The tectonic plates of the TV world are shifting and few can feel it like John Hendricks.
Hendricks, the cable pioneer who founded Discovery Communications and turned it into a wildly successful video empire worth $17.5 billion, has broken ranks with the company he started to make a new bet on the streaming world: a multiscreen, over-the-top subscription service called CuriosityStream, which launches this Wednesday (March 18).
Billed as the “world’s first on-demand, ad-free content streaming service delivering premium factual content in the areas of science, technology, civilization, and the human spirit,” CuriosityStream will market a handful of tiers based on the quality of the video resolution — $2.99 per month for standard definition; $3.99 per month for 720p HD; $5.99 for 1080 HD; and $9.99 per month for 4K. CuriosityStream will start off with a library of more than 800 titles, and feature original content from such partners as the BBC, NHK, ZED, Terra Noa and Flame Distribution.
“We kind of root for Netflix the way I used to root for HBO, because HBO was really good for cable,” Hendricks said. “We’re hopeful of reaching people who have a streaming connection one way or another.”
Hendricks, who retired as Discovery’s chairman last May, no longer has to fret about maintaining a legacy business while also trying to solve the OTT riddle. He’s now free to go full-bore with a direct-to-consumer service.
TAKING THE ‘NEXT STEP’
“My interest moving forward is trying to develop for this next big, evolutionary step in television,” he said. “It was hard to do it with one foot in the cable world.”
In many ways, CuriosityStream is the embodiment of Hendricks’s long-held view that television would eventually shift to an on-demand model — something he used to refer to as “file-serve television.”
Hendricks tested the idea in the early 1990s with Your Choice TV, a “near” video-on-demand service for movies and hit TV shows like 60 Minutes, Saturday Night Live and Seinfeld. The service, which relied on cable systems having the required channel space to devote to the offering, was tested in about 20,000 homes in eight markets. In addition to selling titles for $1, Your Choice TV also kicked the tires on an $8-per-month subscription plan.
“We saw the future,” Hendricks recalled. “It was amazing. The people loved it in those markets.”
While the infrastructure for a scalable video-on-demand product was still in development at the time, the business side of the equation also needed solving. Networks were happy to experiment with Your Choice TV, Hendricks said, but they also feared what it might do to their existing linear TV business.
“The rights situation was just too difficult to handle at the time,” he said. “Networks were afraid of it — what if people lost the urgency to show up at 8 o’clock on Sunday night to watch 60 Minutes?”
Hendricks took another big lesson away from the experience. “In the end, I learned that it’s very difficult to launch a new platform when you have entrenched business interests,” he said. “If you’re entrenched in broadcasting, it’s hard to think about devoting the time and energy and the distraction of threatening your legacy business by starting cable channels.”
And, until recently, broadcasters and cable programmers have been reluctant to launch direct-to-consumer OTT plays for similar reasons — fears such moves could backfire and damage a business that has flourished on the dual-revenue stream of advertising dollars and affiliate fees.
But attitudes have changed dramatically as the traditional pay TV business is assaulted by a surge of online video competition, led by new standalone services such as HBO Now. MVPDs are staring down such rivals as subscription VOD services and a new class of “virtual” multichannel video programming distributors, while also facing a small-but-growing cord-cutting movement. The bottom hasn’t fallen out of the pay TV market, but cracks are forming in the foundation.
The U.S. pay TV universe actually added customers (101,000) in the fourth quarter of 2014, but that growth didn’t keep pace with the rate of new household formation, according to a report from MoffettNathanson principal and senior analyst Craig Moffett, indicating that cord-cutting (and the number of “cord-nevers” who’ve avoided traditional pay TV service) “appears to have markedly increased.”
“On the surface, all is calm,” Moffett wrote, adding that, on a trailing 12-month basis, it appears that 1.4 million homes have cut (or never had) the cord — the highest total during such a span. On a cumulative basis, since the first traces of cord-cutting surfaced in 2010, 3.8 million would-be pay TV homes now fit into this category, he added.
Indicators are everywhere. A recent Horowitz Research survey of 2,000 multiplatform viewers found that 20% of respondents who currently have multichannel services said they are likely to cut the cord — more evidence that a segment of consumers won’t be sticking with their current distributors.
These findings have helped to make the case for programmers and broadcasters — from premium services like HBO and broadcasters such as CBS — to pursue or launch direct-to-consumer offerings that replicate services via broadband, or provide a slimmed-down, targeted subscription-based OTT offering. (For more, see table and Platforms.)
And analysts see more of this on the horizon, making it likely that 2015 will be remembered as a watershed year for OTT.
“The writing’s on the wall,” Colin Dixon, chief analyst and founder of nScreenMedia, said. “Kids content is one of the areas that is feeling the push more strongly than other content types at the moment,” he added, referencing Nickelodeon’s launch of the Noggin OTT SVOD service, the recent debut of a kids-focused app from YouTube, and Netflix’s long-standing kids-optimized interface.
“Kids just take to [OTT] like a duck to water,” Dixon said. “Now the pressure for services like HBO and Showtime to get online is huge now.”
Brett Sappington, director of research at Parks Associates, said he’s tracking between 60 and 70 different OTT services that exist today that will fit in as consumers continue to show a willingness to self-aggregate video. Content providers, he said, are pushing ahead because they “don’t want to be the last one to the party, or not be there at all when things start to pop.”
And broadcasters and cable nets are pivoting to OTT while also keeping their legacy businesses on track.
“My feeling is that they are damned if they do or damned if they don’t,” Dixon said. “Their audiences are moving anyway.”
And they are increasingly moving beyond the “C3” window, whereby consumers watch a show within three days of its original broadcast. In its “Video Monetization” report for the fourth quarter of 2014, FreeWheel, the Comcast-owned ad technology company, highlighted that just 28% of all TV viewing occurs within three days of a show’s linear air date, while 64% occurs after a week. That strongly suggests that a large number of consumers are using OTT to catch up.
Parks Associates, meanwhile, found that nearly 20% of U.S. broadband homes would be willing to pay for an OTT service from HBO, while more than 10% would gravitate to CBS All Access, and almost 10% would give a serious look at a similar type of offering from other premium video providers.
Parks Associates also found that 15% of pay TV subs are also “likely” to subscribe to a new OTT service. Perhaps unsurprisingly, that figure varies by demographic — 21% of millennials are likely to subscribe to one of the new OTT options, versus 19% among Gen Xers, 7% of baby boomers and 5% of “mature” consumers.
The OTT world is flush with entertainment-focused services. With CuriosityStream, Hendricks intends to fill a content gap by focusing on factual, non-fiction fare. And he’s bullish about its prospects for success.
Early on, Hendricks’s service will attempt to gain traction with the 10 million broadband homes that don’t subscribe to a TV service — essentially the same group Sling TV and HBO Now are courting.
“We think that’s the low-hanging fruit,” Hendricks said. “But we also see it as a great supplementary service for people who already have cable or satellite but welcome additional choices into the home.”
Another group that will be ripe for the picking are early adopters of 4K TVs, who will undoubtedly be thirsting for content in the pixel-packed format. Strategy Analytics reported that just 1% of U.S. homes had a 4K set in 2014, but that figure should balloon to nearly 50% by 2020, it predicted.
Hendricks cited research that found 25% of the TV market is interested in the kind of content CuriosityStream will offer, a group he calls “the life-long curious.” Such viewers want, for example, to learn about how the Panama Canal was constructed or find out more about the evolution of robotics technology.
That gives CuriosityStream a target to shoot for over the next five years as it focuses its pursuit on broadband-only homes. A “key challenge” will be marketing a direct-to-consumer product and attracting customers without the benefit of traditional MVPD-style distribution, Hendricks also acknowledged.
“If we do a good job, we should penetrate 25% of those households … that would be 2.5 million of those [broadband-only] homes.”
That’s why Hendricks is a member of Netflix’s cheering section. “If Netflix is someday in 80 million homes, I hope that we are closing in on 20 million households,” he said. (Netflix predicts that it will end the first quarter of 2015 with 61.44 million subs worldwide.)
While CuriosityStream’s content focus would appear to overlap somewhat with Discovery’s, Hendricks insists he is not about to cross swords with the company he founded.
“I don’t see it as competitive from the ground up,” he said. “We’re not competing for advertising dollars, for example. I’m also not competing for distribution on the linear television systems … I’m very proud of Discovery, and I remain a bullish shareholder, but what we’re doing is completely different.” CuriosityStream didn’t disclose Hendricks’s exact stake in Discovery, but it’s believed to be a minimal holding between 1% and 2%.
Different for now, anyway — that could change if cable doesn’t improve on its execution of TV Everywhere. Discovery is developing an authenticated TVE offering for its domestic MVPD partners, but has fired warning shots that it might consider a direct-to-consumer angle.
“If TV Everywhere doesn’t develop as it should, it will require all of us to go direct-to-consumer, because the cable guys aren’t getting it done,” David Zaslav, Discovery’s CEO, said last month during the company’s earnings call. Discovery has already had some success with OTT overseas.
On the point of TVE, Hendricks agreed. “I think the industry has fallen behind in implementing TV Everywhere,” he said. But he also said he believes it’s a good concept for existing cable channels to preserve their commercial stream while keeping advertisers and industry leaders happy. “I thought the industry would’ve had this solved about a year ago.”
He likewise said he believes some programmers should be doing a lot more with OTT, holding that “superfans” of any network would be willing to pay a bit more for access to additional content. Looking back, Hendricks recalled that some viewers were willing to send Discovery $19.95 for a solitary video cassette.
“That was the equivalent, 20 or 25 years ago, to a basic-cable subscription,” he said. “They were telling us they were willing to pay the equivalent of a month’s basic-cable bill to get control of one video.”
While OTT is changing the TV landscape and creating strongly held beliefs that online video will destroy the pay TV ecosystem, Hendricks said he sees a co-existence forming that will instead create a larger video business. Legacy players would do well to embrace these new distribution models, he said.
And history is on his side.
“Broadcasting didn’t do away with radio and cable didn’t do away with broadcasting,” he said. “The broadcast networks that played aggressively in cable are the ones that are the most valuable today.”