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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Time Warner is about to unload its cable unit, which will pay the media giant a roughly $9 billion cash dividend. That could mean good things for Time Warner's suffering holders, whose shares are down 39% to $9.55, in the past 12 months. Cold comfort, but in the same span Viacom is down 60% and Barron's parent News Corp. is off 65%.

Bond analyst Dave Novosel at Gimme Credit says the imminent spinoff of a Time Warner Cable means "financial flexibility will be enormous" for Time Warner, the subject of a positive Barron's story last summer.

A savvy investor who has been talking with management tells us more stock buybacks are likely with the stock so cheap, as are acquisitions. Shares are trading for just 2.4 times the hefty cash thrown off by the company's diverse businesses, again, below multiples sported by some other media concerns. Time Warner expects to post earnings of 66 cents a share this year.

The news was mostly grim last week when the New York company reported fourth-quarter results. Advertising revenue was down, subscriber growth is slowing, and one-time charges ballooned the quarterly loss to $16 billion. CEO Jeffrey Bewkes is still at the helm, however, and we still envision that happy ending, just from an unhappily lower perspective.

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It may be an entertainment company CEO's worst nightmare: waking up, looking in the mirror and seeing a music-company CEO.

That day may be here sooner than anyone in Hollywood would want to believe. Straws in the wind in recent weeks suggest that the recession may be accelerating a structural change toward free or low-cost Web video, either television or movies, and away from traditional delivery methods, such as cable TV or DVDs.

Time Warner Cable CEO Glenn Britt on Wednesday warned that with more TV content being put on the Web, "we are starting to see the beginnings of cord cutting where people, particularly young people, are saying, 'All I need is broadband. I don't need video.'" Such a shift would endanger cable-network revenue, he said. But it would also eventually hurt the studios that supply the programming.

Meanwhile, Walt Disney CEO Robert Iger on Tuesday night had to explain a 64% drop in studio operating income in the December quarter caused by lower DVD sales. He said the DVD business may be suffering more than just a cyclical downturn. Increasing consumer choices, including videos available in many different outlets, may have a long-term impact on the DVD business, he said.

Indeed, Netflix last week said its instant-watch online service, which lets mail-order subscribers stream TV shows or movies, is being used in "ever greater numbers."

Major studios generate about 75% of their nearly $19 billion in annual U.S. feature-film revenue, post-theater, from sources like DVDs and TV sales, estimates Adams Media Research. Cable networks often generate more than half of their revenue from fees paid by cable and satellite operators. Both these pots of money are at risk.

span style="font-size: small;">Admittedly, the media companies control the content and can choose to pull it back from the Web or to raise the price they charge online services for their content. But they also need to respond to consumers' demands, by putting more content online. After all, the music industry tried to hold back the online flood and was almost drowned in the process.

So how should the industry respond? By continuing to embrace the Web, rather than retreating. Some executives at Time Warner Cable have floated the idea of limiting access to online TV-network video only to those who subscribe to cable-TV video packages. So far, the idea hasn't gained momentum, which is fortunate. Given the amount of content already on the Web, it isn't likely to work.

Instead, the media companies need to rethink how they operate. Mr. Iger seems to have the right idea. He outlined plans to cut costs in Disney's home-video business and to be choosier about movies that get made. What they can't do is ignore reality. To misquote Stephen Stills, there's something happening here and what it is, is increasingly clear.

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