The mashup last month between Twitter and Comcast sparked big news that left many companies wondering if, for the moment, they had been left behind. Now, some of the millions of overlapping devotees of the social-media darling and the No. 1 cable operator can tune into TV shows via a tweet.
On the heels of the tweet-cast teamwork, streaming- VOD juggernaut Netflix — supposedly cable’s scariest cord-cutter threat — is seeking a blockbuster accommodation with … cable operators. Untold numbers of Netflix’s 31 million U.S. subscribers could begin receiving House of Cards and the rest of its streaming VOD through (ahem!) the set-top box, the same route taken by rival bundles of pay TV channels. No more over-the-top for Netflix-ers!
FUTURE SHOCK
As the back-to-back advances reflect, television is having an acute Future-of-TV Moment. Over the past few years, of course, the dominant medium of the 20th century has been undergoing a technological metamorphosis, gradually adapting to the insistent demands of a 21st century, Internet-centric mainstream audience, which is intolerant of traditional television’s constraining day-parts and programming schedules.
Now, however, television’s evolution is reaching a convulsive tipping point in real-time speed. Or so it seems, considering a blizzard of stunning moves in recent months throughout the television ecosystem, including the uncharted territory — “the cloud.” The continuing spate of maneuvers confirms what has been long obvious. Cable operators — the undisputed incumbent power of the medium — and the still-unbowed broadcasters that they supplanted face a potential existential threat from over-the-top Internet video. The stakes, according one estimate, total as high as $2 trillion.
The frenzied, paradigm-altering activity has begat an accompanying frenzy of jockeying for advantage and hedging of bets abound. For example, pillars of the cable industry, including Comcast and Cox Communications, are quietly exploring, or have openly toyed with, the once-unimaginable: going over-the-top themselves with subscription Internet video services aimed at short-circuiting upstarts.
At the same time, the developments are furthering the ascent of some relatively recent entrants. In September, Netflix gained validation, winning an Emmy for its foray into original series, House of Cards. A payoff : Surging third-quarter subscriber growth, surpassing HBO.
Meanwhile, other developments foreshadowed the looming arrival of yet more — and potentially more formidable — rivals into the over-the-top space. For consumers, a new golden era of choice, convenience and video ubiquity is gaining brighter luster and becoming more magical.
IDENTITY CRISIS
The rapid succession of developments involve every ilk of television-ecosystem inhabitant — ranging from old guard Hollywood content behemoths and last-century cable, satellite and telco distributors to the players of the new millennium, social- media platforms, technology titans and parvenu purveyors of video streams. The names are household ones. In addition to Netflix, Twitter and Comcast, they include Amazon, Apple, Google (and its YouTube), Sony, Intel, Viacom, Disney, DreamWorks and Fox. Others may be less familiar: newcomers Aereo, Dyle TV, FilmOn and Syncbak are pursuing local-market streaming niches.
Talk to any headhunter or HR honcho and you’ll hear the same theme: Fear, loathing and anxiety pervades the Csuites of media and communications these days. It’s all enough to confront television with an identity crisis. What do you call a broadcaster that also streams its entire live network? Is a cable company still a cable company if it’s reborn with implants of “cloud” DNA and shares its set-top box with a pure bred Internet VOD streamer (which, by the way, in an earlier reincarnation was a DVD rental giant)?
“A defining moment in technology and distribution” is how Anne Sweeney, co-chairman of Disney Media Networks described a first of its kind for a broadcaster. The “Watch ABC” app, unveiled in May, streams ABC broadcast-network programming live on digital devices around the clock anywhere.
Media companies like The Walt Disney Co. also are caught in a balancing act, as a roil of recent moves also indicates. They earn huge profits licensing their cable channels to incumbent distributors. Although relationships have become increasingly strained, given the rising fees they command, both sides have mutual interests to preserve in the brave new television world. For the content owners, cable TV in particular is the golden goose that media giants don’t want to harm by aggressively licensing their networks to upstart over-the- top rivals.
Still, media companies are licensing content to the VOD services, Netflix, Hulu and Amazon Prime, and reaping hundreds of millions of dollars in new revenues and on more lucrative terms than what the mainstay pay TV operators are charged.
But the media giants seem more dissuaded from aiding the insurgents by the incumbent distributors. For now, they seem to more favor strategy that trades streaming rights, along with cable TV licenses, to their traditional distributors in cable, satellite and telcos. “It’s a real goal of our company to aggregate as many rights as we can on as many different platforms to provide [customers] with the best experience,” Comcast vice chairman and chief financial officer Michael Angelakis told the Goldman Sachs Communacopia Conference in September.
On another front, after decades of steadily declining audiences and the rise of cable operators, the Big Four national broadcast networks have weathered the most profound change — and yet, they retain the largest audiences for shows and mandatory retransmission fees flood their coffers. Now they, too, face a grave new threat. It’s spelled Aereo, an upstart that captures the live broadcast signal and streams it to subscriber’s mobile devices. If Aereo can distribute broadcast signals by Internet, why should or would cable operators pay billions of dollars of retransmission fees to the industry? Backed by Internet mogul Barry Diller, the service is spreading to 22 cities, so far, nationwide.
The industry’s fierce legal challenge hasn’t stymied Aereo. Broadcasters are determined to drag the service all the way to the U.S. Supreme Court, alleging it is illegally streaming their signal. But there’s no guarantee of victory. So, the industry is seeking to innovate its way to victory. Thus Disney’s “Watch ABC” in May. Last April, CBS acquired a stake in Syncbak, the Marion, Iowa- based company that controls a platform for streaming local TV-station programming to mobile devices. Some analysts see it as a counter to Aereo.
A confluence of factors is behind the industry’s current unprecedented maneuverings. At a minimum, survival in the television business means satisfying changing consumer habits. And providing TV audiences the control they crave may force a company to, well, turn itself into a media-hybrid, part cable, part video streamer. Further, seminal technological advances — tablets and the cloud, to cite two game-changers — have set the foundation for the whirlwind of actions now buffeting the industry as participants aggressive try to satisfy consumers’ demands, gain new revenues and dislodge old incumbents.
For example, compared to traditional television, digital video ads are a hit with consumers, who find them deeply engaging. To be sure, television is hardly at risk of being toppled even in the next few years of as the leading advertising platform, garnering some 40% of the more than $170 billion of paid media. By comparison, spending on digital video is minuscule — a bit more than $4 billion. Yet, the growth of format is surging, up an estimated 41 percent this year versus a small single-digit up for television.
What’s more, digital video’s gain is television’s loss, according to the Interactive Advertising Bureau, which attributes much of the increase to dollars shifted from TV budgets. Fueled by the growing digital video audience and proliferating digital video services, the trend is forecast to continue.
For now, one historical pattern of nature — that the biggest creature occupying a land suffers the dinosaur’s fate — won’t be repeated on the cable-TV landscape. With 21.8 million video subscribers, Comcast, a cable pioneer and the industry’s leading gargantuan, has been virtually reborn for the digital age. While still serving up linear cable networks, Comcast has become one of the industry’s leading purveyors of VOD — clocking 400 million requests monthly — having been the most aggressive hoarder of rights from the beginning of the product. Some observers regard Comcast’s decision to offer the entire primetime schedule of its NBC broadcast network on video-on-demand as an industry inflection point. But that’s just half of Comcast’s survival strategy. Before our eyes, it appears to be morphing into some hybrid television beast. Consider its X1 platform: Rolled out now across roughly 90% of its territorial footprint, it enables an infinitely flexible, immersive and soup-to-nuts entertainment experience that accommodates smartphones, tablets, VOD and social-media features — all based on technology and innovations mixed together at its Comcast Labs.
In June, amid the frenzy of industry moves, Comcast introduced the next generation, X2. The company, said CEO Brian Roberts at the time, is “transforming our video product into a complete entertainment operating system.” Many of its smaller cable operator peers, though, are having trouble catching up.
CRACKING INTO CONTENT
In a flattering way, the Web-video services mimic some highly successful cable networks, both premium and basic. Like HBO and AMC, for example, Netflix has mined growing critical and commercial success through original programming. It’s no coincidence the category leader added a surprisingly high 1.3 million U.S. customers for a total of 31 million, surging past HBO’s 28.7 million, in the third quarter, during which its exclusive series, the political drama House of Cards, collected the firstever Emmy (Best Director) for a non-network program.
And a second original series, Orange Is the New Black, “has been a tremendous success for us,” CEO Reed Hastings wrote investors last week in announcing earnings. By the end of the year, Hastings added, Orange will be Netflix’s most-watched show ever, with an “audience comparable with … broadcast TV,” though he didn’t specify the size.
Hoping for similar results, rival Amazon Prime is following suit, but with a twist. From 14 pilots produced by parent Amazon, it is making five original TV series selected based on viewer feedback to show on Prime Instant Video, a first jump into exclusive programming. The first, debuting in November on Amazon’s Prime Instant Video service, is Alpha House, a 13-episode political comedy created by Pulitzer-Prize winning cartoonist Garry Trudeau and starring John Goodman.
If it’s a hit, Amazon surely hopes to reap a surge in members to its flagship Prime service, a $79 a year offering that includes free access to Instant Video. The threat to cable TV is a real one — Amazon is the No. 1 e-tailer in the world, with revenue of $61 billion.
So what are cable operators to do as cheap prices and quality shows draw crowds to subscription VOD, and cable customers steadily abandon them—by 400,000 in the aggregate in some quarters? Cable operators already are eyeing a chokepoint: the broad band pipeline. Broadband, the delivery system for Internet video, is cable’s growth engine, accounting for as much as 77% of aggregate additions in recent quarters, International Strategy and Investment Group estimated.
Applying the brakes to Internet VOD may be a simple matter of pricing model. Out with the standard all-the-bandwidth-you-can-hog plans; in with pay-for-what-you-eat — so-called usage-based pricing. It’s “only logical and fair,” CEO Greg Maffei of Liberty Media, which owns a 24% stake in Charter Communications, recently told a Wall Street audience. For streaming video subscribers, the cost no doubt could escalate to exorbitant levels because of the bandwidth-hogging size of Internet video.
And the overall traffic is voluminous. At a point last year, Netflix alone accounted for 40% of all U.S. Web traffic last year — a volume that surely is exploding, given the growth of the service. Add to it the newcomers on the horizon. The rude awakening to exploding broadband cost will inevitably lead to an unpleasant result for over the top video: abandonment by price-sensitive customers.
“We have a government-affairs department that’s interested in that conversation,” Netflix chief financial officer David Wells told the Goldman Sachs conference in New York, alluding to a possible lobbying campaign to head off the usage-based billing. Consumers, he added, are “better served if there is not tolling” and that broadband services already generate “a healthy [profit] margin.”
Can’t they all just figure it out? Not really — not for long stretches, anyway. Or so the history of the television business suggests.
The industry seems constantly in the throes of reinvention. New technologies, morphing business models and iconoclast visionaries compel companies to change and react. Good companies eventually discover their calling.
For those that remained mired in identity crisis, their Future-of-TV Moment is fleeting.
