After Streaming Kills Cable, Where Will the Content Come From?

Mutually assured survival

It’s easy for Hastings to sound so magnanimous. Separately last week, Netflix announced on an earnings call that it had passed Time Warner powerhouse HBO in subscriber numbers for a total of 36 million U.S. customers (it was big news when the service passed 10 million subscribers in 2009). The company’s stock jumps every time it makes a move. Netflix announced last month it had streamed 4 billion hours of video and its share price spiked 3 percent; when it announced the latest customer base, the stock topped $200.

Many see Netflix and services like it (Amazon Instant Video, for example) as the land of milk and honey for the angry hordes ready to flee tyranny—that is, paying an average $160 a month for cable’s triple-play offering. Netflix declined to comment for this story, but Hastings has in the past described the model for the cable industry as “managed disappointment,” adding that his company is happy to take advantage of customer dissatisfaction.

Amazon, too, is trying innovative approaches to programming, including content creation. “Amazon released 14 original pilots; which series end up coming from those will be driven in part by what reception they get from consumers,” says Shawn DuBravac, chief economist and director of research at the Consumer Electronics Association. “When and if they watch them, if they pass them around to their friends—all that information can be captured and analyzed.” It is, DuBravac says, “a more mathematical” approach than the traditional network model.

Networks aren’t blind to that kind of appeal, but there’s other math to be considered. TV programmers understand the strengths of alternatives to traditional cable—they’re easy to use, filled with content and available on any device you’d care to name—but find themselves powerless to match its lateral reach, because their content relies heavily on ad support, and advertisers are used to buying Nielsen GRPs, for which there is no direct equivalent on digital platforms.

“The real issue is that we’re deploying multichannel video services on devices that the industry doesn’t make” or own a stake in, says Jeremy Legg, Turner Entertainment’s svp of business development and multiplatform distribution. Legg has worked with the cable industry’s greatest hope to compete with digital streaming on a level footing: TV Everywhere.

TV Everywhere isn’t one particular service. Rather, it’s more of a rallying cry—a call to all networks and MVPDs to put their content into a VOD package just as friendly and intuitive as Netflix, with more big-ticket programs and movies, and full ad support. Ads are, admittedly, a sticking point. It’s much harder to measure digital viewing than TV viewing, and it’s hard to make sure shows are being watched by someone who actually pays the cable bill. “Historically, whether you were talking about linear video on demand or other services, the set-top box was authenticating people—and you can’t stick a set-top box on an iPad or a mobile phone or anything else,” says Legg. “The industry has to make authentication just as seamless on devices it doesn’t make as it is on devices it does.” 

That has been difficult, to put it mildly. For a while, not all content creators were on board with TV Everywhere. Some saw services like Netflix, which pay hefty license fees, as an easy way to double dip on content costs. They got license fees from Netflix, CPMs from advertisers and carriage fees from MVPDs.

But that strategy, several network insiders told Adweek (none would comment on the record), is not viable in the long term. If a show is available on an $8-per-month service and it sits near enough in time to the same window when it is available on cable, then cable will obviously lose, because consumers will come to believe that all their favorite shows can be made for $8 a month—which, of course, they cannot. “Netflix’s monthly fee is how much it would cost to make one really great channel,” one exec said. One popular network, ESPN, accounts for more than $5 of your cable bill. 

Of course, subscriber fees are a whole new can of worms. Briefly, they’re the portion of a cable bill that goes directly to the networks, and they’re always going up. MVPDs are quick to point out that rising cable bills can be traced to increased sub fees, but John Bergmayer, senior staff attorney at consumer advocacy group Public Knowledge, makes the point that “content companies are only able to charge those prices because they know the price will get passed on to cable customers, because the consumers don’t have another choice.” Cable companies have divided the country up into little fiefdoms where there’s usually only one provider, so consumers upset about exploding bills are stuck. “When you don’t face competition,” Bergmayer says, “there’s really no incentive to be efficient.”

So for TV Everywhere, networks have to provide the incentive to roll out new and better equipment and higher end digital services. The growing presence of TV Everywhere “is essentially part of the consideration set of doing a carriage renewal in the industry,” as Legg explains. “I don’t think it’s coincidental that we’re seeing these around the announcements of carriage renewals.” The price of that, of course, may be that there’s a less pronounced rise in carriage fees for a few rounds of negotiations.

Content fees are a concern for digital-only providers, too. Those dumping money into Netflix stock probably aren’t taking a close look at the company’s SEC filings. Revenue in 2012 was a whopping $3.6 billion, while net income stood at just $17 million. One reason for that disparity is the ballooning costs of all-important content agreements, itemized in the fine print of Netflix’s annual report: As of Dec. 31, 2012, Netflix’s obligations to its licensors was comprised of $1.3 billion itemized on the balance sheet as “current content liabilities,” $1.1 billion designated “non-current content liabilities” and $3.2 billion in “obligations that are not reflected on the Consolidated Balance Sheets as they do not yet meet the criteria for asset recognition.”

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