2013-04-29

Aereo & Netflix executives understand modern viewing habits

The widespread availability of fast broadband has changed the way many people consume video content; it's especially true of younger generations who've grown up with laptops, smartphones, and tablets. The established media companies are bound and determined to maintain the highly profitable business models they've enjoyed for the past few decades, so whenever technology enables new companies to serve customers in a way that threatens to disrupt the traditional media cash cow, the old guard does everything they can to prevent the new guys from gaining a foothold. Typically that involves lawsuits which challenge the legality of whatever they're doing differently, but sometimes it takes the form of withholding access to physical network infrastructure or denying/delaying content licenses. If you doubt that, a reading of Susan Crawford's book "Captive Audience" will enlighten you on the depths to which the media and distribution companies will go to protect what they perceive to be their exclusive turf.

Luckily for consumers, there are several companies that run next generation video services, and a few of those have the potential to be truly disruptive to the established media conglomerates if they can survive and thrive. This post highlights some recent statements by the executives of Aereo and Netflix - two companies that seem to have what it takes to disrupt the status quo.


The new way of consuming video enabled by companies like Aereo and Netflix will require the traditional media companies to adapt (or perish) as the general public's viewing habits shift from linear broadcast TV to on-demand streaming. Anyone who's watched tweens, teens, and young adults over the past few years knows that it's not a question of "if" these viewing habits will change, it's "when". Most of the older generation won't go looking for a change, but when it comes to them and is cheaper and more convenient than what they're currently using, they'll embrace it and never look back. Many of us would have scoffed at the idea of senior citizens using tablet computers a few years ago, yet recent studies peg seniors and children as the fastest growing demographic for tablet sales.

The technology behind an online video company's product is important, but don't ignore the importance of their executive team - do they "get" what consumers want, perhaps before consumers even know it themselves? This ability was one of the big reasons Steve Jobs was able to turn Apple into the tech giant it is now, and is the difference between forward-thinking companies like Aereo and Netflix, and a company like Hulu which has a great product but is owned and operated by a consortium of traditional media companies.

The executives at Aereo and Netflix have been in the news recently, talking about where they believe TV viewing will be in a few years and some of the hurdles they'll face along the way. Both Chet Kanojia (Aereo) and Reed Hastings (Netflix) strike me as guys who "get it", and aren't afraid to make a few enemies of the established companies in order to improve the viewing experience for their users.


Aereo

Most people are probably familiar with Netflix, but Aereo is a fairly new company so it's not as well known. Since it's currently only available in New York City (with expansion to 22 more US cities soon), many Canadians may not have heard of it at all. Aereo is essentially a TV distributor that uses your Internet connection instead of a cable feed or satellite link. Where they differ from IPTV distributors is that Aereo only distributes local over-the-air (OTA) stations rather than channels like HBO or ESPN. If you're wondering who the heck would want to pay for just OTA stations, keep in mind that the OTA market in the US is much stronger than it is in Canada, with a city such as New York having 30 channels available. For those wondering why people would pay a fee rather than just putting up an antenna and getting all the channels for free, reception in cities can be difficult - buildings get in the way or cause interference, covenants on apartments and condo agreements may prohibit external antennas, and reusing the cable company's coax for an antenna feed may not be allowed by your building.

Even still, Aereo isn't especially disruptive because of the way it lets you watch TV, it's disruptive because of its new and interesting pricing models, and that's what has the US cable companies and networks freaking out.

Aereo has 5 difference pricing options, ranging from free for one hour per day of live TV, to $12/month or $80/year for full time dual-tuner access with 40 hours of cloud-based DVR storage. Read that again and compare it to what you're paying now: $12/month for 30 channels with 40 hours of DVR storage that you can access from anywhere within the viewing region. If $12/month is too rich for your blood or you're a once-a-week viewer, you can instead choose to pay as you go: $1/day for 24 hours of viewing with 3 hours of DVR storage. Even better is the fact that there is no Aereo set top box: you use your computer, cell phone, tablet, or media device such as an AppleTV or Roku box. If you're a commuter (and who isn't in NYC), catch up on your shows by watching your DVR recordings on your tablet or smartphone during your subway ride home to the suburbs!

Part of the reason that Aereo can keep their prices low is because they're only offering local OTA channels, and since those channels are transmitted over the public airwaves, it's free for Aereo to tune them in and deliver them to customers. At least that's what Aereo believes and the US courts have ruled so far. The companies that own the channels (Fox, CBS, etc.) are accustomed to getting fees from cable and satellite companies that redistribute their channels, so of course they're not at all happy that Aereo is getting them for free and they've gone running to the courts. You'd think they'd be happy that their channels are being seen by more viewers and increasing their ratings, but evidently they don't care very much about how many people view their channel, just how many people pay to be able to view it.

Other companies like ivi have tried a similar approach in the past and failed - shutdown after legal challenges ruled them to be violating copyright. Aereo has prevailed in court thus far because it uses a dedicated receiving antenna per subscriber. Their datacenter has thousands upon thousands of tiny "micro antennas" the size of a quarter, with one or two antennas dedicated to each customer depending on their pricing plan. Having an antenna per customer rather than one single large antenna has allowed Aereo to be viewed by the courts as an Internet extension of the home antenna rather than as a cable-style TV distributor.

Their time in court is far from over, but the legal victories thus far have allowed Aereo to announce plans to expand beyond NYC to 22 additional markets in the US by the end of 2013, serving most of the large American markets with the exception of cities on the West coast. Even more interesting are their plans for the future: CEO Chet Kanojia recently told paidContent Live conference attendees that he wants Aereo "to provide 50 percent of the value for 10 percent of the cost of cable, and then let partners and services like Netflix or Amazon Prime fill in the rest."

To deliver that 50 percent, Kanojia expects that Aereo will eventually offer free and paid content - movie and news packages for example. Hopefully Aereo will prevail in the legal challenges ahead of them and grow to become a strong alternative. With luck they may even enter the Canadian market someday, although they'd need to make sure they have a good team of Canadian lawyers on board because you can be sure the Canadian media conglomerates won't be any friendlier to Aereo than their American cousins were.


Netflix

Netflix hasn't been resting on their laurels either. As you may know, they've invested significant sums of money to create their own shows like House of Cards and Hemlock Grove, and they resurrected the popular cancelled show Arrested Development with the original cast intact. Netflix executives have said that their goal is for Netflix to become HBO before HBO can become Netflix, which explains their desire to have high quality exclusive content that brings new subscribers to them and helps retain existing subscribers.

CEO Reed Hastings recently published an 11-page essay that lays out his view for Netflix' future. In it he outlines 10 reasons why Internet-based video viewing will continue to grow over the coming years:
  1. The Internet will get faster, more reliable and more available;
  2. Smart TV sales will increase and eventually every TV will have Wifi and apps;
  3. Smart TV adapters (Roku, AppleTV, etc.) will get less expensive and better;
  4. Tablet and smartphone viewing will increase;
  5. Tablets and smartphones will be used as touch interfaces for Internet TV;
  6. Internet TV apps will rapidly improve through competition and frequent updates;
  7. Streaming 4k video will happen long before linear TV supports 4k video;
  8. Internet video advertising will be personalized and relevant;
  9. TV Everywhere will provide a smooth economic transition for existing networks;
  10. New entrants like Netflix are innovating rapidly.
Most of the reasons above seem obvious to those of us who are already using the Internet for a lot of their viewing, but the fact that the CEO of a prominent tech company shared these with investors shows how much closer we are to a "TV Everywhere" world than we were even last year. The technology is already there or is very close at hand; the main hurdles faced by the likes of Netflix and Aereo are the large content and distribution companies and their teams of lawyers who are determined to cling to lucrative old distribution and revenue models.
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