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Home , HBO Now, Les Moonves, Vessel (website)

HBO , CBS ALL ACCESS & OTHER TV NETWORK STANDALONES A SNAPSHOT

ANALYSIS BY MITCH OSCAR MARCH 2015

THE FRAME

Since the fall of 2014, press coverage of TV network-standalone subscription video streaming services has fueled the imagination of the media community. For the first time, consumers have the opportunity to subscribe directly to individual TV Network channels without maintaining a cable, satellite or telco pay TV platform subscription.

As recently as early March, NBC announced a planned launch of a comedy focused subscription online video service. Concurrently, premium channel HBO introduced HBO Now, a service that will not require a traditional TV subscription and will be available exclusively – for three months – on Apple devices when it makes its debut in early April, which happens to coincide with the premiere of the new season of HBO’s hit fantasy series . Within days of these pronouncements, CBS chief Les Moonves whispered plans to launch a standalone Showtime premium streaming service and Sony promised to roll out its new over the top service, PlayStation Vue, by year’s end.

The snapshot is a succinct exploration of this burgeoning standalone TV network streaming distribution model and the possible ramifications for the television ecosystem i.e., , over-the-top streaming video services deployment, TV viewing measurement and challenges for multichannel video platform distributors (MVPDs).

Highlights:

♦ Standalone ad supported TV networks will proliferate in the near future.

♦ Viewing measurement and reportage will be critical to the standalone model’s success as well as other platforms, whether over the top platforms, streaming video services or TV Everyone apps.

♦ Cannibalization of viewership through different platforms concurrently broadcasting the same programming is inevitable.

♦ Creative windowing of content will be key to maximizing revenue.

♦ Greater competition for talent and creative content will augment the cost of doing business.

♦ Recent federal regulation supporting neutrality and OTT access to broadcast content (TV station and network) will ensure the deployment of more streaming video services.

♦ MVPDs face the greatest challenges to maintain their current subscriber base and launch successful tangential services.

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THE EXPOSURE

TV viewing is becoming more ubiquitous across screens regardless of monitor (traditional TV, over the top devices, mobile screens and computers) and consumed in combination of live, time-shifted and/or proportions. Media companies that produce content and/or distribute programming are increasingly facing more challenges to preserve as well as amortize their value propositions:

Augmentation of Production Costs Demand for programming that will entice viewers and subscribers to sample new services and maintain existing relationships is becoming more competitive, and therefore substantially raising the costs of programming. Although ad supported TV networks fund the majority of content creation, streaming video services, such as and Prime, are becoming more aggressive as they bid for talent and product. The chart below delineates the estimated 2014 original and acquired content investment, according to Nielsen/Variety: Sector Billions Ad Supported TV Networks $44.0 Netflix $1.8 Amazon $1.0 $0.8 YouTube $0.2

Viewing Measurement and Reportage Ad supported TV advertising gleans between $65 billion and $70 billion annually. As more television program viewing is experienced outside of the traditional “living room” monitor and/or in a time shifted fashion, measurement and reportage of content viewing in the commercialized, on demand space becomes even more important in order for TV networks to protect, maintain and grow revenue – which becomes the basis for funding incremental and better content as well as distribution avenues.

Marketplace Competition Deep-pocketed technology entities – such as Apple, Google, Amazon, Facebook and – that have connections to consumers through hardware, software and commerce (social and financial), are steadily expanding their model to include forays into the television realm. When coupled with dominant streaming video services – such as Netflix (39 million U.S. subscribers) and YouTube (1+ billion people each month consuming nearly 6 billion hours of video) – and over the top devices – such as Apple (25 million Apple TV sales) and (10 million units) – the consumer has many more options for assessing programming and committing his/her monthly patronage.

An at-risk sampling: cable operators glean nearly $100 billion from their subscribers (video, broadband, telephony, home security); cable networks generate $32 billion in annual licensing fees from multichannel pay TV operators (cable, satellite, telco); and when premium and broadcast station revenue is added to the mix, the revenue aggregation approaches $45 billion, according to Needham & Co. Last year, streaming video services garnered subscription fees of over $4 billion, according to research firm DEG’s Home Entertainment Report.

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THE EXPOSURE(cont’d)

Cord Cutters and A La Cartists In the last five years, the hue and cry for a la carte TV subscription alternatives has become deafening – at least as sounded by journalists. As delineated in the chart below, the average number of channels per multichannel subscriber (cable, satellite, telco) is approaching 100: Year Channels (Average) 2000 42.5 2007 75.3 2014 99.6 Source: SNL Kagan

Who needs them all and why pay for what one doesn’t imbibe are the core issues. Measurement companies Rentrak and Nielsen claim that the average pay TV operator customer regularly tool between upwards of 17 channels. Multichannel pay TV operators are fearful that subscriptions will diminish because bills for triple play services (video, broadband and telephony) are approaching an expensive $200 per month, of which $75+ is applied to video content. Alternative platforms such as streaming services appear to be more affordable to millennials and the economically challenged, and are thought to be responsible for the perennial “shrinkage” of multichannel pay TV subscriptions. To date, in response to these growing concerns, TV networks, premium channels and MVPDs (cable, satellite and telco) have launched three initiatives: TV Everywhere, Internet Plus and direct to consumer standalone streaming video services. 1. TV Everywhere In 2009, proposed the TV Everywhere concept or model to the media community. Essentially, it would allow traditional ad supported TV networks and premium channels, such as HBO and Showtime, to offer their programming to consumers via a downloadable app to tablets or and/or featured apps embedded in over the top device menus – such as a gaming console (Xbox, PlayStation), Apple TV, Roku, Chromecast, Amazon Fire TV as well as smart TVs. The caveat: in order to access the content, the consumer would have to be a pay TV subscriber to either cable, satellite, or telco (AT&T Uverse, Verizon FiOS). The subscriber would then verify his/her status through an authentication process and the pay TV operator would authorize access to the programming. An arduous process that has become less complicated and reportedly more consumer friendly in recent months. 2. Internet Plus Last Fall, , the largest multichannel video program distributor (MVPD) in the U.S. with nearly 22 million subscribers and current suitor of Time Warner Cable’s 10+ million subscribers, launched Internet Plus, an affordable pay TV model that encourages people to sign up for broadband access plus entry level TV service. Customers pay a modest monthly fee, around $30+ monthly, to receive broadcast stations, a few cable networks, a premium channel and fair speed internet access. 3. Standalone Streaming Video Services The third and most recent initiative is direct to consumer TV network standalone streaming video services, which are the focus of this snapshot.

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THE FOCUS

After years of deliberation, ad supported TV networks, premium channels, and MVPD platforms are cautiously jumping into the streaming video pay TV business pioneered by Netflix in 2007, selling subscriptions directly to consumers. The following is a list of the most prominent TV network (ad supported and premium) and service provider endeavors – live, beta’d and planned. Pages 8-11 provide descriptions of each. Category Company Launch TV Networks CBS All Access October 2014 NBCUniversal 2015 (by years end) PBS Member on Demand Summer 2015 ’s Noggin March 2015 WWE February 2014

Premium Channels HBO Now April 2015 Showtime “Not too distant future” 2015 (by years end)

Streaming Video Service Amazon 2015 (mid-year) Hulu Plus March 2007 Sony PlayStation Vue (by years end) Beta YouTube TBD

MVPD Derived DirecTV’s YaVeo 2015 (by years end) Dish’s SlingTV January 2015 Verizon 2015 (by years end)

Note: Top executives from other media companies are contemplating taking brands direct to consumers, including Time Warner with , Disney with Marvel and Star Wars, and Discovery Communications, which has OTT offerings in Europe, with Science and Oprah Winfrey’s OWN.

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THE VIEW

Trade publications abound with “the sky is falling” articles about cord-cutting, cost saving consciousness of younger and older Americans, proliferation of household over the top devices (Roku, Apple TV, Chromecast, Amazon Fire TV, smart TVs, tablets, gaming consoles), customization of TV channel selection as opposed to current multi-channel packaging by multichannel pay TV operators, stultification of traditional MVPD subscriptions (cable, satellite, telco), the growth of streaming video services (Netflix, Amazon Prime, YouTube) that provide all-one-can-eat programming for affordable pricing coupled with the cost of high speed internet connectivity, and most recently, the burgeoning appearance of standalone video streaming ad supported TV networks and premium services.

The following are the most salient challenges and opportunities for future developments and growth in the tumultuous ad supported, premium serviced, multichannel pay TV universe:

Licensing Bidding Wars Bidding wars will become more lucrative with content producers for their original and off network series as solicitations augment from hungry over the top services, streaming video services, syndicators, TV stations, and ad supported cable networks. Two recent examples: Sony is in advanced talks to sell reruns of its hit 1990s NBC sitcom Seinfeld (180 episodes) to an online video service. Bidders include Hulu, Amazon and Yahoo. Netflix declined to participate. Last year, Netflix acquired from Warner Bros., paying $500,000 per episode. The series remains in heavy rotation on ad supported cable network TBS. In late 2014, Amazon struck an exclusive three-year licensing deal valued at $300+ million with premium channel HBO for the rights to stream some of its older popular series, including The Sopranos, Six Feet Under, Boardwalk Empire, True Blood and The Wire.

Subscription Fees The question remains how much will people be willing to pay for the convenience or the opportunity to strip out unwanted channels and no longer have to pay for myriad of channels they do not view and have no interest in sampling. Standalone premium channel services, such as HBO Now and Netflix, have certainly added fuel to the debate. Consumers are no longer handcuffed to cable, satellite or telco platforms to receive non-commercialized theatrical quality and adult oriented dramas, comedies and action adventure programming.

Cord-cutters & Cord Nevers The challenge for media companies as they roll out standalone streaming video channels or OTT services is to target “cord cutters” and “cord nevers” – young people who never intend to get a pay TV connection – without enticing existing subscribers to switch over from traditional services. That would cannibalize the hugely profitable pay TV business that has driven the profits of every major media conglomerate in recent years. A nimble balancing act.

An aside: a non-commercial announcement about SlingTV.

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THE VIEW(cont’d)

Cord-cutters & Cord Nevers (cont’d) The SlingTV proposition is built upon the premise that cord cutters, millennials and cord nevers do not translate the traditional pay TV model as one of good value: too expensive, a plethora of channels not viewed and content not targeted to a younger consumer. Sling TV, at a cost of $20 per month for its basic package that includes live sports from ESPN, has expanded its distribution to include newer Roku devices, Amazon Fire TV, and , and is downloadable through apps supported by Android and iOS on smartphones and tablets. Since its launch, the company claims over 100,000 subscribers. Unfortunately, the majority of its ad supported networks attract audiences whose average age is older than the oldest millennial (38 years old): CNN: (59), HGTV (56), TNT (54), ESPN2 (53), ESPN (48), Travel (48), Food (48), TBS (44). Which brings us to the question: does the millennial really care about live TV as represented by this service. And if they do not, then what truly are the value proposition and the hoopla surrounding this OTT service, other than perhaps live sports (ESPN).

Windowing Conflicts & Viewership Cannibalization TV networks must figure out how to generate “program window license” agreements to stagger how content would be rolled out online in order to avoid viewing cannibalization from multiple distribution platforms, which in turn could diminish licensing fees as well as advertising revenue from reduced viewership in the ad supported realm.

Program Viewership & Measurement MoffettNathanson Research reported that cable network general entertainment programming – original and acquired scripted TV shows and movies – witnessed an 11% decline in C3 total day ratings among 18-49 year old viewers in 2014 versus the previous year, with kids programming down 10%. Media pundits are intimating that the diminution is the result of the availability of programming on streaming video services. The Cabletelevision Advertising Bureau (CAB) estimates that about 40% of third and fourth quarter TV ratings declines can be attributed to such services. Nielsen Media Research claims that 41% of U.S. households have access to subscription services, up from 36% a year ago. Or is the viewership reduction the result of measurement entities’ inability to accurately measure viewership and/or the challenges of measuring viewership through non-traditional channels? Viacom vociferously thinks so – arguing that the majority of its content is viewed through a variety of devices which currently are not accurately measured by the “industry TV measurement currency provider”.

Net Neutrality & OTT Re-classification Recently, the FCC chairman declared that the high-speed broadband delivery would be classified as a telecommunications/utility service and no longer as an information service. This classification places the service in the FCC’s purview and enables the regulatory agency to ensure that no content is blocked and that the internet is not divided into pay-to-play fast lanes for internet and media companies that can afford it and slow lanes for everyone else. A boon for the any OTT and standalone video service to deploy and develop its relationship directly with consumers.

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THE VIEW(cont’d)

Net Neutrality & OTT Re-classification (cont’d) Also, the majority of FCC commissioners voted to approve the Notice of Proposed Rulemaking that would define some over the top video providers as multichannel video program distributors (MVPDS), which means that they would have access to content through the FCC’s program access rules and also have the right to negotiate retransmission consent with broadcasters. Again, strengthening the value proposition of incipient OTT streaming services to attract consumers with offers of affordable packages consisting of broadcast stations, a smattering of cable networks, and a premium channel or two.

MVPD Equations As the playing field of alternative viewing devices and services expands, cable, satellite and telco subscription services are most at risk. They are being challenged from a variety of fronts: retransmission fees from broadcasters, licensing fees from cable networks, unbundling protestations, federal regulations, and the tide of public opinion. The MVPDs are examining and deploying alternatives to assuage these negative sentiments:

♦ “A la carte” model enabling subscribers to pick and choose and pay for only those channels they wish to view – unfortunately, most probably at roughly the same monthly cost they are currently doling out for pre-bundled packages

♦ “Hybrid a la carte” model in which the most expensive channels, such as ESPN, are sold individually on top of a genre based tier

♦ “Internet plus” model in which customers pay a modest monthly fee to receive broadcast stations, a smattering of cable networks, a premium channel or two, and high speed internet access

♦ Expansion of the TV Everywhere model that requires cable/satellite/telco subscriptions but are available through apps – featured or downloadable – on all devices that can receive video content i.e., smartphones, tablets, gaming consoles, OTT services, smart TVs. • “All you can eat” model, a cheaper or more incentivized monthly tiered priced package of 180+ channels, plus DVR capabilities, subscription video on demand (SVOD or pay per view), app marketplaces, TV Everywhere coupled with telephony, higher speed internet assess, social interaction and the expansion of home security, including alarms systems, remote temperature control and monitoring – all for a valued hefty monthly fee with dramatically improved customer service.

In closing, standalone streaming ad supported TV network and premium channel services will continue to proliferate as media companies delicately try to balance existing distribution licensing agreements with potential new revenue streams. Will these new services cannibalize existing viewership deliveries? There is no question. Media companies, such as CBS, are already striking experimental licensing deals that allow the network to air an episode of a new series (Under the Dome, Extant) for live and C3 viewing and make the series available on Amazon’s streaming video service on day 4. These new forays from the media companies will initially make cents. There is little out of pocket expenditures other than for marketing because the programming is already paid for and infrastructure costs are minimal. However, in the next few years it will be important to ascertain the true cost to the historically steady stream of ad supported revenue ($65+ billion) and experimental opportunistic licensing windows that really makes sense.

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AD SUPPORTED TV NETWORKS & PREMIUM CHANNELS

CBS All Access Launch October 2014 Cost $5.99 monthly Description This service is available through CBS.com (live streams in 14 owned & operated TV station markets and anchored coverage 15 hours each weekday) and CBS mobile apps, allowing viewers to watch more CBS programming that is currently available online for consumers including past and current seasons as well as library product. Commercialization of upwards of 16 minutes per hour. Presently, football is not part of the offering. Note: CBS claims 100,000+ subscribers since launch.

HBO Now Launch April 2015 Cost $14.99 monthly Description Time Warner’s HBO Now service will offer all of its original programming, past and present, as well as its movie offerings. The service will launch exclusively through Apple TV (25 million over the top boxes) for three months and then be available through other distribution partners. As part of their relationship, Apple and HBO will market the product together but Apple will handle customer service. Note: There is some concern that the launch of HBO Now will confuse consumers because of the premium channel’s HBO Go service, which allows HBO’s cable TV subscribers to access it on the web, smartphones and tables. The two services will remain separate: with different login pages and separate apps.

NBCUniversal Launch 2015 (year’s end) Cost $2.50 to $3.50 monthly Description A comedy service that will feature full episodes of NBC shows such as The Tonight Show and Saturday Night Live plus original series and may enlist the networks TV stars to create exclusive content. Note: At this juncture the NBC offering does not appear to include live TV in markets where it owns and operates TV stations.

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AD SUPPORTED TV NETWORKS & PREMIUM CHANNELS (cont’d)

PBS Member On Demand Launch Summer 2015 Cost Available through public television membership Description This service will provide access to archives of past seasons of some of its general interest programs.

Showtime Launch “Not too distant future” Cost TBD* Description CBS chief Les Moonves recently commented at a financial conference that sibling Showtime would announce the launch of an OTT service, similar to rival Time Warner’s HBO, which should translate into availability of all original Showtime content (past and present) as well as movies.

Starz Launch 2015 (year’s end) Cost TBD* Description Similar to rival Time Warner’s HBO, and CBS’ Showtime, the service will sport availability of all original Showtime content (past and present) as well as movies. Note: Starz is in the process of trying to sell itself which might impact negatively on further expenditures to launch an over the top service.

Viacom’s Noggin Launch March 2015 Cost $5.99 monthly Description This service will offer solely pre-school library based content (long and short form) in order to keep it distinct from what’s currently available on air on Nick Jr. There will not be any commercialization. WWE Launch February 2014 Cost $9.99 monthly Description The company’s programming consists of pay per view events, originally produced programming, reality shows, documentaries and classic matches. Deployment via WWE.com, Amazon Kindle, Android devices (Samsung Galaxy), Apple iPads and iPhones, Roku boxes and video game consoles PlayStation (3 & 4) and .

*Although a price point has not been set it will most probably be competitive to HBO Now’s $14.99 a month fee.

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MVPD DERIVED & STREAMING SERVICE PROVIDERS

Amazon Launch 2015 (mid-year) Cost TBD Description An ad supported subscription video streaming service that will operate separately from Amazon Prime, the company’s current video service, and feature library product.

DirecTV’s YaVeo Launch 2015 (years end) Cost TBD Description In partnership with Spanish language broadcaster Univision, YaVeo will provide Hispanic centric programming.

Dish’s Sling TV Launch January 2015 Cost $20+ monthly Description ESPN, ESPN2, AMC, Food, HGTV, Disney, TNT, El Rey, Travel, TBS, Maker, Adult Swim, CNN, IFC, Cartoon, ABC Family, Galavision, A&E, Lifetime and History. For additional fees @ $5.00 per month one can access Sports (ESPNU, SEC ESPNews), or movie channels ( and Sundance) or Kids (Disney Junior, Disney XD, Boomerang, Baby TV, Duck TV) or News (HLN, Cooking, DIY, Bloomberg). Also, Sling TV does not require a contract or commitment. Note: Sling TV claims 100,000 subscribers since launch.

Hulu Plus Launch March 2007 Cost $7.99 monthly Description The service offers current and past seasons from major networks – particularly those represented by its equity partners (., Disney and Comcast) as well as original series, clips, movies and movie videos. Note: Similarly to sibling Hulu, it is ad supported but a paid subscription airs 33% less advertisements. The service claims nearly 8 million subscribers.

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MVPD DERIVED & STREAMING SERVICE PROVIDERS (cont’d)

Sony PlayStation Vue Launch 2015 (years end) Cost TBD Description The cloud-based service will offer live TV and on demand content for a subscription fee and utilize its 35 million subscribers to its PlayStation gaming consoles (PS3 and PS4) as a backbone for the video service. To date, Sony has negotiated content licensing agreements with Viacom (22 networks), Discovery Communications, CBS, Fox, NBCUniversal, Scripps, and Time Warner. Also, the service will allow subscribers to watch any show broadcast in the past three days without having to record it with the promise to eventually learn to arrange channels based on what one watches.

Verizon Launch 2015 (years end) Cost TBD Description Verizon is in the throes of signing licensing deals with the major TV networks with an emphasis on sports programming whose infrastructure will be based on OnCue, the Intel over the top streaming service that Verizon acquired in early 2014. Vessel Launch Beta Cost $2.99+ monthly Description Former Hulu CEO Jason Kilar’s new ad supported, subscription video service, Vessel, which is currently in beta, is hoping to create a new window for publishers’ digital video content. Note: The company is financially backed by Jeff Bezos (Amazon) and venture capitalist Benchmark.

YouTube Launch TBD Cost $0.99 per channel Description YouTube is contemplating the launch of an ad service in exchange for a subscription fee. Scant information available on content or creators. Note: Rumors are circulating that YouTube is offering some of its biggest stars bonuses to lock up long-term deals and exclusive content windows as a hedge against Multichannel Networks wooing them away.

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