Over-The-Top video: HBO and CBS crack open the door

Yesterday, HBO announced that it plans to launch an over-the-top (OTT) Internet video service next year that will be available to anyone with a high-speed Internet connection, even if they don't subscribe to cable, satellite or IPTV services. HBO didn't announce any specifics about which shows will be available, if there will be live streaming or Video-on-Demand (VOD) only, and how much the service will cost. Then, today, CBS announced CBS All Access, which will provide nationwide VOD access to current CBS shows and classic shows from the libraries of CBS, Paramount and Desilu, for $5.99/month. Subscribers living in 14 major cities will also get live streaming from their local station 24 hours a day.

In the course of 24 hours, the competitive landscape for OTT video in the U.S. changed from Netflix and a bunch of smaller content companies to a field including the #1 pay television service and #1 broadcast network. Both HBO and CBS will be "canaries in the coal mine" for the other broadcast and cable networks. The right price points and assortments of live and VOD content are experiments in progress, and we're likely to see lots of different combinations as other companies enter the market. These announcements are also likely to impact existing OTT services--especially Hulu. Fox, Disney and Comcast own Hulu, but Comcast is not allowed to exercise any control due to restrictions that it agreed to in order to get regulatory permission to acquire NBC Universal. Fox in particular has put severe restrictions on when its shows are made available to Hulu and for how long. With CBS effectively opening the floodgates, Fox may either have to loosen the restrictions on Hulu, or as I suspect, launch its own Fox-branded OTT service that's much closer to CBS All Access. Disney, which already has an extensive web and mobile app presence, is likely to do the same, but with several services:

• Sports, which will offer ESPN's channels
• Family, which will offer Disney's family and children's channels, and possibly ABC Family
• ABC, which will offer ABC's channels

Other cable networks and groups that are candidates to offer their own OTT services include:

• Starz, which has already announced an OTT service for international markets
• Time Warner, which in addition to HBO could offer services based on CNN and its Turner cable networks (it already offers a large collection of classic movies and TV series through its Warner Archive service)
• Fox, which in addition to its television network, can offer services based on FX, Fox Sports, Fox News and the National Geographic channels
• Discovery, which in addition to its namesake networks could stream Animal Planet, OWN, Science Channel, TLC, Velocity and others
• A+E Networks, jointly owned by Disney and Hearst, which could stream such channels as A&E, History and Lifetime
• Viacom, which could stream movies and TV shows from Paramount Pictures and cable channels including BET, Comedy Central, MTV, Nickelodeon and TV Land
• AMC Networks, which owns AMC, IFC, Sundance TV and WE TV

Comcast may be forced to make NBC Universal's broadcast and cable networks available for OTT as a condition of its merger with Time Warner Cable, but I think that it's unlikely that the company will offer its channels for streaming to non-cable subscribers any time soon.

That brings up a possible "unintended consequence" of HBO's and CBS's announcements: They'll make it much more likely that the FCC will allow OTT services to be classified as Multichannel Video Programming Distributors (MVPDs), the same as cable, satellite and IPTV operators. After all, if content providers can offer exactly the same programming over the Internet that they offer through MVPDs, why shouldn't an Internet-based program distributor be allowed to do the same thing?

Chelsea Handler: Netflix's MacGuffin?

Last week, Netflix announced that it will launch a talk show starring Chelsea Handler. The announcement triggered speculation about Netflix's reasons for launching a talk show, and what kind of a talk show it would offer. After all, Netflix is a video-on-demand service that features movies, old television shows and new series, while talk shows are one of the most time-sensitive show formats, after news and sports. Is Netflix trying to copy HBO shows such as "Real Time with Bill Maher" and "Last Week Tonight?" Would Handler's show be shown the day of production, or even live, or would Netflix delay it? Would Netflix try to create a new type of talk show that's not, as Variety says, "perishable"?

You may know of Netflix's first original series, "Lillehammer," starring Steven Van Zandt. It's never gotten much critical notice; certainly nothing like "House of Cards" or "Orange is the New Black." Netflix has renewed it for a third season, even though I suspect that most television viewers have never heard of it. When Netflix announced "Lillehammer," industry observers thought that was the story, and discounted its (and Netflix's) impact when the show turned out to be mediocre. The real story, however, wasn't "Lillehammer," but the fact that Netflix was targeting HBO with its own original series.

An important nugget in Netflix's announcement of Chelsea Handler's talk show is that the show won't go into production until some time in 2016. That seems like an awfully long time, given that talk shows are usually launched in a matter of months, not years. A daytime talk show can get "greenlighted" in the spring and be on the air in the fall. Why is it going to take Netflix more than 18 months to get Handler's show into production?

I believe the reason is that Netflix is preparing to launch a live service in addition to its existing VOD. Given that all of Netflix's infrastructure and all of the software that people use to watch Netflix was developed solely for VOD, Netflix has a lot of work to do in order to offer live programming. Once Netflix gets it working, however, it opens up entirely new opportunities for the company. One of them is Pay-Per-View (PPV). Typically, PPV is used for big-ticket sporting events, such as boxing and wrestling matches, as well as live concerts. These PPV events are one of the biggest profit generators for cable, satellite and IPTV operators. They would also be a big profit generator for Netflix, above and beyond the company's monthly "all you can eat" subscription revenue.

Another opportunity is live sports--the kinds of events shown by broadcast and cable networks: Football, baseball, basketball, hockey, golf, soccer and tennis. Sports can be very lucrative for networks. Games on Netflix would be very appealing to viewers who could watch them without commercial interruption. Consider something like DirecTV's NFL Sunday Ticket, which offers subscribers every out-of-town NFL game. It costs from $230 to $330 for a six-month (full-season) subscription, depending on the level of service, and it's one of DirecTV's most profitable offerings. In fact, NFL Sunday Ticket is said by many observers to be one of the biggest reasons why AT&T wants to acquire DirecTV. If Netflix develops a live streaming capability, it can offer a similar service to subscribers to any high-speed Internet service. All 99 million U.S. households become potential buyers. No cable, satellite or IPTV company has that kind of reach.

With that in mind, it becomes clear that the real story isn't that Chelsea Handler is getting a talk show on Netflix, it's that Netflix plans to offer live programming--and live programming is increasingly the lifeblood of broadcast and cable networks alike. In short, if your television business is known by initials (HBO, TNT, ESPN, ABC, CBS, NBC, Fox--okay, those aren't initials--etc.), Netflix is coming for you in 2016. And, Chelsea Handler is the least important part of it.

Wishful thinking: "Silicon Valley Will Write The Next Big Check For Original Video Content"

At TechCrunch's Disrupt Conference today, Dana Brunetti, Kevin Spacey's partner in Trigger Street, a motion picture and television production company, said that "...Silicon Valley will likely become a major funding source for original content soon. For a company like Google, after all, offering a few million dollars to produce the next episode of a show like Mad Men and to put it on YouTube is pocket change." Perhaps, but that in no way means that it would be money well spent.

For decades, Hollywood producers and movie studios have solicited investment from people outside the entertainment business. The "term of art" for this kind of investment is "stupid money." Producers and studios go from country to country, convincing government leaders that tax breaks and credits for investment in films would results in thousands of jobs, not to mention great publicity for their countries. That's why you see credits for production funds you've never heard of and production sites far from Los Angeles in the end titles of movies. Germany, South Korea, Canada and the U.K. are just some of the countries that have been tapped for production money and tax credits over the last two decades. Almost every U.S. state has offered some form of movie production tax credits or incentives at one time or another. These programs dry up as lawmakers learn that the jobs created and revenues generated don't compensate for lost tax revenues. Producers look for more stupid money elsewhere, and the cycle repeats.

Individuals who invest in movies very rarely get a positive return on their investments. Entertainment industry accounting makes integral calculus look like simple arithmetic. Once money becomes available, a seemingly limitless number of hands reach out for it. Last week, for example, director Christopher Nolan had to file suit against his current and former talent agencies so that a court could decide which ones he must pay commissions to, as well as how much and on what projects. No one in their right mind would build a movie or television production system, or rules for employment, as they work today.

The approach that YouTube has taken with its channels makes sense. YouTube originally funded each of 100 channels with up to $1 million (some channels were rumored to have received as much as $2 million.) That's enough to "move the needle," but not enough for anyone to get rich on. The funding was an advance on advertising revenues, not an unrestricted grant. As YouTube gets actual performance numbers on each channel, it's offering additional advances to some, cutting others off and identifying new candidates for funding.

I have very real doubts about Netflix's original content strategy, which has funded House of Cards, a television series produced for Netflix by Trigger Street. The network television production model calls for hundreds of scripts, which are culled down into dozens of pilots, which are further cut to become the new shows for the next television season. Even at the most successful network, the success rate is pretty low. Netflix is cutting out most of the process and is going directly to production on the basis of scripts and the people involved. Choosing on the basis of name talent is far from a sure bet--for example, look at HBO's Luck, which had Dustin Hoffman in the lead and the directing/writing team of Michael Mann and David Milch. It was a disaster, and not just because three horses died during production.

If you want to invest in a movie so that you can rub shoulders with stars or see your name in the credits, and you have some "mad money" lying around that you can afford to lose, then by all means enjoy yourself. On the other hand, if you're investing in content in order to generate revenue, you've got to be a lot more systematic and much more hard-nosed.

Desperation time: Warner Bros. doubles the waiting time for DVDs

All Things Digital reports that Warner Brothers is set to double the delay between the time that DVDs and Blu-Ray discs go on sale and when they're available for rental through Netflix, Redbox and Blockbuster from 28 to 56 days--almost two full months. (In a separate decision, Warner Brothers' sister division HBO has decided to stop selling DVDs to Netflix altogether, requiring the company to purchase the movies at retail price.)

Warner Brothers' plan is very likely to anger consumers but have no substantial effect on DVD sales. The reason is that consumers who are already unwilling to pay for a DVD in order to see it a month sooner aren't likely to be willing to pay for it in order to avoid a two-month delay. Under Warner Brothers' new plan, movies will hit the rental and pay-TV/video-on-demand markets at about the same time. The plan could actually backfire and lead to lower wholesale sales of DVDs and Blu-Ray discs, since Netflix, Redbox and Blockbuster may purchase fewer copies due to the increased competition from video-on-demand and streaming services.

Warner Brothers and other studios can't turn back the clock and can't change the economy. They might be able to make their plan work, if they make UltraViolet versions of their movies available without having to first purchase the movies on DVDs or Blu-Ray, at a reasonable price and with a much simpler process than they have today. That would make services like Warner Brothers' Flixster a real alternative to Netflix, rather than an ill-conceived tool for decreasing piracy.

Attention Jeff Bewkes: It's coming, whether you like it or not

Jeff Bewkes, the CEO of Time Warner, has been getting some cheap shots off recently at Netflix's expense. Last week, at an entertainment conference run by UBS, Bewkes was asked about Netflix's offer to acquire rights to in-season television shows for $70,000 to $100,000 an episode, and he said that it "... is a measly little offer...that is not attractive or incremental". So, what's Mr. Bewkes' attractive and incremental opportunity? According to him, it's syndication revenues and DVD sales.

Let's examine that argument. In the U.S., television broadcasters are struggling to recover from the recession. That's a big reason why there's been so much emphasis on payment for retransmission rights by cable, satellite and IPTV service providers; broadcasters are trying to tap into whatever revenue sources they can find. There's not a lot of money in broadcasters' pockets to pay more for syndication rights. But what about DVD sales? According to research firm In-Stat, they're forecasting physical video media sales to decline by $4.6 billion from 2009 to 2014. That's not just a decline in DVD sales--that's a total decline in both DVD and Blu-Ray sales. In other words, Blu-Ray, the technology that was going to save the movie studios, won't. On the other hand, In-Stat is forecasting that video downloads and streaming are going to increase $4 billion, from $2.3 to $6.3 billion, over the same period. Essentially, Bewkes' company has no choice but to sell to Netflix and its competitors, simply to compensate for the decline in DVD and Blu-Ray sales.

In a separate interview with the New York Times last week, Bewkes referred to Netflix this way: "“It’s a little bit like, is the Albanian army going to take over the world? I don’t think so.” The problem is that in many ways, Netflix's army is bigger and has more weapons than Bewkes' own. As The Wrap pointed out, Netflix now has the rights to stream movies comprising 49% of the 2010 U.S. theatrical box office. By comparison, Bewkes' HBO only has access to 43% of the 2010 box office, and HBO is bleeding subscribers, while Netflix continues to grow.

Perhaps by bad-mouthing Netflix, Bewkes believes that he's improving his negotiating position or demonstrating what a tough manager he is. The overall impression, however, is that he's out of touch with reality. Given Time Warner's history of mismanagement over the years, that's not reassuring, either to Time Warner's shareholders or employees. It might be a good time for him to decline additional interview requests and get a better handle on what's really going on in his businesses.