Cracks Appear in Cable TV’s Bundle

With a one-two punch last week, HBO, the most powerful premium cable network, and CBS, the top-rated broadcaster, delivered a staggering blow to traditional TV with their planned over-the-top offerings, giving consumers the ability to access top shows without the burden of a pay TV subscription.

Whether these moves lead to a knockout of pay TV’s traditional business model is still open to debate, but one thing is certain: More will follow.

And soon.

Home Box Office chairman and CEO Richard Plepler unveiled HBO’s breakaway as part of Time Warner Inc.’s overall Investor Day in New York, telling analysts and investors that the time was ripe to tap the estimated 80 million homes that don’t subscribe to the service.

Plepler said the rollout of the over-the-top service — slated for some time next year — will initially target the 10 million broadband-only homes across the country. While he offered few details on pricing and content, people familiar with the offering said it will closely resemble the premium network’s existing HBO Go online service and will be priced similarly to a traditional pay TV HBO subscription.

A day after Plepler announced HBO OTT, CBS announced a $5.99 per month online offering dubbed “All Access,” allowing subscribers to watch live streams of local CBS TV stations in 14 markets and broadcast-network shows like The Good Wife and Blue Bloods a day after their original airing. While the offering doesn’t have live sports (no National Football League games) or same-day network shows — the two main reasons for watching broadcast in the first place — it could have appeal to binge-watchers through on-demand access to CBS’s vast programming library. All Access will offer more than 5,000 episodes of classic network shows, including every season of such series as Star Trek, MacGyver, Twin Peaks and CSI: Miami, according to CBS.

While cable operators have anticipated this event for years — and some say privately that it was baked into previous carriage agreements — questions still abound. Here are some answers.

The services won’t lead to widespread cordcutting. On the surface, it would appear that the ability to stream HBO without a pay TV subscription would be an open invitation to cut the cord, but HBO has put some checks and balances in place that could minimize the impact, at least initially.

Plepler said HBO will initially target the OTT service to the 10 million broadband-only homes in the country, and it will market the service jointly with its distribution partners.

Sources familiar with HBO’s plans said cable, satellite and telco TV distributors will retain control of the customer and will handle all billing and customer service. HBO OTT will be priced similarly to the traditional TV product, sources said.

Analysts believe that the initial market for the service is the 4 million to 5 million broadband-only homes that already subscribe to a streaming service like Netflix.

But once those broadband-only customers are exhausted, that leaves the door open to targeting pay TV customers directly, which could lead to some cord-cutting by customers who want to downgrade their packages.

Sanford Bernstein media analyst Todd Juenger said he doesn’t believe the HBO OTT offering will lead to widespread cord-cutting, but added it could cause some households that would have become pay TV subscribers to postpone taking the plunge.

“We very much agree that the number of households who subscribe to pay TV, just so they can get HBO, is zero or close to zero,” Juenger wrote. “But substitutes to pay TV are getting better all the time, and HBO OTT will significantly increase the quality of the cordcutting option, especially if other competitors respond in kind. And they will.”

The CBS offering is a little trickier. With minimal live TV and no sports, All Access is significantly less compelling than watching the network through a pay TV subscription, or for free over the air.

Content owners — and distributors — will unbundle networks. Programmers routinely bundle their lesser-watched networks in with their more popular channels during contract negotiation time, essentially forcing distributors to carry (and pay for) networks their customers don’t watch. While distributors have begun pushing back, Mediacom Communications senior vice president of marketing David McNaughton said if OTT offerings grow, they could serve as the catalyst distributors need to bust the bundle.

McNaughton said that as more networks sign OTT deals — he used Viacom’s recent agreement with Sony for its planned OTT service as an example — it could give operators the opportunity to take certain channels out of their package.

“That enables an MSO or satellite provider to take Viacom out of the package, and then the 10% or 20% of the people that want to buy a Viacom product, they can potentially buy Viacom over the top through another package,” McNaughton said. “To the extent you have more traditional cable properties selling direct to consumers via different ways, it’s going to hasten the debundling of the large super-bundle.”

But that may be wishful thinking — the bundle has served the programming segment well, and content providers are expected to put up a fight to preserve it.

Don’t expect full-blown a la carte offerings, though. While distributors are all for an a la carte model, most programmers are vehemently against the notion of selling their individual networks directly to consumers. For one, the price of each channel could be prohibitive: ESPN, for example, gets $6.04 per subscriber per month from every pay TV customer, according to SNL Kagan, whether they watch or not. Thus, it would have to charge far more a la carte, notwithstanding additional charges to make up for lost advertising dollars.

“As bullish as we are on HBO, we do not believe the average HBO pay TV customer pays effectively $100 per month just for HBO,” Morgan Stanley media analyst Ben Swinburne wrote in a recent note to clients. “Therefore, we do not believe breaking HBO out is a bundle-killer for the preponderance of households.”

While a la carte may be off the table for now, it could lead to more innovative packaging of video and broadband. Already, distributors such as Comcast, Charter Communications, Verizon Communications and AT&T have offered an Internet Plus package — high-speed data and a premium channel like HBO, Showtime or Starz — for a reasonable monthly fee.

More networks will test the OTT waters. Most analysts expect CBS’s Showtime to be the next to offer an OTT package, followed by the third-largest premium channel, Starz. With CBS offering All Access for broadcast, other broadcasters and cable networks are expected to follow suit, but that could be more complicated.

At the Time Warner Investor Day meeting, Turner Broadcasting System chairman and CEO John Martin said his networks could eventually ride on HBO’s OTT coattails, but programmers also want to be careful not to endanger the billions of dollars they receive each year in affiliate fees from distributors.

Over-the-top moves could have other implications for programmers, Swinburne added.

It won’t derail TV everywhere. Moves by CBS, HBO and ESPN to go direct to consumers over broadband won’t derail TV Everywhere, the authenticated online video services offered by MVPDs, but they do amplify their importance as MSOs continue to seek ways to deliver video in formats that more consumers prefer.

MVPDs will need to do a better job executing their TV Everywhere strategies, particularly with their own apps and video-streaming portals, which will be competing in some ways with programmer-developed applications.

“The signs are increasingly that content providers want to do that themselves online,” Colin Dixon, founder and chief analyst of nScreen- Media, observed. “[These moves] by CBS and HBO, and potentially by Showtime down the road, certainly threatens to water down operator portals as a destination for online video.”