Obsessed with Netflix (2): cable’s war on Internet innovation

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“It is absurd to suggest that, in today’s highly competitive video marketplace, obtaining some level of exclusivity is anticompetitive.” –Time Warner’s response to recent charges of anticompetitive behavior

“They are not paying for exclusivity. They are saying you can sell to X, to Y and Z, but you are forbidden from selling to this new class, called A.” –Richard Greenfield, market analyst, BTIG Research

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In my previous post, from way back on June 8, I tried to explain some features of the Netflix value proposition, along with the battle that’s developed between Netflix and our conglomerates. That battle revolves around two topical points of contention: the Bell-Astral baloney about needing ever more concentration to fight off the American demons; and the outrageous use of data caps by the conglomerates to protect their legacy video businesses. I then said:

In Part 2, I’m going to add a few more comments about why the Netflix value proposition isn’t just about content, and challenge the idea that it’s going to need ”a lot of exclusive shows” (Pete Nowak’s take).

So here goes.

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Nope, content isn’t always king I hear people say they’re not interested in subscribing to Netflix because much of its library consists of old movies and TV shows. But Netflix isn’t a poor man’s version of cable. If it were, we wouldn’t be having this conversation. “Old” content does not necessarily make an OTT streaming service any less original or innovative. What counts isn’t just the content you get; it’s also the relationship Netflix has nurtured with its subscribers, a relationship based on interactivity, the hallmark of digital media. This is a new value proposition, one the cablecos are going to have a tough time replicating as they strive to compete.

Netflix delivers what our TV industry has been bullshitting us about for years: passing meaningful control to the viewer. Netflix also liberates me from the tyranny of the broadcaster’s “appointment” TV; the long wait for new episodes of favorite shows; arbitrary cancellations and new time slots; and from the assault of commercial messages, which impose the advertiser’s needs on both program creators and viewers.

custom_1239230281118_70929c4_springsteen_b_gr_05“Content is king” is one of those wise-sounding adages nobody ever stops to question. But people get bored. They love convenience. They have hundreds of digital devices that run video. And sometimes they’ll watch whatever turns up on the service or device that happens to be under their nose. Ironically, this “least common denominator” approach has a lot in common with how most of us began to watch TV once we could tune in hundreds of channels. Sure, “57 Channels (And Nothin’ On)” – but we’ve usually found something to pass the time. It’s just TV, not War and Peace.

Is Netflix just another movie channel?

Given the Netflix value proposition I’ve been describing, I’m puzzled to read descriptions of the service as just another VoD platform. In a May post (Netflix is going to need a lot of exclusive shows), Pete Nowak ponders what Netflix represents in the Canadian market and how it may develop in the future. We read this: “Right now [Netflix] looks and smells very much like a premium pay service, like The Movie Network.” 

You wouldn’t be surprised to hear that Pete is quoting from an interview with David Purdy, Rogers’ senior vice-president of content. If anybody is going to have trouble understanding the relationship component of a video service, it would be a Rogers guy. What is surprising is that Pete buys into Purdy’s view:

“Netflix is, essentially, an on-demand channel with a big catalog of movies and older seasons of TV shows. […] That’s why Netflix isn’t too different from, say, HBO.”

I don’t get this. Netflix and HBO couldn’t be more different. HBO is happily trapped behind the cable pay wall, even online, where getting into HBO GO requires authenticating not only an HBO subscription but a cable subscription as well. This arrangement for HBO GO led to a grass roots revolt featuring generous offers from fans to pay for a standalone service. That idea fell on resolutely deaf ears at parent company Time Warner, for reasons not far to seek.

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Netflix is different from HBO in another significant way. The latest numbers show Netflix remaining ahead of HBO in total US subscriber count: 29.17 million to 28.77 million. The smart money (e.g. Variety) is skeptical as to whether HBO is really holding out for further growth in the legacy distribution market, or just trying to kill innovation online. Netflix indicated in April it is looking forward to increasing its subscriber base by about two to three times the base of HBO.

amc-logoBut Netflix isn’t merely bigger than HBO. It’s also widely available on open platforms and committed to growing on these platforms, contrary to the agenda of the conglomerates, which see open platforms as a threat to be shut down. I also find it hard to agree with Pete’s conclusion that Netflix will need a lot more original content to keep growing – as in enough content to put it on par with the likes of AMC.

The problem with this analogy is that AMC is no more Netflix than HBO is. Sure, leading cable networks like these have hit shows that draw viewers. While I don’t know how other subscribers feel, I see the self-produced shows like House of Cards as icing on the cake – great fun to watch once, binge-style or otherwise, and still fun in repeat viewings. Season 4 of Arrested Development also offers some intriguing narrative paths to explore by mixing and matching individual episodes.

The money trail

icahn-2Meanwhile, in purely commercial terms, Netflix seems to be doing pretty well. The stock market has had a (slightly mixed) love affair with Netflix’s shares since the disaster provoked by Reed Hastings’ decision in 2011 to split the business and raise prices. At this writing, the share price is about $216, four times what it was last fall. At the top of my previous post, I noted in the photo caption that Carl Icahn saw his investment in Netflix – a hefty 10% of the company – hit $1.35 billion in May, when the stock reached a nearly two-year high.

Even though some Wall Street bears continue to have issues over how much money Netflix is spending on content, Icahn’s investment is revealing not just for what he’s done, but for what he hasn’t done. The scary activist investor had planned to push Netflix into a sale, then changed his mind:

“When Icahn revealed the stake last Halloween, he wanted to see Netflix sell itself. That hasn’t happened, and Icahn says he is no longer agitating for it. After he met with Netflix Co-Founder and Chief Executive Reed Hastings and was given a special showing of Netflix’s original series House of Cards, Icahn backed off the activism, he said.”

Icahn’s decision is a pretty strong vote of confidence in the way Hastings is guiding the business. Even the way Hastings conducted himself during the 2011 crisis of confidence drew plaudits from many observers, despite the 800,000 US subs who bailed on the company. Hastings is one reason I like Netflix. If I’m going to pay for a service, I’d rather give my money to a guy who isn’t a bully or a bullshitter. Which brings me to the latest shenanigans from the Neanderthals who run the TV distribution business.

Cable-TV distribs will keep killing innovation until someone punches back

The New York Times reported recently that the major US cable-TV distributors are busy trying to kill Intel’s attempt to launch a virtual “cable-TV” service in their home market. It’s a double threat because of what it’s not: a) it’s not another Netflix, because its goal is to offer premium pay-TV channels like cable does; and b) it’s not cable, because it’s designed to operate on the Internet, OTT style. As Brian Stelter writes:

“As Intel tries something audacious […] it is running up against a multibillion-dollar barricade. That barricade is guarded by Time Warner Cable and other cable and satellite distributors, which are trying to make it difficult — if not impossible — for Intel to go through with its plan.”

In the US, one favored practice for holding onto legacy market power is exclusivity in content deals, or financial incentives (sometimes penalties) to encourage content providers to keep their programs away from rival distributors. You would think writing a contract that penalizes a program provider for having dealings with a competing distributor would constitute restraint of trade. Well, the Americans are lucky that way.

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Anti-trust is a big industry in the US and hints of restraint of trade often draw scrutiny. Stelter notes the DoJ is already embarked on an investigation into cable and satellite company practices that may be hurting innovation and competition. Some think the FCC may act on this issue by extending regulatory protections to the new breed of online distributors. Criticism has also been heard from public interest advocates like Gigi Sohn, president of Public Knowledge, who warns that the government “has to step up and protect these [new] companies, or the incumbents are going to kill them in their cradles.” Even Wall St guy Richard Greenfield (quoted at the top) is sounding alarm bells:

“The issue attracted new attention on [June 11] during the cable industry’s conference when Richard Greenfield, an analyst at BTIG Research, wrote in a blog post that at least one unnamed distributor had prevented a channel owner from selling to a service like Intel. Whether illegal or not, ‘it most certainly is bad for consumers, as it limits competition and prevents the emergence of distributors who can provide revolutionary new ways of experiencing’ TV, he wrote.”

The abuse doesn’t stop at anti-competitive actions. This week also brings news of how far the cable industry will go in in waging war on its own customers. GlennBritt__TWCable As Deadline Hollywood reported on Tuesday, Time Warner Cable cut a deal with the LA Lakers and the LA Dodgers that gives them exclusive carriage rights for 20 and 25 years respectively. The Lakers deal runs $3 billion, the Dodgers $8 billion. A billion here, a billion there, and pretty soon TW/CEO Jeff Bewkes phones TWC head Glenn Britt to ask how the fuck he’s gonna find $11 billion to pay for all that jumping, batting and sweating. No prob, Britt says, we’ll extort it from our customers… what are they gonna do, disconnect us?

Maybe not, but it turns out they are going to sue. TWC is headed to LA Superior Court to defend its tacky rate-setting practices in a class-action suit filed by some particularly disgruntled customers. TWC thought it would be cool if they collected the entire amount owing on the two sports deals by adding $4-$5 a month to every subscriber’s bill, forever. Except Britt got caught with his hand buried too deeply in too many customer pockets. Here’s how the complaint does the math:

“In sum, TWC will extract from its customer base primarily in Southern California at least $11 billion to recoup its investment, and approximately 60% of this amount, or $6.6 billion, is extracted from individuals who do not want and do not watch and do not want to pay for Lakers and Dodgers telecasts and who, if given the option to do so, would opt out of such telecasts” (my emphasis).

Hey, cable geniuses, maybe that’s why so many Americans hate you right back. And here’s the proof. According to the latest ratings from the American Customer Satisfaction Index (updated May 21), TWC is the least liked subscription TV provider in the US. In its industry chart, ACSI indicates that – with a sector average score of 68 – TWC ranks at the very bottom with a score of 60, below Comcast, Charter and Cox. And way below Verizon’s FiOS service at 73. (As a benchmark for the information industries assessed here, Apple’s iPhones take the cake with a score of 81.)

What we know

It doesn’t take the ACSI ratings to remind us cable providers have a long history of being hated by their customers for providing rude, unreliable service. That’s what happens when you provide a firm with a territorial monopoly over the most popular entertainment medium of all time.

In Canada, we got it even worse. Apart from the monopoly, federal policymakers made cable their “chosen instrument of cultural policy” – a Faustian bargain that transformed cable into the ultimate gatekeeper, in exchange for being regulated. “Cable-TV” is, however, no longer rate-regulated because… the CRTC has found that market to be sufficiently competitive.

What used to be a problem of lousy service has become even more serious. The major telcos and cable MSOs have accumulated unprecedented market power as vertically integrated ISPs, just when Canadians need fast and affordable Internet access more than ever. The incumbents’ stranglehold over TV has ended up becoming a stranglehold over everything we do, or wish we could do, on what we used to refer to as the “public” Internet.

D.E.

In part 3, I’ll have a few suggestions for what Chairman Blais should have on his agenda in the runup to Canada’s TV consultations.