Content Tells Distribution To Lower Your Margin

In what might be referred to as "the pot calling the kettle black", Content company Disney/ABC CEO Bob Iger told a Goldman Sachs Communacopia conference in NY that cable and telco distribution companies need to start lowering their profit margins.  Likely this means lowering the price they charge to consumers although smaller margins can come from a host of other increased expenditures, including the high costs for content.  Certainly distribution companies might just consider lowering their prices should content companies like the one Iger represents also lowered the cost for access to networks like ESPN, Disney, ABC and other networks that they sell. 

I don't begrudge content companies and content distributors from making a reasonable profit, but the profits have run amok.  For Iger to tell his distributors that they are pricing too high and should seek other revenue streams to make up the slack will certainly not be well received.  Those same content distributors can simply ask Iger to take the first cost cut himself and seek other revenues streams as well.  And while it is certainly not a zero sum game, the growth in new revenue that Iger suggests is partly coming at the expense and declines in other businesses.

Iger can argue that distributors should seek lower margins in their video business.  But Iger should also look to ask for some lower margins in his world, too.   Both sides share the blame in the costs for cable TV while both have also been slow in enabling TV Everywhere to truly be ubiquitous.  I hardly doubt that either side will lower their margins when the pressure on both sides of the business is to grow the profits and increase the bottom line.  Before asking his distributors to lower their profit margins, Iger should practice what he preaches and do the same.  It is indeed "the pot calling the kettle black".

Can A New Owner Help Blackberry?

Before Blackberry was Blackberry, it was called Research In Motion (RIM) with the hottest cellular phone on the market.  It was the smartest phone of the day and loyalty, especially by business men and women, was through the roof.  But then Apple's iPhone came along and, despite a name change to its core product, Blackberry never recovered.  Not even with its attempt to compete with its own tablet. Where Blackberry hoped to retain, Apple was poised to innovate and soon loyalty, ever a fleeting thing, eroded.  And so, Blackberry market share went from first to worst and today, the company is poised to be sold.

So what is Fairfax Financial Holdings buying?  "Anaylsts (sic) say that although BlackBerry's hardware business is not worth anything, its service business and patents are still valuable."  While the company is said to have no debt, smartphone innovation continues to move at such a rapid pace, I wonder just how much real value those patents have.  While Blackberry is still trying to make its phone more appealing, the real value may be in the app library and paired devices that make the phone that much more valuable.  Can they really catch up?  With Samsung, Google, Microsoft, and others competing with Apple and its iPhone and iPad products, Blackberry might best be served partnering with someone else.  Google has Motorola and Microsoft has partnered with Nokia; it might just be necessary for the new owners of Blackberry to find their partner.  Otherwise, I suspect that in a few years, the Blackberry brand will be ancient history. 

Apple iPhones Selling Well

Despite initial disappointment that Apple's announcement earlier this month lacked any new information on new products like an iWatch or television, the news was all about the next generation of iPhones.  The stock market wasn't happy with the news and the share price tumbled.  But it seems that consumers still want the latest and greatest and it is expected that Apple will do quite well with this new iPhone release.  "Today's lines for Apple's new iPhones are likely the longest they've ever been and the company will sell up to 6 million units, according to Piper Jaffray analyst Gene Munster."

And who knows, maybe Apple will surprise us next month with more news.

The Money's In Video Games

Of the must haves this year, my son's desire to get Grand Theft Auto V the day it was released ranked pretty high.  He was not alone.  In just its first day, sales of the videogame brought in over 800 million dollars. "At about $60 a pop, that translates to more than 13 million units. It is the highest first-day retail sales in the company's history and the GTA series, which had sold 125 million units before this release. "  Few theatrical films bring in that kind of money and certainly with more marketing dollars thrown at it then any game would need to do.  Gamers know when the next release of games occur.  Social media and visits to Game Stop are sure to remind them when to pre-order their next game. 

True, not every game released makes this kind of return; but, given the intricacies of the game playing, I am surprised that a companion video series hasn't being released at the same time. Certainly there is wide spread appeal for this franchise, numbers that at movie or TV studio would be dying to match.  Congrats.

Our Next Generation Being Raised As Cord Nevers

My daughter has been asking us recently for a Netflix subscription.  Despite having full access to cable, linear, premium channels, and on-demand programming, as well as full use of the DVR, she wants to watch shows on her iPad.  And the shows she wants are shows her friends are watching on Netflix.  She also just downloaded an Amazon rental movie to watch.  My son, on the other hand, prefers watching tons of You Tube videos as well as shows like The Awesomes on Hulu. For them, and countless of other teens, video is streaming and watched on personal devices.  They may be watching still some shows on cable television, but they are increasingly moving away from it.  And when they finally leave the home and start their own households, it will be the broadband connection that matters most to them.

While my kids are not there yet, others are, and cable television is feeling the results of cord cutting.  "The shift in viewing habits is putting pressure on cable, satellite and phone companies by pinching subscriber numbers, which may have a knock-on effect on revenue growth. The impact on the $80 billion pay-TV industry is already being felt, with 2013 on pace to be the first year ever that total U.S. pay-TV subscriptions will decline, falling to 100.8 million from 100.9 million last year, according to researcher IHS."  Younger generations especially will not have the disposable income to buy both cable and broadband access.  They will be forced financially to choose and their preference is a cellular or broadband connection over a fiber line. 

Certainly content companies are recognizing this trend as well.  Although careful not to hurt their current cable revenue stream, they are building windows for streaming access.  And some are going directly to these streaming OTT competitors for exclusive first run airings.  For Netflix, that resulted in their exclusive series, House of Cards, getting multiple Emmy nominations, the first time ever a streaming show was nominated.  As once cable took more Emmy awards from broadcast, so too could streaming shows one day take more Emmy awards from cable.  And as better content goes to streaming so too will more audiences follow.  No longer will the next generation need a cable subscription; they are indeed being raised as future cord nevers. 

Redbox Not Meeting Expectations

Redbox has not been doing well.  The stock is dropping and earnings are down.  The CEO J. Scott Di Valerio "vows to cut the number of consumer promotions, reduce content and operating costs, and repurchase an additional $100M of (Parent Company) Outerwall shares in Q4."  But maybe the problem lies elsewhere. 

While Redbox is better known for its DVD rental business, it has a partnership with Verizon to build out its streaming business model, Redbox Instant.  The challenge is in such a fast paced industry, Netflix, Hulu, and Amazon have all been more aggressive in the streaming video business space, both with cutting distribution deals with strong content partners and more importantly, building a library of exclusive content.  That strategy, most notably seen with Netflix and their show, House of Cards, has earned them Emmy nominations.  It also has led to a huge demand to watch these shows, leading to a rise in subscription revenue.  Redbox Instant has yet to aggressively enter this space.

Certainly Netflix showed that it is possible to stumble through a transition from DVD to streaming media, but that it can also be achieved.  Redbox certainly has the ability to pull off a similar feat, keeping the DVD business afloat while building a valuable streaming subscription business.  Redbox's challenge is that their DVD rentals don't require a subscription to rent, just a credit card for single use viewing.  Getting those customers to convert to streaming will require a creative and innovative marketing effort.  I believe that it can be done.  Competition will only get more fierce and Redbox needs to make a real splash to attract attention.  I suggest an investment in a major content deal and the launch of a signature Redbox exclusive series.  Sure, Netflix, Amazon, and Hulu are all doing that too but the barriers of entry are low enough for Redbox to breakthrough if they are willing to commit. 

Does Netflix Hurt Or Help TV Ratings?

When networks first considered putting their TV shows on cable's on-demand platform, the biggest worry was that it would result in a loss of rating points when the show aired on its linear channel.  But the tactic seemed to gain value as consumers discovered shows and used both on-demand and linear to watch their favorite shows.  In fact, some argued that on-demand helped consumers to rediscover shows or catch up on old plots in order to get current with the new season.

The use of Netflix seems to echo those same finding as on-demand.  New viewers have come to AMC to watch shows like Breaking Bad or Mad Men because they have been able to catch up on previous seasons on Netflix.   "AMC Networks, for example, saw ratings of “Breaking Bad” grow 50% in season four, with viewership for the fifth and final season airing now still climbing."  Cartoon Network, on the other hand, seems to have a different outcome.  They claim to have found a small drop in ratings that they attribute to their new deal with Netflix.  They do claim other factors.  "The drop in ratings is largely attributable to the loss of returning hits such as “Ninjago” in the first part of 2013, the network said."  Perhaps it demonstrates that the best use of Netflix for some content companies is in how it enables viewers to rediscover older seasons in order to encourage viewership in the current season. 

Dramas, especially those where each episode is dependent on the story line from previous episodes, has more to gain from on demand and Netflix.  The challenge for viewers that don't watch a show from day one is that they can't join the action halfway in.  On-demand and Netflix finally allow viewers to "catch up" in order to start watching the shows as they appear on linear channels.  That phenomenon has been called binge viewing.  While cartoons and comedies might not need this type of viewing behavior to enjoy the latest show, dramas seem to especially require it.  That means it is more important to know what happened last week on Homeland then what happened last season on The Big Bang Theory.  Netflix may indeed help some shows and hurt others in the ratings.  No one should have ever thought that it was a one size fit all strategy.

What if...Fuse And Maxim Team Up

Two separate news reports that makes one wonder if a connection should be made.  According to the New York Post, MSG may be interested in selling its Fuse music service.  And according to a separate Variety news story, Maxim magazine has been sold to a media company with the intention of starting a Maxim TV Network.  And while the Post thinks that a likely buyer of Fuse could be Mark Cuban's AXS- TV Network, formerly HDNet, I wonder if Maxim might be a more interesting fit.  With a subscriber base of around 65 million homes, Fuse would bring immediate subscribers to a start-up network like Maxim.  Of course there are a number of stand alone cable networks dying to get near 50 million homes who might be willing to pay up to dramatically improve their subscriber base. 

This of course is pure speculation that Fuse is even for sale.  The network has always been a personal passion for its CEO, James Dolan, and he may be hard pressed to want to give up control.  Selling networks has never been easy for the Dolans so we will have to watch and see how it unfolds.  But if they are indeed a seller, I see a Maxim offer as a likely next step. 

"Young People Can't Afford $100 Cable Bills"

According to Epix CEO Mark Greenberg, cord cutting is nothing new.  Whenever prices get out of whack and competition comes in with cheaper alternatives, consumers tend to choose to change.  He notes that when satellite TV came in to compete with fiber connected cable operators and he sees that today with streaming services.  Others call it cord cutting, Mark calls it competition, and he is right. 

Apple certainly faces the same issue with cheaper smartphones from competitors.  With their latest announcement that their less expensive 5C iPhone was indeed not as cheap as expected, their share price dropped considerably. 

Cable operators with rising license fees and the desire to maintain large profit margins are forced to keep raising the cost of basic cable, driving more and more consumers to seek alternatives.  And Netflix, Redbox Instant, Amazon, and others are there to offer their content at lower monthly costs.  But Mark has some ideas to compete more effectively with these OTT companies and perhaps even winback cord cutters.  "The answer could potentially lie in smaller and smarter bundles, combined with new user interfaces, integration of social networks and better content curation."  He also argues for smaller bundles of networks at lower price points as well as fully embracing the TV Everywhere concept and authenticating content viewing outside the TV box and home. 

For now, it is an acknowledgement that cord cutting is real and that its root cause is price gouging and increased competition.  It is a concept truly not unique to cable but learned across all industries, their products and services.  In cable's case, it just sounds cooler to call it cord cutting.