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What the CBS Blackout Means for the Future of Streaming

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By Peter Suciu
Jul 26, 2019 2:49 AM PT
u-verse and directv blacked out cbs content after negotiations broke down

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CBS earlier this week went dark across AT&T's U-verse and DirecTV services, days after the seven-year contract between the two companies expired. As the two couldn't come to new terms, CBS and its related channels -- including CBSN, CBS Sports and The Smithsonian Channel -- were blacked out.

This latest disruption in service affected viewers in major markets across the United States, including New York, Los Angeles, Chicago, Philadelphia, Dallas, San Francisco, Boston, Atlanta, Tampa, Seattle, Detroit, Minneapolis, Miami, Denver, Sacramento, Pittsburgh and Baltimore. In total, 117 CBS stations have been affected.

As with other service blackouts, there already has been finger pointing between the two sides. CBS has accused AT&T of proposing unfair terms, while AT&T has said that CBS is at fault for being a repeat blackout offender. CBS in fact has pulled its stations from DISH Network and Charter Spectrum in the past.

AT&T also accused CBS of unprecedented fee increases, warning that they could soar nearly 60 percent in the next 18 months. CBS maintained that the previous deal, which was signed in 2012, was not close to today's fair market terms for the content provided.

Blackouts Are the New Normal

This showdown between AT&T and CBS -- and the subsequent blackout of content -- is just the latest high-profile impasse between a pay-TV service and a content provider. Just 20 years ago it was almost unheard of for such a thing to occur, but in the spring of 2000 Disney-owned ABC briefly pulled content from Time Warner Cable.

At the time the blackout of content was seen as the "nuclear option," but today it is far more common for content providers to, in essence, pick up their marbles and go home.

"That is undoubtedly the case," said Dan Cryan, principal analyst at MTM London.

"This has become the modally standard part of the strategy to negotiate in public," he told TechNewsWorld.

"Most of the negotiations happen behind closed doors, but once these break down it moves to the public arena, and the threat is to withdraw -- and that has become part of the standard playbook," added Cryan.

Once the blackout occurs it affects the viewer directly.

Back in 2000 the only recourse for those who couldn't miss the then-hit series Who Wants to be a Millionaire? was to grab the rabbit ears and get ABC over-the-air.

Fast-forward to 2019, and disputes between the service providers and content providers have only escalated. HBO went dark for the first time ever on a pay-TV service last fall, after it and DISH Networks failed to come to terms. Ironically, HBO is owned by AT&T -- so the dynamics and grievances have flipped somewhat.

However, there is still some independence between Time Warner Media and its parent company AT&T, explained Cryan.

"This tactic does seem to be more common than it used to be," he noted.

From 'Please Carry' to 'Pay to Carry'

One reason that blackouts of content weren't really a thing until about 20 years ago is that in the early days of pay-TV services the local stations wanted to be carried, as did the broadcasters. It provided a way for more eyeballs to view the content.

"The times change, don't they?" observed Cryan.

"There has been this incremental shift where we moved from 'please carry' to broadcasters being widely carried to the downturn in ads, and suddenly that was made up with carriage revenue," he explained.

"Those fees have gone up significantly as ad revenue has fallen," Cryan pointed out. "What we've seen is a shift to broadcasters getting paid for the retransmission, but it has come at a cost."

This isn't just the cost that pay-TV services are paying. In other markets -- notably in Europe -- broadcasters have not been pushing technological development vigorously. This is changing in the U.S., as broadcasters see opportunities to reach audiences via streaming services.

OTT to the Rescue

One significant difference between the first major blackout of content in 2000 and this week's blackout is that viewers have more alternatives in 2019 -- even if some are costly. One solution is to go with an over-the-top streaming service -- something DISH actively promoted to its subscribers who simply couldn't miss HBO's Game of Thrones this spring.

It solved a problem. AT&T/HBO demanded DISH pay a fee for every one of its subscribers, even those who didn't want HBO, which DISH refused to do. HBO Now, a US$7.99 a month streaming service, is an option for cord cutters who have ditched traditional pay-TV services.

This is viewed as a disruption to the pay-TV business. It's possible AT&T could be hurting its own business model by driving CBS viewers to CBS All Access, the network's own streaming service.

"The question is the degree to which consumers value content other than CBS, and whether CBS will be missing permanently from the AT&T lineup," said Brett Sappington, principal analyst at Parks Associates.

"Those consumers that subscribe to pay-TV primarily to get CBS have probably already cut the cord for CBS All Access," he told TechNewsWorld. "The remainder likely value the rest of the content in their channel package. This remainder will likely pay $5.99 per month along with their pay-TV subscription if they believe the situation is short term. The longer it lingers, the more likely they will be to switch to a different provider that has CBS."

The Price and Cost of Streaming

When Netflix launched its OTT streaming service, it initially was seen as a replacement for its DVD-by-mail business, but it soon began producing original content.

Now OTT is an alternative platform from cable, with numerous players getting on board. In addition to the established competition from Amazon and Hulu, upstarts including Sony Crackle and Acorn TV have entered the fray, and Disney and Apple soon plan to launch services.

Meanwhile CBS, AMC, FX, HBO and countless other traditional cable/satellite channels also have jumped on the bandwagon. These channels don't want to lose the eyeballs of people who cut the cord, so they are offering alternative methods for viewers to receive the content.

The issue for consumers/viewers -- beyond the fact that there are only so many hours in a day to binge on TV programs -- is that each service has its own fee. Cutting the cord and opting for even a few OTT services could cost as much as a cable bundle!

As result, OTT services could see $9.1 billion in lost revenue due to piracy and illicit account-sharing this year, and that number could increase to $12.5 billion by 2024, according to a recent study by Parks Associates.

"Consumers typically turn to piracy when there are no legitimate options open, particularly free options," warned Sappington.

Back to an Ad-Based Business

Some OTT services have opted to offer a more affordable option -- in some cases even free -- that allows viewers to see ad-supported content. In some ways this solves a problem that has affected ad-supported channels and broadcasters since the late 1990s -- notably the use of DVRs to skip commercials.

Viewers still can get the benefit of time-shifting programs to suit their needs, and even the ability to location-shift to watch shows elsewhere, but the tradeoff is that they can't zoom past commercials. For many consumers who want to pay less, this could be the best solution.

"Ad-based options from a legitimate source can be more appealing than the potential risks of a pirate website," said Sappington.

"Ads are a possibility to the same extent as they were before," said Pedro M. Ferreira, associate professor in the department of engineering and public policy at Carnegie Mellon University.

"Consumers have already shown that they are often willing to pay with their time -- watching ads -- instead of money, so certainly some users will prefer a lower fee and ads," he told TechNewsWorld.

"The share of consumers that will prefer so increases with the fee, which may indeed be significant in the case of multiple 'must see' shows spread across several platforms," noted Ferreira, who coauthored an article, "The Impact of Time Shifting on TV Consumption and Ad Viewership" for the journal Management Science.

Free is better than the alternative.

"Piracy will also increase because some consumers will pay one or two fees and become affiliated with a couple of platforms and pirate everything else," Ferreira added.

Ads also could be less of an issue for younger viewers who are known to multi-task.

"There is evidence that the younger generation watches several shows 'at the same time' and watches some shows at twice the speed," said Ferreira.

This could present problems for advertisers, especially if the ad time is used to do something else.

"I anticipate that they may be doing something else on a second screen while the ads come up, which decreases dramatically their efficacy, lowering the click-through rate to a level that requires rethinking ads altogether," Ferreira suggested.

One-Show Services

The blackout AT&T's service could help drive more viewers to CBS All Access -- notably those who have thought about checking out the service for Star Trek Discovery or The Twilight Zone, but felt that one or two shows weren't enough to justify the costs.

That has been a problem for streaming services. One show, even a marquee title that has earned rave reviews and racked up awards, might not be enough of a draw -- at least not when it means another subscription.

Still, more than a quarter of viewers can be drawn in by the right program.

"In fact, 28 percent of consumers said they have subscribed to an OTT streaming service for a single title," noted Parks Associates' Sappington.

"The job of the streaming service is to show that 28 percent why they should continue to subscribe," he added.

However, that poses another problem.

"Original programming is a large factor in account-sharing, particularly for tentpole content," said Sappington.

"This differentiation strategy, in which each platform has its own exclusive 'must see' show, may also backfire, reducing the platforms' ability to introduce ads," explained CMU's Ferreira.

Back to Bundles

The resurgence of ad-supported programming and the plethora of streaming services could usher in a new era of bundling content.

Amazon already offers premium content from the likes of HBO, Cinemax and other paid-TV premium channels. There is the possibility that this could continue. Instead of cable or satellite, bundles could come via streaming services.

"It could still very much depend on the channel," said MTM London's Cryan.

"For premium channels there are already direct-to-consumer streaming options, but that is very different from ESPN or even AMC, which -- while there are streaming versions -- are still much more tied into a core bundle," he added.

What we could see instead are more a la carte options -- but that raises the same question. In the early 1980s, it was how many premium channels a family could afford with a cable package. Today that question is how many streaming services can one support, even in a bundled situation.

"We're still in the middle of a rush of direct-to-consumer subscriptions," said Cryan, "but there is a limit of what they're willing to pay for, and what content each has to offer. There is still a real concern that we're going to face subscription fatigue."


Peter Suciu has been an ECT News Network reporter since 2012. His areas of focus include cybersecurity, mobile phones, displays, streaming media, pay TV and autonomous vehicles. He has written and edited for numerous publications and websites, including Newsweek, Wired and FoxNews.com. Email Peter.


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