McDonough School of Business
News Story

The Rising Stream

In a few short years, new options in digital media have altered how, when, and where we consume our entertainment. The viewing revolution has just begun.
By Mike Carlson

On Oct. 15, 2014, the news finally hit: HBO would offer an over-the-top streaming service in 2015. Viewers would be able to binge-watch Game of Thrones and other HBO staples without subscribing to a specific cable company or Internet service provider.

Demand for such an unfettered option had been building since the 2010 release of HBO GO, the streaming service that requires a pay TV subscription to the premium channel. Although it was hardly a surprise, HBO’s entry into the streaming market was a body blow to a pay TV industry struggling against Netflix, Hulu, and dozens of other digital interlopers. Parks Associates, a market research company, conducted a study of broadband subscribers and estimated that the newly dubbed HBO Now could result in up to 6.8 million pay TV subscribers terminating their service.

2015 was shaping up to be the Year of the Cord Cutter. But rather than being washed away in the rise of the stream, experts — including ­Georgetown McDonough alumni — see innovative ways to ride the current.

In any conversation about attracting eyeballs to screens, one word inevitably spills out: millennials.

Millennials are 80 million strong. They grew up on the Internet. They are viewing on iPhones and laptops and iPads. So we have to go to where they are and figure out what products and services will appeal to them.”
—Ann Sarnoff (B ’83), President, BBC Worldwide North America

A growing force that gains more purchasing power every day, millennials are a coveted demographic for the TV industry and one with very particular viewing habits. In industry parlance, they are categorized as “cord-­nevers,” meaning they have little history with traditional pay TV. Earlier this year, a survey by Frank N. Magid Associates found that the majority of 18- to 34-year-olds prefer to consume their entertainment on a laptop, tablet, or phone. These preferences are the driving force in the over-the-top market — meaning TV that doesn’t rely on a specific ISP or cable subscription.

“Anybody who is not targeting millennials is going to go out of business,” says Ann Sarnoff (B ’83), president of BBC Worldwide North America and vice chair of the Georgetown McDonough Board of Advisors. “Millennials are 80 million strong. They grew up on the Internet. They are viewing on iPhones and laptops and iPads. So we have to go to where they are and figure out what products and services will appeal to them.”

Sarnoff has been tracking this generation since it entered grade school. Fifteen years ago she was at Nickelodeon, holding focus groups and marketing Blue’s Clues merchandise to millennials. When she walked into Hall H at San Diego’s ComicCon last July and found 8,000 screaming Dr. Who fans, the dynamic felt familiar. The same was true for Orphan Black and Sherlock panels.

The BBC enjoys a passionate, affluent, and tech-savvy fanbase, so over-the-top distribution positions many of their titles for greater success than a traditional pay TV marketplace would offer. At his biannual address to the Royal Television Society in Cambridge in September, Lord Tony Hall, BBC’s director general, announced that an over-the-top BBC service will be coming to the United States in 2016. Designed to complement BBC America, it will offer programming previously unavailable to American viewers.

“The Internet is the ultimate place where supply can find its demand,” Sarnoff says. “It’s harder to monetize niche shows on linear networks. You have to program the most broadly appealing shows because you need a rating, because that is how you are paid. But on digital services, you can super-serve niche audiences and do things a little more off the beaten track.”

It’s difficult to overstate the degree to which Netflix has established itself in our culture. “Binge-watching” entered the lexicon because of Netflix. One recent study estimated that people spend more time watching Netflix than commuting, grooming, or eating. (Work and sleep were the only two singular activities that outpaced it.)

The ubiquitous streaming service turned content provider has more than 65 million subscribers across 50 countries. The group Digital TV Research predicts that by 2020, the number will grow to 100 million and revenue will climb from $4 billion in 2010 to $42.3 billion in 2020.

The excitement of the company’s rise wasn’t lost on Erin Chonko (MBA ’12). Chonko previously worked for the Discovery Channel for nine years, the last few spent listening to her co-workers wonder aloud how pay TV would keep up with a changing audience. Even then, watching a show on Friday at 10 p.m. or setting a DVR to record a show felt archaic to her. So, when the opportunity to join Netflix arose earlier this year, she saw a chance to become part of the industry that was innovating instead of reacting.

“In general, I foresee the cable companies evolving with the times,” says Chonko, now a senior marketing manager for Netflix. “It takes time, and it’s not something that is going to be a light-switch change in the industry.”

Perhaps the greatest lesson Netflix has learned — and passed on to the rest of the industry — is an oldie but goodie: Content is king.

You want to watch your show on your schedule.”
—Glenn Eisen (B ’87), Chief Marketing Officer, Sling TV

When it began streaming, Netflix was an aggregator. It leaned heavily on the deep catalogs of the BBC, Fox, and Disney. Its first foray into producing original series began in 2013. It was nominated for 14 Emmys that year, a number it has surpassed every year since. Original content is now a hallmark of Netflix, with proven performers House of Cards and Orange Is the New Black anchoring promising new shows such as the Emmy-nominated The Unbreakable Kimmy Schmidt and Narcos.

“People don’t watch networks; they watch shows they love,” says Chonko, who focuses on promoting original series in North America, Canada, Australia, and New Zealand. “That is what hooks them in. If you read any of the trades, the focus is on original content. If you look at the long-term view of investor relations, that is where they are investing. Original content will ultimately draw in new customers.”

The Achilles heel for over-the-top television  and the most common factor keeping the figurative scissors out of the hand of cord-cutters is live sports.

Enter Sling TV, the winner of the Best Home Theater Product, Best Software/App, and Best in Show awards at the 2015 Consumer Electronics Show. Owned by Dish Network, Sling TV is a Netflix-like subscription that streams live pay TV to your phone, tablet, computer, or TV. For a monthly fee, viewers get a basic package of cable channels, including the crown jewel: ESPN.

“We have a model that effectively separates the part of pay TV the consumer hates — contracts, equipment fees, step-up pricing, setting aside eight hours to wait for the cable guy — with the part of pay TV the consumer loves, which is the content,” says Glenn Eisen (B ’87), chief marketing officer for Sling TV and member of the Georgetown McDonough Board of Advisors.

Part of what makes Sling TV interesting is that it exists on both sides of the cable-versus-streaming conflict. According to Eisen, the primary demographic Sling TV targets is “cord-nevers,” those 14 million U.S. households that subscribe to broadband but have rejected pay TV. With a number of premium channels available a la carte and a large on-demand library, cord-cutters see the financial sense as well. But Eisen points to a third market: those who subscribe to both pay TV and over-the-top services like Sling TV.

“We call them ‘supplementers,’ ” he says. “They are defined as households that have a pay TV service but also subscribe to Sling TV for its mobility and convenience. The ability to watch TV on all devices anywhere and anytime is a real value add.”

Eisen doesn’t view Sling TV as an opponent of pay TV, but rather as an expansion of it. To him, the new service is a way to drive incremental subscriptions from a segment of the market that would never sign up for cable. It is an expression of pay TV that just happens to look more like Netflix than a cable company.

“You want to watch your show on your schedule,” says Eisen. “You want to watch Georgetown basketball at tip-off, but when it comes to TV shows, you want to watch it when you want to watch it. We give the consumers that opportunity.”

To the outsider, the Comcasts and Time Warners seem slow to react to streaming media, a player that is gouging their market share on a daily basis. But experts point out that much of that reaction time is based on the bureaucratic environment.

“It’s not as if they don’t understand the demographic change and that technology has suddenly made a lot of things possible that consumers are interested in. But from a regulatory and contractual standpoint, they can’t offer those things today,” says Larry Downes, co-author of Big Bang Disruption: Strategy In the Age of Devastating Innovation and project director at the Georgetown Center for Business and Public Policy, housed in the McDonough School of Business. “They are trapped in a sclerotic regulatory tangle that has built up over decades. But they know a less monolithic market is in their future.”

Many pay TV consumers get their high-speed Internet as part of a bundle. Will the business of pay TV morph into one of broadband brokerage? Will cable boxes go the way of the cassette deck?
“It is appealing to draw that trajectory right now, but we are still in the early experimental stage,” says Downes. “No one should feel confident in predicting what the cable industry will look like in five years.”

Published in Georgetown Business magazine, Fall 2015