The document discusses the evolving landscape of television and the battle for dominance in the living room. It notes that while content remains important, consumers now control what, when, and how they watch television across various devices. Key players discussed include Google/YouTube which has positioned itself as a major online video platform, Facebook which is pursuing video aggressively and could become the next largest online video property, and Amazon which has integrated video streaming and purchases through its Fire TV platform. The future of television will likely involve various business models co-existing and companies competing to provide content and services that best meet consumer preferences around viewing, searching, sharing, and buying behaviors.

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Executive Summary of Musings from US/Europe Roadshows
Content remains king in the living room
In my opinion, content is still king in the living room, and the companies who will
win the battle for the living room will have the capacity to successfully integrate traditional
distribution, content creation and web-based technologies. Needless to say, this has positive
long-term implications for traditional content companies, like Fox, Time Warner and Disney,
especially those with valuable sports rights, which continue to play a major role in slowing
consumer migration away from traditional pay TV. However, there are other companies in
the value chain, like Sony, which I believe hold strong promise given their significant content
assets, recent operational changes and restructuring, and product announcements aimed at
leveraging success in video game consoles to deliver over-the-top (OTT) television.
OTT content landscape remains unclear and Traditional TV is not dead
Getting a clear sense of the value proposition of the content and business models
driving these and other stand alone OTT offerings is critical. Specifics of many product
announcements remain unclear and, I suspect, the content offerings of these services may
look vastly different than what is offered via traditional pay TV channels, if only to protect
traditional pay TV operators and not hasten the move away from traditional linear
television. The best traditional pay TV players, like Comcast, BSkyB and others, have
fought the seemingly inevitable migration to OTT television with their own product and
service innovations and, of course, investment in the broadband infrastructure necessary to
support Internet television.
The tipping point may be net neutrality
The tipping point for Internet TV may very well be defined by what happens on the
"net neutrality" front and rate regulation of broadband providers, like Comcast and other
cable telecom companies. Outside of the US – as in Europe, Internet TV companies, like
Netflix, have more regulatory certainty. Lawmakers have agreed to protect net neutrality
and, thus, broadband providers are not allowed to charge Internet TV companies extra to use
their networks for soaking up Internet capacity. This stance has allowed companies, like
Netflix, to stream its services to customers without, in effect, having to pay for access to
broadband – the result of which is favorable to consumers.
Growth of Internet TV content aggregators remains impressive
Certainly companies, like Netflix, Amazon and Google’s YouTube, are benefitting
from the growth of Internet television. Subscription growth has been strong and results have
been impressive brand-wise. Netflix, for example, is its own category, with consumers often
opting to keep their subscriptions just because the low monthly rate is worth having the
service given they might even know what they want to watch. Amazon, on the other hand,
has been successful at extending its service beyond its Prime members to other subscribers.
The company’s strategy of using its Fire TV products as a point of sale device, like the

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Kindle, is positioning it well in both the subscription-based and electronic sell-through
business, the latter of which has been owned by Apple iTunes. YouTube has become the
dominant digital video property, responsible for over 1/3 of all digital video downloads and
an ad-support business that has grown from $500 million just a few years ago to over $5
billion today. All eyes are now also on Facebook, with its 1 billion + users, recent product
announcements in mobile video and “sharing” becoming an even all more important
dominant force in Internet TV.
No one, business model and measurement for digital content likely to prevail
A number of business models are likely to co-exist in the future. Today, content may
be king but consumers rule. As such, some consumers may opt to pay for a TV subscription
without advertising, while others will not. This is especially true for a generation of
consumers who grew up on subscription-based Internet TV, like Netflix, which is
advertising-free. Many in this generation might also not have had to pay for this subscription
and the broadband service that supports it. It was either shared or paid for by their parents.
Advertising, as YouTube has evidenced and Facebook is also more and more evidencing on
mobile, remains viable. US adults spend more time using digital media than any other kind –
an average of 5 hours and 46 minutes a day, ahead of the 4 hours and 34 minutes they spend
watching traditional television. TV advertising, however, still dominates marketing budgets,
accounting for $68.5bn, or 38% of total US media spending this year, compared with
$50.7bn, or a 28% share, for digital ads. Multi-tasking can produce an overlap between the
figures. In order for advertisers to feel comfortable buying digital, over-the-top TV spots,
they need to know what the audience is, but they also need to feel there is a really
trustworthy currency. The big fear remains they’re overpaying. As such, advertisers
continue to sit on the sidelines, hesitant to shift budgets to digital out of concerns over
measuring and valuing audiences across a proliferation of platforms, which stream directly to
consumers. Nielsen (with Adobe) has rolled out a new system that aims to become the
standard currency for digital content. This system has yet to be proven but if “dynamic ad
insertions” prove effective, it may lift prices for digital video spots and boost advertising
demand over the long term.
Content risks for Internet TV aggregators remain significant, and growth in developed and
emerging markets may be key to success
Content risks for Internet TV aggregators remain significant, as competing for
premium TV content is commanding very high prices. Over the last several years, content
licensing costs have increased 700%, prompting many of these Internet companies to invest
in original content as a hedge against these rising content licensing costs. Netflix alone
intends to spend as much a $6 billion this year on content, and spent as much $4 billion on
content from 2012-2014. Amazon and YouTube has followed suit, with recent high-profile
announcements on the talent end, and $1 billion of content spending for Amazon from 2012-
2014. This level of spending on original content creation is worth scrutinizing given the
unpredictable and unstable nature of revenues and profits from content streams. Still, many
of these new Internet TV companies are uniquely using the power of data and analytics to
help with content decisions. The sustainability of these new Internet TV aggregators,
however, remains in question – especially as traditional, deep-pocketed content providers
move to compete for talent as well as leverage their vast content libraries to offer their own

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standalone OTT solutions. It is a business that will require much capital to sustain the level
of investment necessary to remain competitive in the TV content business. Still, Netflix –
with its strong brand and 57 million strong in subscriber base – seems an interesting
acquisition target, despite seemingly high valuation. Subscriber growth will be instrumental
to the success of many of these Internet TV aggregators, driving many of them to look to
developed and emerging markets for subscriber growth.
All eyes on mobile, social and convergence in the living room and home
All eyes remain on mobile and specifically on Facebook as it moves to establish itself
as the second largest digital video property, with “sharing” as a dominant force in the living
room, and on; Apple, with its long-held interest in the living room and its mobile product
offerings as a navigational device for television and other home products. Apple has been
chasing TV content for years, and its failure to line it up has led many to assume that the door
to a viable rival to cable TV was closed. But the staggering amount of cash on Apple’s
balance sheet is adding fuel to rumors of a refreshed Apple TV and an OTT subscription
service. There have been recent rumors of Apple in licensing talks with TV programmers for
developing an OTT subscription service. According to some reports, Apple is exploring
bundled content deals, but not the entire TV lineup typically offered by pay TV providers. If
Apple dips into its rather deep pockets and triggers a content buying war, with the threat of
“sell to us or we will buy you,” it could change the face of TV in the US. It may be that even
Steve Jobs was not prepared to risk the farm on the high prices demanded by content
businesses a few years ago – but now, with companies like HBO looking for OTT partners,
Apple may be able to come to the aid of a handful of content businesses cheaply and reach
the final destination that we all had in mind: a replacement for pay TV in the US. With a few
other content creators on board, Apple can begin forming a package or tier of channels that
reflects the premium aesthetic that it chases in its hardware.
........
TV will continue to evolve, as will the soap operas in living rooms around the world.

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Evolution not Revolution in the Living Room
Slide 5 and Slide 41 visually tell the story of where the living room has evolved to
over the last few decades.
Today, convergence and the battle between tech, media and telecom/cable companies
in the living room are redefining the TV landscape and the business models it
operates under. As such, appointment television has made way for on-demand
television, delivered seamlessly across multiple devices capable of engaging
audiences in a host of activities while concurrently watching TV (Slide 17). Needless
to say, TV audiences have fragmented significantly since 1993 (Slide 6 vs. Slide 19)
and as a result of the proliferation of TV channels (Slide 9).
Except for the impact of online video and the proliferation of Internet-enabled mobile
devices (Slide 12 and Slide 13), the changes that we’ve witnessed in the television
industry have been largely evolutionary in nature. As such, the landscape evolving
from an “all-against-all” assault amongst tech, media and cable/telecom companies to
one defined today largely by strategic alliances and partnerships. (Slide 24)
There are no clear winners or losers yet in the battle for the living room, but there are
companies who have built or acquired strategic assets, which enable them to better
position themselves for success in the living room and, most importantly, in the war
for consumers.
Context is king, but Consumer rule! (Slide 14)
Now more than ever, consumers are in control of what they watch, when they watch
it, where they watch it and how they want to watch it; this means choosing to (and
paying) not to watch it with advertising. In the new TV landscape, business models
are forever altered, with perhaps advertising, subscriptions and hybrid models co-
existing to accommodate specific interests and needs of consumers. (Slide 8)
Premium content, as such, remains valuable but how it is consumed is no longer in
the hands of the traditional media companies that deliver it to TV viewers. Instead, it
is in the hands of TV viewers who also seek out the best context in which it is
delivered to them in terms of time, place, functionalities, etc.
In a sea of content and distribution choices, context is king and TV viewers rule.
(Slide 53) Interestingly enough, time spent watching TV may have shifted but total
time spent watching TV has stayed relatively the same (see Slides 15 and Slide 16)
New Consumer Forces and Players Redefine the Living Room
To adequately assess who wins the battle for the living room, it’s important to
identify the dominant forces redefining TV viewing today, and the players
influencing these forces and facilitating consumer behavior. These are outlined in
Slide 18 and Slide 52: Viewing, Searching, Sharing and Buying, and the specific
actions they are undertaking while watching television.

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Google/YouTube (Viewing/Searching):
Alongside its new super-fast Internet rolling out across various cities in the
US, Google has announced Fiber TV, an entirely redesigned experience for
how people watch TV. It's part-DVR part-cable box, with the ability to watch
and record all the channels you expect, via Google's new network. Drawback
is Fiber's listings still don't currently include ESPN, which is the Holy Grail
for pay TV subscribers. The Fiber TV plan (as part of Google's whole Fiber
plan) is expected to cost $120 / month, plus a $300 construction fee.
Clearly, Google with its acquisition of YouTube in 2006 has redefined online
and mobile video. YouTube is expected to generate about $5.6 billion in
advertising revenue worldwide this year -- an estimate considerably higher
than previous Wall Street forecasts from firms, including Jefferies & Co.’s
$4.5 billion and Barclays Capital’s $3.6 billion. Compare this to $500 million
in 2011, it’s easy to see how YouTube has positioned itself as a viable option
for TV brand dollars. The scale of these dollars relative to the $70 billion TV
advertising business is small but the growth is telling against the size of this
market and digital as well (Slide 7 and Slide 20). Looking at the US TV ad
market, Google certainly has the motivation and capability to win the battle
for the living room.
YouTube is also expected to net about $2 billion in ad revenue, up over 65%
from 2012, after paying content and ad partners. It’s difficult to determine
YouTube’s profitability without bandwidth costs but the Company doesn’t
have to pay content acquisition costs for the majority of its content since it’s
user-generated to begin with. The Company’s content delivery costs last year
were about $600 million, or 12% of its revenue; by comparison, Netflix's
content delivery costs were $463 million, or 10.5% of its $4.38 billion in
revenue. YouTube's video storage costs are likely higher than Netflix's
because it has a much larger library of content to stream. This is all to
Google's YouTube business is likely to be at least as profitable as Netflix.
YouTube may be leveling the playing field for content partners, including the
movie studios and TV networks that provide the site’s most-viewed clips. It is
in the process of shifting all content partners (with few exceptions) to a 55/45
advertising revenue split. That will eliminate the more favorable 70/30
revenue-sharing terms. It’s unclear whether this revised scheme will really
attract more professional content — or drive it away. If YouTube does not
figure out a sustainable model for content producers, those partners will find
other outlets. It’s often been seen as trading on the currency that it is pretty
much the only digital game in town. By aggregate video consumption time,
YouTube accounts for 1/3 of all digital video views. The next largest online
property only account for about 2%. It would likely help the entire ecosystem
if there were another player closer in scale. It could be increasingly
challenged by the likes of Twitter, Facebook or Microsoft if they move to win
over disgruntled partners.

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All eyes are on Facebook.
Facebook (Sharing):
Given its 1 billion + users and its recent video related product announcements
as well as significance on the mobile platform, it’s a strong contender to be
the next large digital video online property. The company has increased its
mentions of the importance of video in its quarterly earnings and investor
calls; and it is actively trying to poach YouTube stars to create content made
specifically for its platform. Facebook isn't just a niche specialist video app
with the potential to carve off 5% or so of users, this is Facebook, which
already has 1.35 billion monthly active users at its disposal to tempt away
from YouTube when it comes to their video needs. Desktop video views on
Facebook grew 38.5% year on year to 491 million in September 2014. Views
across Google's sites were up 4.8% to 831 million. In the US, YouTube’s
unique video viewers on desktop on are on the decline, whilst the general
trend for competitors (apart from a couple of month on month dips) is upward.
Facebook meteoric video rise could well be down to the fact that many videos
on the social network start playing automatically (and are still counted as a
view.) So it could be argued its video views are on the up because users have
no control over when videos start playing, whereas YouTube users need to
click a link or a play button before a view is registered. Facebook also
dominated YouTube in terms of social media shares within the first 24 hours
of the upload (76.9% of shares to YouTube's 23.1%.) Shares are a really
important metric for marketers because they are a sign of endorsement, rather
than just a sign that someone may have passively watched something without
really paying attention. Facebook makes that easy to do within the platform
itself, whereas you can't share a YouTube video within YouTube.
YouTube vs. Facebook: YouTube may be hoping the beta launch of its highly
anticipated ad-free subscription music service will draw people back to the platform
by giving users new ways to consume its content (such as the music player that runs
in the background.) It also continues to make huge multi-million dollar investments in
its original content makers and advertising pushes behind them to improve the
perceptions consumers have of the brand as a platform for quality content. But in the
background, Facebook is becoming an ever-growing threat to YouTube's video
crown.
Amazon Fire TV (Buying):
Building on the success of Amazon’s use of Kindle as a point-of sale-device
for its service, Amazon Fire TV has made it easy for customers to access
Amazon’s video-on-demand subscription service and purchase/rentals of
video (electronic sell-through) on the same platform. Amazon’s service does
not have the TV shows that Netflix does, but Amazon Prime Video offers
plenty to keep people tuned in to its service. As such, Amazon is taking the
opportunity to take a bite out of Netflix’s market, but also grow and take
market share from iTunes’ electronic sell-through market.

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The best news for Amazon may be that is has two sources of user growth,
which could help it maintain momentum in the living room. First, the online
retailer added 10 million Prime subscribers over the holiday season by giving
them one month free. About seven in 10 of those will likely convert to a year
long paid subscription. In addition to the new customers flooding into Prime,
Amazon still has a large base of existing paying customers who do not yet use
the video service. While Netflix's on-demand services are still used most
frequently, Amazon Prime members use both the free Amazon Prime and paid
Amazon Instant Video offerings combined slightly more frequently. In
addition, Amazon users also rent or buy video slightly more often than iTunes
customers do. Estimates indicate that on average, Amazon Prime members
use the free streaming video service 8.3 times, also buying or renting video
from the Amazon Instant Video service an average of 5.1 times per month.
That gives Amazon's services a total of 13.4 user interactions per month,
while Netflix, with its pure on-demand model, garners 12.7 per month, and
iTunes sees customers rent or buy video 4.9 times each month.
Will people drop Netflix for Amazon?
The strength of Amazon's video offerings has already made it a viable option
over iTunes in electronic sell-through, but it has yet to cause very many
people to drop Netflix. Amazon’s streaming service has seen steady
subscriber growth jumping from 31.71 paid U.S. member in Q4, 2013 to 37.7
in Q4, 2014, according to its most recent quarterly report. When Prime Video
launched, it was pushed as more of a bonus for Prime members than a Netflix
competitor, but Amazon has steadily improved the service. The company will
likely never spend nearly as much as Netflix does on content but it has made
significant announcements as of later, especially with A-list talent. But
Prime's improvement from a "good enough" service to a pretty good one may
cause some people to at least consider whether they need both. Amazon has
yet to truly threaten Netflix, but it has the advantage of being perceived as free
from customers who paid their $99 annual fee because they want free two-day
shipping. That, coupled, with an improving library and some buzzed-about
originals could make it a viable option going forward.
Internet TV invades the living room (Slide 23)
Much discussion is had about 2nd
generation content aggregator, Netflix, especially
around the means by which they manage content risk with data and analytics, and
have legitimized themselves, along with other OTT content aggregators, in the
creative community. See Slide 30
Netflix: 57 million subscribers worldwide
The company has more subscribers than the two largest U.S. cable companies,
Comcast and Time Warner Cable. Aimed at primarily the “cord-nevers” who
grew up in an era of online video, Netflix has done a masterful job of creating
a TV viewing category mostly around second generation content it licenses

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from a variety of professional content providers. It’s not unheard of, for
example, to hear TV viewers today talk about “seeing what’s on Netflix
tonight” as opposed to say watching TV. A subscription-based service, with
an intuitive and user-friendly interface design, the power of data analytics and
TV content licensed to appeal to “binge” on-demand viewing habits of today’s
TV viewers has allowed the company to create a formidable brand.
In the Blue Book (T-Volution: Soap Operas in the Living Room), I predict
that the companies who will win the battle of the living room will have the
capacity to successfully integrate traditional distribution, content creation and
web-based technologies. Given its track record and initiatives, Netflix
certainly maintains these attributes but the question remains, at what cost?
TV content licensing costs over the last several years have increased by over
700% in the industry, prompting Netflix and other content aggregators in
invest significantly in original content as a hedge against rising licensing costs
and content deals that expire. As traditional content providers and traditional
content aggregators, like CBS, HBO and others, move to offer their own
standalone over-the-top services, acquiring premium quality content may
prove to be even more costly for second generation aggregators, like Netflix
and Amazon.
From 2012-2014, Netflix alone spent $4 billion on content (Slide 31),
approximately 10% of which was spent approximately on new original
content, like the TV series, House of Cards. The Company invested $100
million for two seasons worth of the series (Slide 32). A number of reports
suggest that by adding more than 2 million U.S. subscribers in one quarter
alone and another 1 million elsewhere in the world, Netflix nearly earned back
its entire investment in House of Cards in under three months. Of course, not
all of these new customers stuck around for two years — and Netflix has other
costs. Without “churn” data, it is difficult to determine how loyal Netflix
subscribers actually are but, at approximately $8/month and a service that
delivers TV viewers the comfort of having at their disposal content that they
might not even know they want, some speculate it’s a small price to pay for
TV viewers to keep a Netflix subscription, especially given its investment in
original content.
So as long as consumers still see Netflix as offering quality content and a TV
viewing experience with a compelling value proposition, as much as 85% of
connected-TV users in the U.S. will continue to double and even triple up on
Internet TV subscriptions, like Netflix and/or Amazon, in addition to their
traditional pay-tv subscription.
Is this sustainable? Depends on lots of factors such as…
! The resources or deep pockets Netflix needs to maintain to sustain the
level of investment necessary create high quality, original TV content
capable of competing with fare offered by traditional content providers

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and aggregators – many of whom maintain vast content libraries and
resources for traditional as well as OTT distribution.
! Growth in subscribers Netflix ultimately achieves, especially
internationally, in order to finance its content plans. Needless to say,
international expansion also comes with a significant price tag in terms of
marketing and promotional expenses, as Netflix has experienced with its
roll out across Europe.
! Acceleration in cord-cutting and regulation clouding the path forward in
broadband as competing services, like DISH, Sony, HBO, and CBS, move
to introduce their own OTT streaming alternatives. Raising broadband
prices by replacing cable packages with metered rates may no longer be an
option for traditional cable/telecom companies, especially once the FCC
reclassifies the Internet as a regulated communication service as part of its
net neutrality initiative. (Slide 35 and Slide 37)
That’s much to depend upon, especially with regard to the capital required to
create high quality, TV content and also to acquire subscribers globally. On
the former point, I can’t help but remember independent home video
distributor, Vestron, and its foray into original content creation after the
success of its film, “Dirty Dancing.” Where is Vestron today? A good
business opportunity didn’t necessarily translate into a strong strategic
opportunity for the Company. Still, Netflix puts a lot of stock in its use of
subscriber data as a means of assisting them with content decisions and related
risks, an asset that traditional content aggregators have not harnessed with
comparable impact (Slide 33).
In addition, how long can TV programmers afford licensing past series of TV
shows to subscription-based video on demand services, like Netflix? Doing
so could further hasten the public’s move away from traditional linear TV and
cable networks and toward video-streaming platforms. But doing so also
helps widen the audience for the first-run series of these TV shows, especially
with younger and more affluent audiences. Such was the case that we
discussed with respect to “Breaking Bad” and what Netflix did for it on the
cable platform and AMC, in particular. But how long can Netflix expect to
build its business on the back of TV shows which TV programmers sold to
Netflix for pennies when these programmers now begin to launch their own
standalone OTT services themselves.
The sustainability of the Netflix model is certainly in question, especially if its
content strategy falters. However, I continue to argue that the value of the
Netflix brand as a content category and its service as curator of content
remains strong. The Company is building its own valuable content library and
manages content risks with powerful data analytics, putting it well on its way
to meeting its goal of, indeed, becoming the HBO of Internet television.
Given the relatively low price of its offering and its ability to effectively
curate content for its subscriber base, Netflix has positioned itself to realize

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formidable subscriber growth and a loyal customer base – the result of which
makes it a viable option as a secondary subscription service or even as
acquisition target (assuming one can get comfortable with its valuation).
Low-cost streaming devices are nothing without OTT content
Low-cost, Internet-connected set-top boxes are flourishing. Apple has sold 25 million
Apple TVs; Roku has sold at least 10 million Roku players. Google has not released
official numbers for Chromecast, but estimates last year put it around the 4 million
mark. Amazon’s Fire TV and Fire TV Stick have been among its best-selling
electronics since they made their debuts in 2014. These and about 50+ other
competing platforms are driving the conversation of the growth in Internet TV today
(Slide 28).
These devices differ little from one another without content and even then, virtually
all of them come packaged with Netflix, the leading subscription-based, video-on-
demand service. In fact, research shows that two out of every three devices are sold
because of Netflix. Priced at less than $100/unit, compared to smart TVs in the $2K
range and video game consoles in the $300-500/unit range, these devices are growing
at rapid rates and driving much of the conversation around Internet or over-the-top
(OTT) television.
CLSA Blue Book highlights the pros/cons of these devices, along with the major
Internet TV content aggregators, like Netflix, Amazon, Hulu, etc.
Where is Apple TV in the living room discussion? (Slide 22)
In the U.S., Roku entered the market with a very different content strategy than Apple
TV. Its strategy is that of open apps as opposed to typically curated apps that
typically defines Apple’s market entry strategy. Roku with 1700 channel apps stole
about 12% market share from Apple TV in the US. This may not mean much to
Apple begin with given the low profit margins on these devices, but it has prompted
many analysts to wonder what Apple has in store for the living room moving forward.
Not much has been invested in Apple TV product or marketing wise over the last few
years. (Slide 29)
Still, the most valuable function of Apple TV seems to be the airplay function, which
allows iPhone user to send video to TV from iTunes or elsewhere. Apple’s
dominance with iPhone may very well give the company the edge in navigating users
to TV video content, whether that be via iTunes or subscription-based provider
partners, like Netflix and others.
Much is still in question about Apple’s plans for television but what is clear is that
Apple has always been interested in the living room and not necessarily in television,
even with $1 billion in worldwide sales for Apple TV. It’s no surprise that the
Company’s acquisition of “Beats” and its music subscription service has created
speculation regarding Apple’s own exploration of OTT subscription service to move
them beyond traditional the electronic sell-through business in iTunes. Beats Music

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will be put to use in a completely new subscription streaming service. The platform
will use the content agreements and some of the back-end technology from Beats, and
Apple is apparently integrating the streaming functionality into its iTunes app and the
Apple TV. It seems that Apple will let the streaming service exist alongside
overlapping parts of iTunes; in a similar manner Amazon is doing with its own video
service. ITunes has offered rental and purchase models for video, but for music have
focused squarely on outright purchasing. ITunes Radio was introduced to offer
something like the streaming service offered by the likes of Spotify or Pandora, but
iTunes Radio, as the name suggests, lacks the on-demand nature of these rivals. This
is the gap, which will be filled by the Beats purchase, while iTunes continues its
operations as normal.
Apple has been chasing TV content for years, and its failure to line it up, in the
manner that iTunes lined up the music labels due to the fear of rampant piracy, has
led many to assume that the door to a viable rival to cable TV was well and truly
closed. But if Apple dips into its rather deep pockets and triggers a content buying
war, with the threat of “Sell to us or we will buy you,” it could change the face of TV
in the US. It may be that even Steve Jobs was not prepared to risk the farm on the
high prices demanded by content businesses a few years ago – but now, with
companies like HBO looking for OTT partners, Apple may be able to come to the aid
of a handful of content businesses cheaply and reach the final destination that we all
had in mind: a replacement for pay TV in the US.
The staggering amount of cash on Apple’s balance sheet is adding fuel to the rumors
of Apple’s imminent TV and streaming products. There have been recent rumors of
Apple in licensing talks with TV programmers for developing an OTT subscription
service. According to some reports, Apple is exploring bundled content deals, but not
the entire TV lineup typically offered by pay TV providers.
If Apple is to launch an subscription-based OTT service, it will almost certainly take
the option of letting customers pay for only the content they want – instead of the pay
TV approach of bundles of channels in compulsory packages, with unwanted or
unpopular channels used to pad out the additional channel packages. So while the
bundled channels will fear the day they are forced to stand on their own two feet and
face the music, the pay TV market is slowly waking up to the idea that there is more
money to be made outside of the control held by the entrenched distribution platforms
– the cable, satellite companies and Telcos. This has been the impetus behind HBO’s
decision to launch its own OTT platform, as it has realized that its content is now
viable outside the distribution agreements with the TV platforms. With a few other
content creators on board, Apple can begin forming a package or tier of channels that
reflects the premium aesthetic that it chases in its hardware.
With 25 million Apple TVs sold, Apple has proven that it has customers willing to
invest in its hardware, even when the only exclusive content option is iTunes rentals.
If Apple can slap together an attractive set of channels or distribution deals, all
centered around the Apple TV or perhaps a new box, then it seems like a given that it
will sell millions of them – to a market that is growing increasingly happy to cut or
shave the cords they’ve traditionally relied on from the pay-tv operators. The allure

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of an Apple TV service only grows with the attraction of an Apple smart home
platform. According to the latest rumors, an Apple TV can be installed in a house so
that the home-owner can control the connected devices while away from home –
using the Apple TV as a link between an iPhone and home appliances.
Videogame consoles stream TV content, and are used not just by kids!
Putting aside smart TVs (that are still high-priced with long replacement cycles and
still make up half of all TV shipments) and low-cost, OTT solutions, Slide 26 shows
that over half of the global connected TV devices are videogame consoles. This is
especially interesting when one considers that as much as 35% of 35-49 year-olds
stream TV content thru a game console and as much as 25% of over 49 year-olds do
as well. Game console rivals Microsoft and Sony have had their eyes on becoming
the main entertainment device in the living room.
Microsoft has been more overt in its strategy, and has focused on the TV features of
its new Xbox One console, the One Guide, a personalized interactive programming
guide that combines OTT services, VoD catalogues and TV listings. Microsoft has
also added a number of content apps to the Xbox Live platform, and is releasing a
lineup of original programming. It would be a wise move for Microsoft to launch an
under-$100 Xbox branded net-top box, if it wants to get very serious about
controlling the living room TV set, but Sony has once again beaten Microsoft to the
punch.
CLSA’s Christian Dinwoodie’s coverage of Sony highlights important stock
implications if the firm manages to integrate all the existing building blocks
(content, delivery) without tying them up to hardware.
Sony: Content Ownership and the PlayStation Advantage
Sony seems to be entering a new phase of growth and profitability, realizing the fruits
of operational changes that have allowed it to look beyond consumer electronics to
focus on more profitable businesses such as entertainment.
PlayStation 4 is outselling Microsoft Xbox One, with PlayStation in about 24% of US
households and about 14% of all households with a PlayStation connected to the
Internet. This gives the Company a unique opportunity to launch an OTT service. At
the E3 conference, the Company announced that it would be making a PlayStation
TV streaming device available in the North American and Europe this year. The $99
box will stream OTT apps like Netflix, Sony’s original Web content, and its
PlayStation video games.
Sony’s OTT subscription TV service could serve up to 100 channels and get up to
$80/month, not factoring the cost of the broadband service required to get the OTT
service into the house. If those numbers turn out to be correct, breaking up the
traditional pay-tv model may still prove to be difficult but the Company is not talking
much about pricing or packaging of its coming service. But in September, Viacom
announced a deal with Sony to license live and on-demand programming for at least

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22 Viacom cable networks, including Nickelodeon, MTV and Comedy Central, for
the upcoming OTT service. Sony has also struck deals with NBC, Fox, CBS, Scripps
Networks Interactive and Discovery. Sony also reportedly is in talks with Disney,
with Disney's sports channel ESPN considered crucial for PlayStation's mostly male
users.
Questions remain about the Company’s restructuring, but the Company continues to
rationalize its hardware businesses and cut costs. In addition, with OTT television
and gaming service as well as other entertainment offerings, Sony appears to be
building a sustainable revenue-profit stream to help it move beyond the cyclical
hardware sales of the past.
Net Neutrality may define tipping point for Internet TV
It is now an open question as to how - and how effectively - cable providers will use
their power to shape the future of television. After all, cable providers maintain
considerable influence over the future of television by controlling most of the “last
mile” Internet infrastructure that delivers Internet TV and downloadable content to
consumers, through pre-existing cable line infrastructure. In the USA, the decision by
a federal court to strike down rules that encourage “net neutrality” has raised
concerns that cable providers might throttle Internet traffic from competing online
services, such as Netflix, YouTube or Hulu Plus. Some US politicians are fighting to
reinstate net neutrality - the principle that telecommunications companies and cable
operators must treat all Internet traffic on their networks on an equal basis and, thus,
reclassify Internet service providers (ISPs) as common carriers under Title II of the
Communications Act of 1934. Powerful players are lining up on both sides of the
issue, with large, Internet-based companies “in favor” of net neutrality and large,
broadband providers opposed to it. This contrasts greatly with other geographic
markets such as Europe, where Internet television companies, like Netflix, have more
regulatory certainty than in the USA. In Europe, lawmakers have agreed to protect net
neutrality and thus network operators are not allowed to charge Internet TV
companies (such as Netflix) extra to use their cable networks for soaking up Internet
capacity. Europe’s stance on net neutrality allows allow Netflix to stream its services
to European customers without, in effect, having to pay for access to broadband,
cable or mobile networks. Needless to say, such a stance has important implications
as rate regulation may facilitate more “cord-cutting” from pay TV providers, paving
more growth for over-the-top television.
Cord-cutting still not happening in massive waves
Despite a host of new OTT offerings and projected growth of OTT television (SvoD
and Electronic Sell-through – See Slide 34 and Slide 35), the cable bundle is still
alive and well, and cable companies have been very good at redesigning cable
packages, including the offering of skinny bundles to accommodate the content needs
of various customer segments. In addition, cord-cutters can't get access to all the
content they thru over-the-top television, especially live sports. ESPN has been keen
to differentiate even its recently announced standalone OTT offering to exclude the
major sports programs provided to pay TV subscribers. With 90+ pay TV

15. ! 15!
subscribers, it’s difficult to imagine sports networks, like ESPN, possibly alienating
significant pay TV relationships by going directly over-the-top of traditional
television. Cable companies have also begun to meaningfully improve their
offerings: Comcast 's X-1 platform makes on-demand content more accessible than
ever before, with built-in access to even a cloud-based DVR (Slide 38).
Even though FCC continues to disavow price regulation, this could change, especially
if content licensing rights, especially for sports, continue to increase at the
astronomical rate they are – the end result of which inevitably is passed down to
consumers. An a-carte future looks more inevitable by the day, perhaps another
reason why we are seeing a slew of new entrants in OTT television. At the 2015
Consumer Electronics Show, Dish officially launched Sling TV, an Internet-based
mini bundle that includes access to ESPN and AMC Networks. Nickelodeon has
announced plans for a children-focused Internet service. CBS now offers CBS All
Access. Sony continues to test PlayStation Vue, its Internet-based alternative to cable.
Verizon also plans an Internet TV service of its own.
There’s still the demographic cliff for cable to worry about
Still, pay-tv operators face a harsh reality. It is one thing to lose customers who can’t
afford pay TV or are dissatisfied with service quality but to never be able to acquire
customers due to some significant cultural or demographic shift in the country is a
different challenge. Such a threat currently exists for US cable companies with a
generation of young adults, who are not in the habit of paying for cable TV (i.e., the
“cord-nevers”), and aging subscribers, who live on fixed income and are moving into
assisted-living facilities, or passing away. This demographic cliff is a concern,
especially as cord-nevers - raised on Netflix and accustomed to “binge” viewing of
TV programs long after they air, constitute a greater population of US homes.
Advertising metrics sill evolving
TV advertising still dominates marketing budgets, accounting for $68.5bn, or 38% of
total US media spending this year, compared with $50.7bn, or a 28% share, for digital
ads. But US adults spend more time using digital media than any other kind – an
average of five hours and 46 minutes a day, ahead of the four hours and 34 minutes
they spend watching traditional television. Multi-tasking can produce an overlap
between the figures. In order for advertisers to feel comfortable buying over-the-top
spots, they need to know what the audience is, but they also need to feel there is a
really trustworthy currency. The big fear is they’re overpaying. Advertisers remain
hesitant to shift big portions of their budgets to digital outlets in part because of
concerns over measuring and valuing audiences across a proliferation of platforms
and devices, streaming directly to consumers. Nielsen, the measurement company
whose TV ratings underpin billions of dollars in advertising sales, has rolled out a
new system that aims to become the standard currency for digital content. It
partnered with Adobe to capture viewers across websites, mobile apps, internet-
connected televisions and gaming consoles. The idea here is that a digital ratings
system will allow programmers to experiment with different kinds of advertising in
online streams. Even if audiences were watching the same program, each individual

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might see very different ads, not just based off demographics and where he lives, but
who he is, what he has bought before and also potentially what else he is doing when
he browses [the Internet]. These “dynamic ad insertions” may lift prices for digital
video spots and boost advertising demand over the long term.