Streaming Wars: View from the Trenches

A girl watches SpongeBob SquarePants on TV in her living room.

A few words from Nii Addy, Philo CMO.

The last five years or so have been marked by consistent escalation in media industry innovation and competition; branded the #streamingwars. The death of traditional cable TV has been predicted for almost a decade, but the landscape did not start its tectonic shift until Netflix established itself as a global juggernaut, with an enviable direct-to-consumer (“DTC”) offering. This movement inspired companies like Roku to develop content aggregation models that could credibly threaten the ubiquity of the linear TV package.

Both Netflix and Roku are examples of companies that chose a bold vision and shirked bending the knee to the incumbent powers (perhaps no coincidence that the former spawned the latter). As a result they, and the movement that proceeded, highlight the crux of any competitive landscape paradigm shift: give the people what they want, or your empire will eventually be usurped.
The punchline is that if the networks had let cable adopt a more “a-la-carte” (or consumption based) model in the first place, we wouldn’t be suffering through this clumsy transition….but well, you know, money. In the end we’re likely gonna end up there anyway.

On one hand, video viewing customers’ desires have been clear for a very long time. They’re interested in a low hassle, intuitive service (or set of services) where they are paying for (and only for) content that they value. There are plenty of nuances to this list of demands, but it captures the governing sentiment.

On the other hand, what I’ll call “legacy cable” has traditionally been the opposite of value focused and low hassle. Whether it’s terrible customer service, clunky user interfaces, or bloated “kitchen sink” channel bundles that cost hundreds of dollars… things did not match up for a lot of people. The resilience of the legacy cable model against innovation was attributable to the absurdly high infrastructure costs required to lay said cable and the government protections that made sense at the time to promote the investment. Basically, there was no incentive to do much about it and people just accepted it as a lamentable, yet immutable, state of affairs. After all, without it we wouldn’t have achieved national broadband internet penetration so quickly.

The unfortunate result is that as technology advanced experiences quickly in most other spaces, TV clung defiantly to its stodgy, and cushy margin, old ways. The old ways of doing things have become untenable. This 5 part series will dive into what I consider to be the primary inflection points for change. Part 1 is below.

Part 1: Old School TV Deals Strike Back

Cable and broadcast networks traditionally engage content distributors (i.e. the TV services where you watch the networks) in multi-year licensing agreements priced on a per subscriber basis. The pricing is linked to the overall prestige of a network, as far as popular programming. These deals are often associated with per subscriber costs that rise automatically year-over-year… which ultimately gets passed along to customers in the form of ever increasing pay TV prices. The networks ostensibly justify the cost increases by reinvesting in making better content. Not sure that this is actually how things have been playing out though recently, amirite?

The licensing deals for the networks that most people care about often require that they be carried in the lowest tier of subscription service offered by a distributor (i.e. “base carriage”), or not at all. Since licensing is on a per subscriber basis, this guarantees maximum reach while also ensuring that most distributors have to cram every channel from said network group down your throat and charge you for the privilege.

Further complicating matters are the most-favored-nations (“MFN”) clauses that the distributors put in place to protect themselves from competitors who may benefit from different arrangements. If Network A wanted to give Distributor X the ability to tier a channel outside of “base carriage” for incremental scale, it would automatically trigger these MFN clauses in their other distributor deals and likely cost Network A billions. While this positioning is rational from a business sense on both sides, it kills the potential for innovation within the existing structure.

The legacy TV structure is [finally!] evolving because there are places outside of the cable ecosystem to get great content and, at the same time, any particular network is less reliably offering something compelling to watch for the general population.

Marquee shows for a network tank in popularity over time, ship off to other networks, or aren’t plentiful enough. The sophistication of data-driven insights have put distributors in a position to know exactly how much a network is worth to them in real time. This makes it more likely that they would consider dropping a network group if the terms are out of whack with the value they drive.

Both sides are leveraging the availability of network content on DTC streaming services in these negotiations since it softens the urgency of customer attrition in the event that a particular network group gets dropped (see YouTubeTV and Disney stalemate). More simply, the burden of value is shifting back to the networks with the rise of all the DTCs a.k.a. “the Plusses”+++.

Ironically, some of the strongest challenges to the persistence of “base carriage” requirements are coming from the networks themselves. By launching DTC services that are available widely with a similar content offering to their linear counterparts; many of the networks are essentially competing against their own television relationships with distributors. What we observe is that the DTC versions are often competitively priced, have less ads, and deeper libraries of older seasons relative to what is being supported in the traditional distributor environment. Let’s not forget that people can get these DTC offerings on a one-off basis without subscribing to other channel groups they don’t want. Pretty hard to square that with increasing license fees and rigid base carriage norms on the distributor side.

My proposal to solve this whole thing is by establishing a standard for a consumption based model within a single viewing experience. This is essentially what DTC is, except that it’s fragmented across dozens of separate apps. If you don’t have anything compelling to watch this month, people will cancel and sign up for what is interesting. The spoils should flow accordingly. Figuring out a way to support this behavior more seamlessly is the answer.

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