The debate over how to structure TV Everywhere - the cable industry's answer to Hulu - heated up again yesterday at the Goldman media conference.
Time Warner (TWX) CEO Jeff Bewkes dismissed complaints by content owners that the proposed revenue split is too low, while Disney CFO Tom Skaggs said content owners deserved more.
What's clear is that if both sides can find a way to work together, TV Everywhere will help the cable industry - from MSOs to networks - ward off a new competitor and help grow their businesses at the same time.
TV Everywhere. TV Everywhere is a planned service in which cable companies will make TV content available to their subscribers online. Right now, cable companies say they will provide TV Everywhere to subscribers for free. Over time, we think they could end up charging for it.
TV Everywhere Is Not Just A Defensive Move By The MSOs. Yes, at first glance, it looks defensive: As more content is made available online, viewers can cobble together a viewing experience that approaches that of cable. Enthusiast channels like Discovery and The History Channel are not currently available online, but some of the highest rated ones – like USA, A&E, Bravo – are, in addition to the free broadcast networks. So, the cable companies have to figure out a way to control that viewing before “cutting the cable” becomes a real threat.
This could be a costly defensive move given how much it costs to host a streaming video site. But don’t forget the cable companies own the pipes so this would be a much less expensive endeavor than an independent company that has to pay tolls on those pipes in the form of content delivery fees. In addition, cable companies make billions of dollars from subscriber fees, so most would likely pay up a little to protect that franchise.
Over time, however, TV Everywhere could become an offensive move by the MSOs. As the service catches on it wouldn’t be surprising if cable companies added an extra fee to their rates (they say this will not happen) or use the extra digital offerings to increase overall cable rates more than they would have without it. In addition, though ad revenue is a small part of their revenue, cable companies could benefit from a shift in spending to online. Later we dig into these numbers in more detail.
It’s Unclear If All Cable Networks Will Sign On To TV Everywhere. Hulu’s owners NBC, Fox, and Disney own major cable networks, and if those are not included in the service it could represent a large programming hole for the MSOs.
For example, 4 of the top 5 and 7 of the top 10 rated cable networks in terms of primetime viewers)are owned by either NBC, Disney, or Fox. This includes ESPN, USA Networks, Disney Channel, and A&E – all very popular franchises. Interestingly, only A&E (a JV between NBC, Hearst, and Disney) participated in the recent Comcast OnDemand Online (its TV Everywhere product) trial. Disney said it would only include its networks in a TV Everywhere model if it received better financial terms, which so far the MSOs have balked at.
Given how much the cable nets make from affiliate fees (about 54% of total revenue on average), most will likely come to the table to avoid another difficult discussion when negotiating how much MSOs will pay them to carry their channels. Given their investment in hulu and its success so far we can’t envision a scenario where NBC, Fox, or Disney remove their programming from hulu and play it exclusively on a TV Everywhere platform. A scenario where programming is played on both platforms with both parties keeping 100% of the respective ad revenue is more likely, in our opinion.
The Numbers:
Right now hulu isn't likely to steal many subscribers completely away from cable, but as the internet viewing experience becomes more like TV and technology connecting the two screens becomes more prevalent, it's a threat.
For example, hulu’s monthly audience has grown 400% the past year and now represents just under 20% of all basic video subscribers combined at Time Warner Cable, Comcast, Charter Communications, and Cablevision.
What’s more notable is how much the cable companies have to gain from winning the online war if they choose to leverage that digital foothold to raise rates.
For example, if the cable companies were able to put together a compelling enough package to convince subscribers to pay an extra $5/month, whether in the form of an explicit additional fee or an increase in the overall monthly cable fee, most would increase their revenue by about 5% - a very big number given the small investment it would take to create a platform like TV Everywhere. Comcast alone would stand to earn over $1 billion in additional revenue per year, with the top 4 cable companies grossing an extra $3 billion combined.
Ad revenue is less than 5% of total cable company revenue (they are allocated about 2-3 minutes per hour from their channels to sell for themselves), so any benefit from online video would be nominal and not enough to get management excited about.
What many may be missing if TV Everywhere works is that the cable companies could in effect be creating separate businesses. For example, watch this interview with Comcast SVP Karen Guilford who oversees the company's online site Fancast, which would host the company's TV Everywhere product.
Guilford repeatedly refers to Fancast as aiming to be an informational hub for TV where viewers watch shows but also chat with each other about them, find viewing information, and interact with each other in other ways.
If the cable companies are able to create a large online hub where people don’t just watch TV, but go there as their first stop for anything TV-related, they will have created an internet content company potentially worth a lot of money. Just look at the $1 billion valuation many are throwing around for Hulu. That’s about 7% of Time Warner Cable’s market cap and it is a fairly straightforward website versus Time Warner’s national cable business and collection of cable channels. And hulu is isn’t even profitable yet.
