I just read an excellent report on the changing economics of content and the likely implications for the future of TV and online video, entitled the “Future of TV,” by Laura Martin and Dan Medina of Needham & Co. This is one of the best treatments I’ve seen to date on the topic, carefully analyzing the fundamental structures and economics of the television and online video ecosystems, mapping out the key drivers in the future for each, and drawing specific conclusions on who the likely winners will be -- and why.
Three points in the report really struck a chord with me. One, Martin and Medina view the TV and online video ecosystems as quite separate and independent from each other. Two, they highlighted the extraordinary power and leverage that the TV industry gets from bundling -- from the subscriber channel bundles to the bundling of shows together on networks, to the bundling of revenue-producing ads with the subscriber content, to the bundled “pre-financing” of shows’ production costs through upfront ad commitments (forcing advertisers to fund the “dogs” to get access to the “stars”). Finally, there’s the bundling of TV and online screens through TV Everywhere strategies.
The third point that I liked: the authors detailed two very significant emerging areas of growth for TV companies. One was a $10-billion-per-year opportunity in video-on-demand, potentially monetizing companies’ deep libraries of shows and movies better than Netflix or Amazon through subscription services and bundling ads with content. The other was a $5-billion-per-year opportunity selling more TV ads to Internet companies like Amazon, Google and Expedia as they become increasingly competitive with others in their category and seek the brand differentiation that TV delivers so well.
While many folks like to talk about the notion of online video eventually overtaking television as an absolute, long-term inevitability, Martin and Medina’s report shows a path through which TV companies can capture and bundle the best parts of online video before losing to the emerging on-demand, content-unbundling digital disruption that has taken away 60%-70% of newspaper companies’ revenues since 2000. Of course, they also point out that the TV industry faces some massive risks to its future: if TV’s channel bundle becomes undone, wholly or partially (a separate sports tier, for example), the industry could lose 20%-50% of its revenue from lost leverage; and the failure of TV companies to invest heavily in mobile content so far could mean that they will be on the outside looking in as mobile video continues its explosive growth.
How might the online video industry upset TV's apple cart and prevent itself from being consumed and subsumed as just another component of TVs bundle? Here are my thoughts on where it needs to step up:
If you want money from consumers and advertisers, spend more money on content. According to Martin and Medina, the U.S. TV industry spent $45 billion dollars on content in 2012, up $1.5 billion from the year before. Incredibly, that annual increase was actually twice as big as the entire amount spent by online companies to produce original video content. Media consumers and advertisers certainly like user-generated content at times, but it’s not where they choose to spend their money.
Get serious about marketing Web shows. Big audiences are needed to attract big ad dollars. Television networks and distributors spend billions of dollars per year marketing their shows, much of it in television advertising. Advertisers know that the networks have real skin in the game, and will push hard to make shows work, thus giving them more comfort making upfront commitments. When will the web video players do the same?
Find something valuable and scarce to bundle with. The television industry gets a lot of leverage from its bundles. Advertising complements TV shows. TV shows complement each other on a network. Multiple networks in a bundle add more value to others on the dial. Can Web video companies find something similar? Martin suggests in the report that maybe Google will find unique value bundling YouTube with its super high-speed Google Fiber project. Maybe we’ll see the same from TV device manufacturers? Time will tell.
TV will own the Web video world before Web video players can seriously challenge the core economics of the television ecosystem. My bet is that CBS is much more likely to own and distribute the highest value Web video content -- including on mobile devices -- than Google or Yahoo are likely to own or deliver the highest value TV shows. What do you think?