OTT Growth Said to Portend Major Upheaval in Pay-TV Universe

Until a year or so ago, content and pay-TV providers worked cooperatively "to hold the bundle together," which made it relatively hard for other, disruptive players to enter the market, Carson said. "Now that's starting to fall apart" as OTT providers like Netflix and Hulu are attracting a critical mass of cord cutters to affect traditional media companies, which in turn are themselves focusing on OTT offerings, he said. "The minute people start to pull back from that [bundle-centric] model, the whole thing starts to fall apart quickly," Carson said. The result is even ESPN is talking about a direct-to-consumer model, "which is pretty radical," said Peter Csathy, Manatt Digital Media CEO. Panelists agreed the only uncertainty about ESPN's creating an OTT offering is how soon. ESPN's contracts with major sports leagues are the only thing holding that up, said Elgin Thompson, managing director of Digital Capital Advisors.

Multichannel networks/multiplatform networks have seen considerable deal activity in the past couple of years, panelists said, pointing to Hearst's buying a stake in DreamWorks' AwesomenessTV, and perhaps most notably Disney's buying Maker Studios (see 1403260047). That "was critical for Disney" as it tries to reach younger audiences," Whistle Sports CEO John West said: "Most of our audience doesn't know what a cord is.”

The video ecosystem can support plenty of small, niche OTT players alongside major operators like Netflix, Thompson said. "Until recently, Apple was a niche," he said. "There's going to be a bunch of winners -- profitable, sustainable businesses." Changing viewership trends likely will see many small and mid-sized cable companies killed off as some content -- from cooking and home improvement shows to documentaries -- works better on demand than in a linear format, Carson said: "It's hard to imagine a world where those kinds of channels survive much longer.”

Digital distribution issues are increasingly a major subject of negotiation in entertainment agreements, said lawyer Kenneth Kaufman of Manatt Phelps, whose clients included networks and TV producers. "The notion of TV Everywhere is an important component of any [content rights] license these days," he said. OTT also is complicating the legal framework for content's changing "windows" or sequential distribution patterns -- such as a movie first appearing in theaters, then hotel and airline pay-per-view, then as a download and so on, Kaufman said. Numerous contractual matters like geofiltering, digital rights management, encryption, and user data collection and use "would not have been on our checklist two, three years ago," Kaufman said. "Anything you agree to in your first window can impact what you can do with those rights nine months, a year down the road," said Vernon Chu, general counsel of BBC Worldwide North America. "It used to be you just did exclusivity [terms]. You get these incredibly long provisions regarding holdback and provisioning and who can do what when. It's happening so fast." In an era "where the traditional space between users and publishers has gone out the window," legal specialties are themselves converging, Kaufman said.

Contractual issues typically come down to leverage, with cable operators often in the catbird seat, Chu said: "They go through their economic analysis, 'If I drop you how many subscribers will I lose?' Most of the time, their customers aren't really going to go anywhere." Cable network contract terms with digital platforms are typically two to three years -- much shorter than the typical 10-year deal with cable operators, Chu said.