Verizon’s Interesting Move Against Cable Channels

Verizon, the 6th-largest cable-TV provider in the US is trying to disrupt pricing in the US cable TV ecosystem. Cable TV pricing is a favorite topic on this blog (previous posts here and here) as some of you may know. 

Traditionally large media companies, such as Viacom, have charged Verizon $X per channel based on how many households receive a channel. But in reality, just based on data from my own household, we regularly watch 5 or 6 of the 80 or so that are piped in 24×7. And perhaps 2 or 3 more of those channels once or twice a month, if that.

So in a move that is not (yet) a challenge to the frustrating lack of a-la-carte pricing, Verizon is proposing to pay providers based on how many households actually tune in to a channel for at least 5 minutes each month. Makes sense, right, especially when you consider that viewership numbers and the % of cable fees collected are not very tightly coupled?

Last year, for example, Walt Disney Co.’s ESPN averaged one million viewers watching its programming live on any given day and up to seven days after broadcast. That was slightly less, according to Nielsen, than the 1.3 million who were watching USA Network, owned by Comcast Corp.’s NBCUniversal. Yet distributors like Verizon paid ESPN an average of $5.04 a month per household last year, according to SNL Kagan, while USA got just 68 cents a month.

And Verizon plans to do this using data from its own set-top boxes, in a potential long-term offensive move against Nielsen’s sampling-based viewership data. Of course, Nielsen’s data is used to set ad prices, not determine cable fees, but its not difficult to envision a future where Nielsen’s revenue model is under threat from some kind of aggregated data collected from various providers’ set-top boxes.

Anyway, getting back to Verizon, unfortunately, the move will not reduce the ever-rising monthly cable bill in the near future:

The proposal, if implemented, wouldn’t reduce FiOS subscribers’ cable bills, Mr. Denson said. But over time, he said, he hoped the shift would “stabilize retail prices for consumers,” unless more people started watching smaller and midsize channels. If retail prices increase, “it would be due to consumer consumption,” he said.

So why is Verizon even doing this? Ostensibly because it, along with other cable companies, thinks that if cable prices rise too much then consumers will “cut the cord” and move away to Netflix and Hulu and others in greater numbers. Perhaps…But don’t be surprised if this is just a way for Verizon to pay less to certain channel providers while keeping customers’ costs where they are (analogy: banks in the US these days are enjoying cut-rate mortgage rates thanks to US Treasury policies, but have opted to not pass on most of those low rates to customers, resulting in very high mortgage profits).

Swatch and the Swiss Watch Industry

The Swiss are to watches, what the Germans are to cars.

Their luxury watches continue to dominate the global market for luxury watches, and have seen impressive growth (32%) in value, over the last two years.

A lot of that success appears to be traceable to the Swatch group, both directly and indirectly.

Directly because Swatch, with its stable of brands (Omega, Logines, others and of course, the memorably “cute” Swatch brand itself), accounts for over 33% of all Swiss watch sales.

But more impressively and indirectly, it looks like Swatch is the “engine” that powers the rest of the Swiss watch industry -  supplying 70% of other swiss watches’ movements and 90% of the balancing springs, per an article in The Economist (which contributed the specific numbers cited above).

Talk about “supplier power”.

However, Swatch is not very happy with the state of affairs:

Swatch became the watchmaker to watch in the 1980s, when it merged two weak companies and launched Swatch watches as a relatively cheap brand (though not nearly as cheap as a typical Chinese timepiece). It remains dominant, in part, because other firms find it easier to let someone else go to all the trouble and expense of producing their watches’ most fiddly and essential components.

But Swatch now finds this arrangement irksome. It supplies parts to rivals (Swiss and foreign) which then spend lavishly on advertising. Swatch would like to curb its sales of components, to 30% of the Swiss total by 2018. The Swiss Competition Commission agreed to modest reductions in 2012. After lobbying by watchmakers, Swatch will make no more cuts this year, but next year it will probably try again.

The article doesn’t detail exactly why Swatch finds this arrangement irksome…perhaps those that it supplies then compete with Swatch (successfully?) in different markets and segments, leading Swatch to think that if it stops “arming the enemy”, its brands could be more successful? The problem with that argument, as the article notes, if it progressively cuts off supply, it will encourage its competitors to develop their own suppliers.

So unless its capacity were fixed and/or it thinks that the movements and springs were sources of major competitive advantage, would it not be better off profiting from its dominant supplier position?

Any thoughts on that, readers?

Netflix’s Disney Coup: Classics Today, New Ones From 2016 Onwards

As noted on this blog in the past, because of a combination of supplier power (movie studios, and Internet Service Providers – to some extent), intense competition (everyone from Amazon to Apple to various other players) and some management challenges, Netflix has been under a lot of pressure since last year.

Most recently, Carl Icahn acquired a stake in Netflix to add to Netflix’ pressure. Netflix then adopted a poison pill, etc.

But today, Netflix scored a major coup by buying streaming rights for Disney for what The LA Times estimates at about $300 annually. The deal gives Netflix access immediately to Disney’s older titles and classics such as “Dumbo” (this is what all the news articles are citing as an oldie classic). The short-term reaction has been very favorable. [The stock jumped and a lot of Netflix shorts lost some money, I think.]

And then starting in 2016, Netflix gets access to all new Disney titles “seven to nine months after they are first shown in theaters“, which is sooner than what Disney’s current partner Starz gets them. Interestingly, Starz didn’t renew Netflix’s contract earlier this year so this must be causing some happiness at Netflix right now. (As an aside, it wasn’t clear to me if the annual $300m payments start in 2016 or earlier.)

A couple of things could happen going forward.

a. Other studios’ willingness to sign deals with Netflix could be changed thanks to this deal…perhaps Disney’s deal with Netflix indicates that they see the “streaming light” and think that Netflix is a good bet? As a move against Amazon’s power in so many different areas? Perhaps…

Or

b. This strengthens Netflix’ already strong offerings for kids (special and easy access to Netflix’s kids selections on its iPad app indicate, to me, that a lot of parents and/or kids watch a lot of Netflix. It would be interesting to see how much of the reported 30% of US peak ISP traffic attributed to Netflix consists of kids shows and movies…). So this may make Netflix more appealing…but to young families, further boxing it in.

While I love the convenience of Netflix and its basic premise, based on customers paying $8 a month, it is difficult to see how it can strike deals with most major studies and truly become a source of all video entertainment (TV shows + movies). Or can it? Today it has around 30 million subscribers globally. If they are all paying at least $8 a month, then Netflix is earning $240m a month * 12 ~ $3B a year. Is that enough to strike deals with all major studios? 

Not sure if the economics work out.

Some of Netflix’s future direction and trajectory should become apparent based on which major studios Ted Sarandos, Netflix’s chief content officer, is able to sign up with, next.

Disney’s Growing Character Arsenal, Amazon’s Publishing Troubles, Machiavelli in Citibank

Disney buys Star Wars studio for $4B: As the cognoscenti now know, Disney swooped up Lucasfilm, of Star Wars fame, for $4B (half cash, half disney stock). George Lucas, Lucasfilm’s visionary and legendary sole owner became richer and now owns about 40m shares of The Walt Disney Company. 

Why did Disney do it? Disney has been building up a war chest of comic book, fictional and mythological characters (its purchase of Marvel a couple of years ago, for example gave it 5000 such characters including Spider Man and many other lesser known ones), with the intent to further monetize them via sequels, prequels, amusement park rides (anyone want to guess how popular and money generating Star Wars themed Disney Park rides will be?). So expect Disney to really milk this one in a way that is tasty for fans and shareholders. Lucasfilm’s video game unit, LucasArts may (not sure or clear at this time) boost Disney’s own highly anemic performance in the ever expanding and growing video game market. 

A huge part of the acquisition is the merchandizing. In fact, in terms of cash flow, the Disney will realize the cost of the acquisition in about 5 years (though becoming NPV-positive may take more time, based on costs):

Lucasfilm’s consumer-products revenue this year will be comparable to the $215 million Marvel generated in 2009, when Disney acquired it…suggesting 2012 sales of about $860 million for all of Lucasfilm. Disney seeks to expand “Star Wars” merchandise beyond toys and sees international markets, now 40 percent of consumer-product revenue, as a growth opportunity, he said.

And why did George Lucas do it? He was getting old and at 68, wanted to pass the baton on to someone who would keep the flames burning. Nice way to do it, if you ask me. 

Amazon – becoming a book publisher is hard: Amazon, as we know, started with books. And while it tries to sell everything to every customer out there, it hasn’t stood still in the book industry either, where it has tried to integrate forward and backward in the book industry. In terms of backward integration (replacing or supplanting the big publishing houses it bought the books from, for sale on its website), it has been trying very hard to become a publishing house. 

The economics are simple. A $10 book might give the author $2 in royalties or so, but generate $3 for the publishing house and $5 for the retailer. So Amazon wanted to see if it could eliminate the $3 that the publishing houses (Penguin, Random House et al, from my post yesterday) captured, capture some more of that value itself and cut customer prices some more. 

So why the trouble in paradise? Two things. One, many of the big publishers out there still supply most of the physical books and the eBooks that Amazon sells. And they haven’t been too happy in the past, which means that the number of books they make available to Amazon goes down. Two, and more importantly, authors are getting cold feet – especially the famous ones (whom the publishing houses made famous in the first place) so they are not signing up with Amazon to publish their books. And they are getting cold feet because of what is happening to authors that make Amazon their publishing house:

…But a likely factor in the book’s poor sales is its severely limited availability. It wasn’t stocked in the 689 stores of Barnes & Noble Inc., Wal-Mart Stores, or Target. Some independent booksellers don’t stock the title either. Nor is the digital book for sale in e-book stores operated by Sony Corp.,  Apple Inc. or Google Inc.

The boycott of Amazon Publishing is deliberate on the part of these book sellers. Like the WSJ article quoted above says, why would a Barnes and Noble store promote a book published by Amazon?

Still, as always, never discount Amazon. It will be interesting to see how it solves this problem.

More rules = corruption: While I find corruption morally repugnant, the sadder thing about corruption is that instead of a million people becoming more prosperous, only a 100 become millionaires because businesses don’t get started, competition doesn’t thrive, jobs are not enabled and prosperity cannot take root.

An interesting article in The Economist argues that as opposed to the lack of no rules like in Somalia which is not exactly known for its thriving multinational corporations, few simple clear (enforced I would imagine) rules go a very long way in promoting businesses – and by implication, the virtuous cycle of value creation and capture (this blog’s raison d’être, as I never tire of reminding my readers).

(Above: The chart lifted from The Economist’s article)

The short piece is worth a read.

Citi’s CEO ouster was a result of its chairman’s Machiavellian moves: A fascinating piece in the New York times details how Citi’s CEO (until a few days ago), Vikram Pandit, was ousted because of its Chairman’s well orchestrated and executed campaign over a number of months that culminated in

…Mr. Pandit, the chief executive of Citigroup, was told (by the Chairman, in a face to face meeting) three news releases were ready. One stated that Mr. Pandit had resigned, effective immediately. Another that he would resign, effective at the end of the year. The third release stated Mr. Pandit had been fired without cause.

The choice was his.

A longish but fascinating piece.

Apple’s Shakeup, Random Penguin House, Google’s S-M-L Devices and Comcast and Lobbying

Yes…yet another format change – but hopefully the last for a while. Going forward, I will have daily roundups such as this one, once-a-week long-form articles (or maybe twice, time permitting).

As always, please let me know what you think. You can also vote with your wallet by interacting with the ads on this site.

Apple’s Management Shake-up: Two of Apple’s top execs are being let go in what is being called a rare top-management move. The best reasoning I could find is from a Gartner analyst:

“I’d call this a big shakeup,” said Gartner Research analyst Ken Dulaney. “And at least with Forstall, it looks like it has to do with problems with usability, which is the iPhone’s trademark. And if Apple feels they’re not at the top of their game, they’ll do what they have to do to get back on top.”

No one is talking about the iPad Mini move though. One could argue that it was a defensive move, which is very unlike Apple. So for some time they did lose some potential sales to 7 inch tablet makers. Then again, one could argue that Apple doesn’t always have to create a category. Entering a pre-existing category and executing flawlessly also works extremely well.

Google’s S, M and L devices: Google announced a 10 inch Nexus tablet. So now it has a S, M and L Nexus – phone, mini Tablet and Tablet. As far as sticking to the Nexus brand and doing classic brand extensions, nice move. I use both Apple and Android devices and can see why each one appeals to different types of users.

So the question is – in a year or two, will customers “self select” themselves as Apple customers (that just want things to work) vs Android/Google/Nexus customers that like to tweak and tinker and change things? Amazon of course can’t be discounted, though at some point, if the Kindle starts eating into Nexus sales I wonder if Google will change the terms of its licensing for Amazon.

The holiday season will be interesting to see how the relative sales of each ecosystem stack up.

The power of lobbying in the U.S.: I remember from a case in an economics class at Kellogg that talked about how $1 spent on lobbying by the Cotton Farmers (huge, corporate ones) resulted in about $7000 of benefits. Think about that, for ROI. I thought of that when reading about an interesting article in The Washington Post that talks about the power of lobbying, in the context of Comcast and how this has enabled Comcast to retain its sometimes-buyer, sometimes-supplier, sometimes-competitor power so well and grow and thrive. The article goes on to assert that this increasing and growing power is stifling the growth of competition and innovation:

In Cohen’s decade at the firm, Comcast…with $58 billion in annual revenue…(has become) the nation’s biggest provider of broadband Internet and cable television and the owner of network television programs, a movie studio and broadcast stations across the country. 

A consequence of all that power is a stubbornly strong cable television model that keeps many households paying upward of $100 a month for their service bundles, critics of the company say. Even as Verizon,Apple, Netflix and YouTube have tried to capture the living room, Comcast still dominates.

Random Penguin House: A big piece of news in the book industry is that venerable Penguin and Random house are merging next year and will control 25% of the world’s English language book sales. The reasons are a combination of (a) the parent companies wanting to focus on other things and (b) more importantly, synergies: cost savings, as well as increased buyer power (in a sense, they buy authors with lucrative contracts) – which become very important given the rise of the eBook and associated margins and (c) supplier power – in the sense that they supply books to book stores around the world.

The Economist says this has some agents and writers worried:

Some agents and writers worry that any combination of the two publishers may pressure the advances that writers are paid; it will almost certainly reduce the number of titles published under lucrative contracts, though self-publishing may be boosted. Whether there is a happy ending to this story may depend on whether you are an agent, writer or Penguin Random House.

But it had to happen, especially with Amazon now trying to become a publishing house too (more on that soon).

Until tomorrow.

DirecTV Blackout Produces Competitor Freeding Frenzy

(Above, a Viacom character whose basic premise I detest)

Or, did it?

In the past, when a content creator (say: Viacom) had a dispute with the distributor (say: DirecTV), while the contracts were being re-negotiated, as soon as the content creator’s channels were blacked out, competitors would be out in force, hunting for disgruntled subscribers.

This time, in the Viacom-DirecTV fight, things appear to be different, as seen from the lack of large scale subscriber desertions.

Though DirecTV customers have been without MTV, Nickelodeon, Comedy Channel, and other Viacom networks for more than a week now–the longest-ever blackout of Viacom-owned networks–the distributor has only seen a small number of its subscribers cancel service, according to its top programming negotiator, Derek Chang.

and realization among other distributors (excluding Dish TV) that today it could be DirecTV but tomorrow it could be them (behind WSJ paywall):

(more…)