I finally got an hour to listen to the replay of last week's UBS media conference keynote discussion with Time Warner's (NYSE:TWX) CEO Jeff Bewkes. His comments strongly reinforced my perception of him as the pay-TV (cable/satellite/telco) industry's biggest defender as well as leading Netflix (NASDAQ:NFLX) skeptic. Bewkes is worth paying attention to not just because Time Warner owns the Warner Bros. studio and several leading cable networks, but because his approach is a barometer for many other content providers' as well.
In Bewkes' world view, the majority of consumers are willing to pay a premium price to get the best, most comprehensive experience of the highest-quality, current content, and distributors are willing/able to pay content creators top dollar for it - in short, a snapshot of the way the pay-TV world has worked for a long while. To Bewkes, digital distribution represents "more opportunity than challenge" in its ability to drive new business models and windows, enhance existing distributor relationships and deliver more value to consumers. To be clear, Bewkes isn't a Luddite, he doesn't oppose digital innovation, he just wants to see the benefits of it accrue to incumbents, not upstarts.
That's because the most important thing that digital must NOT be allowed to do is devalue content. And that's exactly what Bewkes believes low-priced subscription entrants like Netflix do. Again, since he believes that consumers are willing and able to buy expensive pay-TV packages, the goal must be for those who pay the highest content acquisition fees (i.e. incumbent pay-TV operators) to layer on digital distribution enhancements like TV Everywhere and HBO Go, rather than have digital value leak out to new players like Netflix who have neither the willingness nor the ability to pay top-dollar rates.
In this way, the highest content value is retained within the incumbent ecosystem; if there are any last scraps of content value remaining after all incumbents' windows are fully exploited over the full range of platforms, only then should a low-priced "utility" aggregator like Netflix be accorded content distribution rights.
Of course, 2010 has not played out according to Bewkes' wishes. Netflix has signed one major content deal after another - with providers like Epix, NBCU and just last week with Disney-ABC (NYSE:DIS), giving it prime digital rights that have helped it grow its subscriber base to nearly 17 million. Bewkes and others argue that with a price point of $8-10/mo, it will simply be impossible for Netflix to compete effectively once the current period of "exploration" is over. That may well be, but there's no sight of this period being over any time soon.
Bewkes deserves credit for sticking by his company's most valuable distribution partners, a full-throated "dance with the girl that brung ya," argument. The problem with it is that it doesn't fully recognize the extent to which the TV landscape is changing and buyer preferences are fragmenting. While Bewkes advocates for the continuation of a gold-standard TV model where consumers reject less expensive, "good enough" alternatives, the reality is that for most average consumers (i.e. not CEOs making $10-20 million/year), real tradeoffs are being made. For some these tradeoffs are being forced by economic considerations while for others it's simply a matter of allocating their spending to where more value is received (e.g. faster broadband service rather than more TV channels). Though evidence of cord-cutting is still nascent, it seems to me that Bewkes is pining for an America that is neither economically nor preferentially aligned with his vision.
None of this should come as a surprise to Bewkes; as he noted, HBO is typically sold in the most expensive pay-TV packages of $80 or more per month. That's a very high buy-through minimum which is surely exceeding the capacity and/or willingness to pay of more and more Americans each day. Given the fact that past seasons' episodes are available on DVD on Netflix, it's not as if HBO programming isn't available at all unless you pay $80+/mo to your pay-TV providers; it just means you may have to wait a little bit (a "good enough" alternative). This happens to be exactly how my wife and I have watched all the past seasons of "Entourage," "The Wire" and other HBO shows.
Whether more HBO subscribers drop-off and choose to wait, or are willing to pay top dollar to maintain the pay-TV gold standard will be an important indicator of what's ahead. I'm becoming a broken record on the point that the pay-TV industry simply must find more economical ways of delivering slimmed-down versions of its product in order to sustain itself. If it doesn't then it is painting itself into a high-priced corner.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.