CHAPTER 7

Internet Distribution and a New Paradigm

On-Demand and Multi-Screen Access, Cord-Cutting, Online Originals, Cloud Applications, Social Media, and More

More content from this chapter is available at www.focalpress.com/9780240824239

The pace of change in the digital distribution of video-based media has been so torrid that much of what I discussed in the first edition of this book is fully outdated. Cloud applications had not penetrated the mass market, tablets did not exist, the app ecosystem had just been introduced, social media was in its infancy, and cord-cutting was not part of the vernacular. What is startling about the delivery and consumption shift led by cloud-based infrastructure, over-the-top access, personalization of TV, and streaming aggregators vying to become new networks is that this new paradigm follows directly on the heels of a period that was itself considered revolutionary. Traditional networks and video outlets, still critical and relevant as the prior chapters have illustrated, are akin to boxers having withstood a first punch that scared them, and a second blow that dazed—the pending question is whether, in fact, the cumulative shocks will ultimately create a knockout. The old boxer, wobbly but wily, is still upright because content continues to be king, and the most compelling content is vertically integrated within the old distribution infrastructure; moreover, traditional distributors are increasingly finding ways to license and exploit their prized content via on-demand systems and on-the-go outlets, using their leverage to turn would-be competitors into new revenue sources. The challenging question remains, though, whether we are approaching a tipping point when revenue from VOD access overtakes traditional sources, rather than the new channels of access being merely a new window to be carefully exploited and caged. If 2006–2008 was the period when the boxer climbed into the ring to defend his title, then I would argue the ensuing few years pushed him against the ropes; in the next several years, we will see that long-feared tipping point when the ropes come down and the digital distribution genie is no longer a pretender to the crown. The challenge to content owners, going back to Ulin’s Rule, is to balance the streams and impose enough window discipline that persistent VOD is not the only window—for if it is, as discussed in Chapter 1 and throughout this book, then creators will see a continuing erosion of revenue, and the challenge of how to produce and finance premium content will become even more acute.

Not Very Old History—The New Millennium’s Wave of Changes in Consuming Video Content

Before I discuss the impact of this wave of new changes (streaming aggregators competing as networks, advances in over-the-top access, cord-cutting, success of Internet-enabled and cloud-based services, professionals leveraging the broadcast-yourself model, social media and related personalized methods of consuming content, etc.), I want to take a step backwards to set the context. In my first edition, I started this chapter by noting: “The years 2006–2008 will be viewed historically as revolutionizing how consumers watched, accessed, and paid for video-based content. The explosion of video on the Web came about suddenly, fulfilling the promise of what many envisioned almost a decade earlier before the dot-com bust. Much of the change was enabled by technology, such as widely adopted DRM solutions, increased broadband penetration, and the advent of video-capable iPods and then iPhones.” The confluence of several factors ushered in the digital revolution that threatened to upset and cannibalize traditional TV and video distribution:

■  the “Googlization” of the world and proving the Web can be monetized;

■  the YouTube and Hulu generation, instant streaming, and the emergence of free video-on-demand (VOD);

■  the introduction of the video iPod and then the iPhone (and subsequently the iTunes App Store);

■  implementation of reliable, flexible digital rights management (DRM) technology;

■  traditional distributors, not pirates, legally making the market; and

■  mass-market adoption of high-speed Internet access (fixed and wireless), together with the adoption of common standards.

User Experience Becomes King

Just as software drives hardware (content is king), compelling new user experiences (enabled by pioneering technology) tend to drive digital distribution channels, and there was a gold rush to develop platforms realizing the new on-demand, on-the-go paradigm. Apple, Hulu, and YouTube are among the companies that leveraged the serendipitous moment in time to launch the right site or products (e.g., YouTube offering free file hosting, together with a user-friendly interface for uploading and accessing content, at the same time allowing users to easily download the flash video application for free). The online video revolution was unleashed, and whether a new entrant (e.g., YouTube, Hulu) or market leader (e.g., Amazon, Netflix, Apple), all companies started experimenting with business models that could tap into but would not stifle the almost obsessive new consumer habits.

Rationalizing the Burst of Convergence

With so many moving parts, it is nearly impossible to clearly diagram this burst of convergence. Figure 7.1 is an attempt to capture the following key factors: (1) the online market is largely driven by deep-pocketed online market leaders in related sectors, not by pirates nor by traditional media distributors; (2) convergence is not business model-dependent, as subscription, rental, and free delivery models are all being deployed; (3) TV remains the Holy Grail to many, as whatever the primary viewing platform online market sector leaders are looking for ways to leverage content delivery to the TV screen (or, in cases, a second or third simultaneous screen, and as described later, trying to supplement offerings with original content and become TV itself); and (4) technology is enabling the migration of traditional media markets (e.g., TV, sell-through video, video rentals) into new online adapted versions of the traditional markets. (Note: For simplicity, I have omitted the further layer of delivery to TV via gaming systems.)

Figure 7.1 Market Segment Leaders That Pioneered New Technology Applications: Digital-Focused Companies Making the Market (2006–2008)

Again, it is important to emphasize that these were not small players angling to join the space. At the time, this represented the market leader in Internet-based video rental (Netflix), the market leader in Internet consumer shopping, including the top Internet site for DVD purchases (Amazon), the global pioneer in downloading media content transitioning from music to all media (Apple), and the top Internet search engine, whose stock had just made it the most valuable Internet company in the world (Google). Of equal importance to who was entering the market was who was not. Unlike the music space, there were no Napsters emerging as viable leaders. While some peer-to-peer companies may have been dominating Internet traffic, the upstarts were wannabes; funded by venture capitalists, the technology was not dominating the models, and in fact the technology was fast becoming a commodity and playing second fiddle to the larger brands. Perhaps the seminal Grokster case plus the earlier focus of the studios and the Motion Picture Association of America (MPAA) to squelch illegal downloads (and head off the woes that beset the music industry) together created a safe environment for companies to jump in and focus on the legal business. The issues debated were not the illegality of downloads, but the economic models of subscription versus pay-per-buy, adoption rates, conversion rates, etc. Against this landscape, the debate quickly became not “Would video downloads be viable?” but “Who would compete with Apple for the market, how fast would it grow, and would an economic model develop to rival iPod’s flat $1.99 pricing for any download (an issue that now feels ancient, though only a few years old)?”

The key elements were that the product and technology were not perceived as intermediary, waiting for adoption of the next evolutionary product (as was the case with laserdisc before DVD); rather, the download market and portable devices enabling the market were perceived as permanent, with upgrades expected akin to the PC market. Just like the next laptop would be faster, sleeker, etc. (though at the time no one was yet thinking about the move to tablets), there was a built-in expectation that the next generation of downloads would be faster with more storage capacity. In a flash, the consumer adapted to the digital world, and did not even notice that content-viewing was being thought of in computer expectations rather than TV or video terms.

The new variety of offerings tempting consumers—from portability to living room convergence, from rental to ownership, from free to paid-for content—was dizzying and confusing. And yet, as we now know, the disruptive changes emerging were just the tip of the iceberg.

Fear Factor I: Panic to Avoid the Fate of the Music Industry

The quick pace of change and related murky legal waters initially cast fear among traditional distributors that the lifeblood of their business may be snatched away before they could even respond (with some arguing via illegal means). The crisis in the music industry, which was first paralyzed by online piracy and then rescued, in part, by iTunes, was threatening to similarly upend visual media as peer-to-peer services enabled file sharing of movies. Long-form video content, which previously had been thought to be somewhat immune given the inherent barriers of hour-plus stories and correspondingly large file sizes (i.e., a film cannot be divided into independent consumptive elements, like a record can be split into songs) was suddenly vulnerable. Whether melodramatic or not, the fate of media was perceived to be in the balance—and to many it still is.¹

While there are no fully reliable statistics on illegal downloads versus legal buys, most industry insiders would admit that legal watching is simply a fraction of overall Internet viewing. At first, there was a proliferation of illegal services, and the motion picture industry, like the music industry before, had to contend with how to convert people to pay for something they were quickly becoming accustomed to receiving for free. The biggest danger came from peer-to-peer services that could virally distribute thousands of copies of a film almost instantly.

The threat of piracy, and the impact of the new breed of peer-to-peer services, was dealt with in 2005 by the U.S. Supreme Court decision in Metro-Goldwyn-Mayer v. Grokster; this case, discussed in Chapter 2, was a turning point for how Internet piracy would be perceived and contained. For here, it is simply worth reiterating that the peer-to-peer file-sharing services, such as Grokster, Kazaa, and BitTorrent, enabled individual users to efficiently share and download movies and other video content for free. There was enormous pressure, both at the government and industry level, to nip this in the bud and avoid a crisis similar to that experienced by the music industry prior to the white knight arrival of iPod and iPod lookalikes. Additionally, because the Web knows no geographic boundaries, it has become equally critical for foreign jurisdictions to act similarly. The Swedish Court’s 2009 jailing of individuals behind Pirate Bay—a notorious site thumbing its nose at the notion of copyright protection—and the FBI’s shutting down of Megaupload, paired with the indictment of its founder Kim Dotcom,² bolstered the trend fought for in Grokster.³

A key technological advance inherent to controlling piracy, as well as essential to managing the delivery of and access to content via the Internet, was the improvement in encryption systems. History is repeating itself: the prior fear was that DVDs provided perfect digital copies that could be pirated (holding back the introduction of DVDs), and now the same issues are surfacing via digital versions distributed through the Internet, with the scenario complicated by the need to authenticate specific devices and users. Licensors are anxious about their jewels being placed on someone’s hard drive (or shareable device), and all the implications that go with that loss of control. Yes, the files are encrypted to ensure that your copy is truly on the end of a digital yo-yo, with the distributing service able to pull the strings to cut off the copy, pull it back after a set amount of time, and virtually control its ability to be played and copied (despite the fact it is stored on your computer, and now also on your tablet and in the cloud). All of this is critically important in the short term, but to many it is less important downstream, where they question the feasibility of imposing these levels of controls on consumers. To the extent people break the rules, services are shoring up safeguards and facilitating a path to market maturity where violators will hopefully be contained and be relegated to the same danger level as DVD pirates: a serious threat to be managed, but hopefully not a category killer (see further discussion in the companion website).

Finally, coming back to the urgency of thwarting peer-to-peer-enabled piracy, exacerbating the need for the studios to act and restore a sense of equilibrium, was the fact that change was taking place on the heels of the decline and peril experienced by the music industry. There was a feeling that this stage of change was somehow fundamentally different than prior iterative technological advances (which, despite previous fears, had served to expand total revenues); moreover, there was a realization that without action, the historical safety nets could not be counted on to preserve current markets.

Because everyone was unsure whether online would be an ancillary market or instead be the whale that could swallow the whole, as well as where lines should be drawn concerning viral access, people were scared and tending to take absolutist positions. With no obvious solutions, unproven monetization, different metrics than traditionally employed, fear of piracy, conflict between protecting valuable windows versus leveraging the Web’s consumer marketing reach, and unprecedented adoption rates (e.g., YouTube, Facebook), media conglomerates at once acknowledged the changes were real and struggled to craft solutions that would expand rather than shrink the revenue pie.

Fear Factor II: Would On-Demand and Download Markets be Less than Substitutional for Traditional Markets (Pessimistically Discounting the Potential of the Markets Being Addictive)?

No matter what hype, until the on-demand and download markets approach revenue levels of the video market, they still represent secondary revenue streams. Video-on-demand is already perceived as the video of the future, and advertising-supported VOD (AVOD)/FVOD will be a critical element of TV going forward (see Hulu discussion on page 377), but the associated revenues from each remain a small fraction of the larger markets; moreover, it is not certain which markets will actually converge (is SVOD the same as pay TV?), nor whether different access methods will be complementary or whole segments will be eliminated. This is a critical issue given the Ulin’s Rule factors outlined throughout: historically, licensing content through windows fostering exclusivity, repeat consumption, variable timing, and price points has optimized the pie. Because VOD can largely fulfill the consumer’s appetite for access to all “when I want it, how I want it, where I want it,” there was a simultaneous attack on not just the concept of windows, but more fundamentally the elements of exclusivity and timing upon which windows are constructed.

Economically, one of the key factors underlying this jeopardy is straightforward: online trends toward nonexclusive access, and TV licensing in particular is premised on exclusive windows. The much-hyped long tail of the Internet affords a broader platform for access to library titles than has ever existed before, but the long tail does not inherently prove enhanced monetization of that content. (Note: Most content people want to see already finds a home via traditional media (e.g., Brady Bunch reruns on Nick@Nite); see also discussion of marginalized return of the long tail in Chapters 1 and 6.) The jury is out. Even if access to a program and consumption dramatically expands, that would still not ensure greater licensed revenues than could be achieved from competition over exclusive rights. The threat presented by online is that expanded access and consumption could, for the first time, actually shrink the pie if that expansion is enabled by free and nonexclusive access. If windows are not choreographed and controlled but content is instead subject to the free-for-all of the Web, then many fear the bar will be lowered. Moreover, lower distribution costs, given the elimination of physical goods, does not guarantee higher margins, given the downward pricing pressures online.

In summary, the safety net that new technology would expand revenues—as had repeatedly happened, such as when video did not cannibalize TV, as early pundits feared—was in jeopardy, and executives in various sectors were left with the challenge of inventing a new market and revenue models or else, as in television, watch their repeat licensing revenues fall in the face of earlier online access that did not make up for their losses. Although people were witnessing a revolution of how programming would be consumed over the Internet as opposed to traditional TV, few were as prescient about the scope and speed as Bill Gates. At the 2007 World Economic Forum in Davos, Switzerland, he proclaimed: “I’m stunned how people aren’t seeing that with TV, in five years from now, people will laugh at what we’ve had.”⁴ New markets and models have indeed emerged (e.g., catch-up via Hulu, subscription streaming via Netflix), giving hope that at least a balance can be restored. It is still too early to declare whether such new models will ultimately be additive. What is abundantly clear, though, is that consumers will demand multi-platform access, with repeat consumption in the future meaning consuming content via a smartphone, game console, PC, tablet, Internet-enabled TV, OTT hardware box, Blu-ray player, etc., in a pattern dictated more by convenience than a distributor-crafted linear sequence.

(See the companion website for more history, including “The Explosion of Video on the Web,” “Change Could Have Been Even Faster (Speed and Quality as Limitations to Adoption and Downloads),” “To DRM or not to DRM,” “Déjà Vu—Internet Piracy Control Measures Reminiscent of Fear of Perfect DVD Copies,” “Common Platform—Behind The Scenes Accelerant,” and “A Landscape Changed Virtually Overnight by iPods.”)

Online Services Becoming “Networks”—the Move for Online Leaders to Compete with their Own Original Content

As earlier posited, VOD is blurring the lines of just what TV is, and I have long argued that Netflix, which is generally thought of as a video service given its DVD-by-mail roots, is more aptly compared to pay television; after all, pay TV, historically, is an aggregation subscription business, giving customers access to a variety of top programming for a fixed monthly fee. The market is now starting to prove this point, with Netflix acquiring Disney titles (available starting 2016), which had previously been with U.S. pay service Starz, for availability in the pay TV window. As a punctuation point on Internet services competing head-on with pay TV, the UK’s competition authority Ofcom announced that it was ceasing its investigation into Sky’s position of dominance in the UK pay TV market because the emergence of Lovefilm (acquired by Amazon) and Netflix had fundamentally altered the competitive landscape.⁵

As discussed in Chapter 6, though, there are critical challenges to the pay TV business, which, not surprisingly, are starting to impact the strategy of other aggregators: (1) cost of content is expensive, especially when trying to secure exclusive access (as noted in Chapter 6, a single studio’s output deal can guarantee over $1 billion over an extended license); (2) aggregation in and of itself is not enough to retain customers, and to remain competitive pay TV services need to offer compelling original content; and (3) aggregating third-party content in a downstream window in an increasingly VOD world creates a bit of an identity crisis for a pure aggregator. Put another way, if an aggregator has to shell out big bucks for content, and at the same time sees its aggregation of content becoming a supplement rather than the driver of the business (How many people subscribe to HBO to get the movies they could have already seen in a prior VOD window versus those who want to watch Entourage or Game of Thrones?), what should their strategy be? The simple answer is focus on the driver that attracts and keeps customers: original content.

If this is the trend wrought by increasingly ubiquitous VOD access to content, then it was inevitable that other aggregation-based businesses started to modify their branding and offerings with original content. When I started to revise this chapter, based on the foregoing premise, I believed that leading services would launch originals—Netflix was among the first to announce, then followed by YouTube. In fact, in a draft, I had written, “I am not surprised that the likes of Netflix and YouTube in 2012 started to delve into originals; rather, I am surprised it took so long.” Not long afterwards, Hulu and Amazon jumped in as well, saving me from this edition being immediately out of date on its 2013 release. Until recently, the U.S. market was the primary testing ground for this trend, but as the leading players branch out internationally the need for originals is becoming evident market by market. In the UK, Televisual, in an article entitled “Digital Giants Go TV Shopping,” noted that Netflix, Amazon, and Hulu were all commissioning original shows to make their respective VOD services stand out. The article then went on to note of the testing ground: “catch-up services are proliferating and it is increasingly easy to access repeats on services such as YouView, 4oD and the BBC iPlayer—not to mention traditional services such as UKTV’s suite of channels. So the leading players realized they have to offer something unique themselves in order to attract viewers. The move echoes Sky’s strategy (though not its spend) of investing in original British content as part of its effort to stop churn and hold on to its 10 million-plus subscribers.”⁶

The penultimate question, then, becomes whether streaming aggregators can migrate their brand, and how well in the future they compete head-on with, for example, HBO Go. Why should HBO not ask for the streaming rights to content they are already paying a premium price for, and position itself as the leader in aggregating streaming content (having been the innovator of subscription aggregation in the first place)? Maybe the battle lines will be drawn over timing (current content versus library), but this becomes a challenging difference to a consumer that no longer wants to wait.

Netflix, YouTube, Hulu, and Amazon Shift Gears

Netflix

In 2011, Netflix announced that it had partnered with Media Rights Capital and Academy Award-nominated director David Fincher (The Social Network, The Girl with the Dragon Tattoo) to produce a political drama starring Kevin Spacey entitled House of Cards. Reputed to cost $100 million to produce, Netflix is betting more than cash on its strategy of adding originals. After touting that total viewing exceeded 1 billion hours in June 2012, Netflix CEO Reed Hastings predicted via a Facebook post: “When House of Cards and Arrested Development debut, we’ll blow these records away.”⁷ Arrested Development, though not a purely original series, is an interesting example of how online services are also providing a new market for series that were cancelled on traditional television (see also discussion of online and TV development in Chapter 2); whereas cable, on occasion, created a new home for series whose ratings could no longer justify a network run, online and on-demand platforms may now provide that second chance for successful shows with smaller, though avid, fan bases (Arrested Development having been a multiple Emmy award winner on Fox, with a cult following, while never achieving hit ratings).

Despite this promise (which no doubt has a white knight feeling to avid fans), Netflix’s test with Arrested Development also provides an example of the challenges inherent in bringing back an older series. The ability to “tie up” actors for continuing seasons is both a staple and thorn of producers, and once a series ceases production, the cast and crew scatter to new projects. This was one of the pivotal reasons that Netflix, when bringing back Arrested Development, had to announce that after one new season, it was likely it would not be able to continue the series, with CEO Reed Hastings even advising that it would be “one-off” and “not repeatable.”⁸ Launching a new series accordingly brings control and all the other associated benefits.

To move beyond an experiment utilizing only a small fraction of its content budget for original shows,⁹ as well as compete with all the other services now following suit commissioning online original premium content, Netflix needs to commit to a substantial ongoing portfolio of original properties and leverage the shift in its offerings—a direction it signaled taking, with its chief content officer, Ted Sarandos, advising post the May 2013 launch of Arrested Development that Netflix planned to quickly double its volume of originals, devoting 15 percent of its budget to original programming, up from roughly 5 percent in 2013.¹⁰ Clearly, though, even with limited fare, Netflix is starting to encroach on the turf of established pay channels much like it snuck up on the prior video market leaders. The Wall Street Journal acknowledged just this shift: “The move to start licensing original shows for its streaming service thrusts Netflix into more direct competition with premium-cable networks like Time Warner Inc.’s HBO, CBS Corp.’s Showtime, and Liberty Media Corp.’s Starz, which also run pricey original series alongside Hollywood movies.”¹¹ If Netflix achieves even modest ongoing success with its original programming, I fully expect that this trend will continue and that Netflix will be increasingly viewed in “network” terms—in fact, this is already happening as reflected in reactions to Netflix’s groundbreaking fourteen Emmy nominations in 2013.¹²

What was perhaps most interesting about the launch of House of Cards on Netflix (February 2013) was the debate it spawned about binge viewing versus traditional appointment viewing. Perhaps because the show’s success could not be benchmarked against traditional TV since there were no ratings attached—no advertising, so nothing for Nielsen to monitor, a point which punctuates my earlier comment about the need for evolved metrics that capture and harmonize downstream viewing via a plethora of devices—analysts were looking to social media and other barometers to measure performance. In doing so, though, what became evident was the drop-off in conversation from binge viewing, as evidenced by the graph from Trendrr shown in Figure 7.2, as reproduced in the New York Times.

The headlines, interestingly, were not so much about the novelty of original content via Netflix, but rather about the viewing pattern that Netflix enabled by making all the episodes available at once: thus compressing the window and allowing binge/marathon viewing. Examples of headlines from the New York Times were: “Does the House of Cards All-You-Can-Eat Buffet Spoil Social Viewing?” and “Release of 13 Episodes Redefines Spoiler Alert”¹³ The debate turned to how much the water cooler conversation helps market a show, whether a big bang launch akin to movies was better, or if there is an inherent benefit to the serial nature of TV. In analyzing the social media falloff, where trends indicated the debut would have put House of Cards among the top shows initially (at least measured by level of conversations) before its falloff, the New York Times noted: “Absent the long tail of online chatter, Netflix is missing out on the secondary bounce of people who want to catch up with the show when they see that many others are talking about it.”¹⁴ The Times also quoted the CEO of Trendrr, Mark Ghuneim, regarding the pattern: “That lack of scarcity, of windowing like traditional television, means that they aren’t going to get those spikes in conversation … After you binge, you don’t have a place to talk about it because everyone is on a different cadence.”

Figure 7.2 House of Cards: Social Media Decay Post Binge Viewing Launch

© Trendrr 2013, reproduced by permission of Trendrr.

It is far too early to tell what the ultimate effect and patterns will be, but this points to a classic disruptive concern when everyone is talking about windows, the long tail, and social media trends. What could be a further cry from the launch of a new network sitcom at 8:30 p.m. on Thursday evening? As online leaders morph into new kinds of “networks,” not only is competition ratcheted up, but the conventional norms of how, when, and where we watch TV are now being blended in a new kind of online test tube that we do not yet know how to measure.

YouTube

YouTube, though not a subscription-based aggregator, is an aggregator at its core and is likewise migrating its profile to now offer original premium content. The challenge for YouTube has always been twofold: (1) it grew like wildfire grounded in pure discovery with little to no editorial filtering; and (2) the lack of editorial filtering scared off brand advertising that was wary of being associated with subpar content. Accordingly, while YouTube succeeded in establishing thousands (in fact, going into 2012, more than 20,000) of content partners with whom it shared advertising revenues, the associated advertising rates tended to be a fraction of those commanded by professional content.¹⁵

How to change this construct has been a continuing puzzle for YouTube, because user-generated content (UGC) is the heart of YouTube: content created by individuals and uploaded to the Web for anyone to see and potentially share. The company’s early growth was directly correlated to the ease of uploading a video file, and continued when uploading images and video from cell phones created a new level of access and potential. A generation of citizen reporters was enabled, and suddenly nothing was private. A recording of Saddam Hussein’s hanging exemplified that there were now, in essence, no limits to what could be uploaded and accessed. The new gatekeeper was editorial and search—not content creation, access, or technology—and its new owner Google was loathe to undermine the power of search. In its acquisition of YouTube, Google implicitly was betting it could crack the challenge of UGC. It knew the advertising categories were there, whether banners or video advertisements, and that the expectations of free, coupled with concerns about juxtaposing brand advertising next to unfiltered and “unprofessional” content (think silly pet videos), was an impediment to efficient monetization. Google simply had the deep pockets to experiment with models, inherently believing that, with an audience, it would solve the advertising issue much as it had pioneered success with its Chrome browser and Google AdSense.

I asked Alex Carlos, YouTube’s head of entertainment, what progress had been made in capturing value from UGC, and he noted:

Huge progress. More than a third of YouTube’s monetizable views come via our Content ID technology, which allows labels and movie studios to share in the revenue from user-uploaded clips. Record labels alone are earning hundreds of millions of dollars a year on YouTube. We see this becoming a significant revenue stream for the entertainment industry.

Even accepting YouTube’s improved monetization of UGC, economically creating some form of editorial filter was inevitable, and accordingly the launch of “professional channels,” while delayed, should not come as a surprise. This is simply the next evolution of YouTube trying to bridge the divide and be TV for the next generation.

In describing how YouTube does not merely want to be “like a TV network,” but rather be TV itself, the New York Times asked the question that analysts had been wondering for years and that YouTube, wedded to its culture of discovery, had been resisting during its patient wait for enhanced monetization schemes: “But how much more could YouTube make if it could sell advertising based on predictable viewership for specific content—in other words, if it could adapt itself to the planning and budgeting cycles of the people who have real money to spend, and allow for the kind of advance marketing that the film and television industries depend on? So get used to channels. The only questions are what they will be and how well they will work.”¹⁶

While the new U.S. channels are still developing, the scope and investment is sizeable: YouTube is creating around 100 new online video channels, with reports of $100 million to be invested in advances to content creators/providers; the list of celebrities involved is also significant, ranging from recording artists (e.g., Madonna, Jay-Z), to actors (e.g., Ashton Kutcher, Rainn Wilson, Sophia Vergara, Amy Poehler), to sports and extreme sports stars (e.g., Shaquille O’Neal, Tony Hawke), to cultural, self-help, and training gurus (e.g., Deepak Chopra, Jillian Michaels).¹⁷ Further, the range of programming is designed to compete with the portfolio offered by cable providers, and includes news and fashion channels in partnership with major brands such as Thomson Reuters, the Wall Street Journal, and Cosmopolitan. In fact, as summarized by the Wall Street Journal, the ultimate breadth of programming will look a lot like basic cable: “The channels will span 19 categories such as pop culture, sports, music and health, entertainment tailored to African-Americans and Hispanics, animal lovers, mothers, teens, and home and garden enthusiasts … In addition to generating about 25 original hours of programming every day, an additional 20 or so ‘library TV’ hours, or existing content that may have been previously broadcast on TV, would be uploaded to YouTube daily on the channels.”¹⁸

As part of launching (and monetizing) its new suite of channels, YouTube hosted “Brandcast” in May 2012; this was billed as YouTube’s first major event at the advertising industry upfronts, and was targted to introduce the new YouTube channels and related Web brands to potential advertisers. As part of these upfronts, YouTube announced several new partnerships, including:

1.  WIGS (www.youtube.com/wigs), a channel created/programmed by Jon Avent (Black Swan, Risky Business) and Rodrigo Garcia (Albert Nobbs, In Treatment) devoted to women’s lives, featuring scripted series, unscripted content, shorts, and documentaries (with stars ranging from Jennifer Garner, Julia Stiles, and Virginia Madsen featured in initial series, and Jennifer Beals, Dakota Fanning, and Alison Janney committed to upcoming fare); and

2.  a Team USA channel (www.youtube.com/teamusa), sponsored by AT&T, delivered by by the U.S. Olympic Committee, featuring original content relating to 2012 Olympic athletes, as well as potential Olympians and past heroes.¹⁹

As part of the press release announcing new partners and channels, and the hosting of Brandcast, YouTube boasted: “By the end of July, there will be 25 hours of new original content on YouTube each day.”²⁰

Against this background of new channel launches, I turned again to Alex Carlos, head of entertainment at YouTube, and asked whether YouTube perceived this launch and focus on new channels as reinventing TV, and how the company viewed the associated fund underwriting programming. He advised:

We’re betting that the Internet is going to bring a new group of channels that’s more niche and interactive than currently available. Our goal is for YouTube to become the defining platform for this next generation of channels.

Think about what we’re all into today—we kiteboard, we do yoga, we paddleboard, we’re into vegan cooking—we don’t have channels that reflect that on TV because the start-up and operating costs are too high. That’s why this complements the existing TV offering. Just as audiences shifted from broad to more narrow programming when cable came onto the scene in the late 1970s and early 1980s, we think audience will continue to shift—spending more and more time with niche subject matter—because now the distribution landscape of online video allows for very discrete interests and audiences to be served. With YouTube, a whole new world of content can now make it to the screen.

The fund we created represents YouTube putting some skin in the game—it’s small, but it’s symbolic.

Not long after YouTube’s announcement of its U.S.-based channels, it essentially doubled down its bet, announcing the launch of 60 new video channels in Europe. Making the announcement on the eve of the annual TV programming market MIPCOM (Cannes, October 2012), YouTube not only announced channels across the UK, Germany, and France, but also touted channel programming coming from industry heavyweights BBC Worldwide, Endemol (the Dutch company behind Big Brother), and Freemantle Media (American Idol producer, now part of Germany’s Bertelsmann). The mix of channels and programming will mimic the portfolio goals of the U.S., ranging from major brands, to niche programming, to celebrity-led content—such as U.K. celebrity chef-produced “The Jamie Oliver Food Channel.”²¹ While the scope of YouTube’s move appears grand, on a per-country level the investment is not particularly risky given the company’s overall size. In the UK, where it has been reported the annual budget for original content is £10 million, Televisual, in quoting Pact’s chief executive, referred to the amount relative to broadcasters ITV and Channel 4’s budgets as “tiny,” and continued on YouTube’s hedged strategy: “… with YouTube providing an advance which they then earn back through advertising. Only then does YouTube split ad revenues with content creators.”²² Perhaps those seeking online funding and complaining about deal structures ought to read Chapter 10—I would love to find a distributor that started sharing upside before recouping a material part of its investment. YouTube and others investing in online content are still exercising prudence, and “new media” models are already starting to look a lot like traditional media.

Hulu

In the second quarter of 2012, in advance of the advertising upfronts, Hulu jumped on the original content bandwagon. In many ways, though, as an aggregator, it was the least obvious service to take the foray into development. This is because Hulu was started as a “catch-up” service for original programming, and its content consists of new original shows from its primary owners Fox, ABC, and NBC. Nevertheless, whether as a natural outgrowth of branding an aggregator as described above, or whether a necessary strategy to remain competitive vis-à-vis other key online services (e.g., YouTube, Netflix), Hulu announced that it was licensing 13 original TV series to be available exclusively online²³ (Note: The exclusivity element to drive value consistent with Ulin’s Rule; UK’s Televisual noting that Hulu “has a program acquistion budget of $500 million for 2012 and is keen to sign exclusive deals for content to differentiate itself from its competitors.”²⁴)

Although there are no formal “digital upfronts,” a trend started to emerge in spring 2012 of the online leaders making presentations and initiating de facto upfronts, in an effort to compete with traditional TV head to head and siphon off part of the upfront kitty to underwrite their online original content (see also prior YouTube discussion). Hulu kicked off this process, and announced five new “series” (and others in development), including:

1.  A Day in the Life, a documentary series executive produced by Morgan Spurlock; and

2.  The Awesomes, a Seth Meyers- and Michael Shoemaker-backed series set for 2013, pitched as “An unassuming superhero and his cohorts battle diabolical villains, paparazzi, and a less-than-ideal reputation as second-class crime fighters.”²⁵

By the beginning of 2013, Hulu confirmed its seriousness in the space, with an expanded lineup totaling 20 original series, including cop show Braquo about Paris cops on the edge (in the spirit of shows such as The Wire, Southland, and The Shield), The Wrong Mans, a comedy spy series coproduced with the BBC, adult animated comedy Mother Up (starring Eva Longoria), and Israeli drama Prisoners of War (in the spirit of Homeland).²⁶ Additionally, Hulu announced a deal with production company Prospect Park to bring back classic soap opera One Life to Live and All My Children.²⁷ If the soaps prove successful, it will demonstrate a major leap forward for online fare, given the seeming disconnect between the generally younger online demographic watching streaming content and the generally older demographic formerly wedded to afternoon soaps.

Regarding the apparent inconsistency in competing with its parent corporations providing new original content, the New York Times quoted Hulu’s SVP of content, Andy Forssell, as noting that the company would work to “get stuff made and not compete with our partners.”²⁸

As discussed in Chapter 6 regarding TV, and as the trend tilts toward VOD consumption, it is interesting to speculate that there is nothing, in theory, to prevent experiments that launch shows first on Hulu and then window them second to broadcast. In fact, this pattern could be an effective hedge against erosion of certain demographics, where it may be easier to market to audiences whose lives are spent disproportionately online and interacting via social media. Unlike the discussion of development in Chapter 2, where online series can, in cases, be thought of as testing grounds for pilots and series that may then leap the divide to broadcast, if Hulu’s original fare becomes successful, then classic TV may truly become a syndication/downstream window rather than the production goal. It is also conceivable that, over time, Hulu could window to itself, offering subscribers to Hulu+ a first viewing opportunity before series then migrate either to its own free platform (AVOD-supported Hulu classic) or to traditional TV (see also later discussion of Hulu+).

In essence, hit content will prime the pump, and where it is then made available next will be driven by the then-available licensing choices; vertically integrated options are apt to influence the outcome when value is attached to brand-building, but will become less a defining factor as businesses mature and those financing content are simply focused on what option provides the greatest immediate return. We are a long way from lawsuits alleging one arm of a company such as Hulu has favored its sister service, but like lawsuits which challenge that conglomerates preferentially license properties to their affilaites (e.g., Time Warner licensing movies to HBO or Turner, where producers question whether the licenses are arms-length or higher fees could have been earned by licensing to a competitor), it is only a matter of time before we see the same arguments relating to online services (see Chapter 10 for a discussion of profits and such issues).

Amazon

Amazon, too, joined the group of streaming pioneers to announce its move into original programming. For its part, though, Amazon created a hybrid model not dissimilar to the crowdsourcing schemes discussed in Chapter 3 regarding financing production. Amazon announced that it would be soliciting ideas for comedy and children’s TV programming: anyone can submit a proposal (e.g., pilot script), and, if accepted, Amazon will fund and produce the series, pay the submitter of the “winning” idea $55,000 plus royalties, and distribute the program via its online video service.²⁹

In a sense, this scheme further extends the notion of democratizing content development, as discussed in Chapters 2 and 3 in the context of online access and crowdsourcing vehicles. However, to be fair, Amazon Studios is no less a gatekeeper than a traditional network or studio, with the difference being you do not need a track record, agent, or friend to throw your script into the pool for consideration. In essence, the PR sounds great, but the odds of success are no better—everyone living in LA is pitching something, and Amazon is now simply another buyer, albeit with a new carrot and a bit of a new twist.

What may change the equation, however, is how Amazon claims it will monitor the process. The company initially advised that green-light decisions will be significantly influenced by user feedback when it allows users to watch animatics and video excerpts from proposed shows via Amazon Instant Video; nevertheless, it then plans to follow the tried-and-true process of producing pilots before commissioning additional episodes, and will have the overall development process shepherded by executives hailing from the traditional TV world.³⁰ As for the pilots themselves, which are reputed to cost in the range of $1 million each—putting the investment squarely between the lower costs of cable and the higher/closer to $2 million investment by broadcast networks for new comedies³¹—Amazon users will play a pivotal role in selecting series to go to production. Roy Price, Director of Amazon Studios, outlined the process for the first set of six pilots culled from more than 2,000 submitted ideas: “The six comedy pilots will begin production shortly, and once they are complete, we plan to post the pilots on Amazon Instant Video for feedback. We want Amazon customers to help us decide which original series we should produce.”³² Despite the lure of opening up the process to anyone submitting an idea, and punctuating my statement above that odds of discovery/success are no better than traditional development, the initial batch of pilots—including a scripted comedy show based on the Onion’s newsroom, to a series about four senators from Doonsburry creator/comic-strip legend Gary Trudeau called Alpha House—essentially all come from sources with media credibility/roots.³³

Regardless of how one categorizes the odds, the Amazon development process is, at least by some measure, an application of inverting the development pyramid by funneling concepts from the wider user base to the development executive, rather than the development executive selecting the project and then marketing it to the broad customer base (see Figure 2.2, Chapter 2, and the related discussion).

Beyond pure originals, Amazon is taking a page out of its competitors’ playbooks and also licensing content to diversify its portfolio of original offerings. For example, it announced that its Prime Instant Video would become the exclusive online subscription outlet for the PBS hit Downton Abbey.³⁴ Such arrangements (beyond again punctuating the value of the exclusivity driver in Ulin’s Rule) ultimately set the stage for production extensions or joint ventures—theoretically, if viewership on PBS were to wane, then Amazon could step in and continue the show to a targeted online audience, a point discussed and postulated earlier in the context of the promise of online to sustain more limited but targeted viewing (though perhaps this is not the best example, as there may be no more targeted TV audience to begin with than fare for PBS).

Inevitably, Amazon, as well as Netflix, Hulu, and YouTube, will learn the challenge of launching production and development versus the success rate of crafting true and sustainable hits. Netflix in its initial foray (2013) already saw the vicissitudes, having its stock stock beaten up post the launch of Arrested Development, when the show was panned by critics (despite Netflix advising its subscribers consumed the episodes at a rate eclipsing House of Cards),³⁵ and then being hailed, when it garnered fourteen Emmy nominations to become the first streaming service to break the artificial ceiling and be perceived as a “player” in the TV space.³⁶ To the extent these online pioneers succeed, though, it will be a boon for production and significant expansion of creative outlets. In a world with endless niche cable channels, there is always room for quality content, and it will be enlightening to see who can crack the formula in the online streaming space and whether this will truly lead to new forms of self-sustaining networks or merely complimentary programming.

Traditional Search Engines and Everyone Else Creating Online Originals

Search Engines

With the major online entertainment providers such as YouTube, Hulu, Netflix, and Crackle (www.crackle.com, owned by Sony) moving into originals, it was not surprising for search engines, who have always wanted to provide diversified news and entertainment content to their user base, to jump on the bandwagon.

Yahoo!, which has been a leader in online news, launched a new Web series hosted by former ABC news anchor Katie Couric. The show, launched in May 2012, called Katie’s Talk, includes interviews with topic experts and will focus on topics such as health, nutrition, parenting, and wellness.³⁷

AOL, for its part, announced a more ambitious program, launching AOL On Network. The “network” takes the video library of content (already accessible via AOL) and themes programming into 14 curated channels, which will be supplemented by an array of original new series. The new series, announced during what AOL dubbed its “2012 Digital Content NewFront”—its spin on crafting new digital upfronts to steal traditional TV’s thunder, and some of its advertising dollars—included seven original shows, spanning scripted entertainment, reality, games, and news.³⁸ Among these shows were:

1.  Digital Justice, a weekly reality series tracking digital forensic investigators working to solve cyber crimes;

2.  Little Women Big Cars (debuted May 2012), a Web series about soccer moms striving to balance their schedules and family lives; and

3.  Nina Garcia, in which Project Runway judge Nina Garcia helps women reclaim their swagger and mojo when they have lost their groove and embarked on a new life-changing phase (e.g., just had a new baby, stared a new relationship).³⁹

Independents and Studios

The ever-maturing online video advertising market is increasingly enabling original programming made for the Web—producers now able to rely on more revenues than simply from integrated product placements (see Chapters 2 and 3) are developing shows with the Internet as the end and only outlet. The number of players and variety is increasing, and while slowly to date it will be interesting to see if the push into original content by online aggregators will stimulate the whole market, and if we will see renewed interest from traditional media sources that have so far only dabbled in the area. Sony produced Sofia’s Diary for Bebo, Sony’s Crackle has launched various Web series (e.g., paranormal thriller The Unknown), and Big Brother producer Endemol produced an interactive reality show The Gap Year (also for Bebo). Alongside such majors, new media studios such as Worldwide Biggies (launched by former Viacom executive Albie Hecht, who headed Nickelodeon programming and launched Spike), and Electric Farm Entertainment (whose founders include former CBS Entertainment president and co-head of Sony Pictures Entertainment Jeff Sagansky, along with Lizzie McGuire producer Stan Rogow) are examples of traditional media executives trying to match talent and programming to launch the next generation of online shows.⁴⁰

Despite these examples, I had anticipated that original online series would have become more vibrant since the publication of my first edition, especially given the improvement in streaming delivery, increase in access points (e.g., tablets), and growth of streamed (and targeted) video advertising. However, as noted in Chapter 2 under the discussion of development, there are scant examples of success; programming has seemed to grow even more niche and, to date, talent guilds’ fears of being cut out of a new pie have proven unfounded, for there is generally not much money being made. Even studios with deep pockets that would seem able to risk development have generally shied away, dabbling at best; Disney’s Stage 9, which was touted as a dedicated made-for-the-web production arm, launched a couple of short-lived properties (e.g., The Squeegees), and is symptomatic, as it was basically shuttered and folded back into the studio after less than a couple of years. Over time, though, there is little doubt that more, and better, online original content will be produced. In fact, as discussed in the context of key aggregators (e.g., Netflix, Amazon, YouTube, Hulu), this is now finally happening on a much grander scale—what we have not seen yet is crossover or hits, with online series still somewhat novelties. Nevertheless, with the amounts being invested and the ability of these deep-pocketed leaders to market and leverage the one-to-one relationships they enjoy with their bases, it is inevitable that something will break through—the issue is timing, and whether these companies have the fortitude to withstand the “nobody knows anything” risk to see through portfolios and become the next evolution of networks.

Finally, as the market evolves, it will be further interesting to see the impact on windowing. More and niche segmented channels open up opportunities to spin-off or continue programming (that might otherwise not be sustainable) to hyper-targeted audiences, and where a show may debut, migrate, or be viewed in a downstream window opens up a new matrix of licensing possibilities. Again, the notion of “what is TV?” is not easy to define as television morphs into a branding construct and is no longer defined simply by a single platform or appointment viewing.

Cord-Cutting: Over-the-Top, Apps, and Other Modes of Access

Dedicated Hardware Boxes

Since the days of Web TV (mid 1990s before its purchase by Microsoft), a Holy Grail has been the integration of the Web with television. With the advent of Nexflix’s streaming service, the use of Microsoft’s Xbox as a multimedia content hub (originally XBox 360), and the growth of Roku and Apple TV, the promise of streaming media boxes has largely been fulfilled. In addition to Roku, devices such as offered by Boxee easily enable customers to stream digital content and watch it via a TV or other screen/monitor. I have had the pleasure of watching Roku grow, and meeting with its founder (Anthony Wood) and former president (David Krall) in their Silicon Valley headquarters—for those who have not used Roku, the experience is the definition of plug-and-play. Simply plug the Roku box in, select your home wireless network, and you have VOD access to streaming content such as Amazon VOD and Netflix, with full DVR control functionality (e.g., pause). When Roku invested heavily in advertising during the 2011 holiday season, brought down the price of its base box to $50, and had the hardware carried in mass-market electronic outlets, the brand began transitioning to mainstream use.⁴¹ With a Roku box and other OTT devices, the virtual video store is truly realized, with inventory potentially dwarfing a retail outlet at your fingertips, loading and playing instantly.

I do not plan to offer a comparison of various devices here—there are plenty of online sources that can compare feature sets among competitive boxes. Rather, I simply want to emphasize general capability of the devices that enable the Internet-to-TV junction. I have also focused on Roku and Boxee here, not because of favoritism, but simply to illustrate the marketplace. Unless you are living in a cave, you know about Google and Apple, brands that permeate daily life and have changed the face of media. Roku and Boxee, though, are specialized companies focusing exclusively on this space; accordingly, they have either pioneered designs or user interfaces that cater to the core elements of easily porting content digitally/online to the TV screen, and are also likely more recognized by tech-savvy consumers (though you may hear more about Boxee, as it was acquired by Samsung in summer 2013).⁴²

In the instance of both Boxee and Roku, both products are truly hardware/integrated software products that are, at least in design, content-agnostic; each box pulls content digitally and uses the TV merely as a display monitor, linking content from Web-based sources, as opposed to a TV that sources its content from the airwaves, cable, or satellite. Accordingly, both boxes allow users to pull movie and TV content from aggregators (e.g., Netflix, Vudu), and apps from the Web (e.g., Pandora, Flickr). In an effort to expand the content able to be pulled in, Boxee added an HD antenna to access live TV (grabbing the free digital signals of the major networks, and thus capturing a good chunk of live sports programming). The HD antenna connects directly to a small USB thumb drive that plugs into the Boxee device. (Note: Subtle legal differences in implementation have not made it the same target, to date, as Aero discussed in Chapter 2.) This represents the very definition of cord-cutting. While its marketing pitch in 2012 became “watch on TV, watch on apps” (to watch on TV, the company highlights that you either need the antenna or a cable connection), earlier website headings under live TV brazenly noted: “Broadcast + Internet = Easy Alternative to Cable.” Boxee’s website even advised: “Boxee intelligently blends live broadcast TV with shows and movies from the Internet to give you one interface for everything you want to watch … Boxee provides an easy alternative to high-priced monthly cable bills.”⁴³ You can almost hear whispers of “snip, snip.”

Finally, because the Boxee box/platform is content-agnostic and relies on software as “the brain,” the box enables users to sort and interact with the content in the same way that users are manipulating connectivity on the Web. Accordingly, watching can become social, recommendations can come from friends and not just a cycling (and curated) TV guide channel, and content listings and queues can be personalized. (Note: In parallel to its connected TV product, Boxee used to offer a software download, enabling the same functionality via personal computers. In 2012, however, the company ceased supporting its software downloads, with its VP Marketing noting in a blog post: “We believe the future of TV will be driven by devices such as the Boxee box, connected TVs/Blu-rays and second-screen devices such as tablets and phones … People will continue to watch a lot of video on their computer, but it is more likely to be a laptop than a home-theater PC and probably through a browser rather than downloaded software.”⁴⁴

When one thinks about the scope of what these new boxes enable, from the realization of the virtual video store to sorting and searching UI applications that more resemble a computer than a TV, there is a tendency to declare the future is here and that everyone will soon own a box. Remembering, though, the maxim content is king and that it is incredibly challenging to convince the mass-market user base to adopt yet another device that plugs in, means that the battle is far from over. In fact, I believe that despite the elegance and leap forward these boxes represent, by my next edition they could be viewed as iterative steps in the wasteland of media distribution. Why? Because the technology will have been integrated as a feature set into something else most already have: the TV. TiVo was revolutionary, but its core (and at the time revolutionary) application of pausing and recording live TV is now bundled into every DVR and cable box. Similarly, the enabling features of these best-of-breed hardware boxes will be integrated directly into TVs, or other devices connecting the living room (see the discussion under “Living Room Convergence”)—the very fact that Boxee had the capability of being downloaded as software (regardless of the fact the company elected to abandon supporting PC downloads) implicates this slippery slope.

This migration was further highlighted to me in the summer of 2012, when I moved to Europe—instead of the “plug in” being my Roku box, sourcing and translating my wireless Internet signal, I plugged in a mini-receiver to the USB port in my Internet-ready TV, making my TV the multimedia entry point to the Internet, with key channels such as YouTube already preprogrammed.

In summer 2013, Google launched a variant to this gizmo with its Chromecast thumbdrive that plugs into a TV’s HDMI port; in essence, Chromecast allows the user to search video on the Web via a mobile/portable device or laptop, and then stream that content over the TV monitor.⁴⁵ To a degree, it reduces the OTT box to its barest form and defines plug and play.

In the chicken-and-egg conundrum of whether it is better to gain access to Web and app-based content via a plug in to the TV or instead gain access to TV by a plug in to a Web-based box, there is likely to be no absolute answer—it is hard to imagine the elimination of TVs, and yet cord-cutting is real and there will be a significant group that will prefer no cable bills and be watching content via over-the-air channels and the vast array of app-based programming available.

Again, if you believe content is king, and looking at the renaissance of high-quality TV being produced by cable as discussed in Chapter 6, strong originals will provide a buffer against cord-cutting; if, however, those originals are coming from online sources (as discussed above in the context of aggregators introducing originals), then that may further bolster cord-cutting. The consumer may save here, but there is unlikely to be a free lunch, as those same services are apt to erect barriers, such as offering content via subscription pay, to differentiate themselves—going back to Ulin’s Rule, there need to be certain barriers (e.g., windows) to monetize content, and free access plus free content, even if AVOD proves more successful, is unlikely to sustain the production budgets, enabling high-quality premium content that so many people crave. Content will not be king in a cord-cutting world that does not figure out a way to enable value drivers to fund quality programming.

Multipurpose Boxes—Living Room Convergence and Home Network Hubs

The ability to access video over the Internet and then watch it over your TV has been perceived by many as the ultimate goal, and the premise of “living room convergence.” At some level, convergence of platforms and content access would subsume all the different paths discussed in this chapter; accordingly, in my original edition, I was unsure whether to discuss Apple TV and other hybrid boxes under general market convergence, or rather in the context of download threats to the DVD market. Two facts now seem clear: convergence enabling simultaneous on-demand access to both online and offline content will continue, but the aggregation of access into one device is not likely to occur. Think more about access to TV and film content along the same lines as access to any content available on the Web: in a connected world, the ability to browse for what we want will become hardware-agnostic, and hardware will integrate flexible applications. It is no longer about playing a game or accessing TV via only one device, but about having access to Hulu, Netflix, Facebook, HBO, etc. via whatever device you may want to use, be that a TV, tablet, phone, or game console.

The advantage that devices that already connect to the TV have is just that: the TV monitor screen is still the best display medium, given size and integrated audio output. Apple’s Apple TV may not have been the “killer app” people wanted, but regardless of the reason (e.g., people did not want another box), it was only one among a number of hardware solutions trying to provide the bridge. In a sense, it had been tried before (again, remember Web TV?), and whether the bridge is a new box or a feature in an existing box, in the long run there seems something a bit doomed about trying to create an interface to a television when the next generation of televisions can do it themselves (though innovative devices, bridging the Internet and TV, and enabling customization will undoubtedly drive new markets before such devices become standard integrated TV features, and a monitor is the access point to all).

One notable interface, though, where convergence is manifested today is via integrated games platforms such as Microsoft’s Xbox Live Arcade (XBLA) and Sony’s PlayStation Network (PSN); these systems/environments enable both access to linear content and connectivity to millions playing interactive games. The growth of the Xbox Live platform (boasting more than 40 million members) and PSN (which has over 90 million registered users) and integrated ecosystems demonstrates a compelling application of living room convergence.⁴⁶ The lineup of content accessible via the Xbox 360 system, as an example, includes Netflix, Vudu, Hulu+, YouTube, HBO Go, and a variety of cable channels. In fact, Microsoft has announced that Xbox Live subscribers actually used the game console more for consuming entertainment than actual gaming—with Adweek quoting Microsoft’s SVP of interactive entertainment as noting 18 billion hours of entertainment were consumed in 2012 by the service’s more than 46 million subscribers.⁴⁷

Not surprisingly, given this base and trend, and taking note of other online leaders launching original content, Microsoft too is augmenting its suite of offerings by producing original programming. In 2012, it hired former president of CBS Network Television Entertainment Group, Nancy Tellem, to become President of Microsoft’s entertainment and digital media unit. A range of product is being considered, from high-quality pay-level content, to reality, series, alternative, and live programming (with how such product is monetized, such as potential add-on pricing to existing subscription costs, open to a variety of business models). Further, and talking about the possibility of transmedia applications and secondary storylines on second-screen devices, Adweek noted from an interview with Tellem that: “She saw episodes ranging from as short as 10 minutes to an hour and a half, multiple episodes being produced, and using Xbox’s interactive capabilities, be it the voice-and-gesture-enabled Kinect or the second-screen SmartGlass app.”⁴⁸

Original content aside, back to the box, the question Microsoft asks, rightly so, is: Why buy a limited feature box such as Roku when you can get the same content on the Xbox you already have? In terms of streaming and access, they are, in fact, comparable; the difference then lies in cost, user interface, space, and all the other features that drive a consumer to prefer one product over another. In terms of the question “Is living room convergence possible, and is it here?” the answer is yes; the question now becomes “What box/device do people want and, in terms of adoption, how many will they have?” Further, the question becomes one of “How many devices do you need (e.g., multiple TVs), and does the connection need to be fixed or can it be portable? Assuming your next TV has Bluetooth capability (or something similar), if an application such as Boxee software integrated into your tablet can be paired with your TV, enabling your tablet (or even cell phone) to act as your remote control, would that be enough? To some, yes; to the person also frequently connected to a gaming console, probably not; and to the definitive couch potato wedded to their remote, maybe somewhere inbetween. This last example, though, may be moot when the box itself is actually part of your TV.

Integrated Televisions: Internet Access Embedded within Your TV

In terms of television, for several years new sets were being conceived and built with enabling chips, such as evidenced by a deal announced in the summer of 2008 between Amazon and Sony. The then-named Amazon Video-on-Demand video store was placed on new high-definition Sony Bravia televisions. Today, there are multiple manufacturers making Internet-ready TVs, which, unlike boxes that connect via a video cable (e.g., HDMI cable), enable direct Internet access the same way your computer would connect (i.e., wirelessly, through a built-in port, antenna, or via an Ethernet cable). Once the Internet connectivity is established, then content is accessible via apps—Netflix, for example, is an app available on Samsung, Vizio, and Sony Internet televisions.

The limitation to most of the TVs will prove not to be the technology (the ability to access the Internet, and all the content that this implies, over your TV will become commonplace). Rather, the defining feature will become the user interface; complicated remote controls became the bane of the VCR industry—Roku succeeded, in part, because of the simplicity of its remote (minimal buttons and as easy as the plug-and-play hookup), and Apple redefined phones and tablets with its touch screen. Many were hoping that the original Apple TV would have created such a quantum leap, but a few years forward and most internet TVs are still controlled by complicated remotes or keyboards. Whether the next iteration brings touch screens, voice-activated controls (akin to Apple’s Siri), or an entirely new approach, there is no doubt that TV manufactures will focus on pushing convergence and eliminating a box whose features it can seamlessly integrate.

Home Network Hubs and Multi-Screen Access—TV as the Tip of the Iceberg

Once apps and Internet functionality can be embedded into a television, then the next logical question is: Why stop there? If TVs in a networked and multi-screen world become just another type of monitor (though clearly the best one, given size, resolution, and audio), then it should be possible that the “junction box” can become more robust than anything we can imagine today. The future is likely to change the complexion of digital access in home to networked hubs. Whether Internet comes into your home via a high-speed phone connection or cable, the connection to a “box” is more apt to become a nerve center running a myriad of applications.

The first and most obvious iteration will be to enable TV Everywhere solutions within the wireless footprint of your home. We are already seeing this with applications such as AT&T U-verse, where content can move from one TV screen to another with linked DVR functionality; start a movie in the living room, get tired, and move to finish it in the bedroom. More than that, U-verse now allows the downloading of mobile apps to smartphones, where the consumer can browse TV guide listings, program his or her DVR, and even download content from his or her subscription packages to whatever device he or she wants. A content provider that already has rights to bring programming into the home is also in a better position (theoretically) to extend those licenses out via its hub, making the same content available via whatever device a customer may want to use for access (e.g., tablet, computer, smartphone) rather than being limited merely to the TV.

Once this capability is routine, then there is no limit to what digital applications may be enabled. Theoretically, anything that needs to be programmed or controlled could be linked via remote control smart access. Whereas iTunes is an integrated ecosystem for managing media, with content able to be stored and accessed via the cloud, why could it not run apps for other elements of your living room, or home overall? Whether turning on or off a burglar alarm, lights, checking sensors in your kitchen, turning up the heat, or even tuning into a nanny cam, a hub tapping into the Internet and enabling remote or localized digital control is not a far-fetched notion. It will be media applications that first create the experience, but the digital remote control will then migrate to manage your entire connected home and life.

Figure 7.3

© 2013 Apple, Inc.

Figure 7.4

© 2013 Apple, Inc.

Third Screen: Smartphones as Hub, Even if Not Generally Categorized as “Over the Top”

Smartphones have been hailed as the next great distribution platform, and are commonly referred to as the “third screen.” In my first edition, I posed the question: Why would a consumer need unique access to content through its mobile carrier versus gaining access to the same content via the Internet (which is accessible via its phone)? The answer, at that time, was that mobile carriers were trying to carve out a piece of the pie and provide a unique offering, and in some cases partnering to co-brand portals and gateways. Access was via a branded icon, which, if it did not require a download, would come bundled with the phone—“on deck.” The introduction of the iPhone and the emergence of an app ecosystem have fundamentally changed the workings of this market. Apps, whether on tablets or smartphones, are becoming ubiquitous, and content providers are enabling direct access, such as via HBO Go. With the advent of the iPhone and explosion of the smartphone market, phones are, to put it simply, no longer mere phones. (Note: Neither Google’s Android phones nor iPhones existed when the first version of this book was released, just a handful of years ago.) Instead, they are mini-digital hubs, a kind of home network on the go. A phone today can be a super remote control, programming and managing a local screen (i.e., your TV), a screen of its own (such as accessing content via iTunes or Hulu, or even live feeds) for watching content, and a personal computer, allowing you to surf the Web via a browser and then directly link to content (see Figures 7.3 and 7.4).

The potential for this market is just being realized. According to Nielsen’s Three-Screen Report, comparing television, Internet, and mobile viewing, as of the beginning of 2008 there were more than 90 million mobile subscribers who owned video-capable phones (representing 36 percent of all U.S. mobile subscribers) and nearly 14 million people were paying for a mobile video plan (only a 6 percent penetration of mobile subscribers).⁴⁹ By 2012, the number of people watching on phones roughly doubled, with Nielsen reporting (though admittedly not a pure apples-to-apples comparison) that more than 33 million mobile phone owners watch video on their phones.⁵⁰

Tablets and the New Multi-Screen World: Going Beyond the Notion of Second and Third Screen

Tablets have so quickly become part of the landscape, and as a hybrid between a laptop and a portable device offering the advantages of apps first found on smartphones, that the category has become the device of choice for watching content on the go. In fact, the versatility of tablets is such that the NPD Group forecast in 2013 that tablet PCs shipped would exceed notebook computer PCs for the first time.⁵¹

Like the trend innovated by Apple with the iPhone, the iPad was a brainchild of Steve Jobs and further cemented his already iconic status. While the iPad, and tablets in general, are attractive for a myriad of reasons, consuming video content is among their most compelling features—so much so that its screen is more important than the phone, and now underpins the concept of multi-screen access. The Kindle Fire complements Amazon’s VOD and download options, with a harmonized ecosystem that rivals Apple’s. Although at the time Amazon did not reveal public numbers, various analysts estimate the U.S. installed base to exceed 12.5 million units by the first quarter of 2013 (through two holiday seasons of sales), making it the most prominent Android-based tablet. In fact, Venture Beat ran an article estimating that the Kindle Fire’s penetration had a reached a point whereby each tablet only needed to generate $3 per month in digital sales to yield a material profit.⁵²

To fulfil consumer demand and expectations, every content distributor today has to find a way to seamlessly deliver to the multi-screen world, which now counts TV monitors (directly or via OTT services and STBs), PCs, tablets, smartphones, and game consoles. In just the tablet arena, this is a technically complex endeavor, given the growing variety of brand manufacturers, competing closed ecosystems (e.g., Amazon, Apple), and rival operating systems (e.g., Microsoft Windows, Google’s Android, Apple’s iOS).

Compare this to the environment not so long ago (depicted in Figure 6.2 in Chapter 6 where just TV and VCR are below the line), and it becomes a truism to say distribution today has become more complex. To producers and broadcasters, who are generally agnostic as to device, the opportunity for reach and making content ubiquitously accessible is groundbreaking. At the same time, though, this ubiquity is fraught with monetization challenges, as underscored by Ulin’s Rule, and multi-screen access, no more than online access, does not guarantee increased profitability.

Growth of the App Economy—Access via Tablets and Smartphones

An entire book could be written about the explosion of the app economy and the phenomenon of tablets, and I do not plan to delve into the history and specifics of each of these categories. Nevertheless, a discussion of media access and distribution would not be complete without noting the impact.

The whole notion of “apps” was created when Apple launched its App Store in 2008, dramatically expanding the functionality of the iPhone—a classic example of utilizing software to drive hardware sales, though in this example profits flourished in tandem. The market adoption was nothing short of extraordinary, both in terms of companies leveraging the opportunity to develop apps, launching everything from new content to new businesses. Only nine months after the store’s launch, Apple’s SVP of worldwide product marketing announced in a press release: “The revolutionary App Store has been a phenomenal hit with iPhone and iPod touch users around the world, and we’d like to thank our customers and developers for helping us achieve the astonishing milestone of one billion apps downloaded.”⁵³ By the start of 2013, in another press release, Apple recounted the following new milestones:

■  Customers have downloaded over 40 billion apps, including nearly 20 billion in 2012 alone.

■  The App Store has over 500 million active accounts.

■  The third-party developer community have created more than 775,000 apps across the iPhone, iPad, and iPod touch.

■  Since inception of the App Store, developers have been paid over $7 billion by Apple.

■  The game Temple Run from Imangi Studios was downloaded more than 75 million times on the iOS platform in 2012.

■  Two emerging game developers (Backflip Studios and Supercell) brought in more than $100 million in 2012 across their freemium titles DragonVale and Clash of Clans.⁵⁴

The market pioneered by Apple soon saw copycats, just as happened with the iPhone (and with it, not surprisingly, a flurry of patent lawsuits). Soon there were apps tied to the Android operating system, and the market had become big enough on its own that categories of job definitions and statistics were being renamed to take account of apps, and Apple’s CEO Tim Cook boasted of mobile apps that “Apple has become a jobs platform.”⁵⁵ In terms of job growth, the New York Times noted: “A study commissioned by the tech advocacy group TechNet found that the ‘app economy’—including Apple, Facebook, Google’s Android, and other app platforms—was responsible, directly and indirectly, for 466,000 jobs. The study used a methodology that searched online help-wanted ads.”⁵⁶ Regardless of whether you believe the detailed statistics, there was no doubt that the notion of an app economy had become real. Even with Apple taking a 30 percent share on app sales, developers could profit handsomely, and stories were emerging of programmers creating games and other apps making them virtually overnight millionaires. (Note: Such stories are always the PR draw, and those earning this type of money are obviously a small fraction of developers.) As discussed in various chapters (including Chapters 6 and 9 regarding TV distribution and marketing), the growth of the market enabled an entirely new category of marketing and cross promotion, and with the near-simultaneous rise of social media, distributors found an entirely new avenue beyond websites to both promote and distribute content (e.g., HBO Go, Facebook pages accessible via Facebook app).

Tablet growth spurred further adoption and convergence, as Samsung (Galaxy), Amazon (Kindle Fire), Barnes & Noble (Nook), Microsoft (Surface), and a host of other major consumer electronics companies (e.g., Lenovo, Toshiba) entered the market. As noted above, it is now likely that by the printing of this book, tablet shipments will exceed those of notebook computers—in a remarkably short period, app access via tablets has become mainstream, almost ensuring that the consumption and distribution vehicle will remain, even if the particular enabling hardware devices evolve or are superseded by some form of new technology in the future.

Although I am mentioning apps generally under the category of cord-cutting and alternate access, it is important to clarify that while apps enable portable access, they are what networks and cable operators hope will be an antidote to cord-cutting; as described in Chapter 6, TV networks are tying apps to subscriptions, so that if, for example, you subscribe to HBO, you can access that content off-network via the HBO Go app. This fulfils consumer demand for flexibility, but as discussed in other chapters, it does not necessarily satisfy the consumer that wants à la carte access to a hit show and does not want to pay for the bundled full subscription. This is where I have argued that there is no entitlement to access, and those that want PPV à la carte access early cannot, by fiat, change a window (and model) that has been designed to create cash flow to finance risky productions in the first place. Whether the ability of apps to offer easy PPV and VOD access is so tempting that it forces window changes (or else overwhelming demand will cause piracy to compromise the market) is still evolving, and different providers are experimenting with timing and tiers (see also, discussion below regarding international leaders leveraging apps). Apps, therefore, like many of the other Internet or digital changes, create another conundrum for distributors who see tremendous advantages (such as flexibility and a mechanism to blunt the effect of cord-cutting) and yet must tiptoe around the complications the new ecosystem breeds (e.g., should producers/networks tied to paid subscription models, where hit programs drive lifeblood subscription revenues, create a new form of windowing or access to leverage growing PPV demand?).

Overall Impact (Cord-Cutting)

It is difficult to find hard evidence demonstrating the effect of cord-cutting, but as noted in Chapter 6, Neilsen, in 2011, for the first time in over 20 years, revised downward its estimate of total U.S. TV households. In 2012, Nielsen dropped the number by 500,000 households,⁵⁷ but the prior year, when the revelation of a first-in-a-generation decline of TV Households was reported (dropping to 96.7 percent from 98.8 percent), the New York Times commented:

… young people who have grown up with laptops in their hands instead of remote controls are opting not to buy TV sets when they graduate from college or enter the work force, at least not at first. Instead, they are subsisting on a diet of television shows and movies from the Internet … [this] is prompting Nielsen to think about a redefinition of the term “television household” to include Internet video viewers.⁵⁸

It is not surprising, recognizing that younger viewers are cord-cutting and watching via services such as Hulu and Netflix—and once so accustomed, perhaps never subscribing to cable, creating a new generation who do not cord-cut, but rather never cord-adopt—that Nielsen (as discussed in Chapter 6) is succumbing to the new reality and working to redefine ratings to capture Internet viewing.

Internet-Enabled Streaming Services: Amazon, Netflix, Hulu, and Beyond

Cord-cutting is real: consumption patterns are clearly changing, and more video content is being watched off-TV every year (and also further downstream in non-appointment viewing patterns). Table 7.1, from Nielsen’s Cross-Platform Report, indicates that while TV viewing continues to be strong, the largest growth rates for watching are on mobile and the Internet.

Table 7.1 Monthly Time Spent in Hours:Minutes—Per User 2+ of Each Medium⁵⁹

Netflix streaming grew not on TV, but watching via PCs. Netflix, in fact, succeeded by trying to make the application ubiquitously available—Netflix did not care whether you were accessing your account by your computer, over an Xbox, via a tablet, or through a box. In fact, it was the ability to get Netflix on your TV that initially drove Roku adoption. If you believe content is king, then Roku needed Netflix more than Netflix needed Roku, for Roku had little to provide unless paired with a diverse offering of content, whereas Netflix was like a steroid to any device via which you could watch streamed content. By the end of 2012, Netflix could boast of over 30 million streaming users worldwide, nearly 25 million in the U.S., and up from 20 million overall in 2010.⁶⁰

Arguably, on-demand streaming is the most disruptive of all forces, as it leverages simultaneously the wide and long tail and makes access to content ubiquitous—it is accordingly not surprising that the industry has seen explosive growth in this sector.

Amazon: Digital Lockers, Remote Streaming Access, Downloads, and Bundled Subscription Streaming

Recognizing that download times were an inhibiting factor given the large file sizes of video-based content, services started to experiment with ways to combine instant access (to complete with online streaming) and ownership. Amazon launched its Unbox digital video service in 2006, and followed up with an enhanced version of the service, Amazon Video-on-Demand, in 2008 (now called Amazon Instant Video, or Prime Instant Video for Amazon Prime customers). At the time, Amazon was the first to pioneer cloud-based delivery and was attempting to offer a value proposition that was compelling versus DVDs. For my first edition, I had asked Josh Kramer, principal, business development and content licensing, Amazon Video-on-Demand, how he then viewed the market, and he advised, in part:

One of the challenges Amazon has taken on is to make the ownership proposition in the digital sphere as compelling, if not more so, than the value proposition offered today by DVD and Blu-ray discs. A DVD has the inherent advantages of being highly transportable, durable, high quality, and playable on just about any TV anywhere, due to ubiquity of the DVD player. What does digital add to the value proposition? One key element is instant content delivery—giving customers access to their video collection, on whatever screen is most convenient for them. One of the ways we are working to deliver on this promise is through our cloud-based digital locker (“Your Video Library”), which aims to “unbind” content from a specific device, but instead associates the content with the customer him or herself, and the “domain” of screens to which he or she has access … we want to make it easy for the customer to buy a movie or a TV show, whether on shiny disc, or through a myriad of digital access points, and then make it easy for customers to enjoy their media whenever and wherever they want.

Amazon and others have now largely realized the goal of unbinding content, and what seemed revolutionary just a few years ago is now considered commonplace—and further has expanded as apps and tablets (including the Kindle Fire) represent the next iteration, and to a degree the epitome, of convenient, unbound digital access. Today’s Amazon digital locker efficiently addresses the dual issues of file size (a handful of movies or TV shows could eat up the storage capacity of most computers and tablets) and the challenge of moving purchased content from device to device; moreover, because both downloads and streams are instantly available upon purchase from your “Library,” it should not matter if you are at home, on a plane (assuming you have downloaded), or at a vacation ski home to access the program you have bought.

Of course, all of this infrastructure would be immaterial without content to offer, and Amazon, like its competitors, has been aggressively adding content. Beyond the originals discussed above, Amazon has the advantage of having been the leading online e-tailer for buying videos (see Chapter 5) and leveraged its positioning to sign up streaming partners. Beyond limited exclusives (e.g., Downton Abby from PBS, as noted earlier), Amazon, in early 2013, could boast of more than 150,000 titles across film and TV to rent or purchase, and was locking up content partners for its Prime member access. For example, it struck deals with: (1) Scripps Networks (HGTV, DIY Network, Food Network, Cooking Channel, Travel Channel) to allow subscription streaming access to the Scripps panoply of lifestyle shows (e.g., Iron Chef, Chopped, House Hunters, House Hunters International); (2) CBS to include various hit series (nonexclusively), such as The Amazing Race and Undercover Boss⁶¹ (plus, as described in Chapter 6, The Good Wife, in a hybrid deal that also saw some rights go to Hulu and syndication); (3) A&E Networks to stream hits Pawn Stars and Storage Wars; and (4) Time Warner for Turner’s The Closer.⁶²

Specific content aside, Amazon has basically thought about all the contingencies of where and when you watch, as well as what gateway device you may be using for access, and created a three-way matrix: buying content, paying à la carte for rental videos, and leveraging subscription streaming (rental) by bundling with its Prime membership. It is instructive to look deeper at Amazon’s rules, which provide a kind of guide to the new distribution order. For example, in the Amazon Instant Video Usage Rules found under “Videos” on Kindle Fire tablets, the company spells out that for streaming content, “You may stream purchased videos online through your Web browser and through Kindle Fire, compatible Internet-connected TVs, Blu-ray players, set-top-boxes that are compatible with Amazon Instant Video.” Cognizant of the ever-expanding access points, and wanting to be ubiquitously available (competing for the same reach as competitors such as Netflix and Hulu+), Amazon is at once pushing its captive platform (Kindle Fire) while expanding its competitive reach. Then one needs to look at the restrictions tied to renting and owning. If one owns (i.e., Purchased Videos), then the access is infinite, either streaming from Your Library or launching a download, Amazon noting that viewing periods are “Indefinite—you may watch and rewatch your purchased videos as often as you want and as long as you want (subject to the limitations described in the Amazon Instant Video Terms of Use).”

Not surprisingly, rental is more complicated, as DRM protocols and other usage rules will attach to these more transient rights. For example, while only being able to download the content to one device, there is some flexibility in porting content with a Kindle, as you can start watching a download on your Kindle Fire and then finish steaming it via a different compatible device (so long as it is not simultaneously playing on multiple devices). When I first looked up the usage rules under Amazon Instant Video Terms of Use, there was an almost Freudian slip indicative of the complexity of implementing DRM—the posted rules noted of playing on not “more than once device.” Viewing periods in rental are, not surprisingly, bounded (as restrictions will be set in the licenses with content suppliers), with restrictions on the macro-window of how long you have to start your rental post paying (e.g., 30 days) and how long you have to complete watching once you have started (e.g., 24 or 48 hours).

Finally, the third leg of the Amazon viewing stool is Prime Instant Videos, permitting Amazon Prime members—where a Prime membership costs $79 per year and affords members free two-day shipping on all e-commerce orders highlighted as eligible for Prime, plus unlimited instant streaming of movies and TV shows made available under Prime Instant Videos—the ability to watch content without any window restrictions (other than the content being available to Prime members). Amazon Prime Video is thus a kind of free-subscription-streaming-on-demand service akin to free video rental, provided as a value-added benefit to its Prime members. Given that Prime membership was originally, and remains primarily, an e-commerce financing option (pay $79 and get unlimited two-day service, where customers have to estimate the break-even on shipping costs and their yearly orders), granting quicker delivery to eligible products, Amazon is cleverly leveraging and cross-marketing to its customer base to build user traffic for its Instant Video service. Once hooked, an Amazon convert who has a Kindle Fire will see the holistic benefits of flexibility: ability to stream or download a video instantly upon purchase, and to enjoy the currently boundless storage of a remote digital locker or freedom of a resident copy should the manner of his or her on-the-go viewing be at a time when he or she may not have Internet connectivity.

The entire value proposition is highly compelling, and yet while this adds value to Amazon as well as the consumer, how will this fungibility play into the longer-term profitability of the producer/content supplier? The ability to so easily “watch and rewatch,” as Amazon states, is no doubt fantastic for the consumer, but the ease of repeat consumption undermines that particular monetization driver (even if ownership has always enabled, the portable and remote flexibility reduces the chance of paid-for repeat consumption/need for multiple copies) and access via so many devices punctuates a measure of nonexclusivity (undermining part of the exclusivity driver, even if only here tied to Amazon). A content supplier previously would salivate at the segmentation of re-consumption and types of devices, which would create additional monetization opportunities tied to the additional consumption. All the while, though, this ease of consumption for viewers is not accompanied by higher or even any additional fees—the only extra money being made is from the hardware device manufacturers or content access points/platforms (e.g., www.amazon.com, Kindle Fire store). Moreover, Amazon is able to loss-lead its hardware, given its customer base, provide quasi-free subscriptions to undercut the value being paid for other subscription streaming services (e.g., Netflix), and influence consumption choices through its recommendation engines. In a nutshell, Amazon’s offerings highlight the conundrum faced by content suppliers today, unable to turn a blind eye to what consumers crave, yet unable to capture new revenues in as profitable and efficient a manner as they have historically driven through the value drivers sustaining traditional windows.

Netflix

Another example of the same type of enabling of the virtual video store is Netflix’s service, which first allowed users to access and watch movies and TV via their computers, and was then expanded to direct-to-TV applications. As initially launched, the consumer was offered instant electronic delivery, via streaming to the PC, of a rental DVD rather than having to wait for the DVD in the mail. The next iteration was a version announced in partnership with TiVo (fall 2008), where the Netflix Watch Instantly streaming rental service would be included within TiVo’s suite of offerings. The stated goal was for a consumer to order a movie from Netflix via the remote control, which would be streamed directly to the TiVo box/TV. As discussed, though, and in the spirit of covering every angle of living room convergence, Netflix was closing deals to deliver streaming programs not only via TiVo, but also through the plethora of evolving devices, independent set-top boxes (e.g., Roku) and next-generation game console systems (e.g., Xbox Live). Regarding consoles, shortly after its implementation, Netflix issued a joint press release with Microsoft, proclaiming that over 1 million users had downloaded the Xbox Live application from Netflix in less than the first three months of the partnership, and that Xbox Live users had viewed over 1.5 billion minutes of TV and movie content.⁶³

As discussed elsewhere throughout this book, Netflix has also aggressively been acquiring (and launching its own original) content to maintain its position. This is an expensive proposition, and in questioning whether the billions being invested in content by services such as Netflix and Amazon in digital rights will be justified by the audiences they are building, the Wall Street Journal highlighted of the amounts: “Netflix committed to pay an estimated $300 million a year for exclusive rights to stream Walt Disney Co.’s films after 2016. Even before that deal was announced, Netflix had $5 billion in streaming content liabilities as of September 30, [2012], up from $3.5 billion a year earlier.”⁶⁴

Before this spending spree, I had asked Steve Swasey, then Netflix’s vice president of corporate communications, how the company viewed all the experiments in the market, and whether in terms of streaming content to the living room there was space for multiple players and models or whether we would see more convergence. His response (2009) was prescient and still holds true a few years later:

Netflix is at the forefront of offering its customers the same type of services via online streaming and other applications that it has always provided—in terms of implementation, we believe content is king, and our business model is grounded in offering convenience, selection, and value in equal measure regardless of the delivery mechanism. It’s clear to us that the consumer has a strong appetite not just for new releases, but for product in the “long tail”—this was clearly demonstrated to us on Oscar night (February 22, 2009), when 1.8 million DVDs were added to customers’ queues, encompassing over 45,000 different titles. With new technology, we are simply able to diversify access to the long tail (and new content) via a subscription rental model tied to streaming as well as physical DVD. We now offer access through a variety of platforms, including the Roku box, and the more hardware partners, the easier it is for consumers to watch the content they want.

We believe the combined DVD and streaming subscription rental, enabled by the Roku box or through our other hardware partners, can live in a healthy way alongside other options, whether free video-on-demand services such as Hulu and YouTube, or pay-per-view access offered by Amazon or Apple. This is really no different than the brick-and-mortar world of rental video outlets, mass-market sell-through outlets, and television all coexisting, and what we are seeing is a transition of these models from the physical to the online world. It doesn’t matter whether you label our Internet streaming delivery as subscription rental or a type of subscription on-demand service, because, at essence, it is the same model as DVD rental, providing great selection, ubiquitous content, and convenience to the customer. However, the more we can expand that principle—again convenience, selection, and value—the better, and the next step beyond access via physical set-top boxes is to integrate our streaming feature directly into televisions. At CES, we just announced partnerships with both LG and Vizio, whereby future TVs will embed the Netflix streaming application, and we expect to see this next-generation product out within the year.

Hulu and Hulu+

Hulu, as also discussed in Chapter 6, pioneered free streaming catch-up television by leveraging content from network partners and then innovating online syndication access together with new advertising models. The structure and service was quickly a big hit, as only roughly six months after launch, Hulu could boast providing 142 million streams to 12 million unique visitors, making it, according to Nielsen Online, the “sixth-most-popular online video brand in the United States, surpassing online video networks operated by ESPN, CNN, MTV, and Disney.”⁶⁵ By spring 2009, roughly a year post launch, it had leapfrogged the competition to become, according to Nielsen Media Research, the number-two most popular video streaming site behind only YouTube.⁶⁶ Further, comScore reported that Hulu’s video views surpassed 332 million, and its unique users had nearly tripled to almost 35 million. (Note: Ranking it a bit lower relative to competition, placing it in both categories behind YouTube/Google, Fox Interactive Media, and Yahoo!.⁶⁷)

The site had become so big, so quickly, that Disney bought into the venture (May 2009) to become an equal-equity partner, adding its content from ABC.⁶⁸ The deal represented a significant strategy shift and potential game-changer in the space, as Disney altered its go-it-alone position of driving viewers to www.abc.com, while creating a near-network monopoly (only CBS missing, until Hulu struck a deal to carry CBS library series in 2012) to compete with the leading sites, such as YouTube, born of the online world.

Another unique feature of Hulu is that while the company promotes viewing at its website (www.hulu.com), from day one it embraced distribution partnerships. One of the radical departures Hulu innovated from the get-go was providing embed codes, enabling users to show its programming within their own sites and allowing the programming to virally circulate.⁶⁹ Hulu thereby enables third-party websites to embed its player into their sites, a practice now accepted as common, but at its inception it was considered a radical model and led to over 6,000 websites distributing Hulu content when only in the beta test phase. This is a significant departure for the network owners (Fox and NBC, and now also ABC), who thrive on driving viewers to a distinct location. The Hulu model casts the distribution net as wide as possible, with where and how Hulu is accessed as a second thought to offering a range of premium content free to viewers. Hulu is the quintessential example of convergence: while positioning itself as Internet TV, it is a kind of hybrid that can be thought of as VOD, free TV, and Internet TV. It is not surprising that its window pattern is not obvious for unaffiliated content licensors, especially when Hulu offers no license fees/guarantees but rather a cut of advertising revenues generated via its diffuse distribution (making the model to the content owner more like syndicated television).

After a couple of years of growth, Hulu launched a companion subscription service, Hulu+, which by 2013 had grown to 3 million subscribers paying $7.99 per month.

I asked David Baron, Hulu’s VP of content partnerships, why, with the success of free streaming (the AVOD service), it made sense to branch out with a subscription service and how Hulu+ differs from the basic free service. He advised:

Hulu+ provides a number of advantages in the marketplace over our basic AVOD service. For consumers, there may be additional content that is not available on the free service, as well as expanded access. While you can only watch the free Hulu service on PCs, Hulu Plus is accessible via a range of connected devices, including game systems, set-top boxes, smartphones, tablets, and connected TVs. Hulu+ also creates a dual revenue stream, with more revenue available to the content owners, which we believe is ultimately a better model for the industry. We’ve generated over $1 billion for our content providers since our founding, and today more of this money is coming from our dual-revenue-stream subscription service. Given these benefits to the consumer and content provider alike, we think we have a great runway ahead of us—as our advertising business expands, our programming diversifies, and our subscriber base continues to grow.

Even with success that has been heralded across the industry and is fodder for business-school case studies, Hulu faces significant challenges: a potential Achilles heel is that Hulu is beset by the benefit and burden of being a joint venture of networks seeking an upside while still incentivized to protect content value on their captive brands and channels. This dichotomy was highlighted when Variety obtained a confidential internal memo in the summer of 2012. The memo reportedly described debates among its owners that could lead to:

■  retracting exclusivity for current content, which, for example, could enable partners such as Disney and Fox to license programming to competitors such as YouTube (content that has been exclusive to Hulu, driving its growth);

■  holding back certain content to bolster and differentiate network sites such as www.abc.com (whereas before Hulu was entitled to all the content on dedicated network sites);

■  taking back certain syndication rights, allowing parent networks rather than Hulu to distribute content to key third-party sites such as AOL and Yahoo; and

■  questioning the limited advertising inventory, and pushing for additional spots on Hulu (limited and user-toggled choices for how and what ads to watch, having been a driver in Hulu’s growth).⁷⁰

Many have speculated that these tensions between the disruptive upstart service, whose revenues and user base continue to expand, and the independent goals of its owners led to the eventual exit of Hulu founding CEO Jason Killar (early 2013). Joint ventures are challenging constructs, in media often driven by the desire for new land grabs; as discussed in Chapter 1, many media joint ventures, even if still economically sensible, have fallen victim to the competitive desires of owners with the strength to go it alone once beachheads have been established and markets move to a different level of maturation. It will be interesting to see how the dynamics play out at Hulu, which, in a very short period, has successfully implemented new business models and established significant brand equity.

Regardless of the politics, and rumblings of IPOs and different exit strategies, the fact is that Hulu, as much as any other streaming service, has changed the face of television and how it can be consumed. Hulu+ is an extension of that trend, but the extent to which the company is able to continue drawing upon its backers for content, as opposed to competing independently in the overall marketplace for programming, will be an interesting process to watch evolve. Perhaps because of some of this uncertainty, yet also driven by the same forces of differentiation that are driving its online competitors, Hulu is betting heavily on original content (see above discussion). Today, we are seeing the birth of new pay TV services online and it would not be surprising if a streaming model that was originally fuelled by AVOD and catch-up programming comes to be driven as much, if not more, by subscription models—in the online world, where consumers still view content in shorter bits, perhaps a model will be proven where a mix of high-quality original series mixed with catch-up TV attracts a base that heretofore lived on a diet of movies interspersed with original dramas.

International Services

It is beyond the scope of this book to delve into all the new international services trying to follow the success of pioneers such as Hulu, YouTube, Netflix, and Amazon. In cases, these U.S.-based services are trying themselves to expand internationally, either through organic growth or acquisitions (e.g., Amazon’s acquisition of the UK’s Lovefilm). Beyond infrastructure, the most paramount challenge is simply building a compelling local library of content with the requisite streaming rights (a challenge that those in the business recognize as daunting). Nevertheless, there are services now launching regularly. As an example, Vivendi (which formerly owned Universal) is launching “Watchever” in Germany, a subscription streaming service being offered for €8.99 per month. Watchever (www.watchever.de) boasts that customers “will be able to watch entire seasons of award-winning U.S. series, blockbusters, and international art house films via Internet on a wide range of devices,” and that those customers “can choose their end device from Webenabled television sets (Smart TVs or other TVs connected to game consoles), PCs as well as Mac computers, notebooks, tablets, iPads, or iPhones.”⁷¹ An interesting component of the offering is that to overcome instances when no Internet connectivity will be available, the service allows subscribers to transfer content to “offline mode” and then access the programming via iPads, Android tablets, and iPhones.

Channel Streaming Apps (as Opposed to Accessing a Single Piece of Content) and Murky Legal Ground

There are a myriad of services enabling you to watch live TV of global channels via streaming. This is a fast-evolving space, and again my intention is not to highlight a particular service, but to comment on the nature of the offerings. For those who have not tried the exercise, simply go to the Web and create a general search for streaming TV channels; a surprising number of services pop up.

The goal of many of these services is putatively to offer domestic broadcasters the ability to move beyond local reach to a global audience. Without the need for satellite or cable infrastructure, channels can find a new audience, create new themed/branded multiplexed channels for additional content that may not fit within time constraints of existing channels, and expand brand identity. Of course, monetizing the channels is perplexing, as advertising beyond the local geographical footprint is not easily captured, the channels themselves would claim the rights to sell (and retain) advertising against broadcast content, and the streaming services are not generally paying for carriage akin to cable MSOs. Moreover, there are a myriad of related regulatory and legal issues involved (e.g., rebroadcasting rights, content bounded to territory restrictions in licenses with channels, copyright concerns as surfaced with YouTube)—and questions of bandwidth charges and net neutrality implications further complicate carriage downstream.

Nevertheless, opportunities seem to exist as regards accessing global networks whose signals/programming are captured and streamed. This has been made even easier via apps aggregating channels, such as the former version of TVU, providing a kind of global TV guide: Install, scroll through the seemingly limitless menu of network, cable, and other channels, select, and instantly have the channel streamed to your tablet. The challenge is distinguishing pirate from legitimate services, as most networks would not permit retransmission or so-called Web carriage absent compensation (see uproar over Aero in Chapter 2).

(Note: Accordingly, it is unclear whether there is permission to offer channels in many cases, with services seeming to link to published sources/stream first, and then offer to take down channels that object. A downloadable app offered in the Kindle Fire store, USTV, for example, noted on opening up the app: “If owners or producers don’t want your channels to appear in our product, please send us your requests, we will remove corresponding channels from our application.” While certain networks/broadcasters may allow channel streaming to the extent the costs of tracking down and stopping services from aggregating their channels is too cumbersome (if viewed from a whack-a-mole standpoint) and viewership is low given the generally inferior quality of the streams, as technology improves delivery and more consumers access the content, this is apt to become more of a future battleground than monetization opportunity, and legal fodder for the limits of linking.)

“Virtual MSOs”

Also in the mix, and somewhere between streaming of live channels and creating a suite of on-demand channels, is what is being referred to as virtual MSOs. These companies are seeking to aggregate linear TV channels (i.e., offer a package of channels just like you have via a cable subscription) and deliver them via broadband connections, thus competing directly with cable and satellite operators. It is rumoured that the likes of Apple, Sony, Google, and Intel are all involved in different schemes to create an MSO via broadband/IP; additionally, it is possible that the new Verizon-Redbox service may be targeting a similar play.

While the cost of delivery may be negated by transmitting over the Web, there are myriad challenges to launching a successful virtual MSO. One pivotal issue is simply the cost of content, as carriage deals tend to involve marathon negotiations that can also carry billion-dollar price tags. In discussing the obstacles facing Intel, for example, Variety noted: “Add in the complexities of coming to terms on an entirely new business model, one that can’t violate the most-favored-nation clauses in place that prevent programmers from giving Intel any advantage over top MSOs like Comcast.”⁷² Variety further notes among the challenges: “No doubt Intel is keeping an eye on the debate over network neutrality, the principle that broadband providers can’t give preferential treatment to any one source of data.”⁷³

The final results of channel delivery over IP will likely be determined, in part, by lobbyists and regulatory stuctures, as there is too much at stake to have the existing airwaves upended by a free-for-all over the Internet. It is beyond the scope of this book to delve into FCC regulations, politics, and the net-neutrality debate. What I simply want to highlight is the direction the market is evolving, the high-stakes battles being forged, and the ultimate leverage that owners of key brands and channels will have—this is one area where content will, to a large degree, remain king, for MSOs, whether real or virtual, are only forms of pipes charging a toll for access to content, and again, whether traditional or virtual, those holding licensing rights to key content will extract premiums for inclusion and packaging.

Cloud Services and Networks Enabling Everything, Everywhere

UltraViolet and TV Everywhere

TV Everywhere is a user-friendly phrase for a verification protocol that enables a TV broadcaster to verify that a user (seeking IPTV streaming video feeds of its cable content) is a subscriber to the broadcaster’s service; in simpler terms, when Comcast and Time Warner announced the initiative, the goal was to enable cable subscribers to stream TV shows for free over the Internet. All you need to do is download an app (e.g., from TBS or TNT) and verify via a login that you are a paying customer of the cable subscriber. TNT went so far in the fall of 2011 as to run an advertising campaign featuring late-night host/comedian Conan O’Brien telling viewers to download TNT and TBS apps on their phones and tablets and start watching their favorite episodes online and on-demand.⁷⁴ Although HBO Go (part of the Time Warner family) is run independently from TV Everywhere, it helped pioneer the app method of watching cable shows online. Benefiting from advertising offline on HBO, as well as the growth of tablets/multi-screen options, Time Warner CEO Jeff Bewkes boasted in December 2011 that the app had been downloaded “5 million times and streamed over 98 million programs since its launch last year.”⁷⁵

TV Everywhere is, according to some, cable’s grand design to thwart cord-cutting and retain cable subscribers. It is also perceived as a counterattack to the growth of Hulu, Netflix, and Amazon, providing free online access to shows as a value-added service with your cable subscription. For these reasons, and fear of “big cable,” critics have attacked the move as anticompetitive. It is not necessary, though, to look at TV Everywhere in terms of a defensive position—the fact is that this distribution promises very large revenue gains to the content providers. Streams contain the same advertising as in the original cable broadcasts, and these online streams are aggregated within the Nielsen Live + 3 day ratings.⁷⁶ Now, if you watch a hit Turner show on your iPhone or iPad via the app, within three days of the original broadcast, the advertising revenues increase. A Needham & Co. analyst, as quoted in the Hollywood Reporter, projected that this could add $24–48 billion to the TV ecosystem over a few years, suggested that the largest content owners could see upwards of $10 billion per year increases in advertising revenue, and stated that these amounts “… dwarf any near-term revenue streams from digital platforms (Hulu, YouTube, etc.) … Additionally, these are low risk dollars as adding services to the TV bundle suggests additional revenue rather than economic cannibalization.”⁷⁷

The technology enabling the efficient deployment of TV Everywhere-type solutions is inevitably cloud-based. It is a complex technical task to deliver content to multiple screens; there are issues of security, authentication, and monetization, and cloud platforms enable content providers to deploy shows to varied platforms, and to scale deployment (ensuring the accessed show is properly and timely delivered in the right format, to a specific authenticated device) as new devices emerge and markets evolve. Different providers are experimenting with solutions, whether purely cloud-based or hybrids, and turning to software security companies focused on media technology, such as Irdeto and NDS (Cisco), to provide and secure delivery applications.

International Leaders Leveraging Apps and Providing Content Anytime

An interesting fact regarding the “everywhere” multi-screen concept is that before it became in vogue in the U.S., international companies were already pioneering the trend. In particular, Sky in the UK (a division of NewsCorp) had launched Sky Anytime (which later was rebranded Sky Player), which, as discussed in Chapter 6, enabled content to be both pushed and pulled to a box, and leveraged the satellite infrastructure of the Sky network. By the time the U.S. cable carriers announced their TV Everywhere ambitions, Sky had again rebranded as Sky Go and was now pioneering delivery leveraging the new app construct. With the Sky Go app, subscribers to the Sky service could now access content via games systems (e.g., Xbox), mobile phones, PCs, and tablets. Moreover, Sky started to migrate the bundle of cable packages into the Sky Go ecosystem, where content access was tiered to corresponding subscription levels. For example, a variety of live TV channels is offered, but not all channels may be available via the simple Sky Go app, and broader Sky subscription packages may be required. To ensure the widest adoption, Sky Go, for example, is also available for non-Sky TV subscribers on a PPV basis.

Because Sky has always been one of the global pioneers in terms of pay TV—adapting to new platforms, and broadcasting overall—I turned to Sophie Turner-Laing, its managing director of content, and longtime Sky executive, and asked: (1) whether embracing the multi-screen world and making the Sky app accessible via a range of devices, from game systems to phones and tablets, if the viewer base is expanding and thus bringing in more revenue, or if the old base is just being segmented; and (2) whether non-subscribers should be able to access key pay TV content on an à la carte PPV basis, as to some this takes away a carrot to growing and keeping the subscriber base. She advised how the app was indeed proving additive, and why enabling new tiers/types of access should not be viewed as a threat, but rather how Sky is opening up new distribution opportunities:

Sky’s position as a market-leader is down to the way it combines the best possible content with cutting-edge technology that enhances the viewing experience and makes it easy for customers to watch TV on their terms. Our mobile service, Sky Go, is a great example of that. It’s attracting over 3 million unique users a quarter, and growing, and we’re continuing to expand the content available and extending it to reach more devices. New services like Sky Go offer even more value to existing customers from their subscription, but they also provide another reason for people to join Sky and help us to grow our overall customer base. We also recognize that we can monetize this success, which is why we have launched a new subscription service, Sky Go Extra. For a small additional charge, customers have the ability to download TV shows and movies to view offline and they can register two additional devices for Sky Go. It’s still early days, but we’re excited about this opportunity.

We see the growth in new forms of distribution as an opportunity rather than a threat. As well as enabling us to add greater value for existing customers, it also allows us to reach a whole new group of customers. That’s why we launched our own Internet TV service, NOW TV, which is available via a wide range of connected devices. Customers can currently buy a monthly pass to watch Sky Movies. The next step will be the launch of Sky Sports this Spring, with customers able to buy day passes that offer access to all six Sky Sports channels for 24 hours. We believe that the launch of Sky Sports on NOW TV is an exciting opportunity. This is a way for us to reach new customers by bringing a whole host of sports to an even bigger audience. Developing NOW TV alongside our market-leading Sky service positions our business well to deliver for customers and enjoy future success.

UltraViolet

The UltraViolet consortium is the flip side to TV Everywhere’s offering, providing a multi-platform solution to stem the slide of DVD sales. Instead of authenticating that you are a cable subscriber, and then accessing shows via your phone or tablet, anyone who buys a DVD or Blu-ray enters an authentication code and can then watch that content anywhere it can be digitally delivered (e.g., computer, phone, tablet, Web-enabled TV). A consortium of 75 companies, including studios Paramount, Universal, and Sony, together with technology leaders (e.g., Microsoft, Intel), retailers (e.g., Best Buy), and streaming leaders (e.g., Netflix) banded together to offer consumers value-added digital ownership of the physical DVD asset—the motto becoming “buy it once, play it anywhere.”

The technology, mimicking what Amazon pioneered with its Amazon VOD cloud-based service, provides users a digital locker to store purchased content; simply access your locker, and watch your movie from nearly any device, and any location. Disney, not part of UltraViolet, developed its own proprietary digital locker system, Keychest, to similarly offer purchasers ubiquitous access via digital devices with Internet connections. A number of people have questioned whether these cloud-based lockers will catch on, pointing to barriers such as entering authentication codes. While the UI issues may become paramount, the larger issue is in implications for windows. Whereas TV Everywhere is putatively a catch-up service able to expand the penumbra of the ratings shadow to more accurately capture and monetize “current viewing,” digital lockers tied to purchased products effectively give away future viewings for free. While it can be argued that ownership of DVDs permitted this anyway, a critical element of Ulin’s Rule is repeat consumption, and making repeat consumption easier without any additional monetization shrinks the pie. Perhaps if true, as argued in Chapter 5 regarding DVDs that few people actually watch DVDs repeatedly, this will not matter, and the economic effect of saving the DVD/Blu-ray market outweighs this concern. Regardless, UltraViolet without an additional revenue stream or premium on DVD pricing appears more of a defensive step targeted at stopping market erosion and granting consumers the flexibility required in a multi-screen VOD world.

Short-Term Renaissance for TV Programming Sales

The net result of TV Everywhere solutions, combined with the launch of new services ranging from Redbox/Verizon and Xfinity Streampix to compete with Hulu, Netflix, and Amazon, as well as Walmart’s Vudu, Apple’s iTunes, YouTube, and BestBuy’s CinemaNow, is to drive up demand for content. In the short term, the industry’s drop in DVD/Blu-ray revenues is being somewhat masked by growth from online/streaming deals. The content sellers (e.g., studios and networks), adept at windows and masters of exploiting the value in Ulin’s Rule driver of exclusivity, have been deftly parcelling out content. The New York Times noted that a Lazard Capital Markets analyst estimated: “Netflix spent $937 million for streaming rights in 2011 and will pay $1.8 billion in 2012, as deals activate for CW shows like 90210 and DreamWorks Animation movies and TV Shows.”⁷⁸ The total streaming liabilities are much higher: as noted earlier, Netflix’s streaming liabilities for 2012 ballooned to $5 billion (as estimated by the Wall Street Journal).⁷⁹ Additionally, as mentioned in Chapter 6 regarding television, the lines are even being blurred by certain pay services, such as Epix licensing content to Amazon and Netflix—extracting increased revenues from competitive buyers, that are driving up pricing, even if those same buyers could be viewed as would-be competitors aggregating content on a similar subscription basis. Tribal logic of “the enemy of my enemy is my friend” has nothing on the politics and strategies of Hollywood.

While some are jumping for joy and view these new fees as a harbinger of a new market reality, the New York Times reporter Brooks Barnes is right to ask both whether this frenzy is a bubble: “Will movie streaming hurt other parts of the entertainment business, by speeding the demise of the DVD, for example, or by denting the ratings for regular TV?”⁸⁰ Windows and distribution, as painstakingly evidenced throughout this book, are part of a broader ecosystem with many interrelated parts. There is no doubt that this influx of competition to a market that was previously defined by Netflix and a handful of others, enabled by OTT solutions and amplified by the growth of tablets, is driving up content demand and, with it, prices. If content providers can maintain the elements of Ulin’s Rule, including, importantly, exclusivity, within this new paradigm, then there is indeed hope to stave off decline—and even see an upside if growth proves additive above the declines wrought in the traditional TV and DVD markets (though, given the discussions in the preceding chapters regarding monetizing the video market and its scale, actually creating additive value will be daunting). What is less clear and needs further study is the online platypus effect described in Chapter 1, and whether everything being available at once will have an overall cannibalizing effect. Content is subject to a competitive effect, as is demonstrated by numerous examples, including vying for clear marketing windows to launch new product (see the discussion in Chapter 9, “Marketing”); moreover, as posed in Chapters 1 and 6, an infinite tail and infinite shelf space cannot be matched by infinite advertisers and buyers, and as a result revenues are front-loaded against premium content and decline (leading to marginalized returns), the further out content finds itself on whatever type of tail.

There are far too many moving parts, new players, new experiments, and divergent economic forces at play to state an obvious conclusion. The hype of current bidding wars, yielding a temporary and some might argue irrational boon to content sellers lucky enough to leverage a land grab by would-be aggregators, is just one stage in the online streaming market sorting out a new equilibrium, which itself will impact the balance of the overall distribution ecosystem.

Bypassing Everyone: Direct from the Creator

Distributing a program direct to the consumer is every producer’s dream. This was the promise of YouTube (broadcast yourself), but the challenges in returning a profit are generating revenues from advertising (which requires infrastructure and revenue-sharing) and competing with the clutter of millions of other offerings. What if a producer or director could cut out the TV network or theater, and sell the movie/show directly to consumers for a per-viewing fee (akin to a movie ticket, but executed via VOD)? In theory, the barriers to entry have been minimized (manage a website, enable streaming/delivery via off-the-shelf technology, engage a payment processor) and the challenge becomes marketing: What will drive viewers to the site and convert them to purchasers? A big enough brand can assume that it will attract its core fans, solving the demand side of the equation; the remaining business issue is opportunity costs of direct distribution versus partnering with a major provider that bolsters sales by marketing exposure and cross promotion to its general/broader audience.

Louis C.K. Experiment

In December 2011, comedian Louis C.K. decided to experiment with the system, betting that he could make a significant return and charge his fans less to see a special by offering it to them directly. Simply by going to his website, consumers could pay $5 to download his concert film Live at the Beacon Theater. In 10 days, Louis C.K. generated more than $1 million, with his website directing users to buy the special via PayPal, and noting: “No DRM, no regional restrictions, no crap. You can download this file, play it as much as you like, burn it to a DVD, whatever.”⁸¹ After four days, he had sold more than 110,000 copies, and by Christmas that number had doubled.⁸² Louis C.K. paid for the production of the video (approximately $170,000) and website (approximately $32,000) himself, with these production costs largely covered by the ticket sales bought by the two audiences seeing the live show, which was filmed, and then edited; assuming the full costs were roughly a budgeted $250,000 (e.g., including payment processing fees), that created enough free cash flow to pay $250,000 in bonuses to staff, donate in the hundreds of thousands of dollars to charity, and still retain well over $200,000 in profit.⁸³

What the numbers do not tell is how successful the project was versus making it available via a major broadcaster or cable outlet; perhaps Louis C.K. would have been paid a few million dollars with no risk. However, by this direct distribution method, he: (1) generated a bastion of goodwill with his fans (who paid only $5 for access, versus what would have been a multiple of that, perhaps up to $20 via traditional access via a major media company); (2) retained full control over the project, including marketing; (3) retained the ownership/intellectual property rights; (4) made a sizeable profit; and (5) set the table for a repeat performance. Now knowing the system works, there is every reason to believe future iterations could be more broadly marketed, and the net profits could challenge the return from selling the special to a pay network (which would simply package the program and promote it to the same targeted consumers). Although clearly higher risk and more work, having proven the viability others will test this model, especially producers who have a strong brand following and can market to their core fans.

Power to Create Stars

Given the ability to sell content directly to consumers (e.g., Louis C.K. example), and the ability to broadcast yourself without going through a gatekeeper (e.g., YouTube), it would seem that the Internet should be churning out stars. However, that, in fact, is not generally the case. In my first edition, I asked then-head of YouTube’s content partnerships, Kevin Yen, why the Internet had not yet led to the “discovery” of new celebrities. If one thinks about reach and frequency of a television network, YouTube’s reach can be deemed as nearly on par with the 100 million or more TV household market, and arguably, given video views, certain demographics are consuming content at a similar or greater rate. Why, then, has no Jerry Seinfeld or Oprah Winfrey emerged from the Internet, and can those with success online ever hope to reap the financial windfall stars achieve in traditional TV? Kevin advised (2009) that, given the infancy of the Internet, we need to be patient, and as the medium matures and successes migrate into mass-market culture, we will indeed see, and are already seeing, signs of creating stars and those stars benefiting financially:

The power of YouTube to generate stars is real. Already, several musicians have been discovered on YouTube then signed to major labels, and creative talent on YouTube are receiving pitches nearing or even exceeding a million dollars. As marketing dollars continue to flow online and traditional media companies embrace the power of community-procured stars, this translation of YouTube celebrity into real-world financial gain will increase in frequency and intensity. Overall rising ad sell-through rates and individual talent deals, combined with concerted promotion that often accompanies both, can systemically trigger virtuous cycles that fuel fame and fortune to levels of success impressive by any measure.

What Kevin postulated has evolved, and certainly people are translating viral YouTube success into monetary rewards. However, arguably, most of the successes on YouTube (at least in North America) continue to be niche celebrities, and there are scant examples of people gaining crossover fame and fortune solely from YouTube followings. A hyped case from 2011, for example, was then-13-year-old Rebecca Black, whose Friday music video was viewed over 100 million times; she was able to parlay this exposure into commercial ties with networks and leading online sites, with the Friday song performed on Fox’s Glee and a series of videos, Friday or Die, being commissioned by www.funnyordie.com.⁸⁴ While this video may have gone viral and created a moment of fame, that this is a key example of “success” is a case in point why the curation of content helps bubble up hits and why YouTube, in order to generate more revenues, moved to launch a series of professional channels.

What YouTube has more successfully spawned in terms of “creating stars” is a fully democratized casting call, enabling promising performers to be noticed. Perhaps the best example is Justin Bieber, the teen phenomenon whose Vevo-hosted content reputedly crested 2 billion views.⁸⁵ Before Bieber reached this exalted status, though, he needed to be discovered and promoted via more traditional media. According to lore, a talent scout saw postings of Bieber performing cover songs on YouTube, and he was signed by Usher to his recording label (interestingly, Usher similarly broke through and was discovered as a young teenager—Usher was discovered on Star Search, a star curation engine in the pre-streaming era). The virtuous cycle of fame continued to reinforce Internet viewing, making Bieber a star in digital and traditional media.

Interestingly, there may be more examples of wannabes becoming celebrities in less mature international markets, where YouTube provides a differentiating platform in an environment of otherwise limited media choices. At the end of 2012, the New York Times ran an article entitled “Internet-Driven Fame and Fortune for Mideast Comedians,” describing how a local heart surgeon had become the host of a The Daily Show look-alike political satire show (El Bernameg) on Egyptian TV (and no, this is not a parody of Albert Brooks’ parody film Searching for Comedy in the Muslim World). According to the article, Dr. Youssef filmed clips in his laundry room parodying the deteriorating political situation, which led to tens of millions of views and a show that migrated to network TV, bringing comic relief to previously taboo topics, ranging from extreme religious views to political corruption. Describing his appearance as a guest with John Stewart on the real The Daily Show, the article noted: “Mr. Youssef said there was more money in comedy than cardiology. It seemed like a joke, but similar examples of Internet-driven fame and fortune are cropping up across the region, from Egypt to the United Arab Emirates …”⁸⁶

Personalization and Socialization of TV—Playlists, Recommendation Engines, Social Watching, and Tools for Content Interaction

To date, consumption of video/TV has been passive, with the programmer setting the schedule (i.e., appointment viewing); even with VOD applications, the user generally has to sort through a dizzying array of titles, with “hot” or “new” titles marketed near an entry point to entice an impulse purchase. Not surprisingly, new apps are being developed daily that put the power of programming in the viewer’s hand. This can take the form of turning your smartphone into a remote control, enabling you to sort through content and drop it into a playlist for later viewing, discovering content in a manner akin to what Pandora pioneered for music listening, or following recommendations by friends and influencers.

The notion of turning your smartphone into a TV remote control, with the app also learning your preferences so as to recommend other TV shows you may like, is at minimum a compelling notion. It is not surprising, then, to see both large companies and start-ups alike trying to realize this vision. AT&T U-verse, as discussed earlier, has added apps, extending its in-home box to being connected via smartphones. Peel (www.peel.com) is an example of another company pioneering the capacity. It started by providing complementary hardware in the form of a pear-shaped ornament that is synched along with your phone to your local WiFi network—to implement a “smart remote.” Beyond controlling your TV via smartphone touch screen, and recommending programs by learning preferences in the same manner as websites are filtered via behavioural targeting, the app includes social features to share what you are watching. The newest iteration eliminates the need for additional hardware (the “pear”) and instead utilizes integrated IR blasters embedded into next generation smart phones and tablets. IR blasters, in essence, replace your DVR remote control, emulating the function and allowing the phone (via an app) to serve as the remote to your TV, cable, and satellite access. Already, Peel is powering this capacity in Samsung and HTC smartphones and tablets, is working with various OEM manufacturers to make this standard on mobile devices (and is starting to look globally, not simply in the U.S.), and forecasts that this capacity could be a part of over 100 million devices within a year. Philip Poulidis, CRO of Peel, told me: “This is a game changer as it basically puts an IP address on remote controls and the power of recommendations in the hands of tens of millions of consumer living rooms. Not to mention the valuable data that we will have access to real-time user TV viewership and preferences.” (see Figure 7.5).

My point is not a sales pitch for Peel (in line with my economic comments throughout, I was excited about the free app, yet was not quite ready to purchase the pear hardware); rather, this is an example of how interacting with content is becoming more social and more personal, turning the channel guide on its head.

Concepts such as Peel and AT&T U-verse applications, though reinventing the remote, are generally tied to the fixed channels available via cable/TV listings (in fact, the app imports your cable channel guide in order to control it). To take the next leap in personalization, the options need to encompass the reach and long tail of the Web. Services such as Squrl do just this, porting the concept of DVRs for video on the web; search the Internet, as well as content aggregators such as Netflix, Hulu, and YouTube, and drop your choices into an organized collection of queues or galleries for viewing. (Note: The whole notion of search is yet another wrinkle, as various companies, ranging from Blinkx, to Michael Eisner-backed Veoh TV (with software functioning akin to a Web browser, but then generating video playlists), to Google (reportedly experimenting with voice and video search) trying to engineer a leap beyond keyword-based indexing.) This truly converts the channel guide to an iPod-like playlist, enabling users to sort and store content to watch later. Again, because TV is essentially a passive vehicle, whether people will adapt to actively becoming their own programmer is unclear; networks have long survived as curators and recommenders, even if that is achieved via persistent marketing.

Figure 7.5 Your phone as the New Remote Control

Reproduced by permission of Peel.

To the extent that viewers embrace the concept of personal discovery, coupled with personal programming, it further hampers the ability of content creators to market and introduce new programming; worse, this could create the inverse of a virtuous cycle for content creators. With less ability to create overnight brands, the reach of new content diminishes, and so necessarily will its upfront value and the funds available to make the content in the first place. Discovery may be a key driver in personalization, but it is also a euphemism for risk.

The third leg of the personalization stool is an enhanced recommendation engine. You might think you know what you like by discovery (which has its limits, given the nature of experience goods, as discussed in Chapter 3), and may be influenced by friends via their choices (which has the risk of wrong-way cascades, as also discussed in Chapter 3), but in the words of the Spice Girls, what do you really, really want? There are various forms of “curation” in terms of recommendation engines, but the two largest baskets seem to be ones that focus on third-party recommendations and opinions, and ones that focus on internal preferences. An example of the first is an Amazon-type engine that serves up suggestions based upon your history of preferences; a twist on this is Twitter or Rotten Tomatos, where you may elect to follow people or a sum of reviewers, whose comments (theoretically) are influencing your opinion (because you have elected to follow them or seek their rating). These are all responses to the experience goods dilemma earlier discussed. In the social media-focused world, opinions from friends are highly prized. Upstart video sharing site www.chill.com, for example, markets watching videos from people you care about via a hybrid strategy pushing video recommendations to you from friends (classic sharing) and from people you choose to follow (akin to Twitter). (See also the discussion of social marketing campaigns, and Gruvi, in Chapter 9.)

What about the other side of the experience good quandary, and recommendations based upon your instincts and likes rather than extrapolated from third party opinions (even if those are filtered opinions from people you trust)? Put another way, is there a subliminal way to make recommendations better, attacking the “DNA” of your personal likes? That is exactly what Pandora invented with its Music Genome Project®, a system that looks at the attributes of a song across hundreds of traits to form the DNA of the song. Additionally, Pandora layers on playlist technology, including advanced highly contextual collaborate filtering based on the billions of “thumbs up” and “thumbs down” it has received. Not surprisingly, others are attempting to mimic its success with other kinds of media content.

It is too early to tell what will succeed in this new space, but after looking at Jinni (www.jinni.com), an app that attempts to apply a genomic methodology and Taste Engine, I asked Larry Marcus, managing director at Walden Venture Capital, who was a founding investor in Pandora and backed its founder Tim Westergren all the way through its IPO (in fact, somewhat famously, as over one hundred VCs had previously turned down the initial pitch and the company was limping along on the fumes of its last credit card debt), how he viewed personalization in the TV market as opposed to music:

TV has very different dynamics than music: live content like news, sports, and appointment-TV (like primetime series or award shows) drives large swaths of viewing. Music is consumed a song at a time in few-minute pieces, versus TV, which is consumed a show at a time in 22+ minute pieces, or even in multi-hour pieces via movies or season passes to a series. For example, if someone discovers a show they love, they might order or buy or rent a whole season from iTunes, Amazon, Netflix, or their video service provider. So TV-based recommendation is lumpier in need and applies to only a portion of the content. Lastly, TV has a smaller corpus of consumable content, is consumed in different ways so fundamentally has a different set of needs and values.

Social Watching

I mention the marketing benefit of social watching in Chapter 9, but it is important to note here how social media sites are becoming an important new access point for viewing. To the earlier question about ratings, “Why not look at Live + Hulu when evaluating appropriate metrics to capture true engagement and viewership?”, can now be added: “What about Facebook?” YouTube, in posted statistics on its website, noted of social media watching: “500 years of YouTube video are watched every day on Facebook, and over 700 YouTube videos are shared on Twitter each minute.”⁸⁷ The numbers are mindboggling, and when more professional content is able to be accessed via social media sites, whether from embedding media player widgets or simply enabling real estate, proper metrics for capturing value will again be challenged. For example, in a few years when viewing content via a social networking site may be commonplace, should the value be captured by “ratings” at the source of viewing, be captured via direct user impressions or clicks, be captured by passing through the engagement on the player (e.g., a Netflix or Hulu player sitting within Facebox, much like Netflix now sits as an option via OTT boxes such as Roku) to the source of the “broadcaster” serving up the content, or be captured and indexed to user engagement (so that if a user “likes” or “shares” the content, there is a premium added for direct engagement with the content)?

Already, start-ups such as Milyoni are enabling social viewing, and offer films from partners including Universal, Lionsgate, and Starz Media via a customable interface (see Figure 7.6).⁸⁸ The company also claims that its carriage of The Perfect House, a film made for Facebook, was the first full-length feature to play exclusively on Facebook, and that with the film Marley it enabled the first ever day-and-date theatrical release of a film simultaneously on Facebook.

Figure 7.6 Social Viewing Enabled by Milyoni

Reproduced by permission of Milyoni.

User Interface and New Tools for Personalization

Again, like the promise of many new gizmos and functionalities, user interface is critical and can galvanize demand—as Steve Jobs famously proved, sometimes the consumer does not know what he or she wants, and until the iPhone launched, phones had potential that simply had not been harnessed. The concept of personalizing TV is not new, as evidenced by Skype founder Niklas Zennstrom’s launch of Joost and his prediction that “the television is becoming more difficult to distinguish from the computer screen, and yet there has been almost no real technical innovation in the television itself … On the simplest level, the History Channel should know that I prefer to watch ancient Greek history, but it should also allow me to interact and engage with others watching.”⁸⁹

Although Joost’s vision, dating back several years, represented the coming together of a global application to see and even interact with whatever you want, when you want it, organized in favorites lists of how you want it, with good quality and instant access, the service stumbled after initial hype (shifting gears, for example, to a Web-integrated player rather than a download solution). (As a further interesting anecdote, in 2007 Viacom made an investment in Joost, seemingly validating the promise of the Web for distribution, even while it was suing YouTube.

New tools and types of content are starting to emerge and converge. First, companies started to offer simple editing systems, allowing users to make mini-movies, digitally editing and uploading with an ease that seemed unimaginable a few years earlier. Second, companies realized that with facile editing and unlimited content, users could create “mash-ups” combining elements of their own content with third-party content. Yahoo! bought the editing system Jumpcut, and technology start-up Eyespot signed deals with Lucasfilm and the NBA. I could never have imagined a few years ago that I would run a site enabling mash-ups, and being pitched proposals to stimulate engagement by challenging users to create their favorite amputations from Star Wars scenes. Managers overseeing brands realized that, properly structured, they may be able to better engage their customers by offering their own material to be edited by fans, or even combined with fan material.

Additionally, an array of widgets, applications, and functionalities on social networking sites has become a phenomenon; the sandbox will continue to be expanded, as giving consumers new tools to interact with, modify, and personalize content is a trend still in its infancy. The great challenge for media content in a number of these contexts is artistic integrity, and we are seeing the evolution of boundaries in terms of how far a creator or owner (and the law) will allow individuals to manipulate their work. In instances, fully open platforms have evolved, with Wikipedia as a prime example of encouraged modification and Creative Commons enabling open licenses and granting creators simple toggles such as “share alike” and “attribution” within a rules-based open framework for free content licensing.

Old Guard Tries to Adapt—Studios’ Failed Bids to Offer an Online Service; Brick-and-Mortar Retailers Try to Offer Complementary Online Solutions

Limited Studio Attempts to Make the Download Market

Recognizing the potential of the market and the need to have legitimate platforms to counteract piracy around the onset of the online video explosion, the studios launched their own Web-based download services. The largest was MovieLink, a service co-owned by the following consortium of studios: Sony, Universal, MGM, Paramount, and Warner. A competitive service, CinemaNow, also offered a range of studio product.

While pioneers in providing a legal option for movie downloading, neither of these services—both hampered at the time by slow download speeds and starting up during the heyday of the peer-to-peer services that were eventually shut down by the Grokster decision—caught on, and adoption remained limited. Whether the problem was functionality, piracy, pricing, or available content does not matter, as part of the early strategy was for the studios to simply show they were offering a legal alternative to pirate peer-to-peer sites. In the end, with the platform showing increased promise and piracy curtailed, MovieLink was acquired by Blockbuster in the summer of 2007 to provide its download solution.⁹⁰ (See the companion website for more on this.)

Physical Retailers Offering Competitive Online Solutions

The challenges in the media space are no different for physical retailers trying to craft digital solutions than in other areas of retail. Namely, the woes of the traditional book store or record store are no different than toy stores or travel agencies, except perhaps a bit more acute; this is because media properties, often being intangibles (intellectual property), lend themselves uniquely well to digitization and digital consumption. A virtual tire will not do much for your real-world flat, but a portable, indestructible, comparably or lower-priced digital version of a TV show will not only be substitutional, but in the eyes of many consumers a preferable product option. Coupling this real world to digital conundrum of suppliers with the fact that their e-tail competitors (e.g., Amazon, Google/YouTube, Netflix) are some of the stars of the Internet (that have also redefined the world of logistics), it is a daunting challenge—and one that they are more often than not losing. In some instances, the only way companies have found to compete is to acquire companies as a market entry hedge against the inevitable erosion of their traditional businesses.

Walmart provides a telling case study. Recognizing the peak of the sell-through video market (see Chapter 5) and the corresponding threat to its lucrative (and market-leading) DVD business, in late 2006 Walmart introduced its own download service. The guinea pig title was Warner’s Superman Returns, as Variety summarized:

Deal allows Walmart customers to download the film for use on portable devices for $1.95, computers for $2.95, or both for $3.95, in addition to the cost of the DVD, which retails in Walmart stores for $14.87. The retailing behemoth, which accounts for 40 percent of DVD sales, said it hopes to expand the pricing model to other titles … Deal marks Walmart’s attempt to convert its enormous walk-in DVD customer base into download films.⁹¹

This launch and hodgepodge pricing was symptomatic of the confusion in the market—the pricing model was clunky compared to the simplicity of all songs for $0.99 (the iTunes pricing then in effect). What the retailers were doing was trying to add comparable value (“we have it too”) as opposed to something revolutionary. Clearly, the studios were taking a cautious approach. Discussing the fine line between online adoption and maintaining a vibrant DVD business at retail, Jeffrey Katzenberg, CEO of DreamWorks Animation, was quoted in the Wall Street Journal as saying: “We must not undercut our bread and butter … The consumer decided when VHS was obsolete … Not the hardware manufacturers, not retail, not us.”⁹² The same article that quoted Katzenberg went on to describe the awkward position both Walmart and studios found themselves in, and the retailer’s reluctant entry into the digital market as highlighted by its dilemma with Disney: “After Disney announced a deal to provide television shows to Apple’s video iPod, Walmart threatened not to carry the DVD version of the hit Disney Channel movie High School Musical, according to people familiar with the situation. After talking it through, Walmart ultimately relented and carried the DVD in its stores.”⁹³

Capability to offer downloads is one thing, but turning the new business to profitability is another. Walmart was entering the same murky waters of its competitors, hedging its bets against the future. Like everyone else, they would have to wait and see whether the new revenue streams would be additive or substitutional for its traditional business. Walmart, it seemed, quickly made up its mind: not much more than a year after it struggled with Disney and launched digital distribution, Walmart abandoned its experiment. The reasons for its abandonment were likely manifold, but one interesting point sometimes referenced is its DRM requirements were tied to playing content via Windows Media Player. This factor essentially precluded content from being watched on iPods, the then hardware platform of choice for watching downloaded content.⁹⁴

Fast-forward to 2010 when Walmart re-entered the market with its acquisition of Vudu, beating out competitors such as Blockbuster for a reported price tag of more than $100 million.⁹⁵ Vudu, at the time a Silicon Valley start-up, began as a set-top box manufacturer; for the reasons discussed above (and counter to the strategy of some of the OTT device manufacturers discussed above that went fully in the other direction), namely the challenge of connecting yet another box to the TV and recognizing the migration of building the technology into TV sets and other connected devices as an app, Vudu shuttered its hardware box and integrated its cloud-based service with leading consumer electronics manufacturers such as Samsung, Toshiba, and Vizio. By Christmas 2011, Vudu included its VOD service into gaming systems (Xbox 360 and PlayStation 3) and tablets, placing it alongside the likes of Netflix and Amazon on the panoply of devices pioneering the OTT market. Additionally, Vudu added the flexibility to either rent (e.g., $0.99) content or download, and marketed availability of titles as the same day as DVD (since, for windowing, it positioned itself as an on-demand online rental outlet, not offering subscriptions, even marketing Vudu as same day versus Netflix DVD being 28 days later).

We are still in trial stages of companies working to leverage their online versus offline user base, but some initiatives for the 2011 holiday shopping season began to illustrate the type of cross-promotional campaigns that may become marketing staples. Walmart offered a $5 Vudu credit to buyers of certain DVD and Blu-ray titles (e.g., Megamind) in its retail outlets, leveraging in-store traffic over Black Friday.⁹⁶ GameStop, the leading independent games retail chain, had earlier pioneered programs such as this (and has a strategic advantage through user registrations tied to game exchanges and the robust online market), and it was accordingly not a surprise. What will be interesting is whether these key retailers continue to utilize different branding in their offline versus online presence (GameStop versus Impulse, Walmart and Vudu). The answer may be more in the consumer awareness of the brand itself—Netflix’s attempt to separate its businesses and utilize different branding (i.e., the 2011 Qwikster debacle) did not work, while Walmart was likely aware of its prior failures and different customer bases and kept the unrelated Vudu moniker for its online presence.

Revenue Models and Economics: Multiple Systems Coexist, Just Like the Offline World

It is important to recognize that there is not a “right” model—advertising-based, subscriptions, transactional VOD, and downloads are all different economic models tied to different consumer preferences. At the beginning of the online media boom, various people were betting on certain models dominating (e.g., subscription versus pay-per-view), searching for a kind of magic formula to be matched to online consumption; history, though, has shown this not to be the case.

The quick market penetration of the iPod (though it grew up in an environment without other choices) and growth of Amazon’s cloud-based offering is strong evidence of the viability of the pay-per-download/ownership model. One can equally argue that Netflix is evidence of the successful application of a subscription service (although, a rental one). The ultimate answer is less likely to turn on whether subscription, advertising, transactional rental, or pay-per-download models are the best, but on customer interface, reliability, security, marketing, pricing, and range of content offered; as noted earlier, user experience matters, and top experiences drive successful online distribution platforms. In theory, in a world where convenience and choice are the mantra, rival services with these opposing models (and compelling user experiences) will both be successful. Inherent in choice is the notion that a sizeable consumer population will want the ease of one-bill subscription, while another grouping will want the control feature of à la carte pay-per-download choice. Just as retail sales, rental, subscription, and other media coexist offline, there is no reason that a similar rental, purchase, free on-demand construct cannot similarly coexist in the online arena—a prediction posited by Netflix and others, and which has been borne out in the last few years.

Streaming: Fundamentals of Monetizing Internet Advertising

Despite the growth of many Internet sites, it remains a challenge to convert traffic into revenues, and especially profits. Chapter 6 describes a number of trends in advertising, including the emergence of FVOD, including AVOD, as the online equivalent of TV (hence the phrase Internet TV); the companion website includes a brief overview of the nuts and bolts of the advertising market/metrics as opposed to the structure of the FVOD window. For here, I will simply note the chart in Figure 7.7, which depicts the value chain of different types of advertisements (e.g., banner versus video) within the AVOD continuum.

AVOD Takes Off—the Hulu Generation

Hulu successfully pioneered an AVOD model leveraging network content; namely, TV shows and other premium content were available for free streaming, with revenues earned through the sale of video ads. As discussed in Chapter 6, Hulu believes “less is more,” and grew serving a few video advertisements per 30-minute episode, in contrast to nearly eight minutes of advertising typically cut into a network commercial half hour. By restricting advertising and prohibiting ad-skipping, the service can charge a premium per ad, as well as offer a more compelling viewing experience.⁹⁷ Not only are there fewer ads, but a unique feature debuted by Hulu is allowing viewers to select among advertising options before a program rolls (e.g., electing to watch a longer pre-roll advertisement, such as two minutes before the program starts, rather than have the show interrupted with a couple of shorter advertisements spaced interstitally).⁹⁸

Figure 7.7 Value Chain of Advertisement Types

In retrospect, looking at the historical growth of YouTube (free), coupled with ever-increasing broadband penetration and the growth of WiFi access, it was only a matter of time before professional content supported by free advertising mushroomed into a large TV-like business. Video advertising, with its short content and higher value, could be easily streamed, making what was already the standard for advertising offline the optimum form of advertising online—but even better, given the ability to target streams. Hulu was arguably the first and most compelling service to leverage this new paradigm, coupling free advertising with on-demand access.

Looking beyond its success to date, though, Hulu’s AVOD monetization challenge is a microcosm of the overall challenge of the Internet with content: How can services blend the value of equal streams over diffuse locations (see next section) and time versus the live effect of television? Namely, how much are 10 million viewings in “syndication” worth versus live?

In my last edition, I asked David Barron, VP of content partnerships for Hulu, what he thought about the comparison to TV syndication and what Hulu was doing differently that was making it successful in monetizing the new space. He advised:

To compare what Hulu is doing to TV syndication, you first have to understand that TV syndication is just one of many windows in the lifespan of a piece of content. Traditional entertainment companies have always relied on windowing content, whether by platform, time, technology, territory, etc. Hulu is proving that there is another viable window of free on-demand that can live alongside other distribution windows such as TV and electronic sell-through. For current network programming, the on-demand period extends for some number of weeks post initial TV airing, thereby extending the period viewers can watch their favorite show. For library content, the new on-demand window allows people to discover programs that either haven’t been available for a long time, or weren’t available in their market, and therefore provides a new revenue stream for the content producer. Of course, these are all businesses in development, and therefore the rules are changing regularly.

In terms of how Hulu may be better exploiting this opportunity, including the long tail of library product, we create a great environment for people to enjoy long-form premium video, and whereas others have focused on user-generated content or, in cases, quantity over setting a quality bar, Hulu recognizes that entertainment is impulse-driven and we want to make it very easy to watch high-quality premium content in an equally high-quality environment.

Transactional VOD

Walmart’s Vudu, Amazon’s VOD rental program and cable-based rentals are examples of VOD pricing. As discussed in Chapter 5, this is the realization of the virtual video store with an infinite tail and infinite content. Price differentiation is now akin to models previously seen in the heyday of physical rental stores. Vudu, for example, offers tiered pricing tied to standard versus high definition and even 3D, as well as a “movie of the day” for only $0.99 and $2-for-two-night. Amazon similarly enables tiered pricing—all an easy option when distributing via cloud-based infrastructure that can deploy a particular format of a particular show to a specific device. Cable VOD options, such as offered by Comcast and other global providers, follow suit, and offer rental options often tied to format (high definition versus standard definition) and availability (new titles priced higher than library ones).

This type of pricing is optimal to a content owner/provider, for it can set its price (charging a premium in instances), can directly track and audit consumption (there is a discrete rental transaction), and brings in immediate revenue from the purchase transaction. The limiting factor is the same as in the offline world: window timing and demand to drive actual purchases versus free consumption.

Pay-Per-Download (Ownership)—Macro Issues of Downloads

In my first edition, I noted: “I can easily posit that players will begin to differentiate themselves via pricing, types of pricing mechanisms (e.g., pay-per-download versus subscription), and willingness to carry content exclusively and pay guarantees. (Note: Although, to the extent online outlets are akin to retail locations, then nonexclusivity and no guarantees make continued sense.)” This is now largely the case, and fixed pricing models (e.g., $1.99 per download, as Apple pioneered with iTunes) are footnotes of an immature and captive market.

As I forecast, in the long run it is irrational to pay the same fee for a five-minute Pixar short as for an hour-long episode of a hit primetime TV show—pricing tiers had to evolve, taking into account how recent a show is, what genre/category it comes from (e.g., a short, TV show, music video, feature film), and whether the transaction is based on a rental or purchase model.

The one fixed-fee model that so quickly built the market via iPods had to yield, given the interplay of factors in Ulin’s Rule. Differential pricing is one of the key tools driving maximization of content value over time; rational economics posits that the inequality of value per purchase, and the crossover of so many different types of content that are differentially priced and consumed in the non-digital retail space, will favor price differentiation in the online space.

Another key factor influencing pricing trends includes loss-leading software to drive hardware: the download market has to be viewed in terms of related hardware sales. Apple could afford to price songs and video via what constituted an arguably illogical price matrix because, on the one hand, the content was a bit of a loss-leader for driving hardware sales, and on the other hand, simplified pricing helped develop a market that otherwise was slipping away to piracy. However, once the related hardware and software markets matured and competitors started to make inroads, there was inevitably a shift toward greater price differentiation indexed to varied types of content. It was the unique construct of a virtual monopoly on hardware by Apple, coupled with the broadest content availability that initially distorted the overall market. By the time Amazon introduced its Kindle Fire, price differentiation was common and the key was developing an easy consumption platform. Accordingly, rather than software loss-leading to drive hardware, as was arguably the case with Apple, the online market was growing so big that one could argue that Amazon was loss-leading its Kindle hardware to drive online purchases (whether in the growing video market or its grounding and historical e-tailing business).

An oddity that results from the shifting market ambitions in the download space is that one might expect guarantees to secure content in a scramble to establish positions. However, inclined to support market growth at the expense of piracy, and recognizing that initial revenues will, at best, be incremental, content owners were apt to view the EST distributor simply as a new kind of retailer. Instead of worrying about returns, the issue is allowable margin, with the calculus the wholesale markup (i.e., discount form SRP) converted from a retail dealer price to a distribution fee. Because the retailer and distributor are the same entity, the revenue splits (e.g., 70/30) are arguably artificially low, given that 30 percent is an amalgam of the retailer margin and the distribution fee. Let us compare online margin with retail (Table 7.2; excluding cost of goods), and assume: (1) in both cases the same distribution fee; and (2) that the customer price is lower online (which is the expectation, given no packaging and incentive to purchase).

This is a hypothetical evidencing how both sides win and keep as much revenue as possible from retail, even when pricing is lower. The actual splits will find an equilibrium based on these and a variety of other inputs, including leverage, timing, volume, quality of content, etc.—all like the traditional market.

Finally, because there are fewer fixed costs, with cost of goods negligible relative to DVD/Blu-ray manufacturing, managing inventory, and physical delivery to thousands of points of purchase, most revenues drop to the bottom line and margins are high for both sides. This is a further benefit and a fact that may explain the relative quick adoption of simple revenue sharing splits. EST services could therefore afford to drop the price and still yield the same net margin to content owners as traditional retail.

Table 7.2 Online versus Retail Margins

Video at Retailer	Electronic Sell-Through
SRP $29.95	SRP $17.99 (assume ~10% < retail shelf)
Wholesale $18 (assume ~60% SRP)	Distribution Fee $5.40 (assume 30%)
Shelf Price $20.00	Content Owner $12.59 (assume 70%)
$2.00 Retailer Profit
Retailer Margin 11% (2/18)
Distribution Fee $5.40 (30 × 18)
Net to Owner $12.60 (18–5.40)
$12.60 is the same:	Content owner keeps $12.60 EST distributor foregoes 100% of retail margin, and takes this as a price discount to consumer If a “retail margin” were imputed on top of the distribution fee, such as 10%, then distributor would keep $1.80 + $5.40 = $7.20 @ $7.20, the split would be 60/40

Subscription: Better for the Service than the Content Owner?

As discussed in Chapter 6 relating to pay TV (and is somewhat obvious), the key calculus in a pure subscription model is whether the revenue from a subscriber base exceeds the cost of content. In a world without significant competition, and when content is offered nonexclusively to a range of platforms, the equation works remarkably well for the service (think Netflix streaming growth around 2011). However, as soon as competition is introduced and players jockey for content access—namely, the current state of the industry—everything obviously becomes more challenging. Aggregators are likely to watch their margins shrink as the costs of content acquisition far outstrips subscriber growth and the ability to increase pricing (if at all, with pricing pressures pointing the other way as services vie to undercut the other in a fight for subscribers). Because most analysts are looking at a subscription service and its profitability, and because revenues on a per-show basis are confidential and rarely reported, analysis tends to focus on total subscription revenues and total costs/operation costs; this, however, fails to account for the producer side of the equation and the impact that a fixed subscription cost has on the array of content aggregated.

A key limitation to certain subscription services providing a programmed basket of content is the diminishing returns to content providers. This is becauase an aggregation model is akin to cable. An aggregator (e.g., mobile phone, online, MSO) that charges by subscription, for example, only takes in a fixed amount of revenue regardless of the amount of content: revenues are subscribers multiplied by the monthly fixed fee (“monthly subscriber revenues”). If a subscriber pays $15 for a certain variety of content choice, by expanding that choice (e.g., doubling the number of available programs) the provider takes in no additional revenue. Accordingly, if there are 10 channels of content on a platform, then the operator is paying those content holders out of monthly subscriber revenues. If the channels go up to 20, and the operator is still only taking in monthly subscriber revenues, then the amount available per content provider goes down (X/20 instead of X/10).

The only way to counter this is to charge more as content choices go up, much like cable companies offer tiered subscriptions. The problem is that cable is limited to 100+ key channels and the pricing tiers can match the relatively limited universe. In a download, digital environment content choices are limitless (long and wide tail) and consumers are going to demand greater and greater choice and flexibility. However, there will be a natural ceiling for price increases; the tier charges will cap out while the demand for more content choices will continue to expand (Figure 7.8). This will inevitably be difficult for operators aggregating content and offering subscriptions to manage. Either they will squeeze the content providers—where top content driving subscriptions will still command a premium, but the average provider will see pressure to accept less rather than more even with subscription volume increasing—or they will have to limit content and segment offerings into genre silos (TV shows, sports, etc.) and price by tier. In contrast, pay-per-download services simply have to negotiate a split with the content provider.

Figure 7.8

This is the challenge facing companies such as Netflix, which, as described earlier, now has to pay much more for its content, but cannot similarly raise its pricing; it can justify squeezed margins so long as subscribers increase and increased costs can be rationalized as an inevitable consequence of remaining competitive. Currently, the competitive effect of the land grab is masking system weakness, but once an equilibrium is reached suppliers of average content are likely to be the next ones seeing their margins pinched.

The foregoing scenario focuses on a pure subscription service, but a hybrid service such as Hulu+, which couples advertising with subscription fees, is more akin to a basic cable model. The dual revenue stream promises to provide upsides and security to content owners and a measure of flexibility for operators to confront the challenge illustrated in Figure 7.8. In theory, this mix of blending AVOD revenues with a baseline secure subscription rate should provide the same advantages online as has benefited cable channels offline and help solve part of the long- and wide-tail dilemma.

Finally, it is fair to assume that services will go beyond the simplicity of fixed-priced subscriptions and add more flexibility to defeat this challenge: offering subscription rates to content (like pay TV services) and the choice of à la carte pay-per-product options and subscriptions. Subscriptions will accordingly become more complicated, mimicking the pay TV or cable models where there will be tiers of content.

Differentiating between Tiers of Content: Cable Bundle Pricing Goes Online

As noted earlier, including under the discussion of TV Everywhere, as traditional pay TV operators and new entrants push diverse content offerings out for ubiquitous access, it is natural that tiered pricing will evolve. Perhaps some companies, where free access is in their DNA, such as YouTube, may not apply this model to their channel strategy; nevertheless, they will have to deal with the fact that offering 100 niche channels starts to look a lot like cable. What consumers get for free, what comes with a “basic” subscription, and what programming requires a premium charge is a fundamental question—especially when these same entities are all moving into original content to differentiate their offerings.

Any provider who wants to offer a wide range of content, taking into account that some of it may be original and that to succeed with an aggregation play (long and wide tail) the breadth of content is conceptually infinite, has to find a way to amortize costs of providing the programming—content does not come free. Accordingly, as discussed earlier in the context of the Sky Go ecosystem (in the UK), the Sky app indexes content access to different packages. Some channels may be free, but other content requires an ante (whether via VOD access or premium subscription). Any company that looks or feels like a virtual MSO or content aggregator will face the same challenge. While some may leverage existing businesses and amortize costs as an extension (either as a loss-leader to enter the market, or as an incentive to diversify to prevent erosion), at some point the content access needs to be funded. And so, for anyone who loves the notion of cord-cutting and expects to migrate to an online system to shed their cable bill, they are apt to find either a new version of their bill, or be seduced by seemingly free access only to find that they are paying, once again, via their à la carte choices. Namely, Netflix can be accessed via an OTT system, but you still have to pay for Netflix and the more its business becomes like a pay service, and the more online aggregators function like virtual MSOs aggregating a dizzying array of content, the more these companies will need to find a way to pass through content costs.

Dearth of Bold Experiments

Radical experiments with revenue models that implicitly break down or eliminate windows are rare, in part because so much is at stake. There are, accordingly, few examples in the TV space of fully accelerating access akin to the way Mark Cuban and Magnolia have collapsed the theatrical and video window (see Chapter 1). As discussed above, the download for rental, purchase, subscription, and advertising-supported models may compete with each other, but largely mimic the consumption ranges familiar in the offline world (rent, buy, watch for free). The interesting question for those who believe in free flexible access is not simply “Why shouldn’t content be available simultaneously?”, but “Why shouldn’t it be available early?” In fact, this has been posited and some of the boldest experiments in terms of pricing have taken place in Europe, not the United States (see also Chapter 6). Interactive television services, such as Maxdome in Germany (owned by pan-European broadcasting group ProSiebenSat1) were starting to offer viewers the opportunity to see an episode early for an upcharge: if you do not want to be left with a cliffhanger, pay a couple of euros and you can see next week’s episode early. Adreas Bartl, head of ProSiebenSat1’s German operations, noted in an interview with TV Europe that: “… for an extra amount of money episodes have been available on Maxdome before their run on regular television, so if you were really interested in Lost and could not wait until the following week for the next episode, we did some good business with this.”⁹⁹ Additionally, Maxdome offered a “season pass,” where a viewer could pre-pay for early access throughout the season; to preserve demand for the regular broadcasts, however, consumers were not able to jump ahead more than one episode. This innovative approach to access (though admittedly a VOD application or a hybrid, and not a download model) was also catching on in the UK and France, with Britain’s Channel 5 selling passes (£40) to download episodes of CSI before it hit television.¹⁰⁰

The challenge with this model is economic—there may be incremental revenue, but this capacity undermines the “who shot JR?” effect, where a cliffhanger drives masses to watch a show that resolves the mystery. It should be a simple analysis to deduce what number of people need to subscribe to/buy the shows early to equal the value of what an exclusive premiere will yield with a rating of X. The difficulty in practice, though, is that both options are by their nature compelling, and both the buy rates and ratings are moving targets. As discussed earlier in the context of Netflix’s debut of its first online original series, House of Cards, the subscription service allowed users immediate access to all episodes, enabling users to jump to the next episode and further with “binge viewing” of the whole season in marathon fashion—this is the first significant parallel experiment in the U.S. I am not going to repeat some of the issues discussed in that context, and here simply want to highlight the expanding sandbox and the fact that save for these examples most distributors have been loathe to tinker too much with leveraging the serial nature of television to monetize television series. (Note: What is starting to evolve, though, are networks allowing earlier seasons of episodes to be available online, tapping into the binge-viewing pattern enabled by streaming services, as a way to expose series to new potential viewers; those finding the show for the first time in the long-tail (and quickly “catching-up” via marathon consumption) are then hopefully converted to viewers for original on-network new season telecasts.)

Following all this logic, it is an interesting theoretical question why an earlier window has not arisen for theatrical releases. It would be possible, for example, to charge a premium to rabid fans of a franchise to see an early screening of the next instalment of a series (e.g., Twilight, Harry Potter, The Hobbit); if customers will pay a premium for 3D, it is logical they will pay a premium to see a movie before the rest of the world (e.g., charge for private screenings). Almost any movie executive would have a visceral reaction to such a suggestion, for it is iconoclastic and not only cuts against the ingrained economics but also has pejorative moral overtones in being somewhat antidemocratic. There is no law, though, requiring equal access to content, and a recording artist can play a venue of 50 seats as easily as a filmmaker could charge for a private showing. The impediments (egalitarian free and equal access arguments aside) are rather economic, and come from fears on the upside and downside of the action. On the upside, the biggest challenge of film releases (as discussed in Chapter 4) is marketing, and creating sufficient awareness and buzz to create the overnight brand such that it continues and permeates into the long tail; moreover, as an experience good, there is always a significant risk to success and thus any type of staggered release can kill demand pressure if reaction is negative. In short, the marketing challenges are already great, and to add into the mix an extended campaign (which costs more) and the risk of poor word of mouth (before the masses can judge for themselves) is arguably enough by itself to tip the scales. An equal if not paramount concern, on the downside, is that once out the film will inevitably be pirated; accordingly, studios want to bring in the most amount of money as quickly as possible after initial release. The net result is that unless a mogul is willing to roll the dice (which is a harder thing to do when answering to shareholders and markets), the type of early TV window tested in Europe and now by Netflix is likely to remain a strategy limited to TV, and even then generally limited for fear of undermining marketing advantages tied to cliffhangers. (Note: This discussion is different than the premium VOD window discussed in Chapter 1, which charges a premium for early access but has been criticized by exhibitors (i.e., theater chains) as risking cannibalizing ticket sales.)

Resistance to Disruptive Change: Studios Suing Rather than Embracing; Talent Guilds Fearful of Being Cut of Pie

Internet Viewing and Immediacy of Content—the YouTube Generation and the Studios Conundrum

The Emergence of YouTube and its Acquisition by Google

Digital technology accelerates adoption rates so dramatically (see discussion of scaling and joint ventures in Chapter 1), that usage outpaces the rules of the road, which still need to evolve to address the new landscape. This is happening now in the context of Facebook and social networks as regards privacy. When YouTube took off, the issue was posting content owned by a third party, and what was considered copyright infringement. To put this in context, it is important to take a step back and frame the success and impact of YouTube.

At the same time that iPods were fueling the adoption of downloads, free streaming video services led by YouTube were experiencing exponential growth and consumer acceptance. Figure 7.9 is the growth curve for YouTube, exhibiting at the time unprecedented growth from startup phase to over 80 million users per month in a 2–3 year period.

In fact, the growth was so rapid (again, at the time, as opposed to the new benchmarks set by Facebook and Twitter), and YouTube had catapulted so far ahead of its competitors, that it was acquired by Google for $1.65 billion in October 2006—an enormous deal, given that YouTube was reputedly losing money. The Hollywood Reporter quoted Ken August, principal at Deloitte Consulting, commenting on this dynamic: “It’s a huge price for a company that isn’t profitable … It’s a reflection in general of the huge interest in video on the Internet.”¹⁰¹ In fact, the deal was reminiscent of the high-flying deals of the dot-com days before the first bubble burst in 2000, as the move was driven by traffic—where Google’s own Google Video lagged behind—with the assumption that monetization would follow. (Note: YouTube has only continued to grow, with statistics posted on its website in 2012 noting that more than 800 million unique users visit YouTube each month, watching more than 3 billion hours of videos on YouTube each month, with 72 hours of video uploaded to the site every minute.)

Not only was this deal risky, given the money paid for a company that was reputedly not yet profitable, but YouTube carried litigation risks. Certain videos on the site were from content companies that viewed the site as infringing its copyrights, and were requesting YouTube to “take down” the material. This remedy, in theory, would insulate YouTube from copyright infringement liability under the Digital Millennium Copyright Act (see also Chapter 2).

Figure 7.9 Growth Curve for YouTube

A mitigating factor argued by Google/YouTube was the promise of implementing filtering technology. While significant progress had been made in “audio fingerprinting technology,” which would compare music to catalogs of copyrighted songs and enable the automated identification of infringing material that could then be taken down, progress on implementing a video system was lagging. Tensions and stakes were thus extraordinarily high, and a Universal Music spokesman commented in the International Herald Tribune on companies’ actions to prospectively cure the problem and ignore the past: “The copyright law doesn’t give people the right to engage in the massive infringement of our content to build a thriving business and then, after the fact, avoid exposure by saying they will prospectively start to filter …”¹⁰²

Although it was not clear whether YouTube would be weighed down by the type of copyright infringement problems that led to the demise of Grokster and other peer-to-peer sites, there was a significant difference in this context. Google/YouTube was not a pirate and pledged to clean things up. It was viewed as the type of player that could legitimize the market, much like Apple had done in the music space, and developing and implementing filtering technology was, at minimum, an effort to take a best-practices approach. In fact, YouTube not only made good on its pledge of implementing filtering technology, but also innovated what it calls its “Content ID” system. Utilizing this tool, any publisher has the right to tag its content to identify its authenticity. On its website, adjacent to a section entitled “Copyright Education,” YouTube explains that owners posting video may: “Choose, in advance, what they want to happen when those videos are found. Make money from them. Get stats on them. Or block them from YouTube altogether.”¹⁰³

Viacom versus Google/YouTube

Perhaps it was inevitable given the high stakes of distribution, the Hollywood-produced copyrighted programs appearing on YouTube, and Google’s seemingly overnight leap to market leader that a nasty fight would erupt. In March 2007, just months after Google’s acquisition of YouTube, Viacom sued Google for $1 billion.

The amount itself was a statement, but the suit alleging “massive intentional copyright infringement” was a serious counter-punch to failed negotiations over the uploading of clips to YouTube from popular Viacom shows. Instantly, the case was cast as battleground central for old versus new media; moreover, the suit promised to be the seminal case in the evolution of copyright law, following the Sony Betamax case and MGM v. Grokster (see also Chapter 2). In the end, as discussed in Chapter 2, the U.S. District Court in 2010 sided with Google, ruling on summary judgement that YouTube was protected by the “safe harbor” provisions of the Digital Millennium Copyright Act, shielding it against copyright claims by its implementation of take-down provisions to remove infringing materials when put on notice. Although Viacom is appealing, most view the summary judgment as a clear ruling. The ire of the studios (or at least of Paramount/Viacom) is evident in a comment after the verdict from Viacom’s general counsel Michael Fricklas: “YouTube and Google stole hundreds of thousands of video clips from artists and content creators, including Viacom, building a substantial business that was sold for billions of dollars … We believe that should not be allowed by law or common sense.”¹⁰⁴

Marketing Benefits: The Elephant in the Room and the Studio Dilemma

One of the oddities of the tug-of-war playing out in debates around what content users may permissibly upload is that while studio and network executives deride online sources that enable the playing of their content without permission, a large number of executives—and often from the same companies—advocate utilizing highly trafficked online sites for marketing. To the distribution boss, a clip or episode played without permission is taking money away while, to the marketing boss, the exposure of content to tens of millions of people with a viral effect is driving awareness and interest. Harmonizing the positions, however, is far from simple, and continues to present a conundrum.

I turned again to former president of Universal Worldwide TV and independent producer Ned Nalle and asked him how he viewed the marketing benefit compared to the risks. He sees a substantial turnaround from a few years ago when providers were more negative, lamenting that “no producer is getting rich off Internet delivery of his series,” broadband was perceived as siphoning viewers away from traditional broadcasters, and advertisers were underpaying because of the immaturity of the system (and inability to reliably measure viewing):

The convenience of Internet content delivery offers producers several advantages: the first is free marketing. Audiences can sample a debutante series on the bus, in flight, at lunch; not just at home. Positive experience on their portable screens can impel new devotees to the broadcast or cable channel that airs new episodes of that show at a regularly scheduled time.

More importantly, broadband delivery advantageously enables a transfer of power from the broadcaster to the viewer. Binge viewing, which made a weekend event phenomenon from catch-up viewing on network series such as 24 and Lost, now becomes the great product attribute of video-on-demand.

Many thought Netflix would thrive or fail delivering movies. But much of that service’s recent value proposition was bolstered less by films, but instead because it granted instant consumer access to full seasons of TV series episodes. Were Netflix ever rebranded as “Nettube,” the new moniker would be justified as on-demand streamed delivery of multiple seasons of a television series extends the subscriber’s commitment to that branded service (as well as competitors like Amazon Prime Instant Video, HBO Go, Showtime On-Demand, Hulu+, YouTube, Vudu, etc.) Series streaming enable enables viewers to catch up and gorge themselves on an entire cannon of episodes (e.g., Vampire Diaries, Downtown Abbey, Game of Thrones, Homeland, The Following, Revolution), with total disregard to when network programmers decide to schedule or cancel the series. Even with some delayed availability, once each episode becomes streamable, the privilege of subscription empowers the viewer to seize control from the network schedulers.

For the streaming service, the customer engagement for compelling TV series far outlives a single movie. For intellectual property owners, consumer access replenishes coffers. Subscribers pay the streaming company, who in turn compensate the copyright holder. Producers no longer reach ends-of-product life cycle when their serials (such as the examples above) don’t repeat well in a second broadcast run. For years, there was a good reason why local TV stations didn’t pay up for rerun rights to serialized dramas. With story outcomes known, serials didn’t rate. But this old model assumed a paradigm of weekly or daily scheduling at a specific time of night, where the viewer is beholden to the scheduler. Currently, second-run serials seem to find new purpose when programmed back to back by a viewer with a remote control device. Missed plot points are easily recovered by scanning backwards. When the CW Network sought salvage value in its serial reruns in 2011, Netflix came to its garage sale, flush with subscriber cash.

Streaming services delivered by the Internet, and pay TV channels that originally entered the home from satellite or cable, are not dissimilar. Like HBO and Showtime before them, streaming channels have begun to finance exclusive content (e.g, Netflix’s early offering, House of Cards) at sizeable license fees. Regardless of delivery method, in Netflix, YouTube, Amazon Prime, and others, content producers have found additional, rich customers for dream projects. More customers are usually welcomed by any business.

How Online and Download Revenues Became the Focus of Hollywood Guild Negotiations and Strikes

The potential for rapid revenue growth from online streaming and downloadable transactions has become a critical topic in the overall compensation of talent. Members of Hollywood guilds remember conceding issues and participation in the early days of video, not recognizing what an important element those revenues would become for film and television properties. The fear of “never again” has driven entrenched bargaining positions, and served as the emotional lightning rod for negotiations between the WGA and SAG with the Alliance of Motion Picture & Television Producers (AMPTP). Essentially, even though online and downloadable revenues are paltry today compared to sums historically generated via traditional outlets, actors, writers, and directors all want to protect themselves as these revenues grow—especially if they grow rapidly and start to cannibalize the monies that they have fought so hard to protect in past guild agreements.

To read about the issues in the press, it is easy to think that everything is unfair, and residuals are the lifeblood of compensation. In fact, as discussed in Chapter 2 regarding the compensation of writers, it is important to recognize that residuals (and what is fought over in guild new media negotiations) represent just one element of the overall compensation pie, and in many cases a relatively small fraction of the total compensation an individual will earn with respect to a particular project. While securing fair compensation for reuses and ensuring that digital media exploitation does not undermine revenue streams previously fought for has obvious logic, this is arguably an area where emotion and perceptions of just compensation play disproportionately to the actual compensation at hand.

Does Abandoning the Historical Residual System Make Sense?

A dramatic twist emerged in the summer of 2007, when the AMPTP, represented at a press conference by the heads of three networks (Warner Bros., CBS, and ABC) publicly called for a complete overhaul of the almost 50-year-old system of residuals for writers, actors, and directors. The Web was clearly at the heart of the debate, with the studio and networks initially rebuffing any attempt to extend residual-type payments to Web, download, streaming, and other digitl media exploitations.¹⁰⁵ What started as debate about extending residuals to online/new media revenue streams, was seized on as an opening to turn the whole system, perceived to be out of whack, on its head. Warner Bros.’ Barry Meyer, serving as spokesman for the AMPTP group, was quoted in Broadcast & Cable lamenting that fixed payments were being made when projects were still in the red and arguing that production costs need to be recouped before paying out residuals:

“The goal,” Meyer said, “is to find a way to recoup the sizeable investment in movie and television programming before there is a sharing of profits with anybody. Why … does the model work that says you have to reuse that product trying to recapture a loss? Why isn’t there a model that says once the investment is recovered, maybe there should be a higher percentage paid of the profits? … It is clear to us that those old models don’t work anymore, that models based on reuse of programming before you’ve ve recouped your costs, or any semblance of costs have been recouped, don’t work anymore. And we think that the study we’re asking for has to look at that.”¹⁰⁶

Countering the AMPTP view, the guilds, deeply suspicious of “Hollywood accounting” (see Chapter 10) outright rejected the notion that a profits-based system could be fair. SAG’s president bluntly noted that they did not need a study to show that a sharing mechanism based on profit accounting “would be inaccurate, unreliable and unfair. Talent can’t be asked to share the profit risk when creative artists have no control over what projects are made or how they are budgeted—particularly for promotion and advertising.”¹⁰⁷

In the end, probably recognizing that scrapping residuals was too severe a change, the studios backed down a bit and the parties agreed to formulas in both streaming and EST contexts.

After the DGA and WGA settled their differences over the treatment on “new media” residuals and, respectively, agreed to new collective bargaining agreements (2007), SAG elected not to follow suit and was stalled in protracted negotiations with the AMPTP. Oddly, despite the difficulty in reaching an overall accord, both sides were in apparent agreement regarding a residual formula for the principal new media categories: (1) when a consumer pays to view a TV show or movie via a new media platform, including in the instance of downloads-to-own (EST); and (2) when a producer makes a TV show available via advertising-supported streaming. SAG’s website, under a special bulletin pertaining to the negotiations, advised that if a TV show “were to be streamed on the Internet, it would have 24 free streaming days … Then, after the 24 days of streaming, they would have the right to exhibit the episode for two 26-week periods if they pay 3 percent of the applicable minimum for each 26-week period. In the case of a day performer who works one day, that comes to approximately $22 for each 26-week period …”¹⁰⁸ The calculations can become complex, as in the instance of EST the SAG website additionally noted: “the casts would share in 5.4 percent of 20 percent of the DGR (distributor’s gross receipts) up to the first 50,000 units downloaded for features and up to the first 100,000 units downloaded for television programs.”¹⁰⁹

I need not elaborate on the arcane workings of the Hollywood collective bargaining agreements (which are about as easy to follow as the arcane accounting of net profits, which is discussed in Chapter 10 and similarly divvies up shares of shares of receipts), which over time will continue to haggle over splitting the online and download pie; the point is as first noted, in that even while immature, revenues associated with digital/streaming of content are a lightning rod, and guilds are adamant about participating in what they correctly perceive as a growing pie.