Cable Mergers Derailed?

Will Comcast be allowed to acquire Time Warner Cable?  Will AT&T pick up DirecTv?  And does Charter get to buy Bright House Networks?  While the process seems to have been going on for an interminably lengthy amount of time, recent news has emerged that the DOJ might not be in favor of consolidation.  Comcast is scheduled to meet tomorrow with the Department of Justice to demonstrate why the merger should proceed.And should it not, it seems the above deals would fall apart as well.

The biggest concern seems not about carrying cable channels but having a powerful grip on the wired broadband marketplace in the US.  While competition has already been limited for broadband access, and Comcast and Time Warner Cable never competing with each other in any market, their combined entity would hold a powerful monopoly across the country.  And while DSL is a competitive option, the potential of cellular and wireless competitors could one day become a stronger force.

A bigger stumbling block may be the Comcast ownership of content including NBCUniversal and its broadcast and cable networks.  Already we have heard that issues with NBC carriage on OTT services like Sling TV and Apple TV.  In LA, Time Warner Cable airs Dodger games on its own cable line-up but has been unable to come to fair terms with the other cable providers in the market to air its sports network.  Would the DOJ or FCC require Comcast to relinquish majority control of their content networks as a compromise to their acquisition efforts?

With meetings this week, we will wait and see what happens next.  I suspect that ultimately approvals will occur. 

ESPN Objects To FIOS New Packaging Options

According to reports, Verizon's new packaging plan for their FIOS cable business violates the ESPN contract.  These contracts between cable network and cable operator are filled with a number of business and legal obligations including, how the network(s) are transmitted, packaged, ad inserted, data collected, on demand accessibility, confidentiality, and so much more.  In the case of ESPN, it is quite likely that the contract would stipulate that ESPN be carried on the most widely subscribed level of service and that the penetration of that level exceed 85-90% of all cable subscribers.  The FIOS plan specifically excludes ESPN in its planned new basic package and offers it separately in a sports tier.  For ESPN, that means the contract would not be in compliance.

Of course, it is not known the full extent of the contract, when it expires, and if FIOS expected to pay a penalty should early results of the new packaging program become too successful.  It will be interesting to see how FIOS responds and whether it continues to move ahead with its new packaging plans.  They certainly received positive reviews for upending the status quo model and responding to the competitive threats of OTT offerings like Sling TV and Playstation Vue.  But ESPN and parent company Disney may pose a big enough hurdle to force a delay.  With control of other nets like ABC, ABC Family, Disney, and more, it may turn into a very big and stretched out battle.

FIOS Favors Smaller Custom Packages

Following the trend of OTT rivals like Sling TV and Playstation Vue, Verizon's FIOS team is offering subscribers smaller, cheaper cable net packages to buy.  It is a clear attempt to win back cord cutters who have felt that their cable service has gotten too expensive.  And it seems the best way to deliver a cheaper package is to not include sports networks in their base line-up.

According to Multichannel, " Customers who sign up for Custom TV will get a “Base” (and ESPN-free) package with more than 35 channels – including the broadcast channels, CNN, HGTV, AMC, Food Network – plus two of seven available thematic 'Channel Packs' that each offer ten or more additional channels."  While not a true a la carte approach, it seems to be the next best thing.  And unlike some other OTT services, it does include broadcast networks.

The challenge for Verizon FIOS might be that today's millenial audience doesn't care for linear programming anymore and have already been weened off of traditional cable viewing.  Current FIOS customers might see this as an opportunity to cord shave or to cut back their service to a lower priced level.  This could be a big hit to the revenue line in the budget.  And costs of networks could rise, especially with sports nets that contractually may demand to reach 90% or more of the available basic subscriber base.  Failing to reach that penetration level could lead to license fee per sub increases.

Still, given today's digital climate, moving to a more flexible packaging scenario may be the only way to compete on a new playing field.  Further differentiation is necessary for FIOS and its cable brothers to maintain, or even grow, its subscriber numbers.  

Netflix Growth, Now And Future

Netflix is currently on a roll, growing faster than estimated, and delivering a streaming video experience worldwide.  With a library of older TV content, a rotation of popular movies, and a commitment to original series, Netflix has created a strong value proposition, given a subscription fee of less than ten dollars a month.  Whether traditional TV sees Netflix as direct competition or a complement to their own line-up remains to be seen; still, new consumers are continuing to subscribe. 

As of the close of the second quarter, their total international base is almost 60 million subscribers with the U.S. alone counting for two thirds of that total. If cable households in the US are over 100 million, than Netflix still has a huge opportunity base to continue to grow.    The launch of HBO Now may be seen as a competitor, as is Amazon and Hulu Plus, but it is likely that consumers who desire the shows and movies from each of these choices don't view subscription as a zero sum game.  That is to say, these services can all grow together. 

The possible challenge to subscription only services is that at some point growth levels out and could possible shrink a bit.  At today's U.S. sub base of 40 plus million, raising rates just a dime adds $4 million dollars more in revenue every month and a dollar a month increase means $40 million more each month, or $480 million plus a year.  But rates can rise only so much so quickly before subscribers balked.  Cable TV is learning that painful lesson.  So how else does Netflix try to grow revenue?

With original programming, the possibility of syndicating series like House of Cards or Orange Is The New Black back to cable is a possibility although the value may be low given the ubiquitous nature of streaming.  Netflix certainly has gained lots of data on its users that could be sold as well.  Perhaps Netflix might consider adding a small amount of advertising into its welcome screen.  Banner ads while searching for content to watch could make sense without being too much of an intrusion to the subscription value.  And if it keeps subscriber fees down, even better.  Yes, their current one revenue stream model is working quite well, but I suspect that there must be some discussion on how to derive additional revenue opportunities for its existing base. 

Digital Music Streaming Past Physical Sales

Last year, global digital streams and music downloads caught up to physical CD and vinyl sales.  Clutter be gone, consumers are preferring to listen to their music without having to open up a jewel case or LP cover.  Call it simplicity, convenience or simple ease of use, digital is poised to overtake physical sales this year. 

And in the digital realm, subscription services are more desirable than downloadable sales.  According to today's NY Times, "Subscription services like Spotify and Deezer accounted for $1.6 billion in trade revenue in 2014, up 39 percent from the year before, and have 41 million paying users around the world, up from 28 million in 2013. At the same time, downloads — not long ago the most important growth format in the business — were down 8 percent."  That could be spell a big opportunity for Apple's Beats subscription service and Jay Z's Tidal music service. 

Consider us moving into a rent vs buy situation where consumers like to have rental access to a full library of music choices for a monthly subscription fee rather than complete ownership of content.  Last year, notable exceptions included the Frozen album as well as Taylor Swift's 1989 album where consumers chose to buy.  Could any album this year deliver similar results or will we watch more consumers choose to subscribe to a music service or two?  Given the trends in music delivery, subscription seems the likely winner.

Embracing Branded Content

Getting your brand, product, or service noticed is an elusive business.  And in today's digital world, with so many advertising choices and the credibility from social media, breaking through the clutter becomes harder and harder to do.  Programmatic advertising has come along to aid in the efficiency of purchasing advertising and data is the most important component in driving where, when, how and who in ad placement.  But the challenge remains in breaking through the clutter.

General Electric, a former owner of NBC and its collection of broadcast and cable networks, certainly saw that challenge firsthand.  And as an advertiser, GE has chosen the branded entertainment route to drive home its message.  According to today's New York Times, "G.E. aims to create high-quality branded content that will highlight scientific innovation, some of it involving scientists who work for or with the company."  This six part documentary series will be aired on the Nat Geo channel later this Fall.  The plan it seems is not to overwhelm its audience with the GE brand but make it a cohesive part of the program.  "Marketing experts say this turn to branded entertainment is happening because the traditional methods of advertising are outdated and every piece of content, advertising or not, must compete for viewers’ attention."

That this article has already appeared on social media through Facebook and Twitter and that the NY Times chose to report this program as a bigger story certainly helps drive home the GE message. And the timing, just when GE is selling off its capital finance business from its core industrial business, may not be so coincidental.  Certainly we will have to wait and see if this story is revisited prior to the premiere of the broadcast.  Still, it speaks to a growing trend toward branded entertainment as a means to drive brand engagement and value. 

Apple Watch Preorders Surge

It may take weeks, perhaps months to put one on your wrist, yet despite the backlog, Apple has sold 1 million Apple Watches on just its first day.  A huge number consider that " just 720,000 Android Wear devices were sold throughout all of 2014"  according to Business Insider.   Whether the Apple Watch is considered a product winner will take years to finally determine.  In the meantime, it simply represents a small slice of the Apple marketplace which is fundamentally determined more by the number of iPhones sold then anything else they offer.  Heck, even their iTunes music and app store is a side business compared to the iPhone. 

The fact that a million customers were willing to pay $350 or more for a first generation device indicates how strong the Apple base is.  Certainly the number of sales will drop in the coming weeks, perhaps spiking a bit when inventory is available at their stores.  Still, their enthusiasm and love of Apple will encourage more apps to be created for the Apple Watch and more uses uncovered.  And as next generations of Apple Watches are released, more growth will be delivered.  Give it a couple years and you will probably find yourselves buying a new iPhone and Apple Watch at the same time.  And maybe then they will rename it the iWatch. 

Apple Watch Adoption

An important component to the successful adoption of the Apple Watch will be Apple's retail stores.  Just enter the please touch me world of an Apple store and immediately their devices are at your fingertips.  Play with an iPhone 6 Plus, try out the Apple TV, surf the web on a Macbook Pro.  And have a question, an Apple employee is easily spotted in their branded T shirt, happy to help.  Never is anyone told to not touch any of the Apple devices.  In fact, Apple makes it easy to become a fan. 

It is that approach to retail that should surely aid the introduction and adoption of the Apple Watch.  As long as the customer is allowed to play with it, touch it, figure it out, then they will build a connection and ultimately purchase.  The Apple Watch has a long life cycle ahead of it; the first generation watch will come with a lot of learning, some failure, but ultimately future success.  And while reviews were mixed on what was loved and hated on the watch, most expect future generations of the Apple Watch to succeed. 

I too may not be an early adopter of the first gen watch, but I like what I see so far.  The potential is enormous and the future bright.  Like other devices from Apple, price points will eventually come down, noticeable improvements of screen, battery, and memory will occur, and consumers will continue to demand more.  The best way to gauge the success of the Apple Watch might just be to watch consumers pour into their nearest Apple store to play with the device again and again.  For what Apple has learned through retail, the more they interact, the more likely they are to buy. 

Apple Watch Reviews Are Coming In

Not yet available for sale, the Apple Watch is being reviewed and as you would expect they include the good and the bad.  But like any first generation product, the key to longevity will depend on the value the consumer perceives from it.  Apple has a lot of experience with product launches.  Just look at the first generation of the iPod, iPhone, and iPad and see how the current generation compares.  Massive improvement and huge appeal.  So if history is any guide, the Apple Watch will follow the same curve.

But for those looking for some early reviews, I've attached some links:

CNET - "The Apple Watch is the most ambitious, well-constructed smartwatch ever seen, but first-gen shortfalls make it feel more like a fashionable toy than a necessary tool."

CNBC - "positive with caveats"

The Verge - "Apple has the marketing prowess, the retail store network, and the sheer determination to actually make this thing happen."

re/code - " If you’re an iPhone power user and you’re intrigued by the promises of wearable technology, you’ll like it, too."

Business Insider - "The watch is a really nice device that has lots of potential, but most people should skip it for now. It's good for early-adopting techies who live and breathe through their phones, but the rest of the world should wait for the next version of the watch."

NY Times - "It took three days — three long, often confusing and frustrating days — for me to fall for the Apple Watch. But once I fell, I fell hard."

Bloomberg - "The Apple Watch is cool, it’s beautiful, it’s powerful, and it’s easy to use. But it’s not essential. Not yet."

I'm sure early adopters will buy the Apple Watch just like they did the first gen iPod and iPhone, and iPad.  As battery life improves and more apps are written, I am confident the Apple Watch will become another integral part of the Apple ecosystem.  And for those homes that like the Apple Universe, the Apple Watch will be the next big must have device.