November 4, 2014

Missing the Boat

Lots of chatter last week about a proposed FCC initiative to broaden the definition of ‘MVPD’ to include online video distributors (OVDs) that deliver a linear stream of programming. Newly-defined OVDs would then have access to broadcast content under the FCC’s must-carry rules, and be required to negotiate retransmission consent with larger broadcasters that decline must-carry designation.

Many seem to think such a rule would be the savior of Aereo and its progeny, and usher in a golden age for OTT providers.

Are you kidding me? This entire proposal reveals how far behind the curve the FCC is when it comes to understanding the future of TV.

Two simple reasons why this idea is dead on arrival…

1. Linear-only TV over Broadband is a Non-Starter
My first reaction to the FCC’s seeming excitement over linear TV via broadband is to ask whether any of these folks have ever actually used HBO Go, WatchESPN, or any other TV Everywhere application. None of these apps (to say nothing of ‘pure’ OTT apps like Netflix, Amazon, and Hulu Plus) is oriented around linear television. Yes, each of these applications offers some recent content (i.e., new episodes of first-run shows). Recent is good. Recent is important. People like recent. There is a huge difference, however, between ‘recent’ and linear broadcasting. Despite efforts by Cablevision, US courts have not been particularly friendly to large-scale cloud DVR services. Moreover, unlike set-top boxes (or even PCs), mobile devices lack both the storage and battery life for anything more than the most minimal client-side DVR capabilities.

The result is that linear broadcast on a tablet or smartphone means TV circa 1985. Remember this? You start the app at 8:10 p.m. and you’ve just missed the beginning of the show that explains what happened last week (with no opportunity to restart). Worse yet, linear broadcast means you log into the app at 9:00 p.m. and realize you just missed the new episode of your favorite program entirely (with no opportunity to watch it now). Linear broadcast, in other words, defeats the entire purpose of having an interactive app on a personal screen. Good luck selling that to today’s quantum viewing consumer.

Anyone who doubts the validity of this argument is welcome to conduct the following thought experiment. Imagine HBO had two apps. App A is the current HBO Go app. App B is an application that launches, connects with HBO’s linear broadcast feed, and plays the resulting stream on the phone or tablet. Now let’s conduct a little A/B testing. Offer App A and App B to a random sample of 1,000 existing HBO customers and ask them which they prefer. I guarantee you that App A wins 1000 to 0, unless one of the folks at the FCC who thinks this is a great idea happens to be in the test group in which case the result may be 999 to 1.

2. Retransmission Fees are Greater than Zero

This is the real elephant in the room. Aereo, in case anyone had forgotten, did not actually pay content owners for the right to deliver their expensive-to-produce, first-run television programs to its customers. Zero. Zilch. Nada. I understand that Aereo thought that looked like a pretty good business model in terms of gross margins and content costs (who wouldn’t?), but that’s hardly a ringing endorsement for the sustainability of linear streaming over broadband in the real world. In that real world (as contemplated by the FCC’s proposed rule change), new providers will be required to pay monthly retransmission fees to the major broadcasters for this content.

As an example, CBS-owned affiliates currently get in the range of $1.50-$2.00 per subscriber per month from the legacy MVPDs. This amount then gets split between the local broadcast affiliate and CBS. Traditionally this was a 50/50 revenue share, but more recently CBS has moved to a fixed ‘program fee’ model in the range of $0.65-$0.85 per subscriber per month. No matter how you slice it, this is a decent chunk of change. For a package of CBS, ABC, NBC, and Fox you are talking about $6-8/month in retransmission fees. By way of reference, Aereo’s basic package started at $8/month.

Does an online MVPD still look like a great business?

The TV business is a curious amalgam of history, law, business, pop culture, and technology. Adapting this complicated system to the Internet (another weird combination of things, but that’s another story) is challenging, to say the least. As a result, the FCC should be commended for (belatedly) recognizing both how anachronistic the facilities-based MVPD definition has become, and the necessity of finding a way to bring OTT providers into TV’s regulatory framework. At the same time, however, its dogged insistence on linear broadcast as the sine qua non of the TV experience reveals a complete misunderstanding of what broadband video is about.

Bottom line – and regardless of what FCC regulations say or don’t say — the future of TV is still an app.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to the video ecosystem and technology companies. He lives near Seattle, WA.

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