Would the big U.S. TV networks sell their stations?

Earlier today, TVNewsCheck ran a story about the positions of the Big 4 U.S. television networks (ABC, CBS, Fox and NBC) on ATSC 3.0. The Advanced Television Systems Committee (ATSC) administers the U.S. standard for digital terrestrial television broadcasting, and ATSC 1.0 is the system currently in use. ATSC 3.0 is intended to implement capabilities that are limited or missing in the current standard, including support for image resolutions beyond HD. Most importantly for many broadcasters, however, is that ATSC is intended to bring mobile TV reception to parity with the fixed HDTVs that we use today, The broadcasting industry realizes that an ever-increasing percentage of its audience is watching television outside the home on smartphones and tablets, but today, access to those devices is mediated by the mobile phone carriers (AT&T, T-Mobile, Sprint, Verizon, etc.). Broadcasters want direct access to those devices and viewers, and are hoping that ATSC 3.0 will give them that access.

The transition to ATSC 3.0 won't be without problems: Broadcasters spent many billions of dollars on new cameras, production equipment and transmitters to move from analog to digital television. Moving from ATSC 1.0 to 3.0 probably won't entail that level of investment, but it will still be expensive for broadcasters. In addition, smartphone manufacturers, mobile phone carriers and consumer electronics companies will have to be convinced (or required by law) to support the new features of ATSC 3.0 in their products. That will take time--potentially as long as ten years.

According to TVNewsCheck, both ABC and CBS have gone on the record as withholding their judgment on ATSC 3.0. Both NBC and Fox support ATSC 3.0 in principle, but both are waiting for more details of the standard to emerge before making a commitment. That led me to wonder whether the network broadcasters actually want or need to make the investments needed to support ATSC 3.0 in the television stations that they own.

All of the top four commercial television networks in the U.S. own and operate several television stations in major cities; in the industry, these are called O&Os (for Owned & Operated.) For example, all four networks own and operate stations in New York, Los Angeles, Chicago and Philadelphia. In Dallas-Fort Worth, all but ABC own and operate their own stations; in San Francisco-Oakland-San Jose, all but Fox own their own stations. The local stations are a big source of revenue and earnings for the networks; for example, in 2013, CBS's network had gross revenues of $8,645 billion and operating income of $1.593 billion, while its local Owned & Operated stations, both television and radio, gross revenues of $2.696 billion and operating income of $807 million. On a percentage basis, the local stations, while not the most profitable unit of CBS, made a much bigger profit than the network (30% vs. 18%.)

On the surface, it seems obvious that CBS, and the other big networks, should keep their stations. However, when you look further, the choice becomes less clear:

• The major networks could easily get $1 billion or more for each of their stations in the top U.S. markets, and those sales would be taxed as long-term capital gains, not ordinary income.
• The networks are already getting a significant amount of their income from retransmission fees charged to cable, satellite and IPTV video operators. They get those fees directly from the video operators in the markets where they own stations, and indirectly in other markets through the fees that they charge their affiliates for carrying their programs. If the networks sell some or all of their stations, they would get affiliate fees from those stations without any of the costs of operating the stations.
• If the networks no longer own over-the-air stations, they would no longer be directly subject to FCC rules. That means no more multi-million dollar fines for "fleeting expletives" or unplanned nipple slips. The networks would still have to abide by FCC content rules to protect their affiliates, however.
• Over 90% of U.S. households already get their television via cable, satellite or IPTV. Over-the-air reception is increasingly an anachronism.

As little as ten years ago, it would have been unthinkable for the Big 4 networks to sell their stations--if anything, they aggressively wanted to buy more. However, since then, we went through the 2008 Great Recession, which hammered local ad revenues. Network television viewership has been declining for several years, and ratings for many of today's successful network series would have guaranteed their cancellation just a few years ago. Now, many industry analysts are forecasting that digital will supplant broadcast television as the biggest recipient of advertising revenue within the next few years. If the Big 4 have the choice between spending billions of dollars to upgrade their stations to comply with ATSC 3.0, or making billions of dollars from the sale of their stations, it's looking increasing likely that sales, at least of their smaller-market stations, will make more sense.

Advertising is dead. Deal with it.

Have you ever had the feeling that you were a fly buzzing against a window, not knowing that you could escape if you just moved a few inches to one side? That's how I've felt recently, thinking about how to build an advertising-supported Internet site. I've come to the conclusion that, for all but a handful of sites, it's impossible to build a successful business by depending on advertising.

The classical advertising model was based on an economy with few media outlets and many media consumers. In the U.S., for decades there were three broadcast television networks and three commercial television stations in most markets. In most cities, there were one, or at most two, newspapers. The scarcity of media outlets meant that each outlet had a large audience, and that audience attracted advertisers, who were willing to pay enough to turn the outlets into viable businesses.

The Internet turned the classical model on its head: Instead of having a small number of media outlets, each with large audiences, we have a huge number of outlets, each with small audiences. Only a handful of sites and services on the Internet have been able to attract the audiences necessary to make an advertising-based revenue model work. The cost of setting up an Internet site is tending toward zero, especially if you can convince people to create content for you for free. Operators of these kinds of sites can run them profitably, or at least not at a large loss, right up to the point where they have to pay people for their content and services. That's why The Huffington Post has pushed back so hard against bloggers who want to be paid for the content that they provide to the site. If the HuffPo had to pay for all its content at market rates, it would go bust.

The problem goes beyond the Internet--cable television networks, in the aggregate, have a bigger audience than the broadcast networks, but few cable networks attract a big enough audience on their own to be viable without fees paid by cable, satellite and IPTV services. That's why cable networks and service providers fight so hard against "a la carte" pricing that would allow subscribers to pick and choose channels.

So, what should you do? If you're thinking about starting a business, pick a business and a business model that allows you to charge users. If you're running a business that is advertising-supported, or that you hope to run on advertising revenues in the future, pivot to a business and business model that can be profitable on user fees. If you're an investor and someone comes to you with a business plan that depends on advertising revenues, walk away. In short, if you can't get your users to pay for your service, you're in the wrong business.

FCC: Will AllVid be CableCARD Part Deux?

Last Wednesday, the U.S. Federal Communications Commission (FCC) issued a Notice of Inquiry concerning its plan for next-generation set-top boxes. The FCC's intention is to encourage a retail market for intelligent set-top boxes that can support just about any video service, including cable, satellite, IPTV and over-the-top Internet video content. The FCC tried to do the same thing several years ago with its CableCARD initiative, but even the Commission now recognizes that CableCARD has failed.

The original concept was to enable consumers to purchase cable set-top boxes from any of a variety of suppliers, and then rent a CableCARD that would be compatible with individual cable operators' conditional access, authentication and encryption systems. Somewhere between the original concept and actual implementation, the wheels fell off. CableCARDs could only handle one channel at a time and were one-way only, which meant that they couldn't be used for on-demand, pay-per-view or interactive applications. Two cards were required for DVRs in order to watch one program and simultaneously record a second program. The monthly lease price for CableCARDs wasn't all that much less than complete set-top boxes. Cable operators still required installers to come to customers' homes in order to set up CableCARDs, and few installers were trained on how to set them up properly. As a result, CableCARD was a bust.

In the FCC's new proposal, consumers would purchase a "smart video device" (set-top box) that would work for any "multichannel video programming distributor" (MVPD), including cable, satellite and IPTV operators, as well as Internet video providers. Then, each MPVD (except for the Internet video providers, who would connect via Ethernet or WiFi) would supply a "set-back" device, also called an "AllVid adapter", which would serve as a tuner and also perform conditional access, authentication and decryption functions. The FCC would like the AllVid adapters to connect to the smart video devices via Ethernet and to use standard IP protocol to send and receive audio, video and data, so technically, an AllVid adapter could be connected to a conventional network router and make video content available to any device on a home network.

The FCC's goal of "one box to rule them all" is laudable, but it's likely to have many of the same problems as CableCARD. First of all, despite the Commission's attempt to redefine terms, consumers would have to have at least two set-top boxes: The smart video device and one or more AllVid adapters. The AllVid adapters would be proprietary to each service provider, so for example, if a consumer moves from an area serviced by Comcast to one serviced by Cox Cable, they'll have to lease or buy a new AllVid adapter. AllVid adapters are likely to be even more expensive than CableCARDs, since they'll perform many more functions.

Two important goals of the new AllVid strategy are to make over-the-top Internet content an "equal partner" to video from service providers on television sets, and to prohibit service providers from limiting access to over-the-top content. However, service providers will fight hard against the new proposal in order to maintain content control in the living room. They're likely to argue that AllVid adapters will be set-top boxes in all but name, so why not allow them to continue to lease all-in-one set-top boxes to consumers? They'll also argue that they've just invested an enormous amount of money to implement the Commission's CableCARD mandate, and now the Commission wants them to throw out that investment and implement another unproven technology. Satellite and IPTV service providers, who were unaffected by the CableCARD situation, would be covered under the new plan, so it's likely that they'll oppose the FCC's recommendations as well.

If the FCC hadn't already tried and failed with CableCARD, I'd give AllVid a better-than-even chance of success, but in its present form and with CableCARD's experience behind it, I give AllVid very little chance of making it to market. AllVid would elevate over-the-top Internet video content from a bit player in the living room to an equal partner, and the incumbent service providers will do almost anything to keep that from happening.

What business are you in, part two

I've spent the last 20 months writing and talking about telecommunications companies using Internet technology to deliver video programming to consumers (IPTV). In the U.S., AT&T and a host of smaller companies offer IPTV, as do France Telecom, Telefonica, Deutsche Telekom and many other service providers in Europe. They compete with cable operators, satellite providers and over-the-air broadcasters.

A few posts ago, I mentioned Ted Levitt and his famous "What business are you in?" question. If you talk to representatives of these companies, they're likely to tell you that they're in the telecommunications, or cable, or satellite, or broadcasting business, but they're really all in the entertainment business. That's what consumers are buying. Consumers couldn't care less whether the signal comes in over a twisted pair or a coaxial cable, using a satellite antenna or rabbit ears. To consumers, these services are interchangeable; economists call them fungible. Consumers are making their decision based on price, channels, picture quality and customer service. To date, for all the talk about interactive applications, there's no evidence that they actually drive consumer choice one way or the other.

That's why there's so much "sturm und drang" about HD programming, at least in the U.S. DirecTV got an early lead in HD channels, and everyone else has been fighting back ever since, either by adding more HD channels or trying to convince consumers that they're not all that important. The fact that only a minority of U.S. households has the ability to watch HD television hasn't put a lid on the war of words.

There is a way for these companies to differentiate themselves for real, which I'll write about in a future post.

IPTV: The View From London

I just returned from IPTV World Forum in London. This is the world's largest trade show dedicated to IPTV, which doesn't necessarily make it very big (attendance was esitmated at 7,000 early in the show,) but does make it quite influential. Senior executives from many if not most of the world's largest telecommunication companies attended, although the focus was clearly on Western Europe (there are separate versions of the show covering Asia, Latin America, Eastern Europe, and for the first time this summer, North America.)

I wish that I could tell you that I saw something earthshaking, but I didn't. That's one of the problems of being an industry analyst; we see almost everything well before it's revealed publicly, so there are rarely big surprises. However, at a show summary session on the last day, one of the analysts had an interesting insight: There were no content companies exhibiting at the show. Compare that to The Cable Show, the National Cable & Telecommunications Association's conference, which will be held this May in New Orleans. Virtually every cable network that operates in North America will either be exhibiting or operating a suite at the show. These are the same companies that sell programming to IPTV operators, so why aren't they at IPTV World Forum?

My suspicion is that they see the Forum as a technical and engineering show, in much the same way that the Western Cable show eventually turned into a technical show before it was discontinued. The problem is that the primary thing that IPTV operators have to sell is programming. If the programming vendors don't see the industry's premier trade show as a viable venue, perhaps they don't take IPTV all that seriously.

What's the subscriber count at which programmers will see IPTV as a serious business? 25 million? 50 Million? My argument is that they need to take IPTV seriously now, even if it won't be a "real business" by their measures for a few more years. In particular, they need to start thinking about how the markets for their programming will change when the telcos are "busting silos" between the Internet, set-top boxes, mobile phones and landlines. In the long run, this is how IPTV will compete against cable and satellite.