The next battle for OTT? Licensing

Television providers have had a few years now to get used to online competition from over-the-top streaming services, though they should brace for more. As early as this year, they will be facing a new generation of online competition. Google Inc., Apple Inc., Sony Corp. and Intel Corp. are working on launching new over-the-top television services that may allow the viewer to flip through feeds from paid cable TV channels, including live programming. How long consumers have to wait for the tech giants to roll out their new TV products hangs on a multitude of factors—and their biggest challenge may be lining up licensing deals to make it happen, especially for live TV. “There are many arrangements, existing distribution arrangements, that will need to be modified dramatically, and I think that might prove to be very difficult to do,” Paul Sweeney, U.S. director of research and a senior media analyst at Bloomberg Industries, said in a phone interview. The reason we haven’t yet seen disruption to the traditional TV ecosystem is that it’s a well-defined system in which every player, from the studios to broadcast and cable networks to TV providers, continue to profit, leaving industry players with little reason to “rock the boat,” he said. Google, Apple and Microsoft Corp. already sell over-the-top TV devices, not to mention Roku Inc. In most cases, the studios and programmers must supply “apps”, or content applications, for the services. But they don't want to cannibalize their business, and that means the programming available on the devices is not the same as on television. They don't offer the same choice of channels or live TV options. In other words, the technology is there, and the most interesting question now, as Mike McGuire, an analyst with Gartner in California, said in an interview last month, is what happens to licensing relationships between studios and broadcast distributors around the world. “The delivery part of it is settled. Now, it's about licensing and rights,” he said. “People tend to get caught up in the technology discussion, but the really interesting stuff is what's going to be happening between the lawyers, and the programming and licensing people.” To their credit, the technology companies are trying to make headway. Google has been approaching content producers about licensing content for a new, cable-like subscription TV service offered over broadband, while Intel and Sony are working on similar services and Apple has also been negotiating licensing deals, the Wall Street Journal reported last month. The technology companies are racing “to launch an online version of pay television,” WSJ reported. So far, Intel’s the only one of the four companies to go public with its plans for a new service, which would offer live TV and on-demand programming. The tech companies realize video and TV advertising are shifting online, Sweeney said, though they can't launch their services without lining up programming. The hopefuls are probably approaching major studios like Warner Brothers (a subsidiary of Time Warner Inc.) and those owned by 21st Century Fox Inc., for licensing deals for “a big slug of content,” he said. Their challenge is “the ability to acquire meaningful programming, programming that people really want to watch and will pay for,” Sweeney said. “So we’ll have to see whether they can strike any deals. To date, there haven’t been any major ones announced.” A bigger challenge will be getting live TV rights, he said, since broadcasters have exclusive agreements with distributors that limit the way that programming can be licensed online. Erik Brannon, an analyst with IHS who focuses on the U.S. cable networks, said the bottom lines of the major media conglomerates that produce the most popular content “are really buoyed up by their cable network division, which in turn are reaping the rewards of existing pay TV operator relationships.” For network owners like Walt Disney Co. (which owns ABC, ESPN, and other networks) or News Corp. (which owns Fox), “significant portions of revenue, if not the largest portions of profit, are coming from the cable networks divisions themselves,” Brannon said. That means change is not in the best interest of the programmers and content owners. When technology companies approach content creators for licensing deals, those companies, whether they’re a vertically integrated company or a standalone studio or progammer, will ask themselves some questions, Brannon said. “Do we accept a significantly increased carriage fee with a minimum, at the risk of endangering our existing relationships with our pay TV operator friends who have been business partners for 35 years?” he said. Bloomberg reported last month that Time Warner Cable and other cable companies in the United States have been offering incentives to studios and broadcasters in an effort to stop the spread—to new online competitors—of content that's now exclusive to TV. “It certainly does make logical sense that, amongst other things, when negotiate new terms for carriage … that a certain premium amount could be assigned to the fact that content creators would be resistant to OTT pay-TV plays,” Brannon said. “If I’m Time Warner Cable, it makes sense that I’m thinking, 'I need to prepare for that in my immediate future.'” In the coming years, Brannon said, he expects carriage negotiations to become more contentious, with programmers and TV providers potentially entering into public disputes and the rhetoric rising on both sides. “Those of us who follow the industry closely, we’re going to see the highs and we’re going to see the lows,” he said. “We’re in for a wild few years.” How much of this will spill over into Canada is unclear. Carmi Levy, an independent tech analyst in London, Ont., said the new over-the-top services from technology companies are still “at the rumour stage." It’s not yet known if they will be available in Canada, and if so, when. Levy said the tech companies developing the new services will face the same barriers around licensing in Canada as they would in the U.S. “One of the reasons why change has been so glacial in television to date has been the hesitance of incumbent content owners and distributors to give up their existing model,” Levy said. “There is fear associated with change, and when given the choice, most incumbent players would rather stick their heads in the sand and just pretend nothing is changing.” Levy said the Canadian landscape is dominated by strong players with ample resources, putting them in a good position to “adapt to the change that’s inevitably coming.” The industry in Canada is highly integrated and consolidated, with large companies that produce and own the rights to content also owning the networks over which it's distributed. In a way, this simplifies things for new entrants online, because negotiations can be streamlined. “If Google comes a calling, it can speak to Bell, and as long as Bell has everyone from its different divisions at the table to have the conversation, you don’t need to pull together a disparate group of people. They’re all under the same roof,” Levy said. Canada’s cable and satellite distributors have successfully adapted to technological change over the past generation, Levy added. “I expect they’re already very carefully studying the market, carefully studying the dynamics of change, and preparing themselves for whatever the future brings,” he said, “because, if they’re not, they simply won’t be here in the future.” —With reporting by Anja Karadeglija at akarad@thewirereport.ca and editing by Simon Doyle at sdoyle@thewirereport.ca

The next battle for OTT? Licensing

Broadcast | August 6, 2013

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