Sunday, 13 May 2012

IPR: Does Exclusivity Have Value?

Yesterday I took a Forbes article at its word and had to update the post, red-faced, when it was revealed that the author had misquoted his subject to make a point. Hyperbole is a fact of opinon post writing and he hadn't intended to misrepresent HBO's Eric Kessler, just paraphrase him. Anyway, after a linked blog post came up in my G+ stream I had a look at the source and found something much more interesting: a report from the horse's mouth about how the "ecosystem" colludes with IPR to create an artificial shortage to funnel customers to the providers' preferred outlet: their own.

I've quoted from the video throughout this article. It's forty-plus minutes long and the things Eric Kessler said in that interview were very telling of the way that monopolies tie companies down and restrict them from considering other options than licensing. And he doesn't mention piracy once!

HBO's business model

They're a content creation company looking to expand into vertical integration. Their main revenue stream is via cable subscriptions, most of which are bundled with rivals such as TNT and Warner Brothers. The streaming service is a part of the cable subscription service and if you want to access it, you have to pay the cable subscription charges whether you want a cable television service or not. There is no stand-alone option at all, and Kessler doesn't anticipate providing one any time soon because the point of the streaming service is to funnel people to the cable service.

When you look at movies, of the 25% of viewers of movies... they're interested in what... was in the pay television window, which is why when we did our deals with the studios (we have exclusive deals with Universal, Warner Brothers, and Fox), we acquired exclusive streaming rights. So the only place that you can stream... during our window, is via HBO Go. Or through an affiliate... in which case you have to be authenticated/subscribed.

80% of the business is subscription, the linear service.

If you want to experience the shows you want via the internet without paying for cable, you have to wait till the cable windows are over, then buy DVDs from their affiliate outlet partners. The economic downturn has hurt his business a little but he hopes that when the economy improves, they will subscribe again.

What about those people who want internet-only?

Cord-cutting is minimal... primarily the result of... macro-economic conditions.

HBO subscribers watch 18 hours more television than non-HBO subscribers. They buy the package because they want to watch (the other channels)... they're the last to cut the cord.

Broadband-only? We view that market as very small. Penetration rates will be low. Not a market worth going after.

The reason he views that market as very small is that he's counting the stats for people who use broadband and mobile devices that access the internet for content. He's also only counting the US market, as if the rest of us don't exist. He's so tied in to licensing to cable suppliers like Verizon and Comcast that the internet market is an afterthought. The opportunity to mention piracy has arisen here, and neither Kessler nor the interviewer touch it. It's the elephant in the studio that everyone pretends they can't see. It's actually quite funny when you consider all the FUD the MPAA's Chris Dodd throws around. You'd think it'd be more relevant. Kessler also mentions the fact that people like to hold and own DVDs and that he adds value to them with extra features, etc.

He does toy with the idea, though, as if he's willing to consider it further.

Stand-alone service? The opportunity that exists is creating lower priced packages. We're excited about the possibility of a distributors offering a lower-priced package.

Then he compares the experience of cable TV with the experience of broadband. His references to the HBO brand are a sign that he's relying heavily on IP rights and licensing to cable distribution partners (they bear the cost of that) for the company's revenue. Now here's where it gets interesting:

Streaming environment: watching HBO... the reference set is comparing HBO to other networks. On iPAD, the reference set is... aggregators. iTunes, Netflix, Amazon... etc. How do we differentiate? Those services offer quantity. We compete on quality. The only way to stream it is through Go or our affiliate portals... only through us.

The content on those services is basically non-exclusive... we believe there is value in exclusivity. We believe... there's a tremendous opportunity to marry... HBO Go with the content creation skills of our network. For Game of Thrones we created an enhanced viewing experience... with information about the characters, back story, family tree, weapons...

We view Netflix as a competitor

Netflix has started to produce its own content, but not in the way HBO does and certainly not to the same degree. Kessler is open to negotiations with them but what he wants is for HBO to own the experience of HBO content so that it is distributed the way he wants it with everything that goes with it. He even describes his streaming service as free because the whole library of content is available online and via an assortment of devices including Kinect. Watching HBO content via the HBO experience gateways sounds like a trip to Disneyland and Kessler is at pains to promote that idea. HBO intends to add to its 29 million subscribers and give them a VIP experience they can only have on HBO and HBO-approved channels. It's a luxury brand, and that's what he's selling it as.

What about the 80 million people who aren't being served?

Kessler reckons he's addressing those people by negotiating with distribution partners to sell them DVDs, etc., but insists that the cable subscription charges plus HBO Go charges are fair:

We are addressing those 80m people.

We have to continually provide the value... we have to be... worth paying for. It's all about... providing content that meets that criteria... giving them value. We are giving them so much relative to what they'd have to pay...

He makes it sound as though he's selling gold-plated DVDs studded with rare and precious gems, and metaphorically I suppose he is. Their current hit, Game of Thrones, is being made with broadband in mind and there is a host of extra features to enjoy on each of the viewing platforms. Kessler sounds almost offended that people don't see the great deal they are getting but I think he's missing the point: some of us just want to watch the show to find out what happens next (more graphic sex scenes, more incest, more violence; there be dragons and occasionally, zombies.) and aren't really interested in the bells and whistles. Here, of course, is the other effort being made to sneak piracy into the interview but Kessler doesn't seem to be unduly concerned either way. He's convinced that continuing to lock people in to the cable plus service is the way to work this because it's what the business is built on, after all.

Kessler's idea is to give people bells and whistles and although he pays attention to the market, it's an artificial picture built not on supply and demand, but on control and enforcement of IPR. Nonetheless, if piracy was as harmful as it has been made out to be, wouldn't he be whingeing about it in the interview?

Is there a chance of the current business paradigm changing?

When the interviewer presses him again about a stand-alone option, here's what he has to say:

We benefit from the existing ecosystem... from bundled cable TV packages... it's important to keep that transactional machinery going. It's about economics.

Kessler says here that he's doing better from an economical point of view in the current HBO strategy than he would if he opened up the content safe and let some goodies out into the cloud. His company wants to own the content and the way it is experienced in a vertically integrated manner that admits no interlopers. Would a radical overhaul of IPR laws change the economic landscape for HBO? Possibly. Is file-sharing dipping into their profits? Probably not, or he'd have mentioned it. I'm not a big enough fan of any HBO shows to care much one way or the other, but it would be interesting to see what would happen if they weren't allowed to lock their content up like that.

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