What if an industry many had destined for a “big reset”, took the lead in its own disruption
This may best describe the current state of the TV industry today.
“The business has never been better” – Bruce Rosenblum, president of Warner Bros. Television Group, speaking on the challenges and opportunities facing the TV industry, 2012 NAB Show.
There has been no lack of skeptics or coverage to the pending demise or collapse of the TV industry in 20012, as it did in 2011, and 2010. While the mood has been sombre across the industry for the past couple of years, recent events in 2012 support the statement made above.
There has been this sense of revival at the NAB convention and The Cable Show this year focusing on technical innovation, a unified consumer experience, developing partnerships, and embracing the changing demographics the industry has been dealing with.
What has changed?
Skeptics will be pleased to know that the industry is still faced with the same continuous state of technical and cultural change today, as it has over the past few years. From implementing the switch from standard to high-definition, the emergence of on -demand viewing (pay-tv, DVR), and the rapid growth and maturity of the Internet.
These technical enhancements have left the TV industry with a modern infrastructure and the best technical solution today to better the consumer experience
Where’s the problems?
“Its complicated, the industry is very fragmented, until this works itself out, the waters are going to get really choppy” is was how the current state of the TV industry was described to me. Why complicated and fragmented? There is little collaboration going on between the cable providers, broadcasters, or technology companies, each serving up there own version of the user experience.
Part of this battle, is the 100M households that the cable providers combined currently reach. For the past two years the industry has been seeing declines in subscriptions, due to cord-cutting, or simply households canceling their subscriptions.
Perhaps at the root of all of this is the need for the broadcasters, and in some degree cable providers to take a radical departure from the of concept of basic and premium channels, and possibly the channel itself, if the industry is going to continue to tell the consumer why its the best connection for the future.
Statistics published by SNL Kagan
In 2001, traditional analog subscriptions peaked at 66.9M households, as the cable providers began to roll out digital video, which had reached 14.6M households. Broadband access still in an infancy phase, had reached 7.3M households.
By 2011 this shift in consumer behavior was more visible and difficult to ignore, as the subscriber rate in cable TV began to slow and broadband accelerated in growth. From 2006 to 2011, combined cable offerings did increase by ~6 million from 96 million to ~102 million households, but broadband reached ~50M households an increase of ~16M.
Added to this behavioral shift was a growing demographic of cord-cutters, who have been reported to contributed to the declining number by ~4.5M households since 2010.
This shift in viewing behavior has left ad revenues flat since 2009, though having rebounded in 2012, advertisers are more cautious on what networks they spend their dollars with.
The TV manufacturers and retailers have not been left unscathed, as cord-cutting has resulted in lower sales, and declining margins due to incentives and discounting
What is the TV industry doing to stay a step-ahead of all this change?
A recent survey published by Deloitte, on the “State of the Media Democracy” reported that 1 in 5 households are either cord-cutting or planning to do so over the next year. That would equate to a staggering ~11 million of the 100 million households, canceling their cable.
The cord-cutters, saving themselves ~1000 dollars a year in cable bills, typically convert to a broadband only subscriber. While the current economic conditions are considered to be a factor, there is a long-term macro trend taking shape. A younger demographic that is coming out of high school or college who have no intention of spending their dollars on a traditional cable TV package, instead getting their programming from online sources at a reasonable cost. Providers seeing this threat to the industry, are trying to win over this demographic, are pushing broadband first, with the options of a stripped down cable package
Many cable providers have begun to put more emphasis on this subscriber shift, even positioning themselves as “broadband” companies. Quarterly earning calls have become a platform to promote how many broadband subscribers were gained and how this really offsets the loss of cable subscriptions.
Why are providers embracing this shift?
Higher margins, for now, broadband subscriber earn 20% more in gross profit margin, just by eliminating the licensing fees paid the broadcasters. In 2012 broadband only has lead to higher reported revenue/subscriber.
Providers at some point in the future will want to shed themselves of the unwanted caveats that come with cable subscriptions, paying the broadcasters a licensing fee. The intensified fees disputes over this past year serves as example to the precarious relationship between the providers and broadcasters.
Played out in the public, the disputes have become a common re-occurrence, leading to broadcasters services being pulled from the provider. What has typically been passed along to the subscriber, is no longer a welcome option, fearing lost subscriptions. The subscriber will not be willfully used as the negotiation tactic for long either.
What is happening today?
The message has become less about the technology, rather what the technology will deliver to the user, more importantly how it will improve their experience.
As with the music and newspaper industries, the technology challengers are lining up at the TV industry’s gate. So far though there has been plenty of talk, positioning, and rumors, but there has been little delivered that has changed the user experience.
These challengers biggest limitation, content acquisition costs. Any online streaming provider wanting network programming quickly find themselves in the same position as the traditional providers, paying the broadcasters
Hulu and Netflix got the unified viewing experience across multi-device right early on. The success of these services have been one of the biggest motivators for consumers to cord cut. Their future will be decided on their ability to expand content, while maintaining subscriber costs.
How the providers decide to work with some challengers will be seen in the development of an improved set-top box. Many providers see the current video platform as archaic and welcome others to develop a broader distribution platform that will reach traditional TV, web, and mobile devices.
Lumped in with these challengers, are Apple, Google, and Microsoft, who will have the biggest influence where the TV industry is headed.
Microsoft, beyond pushing the Xbox as the platform to push content into the home, hasn’t gotten further then this. Plans to hire a experienced network exec to lead this initiative in 2011, fell apart in 2012, when announced, plans were on hold, reporting high licensing fees.
With Apple, comes plenty of rumors, and anticipation. AppleTV, has been a huge sales success, but is content starved, Apple considers it to be a hobby. Steve Jobs was quoted saying that the TV industry was broken, and he’s figured out how to crack it. Talk of a smart TV isn’t close to reality, more likely is a next generation AppleTV with conventional cable capabilities. You have to think that with 200M itunes account holders, across devices, and experience in negotiating content agreements, both providers and broadcasters will work with them.
Google, had a rough start with GoogleTV and now Nexus Q, but they have the boldest vision of the three.
Teaming up with Hollywood producers and celebrities, and a 100M committed to developing original content for Youtube is taking shape. As with traditional programming, all it takes is a couple blockbusters for the platform to take off.
Google Fiber, puts them that much closer to our living rooms and mobile devices. The first roll out of this high speed Internet + digital TV service underway in Kansas City, making Google a competitor of the cable providers. So far the service is in a wait and see mode, with plans to expand to new cities, it will help other providers how to market broadband, and spur some innovation.
The viewer in the end will need to be convinced why they need it, and the convincing will come in the form of multi-screen distribution.
What will change the viewer experience?
Viewers are still watching live events, may it be awards shows, breaking news, or sports. If there is one live programming category that will influence the shift in viewing habits is going, its sports. Sports has built the conventional tv networks, cable, satellite, and is now heavily influencing online and mobile adoption. Sports is probably the number one reason majority of subscribers still pay for cable.
How important is sports really to TV?
In 1993, after 38 years, the NFL left CBS for Fox, then a relative newcomer to broadcast TV, and with no established sports division. Fox outbid CBS by well over 1B dollars to acquire the rights to the NFC broadcasts, providing them with a known platform to promote their other shows. As a result of this loss, CBS would suffer both a decline in overall ratings and a loss of affiliates. For Fox, this win would serve as the tipping point in becoming a real 24/7 network, as well alter the NFL viewer experience for the better.
Watch any NFL game, and count the promos for the broadcaster’s other shows, live sports is a critical platform in building interest and returning viewership. Look at the highest-rated programs over the past five seasons, on average 7 out of 10 have been NFL games, and the majority of the top fifty have been sporting events. Sports is now the “flagship” brand to the broadcaster.
Consider that ESPN gets a 5 dollar/subscriber fee every month from each cable provider, and can dictate how it plans on rolling out its content for online viewing. Viewers want to be connected to their sports, and the broadcaster can use this as spring board to how it should build out a online digital strategy.
Sports took control of multi-platform distribution early on, with MLB tv leading the way, developing a rather progressive service that kept viewers connected with its games. Key to all of this, is the creation of a global reach, by ensuring the experience reaches the most avid fan anywhere.
What does this all mean? Well one, the cable providers and broadcasters aren’t going away anytime soon, will their business model evolve, yes, but both will play an important role in the shift of the viewers behavior. TV everywhere could be seen as the first step taken by both in how it distributes content online in the future, though today its in a highly controlled state.
Technology is important, to a certain point, but it needs the content, to create the experience the viewer wants. As the experience progresses, so will the viewer. At the center of this storm though is the content, how its distributed and paid for. The concept of a channel as a distribution method will slowly fade away as advanced set top boxes and multi-platform distribution begins to take form. Sports programming distribution will determine how viewers want to pay for all content, and how advertising will be sold. The future of TV will be dictated by how the viewer wants to be connected to their sports.