The linear path – the changing nature of the pay TV channel business

Turner makes shows such as Ink Masters and claims Netflix complements pay TV.

Growth in on-demand consumption and multiscreen viewing are changing the rules of the game for traditional pay TV channel providers. Andy Fry assesses their responses.

There are two fundamental factors changing the way people watch TV – on-demand and device proliferation. While plenty of other issues can affect the performance of a TV business, it’s the ability to watch what you want, when you want, where you want that is changing the commercial dynamics of the industry.

The company most often used to symbolise the shift to on-demand is Netflix, currently rolling out its subscription VoD service around the world. Available for between US$5-US$10 (€4-€8) in most markets, it has so far managed to attract 50 million subscribers and is growing fast. Netflix, with its combination of original shows, carefully-curated archive and ‘box set’ series, is clearly fulfilling a consumer need. But the success of the business has caused a lot of soul-searching in the pay TV industry – for three reasons.

First, because Netflix encourages consumers to question the price they pay for large bundles of channels – particularly during tough economic times. Second, Netflix poses a question about the role of linear channels in people’s lives. With time-shifting already a major feature in developed TV markets, linear brands could start to seem surplus to requirements. Third, Netflix is habituating viewers to a world without ads – an economic model that has driven the growth of pay TV for the last two to three decades.

Straddling all of this disruption is device proliferation – usually associated with the rapid advance of smartphones and tablets. Here the threat is more subtle, but no less significant. What do you do about young viewers who peel away from the narrowly-defined menu on the TV EPG? How do you stop them being distracted by alternative content offerings? What do you do if they want to watch one of your shows on a different device?

The response to all these disruptive influences comes at two levels – that of the platform operator and that of the channel operator. For the platform operators, typically DTH satellite, cable and telcos, one way to try and counter these trends is to secure the role of preferred triple-play or quad-play provider to people’s homes. In general, people who have elected to pay a single bill for telephony, broadband and entertainment services are going to feel less inclined to start unbundling it all in order to rebuild their TV portfolio. Another is to offer options that reduce the appeal of jumping ship in favour of Netflix or any other on-demand, à la carte or OTT supplier. A classic example of how to do this is BSkyB in the UK, which has introduced a number of new products and innovations designed to neutralise the threat of Netflix  – including Sky Go and Now TV.

Fair for the future

Sky’s multi-pronged approach hasn’t stopped Netflix growing its audience in the UK,  but it has led to increased revenues, higher ARPU and controlled levels of churn – and many other operators are following similar strategies. Despite the prospect of competition from Netflix, Amazon and others, recent forecasts from ABI Research claim that the pay TV market is on a trajectory to reach 1.1 billion subscribers in 2019, up from 903 million at the end of 2013, with revenues to rise from US$249.8 billion to US$320.3 billion in the same time period.

This doesn’t mean that every platform in every country will survive and prosper. But what it does demonstrate is that pay TV from a platform perspective looks well-equipped to manage the shift in viewing behaviour. For operators, the key is to make sure on-demand and multi-device delivery are built as adjuncts to their existing services, not alternatives.

In fact, it’s not unreasonable to suppose that the pay TV world will eventually end up incorporating brands like Netflix into their universe of offerings, as cable platform Virgin Media has done in the UK. After all, from a consumer point of view, how different does Netflix really look from HBO or Sky Atlantic? Who would rule out the prospect of Netflix launching its own linear channel at some point in the future and completing the conversion?

With an additional US$70 billion to play for over the next five years, it’s no surprise that channel operators have been in a bullish mood. Hardly a week goes by without A+E Networks, Discovery Communications, AMC Networks, Viacom International Media Networks, Scripps Networks Interactive, Fox International Channels, Sony Pictures Television and Modern Times Group launching a new service, acquiring an additional business or reshaping its existing channel portfolio.

Among the most active players this year has been AMC, which recently acquired channel operator Chellomedia from Liberty Global for US$1 billion and rebranded it as AMC Networks International. A few months later it announced its intention to rebrand its MGM channel to AMC Global, an upmarket channel that will air shows like Halt And Catch Fire and The Divide.

Ask Bruce Tuchman, president AMC Global and Sundance Channel Global, why the company has made these moves and he says: “The real question is why wouldn’t we? We’ve had a lot of success in the US, and produce and own some great content which we know is attractive to audiences worldwide.”

In Tuchman’s opinion, Netflix is not a significant competitive threat to AMC’s business. “Look at the numbers – nearly a billion pay TV subscribers versus Netflix at 50 million. My view is that it’s just another media product among many. No company has the genius to become a single source of programming – that just doesn’t conform to creative or market principles.”

Arguably a more interesting area for debate concerns the relationship between channels and pay TV platforms. If, as appears likely, pay TV platforms are set to dictate the agenda across linear, on-demand and multi-device, then what does that mean for the channel operators? “Well the starting point for us is that we were born and bred in the pay TV world, as a division of Cablevision,” says Tuchman, “So we’re very cognisant of, and sympathetic to, the needs of pay TV operators. We like to work with them and don’t take for granted what they achieved with their hard won businesses.”

In practical terms this means AMC sees its own agenda as very aligned to pay TV platforms as they try to improve their on-demand and TV everywhere offerings. “Our view is that the death of the linear channel has been greatly exaggerated. But where there is clear case for a range of content offerings, we’ll support that, as long as it is an authenticated model,” says Tuchman.

This is the plan for AMC’s global rollout. Locally-versioned channel feeds will launch across Europe, Latin America, Asia, Africa and the Middle East later this year. Accompanying them will be authenticated AMC VoD, HD and TV Everywhere services. This is broadly-speaking the position most channel operators take. But there is an obvious implication here, says Tuchman. “Companies that control the rights to their content are better-placed to adapt to the changes we’re witnessing.”

This message has been rebounding around the industry for the last couple of years. And it explains why so many of the leading pay TV players are taking a more aggressive position on content creation and rights ownership. At A+E Networks, Sean Cohan, general manager of international pay TV networks, says: “It’s more important than ever in this world of anytime, anywhere, cross-platform media that we own and deploy all rights. We have to be able to put rights to work where it makes the most sense.”

A+E is a long way down that road on factual content but is now getting there with drama. Having previously seen some its biggest US hits end up on other channels and platforms internationally, the launch of A+E Studios in 2013 means it is better-placed to keep content in the family, says Cohan.

A+E’s international strategy focuses on six main channel brands – History, H2, FYI, Lifetime, Crime & Investigation and A+E. The goal, says Cohan, is to get between three to six of these brands into each market, ideally with a demographic balance.

In terms of how the company has responded to the plethora of routes to market, Cohan says: “On the spectrum of content promiscuity, we’re pretty middle of the road. We’re not ridiculously precious but you won’t necessarily find our content on Netflix or full episodes of our shows on YouTube, at least not legally. We experiment, but our primary job is to manage audience back in the direction of our core content services. That’s where the social media platforms can play a part.”

By core content, he essentially means linear channels. But where does he stand on the future of linear? Are we reaching a tipping point where it would make sense just to offer content on-demand? “I definitely think we’re seeing more marketing around individual shows than ever before,” says Cohan. “But I don’t think we’ll ever leave the linear channels behind.”

Some of A+E’s rivals have made aggressive attacks on the international market in the last year or two – for example Scripps Networks Interactive’s investment in UKTV and Viacom’s £450 million (€580 million) purchase of Channel 5. Asked whether A+E is likely to do the same, Cohan says: “I’d never rule anything out but our model has been about growing organically. What these deals show is that the walls are coming down between free, pay TV and production. But I think if we were to do anything it would be around pay TV.”

Good opportunity

Humphrey Black, vice-president, media distribution EMEA at Turner Broadcasting System recently took up his role after a lengthy stay at Disney. Like AMC’s Tuchman, Black is not convinced that Netflix is replacing the existing business model: “I think most people see Netflix as a complementary service to pay TV. Some people may have been looking at it as a ‘pay-lite’ option but I think companies like Sky have picked up on this fact.”

For Black, the current changes are an exciting opportunity for channel operators like Turner: “There’s a good symbiotic relationship building up between linear and on-demand. At Turner we don’t see a simplistic division between VoD and linear, we see on-demand as an evolution of the linear channel experience, a way to get more content in front of viewers.”

Thinking mainly of Turner’s kids audience (Cartoon Network and Boomerang), he says “they want different things at different times. They might be very keen on a show and consume as much of it as they can get. But on another occasion they might just lean back and surf through linear channels.”

Black envisages a scenario where the distinction between on-demand and linear becomes blurred, “where the interface has elements of both and the TV knows you by your viewing behaviour. It might know what you like to watch at a certain time of the day, or record shows for you that you have missed.”

For Black, this shift towards the seamless integration of on-demand and linear will help reinforce the role of the big basic pay TV package. “I can envisage big basic getting more sophisticated, and perhaps there being more choices for subscribers. But I think you always have to take into account people’s life stage. Once they have a family the appeal of à la carte recedes. The idea of one simple subscription is appealing as long as providers improve and evolve their service.”

In terms of the company’s relationship with traditional pay TV operators, Turner’s basic position is “that we work closely with them and support them. But we do look to other opportunities,” says Black. “One of the really exciting things about devices is that they often have more interesting capabilities than TV sets. So for a company like ours that’s an opportunity to build games and Apps around popular IP like Adventure Time or Bugs Bunny.”

Scripps Networks, with an international channel portfolio that includes Food Network, Fine Living and Travel Channel, is another company that has been growing fast. Recent deals have seen Food Network and Fine Living launch via M7 Group and Fine Living launch on Romania’s Romtelecom, now Telekom Romania.

Echoing some of his peers, managing director UK/EMEA Jonathan Sichel says: “I think we’re well-placed to navigate the changes because we own rights to our content. We produce 2,000 hours of high-quality lifestyle content a year and it attracts a loyal audience.”

Commenting on the great debate about pay TV and linear, Sichel says: “The role of linear is here to stay for the foreseeable future. If you look at our more established US business, 93% of our viewing is live and we are the number one network group for live viewing. So time-shifting hasn’t affected us too much.”

The company is not complacent about changing consumer behaviour, however. In September 2014, for example, Scripps signed a new carriage deal with leading DTH platform DISH which expanded the latter’s rights to include OTT multi-stream rights for live and on-demand content. The agreement also expanded DISH’s distribution of authenticated Scripps programming on internet-connected devices. It’s a similar philosophy in EMEA. “We support, embrace and invest in the pay TV environment,” says Sichel, “and areas like on-demand and TV Everywhere are key ways to keep people subscribing.”

Support for established pay TV partners doesn’t preclude some experimentation, says Sichel. He points to a recent deal that makes Food Network and Travel Channel available via TVPlayer, a free TV streaming app for mobile and tablet. Scripps also partnered with AOL UK on the launch of AOL OnNetwork and, in the US, launched uLive, a premium lifestyle video portal that’s comprised of both full-episode play and short-form programming from Scripps’ library along with original video.

For Sichel, a key issue that the industry needs to focus on as on-demand viewing develops is “how to address ad-skipping, because advertising is such a key revenue stream for us”. This is, however, an emotive issue, where platforms and channels don’t always see eye-to-eye.

In 2012, for example, DISH in the US introduced a service called Primetime Anytime that allowed some of its subscribers to access the last eight days of primetime TV from the four major broadcast networks with the commercials stripped out. Fox reacted by taking DISH to court, claiming the service would “destroy the ad-supported ecosystem”. Fox lost its case, meaning that the issue of ad-skipping remains a real concern for channels. Some companies have been working on counter-technologies that stop ad-blocking. But the risk in deploying them is upsetting consumers who have become comfortable with ad-free content.

Digital shelf-space

When exploring the way to stay relevant in the pay TV ecosystem, it’s always worth looking at what Discovery Communications is doing. One of the first companies to jump into the pay TV space, it has consistently been ahead of the market in terms of its strategic decision-making. In the early days of the business, for example, it consolidated its position with heavy investments in original content. Subsequently, it moved fast to occupy digital shelf-space by launching a large portfolio of channels. While it hasn’t always got its channel launches exactly right, its  masterstrokes were Animal Planet and TLC, which turned the company from being a male-oriented business into more rounded consumer proposition.

The reward for good decision making has been growth. In the US, the company’s share of the pay TV market has risen from 4% six to seven years ago to the current 11%. Internationally, flagship network Discovery Channel reaches 366 million viewers while Animal Planet and TLC reached 252 million and 204 million respectively. With double-digit growth for Investigation Discovery and Discovery Home and Health, Discovery’s international division has reached a point of revenue parity with its US counterpart.

So what can we surmise from Discovery’s recent activity in the market? Well the first notable point is that it is investing heavily in free TV, splashing out US$1.7 billion on SBS Nordic. This comes in addition to more discrete developments such as the launch of DMAX in Germany. When you also consider rival Viacom’s acquisition of Channel 5 in the UK, it’s clear that pay TV operators increasingly regard free-to-air as a relevant target.

In part, this is because free-to-air channels can be valuable businesses in their own right. But just as important is that they can help pay TV channel operators stand out more in the market. Furthermore, having a free-to-air footprint will provide the likes of Discovery and Viacom with an opportunity to create cross-promotions with the pay TV platform operator.

Another noteworthy development is Discovery’s acquisition of All3Media. This isn’t just important because of what it says about the company’s drive towards international content origination, but also because the deal was done in partnership with platform operator Liberty Global.

Teaming up with one of the world’s largest cable companies is a good indicator of where Discovery’s loyalties lie. Indeed, it has always been careful to keep its platform partners happy rather than rush headlong into speculative deals with on-demand platforms.

Finally the acquisition of Eurosport seems to have multiple motives, including the demographic fit with its existing male-oriented channels. The fact that Eurosport is built around live content also makes it more resistant to time-shifting/on-demand.

Strong position

One company that always has a valuable contribution to make in this kind of debate is Modern Times Group (MTG), which has carved out a strong position as both a pay TV platform operator and a channel provider, both pay TV and free-to-air. MTG’s chief operating officer, pay TV emerging markets, Aleks Habdank says: “Despite the emergence of OTT and catch-up services, viewing has been very resilient for our pay TV channels. There is no doubt that on-demand has grown, but from my experience across all Europe as a channel provider as well as platform operator, this has not been at the cost of linear viewing. Rather, I have seen on-demand help increase viewing and channel/content engagement and loyalty.”

Habdank argues that “the challenge of new OTT services has been positive for the development for pay TV channels as operators have had to improve their offering to be relevant.”

On the subject of content, he says: “That’s the first thing viewers care about. In Russia, Ukraine and the CIS, for example, we have four first pay TV window deals with Hollywood studios and over 60% of the premieres on our factual channels are exclusive. We have also a great portfolio of sports rights with competitions such as the English Premier League, Formula 1 and the NBA in many markets.”

Habdank says being a platform and channel operator means “we understand shifts in consumption and what platform operators need to compete. Therefore we have ensured we have the full suite of enhanced rights for all our content – vital for pay TV operators creating TV everywhere and catch-up services. At the same time, our new branding is optimised to look good on any device regardless of screen size. We have also regionalised more channel feeds so we can better cater to local tastes. This has also made it possible to show more premieres.”

On the issue of à la carte versus big basic, Habdank shares Black’s view: “A market where all of the content offering is fragmented in different online portals won’t work. Viewers need the reassurance and service wrap of aggregator-platforms to provide a single service point. An issue for consumers when using OTT services is that the choice can be too large and too much time is spent just trying to find content to watch. This makes it too much like hard work, leaving customers frustrated and with the feeling that there is nothing to watch. Therefore, in working with our platform partners we present, curate and schedule our channels and content so loyal viewers can easily know what content they can expect to watch and when.”

Having said all this, Habdank acknowledges that there is a role for on-demand and that it is affecting how channel operators see their businesses: “The definition of engaging with a channel brand is certainly broadening. If a viewer is watching one of our channels on-demand or engaging with us on Facebook they are still interacting with our brand. With the plurality of channels and services it has increasingly become more important to have strong brands and verticals. We have several strongly positioned movie and factual entertainment channels. Our movie channels offer the latest Hollywood blockbusters to action movies and local language movies while our factual entertainment brands Viasat Explore, Viasat History and Viasat Nature are strongly positioned among their target audience,” he says.

Habdank continues: “The factual content has a very loyal audience and is proving itself not only in linear performance, but especially as strong on-demand content that is actively watched by viewers. On average about 10% of our ratings come from non-linear viewing. With some very popular series this goes up to sometimes even 50% where we clearly see people catching up with their favourite subjects. People who watch the content on-demand normally watch the whole show and have an average time spent of 46-60 minutes, where the linear average time spent is normally around 10-12 minutes. Most of the on-demand content is watched within two to three days after linear broadcast, the linear schedule is still very much driving on demand viewing.”

MTG recently acquired 75% of Trace, a pay TV youth channel operator that delivers Trace Urban, Trace Tropical, Trace Africa and Trace Sports Stars to around 37 million in 160 countries. In Habdank’s opinion, Trace is a valuable addition for two reasons. First, because it reaches a young audience, the kind that pay TV platforms are so anxious to hang on to. Second, because Trace explores the celebrity and lifestyle aspects of sport. Given MTG is one of the world’s biggest sports rights buyers, it’s a way of giving the company a more deep-rooted position in this key pay TV genre.

The right side

The real issue for channel providers doesn’t seem to be the prospect of on-demand services undermining what they do – because there is enough growth in the market to accommodate both. Instead, it is more about how to stay on the right side of pay TV platforms as the latter expand their ambit of influence. One question that seems to be pertinent is this: if Discovery’s  market share in the US has risen from 4% to 11% then who is losing out? And what happens when Discovery and the other major players are able to control even more share through on-demand add-ons?

Of course, the changes taking place in the business are far too complicated to come up with standard answers to questions like these. While no channel operator would ever undermine its platform partner’s position, some are more willing to push the envelope than others. It’s noticeable, for example, that the more narrowly-defined TV-based channel operators show greater allegiance to pay TV platforms than the Hollywood studios with their mix of movies and kids content.

In part this is about negotiating muscle, but it’s also a recognition that some of this intellectual property has a value that is not limited to pay TV alone. On this subject, it was interesting to note that Walt Disney Studios granted Netflix the exclusive SVoD rights for all its animation and movies in the Netherlands last year. This was despite the fact that traditional pay TV platforms were also interested.

In some ways, the pay TV ecosystem resembles the relationship between supermarkets and suppliers, where the former have extended own-brand offerings and big brands have defended their shelf-space with product variants, diversification into related categories and, when required, corporate acquisitions. Translate this dynamic into pay TV, and the most likely picture of the future is a landscape where a handful of companies control hundreds of channels, with small-to-medium sized players squeezed off the EPG and into the world of internet TV.