The first two launches of the Hallmark Network, International, were done by cable operators in region. Mexico was played out by PCTV, which was a co-op of small cable operators, Sweden was played out by a cable company there. This was the cheapest way to launch but it soon became an impediment to sales because other cable operators and DTH systems did not want to buy a service that came from a competitor. The solution was to go to a commercial provider, a perceived third party. Latin America was moved to Hero in Miami and European playback to Sky in the UK. This helped growth, but as the channels grew, so did the expense.
At the time the magic number for make or by on playback was 6 or 7, that is if you have six channels it may be more cost effective to build your own playback and as the number of channels grew, the cost per channel went down. Hallmark built a facility in Denver in 2001 and began to central cast global playout. It was a dual-standard facility (PAL and NTSC) that originated 27 networks into 120 countries. The transport streams were sent to uplinks in country that did local distribution to cable and DTH satellite providers. In 2005 the international business was sold to Sparrowhawk Media for $242M. That year the channels had an increase in viewership of 34% and the highest rated ad-supported cable movie with a 3.6 rating on “Meet the Santas”.The domestic channel in the US was retained by Hallmark in Crown Media.
In 2007 Sparrowhawk sold the international business to NBC for $350M, including the Denver playout facility. After much due diligence, NBC decided that running a dual standard facility in Denver for international distribution was too far outside the lines. The main asset was the distribution, which had grown to 30 channels in 150 countries with 60M subs. At the time Technicolor was playing back the NBC and Universal networks in the UK. NBC convinced Technicolor to take the facility and run it with a long-term playback agreement that was signed in 2008. NBC had strict penalties in the contract in the form of monetary fines for not meeting service level agreements. Eventually this led to the closing of the facility and the playback was moved to the UK. In the next part of the series we will explore the current state of the commercial business.
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These examples represent a microcosm of the playback business. It is capital intensive and the margins are slim. This has affected both the consumers and suppliers of this services. The result is a dwindling of suppliers on a large to medium scale. The business is still complex. Large providers still do their own, although content in the cloud has given more consideration to outsourcing. While the cloud has flexibility and some efficiency on the labor side, it is still not that much cheaper on the investment side. Extraction costs for cloud providers far exceed storage costs, so it is only cheaper to use a cloud storage provider if you don’t need your content.
All facilities built in the last five years have been based around software stacks in an open IP environment that have greater flexibility, lower capital cost per channel and less staffing requirements. The last two built at Comcast in Denver and Turner on Techwood in Atlanta use the Evertz platform in an open, multi-channel environment. Turner has consolidated all Turner and CNN playback into one room giving them an economically efficient environment for news, sports and entertainment channels. Discovery also has gone in this direction. There is not much outsourcing among the larger players.
So, this reduced the commercial business to smaller and mid-sized customers. Other products, such as central casting for station groups and sports nets have presented opportunities for commercial suppliers but a lot of that work is still done in house. There are other opportunities on the horizon in the form of multi-platform distribution and on-demand services.
The key to survival is the economy of scale. There has to be a critical mass of stable customers, enough capital to survive the rapid advance of technology and the ability to meet the demands of new distribution platforms. The diversity of products and markets is critical. Encompass has been able to survive by having a global footprint and the ability to recycle sunk capital, like using the NBC central casting gear to service CBS after NBC took the work in house.
The barrier to entry is high now and the new providers will be from adjacent industries. Amazon just announced that they are starting a new linear channel, which will be self-sourced. A new FCC ruling says that FCC TV ownership rules don’t apply to internet distribution via 3.0. This is the new wave, where will the commercial providers fit in?