Kicking and Screaming

The Difficulties of Shaving the Cord

Video_cord_cutting_lGet ready for the heavyweight fight.

On 21 April, Verizon announced its FiOS Custom TV plan, which allows subscribers to create personalized subscription television packages. Households can choose from a series of content building blocks covering seven categories: kids, pop culture, lifestyle, entertainment, news and sports. Each genre will cost subscribers $10 per month on top of their basic plan and Internet package.

The move is part of a larger trend among broadcasters to placate demanding subscribers who have become used to on-demand services. Such anticipatory changes are especially needed to attract and retain younger households, which are creating their own bundles using streaming services like Amazon Prime, Hulu, Netflix and YouTube. The technology that allows consumers to bring Internet-based video into the living room has become amazingly inexpensive — we recently noted the availability of Amazon’s HDMI Fire TV Stick for as low as £7 in the UK (see Daily Insight: Seven-Pound Scissors). Hardware isn’t an issue.

But the crossroads of content and new technologies are consistently rocky. From video cassettes to digital music, change happens at varied paces depending on the parties involved. Contract law and consumer demand don’t always move in rhythm.

Yesterday, Disney-owned ESPN announced that it is suing Verizon for offering ESPN channels outside of standard subscription packages, allowing households to strip away ESPN sports channels from other Disney content. Verizon cites a Nielsen study outlining that the average American home with subscription TV receives 189 channels, yet watches only 17 of them. Allowing families to subscribe to their desired 17 channels is an obvious approach to counter a massive level of oversubscription and cord-cutting, and would let customers vote with their wallets. But this will be a tough test for some content, and lead to a new level of democratization.

ESPN, like most live events-based content providers, has more weight and less competition than other video services. However, its often-exclusive agreements with sports leagues make substitution a challenge for broadcasts and subscribers. Unlike pre-recorded content, live broadcasts such as sports and news continue to be a pressure point.

ESPN states that Verizon is violating its contract with the sports channel. The fine print of that pact isn’t public, but ESPN states that, by agreement, Verizon is prohibited from creating sports “layers” like the ones the company is offering. ESPN said that it’s “at the forefront of embracing innovative ways to deliver high-quality content” — it’s in the company’s interest to resist thinner bundles that could raise the costs to some households and create a downward spiral.

Lawsuits don’t tend to be innovation fodder, and legacy subscription models will remain while the industry goes through such teething pains. Major content owners — in this case Disney — have pulled together vast portfolios, and have been glued together into strategic packages that aren’t so easily separated. Mixing current-events content with other video tends to raise the value of both. Broadcasters will have to work their way through the changes, feeling pressure from their suppliers for less change and demand from their subscribers for more.

CCS Insight believes that rights holders will continue to push the boundaries even further. The potential legal debates will encourage players to invest in original content and to bid for key sports rights. Content owners will ultimately need to consider launching stand-alone online video services.

Broadcast is among the last walls to fall as consumer options are growing, but the way in which video rights are sold, owned and distributed needs to change. We expect more turmoil ahead. All players should be prepared.

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