Much has been written over the course of the last twelve months regarding the impact of Over The Top (“OTT”) platforms on the broader media and entertainment industry. OTT is Internet Protocol Video provided by a content provider or aggregator and delivered over third-party broadband pipes (cable system, telecom) to an end user (the consumer) who receives the content via a set-top box, over the internet, Blu-ray player or video game console which in turn is connected to a TV set. This thought piece addresses the implications of OTT on the filmed entertainment industry.

As technology has advanced and consumer behavior has evolved, the demise of the filmed entertainment industry has been predicted for decades. As far back as 1959 Mary Pickford, co-founder of United Artists, lamented about the long-term prospects of the industry in an interview over the “death of motion pictures” thanks to the advent of TV where she was quoted as saying “Because of the competition. Uh, you know. You can see the old motion pictures, that are just as good… or better than some of them today. And why should people leave their house… certainly, the motion picture will always be there, but I, I believe when paid TV comes in, and I’m sure it’ll be less expensive than going to the theater, that it’ll be the real death knell of motion pictures.” Similar predictions were also made in the 1980s as the VCR came into our living rooms. No other prediction was more famous than that of Jack Valenti in 1982, then the head of the MPAA where he testified before the House of Representatives on the emerging phenomenon of VCR ownership and stated, “I say to you that the VCR is to the American film producer and the American public as the Boston Strangler is to the woman home alone.”

The emergence of pay-TV, the VCR, and ultimately DVDs, has not destroyed the filmed entertainment industry. In fact it has expanded the industry, enabling content creators and distributors to exploit their content over multiple platforms, extend the life cycle of content and ultimately create real value for the industry. While filmed entertainment is, and will continue to be the medium of choice for consumers, it is the nature of the broader media industry to be disruptive.  As technology evolves and consumer behavior shifts, we periodically see changes that on the surface seem disruptive for the industry.  While they may not seem like perfect substitutes for existing platforms initially, they often represent innovations that offer an alternative value proposition to content creators, content distributors and consumers in general. These new platforms are often embraced by early adopters and in time become part of the mainstream, assuming they satisfy consumer demand.  As a result, consumers today have more choices and far greater control over the type of content they watch, when they watch it and where they watch the content.  The emergence of AppleTV, Netflix, Hulu, Youtube and Amazon streaming platforms, as well as numerous others including those on the near horizon such as GoogleTV, has resulted in a substantial increase in consumer usage of Internet based video due to improvements in bandwidth and network speeds, increasing broadband penetration, connected TVs, player devices, and PVRs as detailed in the chart above.

For large media companies such as Comcast and Time Warner, the concern is that content delivered over the Internet, coupled with rapid growth of low-cost subscription streaming services like Netflix, or ad-based streaming service Hulu (partially owned by Comcast), could result in consumers “cutting the cord” as they drop their pay-TV services or packages delivered by traditional cable, satellite and telco platforms.  If this was to occur at a substantial rate it could set off a chain reaction of events as pay-TV subscribers decline in favor of these alternative services; thus resulting in lower affiliate and advertising revenue, reduced profitability and a potential marginalization of cable networks.  If subscriber growth was in peril and profitability in a tailspin for cable providers and networks, how would this impact their ability to pay license fees for new filmed entertainment and library product?  Throughout most of 2010, this doom and gloom scenario was played out in the press as cable operators reported increasingly higher levels of subscriber losses.  As it turned out, much of the losses were driven by consumers switching to alternative services (i.e. AT&T and Verizon), timing issues related to end of pricing promotions to ease the transition to digital and the impact of the recession on consumer spending.

For now at least, there simply has not been enough evidence to support the notion that consumers are disconnecting their pay-TV services in droves and replacing them with low cost Internet based services (see chart for subscriber counts). While Internet based services are cheaper, they do not include live or local programming and still require consumers to pay for a separate Internet connection.

In an effort to combat the perceived growing threat from OTT services, media companies have taken significant steps to broaden the availability of their service offerings across a greater number of platforms (PC’s, mobile, gaming and tablet devices, etc.), while preserving their existing TV ecosystem. Comcast has been rapidly growing its XFINITY service to many of its customers, which offers 100+ HD channels, foreign-language channels, nearly 20,000+ VOD choices and faster Internet speeds for its subscribers to watch content whenever and wherever they want.  Furthermore, the company also recently launched its XFINIITY app, which is available for iPhone and iPad users and provides access to nearly the same amount of channel and content offerings.  On the pay channel front, HBO has been leading the charge with a multi-platform offering (mobile, PC, etc.) that is intended to reduce subscriber churn.  HBO Go provides online access to its content which is only granted to existing HBO subscribers that receive the channel through a cable, satellite or a telco provider (currently only with AT&T, Verizon, Comcast and Cox).

While no clear path has been determined, history tells us that disruptive platforms will evolve and technological disruptions will upset the balance of power periodically.  However, brewing beneath this technological evolution is a generational shift in content interaction.  Simply put, content interaction for the Baby Boomers and Generation X has largely been the same – mostly linear.  There is an entire generation (Generation Y and beyond) that does not know a world without broadband access, 500 channels available 24/7, time and location shifting services and endless devices/platforms to watch their content – their interaction with content is anything but linear.  It is here where we see some of the biggest changes taking shape in the filmed entertainment industry as younger consumers demand greater diversity in terms of content interaction through platforms and devices.  This change requires content creators to manage their business models more efficiently, maintain and enhance media windows and create compelling content as ubiquitous access to filmed entertainment content should ultimately increase consumer consumption as history has shown us.

 

---

 

Contact Information

 

Patrick A. Russo	Roy A. Salter	Eric C. Briggs
prusso@saltergroup.com	rsalter@saltergroup.com	ebriggs@saltergroup.com

Salter Group is a leading independent financial and strategic advisory firm specializing in providing business and intangible asset valuations, financial opinions, financial and strategic analysis, forecasting, and transaction support covering a broad spectrum of industries, geographies and situations from early stage, middle market and Fortune 500 companies and capital market constituents.

Our extensive experience in developing asset and business forecasts, and assessing a company’s value and viability in light of current industry trends and global market conditions, enhances the value of our transaction opinions (such as fairness, solvency and collateral valuation opinions), financial opinions (such as purchase price allocation, goodwill impairment and fund portfolio valuation opinions), tax-related opinions, financial and strategic analysis, and transaction support services for parties seeking greater insight and comfort than what is often provided by competing firms.

---

 

The Salter Group, LLC gathers its information from sources it considers reliable. Salter Group does not guarantee the accuracy or completeness of the information provided within this publication. The views presented reflect the current judgment of the authors and are subject to change. Salter Group makes no warranties, express or implied, regarding the accuracy of this information or the subjective views expressed by the authors. Principals, employees and affiliates of Salter Group may have positions in the securities of the companies described. This newsletter does not constitute a recommendation with respect to the securities of any company discussed herein, and it should not be construed as such. Salter Group and its affiliates may from time to time provide financial and strategic advisory services to these companies. The authors of this publication receive compensation from Salter Group.