The End of TV: Media Strains to Adapt to the Streaming ERa
SEE LAST PAGE OF THIS REPORT Paul Sagawa / Tejas Raut Dessai
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August 13, 2018
The End of TV: Media Strains to Adapt to the Streaming ERa
Linear TV is dying. In the US, viewership peaked in 2012, Pay TV subs peaked in 2014, and TV ad revenues peaked in 2016. In its place, the streaming video model, exemplified by NFLX and YouTube, has seen rapidly growing viewership, subscribership and advertising sales. The factors that will drive streaming success are very different from those that governed linear TV competition. TV programming was managed in the context of fixed timeslots on specific channels, while streamers content is limited only by their willingness to acquire it and make it available. This has driven a shift to programs with niche rather than general appeal, to tailored recommendations rather than well considered primetime lineups, and to binge watching rather than appointment TV. Linear TV players will also be disadvantaged by their late start developing international presence. Streamers also have much more data and are much more active in using it, applying detailed understanding of viewing patterns to buy content, to target ads, and to market their programming and service to consumers. Finally, streaming integrates the distribution platform with the content platform, devaluing negotiation relationships with MSOs, channel family branding, and “loss leader” programming (e.g. live sports) that were key to linear TV success. In this new world, we believe digital native platforms (NFLX and GOOGL well ahead, AMZN making progress, FB, TWTR and SNAP intriguing) have substantial advantage over traditional media (DIS best positioned of these).
- Streaming video will replace linear TV. 5 years ago, we wrote a 4-part series “The War on TV” (War on TV – The attack of the Boxes, War on TV – Streaming is Coming, War on TV – The Biggest Pipe Will Not Win, War on TV – Advertising Revolution Will Not be Televised) describing our expectations for irreversible deterioration in linear TV platforms coinciding with rapid growth in streaming video platforms. This has largely played out, with declining viewership, falling PayTV subscriptions, and an inflection point in ad sales on the linear TV side, vs. explosive expansion of viewers and engagement for streaming platforms and strong performance for digital advertising. While it will take MANY years for the linear TV model to be completely displaced, we believe that future is inevitable given the obvious advantages of the streaming model.
- Streaming not limited by timeslots. The key capabilities and assets that have driven success in linear TV will be far less valuable in the future. First, TV is a scheduled medium, with strict timeslots to fill, while streaming programming is limited only by a platform’s willingness to acquire it. Because of this, networks appeal broad audiences and schedule thematic blocks of similar content, often tuned to “hits” serving to pull through audiences for programs before or after them, creating an “appointment” to watch each week. Streamers have no timeslots or channels and can create deep menus of programming with niche content for small but passionate audiences alongside blockbusters. Viewers are presented tailored recommendations to binge-watch on their own schedule rather than primetime lineups.
- Streaming is global. Linear TV is focused on the US market, and while media companies often sell international rights to the programs they develop and may own media properties in other markets, the decision process is largely tailored to the domestic audience. Streamers are not limited by geographically defined distribution and invest in content with its world-wide potential the primary concern. Streamers are also well versed in foreign markets and acquire some content specifically tailored to them. While much US-focused programming is popular overseas, traditional TV players will be at considerable disadvantage building scale in international markets.
- Streamers have data and know how to use it. TV ratings are a blunt instrument. NLSN offers rough demographics from their irreparably inaccurate household sampling methodology, while PayTV MSOs get a bit better resolution on audiences. Networks buy and market programs on the advice of proven hitmakers, on the strength of relationships with producers, and via focus group testing. Meanwhile, streaming platforms have detailed profiles on individual viewers and their reaction to the videos that they view (and don’t view). This plays into decisions on what programming to acquire, what programming to recommend to who, what programming to market to new potential viewers, how to target advertising, and how to assess the effectiveness of ads.
- Streaming integrates content and distribution. Streamers both build their own content assets and market their platforms directly to consumers, while linear TV splits these functions between traditional media companies and PayTV MSOs. A shift to the streaming model will devalue the institutional skills and strategies of incumbents – negotiations for fees and advertising, cross channel family synergies, overpaying for “loss-leader” programing (e.g. live sports), etc. – while demanding new ones, such as expanding multi-device digital reach, building engagement, etc.
- NFLX and GOOGL dominate streaming video. NFLX has more than 130M household subscribers, with half in fast growing international markets. It streams nearly 10B hours of content every month, a larger audience than all 4 US broadcast networks combined. This gives it enormous scale in acquiring content – its projected to spend $13B in 2018, 3x what CBS and 6x what HBO is slated to spend. It is renowned for its savvy use of data and is growing its revenues at 40% despite eschewing advertising. GOOGL’s YouTube reaches nearly 2B monthly users, streams 36B hours per month, and will generate nearly $4B in ad sales in the US alone this year – up 13% YoY vs. declining linear TV ad sales of $70B.
- Other digital players have intriguing potential. AMZN has 100M+ Prime customers, but its 2017 US viewer base for Prime Video was about half of NFLX, with much less average monthly viewing time. Still, this is a substantial foothold and almost double Hulu, which had 17M subs at the end of 2017. AMZN’s Twitch, which has a strong presence amongst gamers, is an underappreciated asset. AAPL may be ready to turn its TV hobby into a real business as it begins to fund original content. FB wants to compete with YouTube, but struggles as a platform for discovering video content, and thus, lacks commitment by creators. TWTR has strong potential as a news video platform and SNAP is launching its own platform for professionally created short-form video.
- US media leaders are seriously disadvantaged. DIS leads the way amongst the old guard, with its tentpole content (e.g. Disney, Pixar, Marvel, StarWars, etc.), investment in streaming tech (e.g. BAM), and established on-line presence (e.g. control of Hulu, etc.). Still, it is over 100M subscribers behind NFLX. DIS’s traditional rivals (CMCSA, CBS/VIA, T-TWX, FOX, Sony) are much further behind.
Requiem for the Pay TV bundle
In the summer of 2013, we published a 4-part series, The War on TV. In it, we predicted 4 profound changes – the shift to streaming video (War on TV – Streaming is Coming), the migration to digital advertising (War on TV – Advertising Revolution Will Not be Televised), the fall of the set-top box (War on TV – The attack of the Boxes) and the eventual decline of wired residential broadband (War on TV – The Biggest Pipe Will Not Win). 5 years later, we believe that these conclusions are inevitable, with major implications for traditional media companies, Pay TV distributers, and the digital native platforms that threaten them.
By now, the stark statistics of linear TV in the US are widely understood. Viewership of channelized TV peaked in 2012 – a reality that had been obscured by a badly flawed NLSN methodology until recently. Pay TV subscriptions peaked in 2014, with cable-cutters and cable-nevers now making up more than a quarter of US households. TV advertising peaked with the 2016 election year and is now stagnant compared to the 4-year spending cycle. The harsh viewership numbers suggest forecasts of revenue stability are wishful thinking. Meanwhile, NFLX and GOOGL’s YouTube are killing it – on viewership, subscribers and revenues. AMZN, with Prime Video and Twitch, is coming fast, and Hulu is holding serve. AAPL, FB, TWTR and SNAP all have major plans to build streaming platforms, building on existing strengths.
Traditional media players will have a hard time in the new world. Linear TV was built on leveraging scarcity – access to channel slots on distribution systems, and to time slots on programming lineups. This rewarded hardball negotiators and programming czars. Media companies would spin out new channels and try to force them into attractive positions next to existing favorites. They would acquire content with broad appeal to fit into coherent primetime schedules with the goal of creating appointment TV, where one show would deliver audience to the next. In contrast, streamers can offer as much content as they can afford, building viewer loyalty by catering to narrow but passionate interests, recommending new content based on demonstrated user preferences, and delivering programs whenever and wherever the viewer likes. Streamers are also not limited by geography. TV studios may syndicate their content to foreign markets, but digital platforms acquire content specifically for international viewers while leveraging programs with global appeal with much greater scale.
The streamers collect hard data and use it to make decisions, rather than the wizened musings of greybeards in a smoky room. It helps that they control their platform from content acquisition all the way to the consumer, combining the roles of media networks and PayTV MSOs. This integration makes many skills and strategies intrinsic to linear TV – e.g. fee negotiations, channel family branding, cross-promotion, loss-leader programming, etc. – moot.
The leading digital platforms are way ahead of linear TV players on the most important factors for success in streaming. They are building loyal sub/viewer relations at scale around the world, using that scale to build their content assets. They are also amassing data that tells them what programming to buy and who to target with recommendations and advertising. We believe that the top streaming services will get better and better, siphoning more and more viewership and dollars from linear TV, accelerating at a pace beyond the cautious estimates of most observers. The traditional TV ecosystem will struggle badly to adapt.
Exh 1: History of Television Led Mass Media
1,000 Channels and Nothing’s On
Linear TV was the only game in town for a long time. TV was invented in the 1920’s with very limited broadcasts beginning in the late 1930’s and widespread adoption after the end of World War II. The top radio broadcasters, CBS and RCA’s NBC were the pioneers of early TV, with ABC formed when RCA was forced by anti-trust to divest itself of a “competitive” network that had been called NBC Blue. By the 1950’s the 3-network structure was well established and received a further boost in adoption with the advent of color broadcasts in the 1960’s (Exhibit 1).
Cable TV, which started as grass-roots businesses that built community antennae to pull in signals for communities with reception blocked by geography, at first extended the market for the networks, before introducing competition for viewers from a handful of independent “superstations”. This changed dramatically with the Cable Act of 1984, which removed regulatory limitations on the number of out-of-market channels that could be offered to subscribers. Tens of billions of dollars were spent extending the cable infrastructure to nearly every neighborhood in the country. New channels were launched addressing more focused target audiences. Premium channels asked viewers to pay for subscriptions, administered through the cable operators. In this context, the hours spent viewing grew and grew, even if the audience was spread over growing number of channels.
The big three broadcast networks were joined by a fourth, FOX, launched by the 20th Century Fox movie studio which recruited independent broadcast stations to its stable. Fellow studios, Warner Brothers (Time Warner) and Paramount (Viacom) followed with the less successful WB and UPN networks to form a “big six”. At the same time, many start-up cable-only channels gained traction – e.g. ESPN, CNN, HBO, MTV, etc. Over the next decade or so, the most popular of these channels were acquired by the big six – ABC itself was acquired by Disney, which also acquired ESPN – which also launched new channels of their own. All the while, the cable industry also consolidated and subscriptions to Pay TV (at first just cable, but later including satellite TV and telco TV) grew rapidly, along with the hours that Americans spent in front of the tube.
By the 2000’s, the linear TV industry was oligopoly vs. oligopoly – the big six vs. the 6-7 Pay TV MSOs that really mattered. The media companies had wrested a share of the monthly fees charged by MSOs and periodically, contract renegotiations might result in one of the big six network families disappearing from an MSO’s channel grids for a protracted stand-off (to the great displeasure of viewers), but the structure allowed both media and cable to prosper. The big six pushed for higher fees, but also used the popularity of their flagship properties to gain prime slots on the channel grid to boost their new or struggling networks, thus squeezing out independent channels. These fees were the third major revenue stream for TV media, adding to the program syndication and advertising that remained constant from the pre-cable days.
The success strategy: Leverage hit-making executives and relationships with studios to acquire hit programming with broad appeal to form the anchor of a weekly schedule for the lead networks. Use the hits to cross-promote other programs and other channels from the family with the hopes of creating new hits. Use your most popular content as a lever to demand more and better placed slots on MSO channel lineups, along with higher overall fees. Syndicate your popular programs overseas and your archive of past seasons to other channels. Sell the unique nature of TV advertising (e.g. big audiences, specific timing, engaging video format, consumer acceptance, etc.) driving CPMs higher and placing more minutes of advertising in each hour of content. Obviously, some media players have been more successful than others.
Enter the Dragon
Today, linear TV advertising is $70B annual market in the US, which is about a third of the global TV ad spending (Exhibit 2). Pay TV subscription fees are even bigger than advertising revenues in the US at $107B, which is a bit more than half of the global market. Streaming threatens to bust up the party, addressing much of that $400B+ in annual spending on TV (Exhibit 3). In 2006, Google bought YouTube. A year later, NFLX launched its streaming video service. The rise of smartphones brought the internet to the living room couch, with Facebook competing for attention with the family flat screen. This has affected the appetite for linear TV.
Exh 2: US Linear TV Advertising Revenues, 2014 – 2018
Exh 3: US Pay TV Subscription Revenues, 2014 – 2018
According to eMarketer, American TV watching peaked in 2012 (Exhibit 4). Nielsen, which relies on a deeply flawed methodology, called the peak in 2015. (N.B. Nielsen has recruited a panel of 50,000 U.S. households, all agreed to install comprehensive monitoring technology in their homes. The panel members are paid and form relationships with their Nielsen contacts, biasing their behavior, and typically remain on board for years. The technology requires each family member to log in and log out of the system and does not adequately differentiate between active and ambient viewing. We believe that this results in significant overestimation of audiences.) The breakdown by age cohort is particularly stark – the oldest Americans are watching a bit more TV than they used to, but all other segments are watching much less, with millennials spending less than half as many hours watching than those 65 and older (Exhibit 5,6,7). While we are inclined to believe the eMarketer numbers, the conclusion is clear: Linear TV viewership is in decline.
Exh 4: Daily Time Spent Watching TV Per Person Peaked in 2012
Subscribership to Pay TV services is also in decline (Exhibit 8). The combined customer base for cable, satellite and telco-provided television service peaked in 2013, with the number declining at an accelerating rate since then. 27 million former Pay TV subscribers have “cut the cord” and 36 million “cable nevers” have skipped subscribing entirely (Exhibit 9). Given the dramatically lower viewership amongst younger age cohorts, we see industry forecasts of deceleration as wishful thinking. This obviously hurts the direct providers of these services, but also the future potential of media companies to generate fees.
Finally, advertisers may be noticing. Despite the decline in viewership and subscribers, linear TV ad revenue has continued to rise. 2016, a Presidential election and Olympic year, was a strong peak. 2017 ad sales were down YoY, but up 2% vs. 2013 (the relevant compare on a 4-year spending cycle). 2018 is a bit worse, but still should be up vs. 4 years ago. The TV networks have accomplished this by a) relying on those flawed Nielsen numbers, which softened the viewership decline, b) adding a few minutes of advertising time to
Exh 5: Time Spent Per Day Watching TV by Viewer Age group
Exh 6: Net Change in Monthly Hours Spent Watching TV between 2010 and 2018
Exh 7: Drop in Monthly Hours Spent Watching TV between 2010 and 2018