Is more better for the consumer?

With the recent decision by HBO and CBS to stream content over the Internet as an alternative to pay TV subscription bundles, one of the primary questions is "who" among the broadcasters, programmers, and MVPDs will be the winner(s) in the evolving ecosystem of providing content to consumers anywhere and anyhow they want it.
But, there is little discussion about the consumer. Is it because the consumer will be the undisputed loser in all of this? Most likely!  Getting what they wished for...unbundled content and pricing...won't come cheap.   A look at the history of the cable industry suggests that the consumer will end up getting more than what they wanted and paying dearly for it.  
http://www.businessinsider.com/comcast-on-hbo-internet-subs-2014-10

Checkmate!

We knew it had to come.  When MVPDs, specifically Comcast and AT&T, announced that they were combining with rival distributors, namely Time Warner Cable and DirecTV, respectively, in order to bulk up and push back on rising programming costs, it was only a matter of time before content providers countered.  The first to move was 21^st Century Fox in its attempt, announced yesterday, to acquire Time Warner.  While Time Warner rejected the first bid, more likely than not, a deal will happen.  Where will this leave us? 

Consumers want content they can watch anywhere, at any time.  Distributors have to provide the platforms (TV, broadband, mobile); all of them preferably.  Content providers have to offer programming that is “in demand”, both in live sporting events and highly valued shows that consumers want to watch when initially aired.  Who is out front on all of this?  Certainly, Comcast is in good shape with its pay-tv and broadband pipelines and its NBC/Universal content, but it lacks a mobile play.  AT&T/DirecTV has mobile, but it lacks programming depth.  Disney is all about content, but that is okay in an industry where content is king.  The 21^st Century Fox move is about amassing content…a good move.

Firm	Pay-TV Distribution	Broadband	Mobile	Programming (cable, broadcasts)
Comcast/Time Warner Cable	X	X		X
AT&T/DirecTV	X	X	X	limited
Verizon	X	X	X
Dish	X
21st Century Fox/Time Warner				X
CBS				X
Viacom				X
Discovery Communications				X

In this wave of consolidation, who makes the next move?  Rivals like Viacom which has gotten significant push-back from both small and large cable operators over higher costs for their “I can watch that later” programming, may need to do something.  Discovery Communications is in a similar situation.  CBS has some great programming, but it may want to ramp up. 

Then, what’s next?  Will distributors like Verizon, Dish, and Charter be forced into doing something?  Where does it end?  In a matter of six months, from the time the Comcast-Time Warner deal was first announced, the media world has potentially been upended.  Where will it end?  How will regulators respond?  That is, how much consolidation is good for the industry, good for consumers?  How do you strike the balance?  Unfortunately, that is not easily answered in a very dynamic, rapidly evolving industry, some of which is technology-driven, some of which is from a shift in taste preferences, and some of it is “created” by the firms themselves.  Regulators will have to sort it all out.

The Aereo Decision

The Supreme Court ruled today that Aereo, using its unique cloud-based architecture, violated copyright laws when retransmitting over-the-air broadcast signals to customers with Web-enabled devices (TVs, tablets, smartphones).  Broadcasters claim that this was a “win” for consumers.  Was it?

The 1992 Cable Act detailed the rules covering retransmission consent.  But, it wasn’t until the early 2000s that TV stations began demanding retransmission fees from MVPDs for the rights to carry their signals.  Today, those fees can be as much as $1 or more per subscriber.  Moreover, TV stations now earn about 15% of their revenues from these fees and have the expectation that the percentage will go up as these fees increase significantly in the coming years.   No doubt the TV stations and broadcasters won big today. 

So did the MVPDs.  While consumers can still get over-the-air broadcast signals for free by having an antenna on their property, less than 10% of households rely on this method exclusively.  For everyone else, the broadcast channels are bundled in with the video packages purchased from an MVPD provider. If the Aereo business model was allowed by the courts, some of them might have been tempted to cut the cord.  For firms, like Comcast, there is an additional benefit as the threat of losing retransmission fees paid to its NBC network affiliates has gone away.

The appeal of Aereo was that it brought with it the possibility for lower MVPD bills for consumers and more choices in how to receive and pay for desired programs.  Today’s decision removes that possibility for now, but hopefully it does not discourage other firms from trying to develop technological solutions that respect copyright laws while providing consumers with lower priced video options.     

Bundles

If you are a cable MVPD, how do you compete with direct competition from LECs and DBS providers and indirect competition from broadband that is provided by your LEC competitors and from another business segment within your own firm?  The answer is: you bundle.  You make the substitute product a complement and you discount the “add-on” products so that the value of the package is appealing enough for the customer not to cut the cord.  This strategy has worked well up to this point.  Will it continue to do so or are customers getting tired of the “deal”?  

	MVPD	Broadband	Telecom - Landline	Telecom - Wireless	Marketing
Cable	X	X	X		Double & Triple Play
Telco	X	X	X	X	Double & Triple Play
DBS	X				Partnerships
# competitors/market	4	2	2

Has anything changed?

Over the past 12 years has much changed in the video delivery market?  Yes!

• DBS (DirecTV and DBS) more than doubled their number of subscribers, aided by passage of Satellite Home Viewer Improvement Act in 1999.
• Significant consolidation among top cable firms.
• Entry of LECs in 1999.  Now hold an 11% share of MVPD market at the end of 2013.
• Today, approximately 35% of HHs have access to at least 4 MVPDs competitors (2 DBS, 1 cable, 1 LEC).  In 2001, the maximum number of competitors/market was three (2 DBS and 1 cable).
• Cable and Telco MVPDs bundle broadband and telephony with video offerings to form double and triple plays.  DBS firms partner with telcos to offer similar video/telephony/internet bundles.
• Broadband is becoming a more viable product substitute to MVPD as firms like Netflix and Amazon Prime create and deliver content for the internet.  Some subscribers are cord-cutting (or cord-shaving).

Over the past 12 years has much changed in the video delivery market?  No!

• Many of the top cable MVPDs are vertically integrated with content providers.  Comcast, with its ownership of NBC/Universal, has the largest number of program affiliations.
• ESPN and live sports programming dictate perceived value and prices.
• Cable programming is bundled into pricing tiers.

	EOY 2013		2Q2001
Comcast	21,690,000	22.9%	8,415,950	9.5%	purchased AT&T Broadband in 2003 and added approx. 2M subs from Adelphia in 2006
DirecTV	20,253,000	21.4%	9,996,700	11.3%	proposed merger with Dish in 2001 was blocked by regulators
Dish	14,057,000	14.9%	6,066,902	6.9%
Time Warner	11,393,000	12.0%	12,672,496	14.4%	purchased 2/3rds of Adelphia's subscribers in 2006
AT&T	5,460,000	5.8%	14,518,176	16.4%	AT&T Broadband thru 2003; AT&T U-Verse began in 2006
Verizon	5,262,000	5.6%	-	0.0%
Cox	4,800,000	5.1%	6,164,043	7.0%
Charter	4,342,000	4.6%	6,490,790	7.4%
Cablevision	2,813,000	3.0%	3,002,543	3.4%
Adelphia	-	0.0%	5,748,986	6.5%
All Other	4,536,294	4.8%	15,233,488	17.3%
	94,606,294	100.0%	88,310,074
CR4	67,393,000	71.2%	45,603,322	51.6%
Top 5 Cable	45,038,000	47.6%	48,261,455	54.7%
AT&T & Verizon	10,722,000	11.3%	0	-
DirecTV & Dish	34,310,000	36.3%	16,063,602	18.2%

The Great Disruptor -- Aereo?

Two years ago, a new product came onto the market in NYC that just might have a significant impact on the distribution of video programming.  Aereo uses small antennas, individually assigned to subscribers, to receive public broadcast signals locally and then retransmits those signals to subscribers over the internet.  The small bundle of broadcast television stations (e.g. ABC, CBS, NBC) are streamed to any device at any time. 

Today, about 10% of households use an on-premise antenna to receive television broadcast signals for free.  What Aereo does is moves those antennas (and DVRs) from the customers’ homes to their own facility.  That move to the cloud allows for greater flexibility on where and when subscribers can view “their shows”. Aereo offers the service to households for just $8 a month.  Some MVPD customers may choose to pair Aereo’s service with broadband and drop their cable subscriptions.  Televisions stations would see a drop in retransmission fees paid by MVPDs, because under the Copyright Act, if a television broadcast is considered a public performance than Aereo, the internet redistributor, does not need a license or have to pay television stations retransmission fees.  If the Supreme Court rules in Aereo’s favor, how will competitors respond?  Will more content move from broadcast channels to premium cable channels or the internet?  How disruptive will this technology change be?     

Are we beginning to see the end of channel bundles?

Tying exists when two or more products are packaged together for sale.  In general terms, tying arrangements are often pro-competitive business arrangements because of the cost savings derived from economies of scope.  The courts, however, are concerned with the business practice of tying if they believe that a firm can extend its dominance in the tying product market to gain dominance or rents in the tied product market.  In 1962, The Supreme Court in United States v. Loew’s, Inc. found that the practice of licensing or selling desired films to television stations on the condition that they purchase a block of films that included unwanted or inferior films was a violation of Section 1 of the Sherman Act.  The Court ordered that the defendants price the films individually and prohibited differences in prices when films were sold individually or part of a package, unless there were legitimate cost differences. 

Fast forward to 2013.  Cablevision filed an antitrust lawsuit against Viacom alleging the content provider forced it to carry and pay for fourteen lesser-watched channels in order to have the right to carry its more popular channels, specifically Nickelodeon, Comedy Central, and MTV.  What’s behind the sudden shake-up in the relationship between content owner and distributor? 

For decades, in an expanding MVPD market, the channel bundles allowed new programming to be introduced at lower risk and costs.  MVPDs and programmers, together, espoused the benefits of the channel bundles sold to consumers and defended the absence of a la carte pricing.  More recently, however, the accelerated rivalry from broadband and wireless networks delivering new and unbundled content anytime and anywhere, has led to an increasing number of MVPD subscribers cord-cutting or cord-shaving.  Consequently, MVPDs will find it increasingly difficult to pass along higher programming costs to consumers without some push back.  The crack in the business model may have come in the recent move by 60 rural cable companies to drop Viacom programming completely from their channel line-ups.  Will the courts play a disruptive role too by declaring these programming bundles illegal?  If they do, the impact will be far-reaching and long-lasting.