2014/03/04 FilmOn: Beyond the Court Cases, an Interesting Business Model

By Mike Paxton

If you ask someone in the TV or telecommunications industry to describe FilmOn’s business model, you would likely receive a quick review of the company’s pending legal cases and how it always seems to be a target for TV broadcaster lawsuits in the United States.  While this description isn’t totally off base, it does miss out on some of the streaming video service’s more interesting capabilities.

One of these capabilities is FilmOn’s growing library of content, something that many online video service providers will tell you is the single most important element of a streaming video service.  Currently, FilmOn offers a wealth of programming from sources all over the world.  While a significant percentage of FilmOn’s content lineup features genres like mixed martial arts and action movies targeted at younger adult males, it also offers well-known programming from the likes of PBS, the BBC, the Wall Street Journal.com, the Associated Press, and France24.  The company also recently acquired what was once known as the Allied Film library, which adds some 47,000 movies, documentaries, and TV shows to its content lineup.

According to Alki David, FilmOn’s founder and Chief Executive Officer, FilmOn currently offers more than 600 live television channels, as well as original programming, to its viewers.  In fact, in January 2014, over 20 million FilmOn viewers watched more than 1.2 billion video streams.

For the past two years, SNL Kagan MRG has been documenting how the growth of streaming video, particularly subscription-based streaming video, has been impacting the global pay-TV and broadcast TV industries.  In recent Executive Briefs, we have examined how companies like Netflix, Net2TV, and Aereo have been shaping the future of both the pay-TV market and the online/OTT video market.  This Executive Brief takes a closer look at FilmOn, a company that is beginning to make a name for itself in the online/OTT video industry.     

Overview: FilmOn

Similar to companies such as Netflix and Hulu, FilmOn’s basic business is the transmission of video over the Internet.  In general, FilmOn allows its viewers to watch two types of video:

-       Broadcast TV programming

-       A wide variety of special interest video content

Similar to many other streaming video-based business models, FilmOn’s content is targeted at end-users who watch the video on either personal computers or any mobile device with a screen (smart phones, tablet computers, etc.).

The majority of FilmOn’s content is free, and its basic business model is best characterized as “freemium,” meaning that it is advertising-supported, but is available to be watched at no cost.  At the same time, FilmOn does offer some subscription-based video content.  The company generates revenues from several different sources, to include:

-       Advertising

-       Sponsored videos

-       Subscriptions

-       Sales and syndication of proprietary FilmOn video content

-       White label/affiliate partner deals

-       Sales of software and network engineering solutions

These last two revenue generators underline a key feature of FilmOn: In addition to being a streaming video service provider, the company also sees itself as a technology company.  The FilmOn platform is fully customizable for white label video services, and it has a team of platform developers (mostly based in the Ukraine) who are constantly upgrading and customizing its video service platform.

Another example of FilmOn’s technology focus is the deal signed last year with Lenovo, the world’s largest computer manufacturer, whose products now come pre-loaded with the FilmOn app.

In terms of its end-user base, most of the people who watch FilmOn’s video content are located either in Western Europe, the United States, or in the Middle East.  The company’s global footprint of end-users actually makes it quite different from most other streaming video service providers, who are often targeted at either a single country or a single geographic region.

Overall, revenue growth at FilmOn has been slow, but steady.  According to company sources, FilmOn’s consolidated 2013 revenues were just under $10 million.  For 2014, revenues are projected to grow significantly, as new TV channel sponsorship deals are signed and advertising revenues rise.

The Best-Known Part of FilmOn’s Business

Without a doubt, the best-known part of FilmOn’s business model revolves around its retransmission of US broadcast TV channels.  To accomplish this, FilmOn uses millions of small antennas located in what is commonly called an “antenna farm” to capture broadcast TV signals, which it then retransmits via the Internet to its viewers all over the world.

However, this part of FilmOn’s business has led to a number of legal challenges.  According to US broadcasters such as ABC, CBS, Fox and NBC, by using this type of technology, FilmOn (along with its streaming video rival Aereo) is illegally retransmitting their copyrighted content without permission.  While FilmOn disagrees with their assessment, the broadcasters are believed to be mostly concerned about the future of retransmission fees, and how a company like FilmOn might impact those fees.

So what is the big deal about retransmission fees?  From roughly the 1980s until the late 2000s, TV broadcasters in the US offered their signals to cable, satellite, and telco TV service providers for free.  During this time, the broadcaster’s biggest concern was that they not get “left off” of any leading cable TV or satellite TV channel bundles.

A change in this model began to occur four or five years ago, when broadcasters started demanding that the pay-TV service providers actually pay to retransmit their programming.  This change effectively created an important new revenue stream for the broadcasters, one that has been estimated at approximately US$2 billion a year.  Currently, retransmission fees from the pay-TV service providers’ account for as much as a third of US broadcast TV profits.

Needless to say, these retrans fees rapidly became the financial highlight of the broadcast TV industry, and anything that threatened them came under almost immediate fire.  Enter Aereo, FilmOn, their antenna farms, and their streaming video services.

FilmOn, which calls their arrays of antennas “Micro Remote Antenna Farms,” currently has them located in 16 major US cities.  However, due to ongoing litigation and appeals of earlier court rulings, FilmOn can only stream broadcast TV shows in three states: New York, Connecticut, and Vermont.

Still, FilmOn remains confident that both its technology and its business model are legal.  To underline this belief, the company recently launched what it calls “Teleporter Technology,” a capability that allows users to remotely view desktop devices connected to FilmOn’s antenna farms.

The Court Cases: Background

FilmOn has become either famous or notorious (depending on who in the TV industry is describing the company) based on its remote antenna farm/broadcast retransmission business.  We will likely see a resolution to the questions surrounding this business later this year, when the US Supreme Court rules on the legality of television services, such as FilmOn and Aereo, which use antenna farms to capture and distribute terrestrial broadcast signals.

TV broadcasters are trying to shut down these services, claiming that they violate copyright by rebroadcasting signals without consent, while streaming video service companies such as FilmOn firmly believe they have developed a new form of terrestrial TV that permits viewers to watch TV in a new and improved way.

The background for the legal challenges facing FilmOn starts with FilmOn X, formerly known as Aereokiller LLC.  FilmOn X is the legal name for FilmOn’s US-based broadcast TV streaming service.  In September 2013, a federal court ruled that FilmOn X’s broadcast streaming services violated the copyrights of the broadcasters, and ordered the service be shut down.  The ruling did not apply to rival streaming video service provider Aereo.

In the ruling, Judge Rosemary Collyer of the US District Court for D.C. sided with the broadcasters, noting they were likely to succeed on their claims that FilmOn X violated copyright law by breaching broadcasters’ “exclusive public performance rights in their copyrighted works.”

Judge Collyer also said the court “carefully considered” rulings by the New York-based Second Circuit, which had earlier affirmed the legality of Aereo.  The judge ordered FilmOn’s service to be shut down not just in the Washington D.C. area, but also nationwide, with the exception of the three states covered by the Second Circuit in the Northeast.

FilmOn has appealed the ruling, noting that Judge Collyer never permitted FilmOn to offer an oral argument supporting its position.

The Supreme Court Case: Aereo vs. the Broadcasters and Impacts to FilmOn

In recent weeks, most discussion surrounding the future of streaming video companies like Aereo and FilmOn has been dominated by the impending Supreme Court case.  In January 2014, the US Supreme Court agreed to hear an appeal from the TV broadcasters, including units of Walt Disney Co., CBS Corp., NBCUniversal Media LLC, 21st Century Fox Inc., and Univision Communications Inc., regarding a lower court’s ruling that Aereo is operating legally.

The Supreme Court has scheduled oral argument in this case for April 22, 2014, with a final decision likely released sometime this summer. The case itself is listed as an appeal of an earlier lower court’s decision that permitted Aereo to continue delivering TV station signals over the Internet without paying retrans fees to the TV broadcasters.

Other previous lower court rulings were split on the merits of broadcasters’ challenge, and both the US broadcasters and Aereo supported the Supreme Court weighing in to resolve the dispute.  The ruling will likely shape the future of online video and copyright protections in the US.

While the upcoming Supreme Court case deals only with Aereo, FilmOn recently filed a motion to intervene in the case before the Supreme Court, arguing that while FilmOn has been enjoined from offering access to network content across most of the US, Aereo is not subject to the same injunctions.  Moreover, FilmOn stated that Aereo, as the company’s “primary competitor,” has an incentive to leave the injunctions against FilmOn intact and therefore is not likely to adequately represent FilmOn’s interests before the court.

To date, the court has not responded to FilmOn’s motion.

While it is important to recognize how these legal issues, in addition to the upcoming Supreme Court case, are impacting FilmOn’s business and its mindshare, it is also important to note that the free-to-air broadcast business is really just a small portion of FilmOn’s total business.  According to CEO Alki David, the FilmOn X part of FilmOn, which is to say the US broadcast part of the business, accounts for just 3% of total company revenues.

Something that is unique about FilmOn, particularly in comparison to other streaming video services is its growing content library.

Content Is a Priority

FilmOn has repeatedly emphasized that growing its content library is one of the company’s key priorities.  In addition to offering popular channels that feature sports, martial arts, and action movies, FilmOn offers a wide variety of content from other genres, to include:

-       Animated cartoons

-       Talk shows, which are somewhat similar to talk radio shows, only videotaped (the Corey Feldman Show is actually kind of interesting)

-       Music videos

-       Cooking shows

-       Comedy shows

-       Educational channels

-       Home shopping channels such as QVC

-       Fitness channels (topics covered range from Pilates to Yoga)

-       Religious channels

-       Regional broadcast channels from numerous countries, including Australia, China, France, Germany, Greece, Italy, Russia, South Korea, and the United Kingdom

In a recent interview with SNL Kagan, CEO Alki David noted that “we’ve aggregated so much content.  We license over 600 channels on our platform; we’ve licensed 45,000-plus video-on-demand titles; I’ve just acquired the world’s biggest private film and TV collection to ingest and put on our platform as well.”

According to some pay-TV industry observers, FilmOn’s content portfolio can be described as “nichey,” meaning that it has a significant amount of obscure, long-tail types of programming.  However, those same observers point out that much of the content in the online/OTT video world, even from market leaders like YouTube and Netflix, can be described as niche-oriented.

What is important, and something that is agreed upon by virtually all people in the online/OTT video industry, is that content is – and will continue to be – an important business model differentiator.  Those services and platforms that have compelling content will ultimately prevail over competitive services and platforms that do not.

Market Sizing: OTT SVOD Services

Regardless of the actual outcome of the court cases facing FilmOn, SNL Kagan MRG believes that the online/OTT video market is poised to expand rapidly over the next few years.  FilmOn’s core business is in the “freemium” or ad-supported side of the market, which is a growth market.  At the same time, the worldwide subscription VOD (SVOD) business, a service capability that FilmOn also offers, is also on track to experience solid growth.

Looking specifically at the global OTT SVOD market, recent research highlights the following:

• SNL Kagan MRG estimates that worldwide OTT SVOD subscriptions reached 66 million in 2012, generating annual revenue of $4.7 billion.
• Consumers now demand a personalized viewing experience and a broad variety of content.  OTT services, allowing for multiscreen viewing options, are well suited to fulfill these expectations.
• The increasing penetration of smart TVs, smartphones, tablets, and other connected devices are further augmenting the demand for OTT services.
• As the market is evolving, OTT SVOD service providers are striving to offer exclusivity and original programming to their subscribers. The focus is on providing video content anytime, anywhere, and on any device.
• SNL Kagan MRG expects the OTT SVOD market to record significant growth worldwide in the coming years.

Our current SVOD market forecasts are illustrated on the following page.  Figure 1 shows how worldwide SVOD subscriptions are projected to rise from just over 80 million in 2013, to over 92 million in 2014, an annual growth rate of 16%.

Revenues from worldwide OTT SVOD subscriptions hit US$5.22 billion in 2013.  Figure 2 illustrates how they are forecasted to rise to over US$6 billion in 2014, and ultimately reach almost US$8 billion in 2017.

MRG Analysis

SNL Kagan MRG has been tracking the online/OTT video market for several years, and we are confident that in the coming years the market will continue to grow, continue to change, and continue to attract new entrants and business models. 

In terms of how FilmOn is positioned to compete in this market, we offer the following observations:

• While FilmOn’s market position and relative size make it just a small player in the global online/OTT video market, the company is in a market segment that is poised to grow rapidly over the next few years.
• The continued acquisition of video content by FilmOn, either through partnerships or via the creation of original content, is a smart long-term strategy.  The next step in the progression of this strategy is to acquire/create even higher-value content (Netflix and Amazon Prime are excellent examples of this type of content acquisition progression).  
• As a company, FilmOn has made itself into a legal target for the US TV broadcasters.  Some of this “targeting” is likely due to CEO Alki David’s repeated verbal jabs questioning the viability of the broadcasters’ business models.  While we concede that many of the points raised by David are valid, the ongoing enmity between FilmOn and the broadcasters may actually end up having a long-term, negative impact on FilmOn, especially when it comes to developing new content and distribution partnerships.
• Regardless of how the Supreme Court rules in the Aereo case, FilmOn will still have a viable business model.  Unlike Aereo, which relies on its antenna farm business to generate the vast majority of its revenues, FilmOn’s antenna farm segment is just a small part of its overall business.  This means that if the Supreme Court decides for the broadcasters, then Aereo will have to either drastically change its business model or possibly even shut down.  This will not be the case at FilmOn.  Again, assuming the high court decides for the broadcasters and against Aereo, FilmOn will still have a diverse and viable business model, even if it has to shut down its antenna farms in the US.

Here at SNL Kagan MRG, we will continue to track what happens with the development of business models in the online/OTT video market segment, including the upcoming judicial decisions and their impact on the industry.