Broadband Cable Association of Pennsylvania


December 4, 2012

Time Warner Cable Inc. Chief Executive Glenn Britt on Monday warned entertainment companies that he plans to take a "hard look" at programming contracts and may drop TV channels that "cost too much relative to the value of the service."

Speaking at a UBS UBSN. -sponsored investor conference, Mr. Britt said TV channels that receive "hashmark ratings"-very low audiences-are going to experience a "different kind of conversation" when their contracts are up with Time Warner Cable "than we had with them five, six or 10 years ago." The company, like several other pay-TV distributors, has recently complained vocally about the rising fees that entertainment companies, especially those with valuable sports programming, are charging to carry their channels. Mr. Britt noted that since 2008, Time Warner Cable's programming costs have gone up more than 30%, while the prices it charges video customers have only increased 15%. He said the rising cost of cable TV is behind the softness in the video business that the cable industry as a whole has been grappling with. "We've accumulated networks that hardly anybody watches," Mr. Britt said. "We can't keep carrying these giant packages...with the services that don't carry their weight."

Mr. Britt also expressed frustration at programmers who think that full distribution across cable platforms is a "birthright." "This stuff is just starting to cost too much. If we as a broader industry want to keep this going we need to get the prices of packages lower," he said. Some channels that don't draw a big audience could be put onto a tier that isn't the most widely available, for instance, or they could be dropped entirely, he said. Mr. Britt and another executive presenting at the conference, CBS Corp.'s chief research officer, David Poltrack, also acknowledged the reality of "cord-cutting"-the phenomenon of people disconnecting their pay-TV subscriptions.

Mr. Poltrack said that the trend "appears to be very real," referring as well to people who have never signed up for cable. He said that a significant number of people are watching TV shows on online-video outlets but aren't being measured for advertising purposes. Mr. Poltrack noted that the fall TV season had experienced a "chaotic start," with soft ratings for many networks, although he attributed that to the elections and superstorm Sandy. Mr. Poltrack argued that it was important to measure audience watching on different platforms, including online streaming. Current ratings measures only track viewership for a TV show up to seven days after it aired, on a digital video recorder. "It is clear that streaming is providing incremental viewing to these shows," he said, citing CBS's drama "Elementary" as an example. He estimated that the show's reported audience increases by about 9% if those viewers past the seven-day mark on various outlets are included.

Viacom Inc. Chief Executive Philippe Dauman expressed a similar sentiment at the conference, saying there is "a lot of additional consumption on other platforms and that's not officially measured or monetized right now." Nielsen, the primary source of TV-ratings data, needed to adjust the way it measures viewing, he added. "They have to catch up with reality of the situation." Nielsen didn't immediately respond to a request for comment. Mr. Britt said that a more threatening issue than cord-cutting was that cable-TV rates are rising even while the economy hasn't improved significantly. The economy is "still bouncing along the bottom," he said, though he added that he is seeing "a little bit" of new household formation. Formation of new households is important for cable-TV operators' ability to sell their services. Wall Street Journal

Looking to tap the wealth of U.S. Latinos, CNN is planning to introduce a Spanish-language programming service tailored for broadcast TV stations next year. The service, CNN Latino, is being designed as an eight-hour programming block featuring news, documentaries, talk shows and lifestyle programming. It is expected to launch in late January in Los Angeles on independent station KBEH-DT Channel 63 and eventually be carried by TV stations in other cities.

CNN Latino comes 15 years after the Atlanta-based news organization launched CNN en Espanol, a 24-hour Spanish-language news network available in about 30 million homes in Latin America and 7 million homes in the United States. CNN en Espanol also provides news feeds for Spanish-language radio stations. With CNN Latino, the company is attempting to diversify by providing a syndicated block of entertainment shows - not just news - to share in the increasing amount of advertising dollars being steered to Latino outlets. CNN's goal is to compete with established Spanish-language networks. "We are trying to appeal to bilingual Latinos in the U.S., those who feel 100% American and 100% Latino," said Cynthia Hudson-Fernandez, general manager of CNN en Espanol and Hispanic strategy for CNN. "This is an alternative to existing networks. We feel that there is a huge opportunity for this type of programming."

CNN is the latest major media organization to try to woo Latinos. For years, three Spanish-language broadcasters - Univision Communications, NBCUniversal's Telemundo and Azteca America, the U.S. arm of Mexico's TV Azteca - primarily battled for Spanish-language viewers. But the estimated 50 million Latinos living in the United States have increasing clout in the market. Earlier this fall, Rupert Murdoch's News Corp. launched a Spanish-language broadcast network, MundoFox, in collaboration with Colombian powerhouse RCN Television. Walt Disney Co.'s ABC News is teaming with Univision to create a 24-hour news channel - in English - that should roll out early next year. Cable giant Comcast Corp. is bankrolling an effort to create niche English-language cable channels to reach bilingual Latinos.

Marketers and media companies have been divided on which language to use to reach the largest audience. Some are opting for English to appeal to bilingual viewers, while others see Spanish as the best vehicle to attract both. At least half of U.S. Latinos are fluent in Spanish. Hector Orci, co-founder of Orci, an L.A. marketing agency, said last month's presidential election underscored Latinos' power as they turned out to help reelect President Obama. "That is a great lesson for marketers," Orci said. "The election proved that the person who spoke to people in Spanish won the election. It's the same for products. If you speak to us, we will be there." By offering a syndicated block to broadcast stations, CNN Latino is targeting an audience that may not subscribe to pay TV channels. The eight-hour block, which will include a locally produced public-affairs show focusing on L.A. issues, is scheduled to run from 3 to 11 p.m. on KBEH, owned by the small Hero Broadcasting.

NBCUniversal's Telemundo also introduced a Sunday morning current-affairs program, "Enfoque Los Angeles," this year to raise its profile in the nation's largest Latino media market. Orci said he is encouraged by media companies' interest in producing home-grown shows. "The Hispanic model of television has been to get it from other countries and hope it works here," Orci said. "We have been waiting for someone to try the more expensive American TV model of investing, testing and often losing before finding shows that work." Wall Street Journal

Netflix is reaching for Starz-and HBO and Showtime. After releasing "Lilyhammer," its first original series, in February, the online-streaming and DVD-by-mail firm is moving more aggressively into original programming in 2013 in a quest to become more like a premium cable network. Political drama "House of Cards" comes out Feb. 1. That will be followed by new episodes of cult-TV show "Arrested Development" in the spring. Also slated for next year: monster-mystery "Hemlock Grove," "Orange is the New Black," set in a women's prison, a second season of "Lilyhammer" and comedian Ricky Gervais's "Derek."

While Netflix already competes against premium cable for viewing hours and subscribers, the push into original programming highlights the comparison. In addition to a lower price tag-$7.99 a month, against the $15 to $20 that consumers pay for HBO-Netflix offers an option outside traditional cable packages.

Netflix had 38% margins on the basis of earnings before interest, taxes, depreciation and amortization in 2011. That is about the same as HBO, according SNL Kagan estimates-although that doesn't include shared overhead benefits that it reaps from being part of Time Warner. But while HBO is relatively stable, Netflix's business model is in flux. Its high-margin DVD-by-mail business is shrinking. And "contribution" profit-revenue minus the cost of sales and marketing-from the U.S. streaming business is offset by losses in its young overseas streaming business. Against that backdrop, Netflix's success as a premium channel will rest on its continued ability to fund and market high-quality original programming.

For 2013, Netflix says it is spending less than 5% of its $2 billion annual content budget on such programs. It can keep costs low in part because it is licensing its original content from other producers. That limits the risk. It also means that it doesn't get lucrative syndication rights if a show is a hit. Chief Executive Reed Hastings has suggested the firm might pursue ownership rights in the future. HBO owns nearly all of its original content. Starz and Showtime own some.

Netflix is adding original-content to spice up its offering. Unlike other premium cable channels that have exclusive deals to air movies a year or so after their theatrical release, many of the newer films in its streaming library are foreign films and documentaries. Netflix has focused recently on prior-season TV shows, which it says are more profitable and generate about two-thirds of viewing. Given Netflix doesn't plan to raise prices, the only lever it can pull to cover rising content costs, fund more original programming and grow internationally is adding subscribers. Mr. Hastings has said 60 million to 90 million U.S. streaming subscribers are achievable. The company had 25.1 million domestic streaming subscribers at the end of the third quarter.

Trouble is, there are just 81 million broadband households in the U.S., according to Sanford C. Bernstein. This means that Netflix is counting on much higher broadband penetration. Highlighting the challenge, HBO, Showtime and Starz all have less than 30 million domestic subscribers for their flagship channels. For Netflix to hit its lofty targets, and become a real alternative to HBO, its new investment needs to yield some seriously buzz-worthy shows. Wall Street Journal