Unauthoritative Pronouncements

My interest in Apple, and over-the-top services picked up after Apple’s March 9th event when they reduced the price of their Proterozoic set-top box, and announced 3 whole months of exclusive access to the new HBO NOW service.

This seemed insufficient for three years worth of work. Particularly because there have been rumors about new stuff in the works every year. New stuff that gets axed before it ever comes to fruition. Predominantly, the content providers have been blamed for dragging their feet, and withholding valuable programming from OTT services. (This doesn’t satisfactorily explain why nothing has been done with the hardware and software.)

After seeing what happened to sales in the music industry, thanks to iTunes, film and TV companies don’t want to see their content undervalued. Cable providers have also been afraid of being turned into dumb pipes that just move data. Clearly, this is not sustainable, especially when faced with Apple.

The Wall Street Journal, a place Apple typically leaks things to, ran a story that there will be a new OTT service from Apple this fall to coincide with new hardware and software (Here’s a link to Macworld’s post based on the WSJ - that headline). 25 channels, including ABC, and CBS (two of the three major networks (Sorry C-Dubs)). The price? Somewhere between $30 and $40 a month. That’s more expensive than an entry-level monthly plan from a cable provider, but there’s no installation fee, and you don’t rent your Apple TV box with a recurring fee. So it’s not that overpriced, depending on what you want to watch.

Notably absent is NBC, which is part of Comcast, the largest cable and internet service provider in the United States. Thanks for letting that merger go through, you stupid politicians.

The Watch isn’t the Only Thing With Perfect Timing

Apple has been in talks with networks, and content providers for years. The talks with HBO started last spring. Everything was so very slow, and nothing was happening. Apple was also building out their own CDN that could take advantage of any theoretical fast lane, or prioritization. The company had no official statement, in either direction, about Net Neutrality.

On February 26th, The FCC reclassified Internet service and adopted Open Internet rules. There are three main points:

Bright Line Rules:

• No Blocking: broadband providers may not block access to legal content, applications, services, or non-harmful devices.
• No Throttling: broadband providers may not impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices.
• No Paid Prioritization: broadband providers may not favor some lawful Internet traffic over other lawful traffic in exchange for consideration of any kind—in other words, no “fast lanes.” This rule also bans ISPs from prioritizing content and services of their affiliates.

No, I don’t have a conspiracy theory, so please, save the foil. It is, however, immediately apparent that these rules do help facilitate anyone looking to provide video entertainment over the internet from being obstructed by Comcast, the largest internet service provider in the US.

Indeed, the Wall Street Journal says that Apple was trying to work with Comcast until it realized that Comcast was stringing them along to develop their own X1 box. The fact that this is in the Journal, with the rest, makes me think that this is going to turn in to a tale of revenge from a spurned lover, or perhaps a cautionary tale about prized horses, and favors.

Bundle

One major problem with HBO NOW (other than the shouting!) is the price. Not because $14.99 isn’t a good price for on demand movies and original programming, with no subscription, but because it doesn’t scale if you try to apply the same pricing per “channel”. Ordering a la carte will always be more expensive than a package deal. That’s the nature of it.

This package of 25 channels will represent something like the entry-level cable package your cable provider offers. You can add premium content to it, like HBO NOW (and logically other premium services), but the basic package gives you lump of stuff that has value.

A major issue with the current “channels” offered by the Apple TV is a lack of any value. The majority that have content require a cable subscription in order to use them. This cable verification system has been a method the cable providers and networks devised in order to provide “cable anywhere” programming. It’s a flawed system because the agreements between networks and cable companies are not universal.

This also effectively negated any reason to open those Apple “channels” instead of using the cable set-top box. Pretty much missed the point.

Advertising?

I must assume that there will be ads.

As I memtioned above, it’s not that much more expensive than basic cable. I am, of course, referring to true basic cable, and not the discounted plans they promote that go up 50-60% after one year. I couldn’t actually find Comcast’s basic cable package on their site. Fortunately, Consumer Reports did the footwork and found out that it’s $16 (receiver included, but no HD or DVR). Time Warner Cable’s package is $20 for a year, and then jumps up to an unspecified amount. Equipment is separate, $12 a month for a basic HD box, and $24 a month for an HD box with DVR. That’s $32 and $44, respectively, before adding in fees.

So what does that have to do with advertising? Well, it basically proves that the cost of Apple’s package with HD, and on demand, is comparable. Apple would have to charge far more to get the networks to strip ads.

That doesn’t seem super exciting, but consider this: Advertising on cable is a two player system. As breaks feature ads sold by the network, and ads sold by the cable company.

Here’s a lovely page from Comcast all about their spot advertising platform. Here’s a page about analytics that they provide based on various audience measuring services.

Comcast Spotlight relies on sophisticated quantitative and qualitative applications to provide you with customized research to maximize ROI. The quantitative data from Nielsen, comScore, Kantar and others gives you precise analysis of television viewership, online activity, views into the competitive media landscape and more. MRI, Simmons, Scarborough, Nielsen Social and various other resources provide extensive qualitative data on consumers, geographies and social media habits to help you make a more informed decision during the media planning process.

Barf.

Analytics is actually an important issue facing networks because advertisers are increasingly demanding targeted ads. From Variety, Senior TV Editor Brian Steinberg writes about how prime time TV is being pressured to provide advertising solutions akin to online advertising.

Senior executives at both TV networks and some of the industry’s biggest ad-buying firms see a time looming when primetime TV is no longer viewed as TV’s most desirable real estate. Instead, these executives say, a new flow of consumer data and a dizzying array of video-viewing behaviors will prompt advertisers to carve out ad plans that put their pitches in front of very specific groups of people: first-time car buyers, for example, or longtime orange-soda drinkers, or expectant mothers. Chasing those targets, rather than viewers of big-ticket shows like “The Voice” and “Scandal,” could well transform primetime into a cultural artifact like Rubik’s Cube or Donkey Kong – something that was certainly fun while it lasted, but is no longer of the moment.

Advertisers and TV networks have long talked about Nielsen ratings guarantees and a pricing metric known as a CPM (a measure of the cost of reaching 1,000 viewers) as part of the upfront, where U.S. TV networks try to sell the bulk of their ad inventory for the coming season. Now, “technology is pushing that to the back burner,” says one media-buying executive. If advertisers are more interested in capturing very select kinds of audience, the buyer says, they will be less concerned about what time a show comes on the air, and more interested in how and when they viewers they desire more choose to watch it.

Read his full report for all the details, but it confirms what many would suspect: Viewership is down, and ad spending is down. The number of young viewers is really, really down.

Compare this with Hulu. Hulu tracks every ad viewed, and every program watched. Their ad targeting is absolute garbage, but if advertisers think it works then that’s just as good as thinking ad buys based on Nielsen numbers worked.

Apple is no stranger to advertising. They sell ads through their iAd platform for mobile apps on iOS, as well as for their Pandora-esque iTunes Radio service. It underperforms the competition with 2.5% of mobile app advertising.

Does that mean that Apple will serve ads like a cable company does? Will regional businesses be able to buy spots through Apple? Political campaigns? Apple might eschew that completely and only show ads that the network requires. Thus reducing the number of ads shown, and simplifying the experience. It would be money left on the table, but if Apple’s real interest is in device sales (boxes, phones, and tablets) then it could be a way to convince people that it was worth it over basic cable, where they would see more ads. It is an area that cable companies would be reluctant to compete in.

It’s very easy to argue the other direction too, that they would sell their own ads, like cable, in order to finance much of this endeavor.

Of course it all depends on how ads are sold.

Possible Ad Configurations

If we assume some amount of advertisement will occur, then there are a few different ways this could play out.

• Networks broadcasting the same ads on Apple’s OTT service as they broadcast over their terrestrial and satellite agreements. Bundling those together would make sense because it’s increasing the volume of available viewers, but then it would be difficult to split out metrics, or split out ads, which is what advertisers desire.
• Networks manage ad buys, but display them through a system Apple provides for tracking anonymous data. This is different from iAd.
• Networks go completely targeted with the platform.
  • Structurally, if the new “channels” are set up like the current ones, then the content provider is hosting the material themselves, and they can track requests for certain media files from IP addresses and assume they’re all the same. Then, when an ad is requested, one can be served based on what the viewing habits tell them is likely to work for people at the IP address. Not great.
  • Apple could provide targeted advertising to users through their own means, through iAd, like they do for iTunes Radio. This is the Hulu model, which allows for targeted advertising, but it takes networks out of wheeling-and-dealing ad sales. (Seems unlikely.)
  • Apple provides networks with a targeted, anonymous platform, but allows the networks to serve ads they sell themselves to those targets based on the way Apple interprets the audience members.

It’s possible to combine any, and all of that. Especially if different content providers go different directions, and it’s not a uniform advertising approach across all the new “channels”. What Apple currently has on the TV platform is a mishmash of different things so it’s plausible that the bundle might be one cost to the user, but ads are still handled on a one-on-one basis.