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>> cbs and hbo announced they would begin internet streaming services, this bypassing traditional media cable, et cetera. that's our topic this week on "the communicators." how people get tv, what's the future of tv, and joining us are two analysts, leading analysts, craig moffet and michael nathanson, and they're partnered in the moffetnathanson research firm. mr. moffet, what is the impact, what's your initial reaction to what cbs, hbo, have announced, and then add on to that netflix and apple, et cetera, and all these other different services. what's the impact on the overall television industry? >> guest: well, those are two separate categories, really. the new one, hbo and cbs, my

guess is the impact will be, actually somewhat limited. on the other hand, the impact of some of the ones already here, like netflix, has already been very profound, and i think what we're seeing here is a real change in the viewing habits of millenials. they're simply watching tv in a very different way than my generation watched tv, and you're starting to see the media companies embrace that and recognize they can't circle the wagons and try to protect the existing ecosystem anymore. they have to actually reach out to that set of consumers. the advertisers want to reach that set of consumers. the media companies want to reach that set of consumers and they're not reaching them today with a traditional product. >> michael nathanson, your reaction? >> guest: my reaction is, really complicated question that you gave us. there's so much change going on. we have been doing this a long

time. i think '14 will go down as the year, probably the biggest change in our careers. we had two huge mergers announced that changes the distribution side of the business, and then advertising weaken for television, and then as it change is happening we have had our companies, hbo and cbs, sony, and dish, launching products that are targeted for over the top distribution, not using traditional cable plants to try to reach customers who are outside of the core bundle. so it's been a year, and you literally need a half hour to go through the step-by-step changes in this business. craig and i agree that we think the changes to the pay-tv, probably not as meaningful as the change to consumption patterns and advertising. >> host: when you hear the terms "cord cutters" and les moonves

used the term" core never" is that our future? >> guest: there's three categories, core cutter, core never, and the core shaving, is the biggest impact of all because it's really stripping hours out of the traditional system, and taking advertising dollars with it and those dollars are now looking for a new home. but the core nevers are really interesting category, and i think les moonves is absolutely right, cord never is bigger than the cord cutter category. cord cutters get attention and everybody likes to wright and talk but but it's small. you are seeing millenial customers that for years the media companies said are inevitably going to join the traditional ecosystem as soon as they come to a life change. today they may subcities on netflix and youtube but just

wait until they have children and then the re be back to the followed and start getting pay tv. for the first time the media companies are starting to acknowledge that may be wrong and those millenials who are the so-called core nevers, may stay core nevers, and to reach them you're going to have to do something different than just wait for them to arrive. >> guest: there are nine million homes in this country that take some sort of tv, that don't -- sorry. people with broadband that don't pay for tv and that nine million, heavily skewed to -- and as they become home owners and move out of their parents' houses and graduate from college, that population agrees. we describe it at our firm, looks like the magazine industry. there's a constant decline of willing customers to pay for the big bundle. it's slow and steady but there's a decline, and the next generation has to be given products to get them back into a

paying mode. may not be a big bundle but may be a little slice of the bundle. >> host: joining our conversation is telecommunications reporter lydia with bloomberg bna. >> host: thank you. so, the federal communications commission is expected to vote soon on an expanded definition of the traditional multichannel video programming distributors that would include certain types of over the top videos, online video streaming services. what is your take on how a change definition could impact consumers, the industry, how investors look on that change? >> guest: truth be told it's probably not a huge issue. what the reclassification of the obd -- what that reclassification does is gives the companies that are

delivering over the top, means they have -- they have fair access to programming that is owned by virtually integrated distributors. the list of vertically integrated distributors are comcast, comcast, and comcast. comcast was already bound by rules, something like that, as par oft the consent decree associated with the nbc merger so it's not a huge issue. people talked as if it might be a lifeline for companies like aereo because it gives them a step in the direction of being able to relicense content for broadcasters about it doesn't really give them all that much negotiating leverage there, all it says is they have to be negotiated with and good faith. that doesn't suggest those companies have to license contents and i don't think that

the reclassification is going to change the world. >> michael, do you have anything to add? >> guest: no. again, that's -- craig and i agree and that's more of his coverage than mine. >> fair enough. some analysts said that à la carte programming or over the top services could benefit consumers and others have said it could make prices rise, to make programming all but disappear. what are your thoughts on that? >> i don't really think we'll see an al a la cart programming model by choice anytime soon. the businesses built on bundles, and one type of consumer subsidieses another type of consumer. when you start unpacking the bundles the pricing you'll need to charge for a lowly consumed network, paid for by 100% of the population, will rise by a large percentage obviously. it's in no one's interest to charge media companies or

craig's companies -- i'll say mia -- not my company's interest to unbundle these channels and go à la carte. they have contracts that simply preclude unbundling. the only change would be regulatory change that puts the gun to the head of the media companies to give you a choice. the companies will have to charge a much higher price per subscriber in order to offset the loss of going to a single channel model. >> guest: you see that with cbs talking about six dollars per subscriber for one channel over the top and that's one of the reasons people have responded to the cbs-ott story, where initially there was lots of enthusiasm and excite. -- excitement. thick it's now greeted with mostly a yawn because people think at $6 it's not going to

resonate all that much because it just highlights it's a very expensive product when it's sold on a stand-alone basis. >> host: i would add two thoughts -- the first -- first, the, remember there are a couple of different kinds of bundling in the value chain. there's not just the bundling of networks together into a package. there's also the bundling -- in fact really there's three levels. there's individual shows are bundled together into a network, individual networks are bundled together into a media con glom rat, say disney or viacom or fox, and then those media con glom rats are bundle together in a package sold to the end user. where you're seeing unbundling is not at the middle level when people talk about à la carte. it's the last level, you're seeing increasingly the disney

bundle being disaggregated from the fox bundle or the cbs bundle or the time warner bundle, and you're starting to let customers buy individual packages. that's something that really started with the negotiations between dish network and disney, and you see it gaining a little momentum. the other point i would make, though -- i think it's probably the more important one -- that is, if you add together a bunch of à la carte happens -- channes and say could i rep mix indicate the existing bundle by creating a bunch of al à la carte channels the answer is almost certainly. no wouldn't be an economically sensible thing to die. think that sort of misses the point. the problem we're trying to solve here is not, how can i recreate the same bundle i already have and deliver it a different way? because that problem has been solved already. the problem we're trying to solve, there is a way to create

a much lower cost alternative for lower income americans or americans who simply don't want to pay that much for tv because they're not that engaged? the answer is, i'm not going to -- if i'm that customer, going to aggregate every conceivable à la carte channel and rebuild the bundle i already have because that's not a problem that needs to be solved. >> i can go further. our firm has a conference on the west coast talking about next wave and disruption, and some of the presenters talk about what millenials want are ten channels for $10, or 20 channels for $20. that's the ideal. ten for t. that's not going to happen in the way the world is constructed today. then we had presenters talking about when they tried to build a next generation virtual mso, their research says they needed to build a 55-channel, $50 bundle, to take in all the choice that people seem to want.

the interesting thing is there's a set of customers who just want à la carte, 10 for 10, what is workable from a research of potentially economics is something that looks like a big bundle different over-the-top. >> host: so, gentlemen, do you see eye telecommunications companies, espn, et cetera, doing what hb expo cbs are attachment -- what hbo and cbs are attempting to do, and if the model works what happens to the traditional cable industry? >> guest: there's a bigger issue than what hbo and appears encan do. hbo is à la carte. by deffings in you have to choose to get hbo. when you look at the world they think there are people, for whatever reason, that is not marketed to them correctly, don't pay, that are opting not to take the à la carte channel.

therefore hbo thinks they can actually add subscribers without damaging the economics of their current business. espn has completely different question. they're running at 90 million to 59 million households getting upwards of six bucks a month. why would you ever want to change that model if you don't have to, to find a five to ten mental people who are not paying for espn? and at some point -- maybe this is a very long point -- needs to be a conversation, and espn is ready to announce plans to work with dish on this personal streaming service. they announced a deal with the nba to work through a program -- a channel that can go over-the-top. they're thinking about the choices, but when they pull the plug to do it, it will be when the economics make the most sense and today with hbo, and espn trying to go over the top. >> mike, to return to something you brought up a moment ago, there is any sort of regulatory action that the fcc could take that could hamper growth in this

sector? >> guest: i can think a lot of actions. one thing that it not contemplated would be anything that looks at the bundling issue, and looks at the economics of bundling and forces more choice. something they can do to slow down the growth of business is re-evaluate the retranslaws because the past five years have seen a change to values of stations and networks due to retrans or reverse retrans and that could change our business. those are my two big things that could change. >> guest: with respect to bundling, the thing to watch is probably not so much regulatory as it is the slowly percolating viacom cablevision case. it's interesting and has a long fuse, but it's worth watching to see whether something really

disruptive comes out of the ruling out of that case. short or that, i think breaking the bundle is a very regarding this to do because the fcc doesn't have the statutory authority to do it. the key questions for -- on the distribution side of the business, where i spend my time, so the comcasts of the world, at&t and verizons of the world ask directv and dish, is -- the questions there are really about how broadband is treated and i think your viewers have probably spent enough time talking about title ii we won't go into it here, but that set of issues dwarfs the others on the distribution side of the business for the moment. >> all right. actually, you brought up -- you mentioned title ii and i was going to do go there. we're not sure what action the fcc is going to take, but how

would title ii broadband reclassifying possibly impact online video streaming, this larger sector, what are your thoughts right now? and how are investors reacting to the regulatory uncertainty in the market now? >> guest: you know, lydia, it's interesting that investors, think, have largely shrugged off the risk of title ii reclassification. the distribution stock fell fairly sharply when it was first -- when president obama first made the statement, asking for title ii, and then has since recovered more or less everything they lost, and i don't think that is the case of investors thinking that the chairman and the -- fellow democrats on the commission will find a title i based compromise. instead i think it's because the investment community has decided they can live with the risk of title ii.

personally, i'm a bit more cautious than that. i think the risk to the business of title ii as an investor are more significant because i think the questions around forebearance are a bit more complicated than they've been made out to be. and there will be this period of regulatory uncertainty. but as it relates to what we're talking about today, which is online video, the questions there are really at the center of the network, and on the interconnection side of the network. fundamentally, what is at stake here is not a series of high-minded questions of first amendment rights and antiblocking and that sort of thing so much a set of very simple commercial questions about will transport be free or will transport be a paid service? and today you have a sort of hybrid model where most hearing -- pairing is done for

free, some on a paid base, peering meaning the ingest by the end user isp, where calm tsa takes the traffic into the network, most 0 the time they're not charging to take that traffic on to their network. sometimes they are. i think what is really at stake in the fcc, and in the policy arena in general, is how do we want that market to evolve? is that going to evolve into a largely paid market? and if so, is it going to be expensive or cheap? or will it remain a largely free market where the customer is the payee? -- the payor. and i think it's fair to say that there is still a lot of uncertainty, not just in policy circles but every as to how the market will evolve. >> host: gentlemen, another policy issue is that fred upton has announced he would like to revisit the telecommunications act. how big of a disruption could

that be? >> guest: if it happens, it could be -- i don't know if disruption is he right word. it would be a very by deal. could be a very positive thing if it finally provided some real clarity and, remember, when the '96 act was written, the internet was bare -- barely mentioned because it was not a big deal. the '96 act focused on the wireline phone business, and so i think there's lots of good reasons why it would make sense to revisit the '96 act. notwithstanding upton's comments, though, i tend to be relatively pessimistic about whether we'll actually see a rewrite in the next couple of years. the problem is you can start with an issue that is already a very partisan and complicated

and fraught issue like net neutrality but you have to start to layer on all of the adjacent issues rained peering, around privacy, around cyber security, around telemedicine, and you eventually -- you start to create the copyright and those issues and stuart acrete so many different issues on here it eventually becomes something like rewriting the laws for a third of the economy. that not something that tends to happen quickly. once you get down into the details it starts to slow way, way down, and count me as somewhat skeptical we'll see a rite anytime soon. >> host: lydia. >> craig you brought up the mergers under review by the fcc right now, and as well as consent agreement requirement on comcast that could affect

program access in the online video space. are there any conditions that you might be watching for that could be placed on either comcast or at&t in these current mergers that could affect the space? >> guest: there certainly are some. i think one of the real questions is to return to the interconnection market. will there be conditions around intersection for comcast? the doj, i think, is -- i suspect, struggling more with the questions of the creation of vertical market power because of comcast's high market share among end users. they're probably struggling more with that question than any other question. and it's quite possible that they could feel like they could -- they could feel that a recommend for that vertical market power could be an arbitration process, or an interconnection agreements are subject to arbitration and that may satisfy any potential

concerns about any competitive behavior or may not. they may decide that those issues are so large that they're insurmountable. that's going to be the issue, so we'll look for what are the conditions there. you're likely to see conditions around the network, state-level conditions from the state of california, about the dodgers and the lakers in particular, and trying to solve that long-standing issue that time warner cable has had with the state of california and with the city. so, there is some specific issues. generally speaking the chairman has said repeatedly that his goal is to not regulate through merger conditions but instead to regulate through regulation, and by and large he seems to be sticking to that promise. i don't think there will be any conditions on this deal that are really dramatic, and it's not because they aren't dramatic changes going on, but it's because the chairman seems to be

very intent on making sure the changes apply to everyone and not just to the one or two companies that are coming through the commission with transactions at any given time. >> michael nathanson, have google and apple tv been disruptors or had an impact on how we view tv? >> guest: i think they have. i think people had at the beginning a lot more hope that google and apple would be even more disruptive, but roku, apple, toshiba, samsung, the ability to get your video delivered through your wi-fi to a smart tv, businesses like enemy flex and amazon prime to grow, and it's so much more rewarding to watch television programs on a tv than a laptop or an ipad that by connect can your tv set to your internet you're able to open up a whole new choice of programming.

they've been very, very impactful. i think going forward, smart tvs in particular, when they price comes down, the ability to actually use your smart tv to get on the web and get video on the web is going to move even more consumers to fragment their viewing across a wider array of choices. so, yes, probably not as disruptive as people first imagined. thought they'd be buying programming, buying super bowl rights, but they've caused change through the technology to how we view media. >> you said earlier that 2014 has been major year of change for you, about i'm curious what issues you're watching for in 2015 that will interest the market. >> guest: so, for media, we worry about what people focus -- will be looking at advertising. 2014, an election, olympic year, a surprising week for television

advertising. next year, without those nice stimulus, what's going to happen to television advertising? we're all concerned about that. second is rate examination measurement. -- ratings and measurement. i'm sure all your consumers are watching television, watching video in a way that's different than they did five years ago the measurement of television has to change, has to changemer quickly. if we're going to see how nielsen and competitors move to capture viewing away from the television set, so viewing is a measure of viewing will be critical. third is going to be, as we talk about, hbo and sony and cbs and dish, will there be any more rolloutedoutedoutedouted of ovep services, can netflix keep growing so just along the line of fragmentation of pay tv choices. so those are our big themes for next year. >> guest: i would add there's still the looming question of

consolidation on the media side of the business, and there have been questions all year in 2014 about will the comcast merger with twc trigger a set of mergers on the other side of the negotiating table among the content companies and we're going to be once again looking to see whether that happens with content, and in the distribution world, where i spend my time, assuming that the comcast/twc deal does close and i think we have put something like an 80% probability on approval -- it's certainly not a slam-dunk it closes but if it closes, then i think you're going to see another round of consolidation on the cable side of the world, where start to follow through with additional transactions in the wake of its portion of the merger on the table today. might actually start to see smaller cable operators start to

do rollouts of the very small cable operators not so much to grow their own scale but actually, oddly enough to make them a more attractive target to be acquired by charter. so i think you'll start to see the pieces on the chessboard move in distribution once the comcast/twc transaction is settled and will free up a logjam and you'll see a whole series of additional dominoes fall in consolidation on the distribution side of the business. >> guest: it's interesting that we actually had a deal announced -- or we had a planned takeover by fox of time warner, that deal did not go through, but to craig's point, right away, there was a whole plan to get bigger on the consent side. going to be interesting to shoed happens in '15.

when you're seeing consolidation on distribution, my side consolidates, i don't think there's the same urge of a large companies to buy smaller companies. the question will be, will the smaller companies get together, how will they, who is going to lead that consolidation, but we did have a deal that tried to get finished, just couldn't get done this year. >> host: unfortunately, gentlemen, we're out of time, craig moffet, michael nathanson in new york. and lydia bayoud. thank you all. >> coming one c-span2, book tv and primetime, with three former cabinet secretary from the obama administration. up next, former treasury

secretary leon panetta on his pork "worthy fights" then his pled sees for pentagon, robert gates, and later former treasury secretary, tim geithner, author of" stress test." >> next on booktv, leon panetta talks about his career in public service, ranging from his years as u.s.a. representative from california, to his most recent post as secretary of defense. this is about an hour and 15. [inaudible conversations]