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January 22, 2014

Amazon.com Inc. has approached big entertainment companies about licensing their television channels for a possible new online pay-TV service, in what would be a significant expansion of the company's online video efforts.

The new service it has discussed with media companies would offer live TV channels, such as those available now on cable or satellite TV. Through its Prime Instant Video service, Amazon now offers various TV shows and movies on demand for subscribers to its Prime free-shipping service. Several other tech companies are pursuing similar initiatives, including Sony Corp. and Google Inc. Intel Corp. said Tuesday it has sold its Internet TV-related technology to Verizon Communications Inc., which could use it to offer an online pay-TV service in the future. The new entrants hope their services will appeal to consumers who have dropped their traditional pay-TV connections or are looking to do so-whether out of frustration with outdated technology or rising bills.

Amazon is still in the early stages of discussions with media companies, and it isn't clear it will move forward, the people familiar with the matter said. Amazon is also developing a set-top box to stream video, much like a Roku player, The Wall Street Journal previously reported. After initially declining to comment, Amazon said in a statement late Tuesday, "We continue to build selection for Prime Instant Video and create original shows at Amazon Studios, but we are not planning to license television channels or offer a pay-TV service." Amazon has approached at least three big media conglomerates seeking rights to distribute their channels online, people familiar with the matter said.

Acquiring TV-channel rights has proved challenging for the other companies trying to launch Web TV services. Media giants that control TV networks and studios don't want to harm incumbent pay-TV providers, whose payments for carriage of channels are propelling the entertainment industry's growth. Those companies seeking to launch new services have struggled to negotiate licensing terms that would allow them to price their services competitively. Intel, for example, faced significant roadblocks in its efforts to acquire TV rights, media executives say, despite working on the project for about two years. Amazon has an advantage over some upstarts: It already has relationships with a range of TV networks and studios that it can use as a starting point for negotiations.

Amazon invested about $1 billion in content in 2013, according to Cantor Fitzgerald analyst Youssef Squali. Spending on streaming video, as well as other initiatives like grocery delivery and mobile devices, has hurt the company's profit margins. Launching an online pay-TV service likely would mean higher content-licensing costs for its streaming video business. Amazon hasn't yet determined its business model for a virtual cable-TV service, the people familiar with the matter said.

Tony Wible, an analyst at Janney Capital Markets, said Amazon may be able to offer an online-TV service "at cost" and make its money selling merchandise through the TV set. He noted that it "doesn't have a legacy margin structure" in the pay-TV business to protect. "There's a precedent of them pricing stuff roughly at cost in order to sell other stuff," Mr. Wible said. Analysts say companies offering bandwidth-hungry services could face increased technology-related costs after a federal appeals court decision this month struck down so-called "net neutrality" rules, paving the way for broadband providers to charge content companies tolls for quality service over their networks.

That could affect the business models of streaming video giants like Netflix Inc. and Google Inc. but also the new entrants in online pay-TV like Sony and, potentially, Amazon. Wall Street Journal; USA Today reports Amazon not looking at streaming TV

One can't help but frame Netflix Inc. 's recent fortunes in cinematic terms. "Raging Bull" or "Some Like It Hot" could describe the video-streaming stock's 227% gain in the past year. Recall its mid-2011 meltdown, though, and a double feature of "For a Few Dollars More" followed by "The Comeback Kid" seems fitting. Netflix's split that summer of video streaming from DVD rentals-a 60% price hike-left some customers feeling like "The Expendables."

Rewind the tape to the beginning and Netflix's current, eye-watering valuation is in some ways more reasonable than before that episode, despite a higher stock price. By July 2011, it was trading at 6.5 times debt-adjusted market value to trailing revenue. Today it fetches a still lofty 4.5 times. Wednesday's fourth-quarter results could boost that if they reverse a recent slide in the stock. Analysts see Netflix earning 65 cents per share, up from 13 cents a year ago. At over 200 times trailing earnings, though, a few cents here or there hardly matters; the key figure is subscriber growth. That helped the stock jump following third-quarter earnings in October. But chief Reed Hastings cautioned that "momentum investors" had sent the stock up more quickly than what the company might consider justified.

The market ignored him, bidding it up another 18% over the next two months. A recent, potentially negative federal appeals court decision helped bring the shares back to where they were in October. "Apocalypse Now" it wasn't. Still, the ruling on net neutrality could hurt. Netflix consumes nearly 30% of U.S. bandwidth during peak hours-almost 1 1/2 that of competing services from Amazon.com Inc., Google Inc. and others combined. In the longer term, fellow streamers may pose a bigger threat to Netflix dominating its "addressable market" of 60 million to 90 million U.S. households-it already reaches about 33 million. Its strategy includes expensive content deals and award-winning original shows that chew up operating cash flow.

Can Netflix grow quickly enough to make the math work? The comedy "This Is Spinal Tap" comes to mind: A musician brags lamely that his speakers are louder because they "go to 11." That movie, like many others, at present can only be streamed from competitors. While orange may be the new black, 11 will never be the new 10. Wall Street Journal

Discovery Communications Inc. said it will raise its stake in Eurosport, making it more competitive against British Sky Broadcasting Group Plc and BT Group Plc in bidding for TV sports rights. "This control gives us a leg up on everyone for the platform we can provide, and now we're competitively in the race country-by-county to look at every sports right," Discovery Chief Executive Officer David Zaslav said in an interview yesterday. "We're not ruling anything out."

Discovery will increase its stake in Societe Television Francaise 1's Eurosport to 51 percent from 20 percent, with a possibility to buy the rest of it should TF1 exercise a put option over the remaining 49 percent, the companies said in a joint statement yesterday. Eurosport is valued at 902 million euros ($1.2 billion), the companies said. The purchase illustrates the value of sports broadcasting and continues Discovery's push overseas in recent years to fuel growth through new channels and programming. The Silver Spring, Maryland-based company, which owns Animal Planet and TLC channels, bought the initial stake in Eurosport a year ago, around the same time it announced the acquisition of ProSiebenSat.1's SBS Nordic unit, which operates stations in Norway, Denmark and Sweden.

Following a number of takeovers in past years, including buying BBC Worldwide out of its joint venture in Animal Planet in 2010, Zaslav said Discovery would invest in existing businesses and look "opportunistically for additional assets." Shares in Societe Television Francaise rose as much as 6.1 percent in Paris trading and were 3.2 percent higher at 14.80 euros as of 9:27 a.m. Discovery fell 0.4 percent in New York yesterday to $80.60. "Even during economic challenges we've continued to grow and we expect growth will be moderate," he said. "It's about getting more people watching more channels and continuing to grow double digit." The combined reach of Discovery, Eurosport and SBS will be 2.7 billion cumulative subscribers across nearly 200 networks in more than 220 countries, according to yesterday's statement.

Eurosport, which operates in 54 countries and counts the U.K., France and Germany among its biggest markets, adds to Discovery's pay-TV distribution and value to advertisers, Zaslav said, adding that the network is the only pan-European sports platform. Discovery, in which cable TV billionaire John Malone controls 29 percent of voting rights, earns about half its revenue from ads, with the rest from rights fees from pay-TV operators. New operators angling for the right to air European sports matches, such as Al Jazeera's BeIn Sport and BT, are challenging more established broadcasters such as BSkyB and France's Canal Plus.

Former U.K. phone monopoly BT, which owns ESPN channels in the U.K. and Ireland, in November agreed to pay $1.4 billion for Champions League and Europa League soccer rights, beating competitors including BSkyB. BT in August also unveiled new sports channels free to broadband customers. BeIn in France beat Canal Plus to most of the rights for Champions League in the last round of bidding, while France's rugby league said it's ending an exclusive deal with Canal Plus and auctioning the rights. "Nobody can match the distribution that Eurosport has and its brand," Zaslav said. "We can buy rights across all countries it operates in or we can lean in on specific countries and buy more compelling rights." Bloomberg

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