Just over a week ago now, Time Warner Cable (TWC) Chief Programming Officer Melinda Witmer uttered a quote worth repeating. It was in response to criticism from cable television programmers ("the old guard") over TWC's decision to stream its cable television offerings to Time Warner cable and internet subscribers' iPads.
I don't know what a TV is anymore. It's kind of an anachronistic term.
-Melinda Witmer, Wall Street Journal, 3/25/2011
It just does not get any better than that. The old guard's response? Please, don't be so proactive, you might disrupt the status quo and cause cable and satellite subscription adoption rates to drop. It's exactly this kind of thinking that could render companies like Discovery Communications (NASDAQ:DISCK) extinct.
On Thursday, however, Time Warner Cable back-pedaled a bit, agreeing to drop several networks, including Comedy Central, Discovery Channel, MTV, and VH1, from the iPad offering. At first, I reacted with slight dismay. Halfway into the story, however, I came across another comment further proving that TWC gets it:
For the time being, we have decided to focus our iPad efforts on those enlightened programmers who understand the benefit and importance of allowing our subscribers -- and their viewers -- to watch their programming on any screen in their homes.
-Time Warner Cable Statement, 3/31/2011
Clearly, Witmer and her team see where things are headed. While I would have preferred they let things play out in court, they understand the battleground better than I do. Based on their aggressive words and stance, it appears that Time Warner Cable will move forward as friends of the 21st Century and the Apple's (NASDAQ:AAPL) and Google's (NASDAQ:GOOG) of the world, as opposed to rigid and ultimately unsuccessful adversaries.
Cablevision (NYSE:CVC) also appears to get it. On Saturday, the company launched an app of its own that essentially gives its customers access to the television channels they receive via their cable box on their iPad. According to The New York Times, that app stood at #1 in Apple's App Store, as of Sunday afternoon.
Clearly, Cablevision customers are jumping at the chance to increase the ways in which they can access content. This reinforces what I thought would be an obvious 21st Century notion: It's not about the hardware you use to access content. Cable television represents just one type of content. You can, or should be able to view it through your anachronistic television set, your iPad and hopefully any other device, ranging from smartphone to personal computer, in the near future.
As Time Warner Cable pointed out in the Times story, this amounts to little more than a cash grab on behalf of Discovery Communications and other programmers. They want to charge consumers separately for each way they choose to access content. Ultimately, the cable company would look like the bad guy because they would pay more to pass the content on, thereby finding it necessary to pass those costs on to the subscriber. The old guard simply wants to squash innovation like a bug, only because they are unwilling or unprepared to do likewise and innovate.
The old guard also worries that TWC's app amounts to an attempt to garner more internet customers because it only works for TWC's concurrent cable and internet subscribers. Cablevision's app just requires a wireless router to beam a signal to a user's iPad. Executives from companies like Viacom (NYSE:VIA) and Discovery also worry that their networks won't get ratings credit for viewers who access content on an iPad. At this point they won't, but Nielsen (NYSE:NLSN), the company that measures television ratings, is at work on a solution. Recent IPO Nielsen could represent a derivative play on what lays ahead.
Paying for Ratings
Companies like Nielsen do not provide television programmers access to ratings for free. A brief look at how the measurement of radio ratings has evolved sheds light on the opportunity that opened up for Nielsen.
Arbitron (NYSE:ARB) measures radio ratings and charges radio companies and individual or clusters of stations for access to this information. Although, Arbitron's stock has performed well of late, I am not recommending it. It concerns me that Clear Channel (CCMO.PK), which could implode at any moment, accounts for 20% of its revenues. Another piece of information from Arbitron's most recent annual report proves relevant to Nielsen's role in the iPad controversy that the old guard has created.
Historically, Arbitron used what it calls a "diary" to collect information from "panelists" about the stations they listen to. Recipients of Arbitron diaries face a somewhat cumbersome and time-consuming task. If nothing else, it's next to impossible to complete an Arbitron paper diary with perfect accuracy. In a nutshell, Arbitron asks panelists to keep track of what they listen to and when. They must record it in the diary and send it back to Arbitron. Countless problems arise from this method.
The most obvious involves recall. It's common for listeners to simply not remember what they listened to, for how long, or the order in which they listened to multiple shows and stations. Along similar lines, marketing power or strong name recognition offer trigger some panelists to write down a popular personality's name or station's call letters in their diary even if they never actually listened to that host or station. For instance, in New York City, some listeners might be inclined to write down "Imus" or "Stern" when, in all reality, they spent the morning with WPLJ and Stern no longer does a show on terrestrial radio.
To solve this problem, Arbitron developed Portable People Meter (PPM) technology. Put simplistically, PPM takes away the need for a panelist to keep a diary. Instead, a device automatically senses and keeps track of what they listen to, taking issues like recall out of the mix. As of Arbitron's last annual report, 48 of the largest radio markets in the U.S. pay for access to PPM ratings. This has opened a new and potentially lucrative revenue stream for Arbitron:
Revenue increased by 2.7% or $10.4 million for the year ended December 31, 2010, as compared to the same period in 2009 primarily due to higher fees charged for PPM-based ratings than for Diary-based ratings within the PPM Markets commercialized. PPM-based ratings service revenue increased by $70.2 million primarily due to the partial year impact of the 15 PPM Markets commercialized during 2010 and the full year impact of the 19 PPM Markets commercialized in 2009, as well as price escalators in all PPM commercialized markets.
Nielsen should be able to generate significant revenue by generating not only a way to measure what people view on their iPads and sell it to cable programmers and others, but other devices as well. Nielsen can solve a problem for programmers just as Arbitron did. While Nielsen has been using PPM-like technology to measure television viewing for some time, it noted in the Times story about the iPad controversy that it's "working on a solution to measure" iPad viewers, but it does "not have a timeline yet." Based on language in its first annual report as a public company, Nielsen appears to be close:
We provide independent measurement and consumer research for telecom and media companies in the mobile telecommunications industry. Clients, principally mobile carriers and device manufacturers, rely upon our data to make... decisions... While mobile internet consumption is still nascent, we are expanding quickly in this area to capture internet, video and other media on mobile devices. As the mobile industry continues to grow, there is an opportunity for us to measure media and data content on mobile devices worldwide and to integrate mobile measurement with other media platforms... We continue to develop advanced measurement techniques of the three principal screens -- television, online and mobile devices. In the United States, we are already utilizing a single-source TV and PC panel to deliver cross-screen insights to clients. Our cross-screen measurement solution provides information about simultaneous usage of more than one screen (e.e. if a consumer uses Facebook while watching a TV program), unduplicated reach (i.e. total audience net of duplication across platforms), cause and effect analysis... and program viewing behavior (e.g. what platforms consumers use to view certain programming).
Clearly, Nielsen anticipates the direction content consumption has been headed in. While it's impossible to predict how much revenue a service measuring iPad viewers could bring Nielsen based on the information it provides in its 10-K, it could be significant. Not only would this information benefit the traditional suspects such as old guard media programmers, but it could be of use to companies such as Apple and other tablet makers, for example.
Surely Apple's marketers would like to know exactly who uses the iPad to view cable television and other content, down to the times they choose to do it, their ages, and where they shopped before and after doing it. The level of detail Nielsen will be able to provide remains to be seen, but they stand to add considerable revenue if the offering they are working on provides comprehensive information relevant to a wider range of customers than just the old guard.
Direct Media Plays
While I intend to write an article that takes a closer look at the fundamental and technical factors driving cable and media stocks, from an early and general standpoint, I am bullish on TWC and CVC. They recognize that they will lose if they tie themselves to the traditional methods consumers have used to view content. I think the old guard programmers who choose to branch out will also win in the end.
I plan to keep a close eye on how Viacom, Discovery Communications, Scripps Networks (NYSE:SNI), News Corp. (NASDAQ:NWSA) and others continue to react. I could turn bullish on one of the above names if they make a move to bring young blood into their organizations. Waving cash in front of a young Apple, Google, or even Facebook or Twitter executive would seem to make sense from not only a strategic, but an image standpoint. Such a move indicates a move away from resisting change to an attempt to sit at its forefront.
I expect something else to happen that could alter this space. While giants like Viacom and News Corp are hardly take-out targets, relatively smaller players like Scripps and Discovery sit well within Apple or Google's reach, for instance. Each company could benefit by putting its cash to work to make such an acquisition. Through such a takeover, Apple or Google could leverage its position as a content creator and provider, while not only extending its mobile reach, but furthering its aspirations to become an all-in-one part of consumers' living rooms.
Discovery, for example, counts 100 networks as part of its stable. They include Animal Planet, the Discovery Channel, and TLC as well as an online video-on-demand service for educators that would fit in well with Apple's growing efforts commercially and in the classroom. As for Scripps, it owns incredibly popular networks ranging from HGTV to the Food Network to the Travel Channel. Its online shopping comparison service, Shopzilla, could be of interest to Google.
In any case, investors should follow developments in the iPad/cable television squabble closely. Not only will they foreshadow the best (and worst) media, internet, and gadget investments going forward, but they provide a fascinating glimpse into an era marked by rapid changes in the way we consume and share content and information. They illustrate how Apple, Google, and others are more than mere gadget and internet companies and traditional media companies are -- or at least ought to be -- morphing into their own unchartered (and for some, uncomfortable) territory.
Disclosure: I am long AAPL.