Last week, with Henry Blodget’s permission I ran one of his essays. I didn't agree with all of it, but I ran the piece because I knew it would be thought provoking and stir up some interesting conversation. While I agreed with Blodget’s underlying premise that existing television business models are under tremendous pressure, and that all of them could not be preserved, I didn’t agree with the comparison to the newspapers.
I also don’t view the Internet as currently or five years from now being a huge factor in what ails television.
The local affiliate broadcast model is busted, and probably not fixable, but not because of the Internet.
Monopolies or near monopolies of distribution are wonderful things to have. For years, the best way for the big broadcasters to get them were with the local affiliate broadcast model. But now, the broadcast model isn’t nearly as cost efficient as, say, having a 24 hour cable channel with wide distribution. I wouldn’t say that the local broadcast market hasn’t suffered at all as a result of the Internet, but it seems very likely that most of that suffering is for the local 5pm, 6pm, 10pm and 11pm news broadcasts. Once upon a time, it was the best way to get news, weather and sports and they could keep the masses dangling between commercial breaks with “find out who won…after this message.”
Those days are gone. And this is perhaps the only place where it's easy to compare television to the newspaper business. Except...
While I’m sure that like everything else, viewing of those news programs is down, and down a lot, especially for FOX and CW affiliates, we hear constantly that the 10pm news hour is still one of the most lucrative hours for the local affiliates. We often see people comment that FOX should expand and broadcast until 11pm, but that doesn’t seem likely. Also, while viewing of local news has declined, the last 20 years has seen the rise of 24 hour cable networks dedicated to news, weather and sports.
For the last twenty-five plus years, tomorrow and five years from now, cable is the biggest threat to broadcast nets
No matter how much it is said, it doesn’t seem to sink in with some folks, but the data is clear: the long term deterioration of broadcast network Nielsen ratings is overwhelmingly due to people watching cable programming instead. Remember, overall television viewing has continued to increase even though viewing of broadcast networks has declined and continues to decline.
DVR is a far bigger threat to both broadcast and cable business models than the Internet
Though the growth ramp of DVR usage has been slow, taking 10 years to reach 30% penetration, it’s not entirely surprising. It seems popular convention to assume that because DVRs are basically better versions of VCRs when it comes to recording television shows that growth would’ve been more rapid. The problem with that is that it neglects to take in to account that despite VCRs having the ability to record, that wasn’t the widest usage of them. The widest usage was playing back rented and purchased movies. DVRs didn’t replace VCRs. DVD players did.
But though the growth has been slow, it is growth and it is having more and more impact as more and more people skip ads. The overall numbers, even for primetime get masked quite a bit, because rebroadcasts (repeats) are hardly DVRd at all compared to the first time a show airs. With fewer than a third of homes having DVRs, even factoring in repeats, it represented a visible chunk of the 2008-2009 broadcast season. Overall, CBS had the most “live” viewing with just over 88% of viewing being live (the other 12% via DVR playback). The impact was more pronounced for FOX (almost 83% live viewing) and the CW (82% live viewing).
For shows like LOST, DVR impact is more than three times as great as Internet viewing:
The impact of DVR was far more noticeable for shows like LOST which ran almost no in-slot repeats, where even factoring in a repeat or two, only 70% of its viewing was live, with the other 30% viewing being via DVR. Lost is also was typically the most-watched show on the Internet, with new episodes generally generating about a million* viewers within a month of airing. But the DVR impact was greater, with over 3 million per episode watching on DVR and within a week of the show airing. And that's with DVRs being in less than 30% of the homes in the US!
*Yes, I know that this only counts sanctioned viewing via ABC.com, and doesn’t include torrent downloads. But in the USA, far more people watch online than download torrents. While global downloading is an issue to deal with, how many people are downloading torrents of Lost and watching it in London, Germany, Japan, Australia, etc, don’t have any impact on ABC’s ratings in the United States.
TV isn’t like newspapers, the content is far easier to control
The comparison to newspapers (or for that matter, the music recording industry, but that’s a story for another post) is flawed. Newspapers had a monopoly on local distribution that completely went away. While it does face similar issues to local news broadcasts, the newspaper models were rocked even harder than television's. There aren’t things like Craigslist and Ebay that essentially killed the goose laying the golden eggs for the newspaper business (classified ads).
And there are just too many places and way you can get general news, weather and sports. The only way to turn it around would be for everyone to collude in some way by either charging for the data or not making it generally available. That’s not going to happen. You will have any number of sites where you can get news, weather and sports no matter what happens.
If someone charges, and you don’t feel like paying, you can and will easily go somewhere else. You might pay for analysis, or the viewpoints of particular people if that suits you, but as far as the information itself, it’s abundantly available, and no matter what happens, will be abundantly available. That genie is out of the bottle and never getting stuffed back in.
But if TNT (Time Warner) doesn’t want to make Saving Grace or The Closer available online, it’s very easy for them to just not make it available. Sure, if they take such a path, the number of people who download or stream it via alternate means will increase, but for now, for most people, that winds up being a barrier and it will be much longer than five years before the general population would “just steal it” if it were not freely available. This isn’t to say that it’s not a problem at all, it is, and one that is probably a bigger problem the younger the group you look at.
Expensive to produce content isn’t easy to commoditize
Scripted television shows are generally expensive to produce. Unlike the weather, and sports scores, it’s not commoditized. You can’t really compete effectively without spending money. While it’s possible that technology will significantly reduce production costs…someday. That day isn’t today or five or ten years from now.
If they can’t get paid, it won’t get made. A world where nobody wants to pay for content doesn’t result in a ton of free content. It results in the availability of less content. It could come to that, but I wouldn’t view that as a positive outcome.
TV is in for big changes, and the models are under huge pressure -- but for now, the Internet is among the least of its worries
I can think of several themes that are a bigger deal to the television industry than the Internet in the next 5-10 years:
- Carriage fees for broadcast networks on cable and satellite offerings. Despite decreases, the broadcast networks are the most-watched networks. Even on Comcast, Time Warner and DirecTV, broadcast networks are the most-watched networks. Perhaps the single biggest revenue growth opportunity for the broadcast networks is increased carriage fees from the cable and satellite companies that are more in sync with overall viewing. This will have repercussions as there will be some robbing Peter (lesser viewed cable networks) to pay Paul (broadcast networks). Peter’s gonna scream like a little kid who just dropped their ice cream cone on the street over that. You can count on some sort of temper tantrums as that starts to play out.
- The trend toward more unscripted programming seems likely to continue. The folks in the creative end of the business hate it, but unscripted has a couple of things going for it – it’s cheaper, and it is more DVR proof. Some in the media twist it around a little because a huge show like American Idol still winds up with a lot of DVR viewing (with most of it being same night time-shifting to avoid commercials!). But on a % basis over 94% of the viewing of American Idol happened the same night the show aired. Compare that to 84% for Lost, 82% for Heroes and 79% for Dollhouse. Sports programming, which are already a very important component, will grow in importance for this reason.
- SOME equilibrium between broadcast advertising rates and cable network advertising rates. There are some real and legitimate reasons that it costs more to advertise on a broadcast network on a cost per thousand viewers basis. That said, I expect the gaps to narrow. Some of that may come via increases to cable rates, and some via decreases to broadcast rates. I expect some temper tantrums will erupt over this as well.
- Figuring out how to monetize DVR and Video On Demand (VOD) viewing better. Will the Sarah character on Chuck be working in a Subway next season? I’d bet my iPhone on it (and I love my iPhone). That sort of product placement, as well as more general sponsorships are pretty DVR-proof. I’d look for more (and more) things like that to make up in advertising shortfalls caused by DVR viewers skipping or fast-forwarding through commercials. As for VOD, there is nothing but room for improvement, both in the offerings themselves and the advertising. Right now, most broadcast and shows from advertising supported cable networks available on demand have almost no commercials at all. Over time, I’d look for them to equalize with the amount of commercials you’d see if you were watching live.
Television does face some very serious challenges, and ultimately the Internet is a challenge. But it seems almost chronically overlooked that for now and the near future, the Internet is a vastly more expensive distribution platform than cable or broadcast, and the people who want to consume the content that way mostly don’t seem to want to pay or deal with a normal amount of advertising.
I’d love to see a la carte offerings available, but personally, I’d rather see them with my cable company than online (but ideally I think I should be able to view online anything I’m paying for via my cable subscription). It will be a good long while before people will be “cutting the cord” on their cable and satellite offerings in droves, and if and when that happens, a la carte may come to pass – not as a method of encouraging subscriptions for content on the Internet, but as a method of keeping people on cable and satellite.
But if it comes to that, it’s the game of whack-a-mole. A la carte offerings will definitely make some people very happy, but ultimately, some of the content currently available relatively cheaply would become very expensive (because it can’t attract enough subscribers) or go away completely with a la carte pricing. It may ultimately happen, but there will be much kicking and screaming first.
A world of totally free content is fun to dream about, but...
As for making content freely available on the Internet, it’s a model that’s busted from the start, and I don’t see how it’s in the networks interest to make something more widely available via a mechanism that generates less advertising and subscriber revenue and costs them more to distribute. But for now, since the data is in and overwhelmingly people still prefer to watch TV via traditional methods – even the people who regular watch video online, not only isn’t it the highest priority for the TV world to deal with, for now, it shouldn’t be.
I think there are a lot of models that could work, but none of them involve getting ESPN, USA, TNT, TBS, MTV, AMC, etc., for free.