Lately, media news has been dominated by two headlines: Comcast’s acquisition of Time Warner and Netflix’s release of the second season of "House of Cards" (I mean, even President Obama tweeted about "House of Cards"). These have more in common than you think -- something to do with my gym analogy as well, so bear with me.
Basically, discussions of both these seismic media events have managed to segue into complaints about the current cost and structure of the cable bundle -- you know, the giant packages of channels people are “forced” to get. With regard to Comcast-Time Warner, the merger creates pricing concerns about those cable bundles (in spite of the fact that pricing is really driven by content costs). And with "House of Cards" (I watched all 13 this weekend! So good!), there are plenty of folks getting smug and saying, “Who needs that stupid cable bundle now?”
If you’re hand-wringing over the cost of your cable bundle, or you’re gloating about how "House of Cards" is making that cable bundle irrelevant, I’d like to politely request that you shut up. You’re going to ruin it for yourself and for the rest of us. The arguments against the cable bundle are, in fact, even more ridiculous than the idea of paying for my gym membership by machine.
Let’s keep going with this analogy. Sure, there are specialized gyms, ones that only offer spinning bikes or CrossFit equipment, but the reality is that joining those specialized gyms costs around the same as joining an all-purpose gym. And then I end up having to belong to two gyms. I guess I could join a cheap gym (or get just a basic cable package), but then I’d be stuck with the crappier equipment that gym happened to offer. If I didn’t like that, I could pay for private workout sessions, or buy single SoulCycle classes (media analogy: buy a particular show's episodes on iTunes) but that adds up fast. I’d quickly go back to wishing I had unlimited and potentially new stuff to do. Besides, no one is forcing me to join a gym in the first place. I could go for a run outside for free. (Or I could ditch cable and just go broadcast.)
The point is, the gym's role is to constantly optimize its offering to justify the total cost of membership to the broadest audience. And that is the single best analogy for the cable bundle and why it’s not just relevant, but optimal. To all the so-called “cord cutters” who like to brag they don’t get cable and live off the likes of Netflix and Hulu, as a cable subscriber I say, “You’re welcome.” Why? While digital TV has its tentpoles, like "House of Cards," a vast majority of the people who watch it are also consuming "The Walking Dead," "Mad Men," and so forth. And you know what paid for that content to get created? That’s right, the economics of the cable bundle.
And Netflix, in effect, is basically its own mini bundle. I love "House of Cards," but my Netflix subscription is also paying for access to the entire repertoire of "Sharknado clones," which are available for streaming and which I would never, ever watch. (I swear.) This is because content is a very expensive, long-lead capital investment. The cable bundle is really a bunch of mini bundles (HBO, Viacom, AMC Networks, etc.), and this bundle-of-bundles has created the single greatest economic incentive and financing structure for the development of creative content -- ever.
Don’t love the gym analogy? Try this one: think of the cable bundle like a hedge fund. You invest in a portfolio of stocks. Some overperform and some underperform, but you don’t get to go back and tell your hedge fund manager “Hey, next time, just invest in the winning ones.” That said, the stocks that continually underperform will be dropped from the portfolio. This is relevant to cable in that content development has very long lead times. Your cable bills today are financing content that won’t hit the screen for years. Without that stability, we wouldn’t have the ludicrous amount of high-quality programming we have today. And that doesn’t even get into news and other live programming, or sports (which is another article in itself). Basically, think of it as the really expensive equipment at the gym.
I will gladly join you in your complaints about set-top boxes’ user interfaces, the lack of a decent solution to so-called “TV everywhere,” or the ad load in cable content. But I’m not going to trash the economics of the cable bundle and the ability it has given great storytellers to invest in the creative process that has led to a golden age of television content.
We didn’t have TV shows like "Mad Men" or "Suits" (another favorite of mine) 30 years ago. And that’s because, over time, the bundle has paid off. As a fan of these high-quality television shows, I say it should continue to do so. And as a fan of my gym, I should stop complaining about it.
I think the big issue is the value proposition - it's a lot easier to pay $8.99 to stream Netflix and get House of Cards, Orange is the New Black, and a whole host of crap you'll never watch. Compare that to the $80+ (often higher) paid per month for cable, and people start to resent it and feel that they're paying that much just for the shows they watch. At some price point, the "you're getting all of this choice, whether you watch it or not" has less significance. And basic behavioral economics tells us that something occurring in the future isn't tangible enough to have value now, when we're paying for it.
ESPN couldn't have happened without early subsidy - only had Australian Football and college baseball. That said today, they are collecting nearly a billion a month primarily from subscribers who are non-sports or casual fans (80-90%). Since advertising no longer controls content costs and rates are increased with impunity, I see cable killing the goose who laid the golden eggs, or as Pogo simply stated - we have found the enemy and it is us. Lot of businesses thought they knew best as well but you can see where newspapers (only local news has any significance), music (albums to singles), books, retail box stores / malls are now.
I tend to agree here EXCEPT I don't have a choice of cable systems. No second company is offering me alternate bundles, packages, privileges and prices. Dealing with monopolies does have its downsides.
@Kim, that begs the question of whether there's a marketing problem. How can something occurring in the future *become* tangible, or how can smart marketing and advertising convince us that it's so? (You're right, humans aren't very good at comprehending that in the first place.)
Bingo. Which is why the companies that are looking at expanding the idea of syndication windows (Netflix) continue to outperform those who are trying to abolish them (Hulu, at least until recently).
The network operators aren’t dumb. No cable, satellite or online video distributor sells cable channels one by one. Why? The content providers have all linked themselves together tightly. If consumers want ESPN from Disney/ABC, they must also buy MTV from Viacom embedded in the same package. That’s why basic cable has 100 channels of which consumers watch only a dozen. And to Joe's point, do you think MadMen or Breaking Bad would have been the cultural phenomenon's they've become had it not been for the bundle? Who of us back in 2009 would have subscribed to AMC?
@Christian, hey, my dad is VERY bitter about AMC not showing all those black-and-white movies it used to.
I have to agree with Jerry, that gyms don't have a monopoly. And with ESPN responsible for a large chunk of the bill, you have to love sports to justify it. I love the fact that Netflix+Hulu+Aereo only comes to ~$25 vs. over $100 in some cases. And its my choice to get all three. This is a controlled market that needs a disruptor to force its unbundling.
And come to think of it, you can go to Freewheel or Soulcycle if all you do is spin, and Gold's if you want a great weight room. Places like Equinox are good because you can change what you do, but with cable you have to pay for things you would never do.
Next up - my $70 internet access bill.
It's not the "more", it's the so much more. It's that the bundles are unaffordable and very inflationary for many families and people along with the tethering to their cell phones. Programs in the bundles have become a continued social spectacle in acceptance and conversations for people as when the 3 networks were the only water cooler topics. There maybe a variety of gyms, but the point lost the luster with that monopoly thingy.
Joe- this is a rough analogy.
1- Like Paula said, it isn't just "more," it's a "more" that is completely unrelated. It's like your gym sending a notice that it was suddenly offering French Lessons and Mahjong, all while adding a small additional fee for the new "services." This doesn't even mention the idea that the gym may remove the treadmills while claiming they're too expensive (see Weather Channel/Direct TV).
2- Your gym doesn't require you to stand still for 18 minutes out of every hour you're on the treadmill (hello commercials). If it did, you'd identify another gym, which bring me to:
3- Regardless of what city you're in, there are probably multiple options of which Gym to go to. Simply not the case for a huge number of consumers.
@Christian, Caroline's dad aside, you could probably argue that yes, Mad Men or Breaking Bad would have gathered a massive following. People find and share great content. OITNB and House of Cards are proving it.
David - what you described sounds like a bundle to me. Just a smaller one, with mostly dated content and little live. Also, much of your bundle benefits from the second window of stuff financed by the bigger cable bundles.
Mike - gyms change equipment all the time. Big enough changes or jot keeping up makes me switch. Most areas have more than one cable bundle option. And, as everyone likes to point out, they could just get internet and use Netflix YouTube hulu etc. So there is plenty of competition. As for commercials, get a DVR.
Also, there are about 18 min of commercials an hour on the TVs at my gym which are even worse when I am trying to run. Like I said, I am with you on the ad load.
As web-based distribution channels grow (Over-the-Top or OTT) in popularity (and they are; there must be a reason driving this) and they gain predictable audiences who pay (either by subscriptions, pay-as-you-go, or the growing value exchange advertising platforms), more content will move in that direction. However, a la carte content that is direct from the producer / publisher will likely never support the creation of high quality content for all the reasons stated.
And there are other obstacles for OTT players. Netflix alone is consuming a huge amount of the Internet traffic pie. Expand on that and there is some infrastructure catch-up to do. And the current "Net Neutrality" debate puts billions of dollars of entrenched stakeholders at play.
DVRs ad-skipping is another issue. Ad-skipping is less likely, at least for now, under OTT delivery systems. But consumers have revealed something here with DVR ad-skipping. They don’t like the interruptions. The impact of DVR ad skipping continues to be debated. However, my view is that it is large enough to be troubling for all three stakeholders: consumers; publishers; and advertisers.
Roughly ~$70 billion in ad dollars flow to the publishers of video content. This is in addition to the revenues cable operators pay them for the content … think ESPN ….. and it is significant. And it is interesting to note that roughly half of that are effective pre-buys or “avails.” This is sort of a future’s market. The point is, “avails” are a big part of the risk / investment equation that support the creation of high quality content within the current cable distribution channels. But, as DVRs have grown in popularity, the effectiveness of TV video ad inserts has declined. How much is debated.
I have concluded: 1.) Consumers dislike the interruptions caused by ad breaks and would embrace a decoupled ad experiences to pay for access to content; and 2.) The drive to achieve lower CPMs for online video ads (pennies) is inherently disconnected with the exchange of value between the consumer and the advertiser. That disconnection (how advertisers value a consumer’s attention and engagement and the consumer’s view of the value of their time) will eventually surface to the advertisers dismay because it will right it self. And when it does, "real" CPMs will head north enabled by new and emerging value exchange platforms. Advertisers will gladly pay higher CPMs because of the quantum leap in effectiveness.
Value Exchange Advertising offers new and “aligned” methods of delivering value to the advertiser, uninterrupted content to the consumer, an alternative method for consumers to pay for access to content and greater revenues to the publishers of content (directly and through higher consumer satisfaction of the content viewing experience). A win/win/win. And another way for distributors to monetize content.
Well Jim, regarding Value Exchange Advertising, you said it, and I couldn't agree more, biased though I might be ;-)
Great points overall as well and thanks for taking the time to add to the conversation.
I am struggling to release cable but I will soon. The cost is not worth what I am paying. ESPN is accessible through its app without a cable subscription but you must have internet. I am waiting for other networks to do the same. Soon watching cable networks through apps will become the new over the air broadcast. I will buy a Tivo box for about $200 and another $500 for lifetime DVR service. Time Warner cable (TWC) charges $12-$13 a month for 'renting' their boxes and another $6-$7 bucks for modem use. People can shave $20 bucks of their bill. TWC is coming to Apple TV soon. DVR or cable boxes will be returned by the droves. Cost-cutting practices can be just as strong as cord cutting. Can I go without cable? Yes. It will be tough. So, I may just go basic and wait until more networks create apps.
As far as the gym analogy, working out is free. Elliptical is walking and pushups. Treadmill is running. What true benefit is going to the gym about? The machines or the building?
I fit in exactly with your example. I had cable and only watched Mad Men. I saw no point to the other channels? So what did I do? I canceled the $90 / month cable bill and bought Mad Men on iTunes. Perfect. I don't see what that's a problem.
Carl - That you don't see the problem is exactly my point. Mad Men never exists without cable fees. Not saying some people can't benefit in the short term, but if everyone did that, the creation environment for shows like Mad Men that cable provides would go away.
Great post, Joe. And I love this analogy. It seems like we are, once again, confronted by an area where the digerati make a lot of progress telling everyone that economics no longer exist. Only, we will find out in the end that not only do they exist - but if we follow the digerati our lives will end up far poorer in the long run. It's a fundamental principal in the digital world - to destroy the old by subsidizing something with VC and stock market money...and of course we end up poorer after the subsidy is gone. For years I've observed that Netflix is a "bait and switch" ... Bait us all to make a decision that's bad for us in the long run by implying content is cheap...then everything falls apart (or they jack prices far higher than Comcast) once they've wreaked destruction on traditional TV.