their pay-television provider, the authentication process’s use of login credentials supplied from the pay-television provider is not a logical linkage. The TV Everywhere ecosystem needs to simplify this entire process:
○ Using geographic and/or IP data to more intelligently filter a list of a hundred potential pay-television providers to a handful
○ Auto-detecting when consumers are on their home network and bypassing the authentication process
○ Extending authentication to a per-user vs. per-household model to enable better control over content (e.g., restricting content by TV rating based on the household member)
○ Exploring the use of alternative credentials, e.g., social network identities
- Availability: Consumers have grown impatient with the inconsistent availability of TV Everywhere, as pay-television providers offer only a subset of the broadcast content and content programmers offer access to only a subset of pay-television providers. As TV Everywhere continues to be shaped by the issue of content rights, its long-term success will depend on the ability for pay-television providers and content programmers to unify the broadcast and digital models to ensure that the availability of content reaches a level of ubiquity established by the OTT providers.
And Then There Was Aereo
Over the past year, NYC-based Aereo has raised eyebrows, excited cord-cutters and found itself in legal hot water with a who’s who of major broadcasters including ABC, CBS, Disney, Fox Television, NBCUniversal, PBS, Telemundo, Twentieth Century Fox and Univision for a range of violations, the core issue being copyright infringement.
Aereo is a unique hybrid. Its business is providing digital content directly to consumers in a paid subscription model. While its support devices are somewhat limited today (desktop Web browsers, iPad, iPhone, AppleTV via iPad/iPhone, Roku), its content and its method of acquiring that content is what has been controversial. Aereo enables consumers to view live broadcast content and record for time-shifted viewing.
Aereo avoids paying retransmission fees as it contends that its digital streaming is not public performance, as each subscriber is assigned their own individual dime-sized antenna. As the next customer joins, Aereo adds another antenna; as the next million customers join, Aereo adds a million antennas. Each customer has their own assigned physical antenna and manages their own DVR.
Over the course of a year, it seemed that its “army of antennas” strategy would lead it down a path similar to now defunct Zediva, which used an “army of DVRs” and a pile of DVDs to stream Hollywood movies to consumers. Even though each physical DVD player (in Zediva’s datacenter) played back an individual DVD to an individual subscriber, the courts didn’t support this supposed loophole based on previous rulings such as Columbia Pictures Industries, Inc. v. Redd Horne, Inc. Zediva lost their argument in court (Warner Bros. Entertainment Inc. v. WTV Systems, Inc.), paid a $1.8 million fee, and promptly shut down after less than a year.
While Aereo’s position was able to stand based on legal precedent (Cartoon Network, LP v. CSC Holdings, Inc.), the ruling by the Second Circuit was not without criticism.
Judge Denny Chin’s dissent suggests the matter may not be settled in the court of public opinion:
In my view, by transmitting (or retransmitting) copyrighted programming to the public without authorization, Aereo is engaging in copyright infringement in clear violation of the Copyright Act.
Aereo’s “technology platform” is, however, a sham. (Emphasis mine)
The system employs thousands of individual dime-sized antennas, but there is no technologically sound reason to use a multitude of tiny individual antennas rather than one central antenna; indeed, the system is a Rube Goldberg-like contrivance, over-engineered in an attempt to avoid the reach of the Copyright Act and to take advantage of a perceived loophole in the law. [Emphasis mine] After capturing the broadcast signal, Aereo makes a copy of the selected program for each viewer, whether the user chooses to “Watch” now or “Record” for later. Under Aereo’s theory, by using these individual antennas and copies, it may retransmit, for example, the Super Bowl “live” to 50,000 subscribers and yet, because each subscriber has an individual antenna and a “unique recorded cop[y]” of the broadcast, these are “private” performances. Of course, the argument makes no sense. These are very much public performances.
Already available in New York with 30 channels and Boston with 21 channels, it plans to expand to 20+ additional markets over the course of the year. With backing by Barry Diller and IAC’s $38 million and support for industry reform from John McCain, Aereo appears to be on track as a new player squarely in the middle of both OTT and pay-television providers — foe of the pay-television providers but not necessarily the friend of the OTT providers.
Cater to the Mobile Lifestyle
While Aereo may be (for the time being) legal, and while it may be satisfying the needs of its consumers, its method for supplying its service feels off. The critical point in my mind is the saying that nature abhors a vacuum; Aereo is fulfilling a consumer need that is missing from current pay-television providers: Lower-cost, unbundled, digital content targeted for a mobile lifestyle.
However, pay-television providers still command 95 million subscribers and have the opportunity to delight their customers — me included.
A few suggestions:
- Reinvent TV Everywhere: TV Everywhere needs rethinking to educate consumers and reduce the technical and business friction between pay-television providers and content programmers.
- Embrace Fragmentation: Pay-television providers should consider the expanding set of platforms (from smartphones to game consoles) as new touch points, an opportunity to extend its brand throughout the daily routine of consumers.
- Emphasize Search and Discovery: Making good content is hard. Finding that content can be equally frustrating. Pay-television providers should focus on how they can reinvent the notion of the EPG to create personalized content libraries for each member of the household, like
○ Parent A likes Anime, sports and news
○ Parent B likes documentaries, science fiction and Ellen
○ Child C is restricted to TV Y programs
○ Child D is restricted to TV 14 programs and the major broadcast channels.
- Support for Offline & Out of Home: Consumers are on the move and expect content to follow. While some consumers will prefer illegal means for obtaining content, consumers shouldn’t feel they need to resort to it. Pay-television providers should focus on how to bring content — and implicitly the provider brand — with them even in offline and disconnected scenarios, e.g., watching on a plane, train, or automobile.
Pay-television providers can’t transform the industry without the support of content programmers, who are often pointed to as the ones forcing channel bundling upon providers and thus on consumers. However, if pay-television providers can adapt their services to changing consumer behavior, we may see less arguments for disrupting the industry and see more actions that improve it.
Albert Lai is CTO, media and broadcast solutions at Brightcove. In this role, Albert provides technical leadership within Brightcove’s media and entertainment team, working with customers to meet their multi-platform content delivery, workflow and distribution requirements. Albert holds a B.S. in computer science from Stanford University.