Investing in media & entertainment in the age of digital disruption


This presentation was given to a group of family offices interested in making investments in media & entertainment at Bloomberg‘s New York offices in October 2016, and focused on sustainable business investment strategies, including:
• Content creation and distribution platforms
• Emerging technology (e.g. TVE, OTT, AR, MxR, VR, etc.)
• Monetization (subscription, PPV, advertising, commerce)
• Data analytics and support systems

Is Customer Experience Cable’s Biggest Advantage?

 

2015 is looking like it will be the beginning of a tipping point in which US consumers will be able to subscribe a la carte to television networks over-the-top (jargon free, that’s HBO, etc. without a cable subscription).

Tabling individual feelings about this inevitable shift, cable companies have certain significant advantages over the networks that are about to go direct. This is independent of the apparent consumer desire to “cut the cord,” and it’s the networks that need to be careful in how they transition to include a new, direct-to-consumer, model.

First, it’s important to simply summarize the business model of each based on the customer (who’s paying) and the product (what’s being sold):

mso-network-business-model.001
These business model differences are the core of where the advantages lie for cable companies:

  1. Customer Service: Because the cable company customer is the consumer, they already have robust systems ranging from automated and live phone support systems to online chat in place for resolving a wide variety consumer service issues quickly (While consumers often complain about cable company customer service, it’s important to distinguish the difference between resolving service related issues and dissatisfaction between the pricing of subscription packages).
  2. Quality of Service (QoS): Cable companies generally own and maintain their own physical networks, meaning they provide television services end-to-end from the facility where they receive network satellite feeds all the way through the last mile to the consumer’s television. As a result, they have very consistent uptime and can troubleshoot, and resolve, service related issues anywhere down the line, from their facilities to the individual consumer’s home.
  3. Program Guide: It may sound antiquated in a world rapidly transitioning from live to time-shifting to on-demand, but one of the things that’s lost on all over-the-top devices is the discovery of programs by way of a cross-channel guide (and queueing by way of recording) . This is especially important for networks’ fall lineups, which have precious little time to build an audience, and to older demographics resistant to any change in how they find or watch programs.

So, what are the networks’ primary challenges?

  1. Brand Awareness: Networks have two levels of branding, corporate and program franchises. Networks deeply care about their corporate brands, but consumers primarily care about programs. From a viewership perspective, removing the layer of a guide by going direct forces a change to a “network first” mentality in order to find programs that consumers may not embrace (Consider how well record label websites did in the late 1990’s when they tried to circumvent Tower Records and HMV).
  2. Customer Service: Networks have always fielded calls from consumers in the form of complaints about programs, but they’ve never had to directly support a consumer customer base. Going direct means they have to be staffed and equipped to resolve a world of issues including account authorization / verification, payment processing, connectivity, crashes and more for the first time. This isn’t trivial, and can have a direct impact on customer perception of the corporate brand.
  3. Pricing: The cost of a top-tier network subscription isn’t likely to be less than the ~$8.00 / month a Netflix or Hulu Plus account currently charges. In addition to a live feed and on-demand current programming, networks will need to have substantial and desirable back catalogs to both draw consumers and minimize churn. Additionally, if a lower overall bill proves to be a primary driver for the consumer, networks may end up having to compete for consumer dollars like CPG companies before they even have the opportunity to compete for eyeballs.

While networks definitely have the opportunity to be successful in a direct distribution model if they scale accordingly, it’s hardly a “doom and gloom” scenario for cable companies if they leverage their significant strengths in Customer Experience.

Hulu’s Creating a Phoenix From Someone Else’s Ashes

 

Hulu already has an interesting position in the market, often airing shows the day after they appear on broadcast television. For consumers who are no longer tethered to broadcast schedules because of time-shifting (DVRs, etc.) or other means, Hulu has become a big piece of the cord-cutting puzzle.

While the television industry is known for its impatience with new program franchises taking time to build audiences, there’s relatively little risk for Hulu to leverage the smaller audiences of shows cancelled mid-season considering its non-linear streaming model. Over the past month or so as the list of fall lineup casualties has become clear, Hulu acquired the rights to the remaining unaired episodes of at least two shows:

  • “Selfie:” Average of 1.5 18-49 rating
  • “Manhattan Love Story:” Average of 0.7 18-49 rating

While the ratings weren’t strong enough to save them from the itchy trigger fingers at ABC, that’s a combined total of 7.3M viewers in a highly desirable demographic, which can be quite a windfall for Hulu. Even a dirty top-down conversion of 1% would mean 73,000 new customers, which is $584,000 in monthly recurring revenue or $7M annually. And Hulu plans to release episodes weekly, effectively “setting the hook” to go beyond their 30-day trials for new users.

Although this is a good way to capitalize on what were once considered valueless assets, short-term customer acquisition is probably not Hulu’s endgame. With Netflix and Amazon in the original content game, and broadcast / cable networks starting to announce plans to deliver content over-the-top in 2015, the writing is on the wall, and Hulu is laying a very strategic foundation for the future.

They just got two programming franchises with built in awareness and interest (admittedly too small for broadcast), without incurring production expenses, that they get to test with their total customer base. If one or both franchises perform well enough, Hulu can be in the original programming business without having taken on the expense or risk of R&D using a variation of Netflix’s “Arrested Development” model.

As an added bonus, Hulu likely has the program acquisition fees categorized as a marketing expense since they are officially about customer conversion. Since Hulu can track individual streams by customer account, even if neither program goes back into development, this is still a very measurable marketing program with the high probability of having a positive ROI. That’s a pretty compelling worst case scenario.

The Impact of Content Ecosystems on User Experience

 

It’s no secret that consumers want an alternative to cable. Even heavyweight HBO has responded to the call, announcing earlier this year that they will launch an a la carte digital service in 2015 (details pending). Sister channel Cinemax will likely leverage the platform, and competition will follow in short order.

Although an everything on-demand world is amazing for the instant gratification the Internet has provided, it requires a significantly different way of thinking about programming. It’s a great benefit that we no longer have to know a program schedule (or set a DVR to record a whole season, etc.), but all these channels we want on an a la carte basis are dependent on some kind of hardware to deliver them to your television, and the agenda of the hardware manufacturers is where some important issues arise for the consumer.

On the surface, the aesthetic interface of all these devices (Amazon Fire TV, Apple TV, Roku, etc.*) is very similar. Channels represented by square-ish buttons, which reveal scrolling bands containing that channel’s content, etc. Scratching beneath this mostly interchangeable veneer reveals some pretty drastic user experience implications based on the business model of the device manufacturer:

Amazon Fire TV: By design, this is another Amazon cash register designed to get you to all things Amazon first. Despite the box implying that there’s a ready-to-go suite of 3rd party channels (e.g. Hulu, Netflix, Showtime, etc.), you have to find and download them. This isn’t difficult, but they are buried in the “Apps” menu… hardly the most obvious place to look for what people currently think of as a TV channel. Once added, they become part of a seemingly useful “most recent” band of items near the top of the screen, but in a world of on-demand, how relevant is the last channel viewed being at the top? There’s also a top-level search on the Fire TV, which was initially promising, but searching for “Homeland” only reveals purchase options via Amazon, a complete miss from a Showtime subscriber’s perspective.

Apple TV: Not surprisingly, Apple TV is centered around their iTunes ecosystem. True to form, they also control what third party services and channels are available on deck, and their order. As a long-time Apple user, I’m not going to debate Apple’s control of what’s on their devices, but controlling the order certainly cripples and for some probably kills the user experience. The problem is that the order is clearly the result of business deals, not a focus on users (e.g. channels or services individuals don’t subscribe to or care about should be removable, or at least moveable to the bottom). The only presumable benefit of a dictated order is that one becomes familiar with what channel is where, but that starts to feel like a one-size-fits-all cable lineup, not like any of Apple TV’s iOS sister products.

Roku: Until the supreme court ruling against Aereo, Roku was probably the lead contender for actually being able to cut the cord and not look back. Roku is the most flexible of the three, with literally 1000s of services and channels that include pretty much everything except iTunes. Granted, nobody would need more than a couple of dozen on the high side. And while M-GO has prime placement for movies because of a revenue share deal, even that doesn’t box a consumer in. One of the nicest feature is Roku’s top-level search, which actually looks across all subscribed services and channels (in addition to M-GO), and gives results that include the cost from each. The order of the channels is also editable, which is useful since most of us are, ultimately, creatures of habit.

A key (theoretical) benefit of cord-cutting from a consumer perspective is the ability to quickly find and watch desired content which, likely to the distaste of individual channels and services, isn’t led by a channel’s brand. Although it’s early in the game, what’s happening so far is more akin to trading out a cable subscription for a device whose manufacturer has their own “me first” content agenda appended with a la carte services. Using the “Homeland” example above, what matters to a consumer is that they are able to get to the content intelligently from the top level of their device of choice, not have to navigate to it by channel hierarchy or pay for it again if they already subscribe to Showtime.

To some degree, there is a parallel to how the music industry responded to the (pre-Napster) wild west days of web 1.0. Record labels thought they could go direct to consumer by delivering music online, bypassing retail record stores. It didn’t work because even a band’s biggest fans don’t typically know what label they are on. The difference here is that the channels are being delivered by third-party devices that still choose to organize content primarily by channel. To be clear, it would be foolish to lose channel branding entirely, but it is becoming less primary and should evolve into an optional organizational method for consumers that lives somewhere underneath a global search-based design.

Unfortunately, as channels begin to offer a la carte subscriptions independent of cable subscriptions in 2015, the main user experience change cord cutters are likely to see is a separate bill for each service and channel. This is for two reasons: there’s a hard cost in device manufacturers aggregating subscriptions (which will have consumers crying foul in no time), and there’s a conflict of interest with each hardware manufacturer’s content ecosystem.

* Google Chromecast was intentionally left out, not to imply it isn’t a significant player, but because I haven’t personally used one.

Netflix vs. HBO

netflix-vs-hboJanko Roettgers published an article “Netflix exec: HBO would have many more customers if it sold online-only subscriptions” earlier this week on GigaOM in response to David Wells’ (CFO of Netflix) statement at a Goldman Sachs conference that HBO should be more like Netflix (read: direct to consumer) to grow. Frankly, it’s not that simple and, coming on the heels of Netflix’s recent original programming award wins, this smells a little like a PR play for Netflix to draw a comparison with HBO, especially as Well’s made another comment (unmentioned in the GigaOM article, but reported by Cynopsis) at the same conference that “We [Netflix] would love… to be available via the existing device in the home, which is the set-top box.”

Netflix doesn’t have the legacy business model (or related nuances) to consider in making such a broad statement, whereas HBO has an established and profitable revenue model, one which offering subscriptions over the Internet would, at a minimum, disrupt. Not something to do lightly.

HBO’s stance of having “no plans to sell subscriptions directly over the Internet,” it’s at least partially posturing due to the MSOs having anticipated content owner’s potential desire to go direct to consumers in their carriage agreements. Most current agreements have “most favored nation” clauses that, in short, mean MSOs don’t have to pay the network more per subscriber than any other outlet they offer their service on.

Considering Netflix subscriptions hover at around $8 a month, that would be considerable lost revenue for any premium cable network. For a network like HBO, this means that they would have to immediately exceed their current subscriber base just to match their current revenue. Unless HBO were taking on significant water in their current model, there’s little immediate incentive for HBO to take the risk.

MSO deals also allow the stronger network brands to negotiate carriage for sister and child networks, something that may very well get lost in an online / direct model. And for networks with advertising, it’s even more complicated because, if they don’t hit their subscription numbers, they negatively impact both of their primary revenue streams, subscription and advertising.

HBO is already on the forefront of TVE with HBOGo and MAXGo, both as apps / services and via their on deck positions on products like Apple TV. From a consumer standpoint, a direct offering give that an online subscriber online access, but they now have to stream to their television (Apple TV, Roku, etc.) because if MSOs aren’t making any revenue on the subscription, they certainly aren’t delivering it via cable or satellite.

Meanwhile, HBO is no doubt learning a ton about the consumption habits of HBOGo and MAXGo users without having put all their proverbial eggs in that basket. Trend data they have at this point in time however is short-term (e.g the binge-viewing and non-linear programming options that Netflix thrives on), and they may not have a large enough sample set across generational demographics to make an informed decision on David Wells’ suggestion.

We will see the day in the not too distant future where networks become unbundled offerings, whether it’s an evolution of MSO offerings, networks taking the Internet plunge and going direct or some TBD hybrid. For now, HBO seems to be striking the right balance.