[opendtv] Re: Punching Above Its Weight, Upstart Netflix Pokes at HBO - NYTimes.com

  • From: Craig Birkmaier <craig@xxxxxxxxxxxxx>
  • To: "opendtv@xxxxxxxxxxxxx" <opendtv@xxxxxxxxxxxxx>
  • Date: Thu, 20 Feb 2014 09:26:38 -0500

> On Feb 19, 2014, at 9:04 PM, "Manfredi, Albert E" 
> <albert.e.manfredi@xxxxxxxxxx> wrote:
> "They," i.e. the MVPDs, MAY be one of many distributors of Internet TV, but 
> not within the confines of just their walled garden networks. If they want to 
> compete, that is. And there's no reason why plenty of other OTT sites can't 
> also get into the fray.

The MVPDs already ARE  the primary distributors of OTT TV services OUTSIDE 
their walled gardens. This is true for cable, which offers the best broadband 
pipes to the largest group of consumers, and Verizon and AT&T, where they are 
offering TV And high speed broadband over fiber. Where the telcos offer only 
DSL, they are losing the war with the cable companies. Google fiber and 
municipal ISP systems are a small factor.

The cable systems can only benefit from any shifts to OTT services, as they 
deliver the bits for all services, and you need a MVPD subscription to use many 
of the best OTT services.
> 
> The OTT sites need to negotiate terms primarily with the owners of content. 
> That's all. (Secondarily, as we discussed, they may also offer to support 
> servers within ISP networks, or deal with ISPs to get adequate bandwidth 
> guarantees.)

Yup. As I have pointed out before, the content congloms are more than happy to 
sell their content to everyone. But you miss the important point that they sell 
these programs much like produce at a grocery store. The freshest programs cost 
the most and access is limited. As the produce starts to "wilt" they sell it to 
more distributors at lower prices. 

There's a good reason Apple downloads 350,000 movies a day...fresh produce that 
you cannot get from The Netflix streaming service - you can get this stuff in 
the mail from Netflix, or run to the closest Redbox...

As you like to say, it all boils down to convenience.

> The owners of content have no reason to insist on JUST getting distribution 
> over legacy MVPD broadcast tiers or JUST over legacy MVPD infrastructure 
> anymore, why should they?

They don't. They have been selling content to a wide range of secondary 
middlemen for decades, constantly evolving with the available distribution 
technologies. The only real change is that they can now deliver their fresh 
produce through their own Internet portals, even as they sell the same programs 
to Apple, Amazon et al.

In essence, their broadcast affiliates get the first showing of a program, then 
it moves immediately to iTunes, and Hulu Plus. A few days later it moves to 
their portals, Hulu, and other free sites. 

> As long as broadband access is unblocked by ISPs, the owners of content 
> simply want to maximize their revenues. If the ISPs start playing favorites, 
> e.g. should TWC block Netflix from distribution over its broadband service, 
> I'm willing to bet the FCC would start clamping down big time.

This is already happening, and the FCC can do little about it. Verizon is 
currently slowing Netflix bits because of a "peering" dispute. They want 
Netflix to pay for the huge amount of bandwidth they are routing through their 
networks:

> This is a scenario that open Internet advocates have been warning about for 
> years. It’s no secret that the big telecom and cable companies resent the 
> fact that they are obliged to deliver high bandwidth content like Netflix — 
> which competes against their own video offerings — in addition to less 
> bandwidth-intensive traffic like emails and chats. In 2005, incoming AT&T CEO 
> Ed Whitacre famously remarked that upstarts like Google would like to “use my 
> pipes free, but I ain’t going to let them do that because we have spent this 
> capital and we have to have a return on it.”
Read more: Netflix Peering Dispute with Verizon is Slowing Service | TIME.com 
http://business.time.com/2014/02/19/netflix-verizon-peering/#ixzz2trtz9TUr

It remains to be seen how the FCC will deal with Net Neutrality, but the 
content and distribution oligopolies have the upper hand, as they are the 
dominant players in the ISP business.

> 
>> And you are wrong about who benefits from the bundles. It is
>> both the content congloms AND The MVPDs
> 
> Again repeating, not necessarily TODAY'S formulation of bundles.

So you agree that they both benefit from the current bundling arrangements.
> 
> For example, Viacom would most likely want bundles that include their own 
> content and not a lot of content from Disney or others. With many independent 
> OTT sites, Viacom can explore these other options.

So here is the dilemma you need to resolve:

Today, the five content congloms control 90% of the content inside the MVPD 
bundles this includes their broadcast networks, and popular channels with 
content that serves niche audiences. It Also includes a bunch of retread 
channels that run off network shows using the worn out appointment TV business 
model. They get subscriber fees for all of these channels, despite the fact 
that they do not attract large audiences.

If a conglom like Viacom decides to create a comparable bundle of their 
channels, will they make as much money as they do today when you add together 
the ad revenues and subscriber fee revenues for these channels? It's not just a 
case of setting an attractive price for the Viacom Internet bundle to equal 
current revenues. 

Most of the programs will move from appointment TV to VOD. There will be large 
costs for CDNs or for their own edge servers. There will be costs associated 
with peering arrangements. And there will be a fraction of the existing 
audience willing to pay for the Viacom bundle, compared to the huge MVPD 
audience where everyone pays for every channel. To equal current revenues, the 
price for the Viacom bundle may need to be much higher than what the market is 
willing to pay.

This does not preclude a service like HBO or Showtime from adding an Internet 
service. These premium channels are not part of the MVPD bundles, they are 
expensive add on services. But they are appointment TV channels when delivered 
by the MVPDs; consumers might pay a bit more for an Internet HBO service that 
provides current movies on demand. For now, HBO is content to let their MVPD 
subscribers use the HBOGo service on their second screens.

> On the other hand, MVPDs want to create bundles that attract their average 
> viewer, and then their niche audience, without worrying about keeping the 
> different content owners segregated in different bundles. Because separating 
> content owners in different bundles would be a royal pain for the MVPD, when 
> using their broadcast MPEG-2 TS (or analog) tiers.

Not a problem for the digital portion of MVPD systems, where channels can be 
authorized individually from the head end. But this is a big problem for their 
legacy analog tiers, which still deliver TV to millions of U.S. Homes.

By the way, both cable AND DBS systems offer many add on program tiers today. 
Here in a Gainesville I can choose from five premium movie services, about ten 
sports packages, three international/foreign language packages, and Pay Per 
View programming. Obviously the MVPDs are fully capable of breaking up the 
extended basic bundles if they wanted to.

> If OTT site X promises a bundling package that Viacom likes, emphasizing 
> their content, there's no reason to believe Viacom would object.

It should be obvious that everything has a price at which a deal can be struck. 
Netflix cut a deal with Disney that will deliver Disney movies soon after their 
DVD release; Netflix outbid Starz, to the tune of $300 million for these rights 
when the current Starz/Disney contract expires at the end of 2015. 

The content owners ALWAYS win in these bidding wars. But somebody has to pay 
for these deals...

The consumer. How the bits are delivered really does not matter; buying 
exclusivity is what drives prices up for the consumer.  Life sucks if you need 
to pay for five separate conglom bundles to get the five programs you like...

Regards
Craig

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