Can pay-TV go over-the-top?

Josh Wein

Pay-TV operators such as DirecTV (Nasdaq: DTV) are said to be increasingly seeking the rights to deliver TV programming "over the top." But as indicated by a recent report in the Los Angeles Times that revealed the breadth of the hunt for those rights, content owners have so far been reluctant to grant them.

It should surprise few to learn that traditional pay-TV distributors want to expand into over-the-top distribution. Already, cable operators are in the process of simulcasting some of their programming in an Internet-protocol, or IP, feed. These simulcasts have allowed companies to reach their customers' IP-connected devices such as tablets and game consoles.

This IP transition is following the same path cable operators took when they first introduced digital and HD service. Followed to its logical conclusion, the trend would lead to all cable programming being delivered in IP. And when that happens, the technical reasons for limiting distribution within a cable operators' traditional service area will start to fall away.

What will remain are business reasons. Media companies have long looked at the Internet as a new platform to be exploited and a revenue stream to be maximized. They will not cheaply cede lucrative content rights to distributors. In addition, some of these rights are explicitly regional. as the major broadcast networks have historically given their TV station affiliates the rights to negotiate with local distributors. Furthermore, there are federal rules that bar distributors from bringing in signals from other markets in most cases.

The cable operators have resisted competing with each other, and that history may limit their appetite for competing over-the-top against others in the industry. They operate in regional clusters and only seem to directly compete against one another when a third party is selling a nearby cable system. Should a cable operator go over the top, it would risk alienating its industry peers.

But there may be a way for cable operators to go over the top without taking on that risk: A cable operator could leave its territory by partnering with smaller regional operators.

Larger distributors will surely have the most leverage when over-the-top rights are negotiated. Though a major content owner will not give away those rights too cheaply, it also will not want to put its advertising and affiliate revenue at risk by potentially losing a major distributor. This will at least keep those companies at the table.

These negotiations will take time. Seemingly in preparation for them, there has been a wave of consolidation in the media sector this year. Those deals will in some ways shape the over-the-top landscape. A few companies probably have a leg up because of their size and existing business operations.

The satellite operators already have a national footprint. Unlike cable operator and phone company competitors, their service is already largely free of the geographical boundaries that resulted from the idiosyncrasies of building the cable systems. This should give them an advantage should their over-the-top plans materialize.

Comcast (Nasdaq: CMCSA) may also have an advantage. As the largest cable operator, it arguably has the most leverage with its content partners. Moreover, it has a history of providing wholesale services to smaller cable operators that could provide the foundation for an over-the-top-like service. I don't claim to have developed this theory--it has been kicking around Silicon Valley for years--but I find it persuasive.

Meanwhile, more and more TV sets are being built and sold with embedded Internet connectivity. In a special report, FierceOnlineVideo's Mariko Hewer examines how consumers, manufacturers and content owners are approaching these devices. Read it here.

--Josh | +Josh Wein | @JoshWein