CBS CBS Corp

By Shalini Ramachandran 

When CBS All Access launched more than two years ago, the $5.99-a-month service only live-streamed in certain markets and offered relatively little programming compared with the likes of Netflix.

CBS has beefed up the online service dramatically since then, making live station feeds available across nearly the whole country, offering full current seasons of shows like "NCIS," greenlighting a new edition of "Star Trek" for the platform, and inking a deal this month to stream its Sunday and Thursday NFL games.

The streaming service is the leading edge of the unorthodox digital approach CBS has pursued -- one that amounts to a major bet on the brand's value in the era of cord-cutting. Winning over young consumers on digital platforms will be key to CBS's future as a stand-alone broadcaster and will be in the spotlight for investors, particularly after plans unraveled this week to merge CBS Corp. with sister company Viacom Inc.

While other media companies have prioritized gaining carriage on every new digital distributor, CBS hasn't been afraid to stay on the sidelines. It wasn't on AT&T's DirecTV Now at launch in November, hasn't signed a deal with Dish Network Corp.'s Sling TV in nearly two years and hasn't struck a pact with Hulu, the service owned by many of its rivals that is set to launch a cable-style streaming offering early next year.

While CBS has withheld its content from many digital platforms, the No. 1 broadcast network did sign a deal with Alphabet Inc.'s YouTube and remains in talks with DirecTV Now and Hulu.

CBS has surprised rivals with the success of its service, which now has some 1.2 million paying subscribers, according to people familiar with the matter.

The success of All Access is a double-edged sword. Executives at big companies like Charter Communications Inc. and Comcast Corp., as well as digital distributors such as Hulu, Sling TV and DirecTV Now, believe that a strong CBS All Access lessens CBS's negotiating leverage, people familiar with their thinking say. If CBS demands too high a price, it becomes easier to simply drop the network from their lineups and direct consumers to sign up for All Access, they said.

If CBS is dropped, "you could give subscribers a $70 gift card and a free year of CBS All Access," said Thomas Larsen, senior vice president of government and public relations at small cable operator Mediacom Communications Corp. "Cable operators could say, 'I don't need it anymore.'"

But distributors also have to be wary of pushing more customers to abandon traditional pay-TV altogether and sign up for cheaper online alternatives instead.

CBS executives aren't concerned. If pay-TV providers were to drop CBS, the company would only need a third of their customers to sign up for CBS All Access to break even.

"As All Access continues to grow, it demonstrates the value of what CBS brings to any size bundle. And since distributors aren't paying $6 a subscriber, we think it's a fantastic value," said CBS Chief Operating Officer Joseph Ianniello.

When CBS digital executives pitched Chief Executive Leslie Moonves the idea of launching the broadcast network's own stand-alone streaming service a few years ago, he was worried about upsetting relationships with distributors. CBS Interactive's now-President Marc DeBevoise argued it would help CBS reach superfans and demonstrate that consumers are willing to pay more than three times what traditional distributors were paying.

"I was originally playing more of the traditionalist role, asking lots of questions," Mr. Moonves said. "Over time, I became more and more comfortable that this was the right strategy."

With just one premium channel, Showtime, and a single broadcast network, CBS has more flexibility to experiment in online TV than rivals like Walt Disney Co. and 21st Century Fox who are more dependent on the big TV bundle.

CBS "tends to be a little more thoughtful and aggressive on their distribution rights of their primary broadcast network programming, because it's all they've got," said Chris Cornelius, chairman of the CBS Affiliates Board.

Asked at a recent investor conference whether he would prefer All Access or new digital distributors to be successful, Mr. Moonves was clear: With All Access, "we keep 100% of the dollars, so the more subscribers I get there, the better."

CBS believes traditional cable and satellite operators that want its broadcast channel in their big bundle should pay $2 a subscriber; new digital entrants like Hulu should pay closer to $4. Fans who want the whole shebang -- the live broadcast feed, library seasons of "I Love Lucy" and the full latest season of "Big Brother" -- will pay $6 a month for CBS All Access.

When DirecTV Now unveiled its service in November, AT&T Inc.'s entertainment chief John Stankey took a dig at CBS, implying that its older demographic -- the average age of CBS television viewers is 59 -- doesn't necessitate its carriage in a millennial-targeted bundle. AT&T doesn't believe CBS's absence from DirecTV Now has hurt its growth, as the streaming service has surpassed its year-end subscriber target already, people familiar with the matter said.

Beyond fights over price, CBS also faces pushback for keeping certain content exclusively on All Access, like full current seasons of shows such as "Blue Bloods," and refusing to grant those shows for cable operators' on-demand services.

But with its success rising, hurdles still loom. CBS All Access' two-year deal with its affiliates board is up in February, and it is likely the stations will push for a higher cut of the streaming revenues, a person familiar with the matter said. Today they make about 10%, while the network keeps 90% of subscriptions, the person said.

Write to Shalini Ramachandran at shalini.ramachandran@wsj.com

(END) Dow Jones Newswires

December 14, 2016 08:13 ET (13:13 GMT)

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