The year started with HBO Go and CBS and then Sling TV, and now we’re learning about new streaming packages from Sony and Apple TV. Certainly many more will be coming. The packages include top channels like HGTV, TBS and AMC -- and, incredibly, channels like ESPN and HBO, which many consider the critical linchpins holding the traditional cable bundle together.
Pundits are now predicting this is the start of the long awaited “un-bundling” of the TV world, where viewers abandon their legacy television packages and eventually only buy TV networks and programs on an a la carte basis -- much like what has happened to the music business. For myself, I’m not so sure that things are going to immediately unbundle that way, at least not in the near term. However, I do think that television networks may soon face a very difficult game of musical chairs.
Virtually all these new bundles have fewer channels and lower fees than the average TV subscription that most consumers buy. With a smaller bundle and a smaller subscription fee, either few channels get the same fee they have today, and many channels that get fees today get none -- or most or all of the channels that get fees today continue to get fees, just smaller fees. In musical-chairs parlance, that means either fewer chairs or smaller chairs, or both.
The “music” of the TV industry is the big deals that cable, satellite and teleco companies cut with the TV programmers. While those deals are long-term, they are based on subscriber counts. If the counts go down, so do the fees. If these new packages replace any legacy packages, fees will go down. The more replacements, the more the fees drop.
If the world of TV is either fewer chairs or smaller chairs, and if fees go down from a loss of legacy carriage fees, things could get tough. TV companies have a lot of long-term fixed costs. Programming deals, which are only getting more expensive these days, are not variable costs that can be dialed down if the audience is smaller.
The fact that many TV companies are also producers of their programming will help, both in the management of costs and in providing those shows to the new entrants in the streaming business. However, things are certain to get dicey as the revenue mix changes.
Even more dangerous in this game of musical chairs is what happens to the legacy bundle if companies start subsidizing premium streaming video services to gain or retain customers in an adjacent business, such as retail, banking or mobile teleco. Those businesses might use TV packages just as banks used to use “toasters”: as a giveaway to get customers. This certainly seems to be Amazon’s strategy with its Prime Video service. Such companies will buy content, but they’ll probably continue to just go straight to the talent and producers, bypassing the networks. That could take a lot of “chairs” out of the game.
It’s quite possible that the future of TV might be a shrinking bundle and a game of musical chairs. What do you think?
Great food for thought Dave - and this is something that I address in my new book, The Manipulator - about the world's first all mobile television networks: http://tinyurl.com/ll46pnz
All good points Dave. I think that consumers who rush to one of the alternative services may ultimately regret the decision. Depending on the package and the various upsell pieces (ie. sports channels, movie channel's etc.), consumers may well pay the same or close to it for reduced choice (especially if they their legacy cable company is their ISP, and they lose the multiservice discount). It also seems to create a downward pressure on content producers. As networks lose HHs, they will have to charge lower rates, forcing them to restrict outlays for top quality programming. Sounds like a vicious cycle to me.
I think THE lynchpins are sports content plus an ISP service. And in an unbundled world (if that ever arrives) consumers could actually find themselves in a very uncomfortable position where they end up having to pay more for the combination of the smaller bundle plus sports content plus the ISP service needed to get the streamed content (let's not forget that last rather critical component -- and whose price can be expected to rise in an unbundled world!) than they pay for a cable subscription today!
Neil, I totally agree on the vicsious cycle issue. it probably won't take too much shrinkage in total subscribers and in the fees to kick the cycle off, and you can imagine that in a monthly subsciption product, retention rates can change pretty quickly.
So far, as the broadcast TV networks have lost share of audience, they have been able to raise the amount they charge advertisers to "reach" viewers for most of the last 25 seasons. We shall soon see whether last year's modest declines in upfront CPMs are the start of a new and sustained downward trend---or not. Frankly, I doubt it. In either event, the networks have many options to go to as the erosion of their ratings continues. First and foremost, they and their cable arms will, no doubt, launch numerous stand -alone services----many partially ad supported----exploiting program content that they already have as well as new stuff. Such line extenders will, if successful, mitigate the impact of rating losses on the network side. Second, the networks will continue --and expand ---the use of cheaper content---especially talk and reality shows plus more newsmagazines in the daytime as well as in prime time. Third, the networks, who generally have lighter commercial loads than cable, can always increase these to generate more GRPs for sale. If nothing else, past experience has shown that many advertisers will continue to pay huge premiums in costs per viewer to the broadcast networks so long as their commercials are aired in sports and "prestigious" , much talked about and highly merchandiseable primetime and late night entries---even if some of these shows can be criticized as not being the very best content that could be offered to the public. At this point, I wouldn't count the broadcast networks as out----or doomed-----just because of lower ratings. They have many irons in the fire---like very profitable TV stations and cable channels---as well as ways to offset ad revenue losses---or slow downs----on the network side.
Gian, I think that your point is one that everyone is going to be watching very closely - can sports continue to sustain, and support, other programming. If sports breaks out of the bundle - say ESPN offers its own standalone - it could ahve some pretty devastating effects.
Ed, yes. There's no question that the TV companies have a lot of levers to pull, from ad rate changes to controlling programming costs to creating new services, to try to mitigate losses from shrinking audiences and carriage fees. However, not all are likely to be adept and successful if they're fighting big battles on multiple fronts at once. It will certainly be interesting to watch.
Dave, I agree. I think it's the smaller cable networks that will absorb the double blow -- loss of subscriber fee payments and reduced revenue from advertising as their audiences shrink due to distribution losses.
Less eyeballs per station with unbundling, the higher ROI or less revenue/profit and combination of the two. Another solution to lessen the blow and change the dynamics at least for awhile would be to lower those costs of the bundling to be competitive, but then the ivory towerers would freak out. As much as we think media is consumer oriented, it is corporate profit structure all the way while keeping the plebs busy to stay out of their way.
All comes down to the experience by the consumer. If unbundling means flipping between different SVOD providers and my operator to find my content or even having to "find" my content all vs. it getting pushed to me based on who am I am and what I like then I don't see it as a game changer. When channels exploded from 2008 to 2013 by 46% the average number of channels watched barely budged, around 17. I see a potential future where smaller networks don't even sell advertising on their linear TV streams and the MVPDs use addressability (which is here) to sell targeted ads.
Lot of change coming. Good article Dave!
Stephen, just a point about the average person's channel viewing. Yes, the number of channels exploded in the last decade but the number viewed for at least ten minutes weekly, seems to have increased only slightly. The problem with this is the time frame. If you take a longer period----several weeks, a month, three months, etc. you will see that more and more channels are sampled, eventually, it just takes longer for viewers who aren't dedicated fans of the smaller, more selectively programmed channels, to get around to viewing some of their fare. In our annual, "TV Dimensions 2015" we estimate that an average adult is exposed to 3 channels per day, 14 per week, 23 per month, 32 in three months and 44 over the course of a year.
Thanks Ed. Good point on the time frame! Here was the Nielsen study I was referencing. Cheers!
Thanks Stephen, I think that the big issue with consumers will be how subsitutable some of the channels are for each other. Gian makes a good points about the importants of sports, but many fo the entertainment channels might be quite swappable in a smaller bundle. Plus, if you add a $9.99 Amazon Prime package, you might only need a few sports & news channels to be satisfied.
Dave: One important issue we need to keep in mind is that the cable and satellite companies pay a massive amount of money to the content owners in affiliate fees -- probably approaching $40B today. So the content owners have to be very, very careful about not killing the golden goose of cable and satellite revenue. Bill Gurley wrote a brilliant piece a few years ago highlighting the issue: http://abovethecrowd.com/2010/04/28/affiliate-fees-make-the-world-go-round/
Gian, I agree. Gurley's piece is the best I've read on the topic. However, given the events of the past few months, it's clear that the programmers are now willing to walk on the edge and test the cable, satellite and teleco folks, probably believing that they don't have much choice, since those companies are buidling their own independent streaming bundles anyway. For sure, it's a very fine and volatile line they walk.
Dave, it's possible that with the increase in cord cutting the content owners are trying to get some revenue from the cutters directly while simultaneously trying to avoid stimulating any further cord cutting. A very difficult balancing act indeed.
When TBS came on the Air, it was the end of Network TV and local affiliates, then Cable, was the end of Network TV and Local affiliates. I think the Nets and local affiliates have forgotten that we are in the “communication” business supported by advertising, not the “television” business supported by advertising.
Maybe this time?