• by John R. Osborn , Op-Ed Contributor, June 21, 2012

For those enterprises still receiving substantial cash from the traditional television business model there is no need to question the issue of bundling – the packaging of large numbers of TV networks into a cable or satellite subscription. Traditional television producers (national broadcast and cable networks, local stations/channels) and distributors (Comcast, Cablevision, Time Warner Cable, Direct TV, etc.) really have no desire to go to what they assume would be a less lucrative model -- one where consumers don’t pay for content they don’t watch, and advertisers don’t pay for ads that aren’t seen. 

Cable and satellite systems smartly offered bundled subscriptions to their customers from the get-go. With hundreds of cable networks to choose from, it would have been burdensome and technologically unwieldy in the 1980’s and 1990’s to sell pay-as-you-go, “a la carte” offerings. By bundling networks in different tiers (basic, sports, premium, pay cable) the cable/satellite operators could over-deliver content desired by viewers, and in turn promote sampling of networks the viewer might not know about. This built-in marketing engine increased the perceived value to consumers and justified rate increases every few years.

The producers of content (cable networks, production studios) love this model, because they get paid for content by the distributors on a per-subscriber basis. So if a cable network was watched by only 10% of a cable system’s subscriber base each month, and ignored by 90%, they would still receive rights fees based on all subscribers. This gives content producers cost certainty with which to develop and produce programming.

But in the emerging business model of T/V (Television/Video), it takes four to tango. Bundling works for 1) content producers and 2) distributors, but no longer serves today’s 3) media consumers and 4) advertisers. Consumers end up paying for networks they do not care about or watch. Bundling sustains the linear television approach where programming and its advertising are thrown up against the wall of network scheduling, and what sticks, sticks. Unfortunately for viewers and advertisers, what sticks and gains audience is a small proportion of the total universe of programming and ads paid for through subscriptions.

Add the fact that cable and broadcast networks have continually expanded their commercial loads over the last 20 years, and we see how viewers now pay high tolls in terms of time and attention to get “free” content (which by the way is no longer free due to escalating subscription costs).

Advertisers have tolerated this model over the years around the ideas that more supply would keep costs down, and because no one ever got fired for buying national or local television. Without commercial ratings, there is no reliable measure of how much channel switching and ad avoidance takes place in ever-expanding commercial breaks, allowing the media “emperors” to rarely be criticized by advertisers for their scanty “wardrobes." Yet linear ratings continue to decline.

Consumers have long shown a desire for on-demand programming. The first “video on demand” platform -- video stores -- was neither digital nor electronic. Film and television viewers would pay $3-4 a night to select and rent a video they could view on their time schedule. The in-store experience of browsing for titles was for many their first “search engine” for media content. It was also the first time that the film and television industry could earn revenues after the scheduled run of a program. Advertising for the most part wasn’t part of the equation. Consumers were happy with more control over their viewing and the “long tail” was born.

In the 1990s the internet arrived – seemingly out of nowhere – and soon search and on-demand information and entertainment delivery was available at levels never imagined, though only now is streaming and downloadable video truly viable due to increased bandwidth.  Media consumers, particularly younger ones raised on the internet, love the instant gratification of clickable content.

Now, consumer electronics manufacturers are building/marketing smart or “connected” TVs that along with ancillary gadgets like Roku are able to connect viewers to high-speed internet streaming. Content sellers like Amazon Plus, Netflix, Hulu and other OTT or “Over the Top” services, along with expected entries from Apple and Google, can bypass cable company subscription offerings a-la-carte and at lower total price points, with or without advertising. Meanwhile cable and satellite distributors have pressured their content suppliers to withhold programming from Netflix, Hulu and the like, and the U.S. Justice Department is investigating restraint of trade accusations against those distributors. As a counter-strategy, the OTT providers are beginning to develop original programming to compete.

The infrastructure has shifted to the point where cord-cutting and movement to a VOD T/V world is possible. When consumer and advertiser demand catch up with what is possible, content providers and distributors will have no choice but to compete in a new, unbundled T/V world.

I would offer that this is not the end of the world for media providers. An “a la carte” model would not necessarily be less lucrative for content producers and distributors. Adjustments would need to be made in the viewer payments and advertising costs for video-on-demand content delivery and verified interactive ad delivery respectively in order to sustain the quality content that consumers and advertisers demand. Since there would be greater value to both viewer and advertiser for actual delivery of the elements they want most, those cost increases would be justified and willingly paid. The win/win/win/win is that consumers/advertisers will pay higher per-consumption costs and benefit from a lower total aggregate spend, while producers/distributors will receive higher per-consumption payments. Lucrative revenues will be there for providers, tied to real media consumption rather than the current linear system where consumers and advertisers pay for programs and ads that are never seen.