October 20, 2014

It has been a turbulent month in the world of “broadcasting”: the quotes pointedly added because the model of simultaneously broadcasting original content to large numbers of viewers through one distribution mode is looking increasingly outdated even as demand for high-quality filmed entertainment and sporting events is growingly robust. This will have implications for capital allocation and M&A strategy in the media and connectivity markets.

Canada contributed some drama inasmuch as the national media and telecoms regulator – the Canadian Radio-television and Telecommunications Commission – undertook a very public tussle with the filmed-entertainment streaming service Netflix. The CRTC sought, and was refused, access to subscriber data from Netflix (NFLX:NASDAQ, which boasts a market capitalisation of $21.5 billion).  CRTC’s head warned the wildly popular service that he might start regulating it, though in the end (perhaps as a recognition of the political difficulty – both domestically and in terms of Canada/US trade relations – of regulating such a firm) the commission settled on striking NFLX’s public testimony from the record.

Yet the CRTC’s finger-in-the-dyke approach to controlling distribution of content was far from the most consequential development in the evolution of media platforms towards new Netflix- and Amazon Prime- style “over the top” media platforms. At one point it had been feared that Netflix might disembowel the networks; now it turns out that they are fighting back very much in the “if you can’t beat ‘em, join ‘em” spirit.” The “broadcast networks” are fast-becoming multi-platform content developers. Perhaps they are mindful of the fate of the newspapers that failed to adapt to the new digital world.

The more consequential news therefore came in the form of announcements by  traditional network CBS and the Time Warner-owned cable network Home Box Office that they would be launching their own “over the top” streaming services (respectively HBO GO and CBS All Access).

HBO – best-known for its immensely popular series such as Game of Thrones – has served traditional cable well. It has a compelling enough offering to anchor many customers into expensive monthly packages layered on top of basic cable service. HBO Go, targeting a U.S. launch in 2015, will not require that users have traditional cable subscriptions (though the broadband connection required to use the service would almost certainly have to be provided by a cableco or a telco).

In making the announcement, HBO’s President, Mr Richard Plepler, noted that roughly ten million U.S. households subscribe to broadband internet without paying cable television fees: the implication being that there is an audience (presumably more youthful) that has severed the traditional connection between filmed entertainment and inbound cable or satellite television. This “Netflix and Hulu demographic” – which is fast-growing – evidently prefers to watch entertainment on its own terms at a time of its choosing.

“That is a large and growing opportunity that should no longer be left untapped. It is time to remove all barriers to those who want HBO” continued Mr Plepler. That said, HBO is far from abandoning its traditional cable partners, indeed it is investing in a marketing campaign to underscore the value of subscribing to HBO via cable. Interestingly this announcement comes several months after Mr Rupert Murdoch’s News Corp. abandoned its pursuit of HBO’s parent, Time Warner. The HBO announcement was made during a TimeWarner investor conference called to outline its plans for growth. Exploiting new digital distribution channels whilst boosting the production of original content is a key driver in Time Warner’s plans. Recall that Time Warner sold its cable operations and has bet on a future as a pure-play content provider.

CBS, which has the benefit of both new original content as well as a massive back catalogue running to the dawn of the television era, is also targeting launch of its service (priced at $5.99 a month). It provided a strikingly similar rationale: “CBS All Acess is another step in the Company’s long-standing strategy of monetizing our local and national content in ways that viewers want it” explained Mr Leslie Moonves, CEO of CBS Corporation.

If filmed entertainment (and it seems pointless to differentiate Netflix’s House of Cards from a feature film) stands as one pillar of the media world, professional sport is surely the other.

It is interesting that CBS All Access will not include any NFL content (CBS broadcasts NFL games on Sunday afternoons and Thursday evenings). ESPN – the sports network owned by the Walt Disney Corporation – has inked a deal with the NBA to deliver basketball games (though not necessarily the most sought-after ones) over a streaming service aimed at consumers that do not subscribe to cable. The package seems structured to allay twin concerns: it is a streaming service (and reassures those focused on not losing the new generation of consumers attuned to new-model media platforms) whilst it does not include the games that anchor pay-television subscriptions (reassuring those at the basketball league focused on the large revenues generated by television distribution deals).

This delicate balancing act is also being performed at the NFL, though without the network partnership favoured by the NBA. The NFL is a powerful institution: the $5+ billion paid annually by the networks to the NFL dwarfs all other sporting contracts  – and the NFL regularly dominates the list of the ten most popular shows in the US. The American football league recently launched something called “NFL Now” a video site aimed predominantly at smartphones and tablets. “Our view is we know that’s where the world is going, so we made sure we had the property rights to populate a new video service,” commented Mr Brian Rolapp, the NFL’s executive vice president for media.

Interestingly the site has attracted over 9 million visits since it was unveiled. How the site is used varies widely by type of connection. Smartphones and tablets account for 55% of the visits, but those reaching the site via PCs and xBox spend twice as much time per visit and are (unsurprisingly) much more inclined to watch longer features and content more varied than highlights of recent games. The NFL seems to downplay this, but this platform could form the basis for competition with the very networks that pay billions a year to the football league.

The other area of sports content is what sits around games: the hours of pre-game predictions and post-game dissection by sports pundits. Here too changes in distribution may be taking place.

One of ESPN’s most popular broadcasters is Mr Bill Simmons. A pioneer of a casual, determinedly fan-oriented style of sports commentary, he complements his broadcasting with podcasts that frequently sit atop Apple iTunes’ most-dowloaded list. He was recently sent on leave for three weeks by the network after he dubbed the Commissioner of the NFL a “liar”. His suspension turned him into an icon of free speech (notable Hollywood actors coming to his public defence) and, on his return, a focus of gossip that he would depart the network to start his own media platform.

This is more than idle speculation because venture capital has joined private equity in the sports/media world, with the former now looking to invest seed money to grow new platforms into substantial, cash-flowing businesses.

In an article in the NYTimes, which read suspiciously like a forum for competing negotiating positions, it was speculated that Mr Simmons could leave the broadcaster to create  a platform linking his well-regarded website Grantland with a “production studio that makes sports films and documentaries for a distributor like HBO or Netflix; a podcast network; a website; and maybe a YouTube channel.” (“Bill Simmons Return Sets Intrigue In Motion at ESPN”, The New York Times, 14 October 2014).

If Mr Simmons does leave it will be an interesting test – undoubtedly not the last – of how far personal brands can go in attracting consumers away from the networks that gave them prominence. Howard Stern, Glenn Greenwald, Katie Kouric and Glenn Beck have made the move to digital/non-neywork platforms in their respective, varied domains; though they all – like Mr Simmons – co-exist at the conjunction of opinion, reputation and personality.

What the announcements of the last week show is that the relationships between content creation, content distribution (running a streaming service is a complicated art) and ownership of the broadband pipes needed to deliver content is evolving in a rapid and fundamental manner. Mindful of the fate of many newspapers, the networks may have decided to copy Netflix and adopt disruptive business models. The sports leagues may be inching in the same direction. We expect decisions regarding capital structure, investment and M&A strategy to increasingly reflect this.