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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.[pullquote]Direct, non-cable channel subscriptions, or even a la carte sales of individual shows, look increasingly inevitable.[/pullquote]

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.

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.

9 thoughts on “TV: A Faster Slow Death”

  1. i’ve seen statistics about the growth of “cord-cutting,” which is on the rise but is still a tiny number in the US. But I haven’t seen anything talking about the prevalence of cable downsizing, that is, the number of people who have cut back on their cable subscription without cancelling it completely. Has anyone done a writeup on the growth of that?

    I know that in our house we pruned back our cable subscription over time and finally got it down to just the cheapest basic cable subscription, to which we added sports channels for the Olympics last year and then cancelled them afterward.

    1. It’s hard to find data on that, but if HBO is a reasonable proxy for premium subscriptions, it’s U.S.customer base has been steady at about 28 million households for the past couple of years. So it doesn’t look like downgrading subscriptions is a widespread thing.

      That;s not too surprising. Cable operators have been moving channels to higher tiers. And with the exception of AMC, most of the good stuff is on premium channels.

      1. I don’t know about cable tiers in the US, but here in Ontario, premium ad-free channels (equivalent to HBO) are a separate add-on, and I wouldn’t evaluate subscriptions to it as a proxy for subscriptions to the more general run-of-the-mill cable channels (with ads).

        The regular cable channels here come in numerous somewhat overlapping bundles of half-a-dozen or so semi-related channels, or you can subscribe to all of them for a discount. We never bothered buying the ad-free premium channels, but for a long time we were subscribed to the “everything” package that combined all those bundles into one discounted price… then as online options became better and better, we started pruning what we were subscribing to, until finally it was just the basic broadcast networks and nothing else.

        Most recently, this month we finally decided to cancel cable altogether (we may re-up briefly for the olympics this winter, depends on what the coverage is like online), but that was after a couple of years of downsizing.

        1. That data is even harder to come. Time Warner did report an increase–amount unspecified–in the percentage of customers subscribing to higher service tiers in 2012. But in general, cable operators say little or nothing about the revenue per customer from cable service tiers.

          It’s an interesting research topic.

    2. The obstacle for many of is that our ISP is the cable company. To get Internet service, one must also subscribe to a minimum level of cable TV service. For that reason alone, I don’t see the cable TV as being threatened. The alternative ISPs are usually DSL from the landline phone company or satellite or some other wireless provider; they all have mix of disadvantages like costing more, having lower bandwidths, and lower data caps

      1. That depends entirely on the mix of providers in your area. DSL here is cheaper, has 3x the bandwidth, and is not appreciably slower than cable internet through the cable TV company.

      2. Cable operators usually offer internet-only service.

        Your IP address suggests your provider is Time Warner Cable in Rochester, NY. (Who says you can’t learn a lot from metadata?) TWC, judging by its web site offers six tiers of internet-only service.

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