TMC
01-23-2020, 10:09 PM
https://www.bloomberg.com/news/features/2018-08-08/who-killed-the-great-american-cable-tv-bundle
SUSPECT #1: REED HASTINGS
Perhaps no one deserves more credit for threatening the old TV business model than Netflix Chief Executive Officer Reed Hastings. As the driving force behind the world’s largest streaming video service, with about 130 million subscribers, he’s taught consumers to expect an abundance of old and new shows and movies, without the irritation of commercial interruptions, for just $8 a month.
But if Hastings’s success is responsible for the decline of the cable industry, he had plenty of accomplices among TV executives who fueled Netflix’s rise in the early going. Over the past decade, media companies have licensed their old hits to Hastings, getting a short-term payout but jeopardizing the long-term health of the industry.
Looking back, some TV executives express regret for doing business with an up-and-coming Netflix, and they struggle to justify their decision to do so. Had they withheld shows from the companies, TV executives might have been vulnerable to lawsuits by the Hollywood talent who have a financial stake in a show being sold to the highest bidder. Netflix frequently offered the most money.
Investors also pressured media companies to take Netflix’s cash. Take, for instance, Time Warner Inc., which is now owned by AT&T Inc. While Disney, CBS, and others licensed many of their old shows to Netflix, Time Warner initially held out. Starting in 2009, Time Warner and Comcast Corp. tried to rally the industry around an idea to slow Netflix by making TV episodes available online—but only to cable subscribers. The idea was called TV Everywhere.
By 2012, however, Time Warner’s investors were demanding to know why the company wasn’t selling its reruns to Netflix, according to one former Time Warner executive. “We sat out for a few years, and all of Wall Street said, ‘What the hell are you guys doing? You’re leaving value on the table for your shareholders!’ ” the former executive said. “So we relented. That was the beginning of the end.”
Time Warner’s Turner Broadcasting did its first deal with Netflix that year. Another transaction the following year brought in more than $250,000 per episode for reruns of shows like Robot Chicken and Aqua Teen Hunger Force, according to the former executive. Time Warner figured Netflix’s money would make up for any lost advertising revenue from viewers who watched on Netflix instead of a cable box.
By 2015, Wall Street had changed its tune. With about 40 million U.S. subscribers, Netflix was becoming a clearer threat. Analysts started pushing media companies to reclaim those old episodes from Netflix to make cable TV more attractive, which could slow the rise of cord-cutting. That year, Todd Juenger, an influential analyst at Sanford C. Bernstein & Co, estimated that big media companies, including Viacom, Fox, and CBS, would have been worth a total $45 billion more if they hadn’t done business with Netflix in the first place.
“It was a big flip-flop from Wall Street,” the former Time Warner executive said.
Some also concluded that the streaming service could be good for ratings after seeing the success of AMC’s Breaking Bad. The drama about a meth kingpin drew more than 10 million viewers in its final episode in 2013 after past seasons began appearing on Netflix. That compared with 1.4 million viewers for the first-season debut in 2008. Fans had caught up on the old seasons on Netflix, then tuned in to the current season on TV, they thought.
Media companies are now clawing back their old shows from Netflix to use for their own online services, while Hastings is ordering up more and more original series. His company is spending $8 billion on programming this year, far more than rivals such as HBO and Showtime.
Netflix has already changed consumers’ expectations, said Craig Moffett, an analyst at MoffettNathanson. A lot of the damage to the cable bundle has been done. “All of the media companies got addicted to the crack cocaine of licensing to Netflix,” Moffett said. “It created a new window to sell shows, but it also created a monster.”
SUSPECT #2: BOB IGER
TV executives have also spent billion of dollars acquiring sports rights, which has driven up the price of TV service—and almost no one has bid more aggressively for sports than Disney CEO Robert Iger. Disney, owner of ESPN, is on the hook for $45 billion in sports rights in the coming years. To cover those fixed costs, ESPN charges TV operators about $8 per month per subscriber, making it the most expensive channel and an easy target for critics.
“ESPN created the model of everybody paying for sports even if only a fraction of the country cares,” said Rich Greenfield, an analyst at BTIG and a Disney critic. “The cost of the bundle has gotten so absurd because of what Disney has done with sports rights.”
Sports programming is still an undeniably huge draw. Justin Connolly, Disney’s executive vice president for affiliate sales and marketing, said ESPN is a big reason why people sign up for new online services such as Sling TV or DirecTV Now. And, of course, access to big-time sporting events is one of the reasons many people renew their cable-TV subscriptions.
For its part, ESPN is happy to avoid a deep inquiry into the connection between sports and rising prices. “We as an industry need to figure out how to avoid the finger-pointing around who is to blame, and provide consumers with the feeling that if they spent $35 or $40 or $90 or $100 on a pay-TV package, they see real value,” Connolly said.
If anyone is responsible for the high cost of sports, it’s not ESPN—it’s sports fans, according to Bill Rasmussen, who co-founded ESPN in the 1970s. “The fan is responsible for ESPN,” said Rasmussen, who no longer works at the network. “They just kept demanding more sports, and ESPN kept going out and buying more rights.”
The cost to networks of paying huge sums for sports rights get passed on to customers in the form of higher monthly bills. Broadcast channels like Fox, CBS, and NBC are also shelling out billions of dollars on sports because it’s one of the few things consumers still watch live, which helps the companies sell advertising. Those broadcasters are raising the prices they charge cable operators, leading to higher consumer bills. Congress handed that new-revenue stream—known as retransmission consent fees –to broadcast channels in the early 1990s.
“From there, the whole industry became a nuclear arms race,” said Mike White, the former CEO of DirecTV.
Cable-TV distributors aren’t blameless. Many own local sports channels, among the priciest constituents of the cable bill.
To some executives, no company offers a more egregious example of how the value of sports has spiraled out of control than Time Warner Cable. In 2013 the cable company, now owned by Charter Communications Inc., agreed to pay an average $334 million a year to broadcast Los Angeles Dodgers games for the next 25 years on its cable channel, SportsNet LA. That’s roughly eight times what Fox reportedly paid in the previous Dodgers deal. To cover the cost, Time Warner Cable initially charged almost $5 per month per subscriber, making it one of the most expensive in the bundle.
Five years later, no other major TV provider around Los Angeles carries the Dodgers channel because of the steep price. Unable to watch their favorite team, many Dodgers fans have either switched to Charter, which carries the channel, or else cut the cord. Charter declined to comment.
“That was such an extreme overpayment for sports rights,” one TV executive said of the Dodgers deal. “That’s what’s killing the bundle.”
SUSPECT #3: CHARLIE ERGEN
The cable bundle was badly wounded by a man who made one of the great fortunes from it: Dish Network Corp. co-founder Charlie Ergen.
For decades, consumers who wanted just a few channels had to pay for all of them. Comcast or DirecTV couldn’t offer, say, MTV without also including Viacom’s less popular channels such as TV Land. While consumers wanted to pay for single networks on an a la carte basis, the industry fought attempts to break the bundle into smaller, less expensive pieces.
In the past decade, the Federal Communications Commission and Republican Senator John McCain of Arizona attempted to force media companies to offer their channels individually. Neither effort went very far. The cable industry argued prices would rise if consumers could choose only certain channels, and channels aimed at minority groups, for instance, wouldn’t survive without every subscriber paying for them—regardless of whether they watched.
It wasn’t until 2015, when Ergen introduced Sling TV, that the floodgates truly opened. Sling TV is a so-called “skinny bundle,” giving online subscribers the option to buy just a few channels and pay a much lower monthly fee—in this case, about a fourth of the average cable bill. Since its arrival, at least six more online TV services have entered the market.
These lower-cost services have won back some people who quit cable, providing hope for the likes of ESPN or CNN, whose channels are included. But the skinny bundles haven’t won back all the departed. They have only about 6 million customers so far. And companies whose channels have been excluded from them have little recourse to make up lost ground.
“Sling TV was a watershed moment,” said Moffett, the analyst. “It broke the all-for-one and one-for-all model for the first time.”
SUSPECT #4: EVERYONE’S GREED
In hindsight, some TV executives believe the industry would be much healthier now if everyone—programmers and distributors—had agreed to make all episodes of shows available to cable subscribers on any device. That was the dream behind TV Everywhere, an idea hatched in 2009 by Comcast CEO Brian Roberts and Time Warner CEO Jeff Bewkes. But in those crucial early days, TV Everywhere struggled to get off the ground.
Executives couldn't agree on how long to make old episodes available for subscribers. Some gave viewers only a day to catch up on a show they missed because the broadcasters had sold the reruns to another service. Others made past series available to subscribers for a month. Consumers became confused about where to go and how long they had to binge-watch a show. Some TV networks were slow to make their channels available online.
In the end, the cable industry’s failure to protect the bundle came down largely to greed, Moffett said. Media executives wanted to charge more for certain rights, like making every old episode available to cable subscribers, or granting the rights to watch a show on an iPad outside the home, instead of giving them away for the good of the industry.
“As soon as TV Everywhere was proposed, media companies imagined ways to charge extra for it,” Moffett said. “It was doomed from the start, and the rest is history.”
SUSPECT #1: REED HASTINGS
Perhaps no one deserves more credit for threatening the old TV business model than Netflix Chief Executive Officer Reed Hastings. As the driving force behind the world’s largest streaming video service, with about 130 million subscribers, he’s taught consumers to expect an abundance of old and new shows and movies, without the irritation of commercial interruptions, for just $8 a month.
But if Hastings’s success is responsible for the decline of the cable industry, he had plenty of accomplices among TV executives who fueled Netflix’s rise in the early going. Over the past decade, media companies have licensed their old hits to Hastings, getting a short-term payout but jeopardizing the long-term health of the industry.
Looking back, some TV executives express regret for doing business with an up-and-coming Netflix, and they struggle to justify their decision to do so. Had they withheld shows from the companies, TV executives might have been vulnerable to lawsuits by the Hollywood talent who have a financial stake in a show being sold to the highest bidder. Netflix frequently offered the most money.
Investors also pressured media companies to take Netflix’s cash. Take, for instance, Time Warner Inc., which is now owned by AT&T Inc. While Disney, CBS, and others licensed many of their old shows to Netflix, Time Warner initially held out. Starting in 2009, Time Warner and Comcast Corp. tried to rally the industry around an idea to slow Netflix by making TV episodes available online—but only to cable subscribers. The idea was called TV Everywhere.
By 2012, however, Time Warner’s investors were demanding to know why the company wasn’t selling its reruns to Netflix, according to one former Time Warner executive. “We sat out for a few years, and all of Wall Street said, ‘What the hell are you guys doing? You’re leaving value on the table for your shareholders!’ ” the former executive said. “So we relented. That was the beginning of the end.”
Time Warner’s Turner Broadcasting did its first deal with Netflix that year. Another transaction the following year brought in more than $250,000 per episode for reruns of shows like Robot Chicken and Aqua Teen Hunger Force, according to the former executive. Time Warner figured Netflix’s money would make up for any lost advertising revenue from viewers who watched on Netflix instead of a cable box.
By 2015, Wall Street had changed its tune. With about 40 million U.S. subscribers, Netflix was becoming a clearer threat. Analysts started pushing media companies to reclaim those old episodes from Netflix to make cable TV more attractive, which could slow the rise of cord-cutting. That year, Todd Juenger, an influential analyst at Sanford C. Bernstein & Co, estimated that big media companies, including Viacom, Fox, and CBS, would have been worth a total $45 billion more if they hadn’t done business with Netflix in the first place.
“It was a big flip-flop from Wall Street,” the former Time Warner executive said.
Some also concluded that the streaming service could be good for ratings after seeing the success of AMC’s Breaking Bad. The drama about a meth kingpin drew more than 10 million viewers in its final episode in 2013 after past seasons began appearing on Netflix. That compared with 1.4 million viewers for the first-season debut in 2008. Fans had caught up on the old seasons on Netflix, then tuned in to the current season on TV, they thought.
Media companies are now clawing back their old shows from Netflix to use for their own online services, while Hastings is ordering up more and more original series. His company is spending $8 billion on programming this year, far more than rivals such as HBO and Showtime.
Netflix has already changed consumers’ expectations, said Craig Moffett, an analyst at MoffettNathanson. A lot of the damage to the cable bundle has been done. “All of the media companies got addicted to the crack cocaine of licensing to Netflix,” Moffett said. “It created a new window to sell shows, but it also created a monster.”
SUSPECT #2: BOB IGER
TV executives have also spent billion of dollars acquiring sports rights, which has driven up the price of TV service—and almost no one has bid more aggressively for sports than Disney CEO Robert Iger. Disney, owner of ESPN, is on the hook for $45 billion in sports rights in the coming years. To cover those fixed costs, ESPN charges TV operators about $8 per month per subscriber, making it the most expensive channel and an easy target for critics.
“ESPN created the model of everybody paying for sports even if only a fraction of the country cares,” said Rich Greenfield, an analyst at BTIG and a Disney critic. “The cost of the bundle has gotten so absurd because of what Disney has done with sports rights.”
Sports programming is still an undeniably huge draw. Justin Connolly, Disney’s executive vice president for affiliate sales and marketing, said ESPN is a big reason why people sign up for new online services such as Sling TV or DirecTV Now. And, of course, access to big-time sporting events is one of the reasons many people renew their cable-TV subscriptions.
For its part, ESPN is happy to avoid a deep inquiry into the connection between sports and rising prices. “We as an industry need to figure out how to avoid the finger-pointing around who is to blame, and provide consumers with the feeling that if they spent $35 or $40 or $90 or $100 on a pay-TV package, they see real value,” Connolly said.
If anyone is responsible for the high cost of sports, it’s not ESPN—it’s sports fans, according to Bill Rasmussen, who co-founded ESPN in the 1970s. “The fan is responsible for ESPN,” said Rasmussen, who no longer works at the network. “They just kept demanding more sports, and ESPN kept going out and buying more rights.”
The cost to networks of paying huge sums for sports rights get passed on to customers in the form of higher monthly bills. Broadcast channels like Fox, CBS, and NBC are also shelling out billions of dollars on sports because it’s one of the few things consumers still watch live, which helps the companies sell advertising. Those broadcasters are raising the prices they charge cable operators, leading to higher consumer bills. Congress handed that new-revenue stream—known as retransmission consent fees –to broadcast channels in the early 1990s.
“From there, the whole industry became a nuclear arms race,” said Mike White, the former CEO of DirecTV.
Cable-TV distributors aren’t blameless. Many own local sports channels, among the priciest constituents of the cable bill.
To some executives, no company offers a more egregious example of how the value of sports has spiraled out of control than Time Warner Cable. In 2013 the cable company, now owned by Charter Communications Inc., agreed to pay an average $334 million a year to broadcast Los Angeles Dodgers games for the next 25 years on its cable channel, SportsNet LA. That’s roughly eight times what Fox reportedly paid in the previous Dodgers deal. To cover the cost, Time Warner Cable initially charged almost $5 per month per subscriber, making it one of the most expensive in the bundle.
Five years later, no other major TV provider around Los Angeles carries the Dodgers channel because of the steep price. Unable to watch their favorite team, many Dodgers fans have either switched to Charter, which carries the channel, or else cut the cord. Charter declined to comment.
“That was such an extreme overpayment for sports rights,” one TV executive said of the Dodgers deal. “That’s what’s killing the bundle.”
SUSPECT #3: CHARLIE ERGEN
The cable bundle was badly wounded by a man who made one of the great fortunes from it: Dish Network Corp. co-founder Charlie Ergen.
For decades, consumers who wanted just a few channels had to pay for all of them. Comcast or DirecTV couldn’t offer, say, MTV without also including Viacom’s less popular channels such as TV Land. While consumers wanted to pay for single networks on an a la carte basis, the industry fought attempts to break the bundle into smaller, less expensive pieces.
In the past decade, the Federal Communications Commission and Republican Senator John McCain of Arizona attempted to force media companies to offer their channels individually. Neither effort went very far. The cable industry argued prices would rise if consumers could choose only certain channels, and channels aimed at minority groups, for instance, wouldn’t survive without every subscriber paying for them—regardless of whether they watched.
It wasn’t until 2015, when Ergen introduced Sling TV, that the floodgates truly opened. Sling TV is a so-called “skinny bundle,” giving online subscribers the option to buy just a few channels and pay a much lower monthly fee—in this case, about a fourth of the average cable bill. Since its arrival, at least six more online TV services have entered the market.
These lower-cost services have won back some people who quit cable, providing hope for the likes of ESPN or CNN, whose channels are included. But the skinny bundles haven’t won back all the departed. They have only about 6 million customers so far. And companies whose channels have been excluded from them have little recourse to make up lost ground.
“Sling TV was a watershed moment,” said Moffett, the analyst. “It broke the all-for-one and one-for-all model for the first time.”
SUSPECT #4: EVERYONE’S GREED
In hindsight, some TV executives believe the industry would be much healthier now if everyone—programmers and distributors—had agreed to make all episodes of shows available to cable subscribers on any device. That was the dream behind TV Everywhere, an idea hatched in 2009 by Comcast CEO Brian Roberts and Time Warner CEO Jeff Bewkes. But in those crucial early days, TV Everywhere struggled to get off the ground.
Executives couldn't agree on how long to make old episodes available for subscribers. Some gave viewers only a day to catch up on a show they missed because the broadcasters had sold the reruns to another service. Others made past series available to subscribers for a month. Consumers became confused about where to go and how long they had to binge-watch a show. Some TV networks were slow to make their channels available online.
In the end, the cable industry’s failure to protect the bundle came down largely to greed, Moffett said. Media executives wanted to charge more for certain rights, like making every old episode available to cable subscribers, or granting the rights to watch a show on an iPad outside the home, instead of giving them away for the good of the industry.
“As soon as TV Everywhere was proposed, media companies imagined ways to charge extra for it,” Moffett said. “It was doomed from the start, and the rest is history.”