DirecTV Now Renames DirecTV's DBS Packages

Unnoticed in the hubbub over its debut yesterday, DirecTV Now, the new over-the-top video service from AT&T, shares its basic packaging scheme with DirecTV's core DBS service.

• "Live a Little" is based on Entertainment
• "Just Right" is based on Choice
• "Go Big" is based on Xtra
• "Gotta Have It!" is based on Ultimate (apparently only spending $70 per month warrants an exclamation point)

Original marketing piece for DirecTV Now did not include many channels

There are some exceptions as noted in white (Crime & Investigation and FX Movie Channel do not appear to be in any DirecTV DBS packages) or blueberry (in the case of FXX, which is in the DirecTV DBS package "Xtra", not "Entertainment" as one would have expected) or light blue (in the case of Justice Central which is in the DBS package "Choice"). Source for the channel lineup list was Todd Spangler's article in Variety. The prices at the top of this chart are the expected retail; as per the marketing piece above, there is a $35 introductory rate for "Go Big" for the first 3 months.

There are some channels in DirecTV's DBS packages that are not in the corresponding DirecTV Now package. Among the more conspicuous absences: Aspire, INSP, ION, Mav TV, Ovation, Reelz, and the shopping services like QVC and HSN. All are independent programmers.

[Many of the channels are public interest channels, which DirecTV is required to provide space for on DBS by law (there is no similar law for over-the-top). Examples of public interest channels are BYU TV, Free Speech TV, and NASA TV; they are all non-commercial services.]

One note on the apparent loss-leader nature of parts of the offer: Prepaying $105 (3 months of Go Big at the $35 introductory rate and getting a free $150 Apple TV) is a good deal even if you don't want DirecTV Now. $105 is even less than the $129 that Apple charges for a refurbished unit.

Another take: Peter Kafka at Recode sees this is as "a national competitor" to the "regional fiefdoms" of cable operators with "more to come".

Another take: Todd Spangler at Variety quotes analysts saying DirecTV Now's most attractive package is a money loser. Earlier he wrote about skinny bundles potentially killing to pay TV ecosystem, back when he thought DirecTV Now was a skinny bundle.

The Essential Truth of Licensing Cable TV Networks

Steve Burke, CEO of NBCUniversal, made a simple statement yesterday that underlies the future of multichannel competition.

“Our job at NBCUniversal is to license our products and maximize the cash flow of our individual channels. If people are interested in putting together OTT businesses, like Sling or the Hulu product or Sony or others, we are going to sell to those suppliers. We want to make sure that we make as much or more selling to an over the top supplier as we do selling to an MVPD.” (emphasis added)

The implication is clear and Burke's view is no different from that of the leaders of Fox, Disney, CBS, etc. Apple is not going to get to carry and pay for NBCU's popular channels, they are going to have to take the whole bundle or pay a premium for taking less. That's what Sony is looking at with PlayStation Vue.

Maybe Sling TV isn't taking the whole bundle, but thinking about it more broadly. If Dish Network rolls out a secondary Disney channel a bit more broadly to its 13 million DBS subscribers, Disney will certainly be willing to give up not getting the full bundle onto Dish's Sling TV service with its less than 1 million subscribers.

There is no good reason for the owners of the must-have content to support new competitors who give them worse economics than they get from the incumbents. New entrants to the market always pay more for the must-have programming. DBS paid more than cable. Telcos paid more than DBS.

If the incumbent's business is declining and the upstarts are growing there is even more reason to insist on the same or better terms. Unless somehow an upstart grows without must-have programming. At that point, it is no longer must-have content, of course.

Burke was speaking at the Bank of America Merrill Lynch Media, Communications & Entertainment conference in Los Angeles.

A previous post: Getting Content for Dish's OTT Service

Hulu Puts Down Its Free Service - The Evolution of Broadcaster Streaming

Word came last week that Hulu is dropping its free service of fresh off-broadcast programs. It is hard to overstate how big a change this is.

The change has not gone unnoticed. When Seventeen magazine publishes a story "Hulu is Getting Rid of the One Thing You Love About Hulu"...well, having multichannel business issues show up in Seventeen...that isn't something this blog has ever seen before.

What it means to me is that the original motivation for the formation of Hulu by NBC and Fox (later joined by ABC and recently by Time Warner) -- the fear of piracy is now much less of a concern for these companies and the potential of creating a subscription revenue business is a much greater one.

At the time of Hulu's launch, it solved a few problems for its owners:

• legitimate alternative to piracy (which was a growing problem and decimated the music business which ignored it and was well addressed by streaming)
• allowed them to share the cost of the technical platform and advertising sales force (and avoid competing with each other for developers, etc.)

Because they controlled Hulu, they had opportunity to revise program licensing terms (if business conditions change/require it). Because the partners were all in the same business, they knew that they were all facing the same types of issues.

In the event there was a business in this, that would play out over time and the big networks didn't have to worry about valuation issues since they were equal partners (and were licensing programs to Hulu on similar terms).

Hulu launched to the public in March 2008 and was rightly declared a success within a year per Forbes. The successful launch decimated the market for pirating the programs available on Hulu.

And then the business evolved...

In 2009, Fox CEO Chase Carey said Hulu would need start charging for some content. Presumably there wasn't enough ad support to be attractive. Hulu Plus (a service at the time without ads) launched in 2010; Netflix was on the radar screen.

When Hulu launched retransmission consent revenues were a small part of the business of most broadcasters. When that revenue stream started growing, the multichannel providers (cable, satellite and telco) wanted something in exchange for their higher payments. Since the broadcasters couldn't shut off over-the-air access to their shows, they offered the multichannel operators a "window" of exclusivity in online access to their shows. If a viewer wanted to watch the program online during the week after it aired, the viewer would need to "authenticate" that he or she had a multichannel subscription.

Comcast bought control of NBC in 2011. Part of what made NBC attractive to Comcast was the growing retransmission consent revenue stream for the broadcast network.

In 2011, Fox changed its Hulu policy to push its most recent episodes of its network series behind the paywall for one week after airing. The impact on piracy was swift and dramatic. According to TorrentFreak pirate downloads of two representative Fox shows went up over 100% following the change.

When Hulu launched on the Apple TV in 2012, there was no free service only Hulu Plus was available.

As Netflix's growth exploded and its valuation followed, Hulu's owners saw the market making the investor case for a video streaming subscription service. Being ad-supported had become passé.

Some might see the change at Hulu cynically. Recode's Peter Kafka writes that Hulu's network owners "have been uncomfortable with the notion of putting all their stuff up for free on the web. And they’ve been trying to back away from it for many years." To my eye, the story is a bit more nuanced. The owners were always looking for the money and didn't have any idea where it was at first. Since they found the money, they have been following it.

In some ways, this latest change -- to exit free -- may be all about branding. As Seventeen notes, free streaming from Hulu will still exist, but not on hulu.com. The new streaming service will be called Yahoo View. I supposed branding a free service as from Yahoo is as good a way to kill it as any other.

Opening Up the Set-Top Box

With yesterday's announcement of an agreement between Comcast and Netflix to make the leading SVOD service available on the largest cable operator's set-top boxes, we are starting to see the regulatory "sausage get made".

Ma Bell would rent you a Princess phone

As you may recall, in late January FCC Chairman Tom Wheeler announced a plan to open up the cable set-top box marketplace, drawing an analogy to an earlier time when the FCC opened up consumers' ability to use their own phones on Ma Bell's telephone network. It is not a terrible analogy, although the actual proposal may not have been the most well thought through idea with National Cable Telecommunications Association CEO Michael Powell, himself a former FCC Chairman, leading the chorus of boos and the cable industry responded by saying the proposal was ridiculous or worse. 

No, it doesn't make sense that a third party can reconfigure a "cable TV package" for which it has not negotiated without the permission of the programmers (who own the channels) or the distributor (which licenses them and delivers them to consumers). Also a third party shouldn't be able to insert its own ads into such programming either. As I said, it wasn't the most well thought through idea.

Wheeler's own comments at the NCTA's annual convention in May suggested that he was willing to negotiate, as long as the cable industry didn't think "no" was going to work as its final answer.

In early June, the cable industry put together its own proposal to address the issues raised by the FCC - "Ditch the Box". While that didn't make everybody happy, it was clearly a step towards what Wheeler had laid out as goals.

With Comcast's agreement with Netflix, the cable industry is providing an example that it can and will work with over-the-top programming sources. Would Comcast had done this without the threat of Wheeler's proposal? Maybe not.

Having seen deeply stupid cable regulatory schemes in the past, from this observer's view, it looks like there is something to be said for this process this time.  Let's see how this plays out.

Update (8 July 2016): It looks like the FCC is receptive to some parts of the cable operators' proposal. The process is moving along.

Revisiting The Innovator's Dilemma and OTT Competition with Cable

Over two years ago, in November 2013, I wrote one of the most popular posts on this site, Over-the-Top Video and The Innovator's Dilemma. In the wake of a Wall Street Journal article on Hulu's plans to offer a cable competitor service with live streams of certain channels controlled by its owners, Disney and Fox, I thought it worth revisiting that post. Where was the analysis on target and where did it miss? More importantly, what really changed?

What Changed?

• In terms of the players in the market, the biggest change was the exit of Aereo. What might have been a leading company in over-the-top video ended up in bankruptcy after a loss at the Supreme Court that invalidated its business model.
  
• The impact on cable, DBS and telco multichannel subscribers played out almost exactly as I had predicted -- in a gradual attrition. The big multichannel providers lost 385,000 subscribers in 2015, about 0.4%. Cable One, a small cable operator who dropped Viacom's channels after a pricing dispute, saw its video subscriber base decline in 2015 by 19%, as it "pivoted" away from video to focus on high speed Internet service. One of the strategies related to this pivot was raising video prices by $10. None of the largest cable TV operators are following Cable One's strategy.
  
• The decline in cable TV subscribers is showed up in a bigger way on the programmer's side. ESPN's Nielsen subscriber count declined by 7 million in the last 2 years which did not go unnoticed by the investment community. ESPN's numbers are tied up in a few issues, falling cable TV subscribers are one part, "skinny" packages which don't include ESPN are another, and the biggest one may be that Nielsen's own estimates of cable household counts may have been too high in the past.

The Hits

• The technical quality of over-the-top streaming has continued to improve. LTE has become widespread and 5G wireless is on the way. 802.11ac wifi is far more common. Gigabit ethernet to the home has also become more common, although it is hardly ubiquitous. Gigabit is coming from Comcast and AT&T, as well as pioneer Google Fiber (pioneer, that is, if you don't live in Chattanooga)
• The quality of the over-the-top content has continued to improve. Netflix and Amazon were winners at the Emmy Awards in September 2015 garnering kudos for House of Cards and Transparent, as well as a decent collection of other shows. Broadcasting & Cable described a the television production boom triggered by the success of the streaming outlets as creating "a run on talent" in a recent cover story (but put the story itself behind its paywall).
• The availability of over-the-top services would expand. They did, and in ways that I had not described -- HBO, Showtime, and Starz all went direct-to-consumer (not too suprising a development) and Amazon embraced a model to bundle individual OTT services with its Streaming Partner Program (a development that was non-obvious).

The Miss

• The availability of over-the-top services didn't happen in one form that I expected -- the roll out of Aereo to additional markets. 
• I made no mention that over-the top services would expand, but they have. PlayStation Vue, Sony's over-the-top service, not mentioned in the original post, launched in a handful of markets, then went national this year. Hulu's build-out of a service with streams of linear channels would be another expansion geared to the mass market. There have also been all manner of subscription video on demand services for niches by major companies like NBC Universal's Seeso, World Wrestling Entertainment), and Crunchyroll for Japanese anime (its backers). In an earlier time, each of these would have been a cable program service.

Unclear

• YouTube's stopped highlighting its original content channels on the same day as my original post, although its interest in originals morphed into content for YouTube Red. YouTube isn't following the big name Hollywood path to video competition, it is carving out a different one. This strategy is a bit harder to evaluate -- the proof would be in YouTube's views and advertising sales. The former are transparent, but not easy to interpret, and the latter are not visible at all.
• I forecast that the convenience of OTT service would improve based on better interfaces, DVR in the cloud, better recommendation engines. There have probably been some incremental improvements here, but nothing that seems to have changed the nature of competition in a big way. PlayStation Vue reviews praise its more Netflix-like interface, but it isn't clear if this is driving its adoption. Meanwhile, Comcast has licensed its cloud-based X1 navigation software to Cox and others, improving some cable interfaces faster than OTT interfaces, in those places that actually got it.

The Innovator's Dilemma continues to be a useful lens through which to look at the development of over-the-top video, finding its purchase in markets/use cases not central to the big screen at home. Unlike other innovations, however, the role of content makes the video distribution system unique. Some holders of high profile content can make more money going direct to consumers than through the cable bundle -- adult video made the leap a long time ago. The next ones to prosper over-the-top are the new services that probably couldn't get carried by distributor's protecting their margins (Crunchyroll, WWE), followed closely by those that are already sold a la carte (HBO, Showtime, and Starz). Those left are the basic cable channels, whose play in over-the-top is focused on their library content (like Lifetime Movie Club) and may be for a long time.

Ultra HD Content Is Coming

With yesterday's announcement that DirecTV will carry 25 MLB Network games in Ultra HD (also known as 4K), it might be time to evaluate whether this format will be a paradigm shift (as was high definition) or not (as was 3D).

HD benefited from the following:

• Clearly better pictures
• Development of flat panel set technology allowing for big screens without the big bulk of earlier HD sets (rear projection or very heavy tubes)
• Digital transition, requiring stations to stop broadcasting analog signals in July 2009 and greatly increasing the amount of high profile native widescreen HD programming

HD was no more convenient to use than standard definition television before that.

3D, it is clear in retrospect, was more of a mixed-to-bad bag. The 3D effect could be compelling at times (like in Avatar), but, 3D had some considerable negatives:

• 3D effect did not work for many people or actually gave them headaches
• Glasses required for 3D made it less convenient to view
• No new desirable set technology was associated with 3D
• 3D content did not benefit by a change in the law regarding television broadcasting
• 3D content was difficult to produce -- it required more than simply higher resolution cameras and other equipment

Ultra HD avoids the 3D negatives. However, it is less than clear that Ultra HD's benefits are worth the cost to consumers. To a significant extent, all new television formats face an uphill climb. It is a very rare consumer who wants the obligation to buy a new set or other equipment.

Ultra HD feels more like the transition from DVDs to Blu-Ray discs, a technically better format that consumers are willing to buy as long as there is little cost premium associated with it. If Ultra HD catches on, expect a much slower adoption curve.

In contrast, the push for "smart TVs" with Internet connections to make it more convenient to get content is going strong.

Early HD sets:

2004 65 inch Sony rear projection HDTV set is 27 inches deep

Sony KV-40XBR800 FD Trinitron - weighs 325 pounds

Update (25 May 2016): This report from John Archer on forbes.com notes that Ultra HD sets have become the de facto standard for 50+ inch TVs, more because manufacturers are not making non-Ultra HD sets in that size, rather than consumers paying a premium to get UHD sets.

Fox Breaks Dish's Auto-Hop

Today Fox and Dish announced the settlement of Fox's lawsuit over Dish's Hopper which dates back to late 2012. The Hopper, for those whose memories have faded since 2012, is a DVR with two main features:

1. It automatically records all of the Big-4 networks' prime time programs; and
2. with a single selection by a home user, can automatically skip over all of the commercials in the recorded shows. Dish calls this feature "Auto-Hop".

Parsing the features, the first, automatically recording a program, is only a negative to the network in the event that not having the recording makes the home viewer more likely to watch the show (and the commercials within it) on a live basis. I don't think most networks are fighting that fight.

The second, however, is the real fight and the basis of the settlement. Dish agreed to disable the Auto-Hop functionality for the first seven days after a program is recorded. This preserves the "C7 Rating" for Fox -- the measure of how many viewers watch a commercial within the first 7 days that a program airs. C7 is a bit of an aspirational goal for the networks; the most common currency is C3 rating -- viewership in the first 3 days after airing. (CBS settled its complaint against Auto-Hop similarly in December 2014).

Fox is certainly a winner here, negotiating for something that has some clear economic value. More precisely, Fox was able to to stop a feature that might have threatened the advertising business model more than the DVR fast-forward button does. (Note that when networks license content to MVPDs for VOD services, they often insist that fast-forwarding is disabled altogether -- that's the power of being able to withhold your content.)

Dish is also a winner here in that they were able to survive the challenge to the automatic recording complaint, although, it sure seems to this analyst that Fox may have been on thin legal ground trying to stop a feature that simply put, simplified DVR recording.

The loser, naturally, is the viewer who loses some convenient functionality. On the bright side, she gains additional exercise for the finger pushing the fast-forward button (unless the cat knows how).

Previously on peterlitman.com: CBS Hates on the Hopper Some More, Claims Fraud (25 January 2013)

Charter Switches from EBUs to Billables for Subscriber Reporting

Close observers of cable MSO financials noted a significant change stuck in the footnotes of Charter's 4Q15 and year end financial statements:

(e) Charter revised its methodology for counting customers who reside in residential multiple dwelling units ("MDUs") that are billed under bulk contracts.  Beginning in the fourth quarter of 2015, we count and report customers based on the number of billed units within each bulk MDU, similar to recent reporting changes at our peers and reflecting the completion of all-digital which requires a direct billing relationship for all units which receive a set-top box.  Previously, our methodology for reporting residential customers generally excluded units under bulk arrangements, unless those units had a direct billing relationship.  Prior year information has been revised to reflect our revised methodology.

emphasis added to highlight the following: The use of billable subscriber counts -- pioneered by Comcast in 1Q2013 -- leads to generally higher numbers than EBU counts. It is a rosier picture to investors.

The corresponding footnote in 3Q15 read as follows:
(h) Included within commercial video customers are those in commercial structures, which are calculated on an equivalent bulk unit ("EBU") basis.  We calculate EBUs by dividing the bulk price charged to accounts in an area by the published rate charged to non-bulk residential customers in that market for the comparable tier of service. This EBU method of estimating video customers is consistent with the methodology used in determining costs paid to programmers and is consistent with the methodology used by other multiple system operators.  As we increase our published video rates to residential customers without a corresponding increase in the prices charged to commercial service customers, our EBU count will decline even if there is no real loss in commercial service customers.

Charter reported residential basics 4,322,000 up from 4,293,000 at year end 2014 under the billable methodology. However, at year end 2014, Charter reported only 4,160,000 EBUs, so the Residential Basic subscriber count for billable subs was 3.2% higher than for EBUs. That seems a bit odd. Residential subscribers shouldn't vary much from EBUs. The reason that comes to mind of why residential billables would be higher than residential EBUs is if a material portion of the residential subscribers are seasonal accounts who pay a much lower rate in the off-season. However, Charter isn't in most of the big seasonal markets (e.g., Florida with its snowbirds).

Commercial basics were 108,000 up from 104,000 at year end 2014 under the billable methodology. At year end 2014, Charter reported 133,000 commercial video EBUs, so the billable subscriber count was 21.8% lower than the EBU count, which makes sense, since commercial accounts include multiple dwelling units and those typically get a "bulk discount". [In a bulk arrangement, 100% of a building's units get the service -- usually billed through their maintenance -- so that there is no reason for a unit to turn down the service and little churn for the cable company. For that benefit, the cable company provides a price break over the cost of all of those units subscribing independently, and potentially disconnecting.]

As Charter pointed out in 3Q15 "As we increase our published video rates to residential customers without a corresponding increase in the prices charged to commercial service customers, our EBU count will decline even if there is no real loss in commercial service customers." Looking at it from the other side, when bulk rates decline (due to furious price competition from DBS and telcos for these MDU accounts) EBU counts go down even if the MSO holds onto the business.

There is no misleading going on here. The revenues of the companies are not affected by this subscriber-counting change. This is investor spin. As there has historically been so much focus on subscriber growth, it isn't entirely surprising that the biggest MSOs have decided to deploy a measurement system that paints their results in a better light than the one that they used historically (and is still the one that they prefer to use when paying programmers like ESPN and was part of a joint industry consensus in 2002 -- clearly another time).

File Under "Duh"

The surprise is not really that Al Jazeera America is shutting down (my link is the Glenn Greenwald's excellent and extensively linked-out article), but that it ever existed in the first place. The multichannel TV dial has a number of fully distributed news services of one flavor or another:

• CNN
• MSNBC
• Fox News
• HLN
• CNBC
• The Weather Channel

As well as less-than-fully distributed channels like:

• Bloomberg TV
• CNBC World
• Fox Business
• BBC World News
• France 24
• RT
• Fusion
• One America
• Newsmax
• Accuweather
• WeatherNation
• The Blaze
• Free Speech TV
• Univision Noticias
• CNN en Español

An Internet-distributed news channel:

• CBSN

And lots of regional news networks like:

• NY1
• News 12 Long Island
• NECN

In short, this isn't a market segment with a lack of programming.

It is also hard to imagine that branding the channel "Al Jazeera America" was what US news consumers wanted. Irrespective of the quality of the programming on the channel (which I thought was good, from the little I saw, if somewhat stilted in a PBS/BBC kind of way), the name "Al Jazeera" was most closely associated with the co-owned Arabic-language Al Jazeera news service made famous as the preferred outlet for Osama bin Laden's videos during the post-9/11 era. As the proud possessor of a marketing degree from arguably the finest school for brand managers, I believe that's too much to overcome.

Welcome to 2016, Here's Your Price Increase

The headline on Karl Bode's story in TechDirt really grabbed me: "The Cable Industry's Response To A Banner Year For Cord Cutting? Massive Across The Board Price Increases For 2016" which goes on to decry the stupidity of cable TV executives.

I'm not sure that's the story here. I have worked in the cable TV industry for many years and, by and large, my experience has been that the cable companies are run by pretty sharp people.

So, why, given "rampant cord-cutting" would a cable company "pour gasoline on the fire" by raising prices?

The logical reason would be that it is better business. Multichannel penetration peaked in 2010 at 88% of US TV households. This figure was up from 82% in 2005 because many people who previously used an antenna to watch TV found cable a more attractive solution than buying a new TV or a converter box to deal with the digital TV transition.

Americans certainly love television, but is there any reason on God's green earth why 88% of them would be unsatisfied with the over-the-air broadcast offerings and feel compelled to spend hundreds of dollars per year on additional television? The broadcast channels have most of the top-viewed shows and are available for free in the overwhelming majority of homes (they are not available for free in rural and mountainous Arkansas, Oregon, and Pennsylvania, where the cable TV industry was founded).

If you don't know who this is, you are probably not a young person (click here for the answer)

It is abundantly clear to anyone in the television business that multichannel penetration will continue to decline as it gets more expensive. There will be more and better content on YouTube (itself now 10 years old) each year, particularly for young people who don't hear their voices represented much on television. Netflix and Amazon have created a lot of attractive original programming. That may continue or it may go the way of Yahoo's original programming. It is unclear to me how much money there will be to support how much TV. FX CEO Jon Landgraf said last year that "there is simply too much television"; he may be right.

However, what do you do if a whole lot of people have been buying your service even though it probably didn't make a ton of sense for them to do so and there are more decent cheap alternatives available to them in the "boredom killing business"? It would seem rational to write off these customers and reposition your service as a premium offering. Maybe you would roll out something like Time Warner Cable's Signature Home. Or to put it more into cable programming, maybe you would pursue the strategy Rachel Menken put forward on Mad Men.