Disputes between broadcasters and pay-TV operators over so-called "retransmission consent" fee payments are a dime a dozen. Broadcasters, seeking their slice of the monthly fees pay-TV operators pay cable TV networks, have bargained hard for this new revenue stream. In this sense, the current CBS-Time Warner Cable retrans standoff is business as usual. What is new, however, is that digital rights - and more specifically the huge licensing fees that OTT's richest players, Netflix and Amazon, are now paying - have taken a central role in this particular drama.
As the WSJ reported last Friday, the real obstacle between CBS and TWC isn't what TWC will pay to retransmit the CBS signal, but rather what digital rights will be included, and at what incremental cost. Five years ago, these rights were a virtual throwaway, but now it's a totally different situation. Here's what changed:
First, Netflix switched its model to emphasize streaming over DVDs. Because streaming rights to movies were locked up for years, Netflix turned its attention to licensing past season libraries of popular TV shows. This in turn led to the concept of "binge-viewing" where consumers watch endless past episodes back-to-back. Netflix has scored big with this formula, helping drive its U.S. subscriber base to nearly 30 million by end of Q2 '13. More recently Amazon - looking to unseat Netflix as the undisputed SVOD leader and support its two biggest consumer-facing priorities, Kindle and Prime - has dramatically ramped up its own licensing of past episodes of hit TV shows (most notably luring PBS's "Downton Abbey" away from Netflix).
With the Netflix-Amazon rivalry raging, TV networks and the studios that produce TV shows have become the big winners. In CBS's case, in just the past few months, it has announced a multi-year extension of its domestic deal with Netflix, an international licensing deal with Amazon's LOVEFiLM and an exclusive license for "Under the Dome," its new high-profile program based on a Stephen King novel and produced by Steven Spielberg's company. In its recent Q2 earnings call, CBS CEO Leslie Moonves noted Amazon's involvement in making Under the Dome's economics work, given its cost of over $3 million per episode. Moonves even called out CBS's interest in producing for Amazon and others, despite their obvious competitiveness with CBS's premium Showtime network.
Underscoring the importance of all this digital activity, CBS said that its Q2 '13 revenue growth of 11% vs. the prior year's quarter, was "led by a 22% increase in content licensing and distribution revenues, which was driven by licensing agreements for digital streaming and international syndication." (in other words, the Netflix and Amazon deals!).
But even as CBS and other TV networks/studios have been cashing in on Netflix/Amazon, pay-TV operators have made TV Everywhere their highest priority to preserve value in the increasingly expensive multichannel subscription, which itself is showing recent signs of weakness. TV Everywhere's success depends on pay-TV operators getting content rights. Whereas pay-TV operators had hoped to persuade TV networks that TVE's objective of preserving the ecosystem's long-term viability was in their interests too, Netflix's and Amazon's riches have made operators' "just give us your digital rights as a value add" proposals look less interesting. Given quarter-to-quarter earnings pressure on all public companies (not to mention senior executives' heavily stock-based compensation model!), selling a long-term, somewhat intangible proposition is hard. (and note CBS's limited cable network portfolio makes them especially tempted by Netflix/Amazon and uninterested in TVE).
All of this supports the observation of leading pay-TV analyst Craig Moffett, who just this morning wrote that, based on a breakfast of industry executives he recently attended, operators and TV network executives have "radically different visions for TV Everywhere."
And so it goes in the TV industry. Digital distribution is enabling new consumption models, which allow big new players to write checks that divide formerly close business partners and weaken their long-standing success formula. No doubt there's plenty of hand-wringing going on in pay-TV land these days, as the mature multichannel model slumps and Netflix's and Amazon's stock prices soar to daily highs. The pay-TV industry has found itself in a fine mess, indeed.