No CBS Blackout Yet On Time Warner Cable

The ads are frequent.  No NFL, no Homeland, no US Open Tennis, no this, no that when CBS and its related networks like Showtime are dropped from Time Warner Cable markets.  The drop date was last night but as last minute negotiations continue, the networks have remained on the air as a sign of good faith negotiation.  This will not be the first time that a major broadcaster has been dropped from a cable operator.  "The blackout threatened to be the first of a top broadcaster by a major pay-TV carrier in New York, the nation’s largest TV market, since Cablevision Systems Corp. (CVC) shut down Fox for two weeks in 2010."

Will a deal be consummated and a drop averted or will TWC customers face a period of time without CBS?  What I can assure you is that a deal will be reached.  It is a symbiotic relationship between these two parties.  Each needs the other to maintain a customer base.  CBS needs TWC for ratings and ad revenue; losing the NY market, not to mention Los Angeles and Dallas, would be a major blow.  And TWC needs CBS especially with football and tennis scheduled to start and a market that might just embrace its satellite competitors, DirecTv and Dish,  as well as upstart Aereo.  And once the dust has settled and rate increases have been increased, the consumer will find their bills have gone up too.  And that is the circle of life.

Reports Say Netflix Doesn't Hurt Cable

In a surprising research study done by TiVo, it shows that Netflix does not hurt TV viewing.  In other words, Netflix is seen more as another "channel" choice and not as a replacement to cable networks.  According to TiVo Research and Analyst chief Mark Lieberman, “'The future of television may tell a different story, but as of today we’ve found that the Netflix subscribers in our study are not watching less traditional TV.'”In fact Netflix users watch more premium shows on HBO and Showtime than non-Netflix users.  In other words, Netflix appeals to the heavy TV usage who wants more choice and sees Netflix as a complement to cable TV and not a replacement.

This research study just might let cable operators breathe a little easier knowing that Netflix isn't a cause for cord cutting.  At the same time, consumers are cutting the cord to cable in an ever increasing stream.  If Netflix isn't replacing cable subscriptions then what is?  Perhaps this younger demo is bypassing TV altogether for gaming on their Xbox and tablets. 

Aereo and Dish's Hopper All Because Of The VCR

In today's New York Times, David Carr provides some context behind the legal challenges defending the practices of both Aereo and the Hopper.  Broadcasters are especially worried because their revenue is now based on both retransmission license fees charged to cable operators and the advertising dollars they earn.  Aereo takes those over the air signals without paying for them and sells them with DVR capabilities to consumers.  Dish does pay but the Hopper enables quick skipping over all commercials. 

So how can Aereo and the Hopper continue to operate? According to David Carr's article, the rise of the betamax and VCRs resulted in " a landmark Supreme Court case in 1984 (that) held that taping and time-shifting on the part of viewers was “'legitimate fair use.'”  In addition, Cablevision's plan to offer a cloud DVR platform, rather than a box in the home, to record programming was also affirmed by the courts.  The result, the VCR started a disruptive trend that leads us to today.

The VCR was indeed a game changer.  No longer did viewers have to wait for a re-airing of a show they missed.  VCRs put consumers in control of watching shows when they wanted, as long as you knew how to set the clock in advance; otherwise, you had to be present to press record before leaving your TV set.  Still, it enabled viewers to go out, not worrying that they would miss their favorite TV shows or movies.  And even better, consumers could fast forward through commercials to watch only the show.  It is because of the VCR that the DVR became so successful. 

Still, Carr's article does not argue the other element of the Aereo business model, the over the air capture and re-delivery of its signals into home for a fee.  That piece is certainly a different issue from the ability to record in the cloud.  The argument for Aereo is that the broadcasters use of the airwaves to provide a free signal over the air enables them to capture and resend.  It is their added value that they charge a fee.  So far, the courts have sided with Aereo.

Given the current fight between Time Warner Cable and CBS over license fees, a court ruling defending Aereo's use of signals could be a game changer, enabling cable operators to follow the Aereo model, to build there own antenna farms, an idea that I have written about before and Mr. Carr approves.  "You could easily envision a cable company buying the idea and technology behind Aereo as a way to work around big retransmission fees."  Of course, broadcasters could change their model too as the Fox Network has speculated and become a cable network as well. Or that might just be an idle threat. 

Is Redbox Not Growing Fast Enough

While the world of streaming media is moving faster than light, shareholders of Redbox are worried that they are not capturing any of the momentum.  Their mainstay product, DVD rentals from vending machines is still ongoing but its Redbox Instant business has not found its footing.  Analysts fear that the rollout of Redbox Instant, a joint venture with Verizon, is not being pushed out quick enough.  Certainly there has been little marketing to indicate that they are ready to compete head on with Netflix and Amazon. 

Expectations are high that the DVD business has room to grow.  "In Q3, studios will release DVDs for eight films that generated at least $100M at domestic box offices, up from three in the period last year, when studios didn’t want to compete with the London Olympics."  They also cite more closings of Blockbuster stores.  But the future for rentals lies in streaming content and Redbox Instant has yet to deliver its own exclusive video content to gain traction against its biggest rivals.  Netflix not only has original content but has also nabbed a number of Emmy nominations.  When awards are announced in September, Netflix will continue to get great media exposure for its service and exclusive content.  I'm sure Amazon is already pressing to build some possible nominees for next years awards.  Redbox Instant must deliver its own original content to remain a competitive threat. 

Streaming video networks are still a nascent industry; consumers are quick to sour on a platform as Netflix showed when it misplayed its DVD business.  But they were also able to bounce back.  For Redbox Instant and others hoping to compete in this space, the challenge is in building a great platform with compelling original and syndicated content that consumers are willing to shell out a monthly subscription to remain a member.  I see tremendous opportunities ahead for Redbox and others to compete in this space and to ultimately take more subscribers away from cable.  My one advice, history repeats itself; follow what cable did to take broadcast share and do the same to take share from cable. 

More Sports Networks, More Fees, More Problems

While Time Warner Cable is balking at the fee increase proposed by CBS, the real worry may be the rise of new sports networks and the associated fees that eventually get passed on to the consumer.  In today's Wall Street Journal, they describe the race to license sporting events and compete head to head with the leader ESPN.  Now we have Fox Sports 1, NBC Sports Network (formerly Versus), and the CBS Sports Network, along we each sports' own network including MLB and NFL. 

For original programming, Fox Sports is developing series that compete head to head with ESPN's Sportscenter.  "The 38-year-old (Jay) Mr. Onrait said his show, "Fox Sports Live" is striving for a more lighthearted approach than SportsCenter, while still tackling hard news."  NBC Sports, on the other hand, is busy licensing live events.  "NBC recently acquired the rights to English Premier League soccer in a three-year $250 million deal, and this week it announced its cable and broadcast networks will televise Nascar races alongside Fox beginning in 2015, taking over those rights from ESPN."  With Fox, NBC, and CBS competing for content, the increased demand will only lead to higher pricing to outbid the competition.  And those higher fees will be paid for through higher subscription fees.

According to the WSJ, ESPN license fees are more than $5 per subscriber per month.  The next highest is NBC at $0.33.  Once NBC, Fox, and CBS bring more programming and viewers to their channels, their license rate will no doubt get pushed higher too.  They can only salivate at the possibility of achieving a $5 per sub fee from cable operators.  Of course, those fees are direct costs to the cable operators.  They no doubt make sure to add their own reseller income margin to the consumer.  So yes, without sports in a cable line-up, fees to consumers can drop significantly. 

Now I am a big sports fan and would hate to see sport networks dropped from cable.  But the high costs of sports extend far beyond TV to the tickets to the game.  Why are seats in ballparks empty; families can't afford to go as often if at all.  Kids have found alternative interests including online gaming.  And it is the loss of the next generation of sports fans that will ultimately kick sports to the curb.  Maybe not now, but it may just be a generation away.

Hulu Not Selling To Time Warner Cable

Time Warner Cable (TWC) is certainly busy these days.  First, they are locked in a license fee battle with CBS for renewal with the current agreement set to expire August 1.  Already, the two are locked in a rancorous negotiation that has spilled over to the public.  And second, they couldn't come up with the price that Hulu wanted to gain a piece of the streaming action. 

To the Hulu purchase, I frankly wonder what the strategic plan would have been should they have acquired an ownership stake in the company.  "The Walt Disney Co., 21^st Century Fox and Comcast each own a one-third interest in Hulu."  That means being partners with folks that you also have license fee relationships with.  Would being teamed up with Hulu help future retransmission renewals with ABC and Fox?  As Comcast is a silent partner because they are both a cable operator and programmer, who could guess how negotiations would affect them.  Does Time Warner Cable need Hulu to support its TV Everywhere initiative or is owning them only seen as an investment for future revenue?  To the former, a TV Everywhere play does not seem to be the direction that Hulu wants to take.  More options are available as either a complementary service to cable or as a low cost content distributor for cable cordcutters.

Now that Hulu is off the trading block and TWC is out of the picture, Hulu can once again concentrate on competing in the streaming space against Netflix, Amazon, Redbox, and others.  Step one will be to pursue the subscriber business for Hulu Plus and step two, increasing its content library, with a bigger push toward original and exclusive programming.    And step three, if I can be so bold, the introduction of linear streaming programming; perhaps a subscription based 24/7 news channel.  Maybe Ted Turner might like to advise them on how to start a channel like he did in the early days of cable with CNN. 

Dish Might Finally Get To Buy More Wireless

Dish Network has been wanting a bigger stake in wireless and has failed in its last two attempts.  No Sprint and no Clearwire acquisition to show for all its effort.  But they might not strike out and could find themselves picking up LightSquared.  "According to documents filed with the U.S. Bankruptcy Court for the Southern District of New York, a group of LightSquared’s lenders have called for an immediate auction of the company, naming Dish as the 'stalking horse' bidder for the spectrum."  Whether Dish ultimately wins the final bid remains to be seen. 

At the same time, I expect that Dish will still be pursuing another cellular player with T-Mobile seen as the next target.  Such an acquisition would reshape Dish into a player with the resources to compete against other telcos and cable providers.  Of course, there are some that hope that Dish and DirecTv combine to take on the cable players.

Netflix Growing, Just Not Fast Enough For Investors

While Netflix continues to grow, it missed analyst expectation on subscriber growth.  "The company finished the quarter with 28.6 million paid domestic customers, a shade behind Time Warner Inc.'s HBO, which had 28.8 million as of March 31, according to SNL Kagan."  Still, Netflix is growing revenue Having "reported profit of $29 million, or 49 cents a share, a nearly five-fold increase from the same period a year ago."  The stock market is not what you have done but what you can do and investors are worried that subscriber growth will slow and profits will decline as Netflix finances more original content for its pipeline.  Yet Netflix should shortly pass HBO in total subscribers.

Like HBO, Netflix relies on subscription revenue to grow.  Both must handle churn and marketing support to retain current customers.  But Netflix might be able to add an advertising revenue stream if done in a non-intrusive way.  While I am not suggesting pre-rolls on streaming content to subscribers, perhaps the Netflix website could expand to showcase native and display advertising as well as previews with pre-roll.  Extra featurettes to shows and other added content could potentially come with sponsorship advertising.  And certainly future licensing of original series to other platforms could return some of the investment from the production.  These may be outlier advertising efforts but it augments the revenue growth without interfering with subscriber enjoyment of their content views. 

Time Warner Cable Pushes Aereo

With a retransmission fight looming and the threat of CBS being dropped from certain Time Warner Cable systems on August 1, TWC is offering a solution, augment your cable carriage with the Aereo service.  "While Time Warner Cable does not seem ready or willing to deploy Aereo-like technology, a spokeswoman, Maureen Huff, said Sunday that it would recommend Aereo to its New York subscribers if CBS was blacked out." 

It may be a veiled threat, though it has repercussions.  But be careful what you ask for TWC.  If consumers get so tired of these same negotiations year in and year out with networks, they might just drop cable service all together for Aereo.  Plus with the rise of original series on Netflix and Amazon, consumers may be finding that they can do without their cable subscription. 

Aereo continues to expand with plans to launch in Utah in August even before their Chicago launch in September.   Before we know it, Aereo will be across the country and neither CBS or Time Warner Cable will be happy with the way this disruptive technology is taking over.