Cracks Are Growing in the TV Business Model

on January 29, 2014
Reading Time: 3 minutes

Photo of television displays © Artur Marciniec - Fotolia.com

On the surface, the television business seems to be sailing through stormy seas on a relatively even keel. Viewership is holding up even in the face of ever-growing alternatives. Comcast, in the course of reporting a strong quarter, said that subscribers rose in the fourth calendar quarter. It was an increase of just 43,000, not much more than rounding error, but it came after seven years of steady declines. Intel had grand plans for a disruptive internet-based TV service, but fled with its tail between its legs, selling the aborted project to Verizon.

But the weather could be getting rougher for the incumbent powers of the TV business. The threats are disparate and affect different players in very different ways. Power is moving slowly but inexorable from distributors to content owners and producers, and distribution itself is moving from traditional cable, satellite, and over-the-air channels to the over-the-top internet.

Over-the-top wrestling. One of the more intriguing developments was the CES announcement by World Wrestling Entertainment that it will launch an over-the-top channel,  including what had been pay-per-view events, for a $10 monthly subscription. In the style that has become typical of over-the-top providers, WWE will make the channel available on just about every device capable of displaying the video: PCs, iOS, Adroid, Kindle Fire, Sony PS/3 and PS/4. Mirosoft Xbox 360, and Roku will be supported at launch.  Xbox One and smart TVs will be aded this summer.

This is a clear threat to cable’s pay-per-view business, but the bigger and more imminent threat may be to over-the-air broadcasters. The U.S. Supreme Court has agreed to hear a case on the legality of Aereo, a rather odd technology that uses banks of tiny TV antennas, one per subscriber, to deliver broadcast TV over the internet. Broadcasters claim that Aereo, which is backed by Barry Diller’s IAC/InterActive, is violating their copyrights and appeals courts have divided on the question, opening the way to a Supreme Court hearing.

retransmissionThe real issue in the case is that Aereo (and competitors using similar technology) do not pay broadcasters to retransmit over-the-air content. These rapidly growing fees, estimated at $3.3 billion this year by SNL Kagan, are negotiated between broadcasters and cable operators and have become a a major source of revenue to broadcasters.

A Supreme Court ruling in favor of Aereo will certainly bring dramatic changes to the broadcasting business. A legal way to circumvent retransmission fees could give content owners, particularly sports leagues, a powerful incentive to switch their content from over-the-air broadcasts to cable and over-the-top internet. Fox Network has already threatened that it may do just that.

(A secondary effect, with important implications for mobile data, is that a threat to retransmission fees may make broadcast licenses less attractive and make station owners more willing to surrender their licenses and participate in the incentive auction of TV spectrum, now scheduled for next year.)

Easier delivery. Another threat to the traditional TV model is that the delivery of over-the-top content to TV sets is getting a lot easier. One impediment has been the requirement for multiple set top boxes to receive all the content and my ideal remains a single box that integrates cable and internet content with a unified interface. There is not technical barrier to this, but it will happen when cable operators are ready for it and not before.

TV makers have tried to simplify things by handling over-the-top content directly on internet-connected smart TVs, but these have been hobbled by generally horrible user interfaces. LG has achieved something of a breakthrough by taking the ex-Palm webOS assets it bought from Hewlett-Packard and turning the software into a surprisingly good user interfaces for the new TVs it showed at CES. Also at CES, Chinese TV makers Hisense and TCL showed sets featuring built-in Roku services, which include the broadest assortment of over-the-top offerings.

Of course, content owners still hold the real keys, and here the trends are somewhat contradictory. Netflix, and to a lesser extent Amazon Instant Video, have found some success getting original content produced for over-the-top distribution. Netflix’s House of Cards and Orange Is the New Black are the first authentic internet hits.

A tough nut. Live sports continue to be the toughest nut to crack, for the good and sufficient reason that sports leagues have not found a path to internet distribution that comes close to the gold mine of  cable and broadcast distribution. ESPN, the richest property in cable land, offers a lot of content online, but only to viewers who are already ESPN subscribers via their cable systems.

ESPN has considered a standalone over-the-top service sold directly to subscribers, but President John Skipper told The Wall Street Journal “it’s not close yet.” Like other content owners and distributors, ESPN finds the current cable-based business model very lucrative and plans to stick with it for as long as it can. Says Skipper: “Our calculation right now is we’re going to ride this. We’re going to ride it as long as it makes sense.”

The one potential disruptor you did not see me mention was Apple and the mythical Apple television set. Maybe this will happen some day, but 2014 doesn’t seem any more likely than the last several years. For now, Apple TV is just another player in the crowded over-the-top set top box field with a nice, but not terribly compelling project.