While we have made it clear over the past few weeks that we believe that 2015 is the year when the war for paid OTT services will begin in earnest, it is important to look at the early battles in that war and this week various shots were fired.
The deal between HBO and Apple last week is seen as by far the most important leg up for HBO Now, and another parallel deal which came out this week with Cablevision promises almost as much.
But the fact that Apple is once again trying to close out a service launch for later this year, built on the back of its exclusive with HBO Now, is perhaps the boldest addition of the week. A fall launch of a $30 to $40 package of around 25 channels is expected from Apple, a deal that is at least 6 years in the making.
Apple will perhaps drag tens of millions of iPhone and Tablet customers to take a look at the HBO Now offer and could follow that up with pushing them towards its own service. Similarly Cablevision can offer a regionally concentrated 2.76 million broadband homes through direct CRM communications, which could translate to a reach of 3 or 4 times that number, perhaps 10 million individuals – anyone using the Optimum broadband service, most of which is in the New York area.
But also Cablevision becomes the first US cable operator to “forgive” HBO the act of taking a premium channel that provides it with a nice chunk of its existing revenue, and shifting its delivery model to Over The Top. If one US cable company can consider co-marketing it, every other cable company MUST at least take a look at it.
Right now all of those Cablevision customers will also have to be or become Apple customers, because HBO Now is an exclusive on Apple, and we understand this is for 3 months. Gradually we would expect this to become available on other net tops such as Roku, Android phones and tablets, hybrid set tops like TiVo, smart TVs and games consoles like Sony Playstation and Microsoft Xbox. If it turns out that Apple insisted on exclusivity in order to allow HBO onto its platform, then that could become an expensive anti-trust mistake by Apple.
But the initial influx of orders anticipated around the next season of the Game of Thrones will all go to Apple customers and it is sure to create a surge in Apple TV owners in the short term, which can be followed up with an Apple service launch to sustain the momentum.
This idea is still at the rumor stage, but the strong rumor stage this time and Apple after 6 or 7 years of rumor is now finally set to launch its own TV service, with viewing on all of the screens it produces. But as we said, there is the potential for an anti-trust issue here – for the dominant music player and the dominant smart phone supplier, who is also dominant in tablets – offering content which once again is tied to only these devices. Surely if Apple was to launch a TV service which worked on every device, in the way Netflix has managed, it would be just as successful? Yes it would, but Apple doesn’t want only the profits from the content, understood to be relatively minimal at cable TV companies. No, it wants to use this to continue to differentiate its physical hardware products, so that the margins on these – iPhones and iPads – continues to be as close as it can get it to 40% or more.
As such, this should be an illegal tie-in under anti-trust, so it will be interesting to see how Apple approaches this market. Our guess is that it will feel that it has every right to tie its products to its content service, and just go ahead. It could argue that it did just this when it launched iTunes, so what’s the problem? The problem is that then Apple had no dominance in products, not even in MP3 players, and it now has control of multiple categories both in the US and globally. And secondly it had 0% of the music market when it started, and now it has around 70% (and falling due to streaming subscriptions).
Using one monopoly to guarantee another is legally frowned upon – what if Comcast said you can only use its broadband lines to view its content? Oh yes, it does. And we have seen how upset US consumers have got over that issue.
We have to understand that this is a case of Apple being pushed into moving into the OTT business in a manner and at a time which are not of its own choosing. We covered the detailed discussions that went on between Steve Jobs and studios and broadcasters while he was still alive, which did not result in a rival product to cable. We also covered Tim Cook the current CEO revisiting these talks not once, but twice since Jobs’ departure. And still no service.
What has happened here is that the market has shifted and it has shifted over quite a long time. Content owners, especially the free to air broadcast networks, but subsequently the premium cable networks like HBO – have taken about 5 years to negotiate themselves into a position where they have separated out internet rights – both allowing them to be used for TV Everywhere services offered by pay TV, but also for re-distribution as individual series by companies like Netflix and Amazon. And having completed that effort, some of them now want to go direct to consumer as well, something of an unchartered move, but one which these rights negotiations have made possible. Apple can now sign up as part of their distribution.
When Apple first tried to negotiate a position as a cable TV rival, it will have asked for the world, because that’s in its DNA. It would want exclusivity, it would want co-marketing guarantees, it would insist on most favored nation clauses and preferably say that the content partner could not sign up with anyone else, at least for a while.
It is those types of terms, terms which are designed to make Apple very rich and which will allow content owners little control over their business, which have now upset Comcast. We saw this way back at the beginning of the Apple experiment into smartphones, when the terms it asked for made Verizon shake its head and show Apple the door. Had AT&T done the same thing, the world would have been denied the delights of the Apple iPhone.
But repeating that act is far harder. In the same way that Microsoft was never allowed to make inroads into the phone market, because it was deemed to be too powerful within PCs, looking at how reliant the music industry is on Apple, has made content owners and pay TV services more circumspect.
HBO and Apple can reach agreement because they are both giants, which are viewed/used in over 100 million homes. They can cut a deal without one trying to ruin the other’s chances – except HBO is on the back foot because of this 3 months exclusive. HBO could have gone to market OTT at any time, because it has always been perceived as a premium channel, where consumers have to elect to pay more to receive it – the clue is in its name – Home Box Office. But HBO felt that it had the edge over players like Netflix because its future was ensured by its distribution partners future – pay TV operators. Now it looks like going over the top is creating a serious rival to its business and any projection of revenues for HBO and for Netflix would end up with Netflix on top, hence a change in the mood and the approach of HBO.
But while we feel HBO doesn’t need Apple as much as Apple needs HBO Now, the Cablevision deal offers far more strength to the HBO position. Cablevision is seen as clearly losing the war against Verizon where the two footprints overlap. Its latest quarterly figures show that it has virtually no growth (outside of cellular neither does Verizon). Its only answer is to make every bet depend on having good WiFi, becasuse Cablevision has great WiFi and Verizon has average WiFi at best, and not much of it at that. Cablevision has two things going for it. A) 1.1 million hotspots of its own 2) It is not yet a partner with Cable WiFi, but we would expect that the Cable WiFi Alliance would welcome it with open arms so customers could get WiFi when out of the cablevision footprint.
If that was our platform – better WiFi – we would pick OTT video to be our service deliverable and would have been first in line to ask HBO if they wanted a distribution partner, which as it turns out is what has happened.
But in the same way that the situation has soured between Apple and Comcast, once thought to be negotiating to use the Apple TV as a set top, they will have also soured between Comcast and HBO. This is because of the “Not Invented Here” syndrome that Comcast is famous for. It wants control, as much over technology choices, as its wants over content deliverables. It would like HBO content over Xfinity, and it has that, and it happy with it. It can control the way the content is viewed, the OTT nature of the experience is buried behind the Quality of Experience of using its own X1 hardware and its own network.
We expect Comcast to be the very last cable operator to sell HBO Now, but other smaller players will want to secure a long term partnership with HBO over OTT right now and more deals will emerge over the coming weeks. Where a US cable operator has agreed to take Netflix, why would they not also take HBO Now. Unfortunately outside the US, the rights issues around Game of Thrones will have HBO tied in knots, and mostly fixed to the TV, except in countries where it has already launched HBO Go such as in Central Europe.
If Comcast is the last to cut a deal, it could leave the dominant cable operator isolated and in some trouble. If it takes this view over all OTT services which come straight from content owners, it will end up with its $135 a month ARPU from big content bundles, while many homes will experience the benefits of two or three $15 content bundles they are far happier with – and so Comcast will miss out in the early days of the OTT revolution.
Meanwhile the new Game of Thrones season will act as a pull toward Cablevision’s Optimum WiFi service, which may bring back growth to Cablevision in a single step.
Kristin Dolan, Cablevision chief operating officer said: “As New York’s premier connectivity company, we are enabling Optimum Online customers to enjoy content in any way they choose to receive it. We are well-positioned to support HBO NOW and, as technology advances, Cablevision will continue to meet the evolving needs of our customers.”
If Apple has indeed returned to the negotiating table for an Apple branded TV service, as the Wall Street Journal and other papers tell us, it will be unlikely to include NBC Universal’s channels for all the same reasons we discussed above in conjunction with Comcast.
At last week’s Apple Watch event, the price for the Apple TV was dropped to $69, closer to the price points of the Roku and Chromecast devices.
As each of these independent OTT offering launch, Netflix service differentiation is likely to weaken. At least that’s what US financial analysts believe, and they have been driving down Netflix shares this week as a result, knocking 3% off its value in just one day, but it is still valued at over $25 billion.
Finally DirecTV now says it offers 90 out-of-home streaming channels (and 120 in-home) through its DirecTV Everywhere service, and has added some 22 new channels from Viacom, Turner, Univision and others. DirecTV Everywhere says it has seen a 40% rise in individuals who stream and a doubling of the total number of streams. It also offers 19,000 on demand assets.