The Global Media Weekly for executives and entrepreneurs

Online TV to spur mega-mergers – and help Murdoch

It has taken Hollywood A-lister Kevin Spacey to move serious coverage of the internet TV revolution from blogs, tweets, and Wired

Spacey changes the rules
Spacey changes the rules

to the pages of daily newspapers. In case you missed the buzz, Spacey is starring in the US remake of the political thriller “House of Cards”. And, if that is all you know about it, this major production is not being broadcast or screened in the movies but is available exclusively online from Netflix – one episode at a time or as a ‘box set’. So, in the year when YouTube and Amazon are ramping up their original programming, the stakes are being raised dramatically. Whether or not this compelling drama is itself a game-changer, it is clearly a sign of things to come.

What TV people have long been calling OTT (over the top) video streaming as opposed to IPTV (the same kind of online content but from cable companies) has taken off. It must soon become known simply as “online TV”. And it’s growing fast:

1. BSkyB, Europe’s most profitable TV broadcaster, plans to intensify its UK-based online TV operations by expanding the once tentative NowTV (launched with Sky Movies content in July) with no fewer than six pay-as-you-go online sports channels, covering premier league football, cricket test matches, Masters golf, and Formula 1. This is a major move by BSkyB whose ground-breaking 1992 Premier League deal catapulted the then struggling broadcaster, into the financial big time, where today it has almost 11million subscribers and profits of over £1bn. The recent declaration that NowTV has gathered 25,000 subscribers means nothing alongside Sky’s move to open up its sports coverage to online viewers – a clear sign of strategic intent by the News Corp-controlled company, determined to maintain dominance of pay TV as it moves online. The strategy has been spurred by the rapid growth of its SkyGo (free to BSkyB subscribers) mobile app. Last year’s Manchester Premier League derby was said to have attracted 234,000 unique users on laptops, iPads and smartphones. A clue to the growing audience of viewers beyond the TV set.

2. YouTube followed up  the announcement of its original channels with plans to start selling subscriptions. It has invited European content producers to pitch for channels that will charge $1-5 a month, apparently paying 55% of revenues to the channel producer. Its first pay channels are expected in the next few months. YouTube (owned by cash-rich Google) is hungry for content and for channel deals that will define the future of online TV. So there will be plenty more announcements as this “Year of Online TV” progresses.

3. Netflix has invested a reported $100million in two 13-episode series of “House of Cards”, the first season of which was released last month. The high-flying company is betting that its 33million worldwide subscribers are as interested in exclusive new drama as in old movies and TV programmes. Releasing the whole series together is almost as a big a bet as sinking all that money into an online-only TV drama in the first place. But it does feel like a game changer.

Powering online TV

So online TV is on the crest of an almighty wave. The only question is who will be helped or hurt by the tsunami set to hit during 2013. UK consulting firm Deloitte had some balm for worried broadcasters, recently reporting that “Far from being the thing that destroys their revenue base, over-the-top services will actually benefit broadcasters who will likely come to dominate pure play rivals in 2013….In markets where such services are available, two-thirds of the top OTT TV programme and film services are likely to be those provided by existing broadcasters…. OTT is likely to be offered as part of the ecosystem of television services provided by either pay-TV companies or free-to-air broadcasters with its principal role likely to be to enable catch-up, rather than to create a bespoke ‘channel’ of TV content.” The consultant reassuringly declared that brand and content were set to emerge as  “the two aces in the hand for legacy broadcasters’ OTT services as most viewers will likely remain faithful to the broadcasters and programmes they have watched in previous years.”

You wouldn’t bet on it.

Take the UK, where ITV is by far the largest  TV network (by advertising revenue). The company has been busy buying up content producers, which is one key to the future, admittedly. But  (like newspaper and magazine publishers) ITV is exposed to new-world, digital challenges because of its:

  • Dependence on advertising at high rates based  historically supported by uniquely large audiences, which will be disproportionately sliced by fragmenting audience figures – as viewing extends online
  • Sparce audience and viewing data, compared with cookie-laden online operators – and cable and satellite subscription services.
  • Weak, under-invested online operations
  • Traditional, relatively high-costs
Jamal Edwards piles up the audiences

The fact is that such network broadcasters in all these countries are faced by the need to create totally new business models, evidenced by huge younger audiences  flocking to YouTube and other online viewing – and away from network TV. Look at Jamal Edwards’ now not-so-fledgling London-based SB.TV whose online TV figures are piling up: millions of views per month and 215,000 subscribers to his burgeoning spread of music, comedy, sports, fashion and business channels. SB.TV is starting to look like a real network beater in the race for the smartphone and lap top-viewing young audiences prized by many advertisers.

But it’s more troubling than that. Network TV operators have seemingly spent their lives trying to ensure that ‘time-shifting’ (recording of programmes for later viewing) does not erode the impact of their all-important advertising. Broadcasters have become paranoid about the ads being ‘zapped’. But the newbies start at the opposite end of the spectrum.  YouTube have been at the forefront of developing a business that seeks to confront viewers only with the adverts they actually want to watch.

Viewers can skip most of the ads. Advertisers only pay when a user chooses to watch their ads. The ads, therefore, get engaged, interested and committed viewers. Some 65% of all YouTube adverts can be skipped. The crunch is that the cost per thousand views (according to UK consultant Enders Analysis)  is often more than $15 – 2-3 times the rate for other ads. The future of media success so clearly belongs with ads that are addressable and whose impact can be measured. It is not exclusively about direct response but so-called “flat” advertising (whose impact cannot readily be measured) will just keep getting cheaper.

And that is the point.

Early player in online TV

We are seeing major change in every aspect of TV: the viewing, the funding and the transmission. And it is undermining the economic power of traditional broadcasters. Like paid-for daily newspapers whose readers still quite like the content but whose advertisers (which have, effectively, been subsidising cover prices for years) are paying less and less, the old TV business model is breaking. And it’s the same painful choice for the legacy operator: whether to cannibalize  existing operations and risk accelerating the decline in profits as the cost of creating a new, more sustainable business. Or whether to ‘manage’ the decline (as best they can) and enjoy the profits while they last. Sink or swim.

But technological revolutions will never be neat, tidy affairs that finish off the old and bring in the new. You can be sure that this powerful new world of online TV will throw up winners from every camp: broadcasters with existing brands and content; pure-play operators like Netflix, Hulu and Amazon; cable-rich telecom companies; new-wave channels like SB.TV; and YouTube as a worldwide platform for its own original programming and almost everyone else’s. And, of course, there will still be network TV operators delivering their brands and content through the air, by cable and satellite and, yes, through broadband too. There will be something of everything, but the distribution of profits – and growth – will change fundamentally. And all the while, the ‘gatekeeper’ of online content is shifting from internet service providers to – believe it or not – the manufacturers of ‘smart’ TV sets (like Samsung, Sony and, soon, Apple). But who knows what YouTube/ Google will do next in their bid to keep control of the market they have created. And, then, there’s Fox/News Corp too.

Some of the outcomes will, of course, be driven by what the commercial free-to-air broadcasters decide to do with their still-substantial audiences: how far they decide to cannibalize those existing businesses. They will have been rocked by the arrival of the world’s most international cable TV business John Malone’s Liberty group with today’s agreed £15bn bid for Virgin Media, the UK’s No.2 pay TV operator. But what comes next may matter even more.

The Liberty move may now prompt another, long-whispered mega-merger in the UK :  ITV with BT, the former British Telecom. These are two traditional companies under pressure in a changing world.  A merger would create a world-scale company that is all over telecoms, broadband, broadcasting, online TV and content production. A company that can compete with Liberty-Virgin and BSkyB across Europe.

ITV a sure-bet for BT?

BT has looked strategically lopsided ever since it was forced by regulators to exit the mobile phone business (although it is now planning the launch of BT Mobile). More recently, it has been busy countering a decline in sales of traditional phone services with a £2.5 billion fibre-optic project for faster web speeds – and expansion of its online TV operations. The former phone monopoly has added 60,000 subscribers for YouView  (co-partner: ITV) since the ‘video-on-demand’ service went on sale in October.

And this year the telco will launch BT Sport, three 24-hour sports channels which will feature 38 live Premier League football matches, women’s tennis, Moto GP and Premiership rugby, initially offering the high-value service free to broadband subscribers. This £1bn push into sports and online TV is enough to provoke Murdoch and his demerged 21st Century Fox. But nothing like a BT-ITV deal.

Insiders have long said BT should not waste its time and money acquiring content and skills when the resurgent ITV – which needs BT’s technology, subscriptions, and a dependence on something other than just advertising – has plenty. These two companies know each other very well. And how deep have been those conversations between fellow You View directors Adam Crozier (ITV CEO) and Gavin Patterson (BT Retail CEO) before and after Board meetings?

The company strategists on both sides have, though, been inspired by US-based Comcast’s 2011 combination with NBCUniversal which has produced a powerful, modern media group, with impressive scale:

  • 24m Comcast cable subscribers, making it America’s largest multi-channel programme distributor
  • 50million broadband homes, making Comcast the largest internet service provider in the US
  • 10 regional cable sports networks
  • National cable networks including MSNBC, Bravo, Oxygen, E! and Syfy
  • NBC national TV network and local stations including Spanish-lenguage channels
  • NBC film and TV production and back catalogue
  • Digital operations including, iVillage,, Fandango and Daily Candy which together generate more than 40 million unique users each month;
  • 30% stake in (online TV)  and 50% of  StudioCanal and Canal+,  the largest pay channel in Europe which holds the third largest film library in the world, along with all distribution rights (outside North America) to the Miramax films library.

The prospects of a UK version of  Comcast-NBCUniversal have been given new oxygen by the  Virgin-Liberty deal. The prospective ITV deal is being helped along by a BT non-executive director, one Tony Ball who was CEO of BSkyB from 1999-2003 and is now also involved in cable TV in Germany and Spain. The merger plans are being dusted off. John Malone’s UK deal has reminded BT and ITV that they must move quickly in order to pre-empt an opportunistic Liberty-Virgin bid for ITV, which might effectively be funded by Virgin Media’s £5bn of tax losses.

So, Ball’s former boss Rupert Murdoch now has to worry not only about Liberty-Virgin (whose CEO will be Tom Mockridge, former boss of News Corp’s European and Australian pay TV operations)  but also about a prospective BT-ITV. Or does he? The creation of two new media monoliths on the UK landscape could be expected to raise the costs of buying content and acquiring subscribers. But they might just be very good news for BSkyB and its Fox parent.

Liz Murdoch pushes online

These two major moves (or even the one done-deal and growing speculation about the other) may, at a stroke, have actually made it much easier for Murdoch to do his last big deal in the UK market: acquisition of the 61% of BSkyB News Corp/Fox doesn’t currently own, which fell foul of regulators at the height of the newspaper phone hacking scandals in 2012. Now, with the papers due to be separated into “new” News Corp in June and seemingly bigger beasts prowling the UK media landscape, it might just become a (reasonably) quick win, during 2013. Hence, last month’s appointment of Fox CEO Chase Carey to the board of BSkyB. They’re limbering up right now, even though the  criminal trials of former News Corp executives will have to be navigated round. With those trials now expected to start in September, it may be that the bid for BSkyB will have to wait until 2014, although Carey and Murdoch must be wondering about that June-September window between the demerger and the return of muddy coverage for News Corp.

But, as Rupert Murdoch again contemplates the delicious prospect of owning outright the highly-profitable BSkyB he created, the words of his daughter Elisabeth are ringing in his ears. The smart Ms Murdoch, whose Shine production company was controversially bought by News Corp for £415m  in 2011, was waxing lyrical about online TV in New Yorker magazine recently: ” I would love to figure out how to build a Shine in the digital space. Hopefully, with Shine: I want to call it ‘Rise’.”

Even more than the executives at BSkyB, Ms Murdoch is convinced of the significance of online TV. And she notes the generational shift. “The average YouTube viewer is 26 versus the TV viewer who is 52”.  In her 2012 MacTaggart Lecture at the Edinburgh TV Festival, she said: “Believe at your own risk that YouTube’s platform is based on homemade videos of cats in washing machines…commercial broadcasters must figure out how to have one-to-one relationships with each and every one of their viewers – if they don’t, they are destined to become increasingly marginalised and dependent on occasional national live events”.

The News Corp boss has been mightily impressed by his daughter’s vision of this new world, not least through the success of ChannelFlip. The sparky online content producer, which was acquired by Shine in 2012, has achieved 1.5bn views from its 8.5m subscribers across 136 YouTube channels. That and last year’s 57% increase in overall YouTube viewing are the numbers now motivating the Murdoch family. They clearly believe BSkyB can dominate online TV across Europe – perhaps, eventually, with Liz Murdoch as CEO. But that’s for another day.

The BSkyB opportunity is why Rupert Murdoch will today be thinking about things other than Liberty Global and Virgin Media. Once again, his strategic gaze is well beyond the headlines.