Out of Pocket Costs for Over The Top Applications Like Standalone HBO

            When one accesses HBO via cable television and other multichannel video programming distributors (MVPDs”), the subscription price covers both content and conduit.  With HBO’s announcement that it will offer standalone access, without proof of an MVPD subscription, consumers now will see a price point for only the content.  Curiously this unbundled price may exceed the current rate of about $15 a month offered by MVPDs that includes carriage.

            How can this be?  Are MVPDs underpricing, or ignoring carriage costs?    Does a $15+ standalone price ignore the cost savings when consumers and not HBO bear the cost of carriage?  Is broadband carriage of an additional bitstream so insignificant in cost that it’s not worth metering or charging?

            These questions do not have easy answers, in part because outsiders, including researchers like me, have no access to cost information.  We know that bandwidth intensive applications, such as streaming video, can have a significant cost, particularly at busy hours when a carrier might have to invest in more bandwidth and switching facilities to accommodate demand.  However, we also know that unless and until Internet Service Providers (“ISPs”) reduce their unlimited or 250+ GigaByte monthly allowances, subscribers incur zero cost when they have to bear the cost of carriage for delivery of HBO.

            So the cost of broadband carriage will have no significant impact on consumer decision making about bundled or unbundled HBO access unless and until using an Over The Top (“OTT”) application for unbundled access to content only triggers additional charges.  Put another way, if consumers can “binge watch” HBO, Netflix and other content sources without exceeding their monthly data allowance, then having to bear the cost of carriage is insignificant.

            Who bears the cost of carriage has become a significant matter in recent weeks for content providers, like Netflix, content distributors, like Level3, last mile ISPs like Comcast and consumers.  Most wireless consumers on metered data plans, have no more than a few GigaBytes available per month. Device shifting HBO from the television set, or even the PC with wired broadband access, to mobile tablets and smartphone would likely trigger a higher data charges, or migration to an “unlimited” data access tier.

            The possibility exists that MVPDs like Comcast can punish HBO and its standalone subscribers by reducing wireline data allowance.  Rather than meddle with HBO traffic, by throttling or degrading service, all Comcast has to do is raise subscribers’ incremental cost of video streaming and other OTT applications from zero.

           

Presentation on Sports Telecommunications Issues

      In the last few days there have been several significant developments in the IPTV and sports/entertainment marketplace.  The FCC may treat Over the Top video programmers as multichannel video programming distributors (“MVPDs”) if they offer a stream of content rather than on demand access. If the Commission pursues this initiative ventures like Aereo may achieve legitimacy and the opportunity for a true marketplace test. 

      As an MVPD, Aereo would qualify for a compulsory copyright license, but have to negotiate for the legal right to transmit broadcast television station signals.  This is pretty much the same deal that cable television operators secured in 1984.  Previously community antenna television systems won court cases affirming their right to receive and retransmit broadcast television.  Cable operators agree to pay for the privilege to secure legitimacy, and so will Aereo and ventures like it.

 

      In addition to the HBO initiative to offer its content without requiring an MVPD subscription, the FCC recently eliminate its sports black out rules that prevented MVPD carriage of games that had not sold out 72 hours before broadcast.

 

     You might have interest in a slide presentation on sports telecommunications issues I will present at the Ole Miss Law School; see  http://www.personal.psu.edu/rmf5/Ole%20Miss%20Telecom%20and%20Sports%20Oct.%202014.ppt.

 

HBO and Extreme Disintermediation

      HBO announced today its intention to offer access to its content via the Internet without proof of a cable or satellite television subscription.  See http://time.com/3510434/hbo-online-streaming/.  This decision could trigger more “disintermediation” of cable and satellite television i.e., reduced or eliminated subscriptions as consumers eliminate the intermediaries.

     Until now premium sources of content largely closed ranks with multichannel video programming distributors (“MVPDs”) presumably because they perceived higher returns by jointly sharing a portion of subscription revenues.  By offering direct access, HBO seeks to serve the growing numbers of cord shavers, who have cut down on MVPD programming tiers and monthly subscription rates, cord cutters, who have abandoned their MVPD subscriptions entirely and cord nevers who have solely relied on broadband options.

     MVPDs may soon have reassess the value proposition they offer subscribers, particularly the tiering of content represented by dozens of networks.  Consumers have grown weary of paying hundreds of dollars annually for channels they never watch.  Using the Netflix $9 price point and the average $6.04 monthly rate paid by MVPDs for ESPN, an a la carte option to select and pay for specific content sources may work.  It will take many selected channels to total the bundled tier now costing $50-75 monthly.

     MVPDs have asserted that a bundled option offers greater value and lower prices.  Maybe not.

Mission Critical Bits and Pay to Play Net Bias

             The proliferation of video content options via the Internet raises questions about what ISPs can and should do to offer “better than best efforts” to enhance quality of service.  Is this an opportunity for “pay to play” extortion, or welcomed quality of service discrimination?  One might assert the lack of a need for service prioritization in light of the absence of network congestion, but as bandwidth intensive, video demand increases does this conclusion make sense?

            Video content often qualifies as “mission critical bits” whose delivery must arrive on time, or the streaming content freezes and evaporates.  For example, Netflix and its subscribers expect each and every link to work with sufficient switching, routing and transmission capacity to deliver packets on a timely basis.  Few Netflix subscribers would stick with the company if suddenly full motion video streams became slide shows of random frames. 

            Increasingly ISPs want to secure surcharge payments from companies like Netflix to guarantee timely packet delivery.  So on top of the double-sided market where ISPs already receive payments from end users and upstream carriers, such as Content Distribution Networks, a third revenue stream should flow further upstream from content providers like Netflix.  Is this being greedy, particularly in light of what ISPs markets to subscribers?  Bear in mind that traditionally both peering and transit agreements involved directly interconnecting carriers, not ones further upstream or downstream.

            Broadband end users expect their $50-75 monthly subscriptions to cover the cost of access without a surcharge to them and others for the privilege of accessing full motion video sites.  ISPs already have the option of charging more for high volume users.  ISPs: send “broadband hogs” fruit packets and a higher bill, not throttled service.  ISPs also tier service based on bit transmission speed.  Are they entitled to more compensation from the sources of content that motivate broadband subscriptions in the first place?

Holiday Reading Part One

In the event you tire of television and run out of written material have I got something for you.  Here's a short piece on IPTV entitled The Opportunities and Threats from Next Generation Television: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1954779

Here's the abstract:

The combination of digitization, converging technologies and new business plans has diversified the terms, conditions and options available for consumer access to content. Access opportunities have migrated from producer- or intermediary-specified schedules, i.e., “appointment television,” to a largely consumer specified environment, i.e., “television anytime, anywhere.” As well the means by which consumers access content has shifted from one-way, downstream, to a two-way process whereby consumers can issue upstream commands for access via different receiving devices, subject to commercial constraints such as copyright digital rights management.

This diversification of access opportunities makes it possible for consumers to access more content, and as well to consume the same content via different devices. Content originally available only via a television set - the first screen - now can be received via second and third screens, computer monitors and smartphones respectively. Consumers of content currently have three major types of access options: 1) a direct so-called peer-to-peer link for real time or file-based content; 2) an indirect link through an intermediary who establishes access rules and limitations, but does not intervene in each session; and 3) an indirect link through an intermediary that actively manages access every time.

As content access opportunities have diversified, so too has the nature and type of available content. The proliferation of content and ways to access it present incumbent producers with both new opportunities and threats. Creators of expensive and compelling content may identify additional display windows and new ways to receive payment. Similarly intermediaries, such as cable television operators, can enhance the value proposition of their service and retain subscribers who now have technological opportunities to access identical or similarly expensive and compelling content outside traditional distribution channels.

Content creators and distributors face new threats to their business models, because the proliferating options for consumer access provide more ways to pirate content and to “disintermediate” and eliminate intermediaries. Try as they may content creators and distributors cannot foreclose consumer “self-help” strategies, including using broadband connections to access content “over the top” of incumbent intermediaries such as cable television operators.

This paper will examine the ways by which incumbent content producers and distributors have responded to new consumer access opportunities. This examination considers the incentives of incumbents to deny, restrict and prevent alternative access opportunities, or to embrace changed models. The paper also will consider the impact new access devices and options have on incentives to create and innovate.

The paper concludes that content creators and incumbent distributors, such as cable television operators, face increasingly divergent incentives. The former incur the risk of greater piracy, but also new opportunities to profit from expanding distribution platforms. The latter face the risk of declining subscribership unless they accept the inevitability of expanded content access options that circumvent the traditionally locked-down, largely one-way distribution model. Most cable television operators recognize the need to relax content access restrictions, but these operators have not similarly responded by expanding their efforts to innovate and diversify their supply of content.

The paper provides evidence that the growth of cable television networks has plateaud at the very time consumers can access an ever expanding inventory of new content alternatives. The paper concludes that cable television operators risk significant subscriber defections, or migration to cheaper service tiers absent an increase in the number of new networks and content access options.