CBS Settles With Time Warner. And Netflix Could Not Be Happier

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On the odd chance you missed the news, CBS and Time Warner settled their dispute last night, CBS is back on the air, and is being widely hailed as the “winner” in the battle. (TWC Chairman Glenn Britt is even quoted as admitting “we certainly didn’t get everything we wanted.”)

Lots of backstory, particularly around the role of sports in forcing TWC’s hand, but the one that interests me the most is the battle over digital rights , which was a much bigger deal than many realized.

It seems that back in 2008, when the last CBS-TWC deal was inked, CBS agreed to give TWC pretty much exclusive rights to its on-demand programming and, much to Time Warner’s chagrin, CBS did not want to renew that portion of the contract.

 So what happened in the interim? Pretty much everything:

1. The MVPDs always treated VOD like the red-headed stepchild. The interfaces were confusing at best, incomprehensible at worst. The content was limited and that was when it worked, which it often didn’t. And you could only watch it on your set-top box connected TV
2. Along came Netflix, Amazon and Hulu who started licensing the networks’ older programming. Digital rights are different than on demand rights, but for the consumer the result was the same: they could watch past seasons of popular series whenever they wanted. And with Netflix, Amazon and Hulu, they could also watch it pretty much wherever they wanted. Or at least on an iPad in their bedroom.
3. In addition, the streaming services all had much more intuitive interfaces than the VOD services: they were easier to search and they had cross-device intelligence - the ability to pick up the program where you left off as you moved from one device to another.
4. Binge-viewing became a thing and people started using services like Netflix to catch up on entire seasons of older series. This was easy to do on Netflix because they made it easy to locate the entire season and navigate your way through it. Not so easy to do on MVPD VOD systems which sometimes randomly left out episodes or left it to the viewer to decide what S3EP4 meant and how it related to the episode they just saw. That, and having the SD and HD versions of the series under completely different sub-menus made for a less-than-compelling experience.
5. Realizing that TV series were driving their subscriptions faster than movies (and after losing the rights to stream most current movies, which were heading to TVOD (Transactional Video On Demand) services like iTunes) Netflix quickly saw the value in paying large sums of money for digital rights.
6. Unfortunately, the deals CBS and other networks had in place with the MVPDs automatically gave them VOD rights to the same series CBS wanted to sell to Netflix. And it gave it to them at no additional cost.
7. This meant CBS couldn’t charge Netflix as much, since they weren’t getting exclusive rights.
8. Now, with the 2013 deal, they can.

While the MVPDs were remiss in not seeing the revolution coming, the truth is, hardly anyone did. As I’ve mentioned before, the one lesson we’ve learned from the digital age is that convenience trumps quality: the music industry did not think anyone would listen to MP3s because the quality was so poor compared to CDs. The phone companies did not think people would use rectangular cell phones they couldn’t cradle between their shoulders and necks for hours.

 They were wrong. People prefer convenience.

 To be fair to the MVPDs, there were also additional rights issues-- VOD rights vs digital rights-- which impeded innovation. But that’s just an explanation as to why they lost, it doesn't change the fact that they did indeed lose.

So the networks have the upper hand. For now. That may well change though, as the lawsuits spawned by Aereo wend their way through the courts and the MVPDs question whether the networks have a right to charge for retrans fees. Stay tuned.