A View on Recent Media Developments in a Dynamic Landscape -- David Bank
Healthy Scatter Market – Network scatter market channel checks indicate relative strength. While impression under-delivery is playing a part, both buyers and sellers tell us that advertisers might have over-played their hand with respect to scatter pricing expectations post an Upfront that was priced relatively softly. Premiums are still modest (mid- to high-single digits), but the bear case (that pricing would collapse this fall) simply has not played out and the TV advertising environment appears stable.
For investors to really capitalize on the pricing environment, though, the Media operators will have to generate improved impression delivery in order to drive real advertising outperformance. We'll be watching ratings closely.
Hulu's Commercial-Free Option Chasing Netflix – On September 2, Hulu announced an $11.99/month subscription option to watch Hulu commercial-free. Hulu's premium service had, unlike its main SVOD rivals Amazon and Netflix, shown commercials. With recent content investments, we believe Hulu is looking to aggressively grow its 9mm sub base and make its SVOD service more competitive with Netflix. Over the last year, Hulu has invested heavily in acquired content including Seinfeld, Empire, Fargo, South Park, CSI, etc., and original programming including 1/22/63 from Stephen King and J.J. Abrams as well as Amy Poehler's comedy series Difficult People. Recently it acquired streaming rights to EPIX theatrical content (from Lionsgate, Paramount, and MGM).
But Is Hulu Punting On Its Potentially Biggest Opportunity (Targeted Premium TV Advertising)? What makes Hulu such a unique and valuable asset, is its almost unmatched ability to offer online content at "scale" that should be screen "agnostic" to Madison Avenue (it's all "premium" TV content). By layering on ad-tech, Hulu could be the first non-linear TV platform to offer true TV contextually with digital targetability (and CPM premiums). We aren't so sure that Hulu should walk away from this opportunity.
FCC NPRM Reviewing Good Faith Retrans Negotiating Rules Released – On September 2, the FCC issued its long awaited NPRM to re-examine retransmission consent rules. Included is a review of the "totality of the circumstances test." The totality of circumstances test allows the FCC to determine an MVPD or a broadcaster to be negotiating in bad faith (in violation of FCC rules), even if neither party has violated a predetermined list of individual violations. This is crucial to investors, as the (currently legal) ability of broadcasters (including network O&O's) to limit access to "must have programming" can be a negotiating tool in retransmission consent negotiations. Recent high-profile stand-offs against consumer backlash from increasing Pay-TV subscription costs have created an opportunity for the FCC to revisit the regulatory paradigm with a potentially stricter framework.
FCC Asking More Questions Than Listing Regulatory Prescriptions, But Agenda Is Clear – Essentially, the NPRM asks lots of questions rather than lists conclusions about what should be included in totality of circumstances. As one of our DC sources told us, "they're throwing everything against the wall." The NPRM asks whether there are any specific practices it should identify as evidence of bad faith as part of the totality test, such as Internet-related practices, like broadcasters preventing online access to programming as an apparent tactic to gain leverage in a retransmission dispute, or whether it should address the practices of the bundling of retrans negotiations with carriage agreements for cross owned cable networks. Although the questions are clearly "leading" in a "pro-MVPD" fashion, the NPRM is written as more of an open-ended question than a prescription because (as our sources tell us) the FCC isn't certain of its authority or how exactly to write the rules. Whatever happens, we think resolution is 6–12 months away and subject to litigation.
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