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What Impact Will Over-the-Top Video Have On Cable Operators? Minnesota Telecom Alliance (“MTA”) Annual What Impact Will Over-the-Top Video Have On Cable Operators? Minnesota Telecom Alliance (“MTA”) Annual Convention and Trade Show March 26 -27, 2012 Brian T. Grogan, Esq. 612 -877 -5340 1

Nothing May Change • It is possible that cable TV as we know it Nothing May Change • It is possible that cable TV as we know it will: – Remain available primarily via cable and DBS – People will continue to pay for bundled services – Young adults will come back to Cable TV • But it is also possible that change will occur – Perhaps not overnight – but slowly over time • Better to be prepared – Ahead of the change – Rather than reacting after the fact 2

What is Happening Now? • Subscribers are disconnecting from cable – Growth of DBS What is Happening Now? • Subscribers are disconnecting from cable – Growth of DBS has been significant – “Over the Top” cable is having an impact • Wireless devices (i. Pad, Smart Phones) • Netflix • Hulu, You. Tube – Economy – high cost • New generation not dependant on cable – Few college students subscribe to cable – All college students have broadband service 3

2010 Top 15 Cable Operators 1. 2. 3. 4. 5. 6. 7. 8. 9. 2010 Top 15 Cable Operators 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Comcast Corporation Direct TV Dish Network Corporation Time Warner Cable, Inc. Cox Communications, Inc. Charter Communications, Inc. Verizon Communications, Inc. AT&T, Inc. Cablevision Sys. Corp. Bright House Networks, LLC Suddenlink Communications Mediacom Insight Communications Cable. One, Inc. Wide. Open. West Networks, LLC Subscribers 22, 363, 000 19, 760, 000 13, 945, 000 12, 109, 000 4, 789, 000 4, 371, 000 3, 979, 000 3, 583, 000 3, 264, 000 2, 109, 000 1, 268, 000 1, 100, 000 670, 000 628, 000 432, 000 Source: NCTA website – September 2011 4

Goldman Sach's Media Conference in NY • Verizon Communications CEO Ivan Seidenberg – future Goldman Sach's Media Conference in NY • Verizon Communications CEO Ivan Seidenberg – future generations of consumers won't have any interest in buying service bundles, which can include Internet, pay TV, and telephone – "Young people are pretty smart. They're not going to pay for something they don't need to. ” • Credit Suisse, financial services company – downgraded media stocks – upgraded Netflix (Pre-Starz termination) – saying its studies show that young adults are now turning to Netflix to acquire film and TV shows. 5

Netflix – North America 6 Netflix – North America 6

Basic Cable Subs ’ 95 - ‘ 10 7 Basic Cable Subs ’ 95 - ‘ 10 7

DBS Subscribers 2002 2003 2004 2005 2006 18, 240, 000 20, 360, 000 23, DBS Subscribers 2002 2003 2004 2005 2006 18, 240, 000 20, 360, 000 23, 160, 000 26, 120, 000 27, 973, 000 2011 33, 500, 000+ Source: Jan 2009 FCC report on Competition 8

Has Cable Lost Subscribers? • Multichannel Video Service Customers • Incumbent cable operators – Has Cable Lost Subscribers? • Multichannel Video Service Customers • Incumbent cable operators – 58. 3 Million basic cable subs – 2001 total = 66. 9 million subs • September 2011 NCTA website • Non-Incumbent – 42. 9 Million basic cable subs – Includes DBS, Verizon, AT&T and others • September 2011 – NCTA website 9

High Speed Internet Customers 10 High Speed Internet Customers 10

Basic Cable Phone Subs • • Year / Subs 1998. 1 1999. 3 2000 Basic Cable Phone Subs • • Year / Subs 1998. 1 1999. 3 2000 1. 0 2001 1. 5 2002 2. 5 2003 3. 0 2004 3. 8 Year / Subs 2005 5. 9 2006 9. 5 2007 14. 9 2008 19. 6 2009 22. 2 2010 23. 9 SNL Kagan – NCTA website 11

Cable Industry Data • • • Homes Passed Basic Video subs Basic Cable Penetration Cable Industry Data • • • Homes Passed Basic Video subs Basic Cable Penetration Homes Passed by Internet High Speed Internet subs Cable Phone subs 129. 7 M 58. 3 M 45. 0 % 124. 8 M 46. 4 M 25. 0 M Source: SNL Kagan – NCTA website (as of September 2011) 12

Cable Industry Revenue (, 000 s) Year Res Video Other Rev Total Rev • Cable Industry Revenue (, 000 s) Year Res Video Other Rev Total Rev • • • • 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 $24, 136 $26, 270 $27, 626 $30, 050 $32, 541 $35, 734 $36, 738 $39, 338 $41, 813 $43, 832 $46, 518 $49, 105 $51, 467 $53, 040 $2, 984 $3, 532 $6, 152 $7, 341 $9, 575 $9, 743 $11, 160 $15, 056 $18, 212 $21, 846 $25, 354 $29, 719 $34, 470 $36, 861 $27, 120 $29, 802 $33, 778 $37, 391 $42, 116 $45, 477 $47, 898 $54, 394 $60, 025 $65, 678 $71, 872 $78, 824 $86, 281 $89, 901 • 2010 • 2011 $55, 470 $56, 938 $38, 310 $40, 660 $93, 780 $97, 598 Source: SNL Kagan – NCTA website (in millions) 13

Cable Statistics • National Cable Programming Networks – 565 (2006) • Price per viewing Cable Statistics • National Cable Programming Networks – 565 (2006) • Price per viewing hr of digital video service – 21. 1¢ in 2010 • Cable advertising revenue – $27. 2 B (2010) • Franchise Fees Paid by Cable Operators – $2. 7 B (2010 est. ) Source = NCTA website September 2011 14

How Do You Watch TV? • 2007 Nielsen Co. study – the average TV How Do You Watch TV? • 2007 Nielsen Co. study – the average TV household has over 118 channels – but watches just 16 of them. . . – around 13% • What would you pay to watch your 16 channels? • Is Cable over the Top the answer? 15

Cable Over the Top Models • Advertising – $30 -$60 per every 1000 viewers Cable Over the Top Models • Advertising – $30 -$60 per every 1000 viewers • Internet views (about the same as TV rates) • Cost of an average show = $2 -5 million – Excludes reality shows – lower budget – $60 x 5 ads/hr @ 6 million viewers = $1. 8 million – CSI Miami = 13 million viewers – Mad Men – maybe 3 million viewers • Source = David Colarusso March 2010 • http: //www. huffingtonpost. com/david-colarusso/the-future-of-cabletelev_b_501895. html 16

Cable Over the Top Models • Pay-per-view via: – micro payments; – Subscriptions – Cable Over the Top Models • Pay-per-view via: – micro payments; – Subscriptions – monthly payment - all you can eat – standard pay-per-view - $5 per movie • $1. 99 (e. g. i. Tunes rate) – for every hour of television watched online – for every show downloaded – Will 1. 5 million people pay to view each show? • If you pay to view – will you accept ads? 17

Online Advertising Revenues 18 Online Advertising Revenues 18

2010 Internet Ad Revenues • U. S. Internet advertising revenues – 2010 $26 Billion 2010 Internet Ad Revenues • U. S. Internet advertising revenues – 2010 $26 Billion – 2011 revenue up 22% since Q 3 2010 • Q 3 2011 - $7. 88 billion • Search-related ads – 11. 6% revenue growth • Display-related ads - 15% revenue jump • Digital video ad revenues up 31% Source - Interactive Advertising Report and Pricewaterhouse. Coopers. 19

Conclusion • Charles H. Duell, Director of the U. S. Patent Office 1899 – Conclusion • Charles H. Duell, Director of the U. S. Patent Office 1899 – Everything that can be invented has already been invented. – Charles was wrong! – Every day a new threat to cable TV is developed • What options are available? – Be careful regarding retransmission/programming agreements – Sports programming • Can’t live without it – Can’t afford it • NFL programming about to get very expensive – Will subscribers pay you for programming that is offered for free over the web? – Carefully consider how system capacity is utilized – Listen to subscribers – • Program packaging, bundled options, value 20

Thank You! Brian T. Grogan, Esq. Moss & Barnett 4800 Wells Fargo Center 90 Thank You! Brian T. Grogan, Esq. Moss & Barnett 4800 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 -4129 Phone: 612 -877 -5340 Facsimile: 612 -877 -5999 E-mail: [email protected] com 21