As consumers move video consumption to new digital platforms, carriage agreements between content providers and platform operators are of key importance. Cable networks’ agreements with multi-channel operators (cable, satellite and telcos) limit their ability to offer their full portfolio of shows online. Many of the proposed "Over The Top" initiatives for bringing video content via the Net to TVs will likely need their own carriage agreements or collide with existing ones. Issues of carriage agreements loom large for VOD and mobile too.
However, there is a digital video on-demand platform where the carriage rights landscape is friction-free. In fact, for broadcast networks, TV stations and cable networks it’s unavoidable. It’s a TV-connected platform in 30% of households – my modelling says it will be in 50% by the end of 2011 (see the previous newsletter Back To The Future (Estimates) – A Brief Review of Broadband Video, DVR and VOD Metrics for more). It’s…
DVRs – The Involuntary Carriage Agreement
TV stations (and therefore broadcast networks) are on all DVRs regardless if they’re seen over the air or in operator-connected households under must-carry or retransmission agreements. Cable networks are on all operator supplied DVRs and many of the standalone TiVo DVRs (despite defining the category, standalone TiVos now are only about 4% of US DVRs, and that continues to decline slowly).
Not only is DVR carriage involuntary, it’s revenue negative for ad supported TV programmers. Unless you make the case DVR timeshifting increases viewing and therefore ad impressions (even accounting for ad skipping). My look at publicly released ratings data says you can probably make this case for some individual shows, but not for overall network viewing.
What are networks and stations to do?
While disabling ad skipping has become the norm online and will probably be the same in VOD, over ten years since the first DVR hit American homes (Replay TV in January 1999) that horse seems to be very far out of the barn.
Legal remedies? The Betamax VCR case (Supreme Court ruling in 1984) is regarded as putting consumer controlled ad skipping on consumer owned DVRs out of reach via "fair use." I’m unaware of any legal attempts to assert "fair use" does not apply to consumer control of operator owned DVRs. For that matter, the ruling by the US Court of Appeals on the Cablevision RS-DVR case ("network DVR" using VOD technology) says that’s "fair use" too. We’re still waiting on the Supreme Court to weigh in.
Regulatory remedies? It’s not realistic to anticipate the FCC or Congress would enact regulations to allow networks for force operators to block DVR ad skipping. Imagine the reaction… take the AIG bonus outrage and multiply by five (ten?).
Operators acting individually under pressure from networks? If one multi-channel TV operator steps out of line and blocks ad skipping on their DVRs, in every US market there are two other operators (and in some cases three) who will proclaim from every marketing rooftop that they don’t.
Move content to other platforms (including online or VOD) where ad skipping can be controlled? DVRs challenge even that. Via robust choice and control, plus the ability to avoid irrelevant advertising, DVRs bind viewers closer to linear TV delivery making it more difficult to move them away. It’s as if the newspapers’ digital challenge was magnified by a magic machine they could not control – you feed it a paper newspaper, out comes a customized paper edition with the content sorted the way you want and the ads cut out.
Could we see high quality original TV content completely depart “free” broadcast TV and move to pay TV models? That shift is already underway and has been going on for decades (although slowly). DVRs could well accelerate that.
There was a time when TV was three broadcast network affiliate stations and a few independents. TV was free and over-the-air. Then came cable (later small dish satellite and then telco IPTV).
HBO and Showtime launched in the mid-70′s, and although the bulk of their initial content was movies and sports, they offered a few original TV series even then. Over time they’ve increased their original content offerings significantly (it’s been 10 years since The Sopranos launched). Today, premium channels are regarded by many subscribers primarily as sources of original series.
Ad-supported cable networks are another pay model. While they do carry advertising, for the top rated cable nets their carriage fee revenues typically are as large as their advertising revenues (or more especially for the outlier ESPN). Those carriage fee revenues are coming from cable subscriber monthly fees. In recent years we’ve seen an increasing number of top rated original series on cable networks such as USA, F/X and TNT, subsidized by this hybrid ad/pay model.
(At least for NBC Universal, the shift in revenues to cable has been pronounced. At last week’s McGraw-Hill Media Summit, NBCU CEO Jeff Zucker said (reported at paidcontent.org) "About 60 percent of our operating profit comes from cable. We’re mostly a cable company now, you wouldn’t know it by the name, but it’s true." Good news too for digital video models, regarding his comment of last year on trading analog dollars for digital pennies – "We’re at digital dimes now. We’ve made progress." Next stop – digital two bits?)
Even broadcast television is moving towards the hybrid ad/pay model as stations are increasingly asking operators for and getting carriage fees, moving from must-carry to retransmission agreements. This new revenue source will roll up to broadcast networks too via their own O&O stations and evolution in affiliate agreements.
There is another option. Reinforce and strengthen the TV ad model via DVRs enabled as enhanced engagement ad delivery platforms (DVRs are computers – dismantle your operator owned DVR and you’ll see). As I discussed in my previous newsletter (Embrace The Click – Taking Advanced Video/TV Ads Beyond CPM), major TV brands are paying significant cost per click rates for the targeted trackable advertising that is keyword search.
There are two important constituencies that want the TV ad model to continue. Advertisers vote with their dollars that TV is an advertising platform that is critical to them – around $70 billion in annual ad spend (subject to economic excursions). Consumers understand that advertising helps pay for the TV shows they enjoy. And while many of them are more than willing to use DVRs to skip a lot of the TV ads sent their way, they also show willingness, via their behavior in many forms of media, to view and engage with advertising that is relevant to them
If networks, operators, advertisers and their agencies work cooperatively to enable capable enhanced DVR advertising (as well as working on other digital video platforms), they all should benefit. As well as forming a better relationship with and providing a better experience for their shared "ultimate customer" – consumers.