Commentary

To Bundle Or Unbundle? That Is The Question

by Diane Mermigas , March 9, 2010

The latest retransmission fee rift between Walt Disney's WABC-TV and Cablevision, as well as Viacom yanking its popular "Daily Show" and "Colbert Report" from Hulu over ad revenue-sharing, strengthens the argument for a la carte content -- allowing consumers to pay for just what they want, when they want.

The complex sphere of content economics is being fractured by continuous conflict and experimentation by bundling cable operators and other content aggregators at one end of the spectrum and iTunes and Netflix paid downloads on the other.

The ability to sidestep gatekeepers using the Internet bypass and cloud computing, promises even more industry disruption and consumer choice.

Even as consumers demonstrate their preference for more select, relevant content options, several Wall Street analysts are making the case why, at least for now, bundling remains economically sound.

Unbundled business models would threaten $25.4 billion in annual affiliate retransmission fees paid by cable TV operators to programmers, according to Barclays Capital's Anthony DiClemente. Even as traditional TV advertising and DVD sales decline, nascent digital ad and pay-to-play revenues remain too small to make up the difference.

Unbundling programs would be a logistical and costly nightmare for cable and satellite operators. It threatens the demise of smaller niche networks, which would no longer be "subsidized" by being carried by major networks. As long as available online video content is limited, TV cord-cutting is not a risk; consumers generally opt for flat -rate pricing viewing a monthly average of more than 140 hours of television.

Needham analyst Laura Martin goes further: She forecasts that the gradual rebundling of music at lower price points and customized selection will pave the way for more innovative and experimental arrangements for TV and film.

Music is "the canary in the coal mine" for monetizing TV and film over digital platforms and devices, Martin said. She estimates the market cap of the TV ecosystem potentially at risk is more than $300 billion. As a result of botching the migration from physical to digital distribution, music industry total revenues have been halved from a peak of about $14 billion in 1999-2000 to $7 billion last year, she said.

That's one reason why content producers and distributors will increasingly break ranks to experiment with revenue-generating options. Recent examples include Disney's earlier than usual DVD release of the new "Alice in Wonderland," Viacom yanked its popular "Colbert" and "Daily Show" video streams from Hulu so it can retain all of the revenue from related online ads by hosting the programs on its own sites.

Some moves by distributors have been even more intriguing.

Cablevision is providing subscribers with their own TV channel to access content directly from the Web, while Hulu plans to charge its 44 million viewers for some streaming online video. (Hulu is the dominant ad-supported online video site co-owned by NBC Universal, News Corp.'s Fox and Disney's ABC.)

TiVo's new Premiere service makes it a one-stop content aggregator, even as Apple seeks to leapfrog its rivals by negotiating with TV and film producers for access rights to their content from the "cloud." Disney is experimenting with its own Keychest cloud technology, which will allow consumers permanent access to and ubiquitous use of any TV or film.

Bernstein Research analysts Craig Moffett and Michael Nathanson observe that the development of online video will be "halting at best" until blue-chip media players such as Disney, NBCU, News Corp., Viacom and Time Warner find economically viable new content business models. By the looks of things, we could be getting closer to that time. More about Diane Mermigas consulting and speaking opportunities at Mermigas on Media; more analysis at BNET and Seeking Alpha.

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3 comments about "To Bundle Or Unbundle? That Is The Question ".

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Richard Monihan, March 9, 2010 at 10:35 a.m.
Unbundling will occur at some point, it's inevitable.
Music represents a good starting point to review a "good thing gone bad". By ignoring trends and viable options in the early years, music saw its revenues erode substantially. Spending money on lawsuits, resisting change, and not opening up the discussion on how to deal with or recognize fundamental changes, the industry was torn apart by external forces.
Seeing how the music industry mismanaged technological innovation and rapid changes in its economic infrastructure, TV can avoid the same problems. Part of this will mean realizing there will be a vast reduction in revenues, but it will also coincide with some rapid reductions in cost, as well.

Joseph Schumpeter wrote that the free market "is by nature a form or method of economic change and not only never is but never can be stationary." The driving force of the market are the needs driven "from the new consumer goods, the new methods of production or transportation, the new markets, the new forms of industrial organization" which a market creates.
The market, by its very nature needs change and must replace the old with the new. Schumpeter concluded : "This process of Creative Destruction is the essential fact" of the market, which is symbolised by the "perennial gale of Creative Destruction".
In world guided by simulacra and simulation, we are seeing the real world effects of Jean Baudrillard's vision played out within Schumpeter's economic reality.
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Douglas Ferguson from College of Charleston, March 9, 2010 at 10:57 a.m.

I agree with this analysis. Furthermore, at some point the high cost of ESPN will attract sufficient attention to the problem. It's already approaching $5 per sub per month, which is outrageous for non-fans (those little old ladies on fixed incomes) who subsidize all the sports fans (not to mention sports salaries). After unbundling, and after the huge monthly cost of access to televised sports is redistributed, it will be interesting to see how many causal sports fans drop ESPN as too costly, further driving up the per-sub fee for the actual heavy-viewing audience.

Howie Goldfarb from Blue Star Strategic Marketing, March 9, 2010 at 11:57 a.m.

Very interesting discussion. We all have web browsers and we bookmark sites. So we do our own bundling. Yet the sheer volume makes it hard see all the bookmarks are many sites go unvisited even though your interested in them. We do this with TV because while we might like many channels we tend to go to the same few outside of special events like the Olympics.

I think the key to the migration to web/mobile for TV/Cable is challenged because no one wants to hurt revenues. But not all revenues does the industry have an inalienable right too. Some can be parasites that lost value which the music comparison is perfect. We do not need retail stores, packaging, or in many cases today even traditional record labels. Take that out of the revenue stream and I bet today's revenues are the same as they have been in the past.

Take print. Do we need paper? Do we need to use trees and ink and ship the stuff all around? Not anymore, so remove that from the cost and mark up and I bet things look good to the industry just not some of the vendors.

I think Video/TV/Cable will go through a similar evolution until we are down to the raw basics of content and a way to access the content. The content creators only care that they can make money on what they provide. As we can see with all the crappy TV on prime time and dumb reality shows, fragmented viewership is really the barrier to quality content. Hard to invest for great programming when you reach only a few million people vs the 10's of millions of the past glory days.