Photo of television displays © Artur Marciniec - Fotolia.com

Cracks Are Growing in the TV Business Model

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.

 

 

 

Published by

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.

45 thoughts on “Cracks Are Growing in the TV Business Model”

  1. Sports are so different. They are almost their own thing, except that the networks are still involved. It was football season that (at least some people speculate) pushed the scale in CBS’s favour when they were facing off with Time Warner Cable in NYC.

    Nice layout of the TV landscape. Thanks.

    Joe

  2. I’d like to pay only for those channels that I watch. This means there at at the most about 6 channels a human can watch for a brief period of time during a work day. I do not want to pay for all the other channels I never watch. Everyone has a list of favorite channels. If everything came through broadband, then that choice can be more feasible. Channels will get selected based on merit and quality of content or popularity. The rest will die a natural death. I’d like the YouTube model where everything is accessible through search. And based on what one watches, other similar channels get listed, helping the viewer zero in one favorite channels. The fee is already being paid for broadband. And based on the popularity and demand, a premium fee could be added. If Superbowl or a similar event is broadcast this way, they can make their money through my premium payment and through ads. Their ratings would be instantaneous. The software will know if I am flipping to a different channel during ad or not.

    TV will come through streaming rather than be broadcast over the air. In fact in the future, what is being shown on a big screen TV in a parlor would be decided by the inclinations of the majority in the room (assuming everyone is carrying his/her mobile devices and through these devices, it becomes possible to know what everyone’s favorite channels are to decide on what needs to be shown on the big TV). Ads can change in content based on who is around and what their preference is. So in different places, at the same time, different ads can appear based on how many in each room have similarity in interests. If there are a bunch of women, the ads can be in health, beauty etc. If there are mostly young people in the room, ads can tailor to their interests. If there are a bunch of sports lovers in the room and if they all watched golf with interest, the ad can change according to their taste (based on the majority of course). It would open an era for intelligent or smart ads that know who is around and what needs to be projected. Sky is the limit if controlled corporate based TV systems are dismantled. True TV is coming.

  3. Right now Cable companies have a geographic monopoly on their respective areas. What I would like to see is more competition via the internet. So through my cable modem I could sign up for Time Warner, or Comcast or Cox etc. and it would be streamed to me over the internet rather than from the local cable company. It wouldn’t be a la carte but it could create different models. Each cable company would have an app for the Roku or Apple TV to access their programs. As a bonus they could offer DVR capabilities as well but they would store it and stream it rather than me having a cable box DVR to store it locally.

    1. So how would the cable companies add value to this model? Wouldn’t such a scheme further institutionalize them?

      1. This would require a major restructuring of the broadband and cable industries, essentially creating a common carrier-like network of pipes and a separate tier of content delivery aggregators. (The system is complicated by the fact that in some places an incumbent cable operator has a de facto broadband monopoly, while in others there is real competition. Where I live, in the DC suburbs, there is heated competition between Comcast and Verizon FiOS. Elsewhere it is a cable company and AT&T U-verse, Google Fiber, or even a second cable company.)

        This separation of content and carriage is probably the ultimate goal of those who favor reclassification of broadband as a Title II telecommunications service. People such as Susan Crawford, who seem to have lost all faith in competition, would be quite happy to see broadband function as a regulated monopoly.

        The question is even if you see this as a good idea, how could you make it happen? The incumbents certainly do not see it in their interest–becoming commodity pipes is their greatest fear–and a Congress that balks at passing the most modest of network neutrality requirements is not about to undertake a massive restructuring of the industry. And the courts have made it clear what will happen if the FCC takes too aggressive a regulatory stance without explicit regulatory authority.

        1. The key to my idea working is net neutrality of some sort so that a Time Warner app and its content is not degraded by Comcast if it travels to someone who lives only in a cable area serviced by Comcast. Today there really are no other ways for a cable company to grow. Cable has pretty much been built out everywhere, no new customers to be had. Now they are just looking at retention or they can grow through acquisition like the Charter bid for Time Warner. At some point they can only grow so big until monopoly anti trust issues come into play. However if the whole country is available to a cable company via streaming over the internet then things get more interesting. The cable companies that first try and develop, and implement this would be in favor of net neutrality because it suits their purpose. Each cable company that doesn’t do this is at risk because where before it may have had at most two competitors through Dish and DirecTV conceivably it could face a multitude of competitors. Right now cable companies are playing defense, customer retention. This will allow them to go on the offense. With more competition hopefully there will be more creatively.

          1. That is happening now. Comcast is obligated to carry that sort of content, including the over-the-top apps of other cable companies, in a non-discriminatory way under the terms of the consent agreement it entered into when it acquired NBC-U. With the (at least temporary) death of the FCC’s open internet principles, other broadband carriers do not have any such legal obligations, but they are going to abide by it anyway as a matter of good business and political practice.

            What I though you were suggesting was a model in which any cable operator would provide its full service of linear content over any other operators system, separating content and transport completely. That would be much more complex.

            The current over-the-top cable offerings are limited in various ways. Some operators allow them to be used only on the same network as the cable modem, i.e., in your house, which is not really very useful. All of them allow only a portion of their channel offerings because of restrictions imposed by the channels themselves. For example, if you are an HBO subscriber, you have to get that programing through the separate HBO Go app.

  4. I agree that sports are the key to the whole thing. Live events that can consistently draw an audience are the holy grail of broadcasting. The revenue model is much simpler when viewership is so predictable. I would love to see a league (or college conference perhaps) go over the top. We aren’t quite to that tipping point, but there is so much opportunity for specialty programming if channels could be run more like apps.

    For example, I’m a Notre Dame fan. I would pay for access to an app that has on-demand coverage of Irish games. When not playing, there could be a selection of static content such as news articles, interviews with coaches and players, and studio analysis (think ESPN meets ESPN.com) I would highly value the opportunity to find all the games in a consistent location, rather than hunting around the channel guide. All of these features of course exist in scattershot fashion today as various content owners and distributors play with the model. But today you can’t get it it on TV, through a semi-consistent interface. If Notre Dame (with or without NBC) decided to app-ify the team’s games, I would likely subscribe year round even to catch fewer than 1 game per month. I’m sure I’m not alone.

    1. Sports is the one segment in this whole topic that can do pretty much whatever they, or whoever controls viewing sports, want to do. There is no alternative to watching live sports. It frustrates me that there is no local OTA network that televises the Atlanta Braves because they will not allow me to watch the Braves online while I am in the Braves “market”. I would have to subscribe to paid TV, which I will not do for anyone ever again. I will gladly pay for content, but I will not pay twice (direct payment AND be forced to watch commercials, and I always prefer paying vs commercials).

      But there is no alternative, there is no competition. They can do what they want. I have no choice.

      Joe

  5. According to recent reports, ESPN receives $5+ per cable subscriber who has the ability to view ESPN, regardless of whether or not they actually do. With a conscription scheme such as this, no wonder ESPN is in no hurry to go over the Internet.

  6. I have over the air free TV. I get tons of football and basketball. Just as much as my wife’s kid with $120 cable.

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