War on TV Part II: Streaming is Coming
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June 19, 2013
War on TV Part II: Streaming is Coming
- As we wrote last week, new devices are challenging for control of TV “Input 1”, aiming to put streaming on even footing vs. cable. However, even at a disadvantage, streamers are stealing viewers from TV networks, a trend that will be amplified as new devices succeed. The cable era has peaked – total TV households and overall viewership are falling, with prime time ratings off precipitously – and the streaming era is gaining traction. On-line media players are using “big data” techniques to direct multi-billion dollar investments in exclusive and original programming, accelerating the audience diaspora. The rise of streaming video is an echo of the rise of cable – 25 years after HBO won its first major Emmy, cable nets now dominate viewership and critical acclaim. The channelized powers-that-be are stepping up their defenses – improved TV Everywhere, new user interfaces, premiums for web-hostile networks, broadband fast-lanes for the operators own streaming content, etc.. Thus far, these initiatives have failed to stem the advance of the streamers, and ultimately, we believe that they will be insufficient to do more than delay the inevitable demise of the channelized TV model.
- Channelized TV has peaked. The percentage of US households subscribing to a multichannel TV service plateaued in 2010 and began to decline in 2012. Nielsen’s estimates of the number of hours that Americans spend watching TV each day is also declining, and the reality may be worse, as the study methodology fails to acknowledge falling viewer engagement in an increasingly multi-screen world. All four major broadcast networks have reported drops in viewership in the most recent periods, and in aggregate primetime TV audiences are down in the high single digits YoY. Moreover, a large and increasing percentage of primetime programming is viewed from DVR recordings, a major red flag for advertisers fearful that viewers will fast-forward past their spots.
- On-line video is coming fast. Nielsen estimated a 47% YoY increase in on-line video for 1Q13, not including NFLX, which streamed more than 1.3B hours of content per month to its subscribers during 1Q13, up more than a third in less than 9 months. NFLX’s monthly audience, which, unlike Nielsen, does not account for multiple viewers in a household, is larger than any cable network. YouTube is streaming 50% more hours this year than last. The continued rise of tablets and the emergence of alternative video boxes that break cable’s hold on TV input one could even accelerate this trajectory.
- Big data tools helping streamers compete on content. Content ages and must constantly refreshed. Networks do enjoy resources and relationships that have given them advantage in securing promising programming. However, on-line rivals are beginning to compete successfully for content, typically using sophisticated analytics on subscriber search data to identify promising programs, a significant edge vs. programming executive “tastemakers” and focus groups used by the networks.
- The rise of on-line video is reminiscent of the early days of cable. HBO won its first major Emmy in 1988, but by 2000, cable nets won more than a third of these awards, and by 2010, more than half. Viewership has followed – in 1988, the “big 4” networks owned nearly 95% of primetime viewership, but today cable-only nets command more than 70% of the audience. On-line original content is on a similar trajectory, with “House of Cards” critically touted as worthy of multiple nominations, helping to drive NFLX into 29M households averaging nearly 1.5 hours of viewing a day each.
- Revenue will follow audience shifts. More viewers means more money – subs, ads or both – paying for more new programs that will attract even more viewers. For US TV networks, $66B in ad sales and $4xB in fee revenues are at risk, with shifting viewership a likely leading indicator for future revenue movements. Again, this harks back to the rise of cable nets, which today command a growing 60% of total industry revenues vs. the once dominant broadcast nets. It is also important to consider the inherent conservatism of the advertising market. Newspaper advertising recovered out of the 2001 recession, rising to more than $55B in 2005 before plummeting to less than $25B in 2009 and heading south from there. Arguably, this drop was predictable, given the shift of readership to on-line information sources. We will look at the revenue picture more closely in the next piece in this series.
- MSOs are taking aggressive steps to forestall market change. In keeping with the theory of “disruptive innovation”, the channelized TV industry is hard at work setting roadblocks. Comcast announced its X2 cable-box platform, which purports to replace the widely reviled cable interface with a modern approach integrating access to non-video internet content. TWC is offering higher fees to networks that eschew on-line. Collectively, MSOs and networks are pushing “TV Everywhere”, which requires viewers to have a traditional service subscription in order to have access to streaming content. VZ bought NFLX wannabe Redbox, DTV is circling Hulu, and Comcast is offering its own NBC-Universal streaming service, all to further the TV Everywhere umbrella. However, also in keeping with “disruptive innovation”, we do not expect these tactics to slow on-line media very much.
- The growth of on-line will seriously pressure the status quo. The best content – e.g. live events like sports – gains enormous leverage. Thus far, competition amongst cable and broadcast nets has been driving up rights fees at an extraordinary pace, while content owners have been retaining some digital rights and experimenting with supplemental or premium streaming services. Media companies have been signing pricey deals with on-line outlets for early windows on theatrical releases, broadcast reruns, and catalog content, and for exclusives on new content tied to established franchises. Meanwhile, demand elasticity for cable fees may be steepening, constraining MSOs ability to push rising content costs onto consumers and raising contention in negotiations with media partners. This context could make on-line a considerably more important future factor in the profitability of media companies.
- Content owners and on-line aggregators to win, multichannel operators to lose, and networks are a mixed bag. The self-reinforcing cycle of growing on line viewership attracting ad and subscription revenue, which brings more compelling programming, which builds a bigger audience, is already accelerating. The creators/owners of the best content will find their way on-line, as aggregators flourish and the market for streaming programming gets more lucrative. MSOs could be left holding the bag, squeezed between network demands and increasingly price sensitive viewers. As ad spending moves on line, the most savvy networks will follow aggressively, weaning themselves from the channelized model, but others will hesitate and fail.
What Goes Around, Comes Around
29 years ago, Congress passed the Cable Act of 1984, allowing MSOs to carry more than 3 out-of-market channels. This freedom sparked a massive expansion in cable investment and the launch of a raft of cable networks all vying for space on the expanded cable dial. The big 3 broadcast networks viewed the upstart cable nets as a minor bother, as they continued to control more than 90% of total viewership and 95% of ad revenues in a rapidly expanding market. But, in 1988, HBO won cable’s first major Emmy – by 2000, cable nets were winning more than a third of the awards, and by 2010, more than half. The rise of 24 hour cable news and regional sports nets sapped the local stations’ most lucrative franchises. The world where the M*A*S*H finale could find an audience of 125M Americans in 1977, is long gone, and the top rated prime time programs, which once found weekly audiences of 30M or more, now struggle to hit 15M, with 70% of the nightly audience diffused over the many dozens of cable nets.
Streaming video is poised to do the same thing to cable, that cable did to broadcast. Just as the Cable Act of 1984 unleashed a nationwide expansion in cable access, the spread of broadband internet service, the emergence of tablets, and the rise of connected TVs has begun to drive rapid growth in the consumption of on-line video. Meanwhile, Nielsen estimates of TV households and total TV viewing appear to have peaked in 2010, estimates that may actually be overly generous in failing to measure a likely rise in ambient rather than active viewing in an era of electronic multitasking.
On-line video is getting much more sophisticated. Aggregators, like Netflix, Amazon and Google, are spending billions of dollars to acquire exclusive and original content, using cutting-edge “big data” analyses of extensive viewer preference data to identify and market promising programming. Netflix’ original “House of Cards” is already a major hit, pushing up subscriptions and gaining widespread critical acclaim. As on-line exclusives gain strength, the balance vs. TV networks and their relationship, focus group and “gut feel” based programming processes is shifting, just as it did during the rise of cable nets. As living room access to streaming spreads, and gets easier with new living room devices, like the Xbox One, designed to oust the cable-box from TV “input 1” and put on-line on par with cable, the audience growth will only accelerate, bringing advertising and subscription revenue along with it.
The champions of channelized TV are fighting hard to stave off the inevitable, with subscription-linked “TV Everywhere” applications, captive streaming services with preferential broadband access, premium fees for channels that eschew on-line, and technical roadblocks to integrating TV with on-line content. These plays to monopolize programming and hamper on-line performance have had negligible effect thus far, and are unlikely to do more than raise the ire of consumers and regulators in the future.
The Cable Era
In the beginning, there was broadcast television. From the early days, as an aspirational purchase for the post-WWII family, to the introduction of color in the ‘60’s, to the ‘70’s, when Roots and M*A*S*H drew more than 100M Americans to their finales, the big three networks ruled (Exhibit 1). Cable TV, where it was available, was thought of by consumers as a mechanism to improve reception for ABC, CBS and NBC. Each cable system was limited to just three out-of-market channels, typically the so-called independent “superstations”, such as Atlanta’s WTBS, Chicago’s WGN, or New York’s WOR, which carried local sports from those markets, in addition to a bland diet of syndicated shows and old movies. Besides spawning a generation of otherwise inexplicable Atlanta Braves and Chicago Cubs fans, these “superstations” did little to upset the status quo, and the big three and their affiliates controlled more than 90% of primetime viewing and more than 95% of advertising revenue for the industry (Exhibit 2).
Exh 1: Most Viewed TV Broadcasts of All Time, Excluding Sports Programming
Exh 2: Network versus Basic Cable Primetime TV Audience, 1984-2009
The Cable Act of 1984 changed everything. Without limitations on out-of-market channels, MSOs were free to add fledgling networks like CNN, ESPN, and MTV, alongside pay TV options like HBO and Showtime. News Corporation launched its FOX network, stitching together independent UHF stations, previously disadvantaged by the relatively poor reach of their higher frequency spectrum band, to carry its prime time broadcasts and taking advantage of the “must carry” provisions of the Cable Act to assure crystal clear reception on nations rapidly expanding cable infrastructure.
Exh 3: US TV Households
Between 1980 and 1990, the number of US television households – defined by Nielsen as any household with at least one TV capable of tuning to a channel – increased from 76M to 92M (Exhibit 3). Over the same time, the number of television households subscribing to a multichannel service, such as cable, more than tripled, from 15M to 52M, and the number of televisions per household increased from 1.6 to 2.0. By 2010, the number of television households had grown to 115M, the number of households subscribing to multichannel television services had increased to 104M and the number of televisions per household had grown to 2.93 (Exhibit 4). In television households, the average family was estimated to watch 6 hours and 36 minutes each day in 1980, increasing to 6 hours and 53 minutes in 1990, and 8 hours and 21 minutes in 2009 (Exhibit 5). The biggest beneficiaries of this massive increase in the television viewing audience were the cable networks. By 2000, non-broadcast networks were the majority of all viewing, with the big 4 networks surrendering primetime leadership by the 2003/04 season (Exhibit 2).
With viewership, the cable networks cracked the code on quality content. In 1988, comedian Jackie Mason won HBO and cable’s first Emmy for writing his variety special “The World According to Me”. By 2000, cable networks were winning more than a third of prime time Emmy awards, and by 2010, more than half of the awards were won by shows that were never seen on over the air broadcast (Exhibit 6). Today, TV’s most critically acclaimed shows – e.g. “Game of Thrones”, “Homeland”, “Breaking Bad”, “Mad Men”, and “Girls”, amongst others – are on cable networks.
Exh 4: TV Households and Average Number of Televisions
Exh 5: Average Time Spent Viewing TV Daily by Households
Sports telecasts also contributed to the dramatic rise of the cable networks. Wimbledon Tennis and boxing were important parts of HBOs early success. The NFL was eager to support the rise of an alternative distribution channel for its games, postulating that expanding the roster of bidders for its rights would increase its own bargaining power, and carved out a special package of Sunday night games for ESPN in 1987. Before “Sunday Night Football”, ESPN had gained notice for its line-up of college and secondary sports, and for its irreverent “Sports Center” news and highlights show – having the NFL was a coup that thrust it into the center of live sports broadcasting. Today, NFL rights are spread amongst CBS, FOX, NBC (which now carriers the Sunday night games), ESPN (which has the venerable Monday Night Football franchise), the league owned NFL Network (carrying games on 8 Thursday nights per season), and DirecTV (with exclusive rights to air all out-of-market games as part of the premium “Sunday Ticket” plan). Total annual fees have risen from roughly $900M/year in 1990, to $4.3B today, and as much as $7B during the latter years of a recently signed deal granting broadcast rights from 2014 to 2022. Clearly, the cable era has been good for NFL owners (Exhibit 7).
Exh 6: Historical Emmy Nominations, Broadcast versus Cable
Exh 7: NFL Rights Deals on US Networks
Between a Rock and Hard Place
By the end of the cable era, the major broadcast and cable networks had consolidated into huge media conglomerates, most with significant programming production and financing arms, and all with growing rosters of channels. The media companies acquire the content, produce it, and package it into the channels, negotiating with cable, satellite and telco distribution system operators for fees. Advertising still accounts for more than 60% of network revenues overall, with traditional broadcast nets much more reliant on ads and cable nets much more reliant on fees (Exhibit 8). This is a remnant of regulatory history, as cable operators were originally compelled to carry broadcast signals but not required to pay for them, and of the antiquated system of local broadcast affiliate stations. With the costs of acquiring top-notch content (like NFL rights) increasing, media companies are looking grab higher fees from MSOs, particularly for the flagship broadcast stations.
Exh 8: Ad Revenue – Broadcast versus Basic Cable Networks and Cable Ad Revenue as % Total Revenue
Historically, this has been a great strategy. Media companies leaned on distributors, who put up a cursory fight before capitulating to the demands for higher fees and then passing them directly on to consumers in the form of higher monthly cable bills. Over time, the average monthly video bill has risen from $38.22 in 2000 to more than $90 today, more or less tracking the rising per subscriber fees from the networks. Despite the rising tab, the multichannel subscriber rolls continued to grow – until they didn’t (Exhibits 9-10).
Exh 9: Average Monthly Cable Bill as % of HH Income, 2000-12
Exh 10: US Multichannel Video Customers
In 2010, after decades of growth, the number of US television households stalled, even as overall household formation continued on. The total number of subscriptions to multichannel television services also stalled and began to slip back ever so slightly. The number of televisions per household also plateaued just south of three, after years of steady increases. The total hours each American spent watching TV each day, according to Nielsen, began slipping back. The audience for prime time shows began receding at a startling pace (Exhibit 11-12). DVR use is rising sharply – as much as 25% of prime time viewing is now from recordings – yielding a big piece of the nightly audience that is fast-forwarding through the commercials, to the great consternation of advertisers and network executives (Exhibit 13).
Exh 11: 2012 versus 1986 Top Shows and Estimated Audiences
Exh 12: Shows with average viewership over 20M viewers, by season, 1980-2012
Exh 13: US DVR Penetration, 2007-2013
Exh 14: Residential Cable Subscribers versus ARPU, 2000-2012
Some of this may be related to the economic malaise hanging over the country since the 2008 financial sector melt down, but most of it seems related to the rise of on-line streaming video as a realistic alternative to channelized TV. Evidence of “cable cutters” and “cable nevers” is still largely anecdotal, but inflection point on subscriptions and viewership is graphically obvious (Exhibit 14). In this environment, demands for higher monthly fees from households on average already paying 2% of their discretionary income for video service, in an environment of stagnant household earnings and increasing health care and education costs, could push consumers to cut services to reduce their bills, perhaps to the point of disconnecting service.
The multiyear deals between a system operator and each of its network-owning media partners come up for renegotiation periodically, leaving the MSO three basic options: accept higher fees and attempt to pass them on, accept higher fees and swallow the costs, or fight the fee increases and face viewer dissatisfaction when the networks are not available. With the first option increasingly risky, investors should probably expect the other two choices more frequently.
Exh 15: NetFlix Subscribers and Percent Utilizing Streaming Features
Exh 16: Netflix traffic on fixed broadband networks, 2H13-1H13
The Streaming Video Era
YouTube was founded in February of 2005 and was acquired by Google just 21 months later for $1.65B. In March 2013, YouTube streamed more than 6B hours of content world-wide, up 50% YoY, reaching more than 1B unique users. Netflix was founded in 1997 as subscription DVD rental service, and launched its streaming service in February of 2007. As of March, Netflix had 29.2M U.S. streaming customers, was streaming more than 1.3B hours of video content each month, and accounted for more than a third of peak Internet traffic in the US (Exhibit 15-16). Hulu was founded in March 2007, as a joint venture amongst NBC-Universal, FOX Broadcasting, and Disney-ABC Television, and began streaming content from its parents a year later. Hulu generated nearly $700M in sales for 2012, up more than 65% YoY, and is reputedly in the process of being sold by its owners to Direct TV for more than $1B. Amazon launched Unbox, its first streaming video product, in 2006, eventually rebranding it as Amazon Instant Video in 2011 and bundling the service with free merchandise shipping as part of its $79/year Amazon Prime service. While Amazon has provided little detail on the growth of Instant Video, Consumer Intelligence Research Partners estimates that the company had more than 10M Prime members as of November 2012, and projects the number to grow to more than 25M by 2017 (Exhibit 17).
Exh 17: Estimated Amazon Prime Subscribers
The overall growth of streaming video has been impressive. Nielsen, who’s flawed methodology does not capture on-line content delivered to televisions, reported total computer and mobile based video streaming up 47% in 1Q13. Netflix, reported 4 billion total streaming hours for 1Q13, the monthly average up a third from the 1 billion mark that it achieved in the previous June (Exhibit 18). A recent study by Cisco, measuring streaming video data traffic across the internet, reported that the total bits delivered to fixed devices was growing at better than 30%, with portable platform video traffic growing at an eye-popping 90% rate (Exhibit 19).
Exh 18: Aggregate Internet and Mobile Video Growth, 1Q2011-1Q2013
Exh 19: Global Consumer Internet Video Growth, 2012-2017
Ain’t No Mountain High Enough
All of this growth has been occurring in the face of significant obstacles. Fast broadband is a prerequisite for streaming video, yet the US has lagged behind many global markets in the average speed of internet connection and in the percentage of connections faster than the 5Mbps threshold necessary for HDTV streaming (Exhibit 20). However, recent data suggests real improvements are underway, and new technologies and initiatives, such as LTE Advanced wireless and Google’s Fiber deployments, may raise competitive pressures toward better broadband (Exhibit 21).
Exh 20: Throughput Requirements by Application and Select Compression Technologies
Exh 21: Wireless and Wireline Advances, 2000-2015
Until very recently, very few consumers could access on-line video on the televisions, giving channelized television a monopoly over that comfy living room sofa. Starting in late 2008, Xbox 360 owners with an Xbox Live subscription could begin to stream video content from Netflix, and other services (Exhibit 22).
Exh 22: XBox Live Subscriptions
Sony’s PS3 added the same capability a year later, without requiring a paid subscription. Nielsen reports that 39% of American households have at least one “7th Generation” console, capable of delivering streaming video. Other households may have access to on-line video via connected DVD/BluRay players, Smart TVs or alternative set-top boxes like Apple TV, but gaming consoles are clearly the most important delivery mechanism for living room streaming (Exhibit 23). Indeed, Netflix has called out the PS3 as its biggest source of demand.
Exh 23: U.S Households with Connected Devices for Viewing OTT Delivered Content
The rise of tablets has been boon to the streaming video business. The original iPad was launched just over 3 years ago, but has had an enormous impact in a short time. From the start, media consumption, and in particular streaming video, has been a killer application for tablets, giving viewers a high-resolution, small, portable, private screen to watch video programs at home or out-and-about. Tablets have proliferated faster than the most optimistic estimates, with more than 25% of US households owning at least one tablet for a total of 79M total units, up more than 130% YoY (Exhibit 24). This population is a huge new venue for streaming video in the competition for American consumer eyeballs, and all signs point to its continued rapid growth.
Still, despite progress, channelized television still dominates the living room television with the set-top box jealously holding on to TV input one. When the TV is turned on, cable (or satellite or telcoTV) is the default and the MSO provided remote control is the primary user interface. To view on-line content on the big screen, the viewer must find the TV remote and switch inputs to the game console or alternative TV box, adding just enough friction to keep the consumer channel surfing, checking DVR lists, or browsing the on-demand choices provided by the cable provider. We wrote about this phenomenon last week (
), postulating that new devices, such as the Xbox One, designed to slip in front of the set-top box on input one, will allow users to search and select on-line programming on an even basis with channelized television. If this approach spreads as we expect, it could provide considerable further momentum to streaming video.
Exh 24: US Tablet Penetration, 2010-2015
Must See TV?
One of the biggest arguments for the continued domination of channelized TV is its control of the most popular programs. Most consumers, according to this logic, will not cut the cord because they would no longer have access to the latest episodes of their favorite programs or to the live events, such as sports and awards shows, where the rights are controlled by TV networks. Following this line, many TV networks have been aggressive in restricting on-line access to their shows to users that can prove that they have a paid subscription to a multichannel TV service. Using the so-called “TV Everywhere” services, the channelized TV industry can try to sate the thirst of consumers for on-line entertainment without cannibalizing their cash-cow telecasts, thus preserving the status quo indefinitely (Exhibit 25).
Exh 25: Major Broadcast and Cable Networks Key Performance Metrics
This perspective is too static. It presumes that today’s most popular shows will remain popular far into the future, when history suggests the life cycle of a successful series is seldom longer than 5 years. It presumes that the majority of the TV audience is enthusiastically attached to the particular programming that they are watching, when research suggests that the large majority of viewership, even in prime time, is about searching for a satisfactory program and that audiences may be less loyal than assumed. It presumes that the broadcast and cable networks have a lock on the best sources of content, and that programs on the web will always be inferior to those found on channelized TV.
These premises seem absurd, particularly in light of the not-so-long-ago rise of cable networks at the expense of the broadcast big three. Cable networks began with reliance on reruns of catalog content, movies, and subject specific programming too narrow for the broadcast networks. As they built audience, they grew more ambitious in their programming, eventually overtaking the broadcast networks in the critical acclaim and the audience that they commanded. Arguably, the same thing is happening with on-line video now (Exhibit 26).
Exh 26: Online Video Providers Summary – Aggregators
Quality is Job One
The on-line challengers – Netflix, Google and Amazon chief amongst them – are investing hundreds of millions of dollars in original content and have the aspirations and deep pockets to keep that investment coming for as long as it takes (Exhibit 27). Importantly, the challengers are using modern business analytics on their ample user preference data to guide their investments toward ideas likely to match subscriber sweet spots. These tools, honed through years of recommendations for purchased and streaming content, leap frog the traditional network approach of focus groups, track record, relationships and executive tastemakers. The cliché of the wunderkind programming exec green lighting daring pilots gives way to the cold efficiency of data mining and live testing concepts directly with subscribers. Arguably, the inherent feedback mechanisms of the on-line model give streamers a leg up in identifying potential winners without the opportunity costs of slotting a dud into a primetime broadcast schedule. If one program in an on-line aggregator’s library fails to gain traction, it does not preclude a viewer from choosing another in its place.
Using its “big data” tools, Netflix funded a slate of new original programs for 2013. The first fruit of this investment, the Kevin Spacey/David Fincher political drama “House of Cards” has been an unqualified hit, gaining widespread critical acclaim, helping to spur a bigger than expected boost in 1st quarter subscribers, and receiving real buzz for what would be the web’s first Emmy nominations. Two other programs, the Eli Roth thriller series “Hemlock Grove” and the revival of the cult comedy classic “Arrested Development” have had more equivocal critical reception, but appear to have struck a real chord with the specific subscriber groups to which they were intended to appeal. Google’s YouTube uses the company’s search engine expertise to steer users to content likely to appeal, and pushes seed capital to content partners deemed likely to succeed. Google’s ad driven revenue model has YouTube open to all comers willing to share a slice of revenue, and the democratic process has yielded programming success stories like Vevo, Machinima, HowCast and AwesomenessTV (recently acquired by Dreamworks). Amazon is more recent to the party, but has funded several pilots and used a crowdsourcing model to let user feedback determine the series that would be given the green light for a full slate of episodes.
Exh 27: Online Video Libraries and Original Content
On-line is attracting serious talent. In addition to the Netflix series mentioned above, Dreamworks, Steven Spielberg, “Weeds” creator Jenji Kohan, Pulitzer prize winning Doonesbury cartoonist Garry Trudeau, and Jerry Seinfeld all have series on or on their way to streaming platforms. This is, of course, a clear echo of cable networks’ move to quality original programming, and if anything, the streamers are ahead of the game in the progress already made and the money available to drive momentum forward. As the currently popular network hits grow stale, and media execs look to fill the funnel with tomorrow’s hits, they will be competing with well-funded and well-informed on-line rivals. The content gap is sure to close.
The last line of defense will be sports, with the NFL the big Kahuna with American audiences. MLB, the NBA and the NHL have all been active on-line, offering streaming out-of-market games to fans. Channelized networks have utilized “TV Everywhere” apps to support their broadcasts of big events such as The Olympics, The NCAA Basketball Tournament and US Open Tennis. The NFL has had an exclusive deal in place with Verizon to stream its games to mobile devices on the cellular network, and recently signed a separate deal with Microsoft to offer supplementary on-line content to be available over the Xbox Live network to support its TV broadcasts. Historically, sports owners and leagues have been aggressive in exploiting media evolution – remember the NFL’s move to ESPN in 1987, the launch of regional sports networks in the ‘90s, and NFL Network in 2006. The big deals signed last year may keep the NFL’s primary broadcasts off of the Internet until 2022, but the price is high and the term is finite. Meanwhile, it is not clear that non-sports fans will be willing to continue to subsidize the high costs of maintaining the channelized sports hegemony.
Show Me the Money
Broadband speeds are improving, driven by technology and competition and protected by the threat of regulation – we will address this issue with more detail in a future installment of this research series. Access to on-line content on televisions and tablets is expanding and growing easier with the promise of slick user interfaces that raise streaming content to the same level as channelized video – we addressed this issue in our piece last week (http://www.ssrllc.com/2013/06/june-12-2013-the-war-on-tv-the-attack-of-the-boxes/). The quality of video programming available on-line is getting better very quickly, as streamers lock in content deals and invest in original programs. These trends are drawing viewers to the web, and this rapidly growing audience is attracting subscription dollars and advertising. We will address the specific dynamics of the spending shift toward on-line video in the next piece in this series, but it is an important outgrowth of the viewership trends that we have detailed here.
Exh 28: Newspaper Advertising Revenue, 2003-11
Advertising is a conservative business at heart, with ad dollars a trailing indicator of shifts in consumer attention. Ad buyers want a track record and well established effectiveness metrics before committing to an unfamiliar medium. Newspaper readership was already under siege at the turn of the millennium and the threat from on-line information sources apparent, yet US newspaper print advertising revenues recovered out of the 2001 recession to return to a relative peak of $47B in 2006, before plunging to less than $21B in 2011 (Exhibit 28). This collapse corresponded with a knee in the growth curve for on-line search and display advertising, as the value of these categories became broadly accepted by advertisers after years of caution.
On-line video advertising has a similar story. TV audiences, particularly for the big ticket primetime programs, have been contracting for a few years. Whereas a decade ago, 7 different series commanded average weekly audiences of better than 20 million viewers, there is no series that can deliver those viewers today. With the exception of special events like the Super Bowl or Oscar telecasts, television can no longer deliver the huge one-shot audiences that were once such an important part of their value to advertisers. The quality of that audience is also in question for advertisers, as much as 25% of primetime viewing is now from DVR recordings where advertising can be and is often skipped. Even live viewers may be distracted during commercial breaks, as the incidence of “multitasking” with portable devices is anecdotally rife but unacknowledged by the widely used Nielsen ratings.
In contrast, the on-line audience is skewed toward the younger demographics that advertisers covet. In fact, specific consumer types can be explicitly targeted based on demographics and prior activity, and their post-impression behavior can be tracked. On-line ads can be engineered to ensure that they are not skipped, or so that the ad buyer does not pay if the view chooses not to engage with the spot. On-line ads can also include interactivity to increase engagement or induce impulse transactions. On-line ads need not conform to arbitrary 30 or 60 second slots, allowing potentially more impactful short spots or more engaging long form commercials.
Exh 29: US Television and Digital Advertising Spend, 2011-17
Still, advertisers have remained loyal to television, with total TV ad spending flat to up in each of the last few years, this year trending toward more than $65B once again in 2013. In contrast, on-line video spending was just $3B in 2012, but with a growth rate of better than 50% YoY, the trajectory puts it on a collision course with the big TV ad budgets (Exhibit 29). Likely sooner than later, something will have to give, and while the graphical plot may not end up being as devastating as the collapse of newspaper advertising, we suspect that it will head in the same direction.
The multichannel TV industry response to the on-line threat has been largely defensive. Media conglomerates and Multichannel System Owners have tried to sequester their most valuable content into “TV Everywhere” applications available on-line only to viewers able to prove that they hold a valid paid subscription to a multichannel service. Thus far, these applications have not proved particularly popular, with the possible exception of HBO’s “HBO-Go” service. Time Warner Cable has taken a further step to offer higher fees to networks that do not offer their programming to on-line aggregators (Exhibit 30). As on-line audiences grow, the price for this “exclusivity” will likely rise beyond TWC’s willingness to pay, particularly in the face of subscriber pushback on monthly fees that many customers already feel are usurious.
Exh 30: Select TV Everywhere App Summary
Other MSOs have looked to establish or buy their own subscription on-line content services to tie to their channelized offerings. Verizon bought a 50% stake in the Redbox streaming movie business, Direct TV is reportedly on the verge of buying Hulu from its media conglomerate owners, and Comcast launched its own service called Streampix under its Xfinity consumer brand. While these services, tied to the “TV Everywhere” concept, may have better access to recent television content, they will lack scale vs. the established on-line aggregators and do not appear to have plans for differentiated or original content.
Comcast may be the most aggressive MSO in confronting the on-line threat. At the recent Cable Show in Washington DC, it revealed its new X2 cable box interface. X2 finally looks to replace the awful grids, menus and thousand button remotes of the widely reviled standard cable interface with a more organic graphical approach incorporating voice commands and allowing integration of non-video Internet applications like Facebook, Twitter or e-mail. While the promises sound like an appropriate step forward, we note that Comcast’s X1 interface was announced more than two years ago, yet has found its way to less than 10% of the company’s subscribers, and that history suggests that designing a winning user interface is best left to the experts in Silicon Valley.
Winners and Losers
George Santayana famously said “Those who cannot remember the past, are condemned to repeat it”. Based on their comments brushing off the threat of on-line video, one might question the memories of cable MSO and TV network executives. The cable industry rose under the feet of the 1980’s broadcast industry, destroying the value of broadcast affiliates and diluting the audience of the big three networks to a fraction of its prior strength. On-line video purveyors intend to upend the entire channelized TV model in the same way, and based on their progress to date and the resources that they can bring to bear, we believe that the outcome will be apparent sooner than many observers suspect.
Exh 31: Winners and Losers
On-line aggregators, like Netflix, Google, Amazon, and even smaller players like Yahoo and AOL, are very likely winners. Pure content suppliers that can leverage rising competition for quality content, such as Dreamworks or Lionsgate, could also gain strength. Network owning media companies, like Disney, NewsCorp, Viacom, Time Warner Inc., CBS, Discover, Scripps, and AMC are between the horns of a dilemma – defend the channelized model but leave the on-line opportunity to rivals that can erode the value of content and channel brands, or embrace the on-line opportunity and risk the enmity of the MSOs that pay the fees that make up 40% of industry sales. We, like chance, favor the bold, and would call out CBS in particular for a forward thinking on-line strategy. It won’t help much in the short run if channelized advertising turns south, but at least the company will be well positioned to recover for the future.
Multichannel distributers are the clear losers in our perspective. Caught between networks demanding hefty fee increases, consumers unable to absorb higher monthly bills, and on-line streamers siphoning off viewers and dollars, the choices are increasingly unattractive. Cable executives may look to their high margin residential broadband franchises as a potential ace in the hole, but we are skeptical that regulators and competitors will allow them to replace video profits with higher cable modem service rates. We will be writing more extensively on this topic in a coming research piece.