Netflix vs. The World: A Study of Competitive Trends in the Modern American TV Industry

by Scott Nover

Bachelor of Arts, May 2017, The George Washington University

A Thesis submitted to

The Faculty of The Columbian College of Arts and Sciences of The George Washington University in partial fulfillment of the requirements for the degree of Master of Arts

May 20, 2018

Thesis directed by

Patricia Phalen Associate Professor of Media and Public Affairs

© Copyright 2018 by Scott Nover All rights reserved

ii Acknowledgements

This capstone was submitted in the Spring of 2018, under the direct supervision of

Dr. Patricia Phalen, with additional guidance from Dr. Nikki Usher Layser and Mr. Frank

Sesno. I would like to extend my deepest gratitude to my entire committee, as well as the entire School of Media and Public Affairs (SMPA) at The George Washington

University. SMPA’s faculty and staff have fostered an intensely creative, rigorous, and thoughtful education—for that I am eternally grateful. I would like to acknowledge my interview subjects, who took time to speak to me about their work and their passions.

Additional gratitude is owed to Kyra Althaus, who aided in transcribing hours of interview recordings. Thank you to my colleagues at The Atlantic who have been uncompromisingly understanding while I have worked on this capstone. Lastly, I would like to thank my family and friends—my constant support system.

iii Table of Contents

Acknowledgments...... iii

Introduction ...... 1

Research Questions and Methodology ...... 4

Literature Review ...... 5

Findings and Discussion ...... 37

Opportunities for Further Research ...... 50

Conclusion ...... 51

Appendix A: Interview Protocol ...... 53

Bibliography ...... 54

iv INTRODUCTION

In the 20th century, American history played out on television: Nixon and

Kennedy debated in 1960, humans landed on the moon in ‘69, and Archie Bunker met

Sammy Davis, Jr. in ‘72. Viewers cheered for the “Miracle on Ice” in 1980, debated

Ellen’s coming-out in ‘97, and gasped with shock at Janet Jackson’s wardrobe

malfunction in 2004. Through this chronology, and in recent years, the technology and

business of TV has changed drastically.

Cable TV first became commercially available in 1948, but took until the late ‘70s

into the mid ‘80s to popularize.1 Meanwhile, in the mid ‘70s, TV companies began

distributing programs over satellites. And in the early ‘90s a series of direct broadcast

satellite (DBS) companies popped up, providing direct-to-home television service.2

Slowly, but surely the U.S. transitioned from broadcast (over the public-owned spectrum)

to a complex and multifaceted system of competing and complementary technologies, all

with the mission of providing TV programming.

Our society soon transformed from a mass media information environment,

relatively simple and systematized in distribution and means of production, to a more

decentralized and complex status quo.3 The notion of spectrum scarcity, the governing

principle underlying broadcast media, had been upended by cable and satellite TV for

1 "Cable's Story," National Cable & Telecommunications Association, accessed February 24, 2018, https://www.ncta.com/cables-story. 2 "Industry History," Satellite Broadcasting & Communications Association, accessed February 24, 2018, http://www.sbca.com/receiver-network/history-satellite-providers.htm. 3 Bruce Bimber, Information and American Democracy: Technology in the Evolution of Political Power, Communication, Society and Politics (New York, NY: Cambridge University Press, 2003), 62-75.

1 whom broadcast rules did not apply.4 Bruce Bimber describes an information revolution where the media environment of the early 1990s onward presented an unprecedented information proliferation.5 And, across the TV industry, there was a boom in new content and service providers along with a slew of new pricing options and packages for consumers looking to experience all that modern TV had to offer.

Since the emergence and popularization of cable and satellite TV, the industry has seen massive shifts in consumer behavior, corporate conglomeration, and content production. 24-hour news, pioneered by Ted Turner’s CNN, shifted the information economy and intensified the immediacy of demands on modern journalism and news distribution.6 Consumers bought bundles with hundreds of niche channels,7 and paid extra for premium subscription channels like HBO and Showtime.8 Video on-demand

(VOD) and built-in digital video recorders (DVR) shifted how TV was watched, undermining linear TV with built-in time-shifting, or watching live TV after its regularly scheduled run—a phenomenon that started with the introduction of videocassette recorders (VCRs). These innovations also drastically changed the nature of TV advertising, as commercials were skippable or avoidable entirely. 9 All this

4 Murray J. Rossini, "The Spectrum Scarcity Doctrine: A Constitutional Anachronism," Southwestern Law Journal 39 (1985): 827. 5 Bimber, Information and American, 89-90. 6 Stephen Cushion and Justin Lewis, eds., The Rise of 24-hour News Television: Global Perspectives (New York, NY: Peter Lang, 2010), 1-14. 7 Derek Thompson, "Why Cable Has So Many TV Channels You Never Watch—Explained in 1 Lawsuit," The Atlantic, last modified February 26, 2013, accessed February 24, 2018, https://www.theatlantic.com/business/archive/2013/02/why-cable-has-so-many-tv-channels-you- never-watch-explained-in-1-lawsuit/273525/. 8 Toby Miller, "It's Television. It's HBO.," foreward to It's Not TV: Watching HBO in the Post- Television Era, ed. Marc Leverette, Brian L. Ott, and Cara Louise Buckley (New York, NY: Routledge, 2008), ix-xii. 9 Kenneth C. Wilbur, "How the Digital Video Recorder (DVR) Changes Traditional Television Advertising," Journal of Advertising 37, no. 1 (2008): 143-149.

2 happened before a company called launched its VOD service in 2007 after having already delivered a billion physical DVDs by mail in accord with its original business model.10

Netflix’s decision to stream online video in 2007 marked the beginning of a series of disruptions in the television industry,11 along with the interconnected, if not completely inseparable, internet and film industries.12 Netflix chose an ad-free delivery system, eventually buying old series directly from traditional TV networks before launching original programming of its own.13 Netflix’s decisions over the last decade affected the entire TV industry, changing its future as well as the future viewing options that will be available to TV consumers.

The TV industry is a competitive marketplace with rapidly realigning powers and players, fueled by an environment of intense conglomeration and consolidation. The present study focuses on three facets of this industry that are inextricably related to competition: (1) government rules, regulations, and policies; (2) the role of TV content production; and, (3) the role of consumer behavior and preference. Further, it explores the technology behind TV, as television distribution is intrinsic to the future of the industry.

10 Miguel Helft, "Netflix to Deliver Movies to the PC," The New York Times, January 16, 2007, accessed January 16, 2007, http://www.nytimes.com/2007/01/16/technology/16netflix.html. 11 Tufayel Ahmed and Jordan Saville, "How Netflix Changed TV and Reached 100 Million Subscribers," Newsweek, last modified May 19, 2017, accessed February 24, 2018, http://www.newsweek.com/netflix-100-million-subscribers-612199. 12 Ashley Rodriguez, "Ten years ago, Netflix launched streaming video and changed the way we watch everything," Quartz, last modified January 17, 2017, accessed February 24, 2018, https://qz.com/887010/netflix-nflx-launched-streaming-video-10-years-ago-and-changed-the-way- we-watch-everything/. 13 Willy Shih and Stephen Kaufman, Netflix in 2011, HBS Case Collection (Cambridge, MA: Harvard Business School, 2014), 1-21.

3 RESEARCH QUESTIONS AND METHODOLOGY

Research Questions

This study was designed to answer the following research questions:

1. What is the future of the TV industry?

2. What options will consumers have in the near future, and what are the market

forces, government regulations, and infrastructure concerns that will help

determine this?

Methodology

Following a comprehensive literature review of academic, trade and news

publications, the author conducted a series of in-person and phone interviews with 10

industry professionals, media analysts, and journalists. These professionals represent a

sample of those most likely to have the information and experience needed to predict the

industry’s future. The interview protocol can be found in Appendix A. It features 11

questions on the state of the industry, corporations and competition, along with questions

about the three subcategories: government regulation, content procurement, and

consumer preference.

“Netflix vs. the World” outlines the competitive marketplace for TV in

organizational terms. While the study utilizes financial information and consumer

behavior data, and analyzes government action and inaction, this is not explicitly or

ultimately a study of finance, or of consumer behavior, or political science. It does,

however, reside in the field of media industry studies, which draws from various

disciplines in order to explain modern information and communications technologies and

4 the content they distribute to the public.

LITERATURE REVIEW

Introduction: Competition and Corporate Players in the TV Industry

The literature review begins with definitions and classification, as corporate distinctions determine, in large part, the roles of different players in a complex competitive landscape. The next section discusses the history and modern ecosystem of government regulation of mergers and acquisitions (M&A) activity and ownership in media consolidation. Next, the review discusses Netflix’s standing and its industry competition across platforms and sectors. Then, it addresses the increasing profile of technology companies producing and purchasing rights to TV programming. The review concludes by acknowledging the role of sports programming in driving the TV ecosystem.

First, Pay TV, a term used throughout the paper, simply refers to the bundle of channels one can buy from a cable or satellite TV service provider.14 Wolk presents a useful clarification in his own definition that is fitting, considering the plethora of emerging Pay TV options, claiming, “[Pay TV is] any service that offers an array of options from a variety of established TV content providers. This service can be as skinny as Sling or as broad as FiOS Platinum, but if you’re buying the right to watch network

14 Derek Thompson, "TV’s Ad Apocalypse Is Getting Closer," The Atlantic, last modified August 27, 2017, accessed February 26, 2018, https://www.theatlantic.com/business/archive/2017/08/tvs-ad-apocalypse-is-coming/536394/.

5 programming from someone who is aggregating rather than creating said content, you’re buying pay-TV.” 15

Traditional and so-called skinny bundles are discussed later on in the paper, but the thickness of a given bundle relates to how many channel offerings are provided.16 The skinnier the bundle, the fewer channel offerings it has, and, in theory, the cheaper it is. À la carte TV refers to paying for only the channels one wants to watch, and is thus, in theory, the skinniest option.17 While à la carte is rather theoretical in the United States, though Sling has misleadingly sloganized the term, it is a reality for many viewers in

Canada, where an optional “pick-and-pay” system was introduced in 2016.18

These terms belong to a vocabulary within, or related to, the recent consumer-led phenomenon of cord-cutting or cord-shaving.19 Michael Strangelove defines cord-cutting as, “cancelling a cable or satellite television service and using the Internet to access programming, and doing so mostly for free.”20 To push back on the latter notion of this definition, cord-cutting typically leads to watching TV programming for free, as lower

15 Alan Wolk, "A New Definition For Pay-TV," TDG Research, accessed February 26, 2018, https://www.tdgresearch.com/a-new-definition-for-pay-tv/. 16 Frank Arthofer and John Rose, The Future of Television: Where the US Industry Is Heading, BCG Perspectives (New York, NY: Boston Consulting Group, 2016), 1. 17 Adam D. Rennhoff and Konstantinos Serfes, Estimating the Effects of a la Carte Pricing: The Case of Cable Television, 1, January 18, 2018, accessed February 26, 2018, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1085392. 18 David Lazarus, "High channel prices overshadow arrival of a la carte TV in Canada," The Los Angeles Times, last modified December 9, 2016, accessed March 29, 2018, http://www.latimes.com/business/lazarus/la-fi-lazarus-canada-a-la-carte-tv-20161209-story.html. 19 Todd Spangler, "Cord-Cutting Explodes: 22 Million U.S. Adults Will Have Canceled Cable, Satellite TV by End of 2017," Variety, last modified September 13, 2017, accessed February 26, 2018, http://variety.com/2017/biz/news/cord-cutting-2017-estimates-cancel-cable-satellite-tv- 1202556594/. 20 Michael Strangelove, Post-TV: Piracy, Cord-Cutting, and the Future of Television (n.p.: University of Toronto Press, 2015), 14.

6 cost options often catalyze the move to cord-cutting.21 Relatedly, consumers, often younger consumers, who have never subscribed to Pay TV are called cord-nevers.22 The move from Pay TV to internet-based TV programming is also called going over-the-top

(OTT).23 OTT can describe both corporate action (i.e. “ is going over- the-top”) or the consumer action of cord-cutting. Over-the-top literally refers to moving beyond the cable set-top box as a middle-man, toward Internet-based programming.

Cord-trimming, on the other hand, is the consumer decision to scaling back a traditional

Pay TV subscription to a skinnier and presumably cheaper option.24

For the purpose of discerning between different corporate interests, TV companies are distinguished by business model and direct competition. Alan Wolk separates corporate entities in the TV industry into the following: (1) networks, (2) service providers, (3) studios, (4) premium networks, (5) over-the-top services, (6) streaming devices, (7) second-screen platforms, and (8) smart TVs.25 Networks are divided into broadcast—e.g. ABC, NBC, CBS—and cable—e.g. ESPN, CNBC, Fox

Sports—many of which are bundled together and sold to Pay TV service providers as package deals.26 They make money through ad sales and content deals. Many networks have OTT offerings, referred to as TV Everywhere (TVE), which require Pay TV

21 As we will discuss later, cord-cutting does not always lead to paying less, in total, for TV programming. For example, cancelling a Pay TV subscription while adding three or four OTT services might net out a higher bill than one was paying for just Pay TV. 22 Frank Arthofer and John Rose, The Future of Television: Where the US Industry Is Heading, BCG Perspectives (New York, NY: Boston Consulting Group, 2016), 2. 23 Multimedia Networks: Protocols, Design and Applications By Hans W. Barz, Gregory A. Bassett chapter 9 24 http://www.broadcastingcable.com/news/currency/23-pay-tv-subs-trimmed-cord-last- year/146274 25 Alan Wolk, Over The Top: How The Internet Is (Slowly But Surely) Changing The Television Industry (CreateSpace, 2015). 26 Ibid, 3.

7 subscriptions to deliver streaming content online.27 MVPDs (Multichannel video programming distributors), or service providers, include businesses such as ,

DirecTV, Verizon FiOs, and AT&T U-verse.28 They make money through local ad sales and subscription fees from consumers. While they are the direct victims of cord-cutting, they also are mainly broadband providers as well, or at least owned by a broadband provider. Thus, one part of their business benefits from the problems of another part of their business. Studios, which produce most TV programming, include Warner Bros.,

20th Century Fox, Sony Pictures, and CBS Television Studios.29 Traditionally, they have made money when the networks pick up their programs. However, through a system called deficit financing, the network often pays the studio a license fee, in order to air a program, which does not cover the cost of production.30 But, in exchange, the studio retains ownership rights and can resell later in syndication. Additionally, Netflix has, in recent years, acquired full seasons of old television shows, which benefits program rights-holders. The studios directly negotiate with the powerful creative unions like

SAG/AFTRA and WGA. The unions play a significant role by negotiating royalties and residuals with the studios on behalf of their members. Premium networks like HBO and

Showtime charge for subscriptions through the service providers.31 HBO, one of the most important parts of the premium cable bundle, has launched two SVOD (streaming video ) services: HBO Go and HBO Now. The former relies on a Pay TV

27 David Waterman, Ryland Sherman, and Sung Wook Ji, "The economics of online television: Industry development, aggregation, and “TV Everywhere”," Telecommunications Policy, September 26, 2013, 729. 28 Wolk, Over The Top, 11 29 Ibid, 13. 30 Amanda D. Lotz, The Television Will be Revolutionized, 10/16/07 edition ed. (New York, NY: NYU Press, 2007), 83. 31 Ibid, 16.

8 subscription with HBO and the latter is a standalone product. Many of the networks, including the premium networks, have followed suit, launching or planning to launch

OTT services of their own. Going direct-to-consumer bypasses the premium cable bundle which has supported their traditional subscription business model for so long.

Next, OTT services: Netflix, , among others.32 They make money primarily through subscriptions, though some include ads and others like iTunes dip into transactional (TVOD), where consumers buy or rent a movie or TV program download. Streaming devices including , Apple TV,

Chromecast, and Amazon Fire all make money selling direct-to-consumer.33 Second- screen platforms, as Wolk calls them, include Facebook, and other social networks which make money through ads, but benefit from a wave of second-screen activity when viewers watch while using their platform to react and interact with TV programming.34 In recent years, social networks have dipped into TV sports rights acquisition and launched native TV shows from publishers or studios. Finally, Smart

TVs like Roku TV, Sharp, and LG, also sell direct-to-consumer.35 Smart TVs typically use computer interfaces to aggregate OTT services (e.g. SVOD, TVE, VOD) and can often be paired with an antenna for procuring linear broadcast TV. Adding to Wolk, vMVPDs (virtual MVPDs), or OTT skinny bundles, like Dish Network’s Sling TV,

Playstation Vue, YouTube TV, DirecTV Now and Hulu Live also play a role, featuring scaled-back pay TV bundles streamed over the internet.36

32 Ibid, 18. 33 Ibid, 20. 34 Ibid, 22. 35 Ibid, 24. 36 Daniel Frankel, "Virtual MVPDs will control 14% of U.S. pay TV market by 2030, research firm TDG predicts," FierceCable, last modified November 29, 2017, accessed March 1, 2018,

9 These businesses can be examined in one sense through categories like Wolk’s, but, also with the understanding that almost all of the companies listed are subsidiaries of much larger media conglomerates—most of which own products or properties in more than a few of these categories. This is best exemplified through the aforementioned comment about MVPDs owning portions of the broadband pipeline and thus benefiting from both sides of the cord-cutting equation. Ultimately, the story of the TV industry is inextricably linked to its corporate participants’ ability to horizontally and vertically integrate in accord with government antitrust regulation.

Media Industry Consolidation: Then and Now

Any discussion of media industry consolidation is interwoven with the history of legislation, administrative rules and regulations, and antitrust jurisprudence in the United

States. While a historical primer is a necessary starting point , in some part focusing on the broadcast media industry that predates the popularization of cable and satellite, this largely sets the stage for a series of M&A environments that have since followed— including the current status quo.

From the early decades of the 20th century, government tightly regulated the media industry in the United States and considered ownership a key benchmark to judge the information environment in a given locale. To consider the effects of media ownership meant considering what regulators called the public interest.37 And by ensuring industry competition, the government could, in theory, promote the best interest

https://www.fiercecable.com/cable/virtual-mvpds-will-control-14-u-s-pay-tv-market-by-2030- research-firm-tdg-predicts. 37 Dennis McQuail, Media Performance: Mass Communication and the Public Interest (Sage, 1992), 3-5.

10 of the public.

The Radio Act of 1927 and the Communications Act of 1934 even required that broadcasters operate in the “public interest, convenience and necessity.”38 39 The Federal

Communications Commission (FCC) has interpreted the public interest standard to mean

“requiring diversity of ownership to maximize diversity of viewpoints.”40 Daniel Ho and

Kevin Quinn argue that the convergence hypothesis—that media consolidation reduces viewpoint diversity—”forms the empirical bedrock for media regulation.”41 Thus, the government has historically imposed stringent ownership rules, especially within the bounds of local media markets, dictating, through cross-ownership rules, how many media properties an individual or group can own of a given of outlet type—e.g. broadcast, newspaper.42 James Ferguson notes that “local newspaper cross-ownership of radio and television stations in the same city are frequently cited as evidence of a deteriorating competitive situation and of the need for corrective government action, especially by the FCC.”43 Peter O. Steiner dissents, in a notable 1952 article, claiming that media concentration actually increases viewpoint diversity.44 This view however is at

38 "The Radio Act of 1927," Columbia Law Review 27, no. 6 (June 1927): 727, accessed April 2, 2018, http://www.jstor.org/stable/1113354. 39 Communications Act of 1934, 47 U.S.C. § 157 (1934). Accessed March 1, 2018. https://transition.fcc.gov/Reports/1934new.pdf. 40 Stuart N. Brotman, "Revisiting the broadcast public interest standard in communications law and regulation," Brookings Institution, last modified March 23, 2017, accessed March 1, 2018, https://www.brookings.edu/research/revisiting-the-broadcast-public-interest-standard-in- communications-law-and-regulation/. 41 Daniel E. Ho and Kevin M. Quinn, "Viewpoint Diversification and Media Consolidation: An Empirical Study," Stanford Law Review 61 (February 2009): 789. 42 James M. Ferguson, "Daily Newspaper Advertising Rates, Local Media Cross-Ownership, Newspaper Chains, and Media Competition," Journal of Law & Economics 26, no. 3 (October 1983): 635, accessed March 4, 2018, http://www.jstor.org/stable/725040. 43 Ibid. 44 Peter O. Steiner, "Program Patterns and Preferences, and the Workability of Competition in Radio Broadcasting," The Quarterly Journal of Economics 66, no. 2 (May 1952): 221, accessed April 3, 2018, http://www.jstor.org.proxygw.wrlc.org/stable/1882942.

11 odds with the prevailing theme of communications regulation in the United States since before formation of the FCC.

Many scholars misunderstood mass media to have extremely strong monolithic effects in the early decades of television and film, especially in the ‘30s and ‘40s—

Harold Lasswell’s hypodermic needle theory, or magic bullet theory, embodied some mainstream thinking in this era.45 The belief in strong media effects applied not only news, but also entertainment media—embodied by the somewhat mythic tale of Orson

Welles’ 1938 “War of the Worlds” radio broadcast, which perhaps inadvertently, blurred news and entertainment.46 Mehmet Konar-Steenberg writes that this era of scholarly thinking “played a significant role in the [Supreme] Court’s creation of a two-tier First

Amendment analysis… with broadcast media again receiving markedly less protection than other forms of expression.”47 48

Later, on the silver screen, the U.S. Department of Justice (DOJ) sued Paramount

Pictures along with the four additional members of the “Big Five”—Loew's (which owned MGM), Warner Bros., 20th Century Fox, and RKO Pictures—and the “Little

Three”—Universal Studios, Columbia Pictures and United Artists—in the landmark 1948

45 Harold Dwight Lasswell, Propaganda technique in the World War. (n.p.: Martino Fine Books, 1927). 46 Denis McQuail, "The influence and effects of mass media," Mass Communication and Society, 1977, 81, accessed March 1, 2018, https://s3.amazonaws.com/academia.edu.documents/6448808/the_influence_and_effects_o.pdf? AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1519888406&Signature=72XCg7xi6X VxcbBUoGIG5siWjD4%3D&response-content- disposition=inline%3B%20filename%3DThe_influence_and_effects_of_mass_media.pdf. 47 Mehmet Konar-Steenberg, "The Needle and the Damage Done: The Pervasive Presence of Obsolete Mass Media Audience Models in First Amendment Doctrine," Vanderbilt Journal of Entertainment and Technology Law 8 (2005): 70, accessed March 1, 2018. 48 Ibid, 53.

12 Supreme Court case U.S. v Paramount Pictures.49 In this famous antitrust case, which was the result of 10 years of DOJ action starting in 1938, a consent decree instructed the major movie studios to divest from one of their three main processes—production, distribution, or exhibition: they chose exhibition. In response to a final legal challenge, the Court held in 1948 that the studios had to divest from their movie theatres. This decision was seen as an important step in dismantling the studio system of market dominance during the Golden Age of Hollywood.50

As the relatively unregulated cable TV system emerged in the ‘70s, broadcast media were still heavily regulated. In 1975, the FCC imposed new strict cross-ownership rules, barring a single company from owning a newspaper and a broadcast—TV or radio—station in the same local media market. Douglas Gomery argues in favor of the strict 1975 rules, writing, “profit maximization has never been the sole point of U.S. communications policy.”51 He continues, “Newspapers and broadcasters are not simple firms reducible to profit-generating equations but rather are large, complex social, cultural, and political institutions, and they need to be analyzed through an institutional economic model that takes into account externalities, both positive and negative, that have an impact on the public welfare.” 52

In accord with Ronald Reagan’s economically conservative and allegedly pro- business administration, the 1980s and, as a result, the ‘90s, saw a great deal of M&A

49 U.S. v. Paramount Pictures, Inc., 334 S. Ct. 79, 79-86 (May 3, 1948). Accessed March 4, 2018. http://caselaw.findlaw.com/us-supreme-court/334/131.html. 50 Scott Bomboy, "The day the Supreme Court killed Hollywood’s studio system," National Constitution Center, last modified May 4, 2017, accessed March 4, 2018, https://constitutioncenter.org/blog/the-day-the-supreme-court-killed-hollywoods-studio-system. 51 Douglas Gomery, The FCC's Newspaper-Broadcast Cross-Ownership Rule: An Analysis (Washington, DC: Economic Policy Institute, 2002), 2, accessed March 4, 2018, https://secure.epi.org/files/page/-/old/books/cross-ownership.pdf. 52 Ibid.

13 activity with news media companies. According to Christopher Daly, “The media consolidation began in earnest in 1985, placing more and more journalism properties inside giant companies that sometimes had little interest in news.”53 Capital Cities

Communication bought ABC for $3.5 billion, General Electric bought RCA—which owned NBC—for $6.3 billion, Time Inc. merged with Warner Bros, Westinghouse bought CBS, Disney bought ABC from Capital Cities for $19 billion, Turner

Broadcasting merged with Time Warner, and Viacom bought CBS.54 And all of this predates Time Warner’s landmark merger with AOL in 2001—both the largest merger in

American history at $350 billion and a major indicator that media and tech interests are not easily reconciled.55 Matthew Bodie asserts that the merger is almost “universally regarded as a disaster.”56

According to Dell Champlin and Janet Knoedler, the ‘90s “witnessed a trend toward media concentration, accelerated by the passage of the 1996 Telecommunications

Act.”57 Champlin and Knoedler note that the “alarming trend toward media consolidation and conglomeration has been especially rapid” since the ‘80s.58 The legislation did away with cross-ownership rules, clearing restrictions to owning different types of media. As a result, the telecommunications and broadcast industries came closer together, with M&A

53 Christopher B. Daly, Covering America: a narrative history of a nation's journalism (Boston, NY: University of Massachusetts Press, 2012), 427. 54 Ibid. 55 Tim Arango, "How the AOL-Time Warner Merger Went So Wrong," How the AOL-Time Warner Merger Went So Wrong (New York, NY), January 11, 2010, Media, B1, accessed March 4, 2018, http://www.nytimes.com/2010/01/11/business/media/11merger.html. 56 Matthew T. Bodie, "AOL Time Warner and the False God of Shareholder Primacy," Journal of Corporation Law 31 (2005): 975, accessed March 4, 2018. 57 Dell Champlin and Janet Knoedler, "Operating in the Public Interest or in Pursuit of Private Profits? News in the Age of Media Consolidation," Journal of Economic Issues 36, no. 2 (June 2002): 460, accessed March 4, 2018. 58 Ibid.

14 activity increasing.59 Additionally, the law “brought deregulation to the cable industry,” and lifted the nationwide cap on radio station ownership.60 In the wake of these changes, for instance, 4,000 radio stations changed owners nationwide between 1996 and 2003.61

Throughout the 2000s, media ownership continued to consolidate, exacerbated by the Great Recession at the latter half of the decade, which saw “structural shifts in advertising revenue, which have left hard pressed media enterprises lobbying intensively for even greater deregulation.”62 Since the turn of the century, telecommunications companies have acquired major media companies—notably with Comcast buying

NBCUniversal and Verizon acquiring Yahoo and AOL Huffington Post, combining them under the a umbrella called Oath.63 As telecoms provide broadband service, this raises the question of whether the telecoms are thus distributors of media—if so that would imply vertical integration.64 While the two aforementioned deals were permitted, there are increased questions about whether AT&T’s planned acquisition of Time Warner will be permitted by the Trump Administration. Currently, the DOJ is suing to block the deal,

59 Anastasia Bednarski, "From diversity to duplication: Mega-mergers and the failure of the marketplace model under the Telecommunications Act of 1996," Fed. Comm. LJ, no. 55 (2002): 273-295, accessed March 5, 2018, https://www.repository.law.indiana.edu/fclj/vol55/iss2/5/. 60 David McCabe, "Bill Clinton’s Telecom Law: Twenty Years Later," The Hill, last modified February 7, 2016, accessed March 5, 2018, http://thehill.com/policy/technology/268459-bill- clintons-telecom-law-twenty-years-later. 61 Geraldine Ryan and Edward Shinnick, "Economic Issues in Media Regulation: An EU and US Perspective," in Handbook of Research on Digital Media and Advertising: User Generated Content Consumption: User Generated Content Consumption, ed. Matthew S. Eastin (Hershey, PA: IGI Global, 2010), 64. 62 Steven Barnett, "What's Wrong with Media Monopolies? A Lesson from History and a New Approach to Media Ownership Policy," MEDIA@ LSE Electronic Working Papers, 2010, 1. 63 Zacks Equity Research, "Is Telecom-Cable TV-Media Convergence Inevitable?," Zacks, last modified November 14, 2018, accessed March 29, 2018, https://www.zacks.com/stock/news/282861/is-telecomcable-tvmedia-convergence-inevitable. 64 James B. Stewart, "Why a Media Merger That Should Go Through Might Not," The New York Times (New York, NY), October 25, 2016, new York edition, Economy, 1, accessed March 5, 2018, https://www.nytimes.com/2016/10/26/business/economy/why-a-media-merger-that-should- go-through-might-not.html.

15 unless AT&T agrees to sell off some of Time Warner’s media assets like CNN—sparking concerns that the President is breaking with conservative free market regulatory thought in order to execute a personal content-based vendetta against a cable channel that he feels has covered him critically.65 That being said, the ongoing trial is being litigated on traditional antitrust grounds, dropping its “selective enforcement” argument.66 AT&T is arguing that the vertical deal is not anti-competitive because incumbent TV companies need to bulk up to compete against Netflix and the tech giants like Facebook, Google and

Apple.

In the last 10 years, the emergence of technology companies, particularly Google and Facebook as essentially a digital advertising duopoly, has created intense problems for media companies that rely upon advertiser-based business models.67 Thus, a common argument finds that, because of the tech giants, media companies need to consolidate— even through vertical integration—in order to compete.68 As discussed later on, tech companies are valued on a different scale than media companies, and their foray into content production and distribution promises to disrupt an already fragile media incumbency.

65 Peter Kafka, "Trump wants to punish CNN by breaking up the AT&T/Time Warner deal," Recode, last modified November 8, 2017, accessed March 29, 2018, https://www.recode.net/2017/11/8/16624946/trump-punish-cnn-att-time-warner. 66 Cecilia Kang, "AT&T Backs Off Political Argument in Antitrust Case," The New York Times (New York, NY), March 10, 2018, new York edition, Technology, B2, accessed March 29, 2018, https://www.nytimes.com/2018/03/09/technology/att-time-warner-antitrust.html. 67 Mathew Ingram, "How Google and Facebook Have Taken Over the Digital Ad Industry," Fortune, last modified January 4, 2017, accessed December 12, 2017, http://fortune.com/2017/01/04/google-facebook-ad-industry/. 68 Matthew Garrahan and Hannah Kuchler, "AT&T-Time Warner looks to break Google-Facebook ad ‘duopoly’," Financial Times, last modified October 25, 2016, accessed March 5, 2018, https://www.ft.com/content/ea38c718-9aca-11e6-b8c6-568a43813464.

16 As it stands, the “Big Six” media companies are Walt Disney/ABC, Time Warner,

21st Century Fox, Comcast NBCUniversal, and CBS and Viacom. At the time of writing,

AT&T is trying to purchase Time Warner and Disney is expected to acquire 21st Century

Fox’s film and entertainment television assets, including FX and National Geographic.69

Additionally, the FCC revoked rules ensuring , passed under the Obama administration, which mandated internet service providers (ISPs) give consumers equitable access to the internet. Critics worry that this repeal will decrease competition on the internet.70

In local media ownership, the FCC recently repealed more cross-ownership rules, notably the rule prohibiting ownership of a newspaper and broadcast outlet in the same media market, likely paving the way for increased consolidation.71 On the horizon, the

FCC is reviewing Sinclair Broadcast Group acquisition of Tribune Media, a deal that would give Sinclair 72 percent penetration into U.S. homes. In order to approve the deal, the FCC would need to raise its nationwide ownership cap from 39 percent—or Sinclair would need to sell stations.72 Sinclair has already proposed selling at least 18 stations to

69 David Hellier and Anousha Sakoui, "A Disney Deal for Fox Is Coming Within Days," Bloomberg, last modified December 12, 2017, accessed December 12, 2017, https://www.bloomberg.com/news/articles/2017-12-11/fox-deal-is-said-coming-within-days-giving- murdoch-disney-stake. 70 Sean Captain, "Why The FCC’s Free-Market Argument For Repealing Net Neutrality Doesn’t Hold Up," Fast Company, last modified December 6, 2017, accessed March 5, 2018, https://www.fastcompany.com/40499900/why-the-fccs-free-market-argument-for-repealing-net- neutrality-doesnt-hold-up. 71 Cecilia Kang, "F.C.C. Opens Door to More Consolidation in TV Business," The New York Times (New York, NY), November 16, 2017, Media, B2, accessed March 5, 2018, https://www.nytimes.com/2017/11/16/business/media/fcc-local-tv.html. 72 Cecilia Kang and Sydney Ember, "Sinclair Deal With Tribune Hits Complications in Washington," The New York Times (New York, NY), February 27, 2017, Media, B3, accessed March 5, 2018, https://www.nytimes.com/2018/02/27/business/sinclair-tribune-merger- antitrust.html.

17 push the $3.9 billion deal through FCC approval.73 Critics warn of “excessive, unbalanced” power in approving the deal, while proponents cite the narrow profit margins in the local broadcasting business. 74 Proponents argue that local broadcasters, as well, need to bulk up to remain economically viable. Additionally, the FCC’s 2017 incentive auction paid broadcast stations who wanted to surrender their licenses or channel-share with others (the FCC resold the spectrum to wireless carriers seeking to bulk up for the rollout of 5G standards). FierceCable’s Ben Munson notes that the auction indicates additional industry consolidation in the broadcast space.75

Returning to our ultimate frame of Pay TV, much of this discussion has veered toward the perhaps archaic distinctions between broadcast media and cable or satellite media. Again, these are regulated differently—in TV and radio alike—due to the theory that government needs to regulate a scarce broadcast spectrum as a public good that must serve the public interest and promote diversity. But, most U.S. viewers access broadcast stations and networks through the Pay TV bundle.

Lastly, the companies that own the major broadcast networks are also invested in

Pay TV. For example, owns the broadcast network ABC, but also the cable networks ESPN, Freeform, and among others.76 Disney

73 Lorraine Mirabella, "Friendly buyers step up to help Sinclair shed enough TV stations to appease regulators," The Baltimore Sun, last modified March 9, 2018, accessed March 29, 2018, http://www.baltimoresun.com/business/bs-bz-sinclair-tribune-station-sales-20180307-story.html. 74 John Eggerton, "Diverse Groups Combine to Oppose Sinclair-Tribune," Broadcasting & Cable, last modified August 7, 2017, accessed March 5, 2018, http://www.broadcastingcable.com/news/currency/diverse-groups-combine-oppose-sinclair- tribune/167736. 75 Ben Munson, "Editor's Corner—From spectrum auction disappointment springs broadcast consolidation hopes," FierceCable, last modified March 2, 2017, accessed April 3, 2018, https://www.fiercecable.com/broadcasting/from-spectrum-auction-disappointment-springs- broadcast-consolidation-hopes. 76 Our Businesses," The Walt Disney Company, accessed April 4, 2018, https://www.thewaltdisneycompany.com/about/#our-businesses.

18 also owns a film studio; the Marvel entertainment universe; resorts, theme parks, cruise lines, and retail facilities; a sizable stake in the SVOD service Hulu; and TV Everywhere capabilities for its TV networks. Additionally, Disney is also launching two standalone

SVOD services, for its sports and entertainment offerings.77 Similar comparisons, at varying degrees, can be made considering Comcast NBCUniversal, CBS Corporation, and 21st Century Fox’s multivariate assets.

Netflix in the Driver’s Seat

Reed Hastings founded Netflix in 1997 to provide DVD delivery to home movie watchers, a model that later become subscription-based.78 From 1998 until 2007, Netflix built up a user base of 6.3 million subscribers, shipping more than 1.5 million DVDs a day.79 Netflix put its original competition—the brick-and-mortar movie rental company

Blockbuster—out of business. Troy Swanson writes that Blockbuster filed for bankruptcy in 2010 because “the Netflix business model of mailing DVDs to viewers and streaming movies over the internet had eroded so much of Blockbuster’s business that it could no longer sustain itself.”80 Blockbuster launched an online subscription service, Blockbuster

Total Access, attempting to pivot toward streaming, but poor management and slow

77 John Koblin, "The Streaming Landscape After Disney’s Deal," The New York Times (New York, NY), December 14, 2017, new York edition, Media, B3, accessed April 4, 2018, https://www.nytimes.com/2017/12/14/business/media/disney-streaming-21st-century-fox.html. 78 Netflix, "Netflix Launches 'All You Can Watch' DVD Rental Program," news release, February 14, 2000, accessed March 26, 2018, https://media.netflix.com/en/press-releases/netflix-launches- all-you-can-watch-dvd-rental-program-migration-1. 79 Dave Demerjian, "Rise of the Netflix Hackers," Wired, last modified March 15, 2007, accessed March 11, 2018, https://www.wired.com/2007/03/rise-of-the-netflix-hackers/. 80 Troy Swanson, Managing Social Media in Libraries (Elsevier, 2012), xx, accessed March 11, 2018, https://www.elsevier.com/books/managing-social-media-in-libraries/swanson/978-1-84334- 711-8.

19 adaptation proved too great a hurdle for the company.81 Eventually Blockbuster was bought for $320 million by Dish Network in a 2011 bankruptcy auction—as of January

2018 there are 8 franchised locations left in the United States (six of which are in

Alaska).82

Blockbuster may have failed in its home movie rental business, but its story has more in common with the TV industry than one would think. In reality, the home video phenomenon upon which Blockbuster and Netflix each capitalized, was never separate from TV programming. The advent of the DVD in the late ‘90s brought with it the emergence of DVD releases of television series, often by season or in box sets. This format of TV programming offered a direct-to-consumer restructuring of how TV shows are consumed as units of culture, according to Matt Hills.83 He writes, “TV texts are converted from being primarily moments in a schedule, designed to hold audiences or reach audiences of a specific type, to symbolically bounded objects more akin to artworks or novels, which audiences can search for and keep as digital files, or purchase as

DVDs/legal downloads.

This restructuring in thought foreshadows a trend Netflix capitalized on: acquiring digital rights to mass quantities of television series, some of which were never regularly

81 David J. Teece, "Business Models, Business Strategy and Innovation," Long Range Planning, n.s., 43, nos. 2-3 (April/May 2010): 183, accessed March 26, 2018, https://www-sciencedirect- com.proxygw.wrlc.org/science/article/pii/S002463010900051X. 82 Brian Lisi, "Last Blockbuster in Texas to close, leaving only eight in existence," New York Daily News, last modified January 30, 2018, accessed March 27, 2018, http://www.nydailynews.com/news/national/blockbuster-texas-close-leaving-8-existence-article- 1.3787683 83 Matt Hills, "From the Box in the Corner to the Box Set on the Shelf: ‘TVIII’ and the Cultural/Textual Valorisations of DVD," New Review of Film and Television Studies 5, no. 1 (2007): 45, accessed March 11, 2018, https://www.tandfonline.com/doi/abs/10.1080/17400300601140167.

20 syndicated on linear TV, first through distribution through physical DVD shipments and eventually through streaming.84

But, the supply side feeds into a demand side phenomenon: binge viewing.

Mareike Jenner describes binge viewership as intrinsic to the VOD experience,

“understanding it as decidedly different from ‘watching [linear] TV’, one being autonomously scheduled and active the other programmed by broadcasting institutions, implying a potentially passive viewership.”85 In a way, binge viewing is the full realization of the time-shifting phenomenon started decades earlier with the first video tape recorders. Jason Jacobs writes “The difference between the VCR [...] and digital television technology seems to be that the various ways to own, time-shift or otherwise mine texts are promoted as the obvious and routinized ways to interact with the medium rather than viewing the schedule in real time.”86 In this way, Jacobs insists on an intentionality from the supply side: VOD platforms—especially original content- producing SVOD services like Netflix—encourage binge viewing.

With a mutually beneficial supply-and-demand relationship between suppliers offering the binge-ables that viewers , Netflix and its SVOD rivals like Hulu and

Amazon Prime Video are driving industry wide demand for more high-quality original

TV series among traditional TV players. Boston Consulting Group’s John Rose and

Frank Arthofer write, “Hit content has become a major differentiator… Networks are

84 Meg James and Yvonne Villareal, "Nostalgia TV makes a comeback. How Hulu and Netflix are breathing new life into old TV shows," The Los Angeles Times, last modified August 20, 2017, accessed April 7, 2018, http://www.latimes.com/business/hollywood/la-fi-ct-timeless-tv-streaming- 20170820-story.html. 85 Mareike Jenner, "Binge-watching: Video-on-demand, quality TV and mainstreaming fandom," International Journal of Cultural Studies 20, no. 3 (2015): 317, accessed March 15, 2018, http://journals.sagepub.com.proxygw.wrlc.org/doi/pdf/10.1177/1367877915606485. 86 Jason Jacobs, "Television interrupted: Pollution or aesthetic.," in Television as digital media, ed. James Bennett and Niki Strange (Durham, NC: Duke University Press, 2011), 255-280.

21 spending more to develop must-see programming.”87 Netflix, for one, is spending $8 billion in 2018 on original programming alone, a move that will make its total library 50 percent original.88

From 2007 to 2011, Netflix had a foot in each the DVD-by-mail and the SVOD business. In 2011, it ungracefully raised prices on its services while spinning off its

DVD-by-mail service, rebranding it as Qwikster.89 In the year that followed, Netflix plunged into what The New York Times would later call a “death spiral”—abandoning the

Qwikster plans, losing 800,000 subscribers in the fourth quarter of 2011. Netflix saw “a dizzying plunge in the company’s stock price from almost $299 in July 2011 to about $53 last September [2012].”90 As the writer Steven Johnson puts it, the most innovative ideas

(e.g. SVOD as a standalone success) start as “slow hunches” and take a long time, if ever, to reach a moment of breakthrough and public acceptance.91 Hastings had the right idea in 2011—that streaming would, in fact, be the future of the company—but moved to quickly, causing “customer backlash and subsequent public backtracking” when Netflix disjointed the old from the new.92 Today, Netflix still operates DVD-by-mail under the trade name DVD.com with 3.4 million subscribers as of January 2018.93

87 Arthofer and Rose, The Future, 1. 88 Nick Statt, "Netflix plans to spend $8 billion in 2018 to help make its library 50 percent original," The Verge, last modified October 16, 2017, accessed April 13, 2018, https://www.theverge.com/2017/10/16/16486436/netflix-original-content-8-billion-dollars-anime- films. 89 Willy Shih and Stephen Kaufman, Netflix in 2011, HBS Case Collection (Cambridge, MA: Harvard Business School, 2014), 1. 90 James B. Stewart, "Netflix Looks Back on Its Near-Death Spiral," The New York Times (New York, NY), April 26, 2013, new York edition, Business Day, B1, accessed March 15, 2018, http://www.nytimes.com/2013/04/27/business/netflix-looks-back-on-its-near-death-spiral.html. 91 Steven Johnson, Where Good Ideas Come From: The Natural History of Innovation, reprint ed. (New York, NY: Riverhead Books, 2011), 67-96. 92 Shih and Kaufman, Netflix in 2011, 14. 93 Jillian D'Onfro, "What it's like to work at Netflix's dying DVD business," CNBC, last modified Jan 23, 2018, accessed March 27, 2018, https://www.cnbc.com/2018/01/23/netflix-dvd-business-still- alive-what-is-it-like-to-work-there.html.

22 Now, as Netflix, with 188 million subscribers, leads a streaming-first TV industry, linear TV companies are playing-catch up.94 Hulu launched in 2007 as a joint venture between Walt Disney Company, 21st Century Fox, Comcast, and later Time

Warner, is giving traditional TV networks—like Disney’s ABC, Comcast’s NBC, and

Time Warner’s TBS—an indirect competitive stake against Netflix’s SVOD dominance.

Hulu has dipped into the vMVPD business too, offering a virtual bundle alongside its

SVOD service. Amazon Prime Video, the third big name in the SVOD space, is largely seen as a loss leader for Amazon Prime—a core part of Amazon.com’s online retail business.95 While Amazon has proven a viable threat in nearly every industry—from retail to cloud computing to supermarkets and maybe even healthcare—the cons may outweigh the pros for a massive company with a bottom line that currently has less to do with streaming video than web hosting and consumer goods sales.96 Hulu, on the other hand, is coming off a strong year, but currently has a mere third of Netflix’s U.S. subscriber base, at 17 million subscribers, with none of Netflix’s international subscriber base.97

This triad of streaming companies has not only focused on original programming, but many of their series have found critical success. Netflix has won two Oscars out of 15 nominations, along with 43 Emmy wins out of 225 nominations and five Golden Globe

94 Rani Molla, "Netflix now has nearly 118 million streaming subscribers globally," Recode, last modified January 22, 2018, accessed April 13, 2018, https://www.recode.net/2018/1/22/16920150/netflix-q4-2017-earnings-subscribers. 95 Adam Levy, "Amazon Prime Instant Video Is a Huge Loss Leader," The Motley Fool, last modified February 22, 2017, accessed March 18, 2018, https://www.fool.com/investing/2017/02/22/amazon-prime-instant-video-is-a-huge-loss- leader.aspx. 96 Ibid. 97 Ashley Rodriguez, "Hulu feels good about its subscriber numbers again," Quartz, last modified January 10, 2018, accessed March 18, 2018, https://qz.com/1175865/hulu-feels-good-about-its- subscriber-numbers-again/.

23 wins out of 36 nominations in the past six years.98 Amazon’s “Transparent won consecutive Emmys for Lead Actor and Direction in 2015 and 2016.99 And, in a landmark moment, Hulu’s “The Handmaid’s Tale” won Outstanding Drama at the 2017

Emmys, the first streaming service program to take top dramatic honors.100 Wired’s

Angela Watercutter argues that Netflix’s emphasis on quality programming and return- on-investment is turning it into HBO.101

Disney’s plans to acquire 21st Century Fox’s entertainment assets promise to have massive implications for the competitive SVOD landscape, with reverberating effects for the entire TV industry. Firstly, the deal would make Disney the majority shareholder in Hulu. Recode’s Edmund Lee argues that “now a single company will own more than half of the service, which makes it less likely the other owners, specifically

NBC parent Comcast, will want to continue selling its shows to Hulu.”102 Disney has long planned for SVOD services of its own, acquiring a majority stake in MLB Advanced

Media’s industry-leading BAMTech streaming technology for $1.58 billion in September

98 John Lynch, "Netflix grabbed 8 Oscar nominations amid a big push into original movies — a top analyst tells us what that means for its business," Business Insider, last modified January 23, 2018, accessed March 15, 2018, http://www.businessinsider.com/netflix-gets-seven-oscar- nominations-analysis-2018-1. 99 THR Staff, "Jeffrey Tambor After Best Actor Win for 'Transparent': 'Please Give Transgender Talent a Chance,'" The Hollywood Reporter, last modified September 18, 2016, accessed March 15, 2018, https://www.hollywoodreporter.com/news/jeffrey-tambor-wins-best-comedy-actor- 927919. 100 Rani Molla, "Watch as streaming TV services are increasingly winning the top Emmys," Recode, last modified September 18, 2017, accessed March 15, 2018, https://www.recode.net/2017/9/18/16328234/emmy-award-winner-streaming-tv-channels-netflix- amazon-hulu-handmaids-tale. 101 Angela Watercutter, "It Was Inevitable, Really: Netflix Is Turning into HBO," Wired, last modified June 13, 2017, accessed March 15, 2018, https://www.wired.com/story/netflix- cancellations-hbo/. 102 Edmund Lee, "Disney’s Fox acquisition means the end of Hulu as we know it," Recode, last modified December 14, 2017, accessed March 18, 2018, https://www.recode.net/2017/12/14/16771712/hulu-disney-acquisition-fox-means-dis-foxa-21cf.

24 2017.103 Disney’s SVOD plans are twofold: the flagship service will package the Disney,

Pixar, Marvel, and Lucasfilm entertainment assets to directly compete against Netflix when it launches in late 2019; the second is ESPN+, a sport-centered SVOD service that launched in April of 2018.104

Additionally, many networks have plans for SVOD services of their own, separate from their current TV Everywhere offerings. In addition to ESPN+, Viacom and Fox

News will soon launch OTT services.105 HBO Now already has 5 million subscribers, and

CBS’ two streaming services—CBS All Access and ShowTime—have a combined 5 million; has about 2 million streaming subscribers itself.106 107 Additionally, nontraditional streaming services like MLB.tv, YouTube Red, and SlingTV are also major players in the OTT space, each making the top 10 OTT services by subscribers according to Parks Associates as of November.108

However, many of these direct-to-consumer network figures are partially due to

Amazon’s market presence. BTIG’s Rich Greenfield writes that, as of June 2017, more

103 Brooks Barnes and John Koblin, "Disney’s Big Bet on Streaming Relies on Little-Known Tech Company," The New York Times (New York, NY), October 8, 2017, new York edition, Media, B1, accessed March 18, 2018, https://www.nytimes.com/2017/10/08/business/media/bamtech- disney-streaming.html. 104 Brooks Barnes, "Disney Reorganization Anticipates 21st Century Fox Assets," The New York Times (New York, NY), March 14, 2018, new York edition, Media, B3, accessed March 18, 2018, https://www.nytimes.com/2018/03/14/business/media/walt-disney-21st-century-fox.html. 105 Jason Lynch, "Fox News to Launch Ad-Free Streaming Service Aimed at ‘Superfans’," AdWeek, last modified February 20, 2018, accessed March 21, 2018, http://www.adweek.com/tv- video/fox-news-to-launch-ad-free-streaming-service-aimed-at-superfans/. 106 Ben Munson, "Editor's Corner—How HBO Now's subscriber surge reshapes the SVOD story," FierceCable, last modified February 6, 2018, accessed March 21, 2018, https://www.fiercecable.com/video/editor-s-corner-how-hbo-now-s-subscriber-surge-reshapes- svod-story. 107 Jason Lynch, "Starz Prepares for a Surge in OTT Subscribers Ahead of Outlander’s Season Premiere," AdWeek, last modified September 8, 2017, accessed March 21, 2018, http://www.adweek.com/tv-video/starz-prepares-for-a-surge-in-ott-subscribers-ahead-of- outlanders-season-premiere/. 108 Daniel Frankel, "https://www.fiercecable.com/online-video/netflix-amazon-hulu-mlb-tv-lead- top-10-list-ott-subs," FierceCable, last modified November 9, 2017, accessed March 20, 2018, https://www.fiercecable.com/online-video/netflix-amazon-hulu-mlb-tv-lead-top-10-list-ott-subs.

25 than half of HBO Now, Starz, and Showtime’s streaming subscribers come from Amazon

Prime Channels, which allows Amazon Prime users to tack on additional services to their standard bundle.109

The Tech Giants: Deep Pockets, Serious Ambitions, Different Standards

As the TV landscape continues to consolidate, many traditional TV players view that mergers and acquisitions like AT&T-Time Warner are justified in order to position them for cross-industry competition with the Silicon Valley tech giants.110

Variety’s Cynthia Littleton writes that 2018 has been dominated by a flurry of news and rumors about media M&A activity—Disney-Fox, CBS-Viacom, AT&T-Time

Warner, Sony looking to deal, Lionsgate looking to sell.111 “Traditional Hollywood is scared witless about the rise of the FAANG giants (Facebook, Amazon, Apple, Netflix and Google),” Littleton writes. “The tech titans may not have all the answers when it comes to a cohesive entertainment strategy, but they do have the resources to figure it out on a trial-and-error basis.”

Already, Netflix and Amazon have been two of the major players described in this paper. Netflix is honing a streaming subscription-only business model, while Amazon’s

Prime Video service acts as a loss leader for its broader direct-to-consumer subscription

109 Ben Munson, "Half of HBO Now, most of Showtime and Starz OTT subscribers coming from Amazon Channels: analyst," FierceCable, last modified June 5, 2017, accessed March 21, 2018, https://www.fiercecable.com/online-video/half-hbo-now-most-showtime-and-starz-ott-subs- coming-from-amazon-channels-analyst. 110 Derek Thompson, "Why the Trump Administration Is Suing to Block the AT&T–Time Warner Merger," The Atlantic, last modified November 20, 2017, accessed March 26, 2018, https://www.theatlantic.com/business/archive/2017/11/trump-att-time-warner/546443/. 111 Cynthia Littleton, "Media Merger Mania: Feverish Speculation About Potential Takeovers Circles Viacom, Lionsgate," Variety, last modified January 25, 2018, accessed March 20, 2018, http://variety.com/2018/biz/news/media-mergers-viacom-lionsgate-1202675515/.

26 retail operation. Google and Facebook’s digital advertising dominance as placing such constraints across the ad-reliant media sector that it has forced industry consolidation.

Apple has two main assets in its bid for TV dominance. First, it has the Apple TV hardware and media player app, and second, it is devoting $1 billion to original entertainment programming in 2018.112 113 The New York Times’ John Koblin writes that

Apple has outspent Facebook and YouTube in original programming in recent months, and promises to blow past the $1 billion figure.114 Additionally, in accord with the new

Republican-led tax bill, Apple is repatriating $252.3 billion at a low tax rate of 15.5 percent (or $38 billion). In other words, Apple has money to spend, and original programming is on the list.115

Google’s YouTube platform has long been a force in web streaming, but has emerged on the OTT scene with its subscription streaming service YouTube Red and its vMVPD YouTube TV. Additionally, YouTube’s main platform for ad-based video is still very popular. Needham & Co.’s Laura Martin and Dan Medina write that its main platform, however, “has had 12 years as a monopoly and remains sub-scale and unprofitable.”116

112 Jason Cross, "Apple's original TV shows and series: Apple signs two-year deal for animated musical comedy Central Park," Macworld, last modified March 12, 2018, accessed March 20, 2018, https://www.macworld.com/article/3245534/streaming-media/list-of-apple-tv-shows-and- series-news-actors-release-dates.html. 113 Littleton, "Media Merger," Variety. 114 John Koblin, "Apple Goes to Hollywood. Will Its Story Have a Happy Ending?," The New York Times (New York, NY), March 25, 2018, new York edition, Media, B2, accessed March 29, 2018, https://www.nytimes.com/2018/03/25/business/media/apple-hollywood-streaming.html. 115 Lisa Marie Segarra, "Apple Leads These Companies With Massive Overseas Cash Repatriation Tax Bills," Fortune, last modified January 18, 2018, accessed March 20, 2018, http://fortune.com/2018/01/18/apple-overseas-cash-repatriation-gop-tax-plan/. 116 Laura A. Martin and Dan Medina, The Future of Media: An Epic Battle, Thought Leader Series (New York, NY: Needham & Co., 2018), 1.

27 Facebook’s Watch platform is an ad-based VOD service closest to YouTube, with some original programming of its own. Spending up to $1 billion on original shows in

2018, Facebook’s main boast is high average viewing time for its series.117 118 It also benefits from second-screen viewing activity—where people use a companion app as part of the TV experience.119

Twitter, which still relies upon second-screen viewing habits, has indicated that platform-native live video is significant for its own original content strategy.120

TechCrunch’s Josh Constine writes, “Twitter seems intent on doubling-down on its position as the second screen by trying to become the first screen too.”121 Twitter,

Facebook Watch and ’s Discover platform have each invested in original news programming as well.122 Snapchat even produces a show of its own, “Good Luck

America,” hosted Peter Hamby, Snap’s head of news and a former CNN national political correspondent.123

117 Todd Spangler, "Facebook to Spend Up to $1 Billion on Original Shows? Social Giant Wants to Stay on Hollywood’s Radar," Variety, last modified September 8, 2017, accessed March 20, 2018, http://variety.com/2017/digital/news/facebook-1-billion-spending-video-original- programming-1202551659. 118 Sahil Patel, "Facebook’s Watch videos are being viewed an average of 23 seconds," Digiday, last modified October 4, 2017, accessed March 20, 2018, https://digiday.com/media/facebooks- watch-off-promising-start-faces-long-road-pursuit-/. 119 Hye Jin Lee and Mark Andrejevic, "Second Screen Theory: From the Democratic Surround to the Digital Enclosure," in Connected Viewing: Selling, Streaming, & Sharing Media in the Digital Age, ed. Jennifer Holt and Kevin Sanson (New York, NY: Routledge, 2013), 49. 120 Arjun Karpal, "Twitter’s live video ambition risks all-out content spending war," CNBC, last modified May 2, 2017, accessed March 20, 2018, https://www.cnbc.com/2017/05/02/twitter-live- broadcast-content-spending-war.html. 121 Josh Constine, "Twitter partners with Live Nation to live stream video of concerts," TechCrunch, last modified May 1, 2017, accessed March 26, 2018, https://techcrunch.com/2017/05/01/twitter-stream-concerts/. 122 Kerry Flynn, "The future of Snapchat Discover looks a lot like TV," Mashable, last modified January 28, 2017, accessed March 24, 2018, https://mashable.com/2017/01/28/snapchat- discover-tv-shows 123 Todd Spangler, "Snapchat Brings Back Peter Hamby’s Politics Show to Try to Make Sense of Trump Presidency," Variety, last modified March 8, 2018, accessed March 26, 2018, http://variety.com/2017/digital/news/snapchat-trump-peter-hamby-show-good-luck-america- 1202003776/.

28 Martin and Medina argue that Facebook, Google, Amazon, and Apple are best positioned for success in TV because “they are much larger, have deeper pockets, are held to different valuation standards by Wall Street, have global distribution and revenue footprints, are dominant in mobile, and they are willing to subsidize losses.”124 In contrast, the authors are bearish about Netflix, which they write “doesn’t have the balance sheet to survive.”125 In contrast, Tarasoff and McCormack write in 2013 that

Amazon’s emphasis on long-term growth and investment, across the entire business, creates “value without earnings” and is acceptable within the bounds of traditional accounting.126

Tech valuation standards factor in, because, while the tech, media and telecom sectors are certainly converging, if not inseparable at this point, tech companies are often judged by different financial standards. Marc Goedhart, Tim Koller, and David Wessels write: “Although the components of high-tech valuation are the same, their order and emphasis differ from the traditional process for established companies: rather than starting with an analysis of the company’s past performance, begin instead by examining the expected long-term development of the company’s markets—and then work backward.”127

Martin and Medina choose not to lump Netflix in with Facebook, Google,

Amazon, and Apple, which they call internet aggregators, because the latter firms

124 Martin and Medina, The Future, 1. 125 Ibid, 2. 126 Josh Tarasoff and John McCormack, "How to Create Value Without Earnings: The Case of Amazon," Journal of Applied Corporate Finance 25, no. 3 (Summer 2013): 41. 127 Marc Goedhart, Tim Koller, and David Wessels, Valuation: Measuring and Managing the Value of Companies, 6th edition, 6th ed. (Hoboken, NJ: Wiley Finance, 2015), 692, accessed March 26, 2018, https://www.mckinsey.com/business-functions/strategy-and-corporate- finance/our-insights/valuing-high-tech-companies.

29 “organize long-tail assets,”128 meaning they sell “less [quantities] of more [products]” as

Chris Anderson puts it in his book The Long Tail.129 If this analysis holds up, the future of TV belongs to those who sell much more than TV programming.

The Role of Sports in the TV Industry

Perhaps more so than any other genre of programming, sports programming is integral to the business of modern television.

As time-shifting and binge-viewing have driven viewer consumption, there are very few programs that necessitate access to linear TV—meaning, there are fewer that need to be watched live. Jorge Abreu et al. write that sports—along with news—“requires an instant audience” because it loses “interest and relevance over time.130 News ceases to be news within hours, making the instantaneity a fundamental requirement of journalism.” Thus, it is no coincidence that ESPN, which features both live sports and sports news, has been a major part of the TV industry since its inception in the late 1970s.

While ESPN has seen a decline in profitability along with the decline in total cable subscriptions, it still holds significant leverage within in the Pay TV bundle.131 A recent PricewaterhouseCoopers survey found that “82% of traditional Pay TV subscribers

128 Martin and Medina, The Future, 2. 129 Chris Anderson, The Long Tail: Why the Future of Business is Selling Less of More, rev. ed. (New York, NY: Hachette Books, 2008), 1. 130 Jorge Abreu et al., "Survey of Catch-up TV and other time-shift services: a comprehensive analysis and taxonomy of linear and nonlinear television," Telecommunication Systems 64, no. 1 (January 2017): 69, accessed March 27, 2018, https://link.springer.com/content/pdf/10.1007%2Fs11235-016-0157-3.pdf. 131 Jay Lafayette, "Disney Earnings Drop as Profits at ESPN Plunge," Broadcasting & Cable, last modified August 8, 2017, accessed April 7, 2018, https://www.broadcastingcable.com/news/disney-earnings-drop-profits-espn-plunge-167777.

30 would trim or cut their subscription if they no longer needed it to access live sporting events.”132

ESPN’s success in Pay TV cannot be overstated, even with its recent decline in profitability. According to The Atlantic’s Derek Thompson in 2017, “Every month, 90 million households pay about $8 for ESPN’s channels, which gives the company about

$8 billion a year, and that doesn’t even include advertising revenues.”133 Simply put,

Thompson writes, “Nobody has more to gain from this arrangement than ESPN—which means nobody has more to lose.”

The topic of sports rights pricing in television has long been a point of contention among analysts, some of which have called TV sports a “bubble” over the years.134

Sports rights deals are pricey, but there are definite upsides in addition to sports being prime content for linear TV. On one hand sports serve as important lead-ins to other programming. On another, sports also capture male viewers, which most programming struggles to do.135 136According to the Financial Times, in 2015, “U.S. NFL games helped

132 PricewaterhouseCoopers, Consumer Intelligence Series: I stream, you stream, 5, December 2017, accessed March 27, 2018, https://www.pwc.com/us/en/advisory- services/publications/consumer-intelligence-series/i-stream-you-stream/pwc-videoquake-i- stream-you-stream.pdf. 133 Derek Thompson, "ESPN Is Not Doomed," The Atlantic, last modified May 1, 2017, accessed March 27, 2018, https://www.theatlantic.com/business/archive/2017/05/espn-layoffs- future/524922/. 134 Brian Stelter, "Rising TV Fees Mean All Viewers Pay to Keep Sports Fans Happy," The New York Times (New York, NY), January 25, 2013, new York edition, Media, A1, accessed April 8, 2018, https://www.nytimes.com/2013/01/26/business/media/all-viewers-pay-to-keep-tv-sports- fans-happy.html. 135 Charles Lane, "Advertisers Say The Influential Male Demographic Is Waning," National Public Radio, last modified February 3, 2018, accessed April 8, 2018, https://www.npr.org/2018/02/03/583037137/advertisers-say-the-influential-male-demographic-is- waning. 136 John Consoli, "Women Viewers Continue to Rule Broadcast Primetime," Broadcasting & Cable, last modified April 17, 2013, accessed April 8, 2018, https://www.broadcastingcable.com/news/women-viewers-continue-rule-broadcast-primetime- 114370.

31 CBS increase its advertising revenues by 4 percent in its most recent quarter. But the costs of the programming weighed on the company’s profitability, with operating income down one-third.”137

Sports media rights have continued to rise in the United States and analysts at

PricewaterhouseCoopers does not project a leveling off any time soon.138 And while these deals are as lengthy as they are expensive, there has been no shortening in length either. The sustainability of price and length in rights deals is best illustrated by the most recent scenario: Fox Broadcasting won the NFL rights in a five- year, $3.3 billion deal.139 If 21st Century Fox succeeds in selling its entertainment assets to Disney, news and sports will become the brand focus—so securing the NFL contract was a big step in that direction for Rupert Murdoch and his company. That being said,

RBC Capital Markets analyst Steven Cahall said “Fox is likely to lose about $360 million a year on the Thursday package.” The deal does, however, strengthen Fox’s leverage in negotiating carriage fees from MVPDs and Fox broadcast affiliates, Cahall noted.

While football is still the preferred sport of Americans—Pew Research center reports that it’s the favorite of 37 percent of the population—the NFL’s TV viewership fell noticeably during the 2017 season.140 “Quite simply, televised football has a

137 Henry Mance, Matthew Garrahan, and Roger Blitz, "TV sports rights: Show them the money," The Financial Times, last modified February 13, 2015, accessed March 29, 2018, https://www.ft.com/content/91570e92-b369-11e4-9449-00144feab7de. 138 PriceWaterhouseCoopers, At the gate and beyond, 3, December 2017, accessed March 29, 2018, https://www.pwc.com/us/en/industry/entertainment-media/publications/assets/pwc-sports- outlook-2017.pdf. 139 Joe Flint, "Fox Wins Rights to NFL Thursday Night Games in Five-Year Deal," The Wall Street Journal, last modified January 31, 2018, accessed March 29, 2018, https://www.wsj.com/articles/fox-wins-rights-to-nfl-thursday-night-games-in-five-year-deal- 1517414094. 140 Jim Norman, "Football Still Americans' Favorite Sport to Watch," Pew Research Center, last modified January 4, 2018, accessed March 31, 2018, http://news.gallup.com/poll/224864/football- americans-favorite-sport-watch.aspx.

32 television problem and a football problem,” writes Derek Thompson, citing declining Pay

TV subscriptions—the television problem—along with a dearth of star players and its most popular franchises faltering in performance.141 The NFL’s ratings decline, as the most popular sports league, along with similar trends for award shows like the

Grammy’s, indicate that linear TV’s flagship programs are not completely immune from shifts in consumer preference and behavior.142

In the world of streaming sports, a few forces are at play. First, TV Everywhere offerings boost the impact of Pay TV sports rights.143 ESPN, Fox or NBC, for instance, have more leverage if they can offer viewers live sports options even if they are away from their physical TV. That being said, TV Everywhere efforts are network-led but contingent on MVPD authentication—a complicated system that Waterman, Sherman and Ji argue that TV Everywhere services may indicate anticompetitive MVPD-led efforts to “leverage its offline market power into the online video market, either to preserve its offline power by preventing the online market from developing, or by attempting to monopolize the online video market.”144 The networks, as previously discussed, are starting to move beyond the

141 Derek Thompson, "Why NFL Ratings Are Plummeting: A Two-Part Theory," The Atlantic, last modified February 1, 2018, accessed March 31, 2018, https://www.theatlantic.com/business/archive/2018/02/super-bowl-nfl-ratings-decline/551861/. 142 John Koblin, "Ratings for Grammy Awards Drop 24 Percent," The New York Times (New York, NY), January 29, 2018, new York edition, Media, A17, accessed March 31, 2018, https://www.nytimes.com/2018/01/29/business/media/grammy-awards-ratings.html. 143 Karen Weaver, "Media Deals, College Football, and Governance: Who's in Charge?," Change: The Magazine of Higher Learning 43 (August 2, 2013): 16, accessed April 1, 2018, https://doi.org/10.1080/00091383.2013.806181. 144 David Waterman, Ryland Sherman, and Sung Wook Ji, "The Economics of Online Television: Revenue Models, Aggregation, and “TV Everywhere”" (working paper, August 27, 2012), 30, accessed April 1, 2018, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2032828.

33 control of MVPDs and launch direct-to-consumer OTT services (e.g. HBO Now,

Showtime). Some, like CBS All Access include, live sports.

In addition to the networks going over-the-top, sports leagues are also going over the top. has led by example in this space, not only through its direct-to-consumer out-of-market OTT service, called MLB.tv, but also through developing BAMTech, the underlying technology. As previously mentioned, BAMTech, in which Disney recently bought a majority stake, supports ESPN+ as well as the forthcoming “Disneyflix” service (what Derek Thompson calls the to-be-named entertainment).145 MLB.tv is in itself a power player in streaming, commanding the fourth-most subscribers of any OTT service behind Netflix, Amazon Prime and Hulu, and ahead of HBO Now, Starz and the rest of the field, according to Parks Associates in

November 2017.146 Other services, like NHL.tv and NBA League Pass also allow leagues to sell direct-to-consumer, a business model that has complemented, rather than replaced, traditional TV and digital rights distribution.

ESPN+ is significant because, while it offers ESPN programming, it does not feature programming available through the Pay TV channel. Recode’s Peter Kafka writes, “If you’re the kind of person who likes watching the stuff that ESPN is paying billions of dollars a year to show you — NFL games, NBA games, big-time college football and other top-tier sports — ESPN’s new service won’t give you what you

145 Derek Thompson, "Will Disney Destroy the Movie Theater?," The Atlantic, last modified May 2018, accessed April 13, 2018, https://www.theatlantic.com/magazine/archive/2018/05/disneyflix- netflix/556895/. 146 Parks Associates, "Parks Associates Announces 2017 Top 10 U.S. Subscription OTT Video Services," news release, November 9, 2017, accessed April 1, 2018, https://www.prnewswire.com/news-releases/parks-associates-announces-2017-top-10-us- subscription-ott-video-services-300552655.html.

34 want.”147 Whether or not the service streams only the least desirable programming ESPN has to offer, should still attract a substantial subscriber base and test the SVOD business model ahead of the “Disneyflix” launch.

Additionally, if Disney succeeds in buying 21st Century Fox’s entertainment assets, the deal will include Networks regional channels, which would bulk up

ESPN arsenal of sports rights. Additionally, ESPN+ serves as an OTT aggregator, through which viewers can purchase out-of-market streaming services like MLB.tv and

NHL.tv. Major League Soccer’s former streaming service, MLS Live, has also announced it is fully integrating into ESPN+ without an extra fee, suggesting that not all league-driven direct-to-consumer services are economically viable as standalone

148 products.

Although Netflix has largely avoided sports programming, other tech companies are actively bidding on live sports rights.149 Rose and Arthofer write, “The National

Football League has agreed to a $10 million (approximately) deal with Twitter that enables the social media site to live-stream 10 Thursday Night Football games.” While

$10 million is small relative to TV networks’ deals, this shows that ad-supported OTT services are hedging bets on live sports as well. Variety’s Todd Spangler writes, “Over the past two years, Amazon, Facebook, Twitter, YouTube, Verizon and Yahoo have picked up smaller sets of mostly nonexclusive rights to different packages of live pro

147 Peter Kafka, "ESPN’s new subscription app will cost $5 a month. It will not be a huge hit.," Recode, last modified February 6, 2018, accessed April 1, 2018, https://www.recode.net/2018/2/6/16982032/espn-plus-subscription-streaming-service-five-dollars. 148 ESPN Staff, "MLS to move its streaming service to ESPN+ this year," ESPN, last modified February 13, 2018, accessed April 1, 2018, http://www.espn.com/soccer/major-league- soccer/story/3382855/mls-to-move-its-streaming-service-to-espn+-this-year. 149 Dan Gartland, "ESPN Acquires Regional Sports Networks in Fox-Disney Deal," Sports Illustrated, last modified December 14, 2017, accessed April 1, 2018, https://www.si.com/tech- media/2017/12/14/espn-disney-fox-sports-regional-networks.

35 games, essentially rebroadcasting what’s seen on TV to a fraction of the audiences coming to linear channels.” Amazon and Facebook have been particularly interested recently, currently bidding on NFL’s “Thursday Night Football” and WWE’s

“Smackdown” and “Raw.”150 However, many of the larger sports rights contracts are a few years away. GBH Insights’ Daniel Ives writes, “In 2021, the year when the NFL,

MLB and NHL media rights deals mostly end, will be the first major opportunity for

Amazon, Facebook, and other major tech streaming platforms to potentially bid on some of these rights vs. the likes of traditional entrenched media/cable players.”151

In league with the decline of sports viewership on Pay TV, a large percentage of viewers have already adjusted to different platforms for watching sports. A white paper from Massive Interactive indicates that “OTT devices and platforms – Apple TV, Roku etc., now account for nearly 40% of live sports streaming. 48% of viewers now watch on

152 laptop/desktop.”

While sports television has not seen a massive shift in profitability or zero-sum migration of viewership, many analysts watch sports closely as a barometer for the entire

TV industry.

150 Todd Spangler, "Big Media, Silicon Valley Battle for Multibillion-Dollar Sports TV Rights," Variety, February 1, 2018, , accessed April 1, 2018, http://variety.com/2018/digital/features/olympics-rights-streaming--winter-games- 1202680323/.

151 Daniel Ives, Facebook and Amazon Could Be Disruptive Forces in the TV Sports Rights World for the Coming Years, 3, March 13, 2018, accessed April 1, 2018, http://gbhinsights.com/wp- content/uploads/2018/03/Facebook-and-Amazon-Could-be-Disruptive-Forces-in-the-TV-Sports- Rights-World-for-the-Coming-Years-GBH-03-18.pdf. 152 Massive Interactive, Staying in the Game: Designing sports OTT services, 7, September 2017, accessed April 1, 2018, https://massive.co/wp-content/uploads/2017/09/Sports_White- Paper_Massive_2017.pdf.

36

FINDINGS AND DISCUSSION

Overview

This section features responses from 10 qualitative interviews with experts currently working in or with the television industry. Six interviewees are primarily industry analysts or researchers, two are full-time journalists, and two are, or recently were, working directly in the TV industry. What follows is a synthesis of these conversations which complement and expound upon the previous literature review.

The section analyzes media industry consolidation, before discussing Netflix and the contemporary competitive landscape. Then, we look at the promise of skinny bundles, and discuss the importance of sports in driving industry movement. The final section looks at the long-term viability of the Pay TV bundle.

Discussing the TV industry is challenging, if not solely for the reason it is difficult to define the TV industry. For the purposes of this paper, the TV industry is comprised of those companies that produce TV-format programming or distribute such content. The same approach was taken in conducting the interviews.

The State of TV Industry Consolidation

While the media industry is in constant flux, the current M&A environment appears particularly frenzied. Netflix’s ascent has placed overwhelming pressure on networks and MVPDs, but no one force or company is driving all of the consolidation affecting the TV ecosystem. “There's no question that the consolidation that we see in the

37 industry is a reaction to Netflix and to other dynamics in the market,” says Will

Richmond, editor and publisher of the trade publication VideoNuze.153 Richmond adds that consolidation is perfectly natural in mature industries like Pay TV. However, industry analyst Charlene Weisler of Weisler Media is less sure that Netflix is driving consolidation.154 “In some respects, one could say consolidation has been happening for a while,” Weisler says. “And even though you may see consolidation, you may also see a lot of small upstart competitors cropping up. It's sort of an exciting time.” The largest companies in Silicon Valley, particularly Alphabet, Apple, Facebook and Amazon, have individual and collective roles in pressuring the traditional TV companies. While each company has unique TV ambitions, and is at a different stage in seeing them through (for example, Amazon is already an established SVOD presence), the collective force of tech sector is a frightening prospect for TV incumbents that have already experienced a significant degree of disruption in recent years.

At the time of study, M&A activity is particularly front-and-center in industry news both in trade press and mainstream news outlets. Many of the proposed mergers have major implications for the future of the TV industry. The next section dissects the current deals on the table, and provide insight as to what they mean for a TV industry that is both especially fragmented and rapidly consolidating.

Evaluating Current Media Mergers

Currently, the pending AT&T-Time Warner deal, valued at $108.7 billion, has held the highest public profile among media mergers, as the U.S. Department of Justice is

153 Will Richmond, telephone interview by the author, April 3, 2017. 154 Charlene Weisler, telephone interview by the author, March 22, 2018.

38 suing in the D.C. District Court to prevent the acquisition on antitrust grounds. Derek

Thompson, senior editor at The Atlantic, notes that the current DOJ under the Republican

Trump administration is breaking with precedent in a number of ways.155 Thompson says

“it’s extremely ironic that the Justice Department is essentially criticizing the vertical merger and seemingly allowing the horizontal merger between Fox and Disney.”

Historically, he adds, the DOJ has been more critical of horizontal integration because it is typically seen as more anticompetitive. “An outsider could definitely say, ‘the deal that involves Fox News you’re chill with, the deal with your enemy CNN you’re not chill with. That looks funny,’” Thompson says. Media and advertising industry analyst

Richard V. Ducey, managing partner at BIA/Kelsey and adjunct professor at George

Washington University, concurs.156 “This Time Warner-AT&T [acquisition] involves a provocative media brand and all of the sudden it's running into trouble. On the face of it is seems pretty much the same as earlier M&As that had no problem getting approved.

So, is there a political spirit involved here? You know, probably. Who knows?” As noted, the case is not being litigated on the political selective enforcement grounds, but nevertheless the ruling in the antitrust suit will have massive repercussions for an industry seeking to bulk up against deeper-pocketed tech companies. Internet and media analyst Laura Martin, managing director of Needham & Co., put it bluntly.157 “If the government doesn’t let the incumbents get bigger, they will die.”

Brad Adgate, an independent media consultant and Forbes contributor, emphasizes the similarities between the AT&T-Time Warner deal and the Comcast-

155 Derek Thompson, interview by the author, Washington, DC, February 23, 2018. 156 Richard V. Ducey, interview by the author, Washington, DC, February 7, 2018. 157 Laura Martin, telephone interview by the author, March 27, 2018.

39 NBCUniversal deal in 2011.158 “On the face of it, it’s the same type of deal,” Adgate says, noting that he believes this situation is a rare inconsistency for a Trump administration that will generally continue to approve most M&A activity.

As Thompson notes, Walt Disney’s proposed acquisition of 21st Century Fox, for

$52.4 billion in a stock deal, is a case of horizontal integration.159 Interviewees across the board agreed that this deal is much more significant than the vertical AT&T-Time

Warner deal. Matthew Ball, former head of strategy at Amazon Studios, says he has far more concerns about the Disney-Fox deal being anti-competitive than about the AT&T-

Time Warner deal.160 Under this arrangement, Ball says, Disney would control 35 to 40 percent of the box office, would have less of an incentive to work with third party distributors, and this could drive up pricing across Hollywood.

Media researcher and consultant Mike Bloxham, senior vice president of television and video at Frank N. Magid Associates, Inc., thinks Hulu is an important piece of the Disney-Fox transaction.161 For context, if the Disney-Fox deal is approved,

Disney becomes the majority stakeholder with 60 percent ownership of Hulu.162 Bloxham speculates that if both Disney-Fox and AT&T-Time Warner are approved, AT&T may look to sell off Time Warner’s 10 percent stake in Hulu—a chance for Disney to control

70 percent of the SVOD service. Hugh Panero, the former CEO of XM Radio and the current president of Yellow Brick Road Ventures, is unsure of Disney’s long-term

158 Brad Adgate, telephone interview by the author, February 13, 2018. 159 Thompson, interview by the author. 160 Matthew Ball, telephone interview by the author, March 20, 2018. 161 Mike Bloxham, telephone interview by the author, April 5, 2018. 162 Marcus Gilmer, "Disney's new weapon in the war on Netflix: Hulu," Mashable, last modified December 20, 2017, accessed April 11, 2018, https://mashable.com/2017/12/20/hulu-fox-disney- deal/.

40 strategy with Hulu, but notes Hulu’s potential as a powerful aggregator—alluding to

Hulu’s bundling abilities through its SVOD and vMVPD offerings.163

Richmond says that the Disney-Fox deal presents the “most formidable” combination of assets, while the AT&T-Time Warner deal is less compelling because, as he puts it, “AT&T is essentially doubling down on the multichannel bundle.”164

Ultimately, these two potential mergers are very consequential for the OTT landscape as well as the traditional TV industry.

Taking into account Richmond’s argument about the TV industry being mature and naturally inclined to consolidate, there is another argument for why smaller companies are looking for exits. “One way to buy yourself time instead of dying is to merge,” Martin says.165 Panero describes this in a slightly different way, calling corporate exits—like those currently sought by Scripps-Howard, 21st Century Fox, Tribune Media and Viacom—“defensive strategies” as opposed to the “offensive strategies” of their

166 potential buyers—Discovery, AT&T, Sinclair Broadcast Group and CBS, respectively.

Ducey rationalizes Sinclair’s acquisition of Tribune Media, for $3.9 billion plus debt assumption, arguing that the broadcast industry needs to “scale to survive.”167 Ducey notes that the increased penetration into U.S. homes, even after Sinclair is forced to sell off stations to comply with FCC regulations, will give the company a much more attractive proposition for national advertisers.

163 Hugh Panero, telephone interview by the author, January 25, 2018. 164 Richmond, telephone interview by the author. 165 Martin, telephone interview by the author. 166 Panero, telephone interview by the author. 167 Ducey, interview by the author.

41 If the Trump administrations keeps with conservative precedent, the DOJ and

Republican-controlled FCC will maintain a fairly lax regulatory environment for businesses across industries. In the media and tech space, Adgate notes that the administration has already rolled back rules ensuring net neutrality and seeks to approve every major media deal on the table—with the exception of AT&T-Time Warner, which appears politically motivated.168 While the Republican tax law allows the tech giants to avoid billions of dollars of taxes, some repatriated from overseas, there is also an increased public interest in regulating Silicon Valley, given data and privacy concerns stemming from Russia’s interference in the 2016 election.169 Additionally, in recent days,

Trump has taken aim at Amazon’s Jeff Bezos with talk of breaking up the company in one way or another.170 Experts interviewed agree that while the administration will maintain a conservative approach to regulating corporate America, the President’s personal vendettas may continue to guide departures from the norm.

Which Companies Will Lead?

The title of this paper, “Netflix vs. the World,” intentionally simplifies the complex contemporary TV industry. Still, with 188 million subscribers,171 $136.35 billion in market capitalization,172 and an $8 billion yearly investment in original

168 Adgate, telephone interview by the author. 169 The New York Times, "Mark Zuckerberg Testimony: Senators Question Facebook’s Commitment to Privacy," The New York Times, accessed April 11, 2018, https://www.nytimes.com/2018/04/10/us/politics/mark-zuckerberg-testimony.html. 170 Laura Stevens and Peter Nicholas, "Slammed by Trump, Amazon’s Jeff Bezos Chooses Silence," The Wall Street Journal, last modified April 9, 2018, accessed April 11, 2018, https://www.wsj.com/articles/slammed-by-trump-amazons-jeff-bezos-chooses-the-silent- treatment-1523282400. 171 Molla, "Netflix now has nearly," Recode. 172 Yahoo Finance, "Netflix, Inc. (NFLX)," Yahoo Finance, accessed April 13, 2018, https://finance.yahoo.com/quote/NFLX/.

42 programming—Netflix leads the pack of standalone SVOD services in disrupting the TV incumbency.173 “I don't think it's as narrow as everyone versus Netflix,” says

Richmond.174 I think it's everyone in the traditional TV industry versus all OTT providers—over-the-top providers.” Richmond adds that while Netflix is the most prominent OTT service, the traditional TV companies are also involved in OTT delivery too.

Weisler does not see Netflix, a subscription service, as directly competing with traditional TV companies that operate on ad-supported business models.175 Rather, she sees Netflix leading an industry-wide “land rush” for quality content. Richmond also sees this phenomenon, arguing, “Netflix has really been able to distinguish itself by allowing these billions and billions of dollars into creating high-quality originals and that's increasingly becoming table space in the industry.”176 Some cable channels have

“basically bailed out” of creating original series, he adds, because recently it has become too expensive to compete. Panero asserts that this is a main motivator behind Fox abandoning its original entertainment properties by selling to Disney. “You look at what

Rupert Murdoch did and he basically just said, ‘I can't compete in a way that's going to appreciate my stock the way I want so I think it's better for me to sell out to Disney right now when my assets are the most valuable.’”177

“Netflix and Disney are going to be the two behemoths,” Thompson says. He predicts that every major media company—including Verizon with its Oath properties,

173 Statt, "Netflix plans," The Verge. 174 Richmond, telephone interview by the author. 175 Weisler, telephone interview by the author. 176 Richmond, telephone interview by the author. 177 Panero, telephone interview by the author.

43 Comcast NBCUniversal, and AT&T if it acquires Time Warner—will try to “Netflix itself.” “I think if Disneyflix succeeded, they’re all going to try and do it,” he says, referring to Disney’s forthcoming SVOD entertainment service.178

Direct-to-consumer streaming services, like CBS All Access and Starz, have gained moderate traction, but the Ball says it is important to understand that these services do not all need to operate to the same scale as the largest SVOD services like

Netflix.179 “Look, CBS All-Access has said that it wants 5-to-10 million subscribers. If they achieve that, that’s probably a pretty good business. 10 bucks a month, times 10 million people, paying 12 times a year, that’s getting you a billion dollars.” That being said, Ball says these services, given this subscriber range, will not have an enormous effect on industry movement in any way.

Panero does not think direct-to-consumer offerings are viable solutions in the long term.180 “I think those companies, if they’re niche services, are just going to die because I don’t think they are going to get the kind of demand for their services to survive,” he said. Weisler, too, doubts that there will be much sustainable consumer interest.181 “I just can't imagine that consumers will want to pay subscription fees for a handful of services,” she says. “It just seems very fragmented and for the consumer maybe not as cost- efficient.” Bloxham thinks that while the fragmented OTT landscape is ripe to be re- intermediated by a bundler, for example a voice-activated service like Amazon Echo or a

178 Thompson, interview by the author. 179 Ball, telephone interview by the author. 180 Panero, telephone interview by the author. 181 Weisler, telephone interview by the author.

44 Smart TV, these initial services are a way for networks to establish a direct relationship with the consumer, often for the first time.182

Bloxham doubts that consumers will want to subscribe to more than a few OTT services.183 He notes that consumers are often coupling their Pay TV subscriptions with

OTT services, and automatically paying more for TV whether they realize it or not. Even with cord-cutting or cord-trimming, Panero says, purchasing broadband in addition to numerous OTT subscriptions can quickly add up.184 “You're going to start looking at a potential entertainment bill is like paying for a mortgage if you're too aggressive about it,” he says.

Amazon Prime Video has inadvertently become a first or second OTT service for many consumers, as the SVOD is not sold as a standalone product, rather one bundled with Amazon Prime, Amazon’s retail delivery service. “You don't really feel you're paying for [Prime Video] if you're a Prime member, which of course you have to be,”

Bloxham says. “But, a lot of us were already Prime members and it just kind of came along for free.”185 As noted, Amazon’s ultimate success is not directly contingent on the success of its TV offerings, which serve as a loss leader and product sweetener for its entire Prime service. This phenomenon, that the TV industry leaders of the future may be tech companies who do not necessarily rely on TV for their bottom line, factors into the overall threat posed by Facebook, Apple, Alphabet and Amazon. Bloxham says that the networks and MVPDs cannot really compete with the tech giants directly, and if they

182 Bloxham, telephone interview by the author. 183 Ibid. 184 Panero, telephone interview by the author. 185 Bloxham, telephone interview by the author.

45 wanted to they would need to find new ways to make money.186 “You've then got to suddenly become a different kind of business where suddenly you don't rely on advertising, subscriptions, and content licensing to make your money... And to make that switch is a colossal challenge. I think that's part of the reason we're gonna see more and more M&A roadkill in the TV space going forward.”

While FAANG—Facebook, Apple, Amazon, Netflix, Google—is a somewhat popular industry acronym, the experts interviewed generally kept Netflix in a category of its own because it sells a subscription video product, albeit an inexpensive one, as its source of revenue, not as a loss leader for another part of its business.

The Skinny on Skinny Bundles

Experts interviewed are resoundingly unsure about the role of skinny bundles, or vMVPDs, which generally scale back the linear Pay TV bundle for online viewing.

Richmond, who thinks vMVPDs are still “early adopter products,” says he has long been skeptical about vMVPDs for three reasons: 1.) they often lack broadcast channel offerings, 2.) what he calls the swiss cheese effect, where a given family has divergent interests and any bundle without an individual’s favorite channel will be a hard sell for the family, and 3.) younger people generally watch less linear TV.187 However, he has recently become more optimistic because two services, YouTube TV and DirecTV Now, have addressed the broadcast problem to some extent and he notes a decline in consumer loyalty to legacy TV networks. Kerry Oslund, vice president of strategy and business

186 Ibid. 187 Richmond, telephone interview by the author.

46 development at Tribune Broadcasting, is bullish on skinny bundles.188 Oslund says that while there are not many opportunities for local broadcast TV with SVOD services like

Netflix, there are a lot of opportunities with vMVPDs like YouTube TV. That being said,

Oslund says vMVPDs have an incomplete model, but “dynamic ad replacement and insertion”—meaning differentiation from linear TV advertisements—could create something much more sustainable for the supplier and distributor alike.

Adgate sees skinny bundles as “loss leaders for big companies,” pointing out that most are owned by large media conglomerates like Dish Network (Sling TV), AT&T

(DirecTV Now), and Alphabet (YouTube TV). “The industry itself is very ambivalent about skinny bundles and frankly, as with most things in the cable industry, they'll fully adopt it as and when they feel they have no alternative,” Bloxham says.

How Live Sports Can Drive TV Down the Field

Live sports factor into our discussion for three reasons: 1.) they are one viewed via linear TV, 2.) they are extremely popular, and 3.) they are extraordinarily expensive to air.

While she does not believe that sports networks, namely ESPN, are keeping the

Pay TV bundle in tact, as somewhat of a keystone, Martin says that sports matter because everyone watches them—even if they only watch the biggest games of the year like the

Super Bowl.189 Martin says it is important to think broadly about the cost of sports rights, as many sports rights deals are money losers at face value. However, sports cross-

188 Kerry Oslund, telephone interview by the author, March 21, 2018. 189 Martin, telephone interview by the author.

47 promote and lead into other network content, and deliver hard-to-reach male viewers to national advertisers.

Richmond and Adgate articulated a commonly held view that sports rights will stay high due to increased interest from the tech giants.190191 Facebook, YouTube,

Amazon and Twitter have already dipped into limited contracts of sports rights across various leagues. Along with Apple, these tech companies may be serious contenders rivaling broadcast and cable sports networks when the leagues renegotiate their seasons- long rights deals in the coming years. Thompson acknowledges the possibility, but doubts this will actually occur.192 He says this will have some effect on the leagues themselves.

“Sports will still be fine, it’s just that they’ll be less rich than they were when you had literally every house in America paying a sports tax, a sports television tax,” he says, referring to the period before OTT disruption and cord-cutting started to eat into the Pay

TV model. Curiously, Netflix has stayed far away from live sports, a system that Panero says would create even another “math problem” for a company that already struggles to balance its books with astronomical investments in original programming.193

The sports leagues, which have done very well under the existing Pay TV structure, have diversified revenue, though. Many have gone direct-to-consumer themselves, as discussed, through OTT like MLB.tv. Richmond says the direct-to- consumer services are an “augment,” but linear TV rights are the “main locomotive,”

190 Richmond, telephone interview by the author. 191 Adgate, telephone interview by the author. 192 Thompson, interview by the author. 193 Panero, telephone interview by the author.

48 whether selling to ESPN, Turner, Amazon or Facebook.194

The Pay TV Bundle—How Long Can It Last?

With steady cord-cutting, declines in viewership, and over-the-top corporate movement, the experts, throughout the better part of the last decade, have been quick to write the Pay TV bundle’s obituary. But, the system was so widespread at its height, it touched almost every American. “I think it’s important to remember, [the Pay TV bundle was] probably the most successful entertainment business in the history of the world,”

Thompson says.195 “At one point, you had 90 percent of all adult households paying $100 a month, $30-to-35 of which was going to entertainment companies [like ESPN] in the way of affiliate fees.” Thompson’s view is unique, claiming that since the Pay TV bundle was so prevalent its fees functioned as the equivalent of a private tax system for entertainment services. That being said, consumer behavior has frayed the edges of this very sophisticated system. “I don't think there's ever been a point in time when consumers had more power,” Weisler says.196

Ball does not see the Pay TV bundle going anywhere in the immediate future, but

“unless [declining] trends reverse, it’s impossible not to believe that the industry is going to fall over a cliff.”197 “If you take the next five years and triple the rate of decline, or quadruple or quintuple, you still end up with anywhere from 55 to 65 if not 75 million households,” he says. “Every year gets predictable worse than the year that preceded it,

194 Richmond, telephone interview by the author. 195 Thompson, interview by the author. 196 Weisler, telephone interview by the author. 197 Ball, telephone interview by the author.

49 and whereas a lot of media personnel used to say ‘well, it’s going to level off, it can’t go on like this forever,’ it has.”

Richmond agrees that Pay TV subscriptions will continue to decline, but says nothing dramatic will happen anytime soon.198 “I don't think the industry is going to go off a cliff, but I do think it's kind of a melting iceberg and the melting process is almost certainly going to accelerate,” Richmond says. “Where the bottom is, or where things sort of level out is anybody's best guess.”

Thompson says that journalists, including himself, are prone to exaggerate the death of the Pay TV bundle.199 “We mistake the rate of decline for the size of the business and we tend to say that anything is dead once it enters a period of structural decline,” Thompson says. “I’m pretty circumspective about both of these things being true at the same time. You can have really dramatic declines, and [still have] a really strong business.”

“If you want to talk like 50 years from now, the industry is probably a fraction of its size,” Richmond adds.200 “But, if you want to talk five years from now, I think there's still gonna be probably 80 million subscribers or more subscribing to traditional multichannel bundles.”

OPPORTUNITIES FOR FURTHER RESEARCH

This capstone takes a broad-based view across the TV landscape. It is designed to survey a dynamic space that transcends sectors, alludes to complex economic systems,

198 Richmond, telephone interview by the author. 199 Thompson, interview by the author. 200 Richmond, telephone interview by the author.

50 responds to rapidly adjusting consumer preferences, and concerns a long-standing history of government regulation and public interest. There are innumerable opportunities for further research—in this style, but more so in diving deep into the individual areas surveyed. As the industry continues to change, there is a need for qualitative studies like this one, taking the temperature of those thinking about and working in the TV industry.

As the highly regulated broadcast industry, the less regulated Pay TV space, and the historically unregulated tech sector converge, research into these conflicting approaches would be helpful. Additionally, as the wireless sector continues to grab spectrum space from broadcast stations, the entire media ecosystem is adapting.

Additionally, there is a tangential conversation about the state of digital and television advertising, or addressable advertising, concerning user privacy.201 202 While this research does not dive into it, many traditional TV players and advertising-based

OTT services want a deregulated environment in order to improve the efficacy of the ads they delivery.

Lastly, as this paper is not written through a purely economic lens, strong research is needed modeling the organizational and consumer dynamics discussed.

The ability to evaluate hyperdynamic industries is tenuous, but the attempt is typically worthwhile. Time will tell if the TV industry can once again find stable footing, but, in this moment, one thing is certain: the consumer has access to more TV

201 Lucinda Southern, "The state of addressable TV in 4 charts," Digiday, last modified June 23, 2017, accessed April 14, 2018, https://digiday.com/uk/state-addressable-tv-4-charts/. 202 Daniel Frankel, "Comcast, and AT&T violating privacy through addressable advertising, groups say," FierceCable, last modified June 9, 2016, accessed April 14, 2018, https://www.fiercecable.com/cable/comcast-cablevision-and-at-t-violating-privacy-through- addressable-advertising-groups-say.

51 programming than ever before. For many consumers, perhaps the biggest problem is that they cannot view it all.

CONCLUSION

The TV industry is a significant part of America’s communications infrastructure, as a mode of transmitting entertainment and information programming to most of the country. While that reality has not changed, the mechanisms for doing so have changed.

More than ever, consumers are guiding the TV industry of the future with their clicks and subscription dollars. Industry progress has brought more interactivity, not just in how consumers watch TV but also in how they pay for it, with companies responding to adapting consumer preference. Many viewers are no longer willing to, or have no reason to, watch linear TV. The industry is in flux. The U.S. Government is grappling with how to regulate, or deregulate it, commensurate with contemporary industry needs and with the public interest.

As the TV industry reinvents itself, existing systems will continue to be tested, some will fail, and new norms of viewership, production and distribution will prevail.

The industry, which may be momentarily characterized as “Netflix vs. The World,” is malleable, if not fragile, and more likely than not, it is temporary. While the TV business is fragmented and uncertain, viewers may be experiencing a TV renaissance, with more high-quality programs at their fingertips than ever before. While supply channels, business models, and production methods may change, demand for affordable, high- quality TV is perhaps the one constant in an otherwise mercurial industry

52 APPENDIX A: INTERVIEW PROTOCOL

1. So, I'd like to hear about your career. How you got to where you are today and

what changes have you seen in the industry over time?

2. Is the TV landscape "Everyone vs. Netflix right now?"

3. I've read that Netflix's success is accelerating M&A activity among traditional TV

players. Is that what you're seeing?

4. What do you think government regulation of these deals will look like moving

forward?

5. What companies do you think are the best positioned for success in the 21st

century? Why? What companies are the most innovative?

6. Cable has been declining for a long time now. Will it level off or die out

completely? If it is part of the new television industry, what is the long-term

viability of the cable bundle? Will it look more like the skinny bundle model?

7. How much do you think consumer preference will drive the industry?

53 8. Do you think there is a limit to the number of streaming services that can be

economically viable? How much will people pay for TV content across

platforms?

9. Netflix is investing $8 billion in original programming this year. Have you seen

an increased demand for TV content across the industry and, if so, what effects

will that have on the entertainment industry?

10. What's the role of sports in all of this?

11. Can you suggest anyone else I should talk to?

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