TV: A Faster Slow Death
Television as we know it is doomed and has been for some time. But I thought broadcasters and cable operators would be able to hold off the inevitable for a long time because their business model, antiquated as it is, still produced a mighty stream of profits. I’m not so sure anymore. The decline will still play out over years, but there are plenty of straws in the wind that suggest that over-the-top internet distribution is disrupting traditional TV at a much faster pace than I believed possible. Consider these developments:
- The successful launch of original content on Netflix, such as “House of Cards” and “Orange Is the New Black,” shows that it is possible to circumvent traditional distribution.
- The protracted fight that has kept CBS off Time Warner Cable, with TWC hinting that its customers could turn to Aereo to avoid the blackout.
- Google talking with the National Football League about over-the-top distribution of games.
Each of these examples cuts to the heart of a business model that has been controlled by an iron triangle of content producers (studios and sports leagues), programmers (broadcast and cable networks), and distributors (cable and satellite companies and over-the-air broadcasters.) The producers and programmers have been looking at the internet with an increasingly hungry eye for a while now, but they haven’t been hungry enough to be willing to disrupt their very lucrative arrangements.
Death by pecking. I used to think it would take some cataclysmic event, say the decision of an HBO to allow over-the-top sales of its programming by non-cable subscribers, to break the TV business model. But it now seems more likely that the model will slowly be pecked to death, one deal at a time.
Of the recent developments, the war between CBS and TWC is the most surprising and perhaps the most significant. The core of the dispute is that TWC’s belief that CBS is charging too much for its content. These fights over “retransmission consent” have erupted before, but typically have not lasted for more than a few days. Usually, the prospect of losing a big sports event has undone the resolve of the cable carrier; it will be interesting to see if TWC can continue to hold out through the start of the college football season next weekend and the NFL season the week after.
Retransmission fees have become an increasingly important part of the revenue stream of networks; CBS reportedly is asking TWC to triple its payments from 66 cents to $2 per subscriber per month. (For a deep dive into the economics of retransmission, read this analysis by Richard Greenfield.) It’s only a matter of time before distributors try to cut out the middleman by negotiating directly with the content providers. TWC, for example is providing all subscribers free access to the tennis channel–an independent operation with close ties to the tennis business–during the U.S. Open (TWC subscribers will still miss the biggest matches, for which CBS has an exclusive.)
DIY sports production. College teams, from the Big Ten to to Brigham Young, are producing telecasts of their own games. Currently, they distribute the content through cable operators, but it is certainly conceivable their their future deals could be with Netflix or Google or Apple.
Direct, non-cable channel subscriptions, or even a la carte sales of individual shows, look increasingly inevitable.
Real change in the television business model will require a realignment of interests in the industry. Local broadcast stations, many of the largest of which are owned by networks, seem at the most risk of disruption. So far, most have been resisting the temptation to give up their over-the-air licenses in the forthcoming “incentive auction” of spectrum, but that option could become increasingly attractive if broadcast economics continue to deteriorate.
The role of traditional broadcast networks in the value chain growing increasingly dubious as competition with non-traditional distributors, such as Netflix, heats up. More and more cable channels are turning up on over-the-top devices such as Roku, Apple TV, and Xbox. Apple, for example, has just announced deals for the Disney Channel, the Weather Channel, and the Smithsonian Channel. Premium channels generally require that the viewer also have a cable subscription because of either contractual obligations or the content owner’s desire to maintain good relations with the cable operator, but direct, non-cable channel subscriptions, or even a la carte sales of individual shows, look increasingly inevitable.
Cable operators may have to get more deeply into programming or face becoming pure suppliers of bandwidth. Currently, only Comcast, which owns NBC Universal has significant production assets; TWC has been spun off from Time Warner, which owns HBO, CNN and many other assets.
One big question about the inevitable move to over-the-top distribution is whether the internet can handle the load traditionally carried by cable networks, especially for, say, a major sports event. In one sense, the traffic is all moving over the same network since most U.S. residences get broadband via cable, but cable’s broadcast model is inherently more efficient than the one-stream-per-viewer required by IP transmission. But the extensive use of content distribution networks has already made the topology of the internet look a lot more cable-like for highly popular sites; the head ends are just a little further away from subscribers. As CDNs continue to improve and as last-mile bandwidth continues to increase, internet logjams seem less and less a threat to over-the-top TV.