Stephen’s Posterous

The music and newspaper industries have faced serious challenges and are struggling to survive in the form that we know them.

The mis-steps of both, the former for reacting too slowly to the onslaught of digital technology and the latter for hesitating in the face of competition from free content on the internet, framed discussions at the annual National Cable & Telecommunications Association convention in Washington DC last week.

Executives puzzled over the explosive demand of free online videos and whether that could lead customers to drop their cable TV service.

Hardly any conversations went without mention of the cable industry’s answer to the threat – “TV Everywhere” or “Entitlement”, a broad concept spearheaded by Time Warner to offer a cable network’s programming line-up online for “free”, but only to paying subscribers to cable video services.

“We’re all being too slow to take all these networks [and] put it on broadband. Do it right away.” Jeffrey Bewkes, Time Warner chief executive, urged some 12,000 cable executives attending the show last week.

TV Everywhere, and a similar plan by Comcast , the top US cable operator, called OnDemand Online, is designed to preserve the lucrative 30-year-old cable business model where networks such as CNN, which sell advertising, are also paid a fee by cable operators like Comcast for the right to carry the channel.

Mr Bewkes’s plan, a revision of a failed attempt to do the same for video-on-demand services, comes as the decline in advertising hits media businesses.

Privately, executives at the show said executing the plan would be a nightmare, but doing nothing could be worse. The tough slog over the next two or more years to convince nearly everyone to go along with the plan will determine the future of media for the next 20, cable executives say.

Talking to the Financial Times, Mr Bewkes conceded there were “some issues”. Among these: how many more adverts must programmers add to online videos, and in what form will these appear?

Services such as Hulu, the free online video service that is a joint venture of News Corp and NBC Universal, carry only about a quarter of the amount of adverts that appear on television. It might prove hard to sell enough ads to fill the available slots for online video. Hulu, which boasted of selling out its inventory of ads last year, has resorted to running filler ads this year.

“What emerges . . . has to result in a growth in advertising,” Philippe Dauman, chief of Viacom, told the FT.  Better technology to attract viewers, as well as the ability of media sales teams to sell across multiple media platforms could offset dented revenue if viewers suddenly flocked to the web, Mr Bewkes said.

For all the hullabaloo about online video, it has generated little revenue and almost no profits compared with TV. The average ad revenue per viewing hour for cable is about three times higher than for online video, media executives say.

“How much more content can you put online until you have mechanisms to monetise [it]?” asks Denise Denson, executive vice-president of content distribution at Viacom’s MTV.

Other programming executives were reticent about offering anywhere near their entire programming line-up on the internet. “We’re going to be as moderate as we can be,” said Joshua Sapan, chief executive of Rainbow Networks. Making TV Everywhere work would also require a massive, industry-wide co-ordination among rivals fearful of divulging valuable consumer data to each other.

“There are at least as many questions associated with building it as there are elements that seem attractive about it,” said Bridget Baker, president of TV network distribution at NBC Universal.

“Maybe it’s not such a good idea,” confided one top media executive by the end of the week-long cable show.

In spite of uncertainty, some, like Time Warner Cable, are forging ahead with plans to roll out an online version of HBO, which carries no advertising. Tests later in the year with ad-supported networks from Turner Broadcast and NBC Universal will be a better barometer of future success.

As to when programming schedules will be a key-press away for paying subscribers, “I don’t know the answer to that,” Mr Sapan confessed.

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This Epix tale might not be one the Hollywood studios were banking on. 

Ten months ago, three film studios, Viacom Inc.'s Paramount Pictures, Lions Gate Entertainment Corp. and Metro-Goldwyn-Mayer Inc., teamed up to create a next generation movie channel that would debut on the Internet and revolutionize the pay-television business.

So far, the studios have invested $35 million in the venture, dubbed it Epix and said that Lionsgate would produce the channel's first original TV series, a drama about a Nashville music family called "Tough Trade." That's not all that's tough. Epix, a pun on "epics," a term for the most ambitious films, has so far been unable to secure distribution with a cable or satellite TV company, a crucial step in the launch of any new network.

Industry titans Time Warner Cable Inc., Comcast Corp. and DirecTV Group Inc., the biggest cable and satellite operators in the country, all appear skittish about adding a pricey new movie channel during a recession, when they are fighting to hold the line on program expenses and retain subscribers.

"This is a really tough economy to be launching a new cable network, let alone a new premium pay channel," said Deana Myers, a TV analyst with consulting firm SNL Kagan. The partners are unfazed. Viacom Chief Executive Philippe Dauman assured Wall Street analysts recently that the venture was on track to launch a subscription-based Internet site in May and a television channel in October.

"We continue to feel very bullish about the prospects for Epix as we go forward," Dauman said. Executives involved in Epix contend that resistance by cable companies to committing to the new channel is nothing more than jawboning for better terms. They predict that Epix will win the backing of cable and satellite operators within a few months and be on the air by fall.

Epix Chief Executive Mark Greenberg said the plan to stream movies should lure cable, satellite and telephone companies because it could encourage customers to upgrade their Internet service to higher speeds that accommodate movie viewing. The dual offerings, an Internet movie feature and television channel, are the reason that Epix wants a hefty $1.50 monthly per-subscriber fee from distributors.

Epix may have other pathways into the home. One potential partner is Netflix Inc., the video rental company, which attributes its growth despite the recession to rising demand for online movie streams, suggesting that customers are warming to watching movies on their computer rather than on cable TV or DVD.

"We do have a number of traditional, nontraditional solid offers right now, which we hope certainly to close imminently," told analysts during the company's quarterly results call. Derek Chang, DirecTV's executive vice president for content strategies, said his company, which serves 17.6 million subscribers, was not ready to sign up.

"It's still preliminary," he said. "They are continuing to adjust their business strategy and we are continuing to have conversations with them." The stakes are high. Studios depend on licensing fees from pay-TV contracts with HBO, Starz and Showtime to help offset the costs of filmmaking.

The arrangements provide steady income, a tonic in a volatile business where millions of dollars are spent making and marketing a single movie, which might land with a thud in theaters. Even modest box-office performers generate millions in revenue from their runs on premium movie channels.

The desire to wring as much as possible from pay-TV contracts was the reason Epix was formed in the first place. Paramount, Lions Gate and MGM decided to launch their own pay-movie channel after negotiations with Showtime to extend their movie deals fell apart. Showtime, owned by CBS Corp., said it no longer was willing to pay the $350 million annually to the three studios for licensing their films.

"Movies are online, they are on video-on-demand services," Myers of SNL Kagan said. "They are just not as valuable as they were five years ago." The studio partners also believe that by cutting out the middleman, in this case Showtime, the venture will be able to offer movies on the Internet only nine months after their release in theaters and before they appear on cable.

Typically, there is a one-year lag before the movies appear on HBO or Starz. In many ways, however, the venture is gambling on the promise of the Internet for distribution.

"We think that making the films available on broadband, on-demand television and through their mobile phones allows the viewer to see the content the way that they want to," said Greenberg, a pay-TV veteran. "We can be adaptive to the marketplace, and from our view that's exciting. We are going to find our way."

However, making movies easily available on the Internet could backfire by alienating traditional cable companies that have long paid hefty fees for exclusivity. Cable executives are worried that viewers won't have a reason to watch their channels if studios make their shows and movies available for free on the Internet, through such sites as Hulu.

But, given that Showtime was unwilling to pay Paramount, Lions Gate and MGM what they were seeking for the rights to air their movies, the studios believe that they have little choice but to bet on new methods of distribution, said Dennis A. Miller, a partner of Spark Capital and a former Lions Gate executive.

"Showtime was offering less and less money for these movies," he said. "These studios are giving up some short-term revenue in return for a meaningful equity stake in something that has the potential to become a viable pay-TV and broadband business. That's the calculated risk this group is taking."

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Cable networks do not have to fear the internet. It may have killed the business models of many record labels and newspapers, but there good reasons to think that companies distributing programming can dodge the online bullet.

For a start, making video of even moderate quality is a very different, and more expensive proposition than writing a blog or starting a band in the garage. User generated content fills a variety of niches but is unlikely to derail television. It is striking that the 10 most popular videos on YouTube in 2008 were all professional efforts.

Also, for all the shows available on sites such as Hulu.com, a video streaming site owned by News Corp and NBC, the economics for content owners do not make sense. Even assuming that it is possible to charge the equivalent TV rate for an online advertisement, consumers do not tolerate as many ads online.

Bernstein Research calculates that once lost affiliate fees, the carriage costs paid by other cable networks, are taken into account, the advertising yield on one 26-minute show is an eighth of that per traditional viewer. Furthermore, hit TV shows are bundled with another 23 hours a day of programming that generates further income. Internet viewers simply cherry pick the good stuff. Putting free content online only makes sense as a means to attract new viewers to a program on the traditional distribution channels.

Convenience and availability are still necessary to avoid pushing viewers toward illegitimate downloads. Ultimately, though, consumers will have to pay for what they watch. And the easiest way to do that is to have one company deal with all the charges and technology, piping it direct to the living room.

Competition between those who lay cable or put satellites in space will erode revenues over time. But with the cable operators Time Warner, Comcast and Cablevision all trading at less than five times earnings before interest, tax depreciation and amortisation, a record low, investors should not hide behind the sofa.

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