Television Networks: Betwixt and Between a World of Change

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Paul Sagawa / Artur Pylak

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March 15, 2012

Television Networks: Betwixt and Between a World of Change

  • The cable era broke the domination of the broadcast networks, ushering choice to consumers and diluting audiences. In the emerging online era, content creators, advertisers, and viewers are all gaining leverage over the traditional multichannel model, which puts an onus on network owners to establish brand relevance for consumers that are learning to expect access to any program they want at any time on any device. Although the multichannel economics are favorable to network owners now, cstrategies aimed at inhibiting the transition to online weaken the long-term viability of network properties, as they open opportunities for new Internet-based rivals. As content owners, viewers and advertisers shift attention online in an inexorable self-reinforcing cycle, networks will either get up to speed or fall aside. All of this may play out faster than many expect, making the next 18-24 months crucial in establishing the winners and losers for the next 20 years.
  • 25 years ago, the television industry passed from the broadcast era to the cable era, disrupting the existing value chain and creating enormous opportunities. At first cable was launched to support broadcast TV by assuring clear reception, but it soon morphed into a disintermediating force on existing broadcast networks and their affiliated stations. Cable-only channels proliferated diluting the audience for broadcast network programming, creating competition for acquiring content, and siphoning advertising dollars. From a much larger TV pie, broadcast networks now take a much smaller slice and local affiliates struggle for relevancy, while multichannel distributers and cable networks have grown and prospered, circumstances that evolved from unthinkable to inevitable over just 10-15 years.
  • Network owners are under pressure as the industry passes from the cable era to the on-line era, disrupting the existing value chain and creating enormous opportunities. The analogs are clear, with channelized networks pressured by on-line for both eyeballs and ad dollars and multichannel distributers shunted to the same trajectory as traditional broadcast affiliates. Advertisers, content owners and viewers will all gain leverage from greater choice and lower switching barriers, placing the onus on network owners to justify their value in the new paradigm.
  • Audience dilution is devaluing top programs, as network proliferation increases the overall need for new content. Online exacerbates both problems for network owners. With the explosion of cable channels, the audience for the most popular programs has begun to fall, reducing willingness to pay up at the high end, while the number of networks shopping to fill out their schedules is raising overall programming costs. Internet aggregators are commisioning original programming, creating even more competition for content, and likely, further audience dilution. It may be that expensive content in the future will a have to be distributed across as many platforms as possible to justify its cost.
  • Deep pocketed on-line aggregators are moving aggressively to establish their own on-line video brands. Internet platform companies – i.e. Apple, Google, Amazon, Microsoft, and Facebook – are becoming trusted curators of online content for their users. While on-line video audiences are still small, these cash rich players are seeing rapid growth and are investing to offer proprietary content and superior streaming performance. While access to network controlled programming is extremely valuable today in building an audience, its importance may diminish with time, as aggregators establish their own content and as independent sources, like VEVO, Machinima and Funny or Die prosper.
  • Advertisers are the biggest revenue driver for network owners, and will have motivation to shift spending as the on-line audience grows. We have written about the changing landscape of advertising, the most important revenue source for network operators. As audience measurement and advertising effectiveness tools become more widely accepted, we expect on-line to grow rapidly as a percentage of overall ad spending, soon to the detriment of multichannel television. Since the potential for further gains in subscriber revenue from cable, satellite and telcoTV operators is constrained by already high end user prices and by conflict with affiliates over retransmission, this trend will press networks to follow advertisers online.
  • While a static view suggests that network owners should be cautious, a more dynamic model highlights the hidden costs of inaction. A common take on the network owner’s dilemma suggests that they are best off in lock step with cable, as the rising tide of rights fees have been the primary source of growth. However, looking further ahead, and considering the entire value chain changes the equation. The stunning growth of tablets and a generation of viewers who expect to be able to watch whatever they want to watch whenever they want to watch it are corrosive agents to the multichannel model, as is the $128 average monthly cable bill. Add to this content owners being seduced by the possibility of a bigger share of the pie online, a growing pool of advertisers willing to pay more online where they know exactly who is watching their ads, and the threat of online aggregators who have the early jump and may supersede network operators in the next era.
  • Winning networks will act boldly and independently to establish their brands online. Network operators are keen to retain control over their own programming and have largely resisted pressure to favor particular channels. As such, negotiations with cable operators over TV Everywhere and with Apple and Google over their connected TV initiatives have been contentious. To date, CBS and NBC have been the most aggressive in embracing the internet, although Comcast’s acquisition of NBC-Universal may change that. Disney-ABC have been the most conservative in hewing to the multichannel model, a stance that we believe will be counterproductive in the long run.

In The Beginning …

There is a curious sense of permanence behind the public statements of cable executives and their most enthusiastic investors, owing, perhaps, to the hundreds of thousands of miles of coaxial cable that the industry has buried over the past 30 years. The hegemony of the cable industry, goes the logic, should last as long as those shielded bundles of wire, that is to say a very long time. For the subsectors and companies already feeding from the multichannel television trough, there is no reason to change. For the would-be interlopers with their “over-the-top” video solutions, the industry has placed obstacles that could make it difficult to deliver alternative services with the quality and selection already available on cable. Status Quo – get used to it!

Exh 1: The Broadcast Triopoly – 1950s – early 1980s

This perspective is particularly curious, given the history of the cable industry itself. Just thirty years ago, cable service was still, primarily, a better antenna. Indeed, the first cable systems, dating back to before 1950, were simply community antennae erected on hilltops to feed signal to the households in the valley below (Exhibit 1). Until 1972, cable systems were restricted from importing distance signals or from launching cable-only channels, but the easing of those restrictions led to the launch of HBO and the rise of superstations, like Atlanta’s WTBS, Chicago’s WGN and New York’s WPIX. Still, by 1980, cable served just 15 million US households and the nation’s viewing was still, overwhelmingly, dominated by the big three commercial broadcast networks, ABC, CBS and NBC, whether delivered over air or by cable.

These networks, and their powerful local affiliates, ruled television with more than 90% of an audience with few realistic alternatives. In 1980, there were 29 broadcast television shows that delivered average weekly audiences in excess of 15 million people. By 1990, that number had dropped to 13, and by 1999, there were only 3. Something had changed.

Exh 2: The rise of cable breaks broadcast network hegemony early 1980s 2000s

Heeeeeere’s Cable!

The 1984 Cable Act serves as the birth date of modern cable, freeing the industry to offer whatever additional channels they wanted, as long as they continued to distribute the local broadcast stations without charge (Exhibit 2). The industry spent the next 8 years putting more than $15B into the ground to wire up tens of millions of new households. By 1990, more than 52 million households were buying cable service, watching 79 cable specific networks. By 2000, multichannel subscriptions, including satellite and telco provided TV, topped 84 million and the number of networks were more than 200. Technology upgrades provided room for additional channels over time, and by 2006, cumulative US cable networks were hitting a plateau at more than 550, while the number of multichannel subscriptions crept to more than 100 million by 2010, an 87% penetration rate for US households (Exhibit 3).

Exh 3: US TV Household Growth and Multichannel Penetration, 1980-2012

The impact on broadcast networks was profound. Audiences, with hundreds of channels to watch, were diluted. In 1985, of the 65% of US households watching TV on a particular night, more than 87% were watching broadcast stations. By 1995, the broadcast share had dropped below 75%, and by 2005, it had dropped below 50%. This has hit broadcasters where it hurts – their share of industry advertising revenue has also dropped below 50%, hitting an absolute ceiling of about $20B while cable stations absorbed all of the growth (Exhibit 4).

Exh 4: Network versus Basic Cable Primetime HH Viewership

As cable networks grew in both audience and revenue, they began to get more ambitious about their programming. In the early ’80’s, the idea that cable networks would compete with the big broadcasters for the best programming would have been considered laughable, if anyone had been willing to state such an audacious prediction aloud. By the late ‘80’s, cable nets were producing original programming, mostly short form specials and mini-series. In 1988, cable channels received 15 Emmy nominations, less than 5% of the total 360, and won a single statue for the writing on HBO’s Jackie Mason comedy special. By 1993, cable nabbed 20% of the nominations, and by 2010, it was grabbing more than half, including winners for best drama, best actor in a drama, best actress in a comedy, best actress in a drama, and all of the creative awards for miniseries and movies (Exhibit 5).

Exh 5: Historical Emmy Nominations, Broadcast versus Cable

Sports has seen a similar cable boom. Coverage of local teams, at least in baseball, basketball and hockey, has been a staple of cable, with regional sports networks like YES, NESN, MSG and others emerging to deliver the full slate of games once relegated to non-network independent broadcast stations. ESPN grew from a sports news and obscure events beginning to offering a slate of 8 Sunday night NFL games in 1987. TNT joined the NFL party in 1993, and in 2006, ESPN took over the iconic Monday Night Football franchise.

All of this has served to raise the bar on programming expenses. Sports rights fees are a prime example, with NFL rights rising by more than 7 times from $427B in 1986 to over $3B in 2006, and the Summer Olympics rising nearly 9 fold from $108M in 1984 to roughly $900M for the London Games this summer (Exhibit 6). Broadcast network programming expenses now run around 80% of total revenues, leaving little room for error (Exhibit 7). In contrast, cable networks run with average programming expenses well below 50% of revenues, in part, due to the high fees that they have been able to negotiate with multichannel operators (Exhibit 8). Note that broadcast networks have not traditionally received any revenue from multichannel distribution, as local affiliates have typically taken all of the relatively modest retransmission fees paid by operators for their signals (Exhibit 9). This has become a bone of contention for broadcast networks, which are pressuring to take a piece of retransmission and to raise the overall level of fees.

Exh 6: NFL /Olympics Rights Deals on US Networks

Exh 7: Broadcast Programming Expenses, 1989-2012

Exh 8: Basic Cable Programming Expenses

Exh 9: Broadcast Network Retransmission Revenue 2006-11

If You Can’t Beat ‘Em, Join ‘Em

The favorable economics for cable networks have not gone unnoticed by the owners of broadcast networks, and all have moved aggressively to launch and/or acquire cable network properties. Typically, the media companies controlling these network portfolios use the leverage of their most popular networks, such as ESPN, The Disney Channel, and Fox News, to drive higher fees and to gain slots for other networks from their portfolios on multichannel system channel line-ups. These broadcast-anchored network groups compete with purely cable network owners, such as Viacom, Time Warner, and Discovery. Arguably, a measure of cooperation amongst the relatively small number of cable network owners has been a key factor in maintaining the ongoing growth of programming fees paid by multichannel operators and the subsequent upward march of subscription prices for consumers.

While the concentration of cable network assets into the hands of a cadre of integrated media companies has been lucrative for the multichannel television industry, it has been a bugbear for the broadcast affiliates that had held the upper hand in the previous era. Broadcast station owners, like Belo, Gray and Sinclair, have seen tightening revenue lines translate into shrinking market cap, despite a strong history of cash flow returns.

Exh 10: Cable networks by parent company

Exh 11: Rise of Online video poised to break multichannel distribution hegemony – 2000s to present

The Times, They Are a Changin’ … Again

The rise of cable completely remade an industry that had been stable for three decades, destroying the dominant position of the big three broadcast networks and reducing the once powerful network affiliates to near irrelevance (Exhibit 11). Arguably, the sea change really played out over a relatively short period of time between the Cable Act of 1984 and the turn of the millennium. As the dust settles, it seems that cable is content to declare victory – over 100 million American households now subscribe to multichannel television, with an average monthly video bill of roughly $80/month. Adding in cable telephony and high speed internet, and cable MSOs are bringing in nearly $130/month from each of their residential customers (Exhibit 12). Right now, consumers have no other real choice for the full range of content available from their multichannel system operator, and the major network owners are paid handsomely for their participation. This can last forever, right?

Exh 12: Total Multichannel ARPU vs. Forecast Aggregate Cable Revenue

Well, maybe not. Online television is in its adolescence. Not everyone can conveniently access it. Much of the most popular video entertainment programming is unavailable, at least on a comparable basis to multichannel broadcast. Network quality is spotty with threats that broadband internet service providers will throttle or cap usage to discourage streaming video. Yet, the consumption of internet video is growing like a weed. The monthly minutes Americans spent watching online video increased 40%, to more than 225 billion minutes over the course of 2011 (Exhibit 13). That is more than 14 hours a month for every man, woman and child in the country, or more than 30 hours per month for the 47% of viewers reported by AdAge to have watched streaming videos in 2011.

Exh 13: Total Monthly Minutes Spent Watching Online Video in the US

Part of this is a major expansion in the percentage of US households with devices capable of delivering Over-the-Top video without requiring a PC. The total US installed base of tablets – starting from the introduction of the first iPad in April 2010, has gone from 0 to more than 30 million in less than two years. On a household basis, Kagan estimates that the number of households with tablet or connected TV access to online video rose from 18M in 2010 to 26M in 2011, and projects that nearly 50M will have access in 2015, a forecast that we believe is extremely conservative (Exhibit 14). IHS iSupply predicts that global tablet shipments will approach 300M just for 2015, suggesting a US consumer penetration that could easily top 30% (Exhibit 15).

Exh 14: Households with Over the Top (OTT) Devices

Exh 15: Global Media Tablet Shipment Forecast, Worldwide, 2010

This will pressure the multichannel television value chain in the very same way that the advent of cable hit the broadcast television value chain. Viewers will have more options and a diaspora of eyeballs to the internet is beginning to sap what has been a nearly unbroken history of increasing television viewership. Advertisers have already noted the opportunities on the internet and have begun shift dollars there – eMarketer just adjusted its 2012 US online ad spending forecast upward to $39.5B (NB – in 2009, it had predicted 2012 spending of just $26B) (Exhibit 16). Content producers have noticed as well, committing to delivering original material to the new medium. Meanwhile, online aggregators with deep pockets, like Google’s YouTube, Amazon, Netflix and Apple, have moved to establish position as primary portals for online video viewing. The emerging market is beckoning to television network owners to join the fray.

Exh 16: US Online Ad Spending versus Print Ad Spending

Of course, the multichannel operators have their own ideas. Between denying that an over-the-top threat exists and threatening to squelch it through higher broadband fees and usage caps, operators have launched TV Everywhere as clever line of defense. As long as consumers maintain their costly monthly subscriptions for multichannel service in their homes, operators will give them access to content for free over the internet. While the idea is theoretically sound – TV Everywhere users would have less incentive to subscribe to alternative streaming video services – it has been less so in practice. Network owners have thus far balked at giving multichannel operators carte blanche to expand their rights to network content without additional fees that the operators are not comfortable paying, given that they intend to give the service away for free. Even at no charge, multichannel operators have found it difficult to give away the truncated content available on TV Everywhere, much less stanch the growth of independent online video (Exhibit 17).

Exh 17: TV Everywhere versus Over the Top Free iPad Apps

I’m Gonna Take My Ball and Go Home

For years, Internet gurus have been advising that “Content is King”, but the story is somewhat more complicated than that. Certainly, content owners and producers have benefited greatly from profusion of channels created by the cable era – instead of 4 shows running at 8:00PM, there are hundreds. Every year, as contracts expire and as programs become less popular, network owners trudge back to the well to buy more content to refill the leaky bucket. As such, the cost of refilling the bucket has risen, particularly during the 1990-2005 heyday of cable network growth. As mentioned above the rights fees for tent-pole sports programming have skyrocketed over the years. Overall, the cost of programming as a percentage of revenues has peaked at more than 80% for broadcast networks and 45% for cable nets.

At the same time, the diffusion of the viewing audience has started to seriously dilute the value of even the most popular individual shows. Program ratings, which judge the percentage of television equipped households that watch a particular program, and share, which judge the percentage of televisions in use that tune to a particular show, have been falling consistently for the most popular programs over the past three decades. Yet, until about 5-6 years ago the estimated audience size for the top shows on broadcast television remained consistently strong. Counteracting the rising viewership for cable network programs were strong growth in the number of US households equipped with televisions and in the percentage of those households that were watching TV at any given time – more TV households, all watching more TV. For example, in 1980, 80 million US households had television, growing to 115 million in 2011. A program watched by 20 million viewers would have earned a 20 rating in 1980, but just a 17.2 in 2011. A further factor was the advent of DVRs – households could watch programs outside the normal scheduled time. Nielsen started to include these out of schedule viewings in their ratings starting in 2006, controversially juicing ratings for top shows (Exhibit 18).

Exh 18: US TV Households, DVR Ownership and Ave Daily Viewing

For 1981, the show “Dallas” delivered an average weekly audience of more than 23 million. In 1991, ratings champ “60 Minutes” attracted just over 20 million viewers per week on average. For the year 2001, “Friends” was tops, with an average audience of a bit over 24 million viewers. In 2004, seven different shows were able to sustain weekly audiences of more than 20 million viewers, but by 2010, there was just one, with top rated “NCIS” pulling in 21 million, including anyone who watched it on their DVR within a week of the original air date (Exhibit 19). Thus far in the 2012 season, there is no show that is averaging 20 million viewers per week. Given stagnation in the number of TV households and in the number of hours spent watching TV, the trend toward audience diffusion can be expected to continue. Note the drastic hit to audiences between 1987 and 1998, corresponding to the massive expansion in cable subscribers over the course of the decade. With any rise in online video viewing at the expense of TV, the effects could be similarly drastic.

Exh 19: Shows with average viewership over 20M viewers, by season, 1980-2011

The effect of this diffusion can also be seen in the salaries drawn by the stars of the most popular programs. Ted Danson was pulling down $500 thousand per episode of Cheers in 1990 (Exhibit 20). Jerry Seinfeld reportedly topped seven figures per episode in 1998 for the last season of his eponymous series, and supposedly turned down $5 million per episode to return for a tenth season. The salary rush seemingly peaked in 2003, when each of the 6 “Friends” received $1 million and Kelsey Grammer commanded $1.6M for each episode of “Frasier”. Charlie Sheen’s messy departure from “Two and a Half Men” and his $1.2M/episode salary, likely marked the end of the seven figure sitcom star – his replacement, Ashton Kutcher, signed on for just $700 thousand per show. Tim Allen, who once commanded $1.2 million an episode in the late ‘90’s for “Home Improvement”, now settles for $225 thousand for each episode of his new “Last man Standing”. TV Guide reports that “The general rule across the TV business is to keep lead performers on new network prime-time series to $125,000 an episode. (Cable networks are going as high as $150,000.)”

Exh 20: Notable TV Talent per Episode Salaries

The upshot is that network owners are in the position have having to buy many, many more shows, but the likelihood that anyone of them breaks out to be a monster hit are declining. As such, the willingness to pay for individual programs has been receding for the first time in history. This puts content producers in a new position. For the lucky owners of truly blockbuster content, and these days the definition may be limited to the NFL and the Olympics, the sky is the limit. For the producers of proven hits – Jerry Bruckheimer (CSI), Mark Burnett (Survivor), Simon Fuller (American Idol), Chuck Lorre (Two and a Half Men), etc. – the network market may no longer bear the fees to which they have become accustomed, making it more enticing to pursue opportunities online. For the vast army of wannabes, opportunities abound, albeit at bargain prices.

The Ad Game

Advertisers are used to paying up for a known quantity. Determine your advertising budget and your target audience. Buy ads in the media that are the most likely to effectively deliver your message to the audience that you want to reach. Television, which gets almost half of the US measured media ad spend, sells most of its spots in a process called “upfronts” where advertisers commit to slots on popular shows ahead of the season. Advertisers know who watches the shows and gets their audience, networks know where most of their revenues are coming, everyone is happy (Exhibit 21).

Well, that was yesterday. Internet advertising has come from nowhere to take 18% of the total measured media spend, mostly out of the hide of newspapers, radio and the Yellow Pages (N.B. Yellow Pages are not reported as part of measured media). Advertisers have come to value internet based advertising for its superior targeting, tracking, and interactivity, and while simple print ads took the first bullet, online video advertising looks for multichannel TV network advertising to take the next one. Internet video advertising, on pace for about $3B for 2012, is a small piece of the nearly $70B video advertising market, but growing at 43% YoY and projected to maintain near that pace for the foreseeable future (Exhibit 22). Not only that, but the CPM (cost per million) for online video advertising impressions now exceeds typical broadcast TV rates by 25-30%, a testament both to the advantages of online, but also to the slipping value of television (Exhibit 23). Television audiences are becoming less predictable, demographics are deteriorating, and there are no assurances that ad spots will be watched, given the fast forward function on DVRs. Moreover, the proliferation of portable platforms has ushered in a brave new world of multiscreen viewing, where the TV may be a secondary focus, or even relegated to an ambient backdrop, to online activities.

Exh 21: Advertising Spend Outlook by Format

Exh 22: US Online Advertising Revenues Forecast

Exh 23: Advertisement CPM Ranges by Media, 2011-2012

Note that the growth of online video advertising has delivered this growth despite some fairly significant obstacles. First, until recently, most Americans watched their online video on their home PCs rather than from the comfort of their living room couch. We forget that the original iPad launched only 2 years ago, and that many viewers are just getting the hang of watching on their tablets. Connected TVs, whether via the television itself or through a gaming console or other video peripheral, are also a relatively recent phenomenon. As these platforms proliferate, it will bring bigger audiences on line. Second, advertising effectiveness metrics, such as those provided by Nielsen, have only recently begun to adequately account for online viewing. As conservative advertisers grow more comfortable with comparisons across media, we believe they will also grow more enthusiastic about shifting ad spend to the Internet.

This is a bad thing for television networks, particularly for broadcast networks and their affiliates, which receive far less compensation from multichannel distributers. Collectively, multichannel distributers – i.e. cable, DTS, and telcoTV – pay roughly $35B for access to network content, while advertisers anted in more than $60B to cable networks, broadcast networks and network affiliate stations (Exhibit 24). Clearly, the needs and interests of advertisers should mean more to network owners than those of their distributers.

Exh 24: Multi-Channel Advertising Revenues, 2010-2012

Fool Me Once …

The big internet companies have obvious designs on the video entertainment market. Netflix was first out of the gate and boasts roughly 22 million streaming subscribers (Exhibit 25). It has forged agreements with a variety of content owners and device platforms, giving it a wide reach into the addressable market of consumers. Without its own consumer platform, data processing infrastructure or proprietary content, Netflix must take advantage of the more deliberate pace of its rivals to be first to critical mass in streaming, lest these shortcomings become fatal liabilities. To that end, Netflix has stated its intentions to acquire its own original programming to cover for at least one of its holes.

Exh 25: Percent of US NetFlix Subscribers Utilizing Streaming Features*

Apple, having already triumphed over big media in the battle over recorded music, has dabbled in AppleTV as “a hobby” and reputedly, is plotting to launch a bolder foray into the living room soon. Apple’s customers are famously loyal, and demographically attractive. The raft of iPhones and iPads in the hands of these consumers give Apple architectural control over how they access video content, control that gives them some leverage over content producers and networks.

Google is already the biggest player in online video via its YouTube business and has launched an initiative to expand its offerings beyond simple user generated content to professionally produced “channels” (Exhibit 26). Its GoogleTV product failed in its first iteration when the networks squelched access to their online sites, but few doubt the resolve to try, try again. Google also has a significant performance advantage for streaming media born of its massive network of distributed data centers, and is the obvious leader in online advertising. Add to this the growing population of Android powered devices, and Google, like Apple, has gained leverage in the game.

Amazon is coming too – it offers free streaming to its Prime customers and is looking to fund exclusive original content. Amazon does business with 95 million Americans, with at least 12% of those with Prime membership. Its Kindle Fire platform, capable of streaming video, is in the hands of more than 5 million people. It also has a strong data processing and network platform for online video. Facebook and Microsoft have revealed no explicit plans to compete directly for video entertainment, but the opportunity must be enticing, given the advantages that either of these deep pocketed players would bring to the table. Even Intel is now floating a proposal to offer an online alternative to cable.

Exh 26: Original online content announcements

Collectively, US broadcast and cable network owners spent about $35B for programming across hundreds of channels. The big four broadcast networks each spent less than $4B on content for their flagship networks. While the initial prospect of Google, Netflix or Amazon spending $100M on original programming may seem inconsequential, a whiff of success could see much bolder gambits. Of course, the networks are loathe to play ball with the likes of Apple or Amazon, having seen the end game for recorded music and electronic publishing, but the alternative could be much worse. If the big network owners are content to play defense and let Internet Inc. take control of online video distribution, it could end VERY badly for the status quo.

Disruptive Innovation

So network operators have a difficult decision on how to proceed in the face of an accelerating, self-reinforcing cycle of online viewers, advertisers and content (Exhibit 27). In a sense, it is yet another version of the incumbent’s dilemma, eloquently described by Dick Foster in “Innovation: The Attacker’s Advantage” and by Clay Christensen’s work on disruptive innovation. Essentially, it boils down to whether a company under threat by a new technology should hunker down and play defense to protect the revenues from its existing business, or whether it should actively cannibalize its own livelihood and move aggressively to gain advantage in the new model. Since history is filled with examples of big enterprises that were buried while trying to preserve the status quo, the academics and consultants are fairly unequivocal in advising incumbents to break off a tiger team and giving them an unfettered mandate to take the new hill.

Exh 27: Content’s self reinforcing virtuous cycle

Hulu is a bit like that. Launched by Disney (ABC), NewsCorp (Fox) and NBC-Universal (NBC), Hulu was meant to establish a new internet brand for online television distribution, with provisions for advertising driven free streaming and subscription-based, advertising free premium service. While Hulu is easily the number one online video advertising vehicle today, it has been somewhat hampered by the mercurial attentions of its owners. The terms and windows under which it can make programming available to its viewers varies from network to network. Bickering owners with various levels of commitment led to an attempt to sell Hulu that was aborted when the network owners could not agree on the terms to give online rights to programming.

Multichannel operators offered another play, with their TV Everywhere initiatives. Disney, which has been the most defensive in its online strategy, bit on allowing Comcast to rebroadcast its programs online to its multichannel subscribers, but the other media players have been less enthusiastic about a product that could erode the value of their own online offerings and open the door for big internet companies to establish online television brands.

Network owners ought to be concerned that the multichannel gravy train of big fee increases with each new contract will come to an end. The average monthly video bill for US consumers is now more than $80, or roughly 2.5% of household disposable income. With expenses for health care and education unchecked, the monthly video bill becomes suspect and forecasts that suggest that it can grow to top $100 per month by decade end seem unrealistic. Network owners also ought to be concerned that advertisers will divert spending from channelized television to online, as they already have for newspaper, radio and yellow pages. They also ought to be concerned that viewers are learning to find and enjoy alternative video programming on line from sources beyond the networks. Any household with teenage children can report the popularity of on-demand Internet video and the deterioration of time-slot dominated television schedules of yore. Finally, they need to be very concerned with the cash-rich Internet interlopers setting up shop to establish their own online brands, buy and market their own original online content, and attract advertising dollars with their superior user data. In this context, walking lockstep with the multichannel distributers seems a bad idea indeed. .

A static observation of the circumstances might conclude that the price that internet aggregators would have to pay to collect enough content to be competitive with multichannel operators is too high to make it a viable option and that the flow of fees from cable operators is too lucrative for network owners to cut a deal. Maybe now, but not forever, and, perhaps, not for long. All it takes is the first big deal between a major network owner and an internet aggregator, and the bigger the online market grows, the more and more likely such a deal becomes. The last networks in will be the losers.

Who Wins?

Overall, we remain more comfortable with the investment opportunities in online aggregators and pessimistic about the fortunes of multichannel distributers. The networks are a mixed bag and it is early to pick who will thrive, who will survive and who will lose amongst the 9 major public network owners.

Some have been more proactive in building an online presence than others. Some start out with more attractive network brands than others (Exhibit 28).

Exh 28: Winners and Losers

Not surprisingly, given their dependence on advertising rather than distribution fees, the broadcast networks have been the most aggressive in pursuing online viewership, with CBS and NBC/Universal at the front and Disney(ABC) at the back. CBS has been highly innovative in its use of online video during the annual NCAA March Madness Basketball Tournament – it is worth a look over the next two and a half weeks – and it has been bold with its TV.Com and websites. NBC/Universal has also been innovative, streaming the Superbowl for the first time earlier this year and fronting expansive plans for streaming the Olympics in August. At the same time, one must be concerned that the acquisition by cable operator Comcast could have a chilling effect on NBC/Universal’s over-the-top strategy. The Fox network has approached online cautiously – it has the most conservative windows for internet access of its shows – but at the corporate level, News Corp has been aggressive in the online strategy for its newspaper and studio businesses, suggesting a corporate mindset that may play to its TV properties as well.

The cable only network owners have not really revealed comprehensive strategies for online video. Time Warner tied its HBO to Go initiative to its pay channel franchise – you have to subscribe to the traditional service to get the online version, but is a leading online news source. Discovery has viewed online as a licensing opportunity for its catalog content and has been a stalwart provider of programming for anyone willing to pay the freight. Viacom, with its youthful mix of TV properties, including MTV, Comedy Central and Nickelodeon, has been curiously passive online. Music and comedy have been amongst the most successful genres for original online video, yet Viacom has done little to establish its brands in the mix, risking irrelevance in the emerging world.

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