• Dodgers Stalemate and Viacom's $785 Million Write-Down Epitomize OTT's Growing Impact

    Yesterday provided us with 2 excellent examples of how OTT is changing the video landscape and how the pay-TV ecosystem is struggling to adapt. The first example was the second straight LA Dodgers' opening day in which the majority of LA fans were not able to watch the game because SportsNet LA doesn't have deals with most of the area's pay-TV operators. The second example was the $785 million write-down announced by Viacom to cover the costs of an expected "strategic realignment."

    In the Dodgers' case, virtually all of the LA area's pay-TV operators have balked at paying almost $5/month to carry SportsNet LA, a regional sports network created by Time Warner Cable, which paid $8 billion in January, 2013 to broadcast the games for the next 25 years. Time Warner Cable was so desperate to get the deal done that it guaranteed the Dodgers their annual $200 million fee even if other operators did not carry the network.

    The TWC-Dodgers deal was one of the most extreme bets made that sports would continue to be the "glue" that keeps subscribers on board with pay-TV and that operators would pay any price to carry sports networks. Instead, in a sign that the obscene "sports tax" non-fans pay each month for sports networks they don't watch has reached its limit, LA's pay-TV operators cried uncle and refused to simply add the network to their basic channel lineups.

    Operators are correctly worried that budget-minded, entertainment-oriented and younger viewers are already migrating to cheaper OTT options like Netflix, Hulu, Amazon, etc. and that increasing pay-TV's price still further would accelerate the shift.

    As big a test of sports' value in the bundle has become in the LA market, a full-scale national test of sports' real value will begin this week when HBO Now officially launches. As I wrote a few weeks ago, the $15/month HBO Now service will give budget-minded, entertainment-oriented and younger viewers even more reason not to pay for expensive sports networks carried in traditional pay-TV bundles.

    Meanwhile, Viacom's $785 million write-down is the latest evidence of how the shift to OTT viewing is affecting kids and entertainment cable TV networks. Citing changing consumer behaviors, Viacom streamlined its organization and wrote off the value of certain underperforming programming, while moving resources to areas like data analysis, technology development and consumer insights.

    Viacom's troubles demonstrate how OTT is impacting both entertainment and kids-oriented pay-TV networks. Viewing at practically all of Viacom's cable networks are down by double-digit percentages year-over-year. The Cabletelevision Advertising Bureau recently estimated 40% of network audience declines can be blamed on OTT alternatives. Viacom, which was among the most active in licensing its shows to OTT providers, no doubt contributed to this dynamic.

    Audience declines translate directly into lower advertising spending, a scenario that will play out across the TV network landscape this upfront season. But just as with SportsNet LA, the value of any network's programming is being closely scrutinized by operators when deciding how much to pay to carry a network, or whether to even do so in the first place. Suddenlink, one of dozens of mid-tier operators which dropped Viacom entirely last year, recently said it lost only 2-2.5% of its subscribers as a result of the decision.

    If more evidence like this emerges, Viacom will find it ever harder to renew its pay-TV distribution deals, even as audience declines drive softer ad revenue. Add it all up and it's clear Viacom is facing many critical challenges.

    As OTT goes more and more mainstream, entertainment choices multiply and viewing devices explode, the traditional pay-TV industry is under more pressure than ever to figure out how to respond. The Dodgers' standoff and Viacom's write-down are just 2 of the many examples we'll be seeing as the industry tries to adjust to new realities.