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Nine Thoughts On An Unbundled HBO

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HBOToday HBO’s CEO Richard Plepler announced that they’d offer some form of HBO service in 2015 that doesn’t require a cable subscription. From Re/Code:

Plepler said the company will go “beyond the wall” and launch a “stand alone, over the top” version of HBO in the US next year, and would work with “current partners”, and may work with others as well. But we wouldn’t provide any other detail.

This is what we’d call “kind of a big deal.”  It’s big enough to make my head spin a little bit, so I’m going to share my thoughts in a non-“prose” fashion. So in no particular ordering, my thoughts (mostly questions really):

“Could this be the death of Pay TV as we know it?” Yes, this could easily be the canary in the coal mine. If HBO “fully” unbundles, then the combination of Netflix+Hulu+HBO as (non-sporting) Pay TV Alternative is pretty compelling. And if it works, then it’d be easy to see ESPN and others follow suit. Which then takes us to unbundled TV – and probably higher overall content costs, but a lot fewer junky channels to watch.

“What exactly are they going to offer?” I highly doubt the Unbundled HBO offering will be the exact equivalent of the current HBOGO product/service. My bet’s on a library similar to what you can find in Amazon Prime.

“Is this for the masses?” About 30-odd-million US households have HBO. That leaves 80mm as the opportunity ahead. So do these folks not have HBO today because of price, interest, accessibility, catalog, other? Curious.

“This could have no impact on Pay TV after all.” Before we run off and say Comcast and Directv are ruined here, let’s go back to that 30 million HBO subscriber number. Does it *really* drop in a meaningful way? I could easily see this as a non-predatory move.

“But then again, what about cable-delayers?” We’re clearly seeing the adoption of Pay TV shift from something 22-year-olds do when they get their first apartment to something done later in life (long term impact of this is still TBD). It’s really, really hard to go FROM a full Pay TV lineup to an all on-demand/a la carte one. But the reverse isn’t true – if you have never had 500 channels, you don’t know what, if anything, you are missing. And with an HBO service available without Pay TV, maybe this impacts that delay even more.

“How will it price-compare to iTunes and Netflix?” If I were to buy the shows I already enjoy on HBO from iTunes, it’d cost me roughly $60 this year (Game of Thrones and Silicon Valley), or $5/mo. But if I were a larger consumer of their content, let’s say 6 original shows per year, that’d be roughly $15/mo. I’m not even using any new math to figure that all out – which means anyone/everyone can do the same. Would I spend more than that for full HBOGO access today? I don’t think so, because any price point above $10-15/mo is going to cause me, and others, to do math. Which turns out to not be that hard to do. Obviously with an unknown product offering, this is hard to speculate, but again – I’m curious.

“What does Comcast think?” While I don’t know the intricacies of the distribution terms between HBO & Comcast, I do know that, for the most part, Comcast tends to have a “most favored nation” type of clause. This is what’s historically prevented new offerings (Intel Media?) from actually competing in the market, since “nobody” can get better pricing than them for a given channel. So *something* exists between HBO & Comcast to enable this new service – wondering what that looks like.

“What if there’s more to the story in terms of distribution/devices?” Maybe this is an all-Amazon deal, and Prime subs get even more HBO, and that’s it? Or if it’s unique to iPad owners? Or is only on Samsung Smart TVs? Or Google Fiber? I don’t really think any one of the above is on the money, but there could definitely be other players involved here. Further, I’d muse that this is a distinctly “not available on a TV set or connected TV device” offering – but I could even be wrong on that too.

“What if it does actually still require cable?” It’s very hard today to subscribe to basic cable + HBO in all markets. What if this is a move that requires *some* kind of cable subscription, but then unlocks the full HBO service? This would still fit in the description Mr Plepler outlined earlier.

Add your thoughts to the comments below. And for no particular reason, the Game of Thrones theme sung using nothing but Peter Dinklage’s name:

The only thing that could kill TV? TV itself.

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It’s fun to write about the “death of TV” (or flip flop on it, whatever).  Why it’s so fun, I’m not sure, but I have a hunch it’s because…

  1. It’s a HUGE industry ($500+B/year if not more)
  2. It’s been utterly untouched by the Internet (so far – a thing that really rankles a lot of people, mostly tech bloggers)
  3. The newspaper and music industries both got trashed, so why not TV too?
  4. It’s controlled by a very small number of extremely powerful and wealthy companies
  5. The aforementioned companies have a perception of (a) greedy profiteering, (b) being dinosaurs, and (c) restricting people from doing whatever they want with content, which also tends to rankle said tech bloggers

Arguments for the death of TV are equally fun to read and fantasize about.  They tend to fall into these categories:

  • “Those Kids Today”:
    Theory – Kids today like to watch the YouTubes and the Torrents!  Kids today don’t like to pay for content. Therefore when kids get older, they will continue to watch YouTube and not pay for content.
    Reality – To debunk comically: kids today like Play-Doh, Lego’s, Justin Bieber, and eating Mac & Cheese at every meal – none of which hold true when kids become grownups (well, maybe the mac & cheese bit).  To debunk more seriously: kids have loads and loads of time on their hands and very little money, so they can spend the time and energy hunting and pecking for free content – something most adults (30+, with kids) just don’t have.  Or, it’d be like assuming that because kids like Justin Bieber when they are teenagers they will like equally crappy music in their fifties.  Well, that might just happen I guess.
  • “Cord-Cutting/Shaving/Trimming/Slicing/Thinning/Balding/Receding”:
    Theory – everybody’s quitting cable! EVERYBODY!
    Reality – I’m not even going to bother finding the links, but bottom line is this – for every article that shows XX thousand customers quit Cable, if they don’t ALSO INCLUDE the part where XX thousand customers signed up for IPTV, FIOS, Telco’s, or Satellite, you need to utterly ignore the article.  After that, there’s not much evidence left.  This may change, but that’s just a theory, and one that’s yet to be really substantiated.
  • “The Great Unbundling/A La Carte/Go Direct to Consumers”:
    Theory – In the not-too-distant future, you’ll be able to set exactly the lineup you want, and not pay for channels you don’t watch.  Or you’ll watch *everything* a la carte, paying as you go.  Or channels like HBO will start selling direct to consumers.
    Reality – This is in utter conflict with how the TV industry actually works and makes money. And since they, you know, like making money, and since shows are, you know, expensive to make, they need to keep making the money.  So if channels were to unbundle, they’d instantly get so expensive people wouldn’t be paying for them.  Here’s some of my previous thoughts on this same topic.
  • “Newspapers/Music died!”:
    Theory – Because of the deaths of other industries, TV will die too, as it’s antiquated, etc.
    Reality – This is like arguing that because the coal and steel industries in the US shrank, so will the TV industry. Other than being ad-supported, TV and Newspapers are utterly dissimilar (and BTW, the way the ads work for both are exceptionally different).  Other than being, well, media, TV and Music are utterly dissimilar.  We might as well say the Internet will die soon because it’s just like newspapers.
  • “Startups! Technology!”:
    Theory – Some startup will come along and just utterly kill TV in every way.
    Reality – Yeah, no.

OK, Jeremy, Mr Big Talk Guy, so what could actually happen?  Here’s my theory on what could “kill” the TV industry as we know it – it’s “catch up TV”. For those unfamiliar with the term, “catch up TV” (also called “binge viewing” sometimes) is when you watch a show long after it aired, by days/weeks/months/even years.  Whether it’s via Hulu, Netflix, Amazon, iTunes, Video On Demand, or any other service, it’s the rapidly increasing trend on TV consumption.  And it’s the one thing the TV industry is massively enabling, and could massively come back to haunt them.

In a nutshell, the TV ecosystem is like a big food chain, with advertising dollars acting at the bottom of it all (yes, TV ads are the kelp of the TV world).  Should advertising falter in a notable way (which, by the way, it isn’t at present), it could bring down the whole system.  There are several exceptions to the system, such as HBO, but the numbers there ($1.2B) are literally paltry when compared to TV ads ($90B).  And catch-up TV represents a problem, as it’s not monetized the same way as live TV.  See the Live TV part is where almost all of the $90B of TV ad revenue comes from – hence why ratings declines cause shows to get cancelled, as they don’t generate the cash flow to sustain themselves.

So as we all get further and further accustomed to being able to watch shows whenever we want, we (collectively) are reinforcing the habit of “why bother watch live?”  For example, my friends all tell me to watch Homeland, but I don’t really have the time for a new show right now, so I’ve bookmarked it for later (ahem, NextGuide), and will just start watching it on Netflix.  Along with Breaking Bad, Mad Men, and lots of other shows I know are great, but just haven’t watched – yet.

What, then, happens to highly anticipated shows that launch, combined with audiences who increasingly choose to wait to view them?  They get cancelled (great thoughts on this by Andrew Wallenstein here).   Sure a startup like mine can benefit from this, and even become a fabled Billion Dollar Company (FTW!), but success beyond our wildest dreams will, in no way, replace the lost revenue the entire ecosystem would suffer.  And just as environmentalists are concerned about loss at the bottom of our food chain, if the TV ad system begins to crumble, then so do budgets for new shows, etc.  It ain’t pretty.

Now I’m not predicting the above will all happen – but at the current pace of things, it wouldn’t shock me to see much of it play out.  The TV industry is giving its content away way too cheaply to all the providers to sustain itself without the advertising, and they are effectively disincenting viewers from the live experience (not that it’s not cool to get a sticker or a badge or something, but let’s face it, people are smarter than that – hence the general “meh” of most of the social TV offerings – sorry guys, but #come #on), other than for appointment TV programming.  Further, it has a certain prisoner’s dilemma aspect to it all, as no single network can make the bold move to pull recent content from the variety of catch-up/streaming services – oftentimes their own apps! From the discussions I’ve had with TV execs, there’s a lot of awareness and a growing concern, but no solutions in sight yet.   But, at least it’s the enemy we know…

Dear Jeremy (d/b/a HBO) [guest post]

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This is a guest post by Lee Milstein, you can find his bio below.

Thank you very much for taking the time to explain your stance on why I won’t soon be able to subscribe to HBO GO without first becoming a cable customer.  To paraphrase your argument, you indicate 3 primary motivations for keeping your service as an add-on and not making a direct consumer offering.  Those motivations are:

  1. You don’t have a direct customer business today and would have to staff up, primarily for billing and support to be able to make an offering;
  2. You don’t believe you’d be better off (financially) trying to go after individuals directly; and
  3. You make too much in guaranteed payments from your existing customer base  (the cable MSOs) to risk pissing them off.

You’re stance, while rational and understandable is also wrong. Taking each point in turn:

You do have a direct customer relationship today.

You already maintain an active user database on your website, complete with authenticated email registration, and you offer technical support to your users on the same site.  So, the issue is not that you LACK consumer touch points, it is that you believe them to be insufficient.  I think you’re better off than you realize.

Apple has proven that, with a good enough product, you don’t need free customer support.   AppleCare subscriptions or one-time incident fees are required for support for streaming services from Apple, and I’d be willing to bear the same lack of support for you.  In fact, NOT offering support may help your cause (more on that later).

Further, online payment is an opportunity to partner with players such as Google, Square, Amazon, PayPal and others in what is amounting to one of the most brutal fights in our digital world.  For the right deal, any one of them would likely be willing to help you get transactions working.  Plus, you have DRM covered as part of the streaming protocol and with very little effort, you can do what Spotify does, allowing only 1 stream to run at a time on the same authenticated account.  You already have most of what you need.

The Direct-to-Consumer Opportunity is Big, and not Mutually Exclusive with the MSO offering.

In your letter to MG and in other public statements/posts, you’ve pointed to the 100M cable subscribers (70% of which don’t subscribe to HBO today) compared to only 3M broadband customers as a reason to stick ONLY with your current model.  BUT, the broadband subscribers represent a mere fraction of the potential market for HBO GO, and it is a group of users that has been marketed to efficiently for decades.

The real potential customer base includes tablets and smart phones, not just broadband subscribers.  With over 25M tablet devices and roughly 400M iPhones/Android phones now on the market, after making some assumptions about geographies, the potential domestic user base is likely to be in the range of 200M subscribers, not 3!  That’s twice as large as the cable base, and they’re worth more money to you.

Assuming you get 50% of a subscriber’s monthly payment from cable; that means your 28M subs net you approximately $196M per month in the US (again, let’s leave out your international revenues, which are both substantial and need not be impacted at the outset).  If you need to make that whole number with digital subscribers (at the $20 monthly rate suggested in MG’s letter), you need only roughly 10M subscribers to make even money.  You can have 1/3 the number of subs for the same receipts!  Netflix, even after all of this summer’s hoopla is estimated to have around 20M subscribers and they don’t have the original programming that is the biggest draw for HBO.  You can’t do half as well as Netflix?   Plus, the cable MSOs have had decades to attract HBO subscribers for you and still haven’t surpassed the 30% mark.  What’s going to change?  Direct is a much bigger opportunity than you’re suggesting

The MSOs aren’t going anywhere.

But it would be fair to agree with the above and still not be willing to risk guaranteed revenue if indeed the MSO revenue would be put substantially at risk.  It wouldn’t be.

There are at least 3 arguments worth highlighting here:

  1. Making an offering won’t take your MSO revenue to zero.  The cable companies won’t drop you (you’re still worth too much money to them), so they’ll simply renegotiate, but again, not substantially.  It is fair to assume that not only will a material percentage of people continue to subscribe through their MSO, but a naked offering from HBO can help highlight a cable offering as premium.  The vast majority of Americans have access to local broadcast channels free over-the-air, yet choose to subscribe to cable.  Making a similar argument for the benefit of HBO isn’t much of a stretch.  Cable still offers the easiest, most reliable means of accessing ANY programming.  Any IP-delivered video service is likely to stop at least once during playback to buffer, and require you to switch inputs if you want to watch the game.  Cable doesn’t.  Plus, there are other conveniences including direct-billing, discounts on bundled services, DVR functionality, AND robust customer service that will bolster the MSO offering.  Cable shouldn’t be impacted materially.
  2. Broadband subscriptions benefit the cable operators.  More and better streaming video offerings help drive broadband subscription and that is a good thing for the cable companies.  Access, unlike cable is a high-margin business with little incremental cost for adding a new userPlus, any new broadband subscriber offers cable a chance to convince users to take or retain core bundled services.  Cable knows you aren’t killing their business by offering something of value that requires broadband.
  3. Consumer interest won’t last forever. Finally, you can’t expect consumers to wait for you to deliver what they want.  Cord-cutting isn’t the issue, but accessing programming via the device and at the time of a user’s choosing is.  Taking a quote from Steve Jobs out of the Walter Isaacson biography, “If you don’t cannibalize yourself, someone else will.” With Amazon, Apple, Google, Netflix, Disney and many others offering direct-to-consumer access to movies and programming, people have to make trade-offs. I’d sooner pay for the series you’re making, but if you won’t let me, I’ll eventually give up.  I’m not alone.

To Be Fair.

But, to be fair, I understand your unwillingness to do it TODAY. You’ve got enough money coming in and your building a large enough stockpile of great original programming to license out if you choose to do so.  There’s very little urgency.

I don’t blame you for waiting, but you don’t have to.  I’ll sign up today.  You’ll make more money and grow your audience.  I hope you’ll reconsider.

Thank you,

Lee

About Lee Milstein: Trained as a lawyer, but a tech guy at heart, Lee is on a quest to better media through the use of technology.  Currently doing business development deals for AOL, Lee previously ran Business and Corporate Development at DivX and once took a class called “Mobile Robotics” that he never heard the end of from his friends. Read more on Lee’s blog.

Dear MG (a note from HBO)

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We saw your letter yesterday, and wanted to take the time to write you back.

First and foremost we love your content too!  Seriously, you write great stuff, and we generally love all of our fans.  This is why we’re writing to you.  See, the thing you love us for is the great shows we make like Game of Thrones, Entourage, The Sopranos, etc.  And we love making them.  Some might say our brand is at its strongest in recent memory, as we put out some of the best shows on television (though we’ll give a little head nod to our friends at AMC for their impressive content selections in recent years – we wish we had grabbed Mad Men, but… oops!).

See the thing is, the way we get to make these shows is, candidly, by spending a lot of money on trying to be the best (btw – can you believe it’s been 20 years since “Simply the Best” was our theme?  flashbacks!).  Our mutually agreed upon favorite Game of Thrones?  North of $5 million – just to make the pilot!  And the dude writing it hasn’t even finished the whole series yet!  This stuff costs a fortune, and, as you’ve probably seen, they can’t all be winners.

We love that you’d spend $19.99 (or more) to pay for our service, and we wish we could have you as a customer.  But let’s talk about that for a second.  First of all, we don’t have any direct relationship with our fans right now, so when you need customer service, you call Comcast or DirecTV or Cox, etc.  So we’d need to get customer service up and running, and that’s pricey, since, as you know, we’d want our service to be top notch.

Next, we have no method of billing you.  And sure, we can just do some PayPal or an easy Website transaction, but then we’d also need a full authentication framework (we trust you, MG, but let’s face it – not everyone on the Internet is quite so honest).  Today, we just get paid by the cable/satellite companies, and it’s up to them to deal with everything else.

But let’s get to the crux of the issue.  There are about 30-40 million Americans who watch HBO shows legally, and we agree, a lot of them would be happy to pay us directly. If we went, as you put it, “cable-optional,” we’d be breaking our existing, mega-million-dollar contracts with our current partners, and from what we’ve seen, they wouldn’t be too happy about that.  Second, we don’t really know how they’d change their billing relationship with you or other consumers.  Which is going to put a lot of people into a precarious position of having to decide if they really do want to sign up with us and keep paying their cable bill.

This too wouldn’t be a problem if we had a really strong feeling about our ability to recoup the investment. See, we make about $4 billion a year right now.  Yes, that’s right, four, zero, zero, zero, zero, zero, zero, zero, zero, zero dollars.  Oh my is that a lot of zeros.

We’d basically be building a product, from scratch, with no distribution whatsoever (remember we’d have to break all our contracts to be able to run a standalone business, which would put a major crimp in our style of marketing and promotions). And even if our current brands were strong enough to build on, do you think our entire customer base would make the shift?  We don’t, even the ones who love our shows.  We also don’t think this standalone business would actually get us a larger audience than we have today, which means even less people would get to watch our stuff.

So MG, we’d love to have you as our direct customer, but honestly, we can’t afford you.  Can we send you a real crown from the set of the show instead?

-your pals at HBO

ps – just in case its not clear, I don’t really work for HBO, nor would I presume they’d write a letter like this one, nor can I be 100% certain of some data points including subscriber base or ARPU. in other words #satire.

The Dirty Little Secret of The Future of TV: Data [Guest Post]

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This is a guest post by Anil Podduturi, you can find his bio below.

Gary Myer, who helped found DirectTV, recently penned a guest post for Wired on the future of TV. It comes with a provocative headline: Why Nobody is Challenging the Pay‐TV Providers.

Myer covers a lot of ground in the post, but it’s mostly familiar territory for readers of this blog: Unbundling, linear vs. VOD, social, device ecosystems. After setting the scene with the 40k-foot industry landscape, Myer makes some bold claims about what’s gating television innovation that dramatically oversimplify industry dynamics.

The biggest problem with Myer’s argument is that it ignores the major impediments to progress for both newcomers and incumbents – these include product design in all of its various incarnations, but let’s not forget content rights, content cost structures, and the economic realities of unbundling. It’s not as simple as cracking a new navigational paradigm for on-demand video or acquiring more content.

(For more on the nuances of this industry quagmire, see my Storify from last week capturing a Twitter conversation between Dennis Crowley, Dan Frommer, Hunter Walk, and others, that all started when Dennis’s grandmother couldn’t watch the Pats game in Florida without a $350 DirectTV Sunday Ticket subscription.)

At the end of the day, video services of the future must increase the value of the monthly subscription through a mixture of distribution, content, and user experience, but getting there will require a data-driven approach to the business that embraces platform dynamics and wedges the economics of content in favor of consumers.

This approach should extend to every dimension of the business, including content acquisition. Myer acknowledges that content acquisition is one of the biggest challenges for would-be disruptors. In fact, it’s his hypothesis for why nobody is challenging the pay-TV incumbency:

What’s the Problem

To seriously compete with existing pay‐TV providers, new providers need to offer at least what the existing providers offer, plus added benefits (more content, lower price, superior user experience, etc).

Successful internet‐video providers will offer a comprehensive catalog of à la carte/on‐demand content –- with an intuitive user experience. Existing internet video players are offering only a fraction of the programming of pay‐TV providers and they are securing new content rights haphazardly. If you’re going to compete with the incumbents, why guess what programming is important to your customer by only acquiring rights to selected programs?

That’s the old Microsoft embrace-and-extend ploy. I’ll save you my personal thoughts on embrace-and-extend as it relates to product development, but assuming some newcomer could actually afford a content acquisition strategy that successfully equalized the traditional channel lineup, what would be the return on such an astronomical investment, and would it even add value for consumers?

Myer says that newcomers shouldn’t guess what programming is important to the customer, and he’s right. But that doesn’t mean the video service of the future should strive for parity in programming. We now live in a world where the best consumer web products have iterated in part because of data – usage data if your product has traction, but how about general industry research like this Nielsen study that tells us the average US home with a cable package receives about 118 channels, but only watches 17 of them.

The way to increase subscription value isn’t by embracing the same content library, but rather by extending the value of the ~14% of content that consumers do access regularly and augmenting that offering with other relevant content and services. To do that, newcomers should leverage actual consumer data signals if they’re fortunate enough to have built a product that can capture them.

"Let me just write em an email, I can explain it all in a simple email!"

Netflix has built a data-driven product, and this is why Reed Hastings got on stage earlier this month at the UBS Media conference to proclaim that he’s the Billy Beane of digital media.  “We’re very much the ‘moneyball’ content buyers. We’ll look at, OK, we paid X for something, so how many people watched it?” Netflix is collecting and analyzing viewing data that then informs their content acquisition strategy.

Netflix, like the Oakland A’s, must apply a data-driven approach because they simply can’t afford to acquire everything they think consumers might want. It’s been reported that Netflix’s streaming content licensing costs will rise from $180 million in 2010 to $2 billion in 2012. Netflix can’t afford to spend another dime or another million on content that doesn’t directly add measurable value to the service.

But at least Netflix is in position to measure value and apply data-driven learning to its product strategy. This brings us to the supply chain of internet-age content distribution, an ecosystem within which Myer says, “companies need to control at least the device and the service.”

It remains to be scene whether this level of control will prove to be a categorical business imperative. Apple and Amazon seem to think so, and have demonstrated success owning their respective hardware and software stacks.

Netflix, on the other hand, is a service provider that understands platform dynamics and how to extract value and meaningful consumption data at the service layer. Netflix not only operates its service across PCs, tablets, gaming consoles, connected TVs, and phones, but has also developed the technical proficiency to optimize that cross-platform device distribution. This allows Netflix to maintain a direct relationship with the consumer and refine its user experience across platforms.

Incumbents like HBO and Showtime have begun to recognize the value of the direct-to-consumer model with their HBO Go and Showtime Anytime streaming services. Competitors like Hulu and YouTube keep investing in direct-to-consumer efforts to drive greater engagement (Hulu Latino, YouTube Channels). Microsoft redesigned the XBox Live Dashboard as a platform for content providers to go direct-to-consumer. Just this past week, we saw the comedian Louis CK pull off an experiment in content distribution, going direct-to-consumer to the tune of $200k and counting in profit.

These direct relationships, and how service providers leverage them to extract data that in turn informs product development, content distribution, and content acquisition will help shape the real future of television at the service layer. No single service will be able to provide a comprehensive offering so long as there is still exclusive, marquee programming and healthy competition in the device ecosystem. However the dust settles, content must stay accessible and affordable for the consumer.

—
About Anil: Anil Podduturi was most recently VP of Product Strategy at NBCUniversal. Prior to NBC, he led product management at Daylife, MTV Networks, and Microsoft. On Twitter: @anilpod