I can get caught up in details when I start ranting on about how the movie and television business is moving into the future. But I thought of a less complex analysis of all of this – with plenty of footnotes I am not going to offer today – that might help some see the forest for the trees. (CBS/TWC is a tree. Netflix is a tree. Aereo is a tree.)

1. We Are The Infancy Of The Dominance of Internet Delivery of Content.
Realistically, we are about 3 years into the current era of streaming. Netflix began streaming limited films from its catalog in 2007. StarzPlay joined the streaming service in January 2008 for about $3 million a year. And on the TV side, Hulu launched in March 2008.

Going back a year, in 2007 Hollywood’s unions/guilds were threatening to strike for an extended period over streaming, having “lost” the fight to get paid fairly for DVD rights a decade earlier. The WGA struck in November 2007. DVD, which was supposed to be on the table, was quickly taken off the table. The AMPTP made the same argument for streaming that they had for DVD… that the tech was so young that there was no money and little money in the foreseeable future in streaming to pay the union members significant/fair residuals. The WGA settled in February 2008. The DGA also settled with AMPTP, without a strike, in February 2008.

SAG was the only union left with a threatening negotiation. There was talk of a strike or lockout before the formal agreement with AMPTP ended July 1, 2008. Didn’t happen. The union, suffering an enormous battle internally, worked without a deal for 11 months. A deal was finally ratified in June 2009.

Thirteen months later, July 2010, Netflix did its first big dollar deal with a content provider, Relativity Media, which was then distributing through other studios, but would start holding pay window rights for their product for Netflix. The deal was estimated by Relativity to be $100 million a year.

In the 3 years since the Relativity deal, Netflix has made a bunch of deals for streaming content with price points for major studio content using the Relativity deal as the North Star.

In these same three years, content owners of all scales have been analyzing, experimenting, and projecting the numbers on streaming opportunities.

2. Retransmission Fees Go From A Legal Possibility In 1992 To The New Normal Starting in 2009

There were retransmission skirmishes in the years since the law was changed in 1992 to allow broadcasters to negotiate retransmission fees if they so desired. But the first game-changing event was really in late 2009, when Time-Warner Cable and Fox TV network went to war. (Was it coincidental that Time Warner Cable had been separated from parent Time-Warner in March 2009? Probably not.) A deal was made on New Year’s Eve. Happy 2010!

Since then, we have all heard of repeated conflicts over retransmission fees. It’s not an occasional thing. If there is a major network/group of sites and a major cable/satellite provider, there is going to be a hot & heavy negotiation.

Every time it happens, it is treated like some anomaly by most of the media. But it’s neither an anomaly nor a surprise. It is, indeed, The New Normal.

3. Retransmission Fights & The Changing Face Of Streaming Subscriptions Are Rooted In The Same Thing

Pay me!

Pay me for every use, anytime, anywhere, any delivery system, and kind of receiving instrument… pay me!

There is this ongoing mythology perpetuated by a lot of media and a number of stock market analysts that there is a way to have this movement and end up with “free” content. But here is the bad news… free content is dead.

And here is the great news… content has become cheaper for consumers to access than ever since the cable era started and will only become cheaper.

We have learned, over and over, that there is some elasticity in the amount of money people will spend on entertainment in their homes…. but not endless elasticity. If the average cable/satellite bill is in the $80/month range, “average” families may be willing to go to $90/month. But when it gets past that, they will start slicing away at premium services… perhaps even cord cutting.

Households have accepted new monthly bills in the form of cell phones or home internet service, expanding their overall spend on “media.” But again… there is a glass ceiling on these spends.

CBS understands this. So does Time Warner Cable. And so do all the other companies. The only reason cable/satellite is unwilling to spend more or content providers are not asking for more is because they really can’t just pass the costs on to the consumer. There is a ceiling… and everyone selling wants to force the buyers as close to it as possible, while the buyers want to be as far away from it as possible (aka making more profit).

Still, no one, on any side, wants to give anything away for free. None of this is a negotiation of philosophy – and much of the media wants it to be – but simply of the price for everything being set by the marketplace.

If you believe Netflix claims that they are tailoring content to the stuff that people like best, you might want to take a look at the Brooklyn Bridge. I’ll give you my PayPal account number and you can just transfer however much you think it’s worth. Netflix, like Time Warner Cable, like CBS (as they buy content from production companies) has a limited amount to spend.

If every major studio was willing to sell content to stream on Netflix for a couple million dollars a year, as was the deal with Starz just 5 years ago, Netflix would be streaming every piece of content on the planet and making money hand over fist. And let me note… the companies getting paid out on StarzPlay were thrilled with the additional revenue. Thrilled! But in 3 years, that price point has grown exponentially. Starz was two studios, Sony and Disney. The new deal between Netflix and Disney is for $350m a year. That’s one studio, albeit with more TV product in the deal and with exclusivity. But still, ONE studio.

4. On The Other Hand…

A $350 million annual streaming deal doesn’t begin to replace the revenue that evaporated from the crash of the DVD business for any studio. And the pain of the dying of the DVD light is equally bad if not worse on the TV side.

So with the assumption that the big pot o’ home entertainment spending is not going to expand without a new, successful must-have product, how will the studios make up for the loss?

Retransmission fees are part of making up that lost revenue.

But to my eye, the biggest change we can expect in the next 5 years is a reconfiguration of “premium” packages and subscription content. The cap on the number of households in the TV universe choosing to subscribe for any premium service/subscription is still under 40 million households in a cable/satellite universe of about 110 million. The economics for content providers demands that the number of subs be a lot closer to the 110 million mark.

If CBS gets $2 a month for the network on 110 million cable/satellite boxes, $2.64 billion dollars a year. That’s beginning to be real money. CBS’ annual revenues are about $15b a year now. Earnings are about 10% of that. And they are the top network right now.

For reference, ESPN is charging $5/mo to some cable/satellite companies… if 110 million households were paying that, that’s $6.6 billion.

5. We Are Experiencing The Growing Pains Of Transition, Not The Final Product

If you’re the owner of a cable company and for 25 years of the 30 you have been in business, you have been forced to carry the broadcast networks and all local stations as part of your contract with each municipality, and all of a sudden (last few years) you are being asked to pay 24 bucks a year for CBS, which inevitably would mean paying no less than $7 a month/$84 a year just to show the broadcast networks (which your subscribers have considered basic cable for decades), it is understandably shocking.

But you didn’t get and then lose all that DVD revenue. You aren’t sweating out the ratings of your shows and thus, the advertising dollars, some of which are moving to cable stations that your broadcast network carried for years so they can now take advantage of with new, fresh, costly programming. You aren’t sweating out the post-first-run release to streaming and estimating how much revenue that will ever produce.

It’s easy to say “a plague on both houses.” But not so easy to be glib if you are running a multi-billion dollar business with 15% margins at the very best, the threat to lose money at the worst, and a big transition in revenue streams.

Some part(s) of the food chain will get hurt in all of this… and potentially hurt very badly. And we are just at the beginning of the massive, violent, vicious scrum that will determine who wins and who loses. The winners may not be as strong as they imagine “winning” should leave them. The losers may expand into other businesses that will be more successful than they would have been had they just been able to stay the course.

But not being able to see “Under The Dome” for a month of episodes is collateral damage… and minor damage at that. It’s the traffic you have to sit in when the city is expanding the road you drive to work on every day. It sucks. It’s unfair. It may force you to sleep less in order to get to work on time. But when the road is done and you can get to work faster every day for many years to come… you forget.

Or how about this analogy… remember when they tore up your street to put in the cable? Or when you were infuriated by having to wait home all day to get a cable installation?

In five years, when real change settles in – and settles in for a lot higher percentage of Americans than are currently considering what content they can get on their iPads or on VOD – all of this will seem like a small price.

And if you are still caught up on the ides that there will be some nirvana in which the average American household will pay $40 a month and be happy to get the cord-cut-content that’s available for that… well, enjoy your fantasy. The rest of us will be over here, still paying $80/month or $100/month or whatever and trying to figure out how to consume a bucket of content of greater depth and breadth than was ever available for eat relatively inexpensive access in the history of mankind. (Kinda like now… but a lot better… just not cheaper… and certainly not “FREE!”)

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