Netflix Found a Weak Link in Video Entertainment; Will Sports be Next?

Sports programming might someday lead to a major change in the way people buy video entertainment, perhaps representing a more significant change than broadband-delivered streaming services. 

To be sure, we commonly think it will be a technology change that enables some disruption of the video entertainment business, whether that is peer-to-peer, streaming, mobile devices or 4G mobile networks. Those things could help, certainly. But video is a different sort of business than many others. 

As the National Football League controls its "programming," so movie studios and TV networks control their content. While there are lots of other sources of sports programming, the NFL is a "unique brand" in the content realm. Unless NFL football becomes far less interesting, the NFL has a "moat" around its business. 

But disruption will occur at the weakest link in the entertainment video value chain. And some might argue that sports programming is a weak link, as "premium channels" have been disrupted by Netflix, another "weak link." 

Some might argue that Netflix has the potential to disrupt the TV business, but that is a theoretical possibility. What Netflix arguably already has disrupted are "premium video" channels such as HBO. Netflix is not a full substitute for HBO, in part because HBO has original programming, and in part because even when that programming is available to Netflix customers, quite some time has passed. 

So why could sports become another weak link? Cost.


The reason is the sheer impact of sports programming on the overall cost of a typical video subscription. Sports programming might be 20 percent of the viewing on a day-to-day basis but it may be 50 percent of the cost that the consumer pays, according to Dish Network Chairman Charlie Ergen.

Consider the business from the standpoint of a sports programming network. In most markets, any single content provider has four different customers buying an important sports channel. Once streaming services take hold, there will be additional providers buying sports programming.

As great as that is for the sports programming network, it isn’t so great for distributors or consumers.

The sports providers often require, for example, that sports channels are packaged on the tier with the most buyers. But not every video subscriber, or even every household, is populated by sports enthusiasts who value sports programming.

In theory, a daring video provider could make a decision to segment an audience, essentially choosing to give up “sports enthusiasts” by refusing to carry expensive sports programming.

That might cut distributor content costs a substantial amount. Ergen suggests as much as 50 percent. Such a provider would risk losing perhaps 20 percent or 30 percent of the sports enthusiast audience.

But such a provider would be significantly more attractive to the other 50 percent, or 60 percent or 70 percent of the customers who might willingly give up ESPN and other channels, to get a serious break on recurring monthly subscription fees.

Here’s the “money” quote: “If the economy continues to struggle along, that's probably a valid long-term strategy,” says Ergen.

“We almost went there last year with FOX Sports,” Ergen says.

In a daring bit of strategic thinking, Ergen says “I think that there's a limit to where sports cost can go and at some point, it's not going to be in 90 percent of the homes at some point if the costs go too high.”

Consumer demand for video programming really is not completely elastic. At some point, the value simply will not match the retail price in a satisfactory way.

To be sure, given a choice, every service provider would prefer the widest possible variety--”something for everyone.” But if push comes to shove, and price begins to be a barrier, a “sports free” service, offered at significantly lower cost, is going to be attractive to a significant portion of the audience.

“And there certainly becomes a time when a deal doesn't make any sense and a sports offering might not make sense, and that's been the case for us in New York,” says Ergen. “It could happen in other places.” Sports programming could drive change

TV Shift for Decades Has Been in the Direction of "On Demand"

One can argue that the evolution of television and movie consumption over the last few decades has been one story: of a shift from linear consumption to consumption on demand.

Digital technology has improved the quality of the experience, but is not solely responsible for the trend.

People just want to watch what they want, when they want it. Evolution of home video

Video on Demand Consumption Grows, So Does Rest of "On Demand"

Video-on-demand services offered by cable, satellite and telco TV providers have been a modest success so far. In fact, one might well make the argument that digital video recorders represent the biggest innovation in "on demand" viewing in recent years, though some also would note even that viewing is relatively low, compared to total viewing.

Still, there was a 35 percent increase in VOD transactions in 2010, compared to 2009, according to Rentrak OnDemand Essentials, an audience measurement company.

According to the Leichtman Research Group, DVR penetration rates have reached 54 percent for consumers with households exceeding $75,000 while those with incomes below $30,000 only have a 16 percent penetration rate. See http://www.marketingforecast.com/archives/6941.

Last year, a Nielsen survey revealed that over 30 percent of consumers owned DVRs, but a more recent survey conducted by Comcast says that up to 60 percent of households may be time-shifting their TV viewing.

According to Leichtman analysts, live programming still represents about 80 percent of total viewing. But DVR now represents about 41 percent of that activity.

Online is 17 percent of total TV consumption while other forms of video on demand represent 16 percent of viewing.

But estimates vary. Overall, consumers watch an average of 158.25 minutes of TV per day, according to Nielsen. And they spend just 9:36 minutes watching time shifted TV daily, a 14 percent increase from last year, but still a small amount, according to Nielsen.

On-Demand Viewing Poses a Test for Broadcasters - NYTimes.com

Video on Demand: After 25 Years, Still Not that Big a Deal

Despite all the attention now paid to online delivery of movie and video programming, after 25 years, consumers globally still show an overwhelming preference for renting shows using some form of physical media.

Video-on-demand services, which have been available for 25 years, continue to lag other methods of delivery, DVD rentals and purchases being the dominant method.

The other significant issue is that demand for all forms of on-demand video seems to have flattened out, globally. That suggests displacement, not growth, is the strategic imperative. For VOD providers, the issue remains: can VOD grab more share of the market than developing online delivery methods?

Internet TV and The Death of Cable TV

Lots of people believe video distribution is going to change, and the only question is how long it will take. Some think the important thing is the number of alternative venues now available, or which will likely be made available, to view professionally-produced content users now associate with "cable TV."

All you need to know is what the content owners want to do, and when.

The networks aren’t blocking Google TV access to content because Google is uniquely disruptive. They are blocking Google TV access to network content because "web TV" economics likely would be incredibly disruptive to the current business.

Content owners want preservation of existing revenue streams--at least the magnitude of those streams--as "over the top" delivery modes develop. One might question whether that is possible, but there is no question the networks will attempt to maintain the existing business practices to the greatest extent possible.

Cable, for its part, claims the lowest-possible distribution cost, from an end-use standpoint. The objection many users will have is that the cost to deliver programming that is not wanted is not the important metric. What matters is the cost to view only the content any single viewer wants to watch.

The key is what content owners are willing to accept.

Internet TV and The Death of Cable TV

What Does Comcast-NBC Universal Merger Mean?

The Comcast merger with NBC Universal will be viewed in many ways: a way for Comcast to move upstream in the content business or a chance to grow the "digital" or "new media" side of the merged company's operations.

The merger also is about protecting the value of the exsiting video distribution ecosystem from destabilizing change. "TV Everywhere," the cable industry approach to enabling use of paid-for video content on any screen, is a similar initiative.

The move also suggests a view on the part of Comcast management that the cable TV distribution business has limited upside left. Revenue growth for virtually all of the cable companies now is coming from voice and high-speed data services, with the emphasis now shifting to business customers, as even the consumer elements of that business are seeing slower growth.

One might question the ultimate value of the move, either as a way of growing revenues near term, or as a strategic bridge to the future. The near term value is clearer, though.

Essentially, the attempt is to provide low-cost or no-incremental cost, convenient access to large quantities of popular professional video while baking in an indirect business model. If you think about the way metro Wi-Fi hotspot access now is positioned by cable and telco service providers, you'll get the idea. The direct revenue actually is produced by purchases of fixed broadband access service.

Then Wi-Fi access is added as a "no incremental charge" enhancement. In the same way, some mobile broadband plans might be pitched as fees for "mobile Internet" access, but then also allow no-incremental cost email access.

In other words, Comcast wants to hang onto the proven business it has--all it "cable TV"--while merchandising "new media" access to that content on smartphones and PCs, for example.

Perhaps Comcast and others would prefer to keep the old business while growing a new one with a direct revenue model, but that seems problematic for most content distributors and owners.

Some studies suggest users will pay some amount for mobile or on-demand video and TV. The issue is how much such users would be willing to pay. Consider a scenario where a typical user pays $10 a month for mobile and other on-demand access, and where the typical household consists of three people, for a total revenue of $30 a month.

Consider that for most households, multi-channel video now costs between $70 and $100 a month, and that is a flat charge for all users in the home. That works out fine if there is no cannibalization of the fixed connection.

But it won't take much substitution to wipe out all the gains from the incremental on-demand revenue. Unless, of course, the different approach is taken: keep your regular subscription and we'll give you the additional on-demand capbility for no incremental cost or low cost.

Why Netflix is Not "Toast"

On-demand video might affect the DVD rental business someday, but apparently not this year. Netflix just revised first quarter and full-year 2008 guidance. For the year, Netflix expects to have 8.9 million to 9.5 million subscribers, up from the prior forecast of 8.4 million to 8.9 million subs. It expects revenue of $1.345 billion to $1.385 billion, up from $1.3 billion to $1.35 billion. It expects unchanged GAAP net income of $75 million to $83 million. But GAAP earning per share will be higher. The new forecast calls for $1.18 to $1.30 per diluted share, up from $1.12 to $1.24 per diluted share.

On-demand viewing is convenient, to be sure. But there are countervailing values as well. On-demand purchases introduce an element of uncertainty into monthly budgeting of expenses. On-demand rentals can be cash transactions, with no later unexpected financial impact. It's an underestimated value for physical rentals rather than on-demand purchases.

Flat rate is important for many consumers. So is the "unlimited" number of titles one can buy on some Netflix plans. That adds more value. Think of how parents view texting charges. Why do so many people buy relatively large plans? Because they don't want overage charges.

On-demand viewing leads to "overage" charges. Flat-rate or "cash on demand" services eliminate that uncertainty.