On yesterday’s earnings call, Comcast executives were asked for their reactions to HBO and CBS offering direct-to-consumer subscription services.
The answer from executive vice president Stephen Burke was interesting. Via Seeking Alpha, here’s what he said:
Regarding HBO and CBS selling directly I was surprised, I was surprised by both of them for different reasons. CBS I was surprised because they have been such a defender of retransmission consent in the traditional ecosystem and been so successful in the broadcast business and HBO because I think its going to be such a challenge for them to not cannibalise what is already a really really good business. That having been said, we are still early on in the transition to more internet television that I think you are going to see a lot of surprising things. And you know what’s surprising to me is that we are making hundreds of millions of dollars from Hulu and Netflix and Amazon, businesses that we didn’t even think about five years ago. [Note: Comcast owns NBC, so it’s getting money from Netflix and Amazon for NBC shows.]
So I think we all ought to be prepared to be surprised every once in a while but also put everything in perspective and really look at what people’s real motivations are and the challenges. I don’t think distributing directly to consumers be the internet is an easy thing to do and I think it’s a voyage that if you are successful like Netflix can be a way to create a lot of value but it’s not an easy thing to do.
It’s a pretty good response. He throws shade at CBS since CBS has been a staunch supporter of the cable business model where CBS gets paid by Comcast a certain amount per Comcast subscriber. He’s basically saying that the only reason CBS is doing this is for leverage later on in negotiations. In other words, if Comcast pulls CBS programming in a pricing dispute, CBS is protected because it can sell directly to consumers through the web. (It could even offer a discount to customers while it’s in a dispute with Comcast, thus making it look like the good guy and Comcast the bad guy.)
As for HBO, he’s got a point. People tend to underestimate the success of Netflix. Pundits just think HBO can flick a switch and it will be as successful as Netflix. Maybe that’s true, but we somehow doubt it. Netflix has worked hard to get to where it’s at. We expect HBO will have some growing pains as it tries to scale.
Burke had more to say on the HBO product, and it’s worth reading (although Seeking Alpha’s transcript is a bit rough in spots, you get the overall idea):
So Ben, in beginning of your question you mentioned that the HBO product was then over the top product, I actually don’t think it is, and I don’t think the CBS product is over the top either. If you define over the top sort of coming over the top the existing distributors and going direct and bypassing existing distributors, I think both HBO and CBS are trying to add to their existing ecosystem.
And if you think about it HBO probably has the most elegant, economically attractive sort of business model, anybody who is ever been in the television business as be interesting and I think challenging for them to go and try to attract new customers into that ecosystem without cannibalising the existing customers.
The existing customers that are sold through cable and satellite are extremely high margin. So even if they sell at $US15 sub, they got to be very — when they go directly to a consumers view the internet, they got to be very careful at cannibalization.
It will be interesting to see how that works, but I don’t think they are saying we’re going over the top of the existing ecosystem, I mean, Time Warner was company that really created TV everywhere. I think CBS is the same thing. CBS is not, I don’t think trying to get their existing ecosystem to move over to a new model, they are trying to Mellanious or new customers and I think that’s we’re all trying to do.
And that leads into the second part of your question about time-shifting and leakage. I think the fact of the matter is people have more options to watch quality, professionally produce video then ever before and they are using those options. Whether its DVR, Netflix, Hulu or a variety of other ways to consume this content. A lot of those options are not properly measure; some of those options are not measure at all. And so what you’re seeing I think is a pressure on traditional ratings in both broadcast is been going on for a while.
But now cable, I think some of that is going to get better, I think there will business models that evolve, some of that we’ve addressed by selling to Hulu and Netflix and Amazon and we make hundreds and millions of dollars doing that. But I think its going to be more, more and challenging. There was a great article a few months ago where they said that were 88 new television shows launched during the summer and this is in a business that 20 years ago nobody launched a new television show during the summer. So that competition combined with new technology is making it harder and harder to deliver the kind of ratings that we’ve all been used to.