23 April 2012

Nimble TV's DVR Is More Interesting than Its TV Everywhere

TV Everywhere seems both wildly misunderstood and greatly overstated. In this post I will lay out what it is, why it makes sense, and how a startup announced today, Nimble TV fits into the TV Everywhere picture.

The general concept of TV Everywhere is that the multichannel television subscriber should be able to watch anything anywhere, not just at home via the set-top box provided by its MVPD (multichannel video programming distributor). A key question in understanding TV Everywhere is: What is the use case? Or, more precisely, since multichannel television is a household rather than individual subscription, what are the use cases?

  1. In the car, young children in the back seat. Live Nickelodeon or Disney Channel or prerecorded programs (from the family DVR). This use may supplement or take the place of viewing DVDs on portable or car-based players. (Best Buy's selection of such products is extensive.)
  2. Waiting for the bus (apologies to ZZ Top) or plane or train or whatever. There is dead time and while the smartphone has done an admirable job filling such moments with Angry Birds or podcasts or catching up on Facebook, sometimes watching a game, a bit of live news or part of the program on the DVR would be an attractive additional option.
  3. A "second set" within the home. Several MSOs have created iPad apps that offer this functionality already -- Time Warner Cable, Cablevision and DirecTV among them -- and it seems to be pretty popular with everyone except Viacom. Oh, yeah, and there are people who have second sets connected to second set-top boxes, too.
  4. Deep library. One of the appeals of HBO Go is the ability to watch things that no longer air on HBO, like earlier seasons of current shows (How did Game of Thrones begin?) and shows from HBO's past (The Sopranos).
TV Everywhere is added value to your existing multichannel subscription. Because it is not sold separately, it is not a substitute for it. It is "added value" rather than an extra cost service because few would likely pay for it and, more importantly, multichannel operators want to raise the cost of the package (in part because programming costs are growing faster than inflation). While everyone would prefer to create something that would inspire people to pay more for greater functionality, the last service to succeed with that model was the DVR. If the distributor does not charge a discrete amount more to the customer, the distributor has a good argument that it should not pay more to the programmer for these rights (and, in turn, the programmer has a good argument to its program providers that it should not and the program providers have a good argument that the members of the guilds who create the programs should not get anything more either). Presumably, if this innovation adds value to the system, that value will trickle down the food chain, enabling each seller to do a bit better upon the renewal of their deal with each buyer. While there will be the usual squabbling about the terms, TV Everywhere has a few real strengths as an addition to the pay-TV ecosystem.
  1. It is easy to explain to consumers, since it is adding convenience to an existing service, rather than creating a new service.
  2. It is not displacing a significant revenue stream for the programmers. In fact, all of the attempts to create additional TV subscription businesses haven't exactly been huge successes, with the exception of Netflix, which is only truly competitive with pay-TV on deep library (and which does provide some real money to a few programmers, most notably the CW.)
  3. It enhances the value of the subscription and, thus, helps support price increases, in much the way that addition of channels to the basic package did a decade ago.
All of this brings us to Nimble TV, the startup du jour that looks to be about TV Everywhere. Nimble has an interesting business model. The concept is that it will subscribe, for a user, to a package of television service, of the user's choice, from a multichannel operator. Nimble TV doesn't need a deal with the programmer, the theory goes, it only needs a deal with the MVPD. Nimble TV will charge the MVPD's going rate for the package and then mark it up by "around $20" for the benefits that Nimble is providing. In that way, it is like buying stamps at the UPS Store; there is a markup for the convenience of purchasing them there instead of at the post office. 

The convenience, in this case, has a number of qualities:
  1. The set-top box is not in your house, it is at Nimble, taking up their space and sucking down their electricity.
  2. You get full-blown TV Everywhere. Every single program, including those on your DVR (more about that below) is accessible anywhere you have an Internet connection. Nimble TV will deliver a single stream of video from "your" set-top box to your iPad or web browser (the first two available clients) via the Internet. In this way, the functionality is similar to a Slingbox, but with the convenience of not having to buy the Slingbox. 
  3. Instead of purchasing DVR service from your television provider or TiVo, Nimble TV will provide a DVR service with the storage of 10,000 hours (!) of your programs "in the cloud"
Here's the issues that I see:
  1. Multichannel operators may not be willing to allow a third party to have the billing relationship with one of "their" customers, particularly if it allows customers to switch providers more easily (more on that in a moment).
  2. The value proposition for Nimble for a consumer may not be compelling. For subscribers who really value watching TV on their computers or other devices, Nimble does offer that. However, until it also provides service direct to the television (via a game console or Roku or some other box), it appears to offer a more compelling offering on secondary and tertiary viewing devices than it does on the primary device. Addressing this concern, however, should be trivial for Nimble, if they can make an iPad app, I'm sure they can make a Roku app. Getting onto the game consoles, which are far, far more penetrated in US households than Roku boxes, may not come as quickly.
  3. The concept of a single-stream service seems not particularly useful for multiperson households. A Time Warner Cable customer with only one set-top box can still use an iPad as a a "second set" within the household (and a computer as a third set and smartphone as a fourth). While TWC TV's app does not have the same functionality as Nimble's, it does have a large portion of that functionality and Cablevision's app has more. These apps have also improved substantially in the short period they have been on the market. [I'm sure Nimble can provide more than one stream, but doing it with more than one-box would put the kibosh on using the Slingbox as legal precedent.]
  4. The $20 monthly fee for TV Everywhere might not be compelling for many customers. To the extent that the subscriber is getting the DVR functionality from Nimble instead of the core provider, the savings on the television subscription might offset Nimble's cost, in whole or in part, especially as MVPDs raise the prices of their DVRs.
  5. An increasingly large number of multichannel customers purchase more than television service from their provider (e.g., Internet, phone and/or home security service). If the customers takes off the video, substituting Nimble, the price of the other elements of the bundle may go up making the economics of Nimble for a customer a even more challenging.
In his highly recommended and thorough post on Nimble, I believe Rich Greenfield of BTIG Research, is mistaken in his belief that MVPDs will agree to work with Nimble and, if they do so, that the MVPDs will allow Nimble to ignore the geographic boundaries of their systems. Mr. Greenfield foresees a Nimble customers on Long Island, upset with an MVPD's drop of a popular channel during a carriage dispute (e.g. Fox-Cablevision during the 2010 World Series), simply switching to another provider's service. For the same reason that incumbent cable operators have generally not overbuilt each other, there is little reason to see why they would think they would benefit if Nimble facilitated such competition. Verizon and other overbuilders (and the DBS services) would have greater reason to sign up.

Even if the MVPD signed up to work with Nimble, it is impossible to imagine that the programmers and program providers (e.g., sports leagues, movie studios) would agree that the geographic restrictions in place when they license their programs all of a sudden do not apply to Nimble. Regional sports networks do not license their service to MVPD to provide it to customers outside of a defined geographic area and US cable networks that buy movies from the big studios usually do not have the right to distribute them in other countries. Someone else owns those rights. If Nimble does not think that ignoring these rights restrictions would be problematic, they are either hopelessly naive or woefully ignorant.

[One ancillary but related question that comes to mind is: if an MVPD is offering service via Nimble outside of its franchise area -- which community gets the franchise fees? Presumably it has to be the community in which the box resides, but the community in which the subscriber resides might not agree.]

Pulling back a bit, what seems truly compelling to me about Nimble TV is less the TV Everywhere part, than the very high capacity DVR part.  Certainly a large amount of DVR storage is a benefit that is difficult or expensive for consumers to create on their own (via a DVR Expander - 1TB of hard drive space holds about 150 hours of HD video and costs about $100; an individual DVR expander that would hold 10,000 HD hours would cost $6600, at that rate). In my household, managing storage on the DVR is a bit of a pain. While a consumer could add a DVR expander, those products have a reputation for flakiness, as do hard drives in general. Putting the DVR into the cloud, giving it a ton of capacity and making it available on my phone and iPad is something no cable operator is providing right now. However, to make that truly compelling, Nimble needs support for the TV and multiple streams to accomodate everyone in my household. Go down that path a bit and it starts to sound more and more like a service that the MVPD should be selling. Perhaps Nimble ends up going down that route eventually, being a vendor of services to the MVPD. [That was part of Sling's original plan, but being owned by Charlie Ergen didn't put Sling in a good position to be a vendor to its competitors.]

20 April 2012

Inferences from the DirecTV-NFL Sunday Ticket Price Cuts

According to Bloomberg News, DirecTV is cutting the price of the out-of-market NFL Sunday Ticket package by 40% to existing customers ($200 instead of $325) and giving it away free to new customers.
What does this mean?

  1. It is unlikely that DirecTV is paying for Sunday Ticket on a per-Sunday-Ticket-subscriber basis. That sort of structure would make a retail price cut extraordinarily expensive. Most likely DirecTV pays the NFL a flat fee or a share of the revenue with some aggregate minimum.
  2. Competition among distributors continues to heat up. NFL Sunday Ticket may be the only marquee exclusive service in the multichannel marketplace. DirecTV clearly sees more to gain by using it to lure or retain subscribers than to increase average revenue per unit (ARPU). Sweet introductory offers are basically a form of price discounting (in this case the sugar is added programming value rather than a per se lower price). The flashing light is the warning that distributors' margins will continue to go down.
  3. For all the discussion of the consumer appeal of a la carte, bundling is more powerful. New DirecTV customers are getting NFL Sunday Ticket as part of their bundle. Since only about 10-15% of DirecTV customers usually buy the package, that would suggest its appeal isn't that broad. Yet, here it is, front and center of a subscriber acquisition strategy.
Another wrinkle is that customers who want mobile, online and HD access to Sunday Ticket, whether they are new or existing customers, will pay $100 extra (last year that premium was $60). That's counter to the usual TV Everywhere approach where mobile and online access is included in the package as added value. The programmer charging extra for HD programming has also disappeared from the multichannel landscape. Mobile, online and HD fees may not be part of the NFL's flat-fee, yet. It seems that between the NFL and DirecTV they don't know how to value that TV Everywhere added value. As Mike White, DirecTV's CEO put it in an interview with Bloomberg “Charging for digital rights is an experiment. There aren’t great models in how you get your price elasticities right there. We’re all learning what will the market bear in terms of digital rights.”

Once they do, look to see mobile added to the bundle. As for charging extra for HD, at a time when the sets are 69% penetrated to households -- that just seems odd.

17 April 2012

Does Ikea TV Beat Apple to the Punch?

In his biography Steve Jobs, Walter Isaacson quotes the Apple founder as saying
Among those interested in the evolution of television, this quote has taken on a Fermat's Last Theorem-like quality.

However, it looks like Ikea -- yes, Ikea -- may make the first big step forward with a TV that simplifies the interface and, perhaps more importantly, tames the rat's nest of wires. The solution seemingly harks back to the console stereo of the mid-sixties.
Stereo phonograph, tuner, amplifier, speakers and legs
According to Engadget, this all-in-one cabinet, TV set and Blu-Ray player will be available in this fall at a price of around $960. While some of the functionality and specs are clear from the video embedded below, we'll all have to wait on the rest, like screen size. The interface is at least a little reminiscent of the pricey Bose VideoWave set, which All Things Digital's Peter Kafka noted as a potential starting point for the mythic Apple device.

11 April 2012

If Cable Costs $200 in 2020 Penetrations Are a-Gonna Fall

According to a provocative study/press release from the NPD Group, the average US multichannel television subscriber paid $86 for "basic pay-TV service" and "premium-TV channels" in 2011 and that figure is going to hit $123 in 2015 and $200 in 2020. NPD Group says that pay TV monthly rates have risen an average of 6% per year while consumer incomes have remained essentially flat. Keith Nissen, research director of NPD sees this trend as "unsustainable in the long term" and concludes "Much needed structural changes to the pay-TV industry will not happen quickly or easily; however, the emerging competition between S-VOD and premium-TV suppliers might be the spark that ignites the necessary business-model transformation of the pay-TV industry".

Dos "Benjamins" para cablevisión
Hmmm. Let's do some analysis of these figures. According to Multichannel News, the $200 is really $196 and that breaks down to $110 for basic and $86 for premium. Filling in the rest of the numbers (hat tip, Todd Spangler for doing the reporting) and looking at the growth rates, we can prepare the following table.
NPD Group Actual/Projected Average Cable Subscriber Monthly Bills with Compound Annual Growth Rates

The current 6% basic package price increases will continue forever; that's straight-line trend extension more than analysis, but not necessarily a bad place to start. Basic rates have grown faster than inflation for probably two decades now and basic penetration is now 86% per NPD's reckoning. A rational explanation would be that  consumers are must be finding value in basic cable television, particularly with the recent stagnation in household incomes. If they didn't value it, they certainly wouldn't keep buying it. If you don't believe that, you haven't seen the data of how cellphones have eroded the market for landlines.

A further rational explanation would be that the program quality of basic cable has increased dramatically by any reasonable measure. Regional sports networks have more pro games than they used to have, typically at the expense of broadcast carriage. Entertainment networks are putting greater resources into original programming and have turned out some real quality stuff (e.g., 4-time Emmy-winning Best Drama Mad Men). Up-the-dial channels like Bravo which ran older art movies and whose marquee show was Inside the Actor's Studio developed a slate of...watercooler favorites (if you must know, see this). Less commercial concepts like The Nashville Network and America's Talking gave way to the more-commercial stylings of Spike TV and MSNBC. This bounty is now spread across dozens of additional channels (Style!, Tennis!, not just one but two food networks!), almost all of which are in high definition which is not just good but necessary because 65% of households now have sets that a 15 years ago were primarily found in the high-end room at Best Buy.

Will that all continue? It sure could. More investment in programming, more channels, TV Everywhere would allow people to use their subscription in more places on more devices, maybe a technological advance like 3DTV -- all these elements could increase the value of the basic service. In fact, I think it could grow faster than 6%.

The interesting part of the NPD analysis to me is that premium programming retail pricing will increase much faster than basic, no less than 17% annually over the next 9 years. At first blush, that makes no sense at all. Basic programming is a take-it-or-leave-it bundle and that gives it a lot of pricing leverage. If you need ESPN, you need to take the whole package. Ditto for Disney Channel or MTV. We know that basic is a fairly low-churn subscription service.

Premium television, in contrast, churns all the time (HBO churns 10 of its 28 million subs annually) and the channels are often sold a la carte, not benefiting as much from being bundled with others. If HBO is too expensive, or if the season of Game of Thrones has ended, subscribers drop it. This happens all the time. [Even premium services that are not sold a la carte (e.g., Verizon packages Showtime and The Movie Channel in a third level basic tier with a dozen or so ad-supported channels, but the premium services provide most of the value of the tier) it is hard to argue that the packages in which they reside are "basic".]

The other part of premium television is transactional -- pay-per-view movies, events and things like out-of-market sports packages (e.g., NFL Sunday Ticket, MLB Extra Innings). Many of these offerings have substantial competition from over-the-top players.

The only way that premium television retail pricing will go up by 17% annual leaps (and bounds!) is if the cable operators are tapping other revenue streams (e.g., DVD purchases, movie theatre tickets) and that will only happen if the service itself becomes much more compelling that it is today. If that happens, it is more than likely that the program quality of these offerings will have increased and/or the convenience of using the service will increase (for example, the highly compelling HBO Go) or both. In short, if the average bills are going up this much, that's probably very good news for viewers of premium television.

[If NPD is considering DVR service to be part of premium television, that's another element that would support an increase in the average bill. DVR penetrations are going up even as operators have raised the prices for it. It is simply a very compelling service.]

So, at second blush 16-19% annual increases in premium television revenue still don't seem to make sense. I would be very surprised if the average bill for premium services from a multichannel provider will grow by that much over the next decade unless...the business is very different from what it is now. [Hold that thought.]

If the average bills go up that much, it also means that Netflix, Amazon, Xbox, Vudu and iTunes are not providing as much competition for the video dollar as it appears that they are currently. One notes that result would be the exact opposite of the conclusion from an earlier NPD study on the results to date in that area of the business (my earlier post on that study). It isn't impossible to imagine pay-TV service improving over the next decade, but it is pretty hard to imagine that it will improve faster than over-the-top delivery of video. [Unless the cable/telco ISPs defang OTT video via broadband caps, throttling or price increases.]

So how do we reconcile these conflicting projections? The way that I see it is that multichannel television may longer be a 90%-penetrated service, but will morph into more of a luxury good as the prices go up. There is a nugget of this point-of-view in the NPD study findings:
"In fact, 59% of pay-TV subscribers preferred having one single provider for their pay-TV services, compared with 21% who desired multiple providers, and 21% who expressed no preference. Sixty-two percent of subscribers wanted premium TV either delivered by their pay-TV provider directly, or from a service affiliated with their pay-TV provider."
The key word here is "preferred". Consumers would "prefer" to get everything from one provider (less technical hassle, fewer bills to pay, etc.), but if the cost differential is significant..."the lure of convenience may not be enough if the content is available and people can access it without going over some set broadband cap." (well put, Stacey Higginbotham in GigaOm's The cable industry isn't stupid, is it?).

This is the future that I see for multichannel television, because the cable industry is many things, but stupid is not one of them. The cable guys will choose to hold onto the high-quality, high-price segment of the market and effectively give up the lower end to alternative solutions in whatever forms those solutions may take. Right now 14% of households rely on antenna service for television. Maybe 10-20% of the multichannel households leave the increasingly spend-y pay-TV market  That's a business different from the one now, but consistent with the major driving economic factors.

02 April 2012

Pandora is Not the Future of Television

Peter Stern, the Time Warner Cable Executive Vice President and Chief Strategy Officer, sent the cable media abuzz with his comments at a recent industry conference that television is going to evolve into a Pandora-like experience. With all due respect, by and large, that's not going to happen and it has happened already.
Pandora, for those unfamiliar with it, is an Internet-delivered service which is most easily thought of as a substitute for listening to the radio. On the radio, a series of songs are played. Songs are short-form programming -- usually 2 to 5 minutes in length with some exceptions. The listener expectation is that there will be variety, but within a limited area. No one expects to hear Mozart after Madonna on a commercial radio station, even if some people undoubtedly do listen to them back-to-back at home. That limited area in radio is called the station's format (e.g., Top 40, hip hop, rock); in Pandora the format is formed by algorithm from the user's initial choice and subsequent thumbs-up/thumbs-down feedback. It is the nature of a short-form medium that making a dozen or more programming choices per hour of listening would require some work on the part of the listener. Another quality of short-form programming is that a bad song (i.e., one that the listener does not like) lasts a relatively brief time. Also, radio is an audio-only medium. It is common that listeners use it while participating in other activities, like driving a car.

Television, in contrast, is a long-form medium. Programs are typically 30 or more minutes long. A viewer typically does not need to make more than one programming decision for an hour of entertainment. Second is that a poor programming choice (e.g., a bad show) lasts a lot longer than a bad song. Third is that television is used more frequently than radio as a primary activity. In fact, some television programs are pretty difficult to follow without paying attention.

As many have pointed out, YouTube Leanback has been doing the Pandora-for-video thing for years...without getting a whole lot of traction.

It's not usually too much work for the viewer to select the next television program.  Also, even more importantly, there is already a great passive system for watching television. It's called "not changing the channel". Cable channels are often formatted by genre, not unlike radio stations. All television channels - niche or general entertainment - pay attention to audience flow when setting up their schedules. "Channel up" and "channel down" are simple, if crude, controls for finding another program, and often pretty useful for channel lineups organized by genre (and they'd be much better if viewers could organize their lineups themselves, per an earlier post).

One area in which Peter Stern's observation about a Pandora-like future is spot on is in video-on-demand. The video-on-demand experience generally sucks at segues -- a DJ's term for the transition between two songs. A show ends and then the viewer is deposited back at a screen where the show was originally selected. Is the most likely thing that I want to do after watching a show is to watch it again? Music videos are a popular part of Time Warner Cable's Video on Demand offering. This is what the screen looks like when your choice has finished playing.
I just watched "We Found Love"; watching it again is not my only logical next choice.
Netflix is better. After watching Season 1, episode 4 of Mad Men, it will make it very easy to zip right into episode 5. It's my experience that Netflix's recommendation engine can be pretty good at turning up suggestions of things I might like, but I have rated about 100 movies to give it something with which to work to understand my tastes. (And that works well if only I rate the movies; it gets pretty wonky in a household with mulitple members with disparate tastes).

Lord knows there are some elements of TV navigation that need work, I would humbly suggest Peter Stern sic Pandora on those first.