Cord cut­ters’ dreams dashed as stream­ing sec­tor splin­ters

The Washington Post Sunday - - FRONT PAGE - BY STEVEN ZEITCHIK AND CRAIG TIMBERG

burbank, calif. — The dream of cut­ting the cord on pricey ca­ble TV ser­vices went some­thing like this: Con­sumers could get what they wanted, when they wanted, while sav­ing money be­cause they wouldn’t be pay­ing for ex­pen­sive bun­dles of chan­nels they never watched. Snip, save, en­joy. But this en­ter­tain­ment nir­vana never ac­tu­ally ar­rived. First came pricey broad­band ser­vices re­quired to stream In­ter­net video, of­ten de­liv­ered by the same ca­ble wires con­sumers longed to cut. Then came a pro­lif­er­a­tion of ser­vices — of­fered by Net­flix, Amazon, Hulu plus and more — each with a bill of its own. Then came more boxes, wires and re­motes.

And fi­nally came the ques­tion: How ex­actly do I get my “Star Wars” fix?

The an­swer, it be­came clear with an an­nounce­ment here at Dis­ney’s South­ern Cal­i­for­nia head­quar­ters Thurs­day night, is that most con­sumers even­tu­ally will need yet an­other ser­vice to stream many of the sta­ples of Amer­i­can en­ter­tain­ment: “Frozen,” the Avengers and, yes, all those “Star Wars” se­quels, pre­quels and spinoffs.

While many of these fa­vorites will re­main avail­able on other ser­vices for a time, grad­u­ally Dis­ney will pull them into its own ser­vice, Dis­ney+. The cost: $6.99 a month.

“If cord cut­ters thought there was some way they were go­ing to evade the tyranny of an­nual price in­creases, they were de­lud­ing them­selves,” said Craig Mof­fett, an in­dus­try an­a­lyst for Mof­fett-Nathanson. “Ev­ery economist in

world tried to warn that the out­come of that sys­tem would be higher prices and less choice. And lo and be­hold, that’s where we landed.”

Those who study the en­ter­tain­ment in­dus­try de­bate the un­der­ly­ing rea­sons for this. One group blames the in­dus­try’s big­gest play­ers for re­assert­ing their con­trol over pric­ing in a way that dis­ad­van­tages con­sumers — and Wash­ing­ton for al­low­ing that to hap­pen. Stream­ing ser­vices are the prof­itable ben­e­fi­cia­ries of these shifts, while con­sumers’ wal­lets are the losers.

The other side, in­clud­ing Mof­fett, say the out­come was in­evitable for a range of pre­dictable rea­sons: Amer­i­cans want the best, coolest shows, and these cost a lot of money in ac­tors, set costs, big-name direc­tors and spe­cial ef­fects. Even for a tele­vi­sion show, these ex­penses can run into the mil­lions of dol­lars per episode.

But there is no real de­bate about the out­come: The dreams of cord cut­ters are largely un­ful­filled. A tran­si­tion that some hoped would pro­vide more choice, lower prices and more sim­plic­ity in­stead has de­liv­ered frus­trat­ing lev­els of com­plex­ity. There still may be more choice, but each choice comes with price tags that, taken to­gether, may well ap­proach the ca­ble bills of old.

“It’s not go­ing to come for free,” said Michael Pow­ell, pres­i­dent of trade group NCTA, rep­re­sent­ing pay tele­vi­sion and broad­band providers. “Peo­ple want to watch their ‘True De­tec­tive,’ ‘Break­ing Bad,’ ‘Mad Men,’ and that stuff costs a for­tune.”

The shift is vis­i­ble in the fall­ing num­bers of tra­di­tional ca­ble video subscribers and the ris­ing num­bers of broad­band subscribers. The two lines crossed a few years ago, ac­cord­ing to data com­piled by S&P Global Mar­ket In­tel­li­gence. Broad­band cus­tomers are more prof­itable for ca­ble com­pa­nies too — be­cause they don’t have to share those monthly fees with the me­dia com­pa­nies pro­vid­ing the shows.

In other words, as tele­vi­sion con­sumers pared back on ca­ble pack­ages, they spent more on In­ter­net. This hurt satel­lite tele­vi­sion com­pa­nies, but rel­a­tively few ac­tual cords got cut. And many of those that got cut were re­placed by new cords from other com­pa­nies, with bills of their own, not to men­tion the ones from stream­ing ser­vices that de­liv­ered the ac­tual shows, movies and sport­ing events.

“Pay­ing five dif­fer­ent stream­ing ser­vices a to­tal of 50 or 60 dol­lars to get some of what we want in­stead of a lit­tle more to get a lot of what we want — well, I think a lot of peo­ple would pre­fer the pack­age deal,” said At­las Me­dia founder Bruce David Klein, a vet­eran tele­vi­sion pro­ducer and ca­ble ex­pert. “It’s get­ting harder to piece all this to­gether in a way that doesn’t cost a for­tune.”

Dis­ney of­fi­cials said their ser­vice would of­fer ad­van­tages view­ers can’t get any­where else.

“Never be­fore has our con­tent been as broadly, con­ve­niently or per­ma­nently avail­able as it is on Dis­ney+,” said Dis­ney ex­ec­u­tive Kevin Mayer while stand­ing on the stu­dio’s lot. “We’re con­fi­dent con­sumers will love the ser­vice.”

Com­pany of­fi­cials por­trayed Dis­ney+ as par­tic­u­larly at­trac­tive to con­sumers crav­ing sim­plic­ity. Rather than the thou­sands of scat­ter­shot shows and movies on Net­flix, Dis­ney ex­ec­u­tives said they would of­fer a stream­lined set of of­fer­ings from their pop­u­lar con­tent brands in­clud­ing Marvel, Pixar and Lu­cas­film.

In­vestors seemed pleased — Dis­ney stock closed up 11 per­cent Fri­day.

But Tim Wu, au­thor of “The At­ten­tion Mer­chants,” ar­gues that Dis­ney’s an­nounce­ment and other re­cent de­vel­op­ments signal that a hal­cyon era is end­ing, one in which dis­rup­tion in the en­ter­tain­ment in­dus­try un­leashed op­por­tu­ni­ties for bet­ter con­sumer deals.

The deals came for those will­ing to can­cel their ca­ble ser­vices while be­ing care­ful in adding new stream­ing ser­vices. Such re­straint has got­ten harder as the in­dus­try has frac­tured, with many en­ti­ties, in­clud­ing sports leagues and genre-fo­cused pro­duc­ers, now of­fer­ing their own pack­ages.

“Ev­ery­thing is about fund­ing, a way to make peo­ple pay more money,” Wu said. “The in­cen­tives are to have stream­ing be as bad a deal as ca­ble al­ready was.”

Stream­ing be­gan as the domain of the dig­i­tal-minded Net­flix and soon at­tracted a slew of en­trants. Legacy com­pa­nies, frus­trated that Net­flix was grow­ing its in­flu­ence on the backs of their shows, made plans to take back rights and launch com­peti­tors.

Tech­nol­ogy giants such as Amazon soon be­gan mov­ing in. Ap­ple, which has a ros­ter of new high-end con­tent it will launch later this year, is the lat­est to join the fray. And a host of niche ser­vices have sprung up, from the ani­me­cen­tric Crunchy­roll to mul­ti­ple plat­forms spe­cial­iz­ing in British tele­vi­sion. HBO parent Warn­erMe­dia is ex­pected to launch its own stream­ing ser­vice as soon as this year. (Amazon’s chief ex­ec­u­tive, Jeff Be­zos, owns The Wash­ing­ton Post.)

“It is quite an Ex­cel spread­sheet to dis­sect all the op­tions,” said Trip Miller, the founder of the in­vest­ment firm Gul­lane Cap­i­tal.

When con­sumers do de­cide on a ser­vice, they might find it costs more than they ex­pect. Net­flix re­cently raised its monthly prices by as much as 18 per­cent. The hikes have been im­posed partly to fund orig­i­nal shows, whose costs have risen thanks to a heated con­tent mar­ket and the au­dithe ence’s de­sire for higher pro­duc­tion val­ues.

While fig­ures don’t sug­gest a ca­ble tele­vi­sion resurgence, the sec­tor has slowed its losses. Com­cast and Char­ter Com­mu­ni­ca­tions, the na­tion’s two largest ca­ble providers, re­ported ca­ble-revenue growth in the mid-sin­gle dig­its for the most re­cent quar­ter, sug­gest­ing that the rate of at­tri­tion has less­ened. Shows on Hall­mark and His­tory reg­u­larly at­tract 2 mil­lion to 3 mil­lion view­ers, an im­pres­sive num­ber given that Net­flix mostly does not re­veal how many peo­ple are view­ing its shows.

Still, stream­ing could un­der­mine con­sumer choice. Net­flix’s emer­gence has put the squeeze on what has his­tor­i­cally been a large sup­plier of orig­i­nal pro­grams — ca­ble net­works.

In the fall, a crit­i­cally ac­claimed show on Life­time, “You,” foundered as many of its core cus­tomers had turned to Net­flix. The ca­ble net­work de­cided against fund­ing a sec­ond sea­son due to low view­er­ship. Net­flix then stepped in to fi­nance the sea­son. Many in Hol­ly­wood saw it as proof that only a few well-cap­i­tal­ized play­ers could keep the pipe­line flow­ing.

And newer sup­pli­ers, like Ap­ple, could de­cide to exit if con­sumer adop­tion doesn’t hap­pen quickly.

A study by Ovum an­a­lyst Tony Gun­nars­son cited at the re­cent NAB trade show noted that the ma­jor­ity of con­sumers will sub­scribe to only 2.25 stream­ing ser­vices, leav­ing many play­ers out in the cold.

Ex­perts say that while the mar­ket can prob­a­bly ac­com­mo­date Dis­ney, oth­ers may not be as lucky.

“Net­flix got there first and is far and away the big­gest, so Dis­ney is try­ing to play Avis to their Hertz,” said Lloyd Greif, a Los An­ge­les­based in­vest­ment banker who closely fol­lows the me­dia space.

Dis­ney’s ser­vice will cost just over half the monthly price of the most pop­u­lar Net­flix plan, and even less if con­sumers make an an­nual com­mit­ment. The com­pany can af­ford to do this in part be­cause, un­like Net­flix, it draws revenue from box of­fice, theme parks, TV ad revenue and other non-sub­scrip­tion ser­vices.

The goal is to achieve revenue through reach, not over­charg­ing, com­pany of­fi­cials said. Dis­ney+ plans to launch 25 new episodic se­ries and 10 movies in its first year. But within five years, the num­ber of episodic shows is ex­pected to dou­ble to 50. Over the next few years, the com­pany will also reac­quire rights to all the prop­er­ties it had li­censed out on long-term deals to other plat­forms and com­pa­nies. Ex­ec­u­tives also said they ex­pect losses through 2023. “Dis­ney is loved by so many mil­lions of peo­ple around the world,” said Robert Iger, its chief ex­ec­u­tive, at the in­vestor pre­sen­ta­tion. “This is our first se­ri­ous foray into this space, and we want to reach as many peo­ple as pos­si­ble.”

JIM YOUNG/BLOOMBERG NEWS

DIS­NEY/ASSOCIATED PRESS

There’s no short­age of fans — in­clud­ing the cos­tumed at­ten­dees, top, at the long-run­ning Star Wars Cel­e­bra­tion event in Chicago on Satur­day — for what now are Dis­ney prod­ucts. The firm is fun­nel­ing a range of se­quels, pre­quels and spinoffs from the var­i­ous uni­verses it now owns into Dis­ney+, above, a stream­ing ser­vice.

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