THE BLOG
10/22/2014 06:52 am ET Updated Dec 22, 2014

A Warning for HBO and CBS: Danger Lurks in the Stream

Steven Puetzer via Getty Images

Do HBO and CBS know what they got themselves into? Do Lionsgate and Tribeca have a clue? Think parlor, spider, fly. Or, if you're of a more cinematic state of mind, think of a deal they can't refuse. Pick your metaphor.

The clever minds at the media companies think they will be able to cash in on the streaming technology that boosted Netflix and made stars on YouTube.

They well might, but at some point, the same extortion racket that got to Netflix will get to them. And it won't be pretty.

Getting Into The Ring With The Big Boys

HBO made quite the splash recently, being the first to announce it would go into the video streaming business.

CBS followed shortly thereafter, with the movie studios after them.

Interpretations of these events varied greatly. The Times said the move meant the end of TV as we know it, as monopolies would start to disappear. David Lieberman, in Deadline, disagreed, saying HBO and CBS were strengthening the status quo, not tearing it down.

No matter, because neither analysis takes into account that both companies are going to encounter new business conditions neither had the misfortune to encounter before. HBO and CBS are multi-billion-dollar enterprises. HBO, with revenues of $4.9 billion, is part of the Time Warner empire, which had revenues of almost $30 billion in 2013. CBS, once part of Sumner Redstone's Viacom, had revenues of $15.2 billion last year. So these are sizable companies with lots of financial resources. That's good, because they will need it.

As corporate entities, HBO and CBS have led relatively sheltered lives. HBO is snugly tucked into its cable cocoon, spending lavishly on quality TV series like Game of Thrones, The Sopranos, and more without regard to ratings. It lives in the exalted higher-plane tier, apart from the hoi polloi in the basic realm.

If there's a dispute between a cable or satellite company and a TV station over carriage fees, HBO just isn't involved. It's the TV stations that get dropped, not the cable and certainly not HBO.
CBS has had more experience with conflict. Its shows are evaluated every day. Every few years, usually around a Super Bowl, Oscars or other big event, it gets into these fights with cable companies.

Last year, CBS got into a hissy fit with Time Warner Cable (which is separate from the entertainment Time Warner) and found itself dropped from the cable system for a time.

Those carriage deals are a matter of negotiation, with the result being either a one (you're on) or a zero (you're off). It is a fairly straightforward game of chicken. It's a simple binary existence.

But now they plan to enter another realm, one inhabited by giants more powerful and more devious than they HBO, CBS, Lionsgate or Tribeca can ever imagine. It's one thing to be carried as part of a cable package. It's another to be streamed, and to be at the utter mercy of Comcast, Verizon and AT&T.

Look at the relative size of the three biggest broadband carriers. In 2013, Comcast had revenues of $64 billion, Verizon $120 billion and AT&T $128 billion. These are the biggest companies around.

Big Boys Get What They Want

What's worse is their attitude. They are not only big, they are bad. They never take "no" for an answer. They get what they want from whomever they want.

The carrier's view of the world hasn't changed in almost 10 years, when Ed Whitacre, the former chairman of SBC (today's AT&T), uttered the immortal words:

Now what they would like to do is use my pipes free, but I ain't going to let them do that because we have spent this capital and we have to have a return on it. So there's going to have to be some mechanism for these people who use these pipes to pay for the portion they're using. Why should they be allowed to use my pipes?

Here's Brian Roberts, the chairman of Comcast, earlier this year: "They would like it all to be free. I would like to not have to pay for cable boxes."

The "they" in this case, are the services that you, the customer, request. In an earlier day, it might have referred to Google or YouTube. Today, it likely is aimed at Netflix, which is constantly being blamed for hogging the Internet with all of the bandwidth, even though Netflix doesn't send out one bit of data without a customer of the big broadband carriers requesting it. In a rational world, Comcast, Verizon and AT&T would thank Netflix for stimulating demand for their service.

Instead, they diddled with their customers' traffic and then held up Netflix for protection money. For months, Verizon customer and Comcast customers complained that their data speeds were too slow to watch video, with constant buffering interrupting the experience.

Netflix, which admittedly has a stake in such things, charted the decline. Verizon, of course, said, "who, me?" and blamed Netflix for slowing down its own traffic.

However, if you chart the data speeds by the dates at which negotiations proceeded, the picture is pretty clear. Netflix doesn't pay, speeds drop. Netflix pays and speeds increase, albeit gradually.

Shades of Grey Are Strictly Business

This isn't as black and white as a service being on or off. It's the shades of grey and the subtleties that will drive the newbies crazy. Of course, Comcast, Verizon, AT&T and others, will tell the video providers they are really sorry that there are some issues with their video traffic. Some days it's good. Some days it's bad. It all depends on whatever else is going on in the network.

How, after all, can mere mortals untutored in metaphysics know the depths of what goes on in a sophisticated broadband network? Any excuse, like "network management" or "temporary congestion" will do nicely, and it's up to the other party to prove otherwise. Have fun with that.

But, it will all be fixed if you, the video provider, ditch your relatively low-cost wholesale carrier and hook up directly to us, for a not-so-modest fee, of course. After all, we would hate for all of your customers to be disappointed and drop the service.

Netflix tried complaining to the Federal Communications Commission, but the FCC, as is typical, declined to get involved. The chairman, Tom Wheeler, said the agency would look into it, but the bottom line is Netflix's bottom line will be affected.

If HBO, CBS and the others think they can avoid the same fate, well, good luck to them.

The only good that could come of this mess is that the entertainment industry wakes up and realizes that an open, neutral Internet serves their purpose. If the showbiz industry (minus NBC and Universal studios which are owned by Comcast), used its traditional muscle in Washington to team up with the tech industry and public-interest groups, to make a big push for Net Neutrality, there might be a decent chance something positive might result.

But if they decide to tough it out alone, they shouldn't be surprised to hear a knock at the door and find someone saying, "Nice little video business. Be a shame if something happened to it." It's something that Tribeca co-founder Robert DeNiro would recognize from his film career.