Wible's Weekly: Privacy, Netflix, IPTV Updates, Machinima and OTT - Janney/MediaEntertainment

Internet Privacy – Ongoing efforts by the online industry to self-regulate on privacy appear to have stalled, with the tracking protection working group of the World Wide Web Consortium rejecting the Digital Advertising Alliance's proposal. At issue is a browser-based mechanism that could potentially restrict the data collected by advertisers and hamper behavioral targeting. If no agreement is reached by July-end, the issue may end up in Congress, who is likely to take a more consumer-friendly stance. In the near term, this could be a positive for other forms of advertising including TV, particularly for networks that target niche audiences.

Original Recognition – NFLX's efforts in original programming could pay off at the Emmy's, as three of its shows, House of Cards, Hemlock Grove, and Arrested Development were nominated for awards. Despite being eligible for 7 years, this is the first time a digitally broadcast series has been nominated. NFLX received only 14 nominations (vs. HBO's 108) but the company has shown it can acquire some quality original content that may help drive/improve sub religion - an imperative for NFLX to achieve its long term targets.

IPTV Updates – GOOG is reportedly in talks with content producers to develop a virtual MVPD platform. We question the viability of these VMVPD models, as they would require premium payments to media owners that will want to hedge cannibalization. Consumers may end up paying more for less. This dynamic could push GOOG and others towards a SVOD model that will drive up the cost of content. Meanwhile, AAPL is exploring an ad-skipping feature for Apple TV that would allow customers to purchase the ability to bypass advertisements while viewing content. Under this arrangement, AAPL would pass along a portion of proceeds to networks every time a customer skips through advertisements. It is unclear why consumers would pay extra for this service, since it is already available for free on DVRs. This would also be very costly, as over 60 billion is spent on TV ads each year.

Studio Content – Machinima, a small startup online television provider backed by GOOG is in talks with Paramount and Warner Bros. about licensing original content. Machinima, which began as a YouTube content producer, is one of many companies looking to move into the online television space. The trend toward adding professional content is driving greater demand for content, a positive force behind studio companies. However, content from studios is likely to be expensive and will force online distributors to focus on monetization quickly to cover licensing costs.

Global OTT – Global OTT service are gaining traction and are expected to triple revenues from $10.6 billion to over $35 billion by 2017 (or 15% of the overall TV market), according to Informa Telecoms and Media. The OTT services are particularly attractive to price-sensitive consumers, who are willing to compromise on the amount of content in exchange for a lower subscription and supplement with pay-per view and/or SVOD. Panelists at the tvXperience conference suggested that over time, popularity of OTT services could undermine the current business model of bundled TV, as consumers' viewing habits become more on-demand and a la carte. While this is a risk, we doubt this is imminent; however, changes in viewership patterns may limit MVPD pricing power, which over time will force MVPDs to stabilize content costs.

Tony Wible joined Janney Montgomery Scott in 2008 and is a Managing Director covering the Media and Entertainment sector after spending the previous 10 years at Citigroup Investment Research—most recently covering the Broadcasting and Entertainment Services industries.
Tony can be reached at twible@janney.com.

Janney Montgomery Scott LLC, is a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the New York Stock Exchange, the Financial Industry Regulatory Authority and the Securities Investor Protection Corp. Disclosures may be reviewed at Wible's Weekly.

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