Pay TV grapples with auds' on-demand appeitites

Pay TV has long been the smallscreen’s bulletproof business model: Subscribers pay their $10-$15 a month, and the nets are free from the tyranny of advertiser concerns and overnight ratings scrutiny.

But it may be time to don the flak jackets.

As multiplatform distribution takes root, auds have more options to choose the shows they watch and when they watch them. So pay TV nets will have to work harder to keep their customers writing those monthly checks.

At a time when HBO and Showtime are in a heightened duel and Starz is trying to become a contender in original series, pay cablers are being challenged to serve up their programming on myriad platforms to keep pace with fast-changing viewing habits.

If viewers know they can eventually check out HBO’s “True Blood” or Showtime’s “Dexter” via iTunes or on DVD, or, worse, pirated copies, that flexibility may dampen the incentive to pay a monthly subscription fee in favor of dining a la carte.

That may be especially true in a recessionary environment where many consumers are looking to rein in discretionary spending, although so far there’s no sign of a mass exodus in the latest subscriber figures for pay TV’s Big Three.

Pay TV execs downplay any such threat and note that their biz has been at the forefront of harnessing on-demand technologies to keep viewers engaged. Still, industry observers say the growth of viewing options could become a speed bump for the sector that has seen subscriber growth plateau at about 30 million homes in recent years.

“You’re going to see some short-term turbulence right now as the (TV) industry tests the waters on what kind of pricing models work for consumers and distributors,” says David Joyce, media analyst for investment firm Miller Tabak. “It’s a new paradigm. In the near-term, the economics are going to be challenged.”

Despite the uncertainty, the rewards can be so great (witness HBO’s enviable profits) that Starz parent Liberty Media is plowing millions into series development, while Viacom, Lionsgate and MGM are braving a premium startup venture, with the planned launch next month of Epix. (See story, page 3.)

Ironically, amid this heightened competition, pay cablers in some ways will be forced to think a bit more like broadcasters and serve up more than a few signature shows and franchises to ensure their linear channels remain a must-have for subscribers.

Pay TV outlets have responded by ramping up their proprietary video-on-demand services and keeping a tight rein on the availability of their shows on outside platforms. They aim to get subscribers hooked on the ease and convenience of using their services … and keep them hooked. And because pay TV doesn’t have the same advertising and ratings issues that ad-supported nets do, they’ve been more adventurous in how they slice and dice their programming.

One big hurdle, however, is that on-demand services are not offered by every cable operator because of technical limitations. DirecTV can’t offer true on-demand because its sat-TV platform doesn’t support the same level of two-way communication with the home set-top box as do digital cable services.

“All of the linear networks are challenged by on-demand competition in Internet delivery space,” says Deana Myers, analyst with media research firm SNL Kagan. “The premium networks have been embracing new technologies as a new means of distribution, and looking at different ways in which they can make (themselves) more valuable to the consumer.”

The audience base for HBO’s red-hot vampire drama “True Blood” offers a good illustration of how viewing is changing.

According to HBO, the series’ sophomore season, which wrapped Sept. 13, averaged 12.4 million viewers per episode, when measured across various viewing platforms. But only 24% of those viewers came for the show’s premiere 9 p.m. Sunday telecasts.

Some 37% of “True Blood’s” true-blue fans caught reruns on HBO and its themed channels throughout the week, while 21% watched via DVR playback and 18% watched on the HBO on Demand platform. It’s telling that the percentage of on-demand viewing climbed significantly from the show’s first season, when it was 13%, while the rerun viewing dropped sharply, from 56% in season one.

“Homes with HBO on Demand actually watch twice as much HBO as homes without On Demand,” says HBO co-prexy Eric Kessler. “What that means is that as it provides greater access to programming, it increases overall usage, and that leads to greater satisfaction with the overall subscription.”

The satisfaction factor is a key measure for HBO, because it’s so focused on retaining its existing subscriber base. The oldest of the pay cable pack remains the gold standard, situated in 90% of pay TV homes. Even with Showtime’s momentum over the past few years, its growth has come from moving into homes that already take HBO. That’s another reason why on-demand and other services are so important to the sector.

But pay TV’s embrace of emerging distribution platforms goes only so far.

There is a dizzying array of options for catching a show, but they all hinge on users maintaining their monthly subscriptions. There’s little chance that any of the three major feevee players will offer a stand-alone on-demand service in the near future, industry execs say.

Auds may like such a convenience, but it’s doubtful that an on-demand-only service would command a price on par with a traditional TV channel. Just as broadcast nets make most of their money from viewers watching the old-fashioned way, so do pay TV providers rely on the model of receiving fees and marketing support from cable and satellite operators.

“We don’t see any reason why you would want to bifurcate your audience. If you want on-demand, you’re going to be a Starz subscriber,” says Bill Myers, Starz prexy and chief operating officer.

Starz’s internal data show that the bulk of its aud still watches its various channels live.

“Clearly the traditional linear world will hold pretty strong for the next four to five years. It’s the most important part of viewing,” Starz’ Myers says. “On-demand and Internet will nibble around the edges, but we don’t see that causing a significant change in our business model.”

Showtime and HBO are cautious about venturing outside their own has four walls with their hit shows. Showtime does release most of its hit shows to iTunes and other paid download services about four months after a series wraps its latest season on the mothership net. HBO releases its shows to iTunes strictly in tandem with their DVD debuts.

Showtime chairman Matt Blank sees iTunes as a marketing tool. The more iTunes users have a shot at sampling “Dexter,” “Weeds” and “Californication,” et al., the more they’ll be encouraged to become a Showtime subscriber.

“We think our product travels well,” Blank says. “As new technologies come along, we think they can be additive, not cannibalistic, to people who don’t have premium TV.”

HBO treats iTunes and other paid download services as part of the traditional homevid window for its original fare.

“We view ourselves like a studio,” Kessler says. “Our first window is the pay TV service. After a period of time, we move it to the DVD market. … And our research shows that consumers who sample our programming (online) go off and buy the DVD or the service.”

The next frontier for pay TV players is broadband delivery, or Web streaming of hit shows a la Hulu and YouTube. Simultaneous broadband availability is a big part of the pitch that Epix is making to distributors as a marketing proposition for the nascent channel.

Starz has a service dubbed Starz Play in partnership with Netflix that makes the main Starz channel available for Web streaming, for an extra fee.

HBO is preparing for the gradual national rollout later this year of its “HBO Go” service, which is part of the TV Everywhere broadband push championed by Time Warner and Comcast Corp.

While online viewing is growing, cablers have been wary of making shows available online for fear of losing subs
cribers. The TV Everywhere initiative revolves around a password-protected system that gives users access to a limited menu of shows, provided they are already subscribers to a cable, sat-TV or telco-TV provider.

Comcast and Time Warner Cable are running trials of the system with about 10,000 subscribers to work out the technological kinks prior to a national rollout. HBO mounted a test of a similar service in Milwaukee for nearly a year, which helped it design the final specs for the HBO Go service.

Showtime is considering joining the TV Everywhere rollout but has yet to formally commit.

The move into the broadband realm does raise some rights issues for the pay cablers. Starz was forward-thinking in securing limited online distrib rights in its movie output deals with studio partners — but it still has raised some hackles with the Netflix streaming partnership.

The movie rights minefield is another reason Starz is diving deeply into original series, most of which it aims to produce in-house. To that end, Starz parent Liberty Media has made a series of acquisitions during the past few years, including IDT Entertainment and homevid distrib Anchor Bay Entertainment, and launched Overture Films with an eye toward putting that content through Starz’ various pipes.

“We want to take advantage of these multiple products we have by marrying our own original content with all of the great movies we have,” Starz’ Myers says. “We like the position we’re in.”

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