International In-house Counsel Journal Vol. 11, No. 41, Autumn 2017, 1 The Future is Cordless: How the Cordless Future will Impact Traditional Television SABRINA JO LEWIS Director of Business Affairs, Paramount Television, USA Introduction A cord-cutter is a person who cancels a paid television subscription or landline phone connection for an alternative Internet-based or wireless service. Cord-cutting is the result of competitive new media platforms such as Netflix, Amazon, Hulu, iTunes and YouTube. As new media platforms continue to expand and dominate the industry, more consumers are prepared to cut cords to save money. Online television platforms offer consumers customized content with no annual contract for a fraction of the price. As a result, since 2012, nearly 8 million United States households have cut cords, according to Wall Street research firm MoffettNathanson.1 One out of seven Americans has cut the cord.2 Nielsen started counting internet-based cable-like service subscribers at the start of 2017 and their data shows that such services have at least 1.3 million customers and are still growing.3 The three most popular subscription video-on-demand (“SVOD”) providers are Netflix, Amazon Prime and HULU Plus. According to Entertainment Merchants Association’s annual industry report, 72% of households with broadband subscribe to an SVOD service.4 During a recent interview on CNBC, Corey Barrett, a senior media analyst at M Science, explained that Hulu, not Netflix, appears to be driving the recent increase in cord-cutting, meaning cord-cutting was most pronounced among Hulu subscribers.5 Some consumers may decide not to cut cords because of sports programming or the inability to watch live programing on new media platforms. There will always be consumers who are too accustomed to traditional television to cut cords. However, many consumers are moving towards the cordless future, and some consider this trend to be a generational shift.6 This research takes a deeper look into the trend of cord-cutting and the way in which digital media platforms are paving the way for the future of content and impacting the practices of, and contractual relationships between, consumers, television studios, networks and distributors across the United States. Ultimately, these evolving practices 1 Shalini Ramachandran, As Cord-Cutting Intensifies, Media Companies Scramble Toward Online Streaming Bundles, MARKETWATCH (May 5, 2017), http://marketwatch.com/story/as-cord-cutting-intensifies-media- companies-scramble-toward-online-streaming-bundles-2017-05-15. 2 Makeda Easter, Cutting The Cord Doesn’t Necessarily Mean Cutting The Cost, LOS ANGELES TIMES (May 20, 2017), http://www.latimes.com/business/la-fi-tn-cord-cutting-20170520-htmlstory.html. 3 Id. 4 2017 Annual Industry Report, ENTERTAINMENT MERCHANTS ASSOCIATION, http://www.entmerch.org/industry/annual-industry-report/ (last visited July 31, 2017). 5 David Gernon, Cord Cutting is Accelerating Thanks to Hulu, Not Netflix, Analyst Says, CNBC (June 23, 2017) http://www.cnbc.com/2017/06/23/cord-cutting-is-accelerating-thanks-to-hulu-not-netflix-analyst-says.html. 6 Id. International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online 2 Sabrina Jo Lewis will change the contractual aspects of the television industry. We are already seeing changes in the way license agreements are negotiated between studios and networks/exhibitors. Similarly, guild agreements have already been ratified to include higher residual fees for SVOD programming. As for the potential impact on consumers, cable providers are reconsidering the contracts that they offer consumers, which means we may eventually see a decrease in fees and an increase in package options. Consumers According to a poll conducted by The New York Times and CBS News, consumers under the age of 45 are four times more likely to use digital services.7 This generational shift means that younger viewers are not subscribing like their parents did.8 Furthermore, consumers now have more of a reason to be skeptical of cable and satellite television providers because of recent findings by United States Senator Claire McCaskill during a bipartisan investigation in 2016.9 Senator McCaskill exposed the practices of several providers including Comcast, Time Warner Cable, Charter, DirectTV and Dish in a hearing before Congress on June 23, 2016. The Senator found that providers charged various fees that were not overtly laid out in ad pricing and they made it difficult for consumers to get out of their contracts and cancel services.10 Two of the companies overcharged customers by millions on a nationwide level and the companies had no way of tracking or refunding overpayments. The findings of this particular bipartisan investigation gives consumers yet another reason to cut cords. Studios, Networks/Exhibitors and Distributors Television studios, networks/exhibitors and distributors all face challenges as their business models are disrupted by the cordless future. As new media continues to conquer, we may see changes in customary business models including revenue reporting, piracy protection and content distribution avenues. TBS and ESPN, amongst many other networks, have taken a hit losing millions of subscribers and resulting in a decrease in subscriber fees that distributors pay these networks for programming, resulting in loss for TV networks.11 For example, ESPN sports network reportedly collects US$7.21 per month from distributors for each subscriber, so the loss of subscribers who have cut the cord has resulted in a loss for the network.12 As primetime and cable networks face their own challenges, some are now offering their own streaming services like CBS All Access and HBONow that are available on laptops, tablets and cell phones to keep up with the trend of binge-streaming. As SVOD “generates massive buzz by delivering seasons of shows in toto,” networks are accepting the challenge by giving viewers the opportunity to binge their favorite cable show.13 For example, the TBS comedy series entitled “Angie Tribeca” was available to stream on- 7 Cord-cutting, WIKIPEDIA, https://en.wikipedia.org/wiki/Cord-cutting (last visited July 20, 2017). 8 Gerry Smith and Christopher Palmeri, Cord-Cutting Isn’t All Bad News for Cable-TV Networks, BLOOMBERG (June 15, 2017), https://www.bloomberg.com/news/articles/2017-06-15/cable-tv-networks-see-a-ray-of- hope-amid-the-cord-cutting-clouds. 9 Cable & Satellite TV Providers – McCaskill Pulls Back Curtain on Companies’ Internal Workings, HOMELAND SECURITY & GOVERNMENTAL AFFAIRS COMMITTEE (June 23, 2016), https://www.hsgac.senate.gov/subcommittees/investigations/media/cable-and-satellite-tv-providersmccaskill- pulls-back-curtain-on-companies-internal-workings (last visited July 31, 2017). 10 Id. 11 Smith and Palmeri, supra note 7. 12 Erik Gruenwedel, Online TV: The Future Has Arrived – And It May Be Less Profitable, HOME MEDIA MAGAZINE (May 29, 2017), http://www.homemediamagazine.com/streaming/online-tv-future-has-arrvied- and-it-may-be-less-profitable. 13 Daniel Halloway, Networks Challenge Netflix With New Binge-Streaming Strategy, VARIETY (March 30, 2016), http://variety.com/2016/tv/news/networks-new-binge-streaming-strategy-1201740379/. Contractual Relationships 3 demand or online when it premiered in January of 2016 and at the same time it aired as part of a 25-hour marathon on TBS network.14 And then we see networks like Showtime entering into deals with Amazon and Hulu so that customers are able to subscribe to the network without a cable subscription. Starz has a similar deal with Amazon Prime.15 Clearly, this trend is only the start of contractual network changes to come. In the past, companies like Comcast, Spectrum (also known as Charter Communications) and Time Warner Cable have had exclusive rights built into their license agreements to offer premium channels such as A&E, AMC and History Channel. Today, consumers do not need cable subscriptions to access these premium channels. To make it easier for consumers to access these premium channels, many distributors are offering “skinny bundles” such as Sling TV, DirectTV Now, YouTube TV and Sony’s Playstation Vue which are priced as low as US$20 per month making these options more appealing to consumers. Nielsen data supports the position of cable networks like ESPN that services such as Sling TV, PlaystationVue and the like will help make up for some of the loss of cable customers because viewers can subscribe to their favorite cable network by purchasing a skinny bundle through a service like Sling TV without having to pay for a full bundle package through a cable company.16 However, media analyst Michael Pachter of Wedbush Securities has said that allowing consumers to customize content will negatively impact the revenue stream from traditional channel bundles.17 According to the American Bar Association, as SVOD distributors like Netflix and Amazon continue to cover new territories, foreign television distribution deals may be affected. The exclusivity of their distribution rights may be at risk if the increase in international SVOD affects the presales value a foreign territorial distributor might place on independent films.18 Contractually, this means the legal structure of television deals is changing. In the past, studios retained rights to sell foreign. Now, in many cases, all rights go to the SVOD platform and the studio does not retain domestic or foreign rights. Revenues The SVOD trend may result in a decline in revenue for DVDs and Blu-ray sales. According to recent data released by Digital Entertainment Group, subscription streaming spending was up 22.6% in 2016. DVDs and the like saw a decrease in sales of 9.5% in 2016.19 As consumers continue to cut cords and companies like Netflix dominate the new media market, the way in which television studios and distributors report their revenues may differ depending on whether SVOD revenue is classified as television or home video.