The Morphing of Media

A Whole Lot of Changes, Not Much Direction

 

With new video providers popping out from every corner ... traditional players declaring new business models ... Comcast buying and/or partnering with half the business ... Charlie and Barry upsetting apple carts ... and some kid in a hoodie declared the master of the universe (if not IPOs), it's hard to know how to keep your bearings strong and your numbers up.

But we do have a few clues.

In large part they revolve around keeping your eyes open and your strategies adaptive to what our friend Bruce Leichtman of Leichtman Research Group calls "the interplay of traditional video with emerging services and how that impacts businesses going forward."
 
Of course, that interplay and impact are the subjects of much debate.  But bit by bit the picture is coming into focus and we'll consider the research and data on that in some depth here.  But first, a look at how incumbent players are performing ... aka the 1Q12 numbers:

The Good, The Bad ...

& The Numbers

 

Any discussion of quarterly results requires our quick caveat emptor lecture:  Data, as we've said before, form a slippery slope where only the arrogant or the addled will tell you they've got the "final" truth.  Differences in methodology, reporting mistakes and revisions, fluctuating territories and, of course, the ephemeral quality of estimates all make conclusive numbers subject to doubt.  But as a way to track trends and test the winds ... that's where the numbers shine.

So here we go:  For the first quarter of 2012 the large publicly-reported cable companies (Comcast, Time Warner Cable,  Charter and Cablevision) showed a total video sub loss of -101K with by far the biggest down afflicting TWC (-90K).  For smaller and non-public MSOs, Citi analyst Jason Bazinet provides an estimate of -31K.  Add to that the gains made by DBS players (a total +185K for the quarter) plus those made by the big two telcos (+380K) and you have a reasonably strong uptick in pay TV totals:  +433K gained in 1Q12 to end at a grand total of more than 97M pay TV subscribers. 

That gives pay TV an approximate 85% share of total TV households ... and with hours of viewing continuing to hold strong, it's good news for those in the MVPD biz.  Except, of course, for some contrary indications – the declining number of TV households, the growth of alternative platforms, some odd fluctuations in ratings – all of which will be covered in the following pages.

 

Cable's Broadband Boom

Tomorrow's Monopoly?

 

While plagued by continuing (albeit slowing) video losses, the cable folk continue to have a big, big winner on the broadband side.  According to their quarterly reports, the top four publicly traded MSOs (Comcast, TWC, Charter and Cablevision) picked up nearly 1.4M additional high speed data subs during the first quarter of this year.  Other operators accounted for well over 100K in gains.  Overall, estimates of cable's current share of the U.S. broadband market range from a low of near 50% to a high of near 60%.  More importantly, virtually all observers see cable's share of the broadband market growing rapidly.  For example, Bernstein Research's Craig Moffett believes cable will capture nearly 70% of the broadband market by 2020.
 
This does not mean, however, that broadband growth will continue at its torrid Q1 pace.  Notes LRG's Bruce Leichtman "Given the mature status of the broadband industry, and traditional seasonality, it is likely that net adds in 2Q 2012 will be less than half of what they were in 1Q 2012." 

So what does the growing broadband business mean for the MSOs?  Obviously they have a winner – and one with margins considerably better than those found on the video side of the MVPD fence.  Indeed, looking at data provided in TWC's 1Q12 report, Bernstein's Moffett notes that the numbers "suggest that broadband is an almost comically profitable service ...." Ha!
On the serious side of that coin, video remains a critical piece of the MSO pie.  Comcast's 1Q12 report, for example, pegs video at more than half of its subscription revenues (51.8%) although that dropped by -2% since the first quarter of 2011.

Thus despite all the broadband hoopla, cable operators are clearly not going to jettison, or even stint on, video.  Instead they're on a path of using their broadband to complement and support their video.  The TV Everywhere push is one key example of that ... as is Comcast's much disputed decision to provide on-demand video to Xbox 360s without having the usage count against data caps.  (A "nail in net neutrality's coffin" proclaimed various open internet enthusiasts.)

Indeed, as pointed out by BTIG analyst Richard Greenfield, broadband is likely to prove video's well-muscled big brother when it comes to bottom lines.  Citing the latest Sandvine report, Greenfield says bandwidth consumption now reaches 10.3GB per month versus just 4GB/month a year ago.  That, of course, can be traced largely to video streaming services like Netflix and YouTube ... which, Greenfield says, "are the cable industry's (new) best friends."
Speaking of Netflix and YouTube ... 

Disruption in Dispute

Rolling in Money

 

Here's the really BIG battle to keep an eye on.  From the public utterances of many top programming execs, online video distribution – or more specifically, the subscription VOD services – are causing barely a ripple in the sea of programming profits. 

In the face of declining ratings at Nickelodeon and an outcry over that network's offerings on Netflix, Viacom's Philippe Dauman insisted, "I can tell you the time spent on Nickelodeon content on Netflix is approximatel y 2% of the time spent on our Nickelodeon channel.  It would have minimal impact.”  Likewise Disney's Bob Iger told a recent Bernstein Research conference that he doesn't believe Netflix is impacting the company's linear viewership.  Discovery's David Zaslav told the same conference that he doesn't believe SVOD has hurt his traditional TV ratings (although, notably, Discovery's contracts have an 'out' clause in case that should change).  In a slightly more circumspect view on the subject, Time Warner's Jeff Bewkes has gone on record saying he really, really likes those SVOD dollars ("$75M 1Q12!"), but he adds, "Obviously (online video services are) taking some viewing away" ... and management must consider online strategies carefully both in terms of what they offer and when.
  
This latter view is far more in line with the results reported by a number of surveys and research projects.

Poster child No. 1 in this view of the media universe is the fact that for the second year in a row ratings giant Nielsen reported a drop in the total number of U.S. TV households.  To be sure it's not a huge drop (a decline of -0.5% to 114.1M) but that's still down.  So is traditional TV's share of total video users as measured by Nielsen's most recent cross platform report.  Traditional TV still captures the lion's share of average viewing per day (~90% of a reported total near 5 hours/day at the end of 2011), but it has dropped across the past four years ... as has traditional TV's share of video users across a variety of platforms.  (See "Changing Viewing Patterns" below.)

In another look at online video distributors (OVDs) vs traditional TV, researchers at comScore note "a behavioral shift in how Americans are consuming video content."  Says a comScore report released this past February, "More than 100 million Americans watched online video content on an average day to close out 2011, representing a 43% increase versus year ago. In addition to more daily viewers, the number of video streams jumped 44% to 43.5 billion in December 2011."

Change Afoot

... But How Fast?

 

Despite what some programming execs would have you believe, the OVD revolution is clearly not a mere tempest in a teapot.  Nor is it, as some online gurus would have it, an event of immediate, cataclysmic proportions. 

The fact is that existing network owners are a powerful force ... and neither they nor their partners on the distribution side have any incentive to "kill the golden goose" as Disney's Iger put it when discussing ESPN fees at the aforementioned Bernstein Research conference.

In fact, a report from Bernstein's Moffett commented on the enormous power enjoyed by network execs.  Wrote he, "Just seven companies (CBS, Discovery, Disney, NBCUniversal, News Corp., Time Warner and Viacom) control essentially all of the video content in the US, and the content providers are in many ways more analogous to monopolies than oligopolists (try telling a Fox News fan that MSNBC is an acceptable substitute, or that televised soccer is a substitute for the NFL)."

Thus programmers have prospered mightily.  (Viacom, for example, saw sales of $3.33B in the first quarter, thanks partly to a 15% boost in fees for domestic cable nets and a 17% boost worldwide.)  And despite consumer dissatisfaction with costly programming packages and internet services rushing to boost their own original offerings, today's top programmers are highly unlikely to take any serious tumbles, especially given the apparently insatiable viewing habits of American audiences.

 Still change is afoot.  What should you expect to see in the future?  Here's an analysis of the analyses by MediaBIZ's renowned forecaster Paul Maxwell:

So, What Does It Mean?

... and What's Next?

 

Commentary by Paul S. Maxwell

Looking at the numbers, linear video is clearly approaching a zero-sum-game.  There just aren't that many households likely to buy a subscription that don't have one ... that raises the possibility for price wars among providers.  But given the corporate players (sans DISH) I’d put that at a one-in-five – at best – chance.  Of course, if MVPDs are patient, maybe, just maybe household formation will resume and the zero-sum might recede into the future (I'm optimistic ... eventually, see below).

Upsides clearly lie in broadband.  Three real upsides to be precise.  There is room to grow and – with cable’s school-lunch gesture (discounts for lunch-qualified kids – which is likely to be copied by every telco, including DSL providers) there’s a chance to build long-term loyalties that can add to the glue known as inertia (cable’s hole card as it built out broadband as DBS entered the market). 

Another upside is likely to be financial as the Department of Justice’s purported inquiry into broadband “caps” and pricing is most likely to result in widespread usage-based pricing.  There could be no better news than charging and building more margins for more data usage. 

While the over-the-top players have been riding on someone else’s infrastructure(s), the free ride aspect of the so-called ‘free’ Internet is certainly going to change.  What this all means right now is that the business cases are in real flux given the DoJ intrusion ... which, as something to pursue, we note was likely rejected by the Federal Confusion Commission (partly because the House committee and subcommittee ranking members would have a field day screaming).  The downside possibility is that some legislators will get involved and get into the middle.
One more upside happened just before press time as the White House announced a robust partnership of research universities, cities and major broadband providers ... called US Ignite!  Well, it just might ... more buildout of higher speed backbone can only help.  This announcement came along with another one that allows for easier access to Federal rights of way with a “one dig” deal allowing conduit to be included in road building.

This issue talked about ratings ... the current currency (Nielsen’s semi-monopoly) will continue to be devalued as set-top box data gets closer and closer to true ubiquity.  The horse race (or is it sports cars or NASCAR?) will be interesting to watch as Rentrak keeps coming up on the outside tracking Nielsen.  In the meantime, Nielsen is really the only rating statistical source that counts for an ad buyer ... for now.  Look for more on the fringe ... like remora with sharks.

When – not if – the growth of household formation truly resumes and accelerates, look for cutthroat initial subscription offerings to complicate the echo chamber of coverage.  But growth will come back.  In this interim of complete political dysfunction, that probably won’t mean anything for awhile.

Something to keep a close eye upon is the outside chance of a virtual MSO being created by a current MVPD.  A couple could become such simply by flipping a switch.  DISH’s eyes are on wireless spectrum and 1/0s for ubiquitous CONUS data via IPTV ... but that's off in the future.  The question is, will Comcast try to stay #1 by taking Xfinity national?  Or will DIRECTV try something similar to stay #2?  (After all, it has national rights ... maybe “InDirecTV” via cable lines?)  Or will Verizon try a virtual overbuild?  (Gotta justify FiOS somehow.)

As for those online video plays .... Aside from a strong possibility of usage-based pricing (which could significantly boost their expenses), the simple fact is they're not just coming ... they're already here.  And the key is learning how to best use them to boost existing offerings.  Think, for example, of how AMC has used Netflix to boost some of its key shows by timing previous seasons on Netflix to coincide with the intro of new seasons on traditional pay services.  Commenting on this Bernstein Research's Todd Juenger noted, "When you smartly line up your shows, it can introduce new audiences to the show and probably drive them to watch on the regular network."

If you’ve got any comments, suggestions and/or criticisms ... let us know at max@mediabiz.com.  Thanks for reading; see you next quarter. - PSM

The Ratings Game

Where Did the Kids Go?

 

"Kids TV under attack," proclaimed Bernstein Research's Todd Juenger in a recent report, "Netflix holding the smoking gun."

This, of course, is what set Viacom's Philippe Dauman off on a rant about Netflix's relatively negligible impact on the fortunes of the company's beleaguered Nickelodeon network.  (Barely 2% of the time spent, he famously sniffed.) 

No doubt Mr. Dauman knows his numbers but something is clearly afoot with ratings and, at least in some part, that foot has fallen foul. 

Consider this from Citi analyst Jason Bazinet looking at the most recent data from Nielsen:  "Across all day parts, Cable Network audiences fell 6% over last year, marking the eighth sequential month of declines."

The viewership pain has also been felt by broadcasters whose ratings took an -8% dive in prime time.  And of course, not all cable networks have felt the pain equally.  

There were, in fact, some sharp disparities in the fates of different programmers.  On the seriously hurting side of ratings, Viacom saw a -15% decline.  On the upswing, Discovery saw gains of 14% with Discovery ID hitting a high of +44%.  As also noted by the Bernstein analysts, there are sharp disparities in types of programming.  Among the disparities highlighted by Bazinet are continued steep declines not just in Kids but also for Teens and Men's programming (respectively -12%, -17% and -18% for January '12) while Crime and Mystery programming soared by +23%.

So what's happening here?  No one really knows although Bazinet hazards several possibilities:  It could be the weather, says he, as warmer temperatures generally equal less viewing; or it could be changes in Nielsen sampling methods (always a subject of much controversy in the industry); or it could be subscription video on demand – AKA Netflix et al – taking a pound of flesh.

For his part, Bazinet ranks this as the #1 likely culprit.  For the rest of us, in corner office or cubicle, it will be a force well worth watching for some time to come.•

Video Subscribers 4Q10 ~ 1Q12

 

HSD Subscribers 4Q10 ~ 1Q12

 

VoIP Subscribers 4Q10 ~ 1Q12

 

Company Scorecards

Hitting a Wall; Hosannas for an Underdog; Best Practices for a 'Dog;' & WOW!

 

Behind the sector plusses and minuses we have, of course, individual winners and losers.  Clearly, not all fare equally no matter what the general trends.  For a few notes on ups and downs that could impact your corner of the market, we note (in alphabetical order):

• AT&T U-verse:  Yes, they gained video subs in the first quarter of 2012 ... but there are some significant signs of slowing as both major telco TV players edge ever closer to their maximum built-out parameters.  Notes Bernstein Research's Craig Moffett, in U-verse systems which are more than three years old, penetration has apparently hit a wall, hovering around 25% since 2Q11:  "That the number has not budged is quite meaningful," notes Moffett.  "Said differently, roughly three years after AT&T had entered in a given area, the pay TV market in those geographies had already found a new (and apparently stable) equilibrium. After only three years, AT&T was no longer taking share."

• Cablevision:  The Dolan-family run Cablevision has been taking it on the chin lately as scion Jimmy dominates not just one but several corner office spots.  Wrote ISI's Vijay Jayant, "Expectations going into Cablevision’s 1Q12 earnings were quite low. But were they low enough? Apparently not."  Of course, not all was bad, said Bernstein's Moffett, "Surprisingly, perhaps (Cablevision) beat on all their subscriber metrics.  But they missed on every financial metric ...."

• Charter:  Meanwhile, under the guidance of former Cablevision boss Tom Rutledge, Charter gained 1Q kudos.  Write ISI's Jayant, "Charter’s unit growth – in all three categories, video, HSD and VoIP – surpassed expectations. Their 20k video net additions (yes, additions), not only beat consensus expectations of a -17k video loss, but also represented Charter’s best video quarter in 5 years, according to the company."

• DIRECTV:  While it's fashionable to be down on DBS these days as that lack of a broadband pipe weighs heavily, DIRECTV garnered at least one high five as Moffett gave the company his "best practices" award, both for its deft handling of the slowing U.S. market and its explosive growth in Latin America.

Somewhat less positively CANACCORD Genuity's Tom Eagan noted, "The headline positive was the 1.44% churn, lowest we’ve seen in several years and part of the company’s strategy to grow its base more profitably. While churn was below our estimate, gross adds were too .... The Street concern may be that continued gross adds decline will lead to negative Q212 net adds."

• DISH:  Here's the real wild card, of course.  Aside from purchasing near everything in sight (spectrum, Hughes, Blockbuster et al), DISH recently rattled cages by introducing an 'Auto-Hop' ad hopper ... and then promptly sued broadcasters for the company's right to offer it before the big Bs even had a chance to convene their lawyers.  Of course, the DISH move is not quite the ground shaker that it first appears (that auto hop must be actively enabled by DISH DVR consumers and it springs into action only a day after a program first airs).  Still, the broadcasters' apparent insistence that consumers are legally bound to ad exposure is an interesting ploy(?) and the lawyers will, as always, be busy.

• Time Warner Cable:  Time Warner Cable is notable for many things but for the purposes of this report, it's especially important to keep that Insight transaction in mind.  Closing on Feb. 29, 2012, the deal added 673K video subscribers, 548K HSD subs and 289K voice subs to the residential side of the TWC ledger.  These additions led to a large increase in the total numbers reported by TWC, as shown in our regular subscriber tables.  However it's important to note that, as pointed out by Bernstein's Craig Moffett, TWC saw a 90K internal loss on the video side, helping to account for the overall cable loss in 1Q12.

• WOW!  They're not a public company ... they're rarely, if ever, singled out on analyst or researcher reports ... so why, oh why is WOW on this company watch list?
 
Easy:  Just one month ago, WOW announced its intention to acquire fellow overbuilder Knology in an all cash transaction of ~$1.5B or $19.75/share.  As soon as that transaction is complete, WOW will vault past Cable One in the pantheon of top cable MSOs, putting it securely in the No. 9 spot (which would have been No. 10 except for the absorption of Insight into Time Warner Cable.)•

The Cable Center Bibliography

 

 If you are interested in reading more about this topic the following is a selection of additional periodicals provided by The Cable Center’s Barco Library.  Dedicated to chronicling cable’s varied and colorful history, The Barco Library houses the largest collection of cable telecommunications equipment, photographs, and marketing and informational materials in the industry.  

Visit www.cablecenter.org for more information.

Sherman, Alex “Comcast Falls After Reporting Video-Subscriber Decline” Bloomberg ( May 2, 2012)

Spangler, Todd “Cable TV Subs Fell 5% In 2011: Nielsen - Broadband With Broadcast-Only TV Households Jumped 14%” Multichannel News, (May 4, 2012)

Lieberman, David “Charter Earnings Miss Q1 Forecasts But With Impressive Video Sub Gains”  Deadline Hollywood (May 8, 2012)

Prescott, Roberta. “NII Holdings ARPU falls in Q1, launches PTT Android smartphone in Peru”  RCR Wireless (April 26,2012)

Stelter, Brian. “In a Time of Change and Investment at Cablevision, Its Net Income Plunges” New York Times (May 3, 2012)

Flamm, Matthew. “Media exec pay: What goes up, stays up; Zeitgeist, shmeitgeist. Moguls enjoy outsize salaries while bankers feel pressure to cut.” Crain’s New York Business (April 23, 2012)

Umstead, R. Thomas. "USA, TBS win Q1 ratings crown: characters net notches 23rd consecutive quarterly win." Multichannel News (April 2, 2012)

Goldsmith, Jill. "AMC sees 40% jump in Q1 profit: Execs say Dish threats are retaliation for long-running legal dispute."  Variety (May 10, 2012)

"Why cable has become more like broadcast TV; TNT, MTV, Nick ratings dipping amid more original programming competition." Advertising Age (May 14, 2012)

Goldsmith, Jill. "Advertising, affiliate revs lift Scripps: Revenue rose 11% to $535 million."  Variety  (May 4, 2012)

Poggi, Jeanine. “BET is winning back advertisers, but competition will soon abound; Will a bump in the number of cable nets appealing to black viewers encourage marketers to boost their budgets for the demographic?” Advertising Age (April 16, 2012)