HBO Go Without Cable, Maybe

HBO has announced that it plans to offer a streaming service without a cable subscription sometime in 2015.

As way of background, to date, HBO's streaming platform, HBO GO, has only been available as "added value" to an HBO-on-cable-television subscription. (Cable, for these purposes, includes DirecTV, Dish, Verizon FiOS and AT&T U-Verse -- anything the FCC would call an MVPD).

For those who doubted that such a move was inevitable, you were wrong. For those who think this changes everything, I suspect you are also wrong.

Here's why: I strongly suspect HBO will be marketing the streaming service, let's call it HBO GO for these purposes (although it may be a "new" service with a different name and content) in conjunction with its distribution partners -- in this case, the ISPs who provide the nation's high speed home Internet access. And those companies just happen to all be distributors of HBO, the cable channel, on their multichannel television platforms.

After all, many "cable" operators have more broadband customers than video customers.

From the named providers on Leichtman Research's 2Q14 list of top broadband ISPs, exactly two of them, Windstream and Fairpoint, do not offer (yet) their own facilities-based multichannel television service (and both of them do on a non-facilities-basis via partnerships with Dish and DirecTV. respectively).

Much like the HBO with a cheaper smaller cable TV service offered last year (see GigaOm's article from December 2013), the customer will still have a relationship with a distributor. For the distributor, HBO GO represents an "upsell opportunity", something they don't currently have with Netflix, which sells its service direct to consumers.

To actually go direct to consumers would risk HBO's relationship with the multichannel television providers, who, it has often pointed out to the financial community, allow it to be much, much more profitable than Netflix. No need to kill that egg-laying goose.

HBO is here depicted as a woman wearing a purple suit. The MVPDs are represented by the fowl.

Perhaps HBO will offer HBO GO via ISPs that are not also multichannel television distributors, but, if HBO does not, they aren't giving up very much of the potential market. And HBO can always change its mind about that later.

The big losers in this are the multichannel video providers that are not ISPs: DirecTV and Dish Network.

Update (17 October 2014): More support for my view: It looks like the streaming-only HBO service may cost $15 per month, about the same as it costs as an add-on to basic cable.

Update (23 October 2014) via the Wall Street Journal: “Why is giving our distributors the opportunity to sell them an HBO subscription anything less than a win-win?” [HBO CEO] Mr. Plepler wrote in an email. “To us, that’s not cannibalization, that’s growth.” (full article --
subscription required)

Update (3 November 2014) via Multichannel News: About the new HBO streaming service, Richard Plepler said it "would at first be marketed to the 10 million broadband-only customers of its cable and telco-TV affiliates; operators would handle all billing, customer service and customer control; and the service would be sold in partnership with distributors." full article

Update (6 November 2014) via Deadline: Richard Plepler, HBO's CEO "aims first to go after 70M pay TV homes that do not get HBO. In broadband 'we think there’s 4 to 5 million that we can also get with our partners. I’ve talked to all of our distributors. We want to lean in with a new effort in the new year.… I see nothing but upside for us, for the consumer, and for the distributor.'” full post

Others on the news:
David Carr in the New York Times
Will Richmond on VideoNuze
Howard Homonoff on Forbes
Sahil Patel on VideoInk
Mike Farrell on Multichannel News
Peter Kafka on Re/code
Jon Russell on GigaOm
David Lieberman on Deadline
Joel Espelien for The Diffusion Group

An OTT Watershed Moment

We could soon be looking at the watershed moment for over-the-top video: According to a Multichannel News posting, that the FCC is considering making "being a multichannel video program distributor" (MVPD) an option for online video providers (the conclusion is implied from the actual FCC .pdf release). To date, online video providers have not been able to be considered MVPDs because they do not own the facilities that transmit channels of programming to end users.

Sony's OTT video offering will be delivered to its PlayStation game consoles

In one fell swoop, this could clear up three big issues for potential OTT providers who are direct MVPD competitors, offering a package of linear "cable TV" networks.

#1 Access to top name-brand broadcast and cable network programming

Much like cable and DBS, any MVPD would have the right to negotiate with broadcast TV stations over retransmission consent and the stations would have the right to demand must-carry. For example, Aereo, which the Supreme Court declared was not legal because it distributed programming like an MVPD, but was denied the right to be an MVPD when it used the Supreme Court's argument at the US Copyright Office, would no longer be in a legal no-man's-land. Clarity on this point is overdue, as David Oxenford in BroadcastLawBlog notes, the Sky Angel case has been before the FCC for a long time, long enough, it turns out, for Sky Angel to go bust in its over-the-top incarnation.

#2 A way around online streaming restrictions in MVPD affiliation agreements

Restricting the distribution of cable programming on some "other" technology was a backdoor way to get some exclusivity, now the other MVPDs will have to negotiate exclusivity versus other MVPD competitors through the front door and many programmers have, not unreasonably, been historically reluctant to do exclusive deals that reduce MVPD competition.

#3 A way around rights issues for cable TV programming and advertising (e.g., SAG members get paid differently for commercials produced for the Internet than for those produced for TV)

Right now, only companies that explicitly clear "Internet rights" are allowed to put the programs on their TV channels on the Internet. Once an online video distributor is an MVPD, the linear stream of programs, as presented on a cable program service like Lifetime, can go to any MVPD.

[If the programmer owns the program and all its rights, like Major League Baseball, one can find MLB Extra Innings on cable TV or DBS (with internet streaming as added-value for "authenticated" subscribers), or as a stand-alone OTT offering at mlb.tv (although the TV commercials are usually not included in the Internet stream as the advertisers do not want to pay the performers for both the TV and Internet exhibition).]

Unfortunately for the soon-to-be-nascent-direct-MVPD-competitor, the over-the-top business still has two big remaining issues:

#1 Bandwidth caps

It might be politically poisonous for a cable MSO facing a direct competitor delivering "cable TV service" over-the-top to announce bandwidth caps that would make it uneconomic for any of their customers to use such a service. That said, the cable industry, like many other industries, has historically looked to protect its business against competition. Certainly that's what Netflix thought Comcast was doing when the streaming performance of Netflix customers using Comcast as their ISP declined in late 2013. Bandwidth caps would be great protection for MSOs against online video competition.

#2 The reality of the marketplace

This combines several issues: Is the consumer offering attractive enough? Are the programmers willing to negotiate with these new MVPDs? Are there terms that the programmers will find attractive enough that create a business opportunity for the new MVPDs? On the first one, Sony's rumored $80 per month offering is considerably more expensive than many had hoped.

Cable TV programmers have been supportive of new, clearly legal entrants to the program distribution business. More competition among distributors is always good news for the program suppliers who now have a new set of customers. Viacom certainly thinks so. Going over-the-top and preserving the existing pay-TV packaging (and business model) appears to be more attractive than going over-the-top on one's own like World Wrestling Entertainment's $9.99 monthly offering.

Rather than going-head-on against the pay-TV incumbents, it would seem that a more prudent course for new MVPDs would be to find a segment of the marketplace that is un- or poorly-served by the incumbents, but which also has high broadband Internet penetration. That may be a difficult combination to find.

My earlier post: The Virtual MSO Opportunity (19 July 2013)
Update (14 October 2014): Aereo asks the FCC to classify it as an MVPD (via Deadline), Brian Fung in the Washington Post thinks Aereo is making this request only in the short-term
Update (29 October 2014): FCC Chairman Tom Wheeler makes his views explicit in an FCC blog post "Tech Transitions, Video, and the Future". In short, he supports OTT video providers getting the rights that MVPDs have, believing that it will foster competition.