sign in sign up
<<
Home , Hulu, PlayStation Vue, Seeso

International In-house Counsel Journal Vol. 11, No. 41, Autumn 2017, 1

The Future is Cordless: How the Cordless Future will Impact Traditional

SABRINA JO LEWIS Director of Business Affairs, Paramount Television, USA

Introduction A cord-cutter is a person who cancels a paid television subscription or landline phone connection for an alternative Internet-based or wireless service. Cord-cutting is the result of competitive new media platforms such as , , , iTunes and YouTube. As new media platforms continue to expand and dominate the industry, more consumers are prepared to cut cords to save money. Online television platforms offer consumers customized content with no annual contract for a fraction of the price. As a result, since 2012, nearly 8 million households have cut cords, according to Wall Street research firm MoffettNathanson.1 One out of seven Americans has cut the cord.2 Nielsen started counting internet-based cable-like service subscribers at the start of 2017 and their data shows that such services have at least 1.3 million customers and are still growing.3 The three most popular subscription video-on-demand (“SVOD”) providers are Netflix, Amazon Prime and HULU Plus. According to Entertainment Merchants Association’s annual industry report, 72% of households with broadband subscribe to an SVOD service.4 During a recent interview on CNBC, Corey Barrett, a senior media analyst at M Science, explained that Hulu, not Netflix, appears to be driving the recent increase in cord-cutting, meaning cord-cutting was most pronounced among Hulu subscribers.5 Some consumers may decide not to cut cords because of sports programming or the inability to watch live programing on new media platforms. There will always be consumers who are too accustomed to traditional television to cut cords. However, many consumers are moving towards the cordless future, and some consider this trend to be a generational .6 This research takes a deeper look into the trend of cord-cutting and the way in which digital media platforms are paving the way for the future of content and impacting the practices of, and contractual relationships between, consumers, television studios, networks and distributors across the United States. Ultimately, these evolving practices

1 Shalini Ramachandran, As Cord-Cutting Intensifies, Media Companies Scramble Toward Online Streaming Bundles, MARKETWATCH (May 5, 2017), http://marketwatch.com/story/as-cord-cutting-intensifies-media- companies-scramble-toward-online-streaming-bundles-2017-05-15. 2 Makeda Easter, Cutting The Cord Doesn’t Necessarily Mean Cutting The Cost, TIMES (May 20, 2017), http://www.latimes.com/business/la-fi-tn-cord-cutting-20170520-htmlstory.html. 3 Id. 4 2017 Annual Industry Report, ENTERTAINMENT MERCHANTS ASSOCIATION, http://www.entmerch.org/industry/annual-industry-report/ (last visited July 31, 2017). 5 David Gernon, Cord Cutting is Accelerating Thanks to Hulu, Not Netflix, Analyst Says, CNBC (June 23, 2017) http://www.cnbc.com/2017/06/23/cord-cutting-is-accelerating-thanks-to-hulu-not-netflix-analyst-says.html. 6 Id.

International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online

2 Sabrina Jo Lewis will change the contractual aspects of the television industry. We are already seeing changes in the way license agreements are negotiated between studios and networks/exhibitors. Similarly, guild agreements have already been ratified to include higher residual fees for SVOD programming. As for the potential impact on consumers, cable providers are reconsidering the contracts that they offer consumers, which means we may eventually see a decrease in fees and an increase in package options. Consumers According to a poll conducted by and CBS News, consumers under the age of 45 are four times more likely to use digital services.7 This generational shift means that younger viewers are not subscribing like their parents did.8 Furthermore, consumers have more of a reason to be skeptical of cable and providers because of recent findings by United States Senator Claire McCaskill during a bipartisan investigation in 2016.9 Senator McCaskill exposed the practices of several providers including , , Charter, DirectTV and Dish in a hearing before Congress on June 23, 2016. The Senator found that providers charged various fees that were not overtly laid out in ad pricing and they made it difficult for consumers to get out of their contracts and cancel services.10 Two of the companies overcharged customers by millions on a nationwide level and the companies had no way of tracking or refunding overpayments. The findings of this particular bipartisan investigation gives consumers yet another reason to cut cords. Studios, Networks/Exhibitors and Distributors Television studios, networks/exhibitors and distributors all face challenges as their business models are disrupted by the cordless future. As new media continues to conquer, we may see changes in customary business models including revenue reporting, piracy protection and content distribution avenues. TBS and ESPN, amongst many other networks, have taken a hit losing millions of subscribers and resulting in a decrease in subscriber fees that distributors pay these networks for programming, resulting in loss for TV networks.11 For example, ESPN sports network reportedly collects US$7.21 per month from distributors for each subscriber, so the loss of subscribers who have cut the cord has resulted in a loss for the network.12 As primetime and cable networks face their own challenges, some are now offering their own streaming services like CBS All Access and HBONow that are available on laptops, tablets and phones to keep up with the trend of binge-streaming. As SVOD “generates massive buzz by delivering seasons of shows in toto,” networks are accepting the challenge by giving viewers the opportunity to binge their favorite cable show.13 For example, the TBS series entitled “Angie Tribeca” was available to stream on-

7 Cord-cutting, WIKIPEDIA, https://en.wikipedia.org/wiki/Cord-cutting (last visited July 20, 2017). 8 Gerry Smith and Christopher Palmeri, Cord-Cutting Isn’t All Bad News for Cable-TV Networks, BLOOMBERG (June 15, 2017), https://www.bloomberg.com/news/articles/2017-06-15/cable-tv-networks-see-a-ray-of- hope-amid-the-cord-cutting-clouds. 9 Cable & Satellite TV Providers – McCaskill Pulls Back Curtain on Companies’ Internal Workings, SECURITY & GOVERNMENTAL AFFAIRS COMMITTEE (June 23, 2016), https://www.hsgac.senate.gov/subcommittees/investigations/media/cable-and-satellite--providersmccaskill- pulls-back-curtain-on-companies-internal-workings (last visited July 31, 2017). 10 Id. 11 Smith and Palmeri, supra note 7. 12 Erik Gruenwedel, Online TV: The Future Has Arrived – And It May Be Less Profitable, HOME MEDIA MAGAZINE (May 29, 2017), http://www.homemediamagazine.com/streaming/online-tv-future-has-arrvied- and-it-may-be-less-profitable. 13 Daniel Halloway, Networks Challenge Netflix With New Binge-Streaming Strategy, VARIETY (March 30, 2016), http://variety.com/2016/tv/news/networks-new-binge-streaming-strategy-1201740379/. Contractual Relationships 3 demand or online when it premiered in January of 2016 and at the same time it aired as part of a 25-hour on TBS network.14 And then we see networks like Showtime entering into deals with Amazon and Hulu so that customers are able to subscribe to the network without a cable subscription. has a similar deal with Amazon Prime.15 Clearly, this trend is only the start of contractual network changes to come. In the past, companies like Comcast, (also known as ) and Time Warner Cable have had exclusive rights built into their license agreements to offer premium channels such as A&E, AMC and History Channel. Today, consumers do not need cable subscriptions to access these premium channels. To make it easier for consumers to access these premium channels, many distributors are offering “skinny bundles” such as Sling TV, DirectTV Now, YouTube TV and ’s Playstation Vue which are priced as low as US$20 per month making these options more appealing to consumers. Nielsen data supports the position of cable networks like ESPN that services such as Sling TV, PlaystationVue and the like will help make up for some of the loss of cable customers because viewers can subscribe to their favorite cable network by purchasing a skinny bundle through a service like Sling TV without having to pay for a full bundle package through a cable company.16 However, media analyst Michael Pachter of Wedbush Securities has said that allowing consumers to customize content will negatively impact the revenue stream from traditional channel bundles.17 According to the American Bar Association, as SVOD distributors like Netflix and Amazon continue to cover new territories, foreign television distribution deals may be affected. The exclusivity of their distribution rights may be at risk if the increase in international SVOD affects the presales value a foreign territorial distributor might place on independent films.18 Contractually, this means the legal structure of television deals is changing. In the past, studios retained rights to sell foreign. Now, in many cases, all rights go to the SVOD platform and the studio does not retain domestic or foreign rights. Revenues The SVOD trend may result in a decline in revenue for and Blu-ray sales. According to recent data released by Digital Entertainment Group, subscription streaming spending was up 22.6% in 2016. DVDs and the like saw a decrease in sales of 9.5% in 2016.19 As consumers continue to cut cords and companies like Netflix dominate the new media market, the way in which television studios and distributors report their revenues may differ depending on whether SVOD revenue is classified as television or home video. New contractual classifications for profit participants may result in variances in (1) the extent of revenue subject to contingent compensation, and (2) the extent of distribution fees deducted from net revenue. 20 Currently, the reporting of SVOD revenues differs from distributor to distributor, but most report SVOD at 100%, while others report it as home video, which is subject to a royalty.21 However, there is an

14 Id. 15 Id. 16 Smith and Palmeri, supra note 7. 17 Gruenwedel, supra note 11. 18 Ben W. Sheppard and John G. Plumpe, The Rise of SVOD: How the Growth of Subscription Video-on- Demand Impacts Copyright Holders, Vol. 8 No. 1, LANDSLIDE, ABA SECTION OF INTELLECTUAL PROPERTY LAW at 9 (2015). 19 DEG Releases Year-End 2016 Home Entertainment Report, HUGH’S NEWS, http://www.hughsnews.ca/deg- releases-year-end-2016-home-entertainment-report-0055069 (posted by Hugh Bennett on January 10, 2017). 20 Sheppard and Plumpe, supra note 11 at 10. 21 Michael Sippel, Brave New Media World: The Various Forms of New Media, Studio Reporting and Potential Concerns, Green Hasson Janks Media Clips blog (February 24, 2016), https://www.greenhassonjanks.com/blog/media-clips/brave-new-media-world-the-various-forms-of-new- media-studio-reporting-and-potential-concerns/; and IIan Haimoff and Michael Sippel, Current Issues in 4 Sabrina Jo Lewis ongoing debate as to how SVOD revenues should be classified as new media takes over. On a related topic, television revenue may also see a decrease in traditional and an increase in digital advertising. Residuals and Guild Agreements Writers Guild of America Other contractual changes include new formulas for increased residuals in connection with high-budget SVOD programs when reused on the original SVOD platform. In May of 2017, the Writers Guild of America (“WGA”) negotiated with the studios for a contractual increase in residuals for high budget SVOD programs when reused on the original SVOD services.22 Platforms such as Netflix, Amazon and HULU qualify for either a domestic residual alone or a domestic and foreign residual which amount is in relation to its subscriber tier. Since HULU currently only operates in the United States, the WGA does not require a foreign SVOD residual payment.23 Directors Guild of America Similarly, the Directors Guild of America has secured new subscriber tiers to appropriately compensate directors providing services on original content for established SVOD platforms. The guild claims that this will triple residuals for directors working on original content that fall under the higher tier.24 The new contract also includes residuals payments for related foreign SVOD services. In response to the new deal, DGA President Paris Barclay said “when it comes to our major gain, SVOD, our approach can best be summed up by the famous words of hockey great Wayne Gretzky: ‘Skate to where the puck is going, not where it has been.’ Protecting our future is the goal of all our negotiations, and the end result is a stellar contract with substantial gains.” These newly negotiated terms became effective on July 1, 2017. Screen Actors Guild/American Federation of Television and Radio Artists In line with the other guilds, SAG-AFTRA has also established significant increases in the residuals rate paid to performers for use of their performances on streaming platforms. Additionally, their members will receive compensation for international exhibition of their work on SVOD platforms. It will be interesting to see how the residual value of original content will be affected once an exclusive SVOD window lapses and the rights revert to the owner. A good example of this will be “House of Cards” which is exclusively available on Netflix (excluding prior seasons which can now be purchased online via AmazonVideo and iTunes). However, eventually the rights will revert to Media Rights Capital so, perhaps, one day consumers will find “House of Cards” syndicating on primetime or (or even Hulu, a competitor of Netflix). Effects on Writer and Actor Agreements Series Episodic Orders Since the growth of SVOD, the number of episodes being ordered for each season has decreased. Today it is becoming more common for exhibitors to order fewer episodes ranging from 8 to 12 episodes per season whereas, 10 years ago, under the old business

Profit Participations, Green Hasson Janks Media Clips blog (June 15, 2016), https://payorplay.foxrothschild.com/2016/06/articles/digital/green-hasson-janks-current-issues-in-profit- participations/. 22 Residuals for High-Budget Subscription Video (HBSVOD) Programs, WRITERS GUILD OF AMERICA, WEST, http://www.wga.org/members/finances/residuals/hbsvod-programs (last visited on July 17, 2017). 23 Id. 24 David Robb, DGA Board Approves New Contract That Includes Big Gains in SVOD Residuals, (December 29, 2016), http://deadline.com/2016/12/dga-board-approves-new-contract-wage- hikes-svod-residuals-1201876926/. Contractual Relationships 5 model, primetime and cable network series orders were for 22 episodes. This new trend has had a positive impact on the value and quality of each episode delivered because studios are putting more money and time into these shorter orders. On the flip side, this change has affected writers and actors alike who are now working on fewer episodes for the same length of time as they were under the old model. Since these artists are paid on an episodic basis, they are making less which puts pressure on studios to increase fees. Exclusivity Concerns During the most recent studio negotiations with the guilds, one of the big talking points for the guilds was limitations on performing agreements required by SVOD exhibitors. The main issue is that most SVOD exhibitors do not want series performers to appear on other SVOD platforms for the run of the show. The exclusivity requirements will eventually have to be revisited as platforms like Netflix and Amazon expand the made- for-television movie world. Since these original television movies are exhibited on SVOD platforms, the guilds have taken the position that a theatrical should have the ability to appear in a made-for-television movie for competing SVOD exhibitors without any limitations. Typically, the SVOD platform will allow such an appearance if the services are classified as a made-for-television movie and not a television series. Exclusivity has also been a guild concern because of the cut-back in episodic orders discussed above. Ratings TV are not applicable to SVOD so we do not have access to their ratings info. This may eventually change in the future. However, as of now, SVOD platforms track their own ratings based on trends in viewer habits. Therefore, only Netflix knows the first time viewer ratings for its original series like “Orange is the New Black”, “Stranger Things” and “Ozark.”. As for traditional television, choosing what programs will be the biggest hits is still up to the consumer, but deep intelligence into viewing behavior can improve both return on investment and reputation.25 Piracy Another concern for studios, networks and distributors is piracy. Studios spend millions of dollars to prevent revenue loss due to piracy. The industry group “Motion Picture Association of America” has been quoted saying that “the revenue U.S. studios annually lose to global piracy is roughly $6.1 billion.”26 The experts say that piracy in the U.S. has diminished. However, streaming services like Netflix (who was recently the target of a hacker by the name of “TheDarkOverlord”) are still prepared to fight back. In an attempt to fight against piracy, 30 companies including Netflix, , the Company, Amazon, BBC Worldwide, HBO, Hulu, and NBCUniversal, to name a few, have combined forces to form the “Alliance for Creativity and Entertainment.”27 The goal of the alliance is to reduce the pervasiveness of online piracy by conducting research and working with law enforcement to cut back illegal pirate enterprises by filing civil lawsuits to fight against copyright infringement.28 Furthermore,

25 TV Ratings, NIELSEN, http://www.nielsen.com/us/en/solutions/measurement/television.html (last visited on July 7, 2017) 26 Jim O’Neill, Video Piracy: The Simple Solution To A $6 Billion Global Problem; OOYALA (February 16, 2015) http://www.ooyala.com/videomind/blog/video-piracy-simple-solution-6-billion-global-problem. 27 Dimitar Serafimov, The Fight Against SVOD Piracy is Picking Up Momentum (posted on June 20, 2017), https://cleeng.com/blog/fight-against-svod-piracy-picking-up-momentum/. 28 Todd Spangler, Entertainment Giants Forge New Alliance to Fight Piracy, Sue Offenders, VARIETY (June 13, 2017); http://variety.com/2017/digital/news/entertainment-studios-piracy-lawsuits-1202463987/. 6 Sabrina Jo Lewis the coalition’s focus on online piracy signifies a new effort of coordination among multiple stakeholders.29 Conclusion With all of these changes in the works, the cordless future will undoubtedly dictate the future business models for studios, networks, and distributors while impacting consumer habits. Some experts think that the popularity of SVOD may fade, especially as newer options are presented to consumers. We saw a similar result following the explosion of VHS sales in the 1980s and DVD sales in the late 1990s and early . Furthermore, in a recent article, media analyst Laura Martin points out that “TV has been building itself for 50 years and streaming is 10 years old, so we should probably give it 15 years.”30 Since most people are creatures of habit, it may be challenging for the next streaming services released to win over the masses.31 On the flip side, Home Media Magazine has taken the position that recent attempts to retain (and attract) traditional cable service contracts with consumers have failed in a big way.32 With this in mind, most signs point to a cordless future. References 2017 Annual Industry Report, ENTERTAINMENT MERCHANTS ASSOCIATION, http://www.entmerch.org/industry/annual-industry-report/. Cable & Satellite TV Providers – McCaskill Pulls Back Curtain on Companies’ Internal Workings, HOMELAND SECURITY & GOVERNMENTAL AFFAIRS COMMITTEE (June 23, 2016), https://www.hsgac.senate.gov/subcommittees/investigations/media/cable-and- satellite-tv-providersmccaskill-pulls-back-curtain-on-companies-internal-workings. Cord-cutting, WIKIPEDIA, https://en.wikipedia.org/wiki/Cord-cutting. DEG Releases Year-End 2016 Home Entertainment Report, HUGH’S NEWS, http://www.hughsnews.ca/deg-releases-year-end-2016-home-entertainment-report- 0055069 (posted by Hugh Bennett on January 10, 2017). Easter, Makeda, Cutting The Cord Doesn’t Necessarily Mean Cutting The Cost, (May 20, 2017), http://www.latimes.com/business/la-fi-tn-cord-cutting- 20170520-htmlstory.html. Gernon, David, Cord Cutting is Accelerating Thanks to Hulu, Not Netflix, Analyst Says, CNBC (June 23, 2017) http://www.cnbc.com/2017/06/23/cord-cutting-is-accelerating- thanks-to-hulu-not-netflix-analyst-says.html. Gruenwedel, Erik, Online TV: The Future Has Arrived – And It May Be Less Profitable, HOME MEDIA MAGAZINE (May 29, 2017), http://www.homemediamagazine.com/streaming/online-tv-future-has-arrvied-and-it-may- be-less-profitable. Haimoff, IIan and Sippel, Michael, Current Issues in Profit Participations, Green Hasson Janks Media Clips blog (June 15, 2016), https://payorplay.foxrothschild.com/2016/06/articles/digital/green-hasson-janks-current- issues-in-profit-participations/. Halloway, Daniel, Networks Challenge Netflix With New Binge-Streaming Strategy, VARIETY (March 30, 2016), http://variety.com/2016/tv/news/networks-new-binge- streaming-strategy-1201740379/.

29 Id. 30 Megan Haynes, #Stream 16: Laura Martin and the Future of Streaming, STREAM DAILY (June 6, 2016), http://streamdaily.tv/2016/06/06/stream16-laura-martin-and-the-future-of-streaming/. 31 Id. 32 Gruenwedel, supra note 11. Contractual Relationships 7

Haynes, Megan, #Stream 16: Laura Martin and the Future of Streaming, STREAM DAILY (June 6, 2016), http://streamdaily.tv/2016/06/06/stream16-laura-martin-and-the-future- of-streaming/. O’Neill, Jim, Video Piracy: The Simple Solution To A $6 Billion Global Problem; OOYALA (February 16, 2015) http://www.ooyala.com/videomind/blog/video-piracy- simple-solution-6-billion-global-problem. Ramachandran, Shalini, As Cord-Cutting Intensifies, Media Companies Scramble Toward Online Streaming Bundles, MARKETWATCH (May 5, 2017), http://marketwatch.com/story/as-cord-cutting-intensifies-media-companies-scramble- toward-online-streaming-bundles-2017-05-15. Robb, David, DGA Board Approves New Contract That Includes Big Gains in SVOD Residuals, DEADLINE HOLLYWOOD (December 29, 2016), http://deadline.com/2016/12/dga-board-approves-new-contract-wage-hikes-svod- residuals-1201876926/. Residuals for High-Budget Subscription (HBSVOD) Programs, WRITERS GUILD OF AMERICA, WEST, http://www.wga.org/members/finances/residuals/hbsvod-programs. Serafimov, Dimitar, The Fight Against SVOD Piracy is Picking Up Momentum (posted on June 20, 2017), https://cleeng.com/blog/fight-against-svod-piracy-picking-up- momentum/. Sheppard, Ben W. and Plumpe, John G., The Rise of SVOD: How the Growth of Subscription Video-on-Demand Impacts Copyright Holders, Vol. 8 No. 1, LANDSLIDE, ABA SECTION OF INTELLECTUAL PROPERTY LAW (2015). Sippel, Michael, Brave New Media World: The Various Forms of New Media, Studio Reporting and Potential Concerns, Green Hasson Janks Media Clips blog (February 24, 2016), https://www.greenhassonjanks.com/blog/media-clips/brave-new-media-world-the- various-forms-of-new-media-studio-reporting-and-potential-concerns/. Smith, Gerry and Palmeri, Christopher, Cord-Cutting Isn’t All Bad News for Cable-TV Networks, BLOOMBERG (June 15, 2017), https://www.bloomberg.com/news/articles/2017-06-15/cable-tv-networks-see-a-ray-of- hope-amid-the-cord-cutting-clouds. Spangler, Todd, Entertainment Giants Forge New Alliance to Fight Piracy, Sue Offenders, VARIETY (June 13, 2017); http://variety.com/2017/digital/news/entertainment- studios-piracy-lawsuits-1202463987/. TV Ratings, NIELSEN, http://www.nielsen.com/us/en/solutions/measurement/television.html.

*** Sabrina Jo Lewis has been a licensed attorney in the state of since December 2013. As an undergrad, she majored in Law & Society and received a Bachelor of Arts degree from the University of California at Santa Barbara. She started a career in entertainment in 2007 when she was hired as an assistant to a in Business Affairs at ABC Studios (owned by ). After attending the University of La Verne College of Law, she received a Juris Doctor degree in 2012. Since obtaining her license to practice law in California, she has worked in Business Affairs at Fox21 (owned by Twentieth Century Fox) and Paramount Television. 8 Sabrina Jo Lewis

Paramount Television, (“PTV”) is an American television studio company that produces and distributes content. PTV, a division of Paramount Pictures Corporation which is -owned, is a start-up studio that has been led by President, Amy Powell, since 2013. PTV has produced one live event (“Grease: Live” for Fox) and several new media and television series including, “Resident Advisors” (Paramount Digital Entertainment (“PDE”) for Hulu), “Hotwives of ” (PDE for Hulu), “Bajillion Dollar Properties” (PDE for ) “Berlin Station” (), “Shooter” (USA), and “Thirteen Reasons Why” (Netflix). PTV also has several upcoming shows in production including “The Alienist” (TNT), “Jack Ryan” (Amazon), “Maniac” (Netflix) and “The Haunting” (Netflix). PTV also has dozens of television projects in development. Over the last 4 years, PTV has rapidly grown as a television studio and, at its current pace, there is no doubt that it their team will continue to create compelling content for years to come.