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Saturday, July 30, 2016
The future of television: Cutting the cord
THE future of television was meant to have arrived by around now, in a bloodbath worthy of the most gore-flecked scenes from “Game of Thrones”. The high cost of cable TV in America, combined with dire customer service and the rise of appealing on-demand streaming services as inexpensive substitutes, would drive millions to “cut the cord” with their cable providers. Customers would receive their TV over the internet, and pay far less for it. Many obscure channels with small audiences, meanwhile, would perish suddenly.
So, at least, many in the industry thought. Instead, the death of old television has been a slow bleed. American households have started to hack away at the cable cord, but the attrition rate is only about 1% a year. Television viewership is in decline, especially among younger viewers coveted by advertisers. Yet media firms are still raking it in, because ad rates have gone up, and the price of cable TV continues to rise every year. The use of Netflix and other streaming services has exploded—half of American households now subscribe to at least one—but usually as add-ons, not substitutes. Overall, Americans are paying more than ever for TV.
This cannot last for much longer. The fat, pricey cable bundle of 200 channels is fast becoming antiquated as slimmer streaming options emerge. Now two tech giants, Amazon and YouTube (owned by Google), as well as Hulu, a video-streaming service that is jointly owned by Disney, Fox and NBC Universal, are negotiating to offer live television over the internet by the end of the year or early next year. They would offer America’s major broadcast networks and many popular sports and entertainment channels, at a price that would cut the typical monthly bill almost in half, to $40 or $50.
That threatens to upend what was, and still is, the best business model in media history. The media conglomerates delivered a package of something for everyone—at first, at a reasonable price. The audience kept on growing along with the number of channels, which was good for advertisers, for studios that produced shows, and for sports leagues that sold broadcast rights. Cable operators and networks enjoyed gross margins of 30-60% and merrily pushed new gear, such as digital video recorders, and still more channels towards their loyal customers.
They are becoming less loyal. The pace of cord-cutting has not been as fast as many expected, but it has begun to quicken. The number of people leaving cable each year outnumbers those joining, and has done so since 2013. For a while the losses were modest, at just over half a million households in total in 2013 and 2014, out of 101m subscribers. Last year, however, traditional pay TV suddenly lost 1.1m subscribers. Lots switched to an early internet “skinny bundle” from Sling TV, a new product from Dish Network, a satellite-TV provider. Investors panicked. When Bob Iger, chief executive of Disney, acknowledged last August that people were severing the cord even with ESPN, a sports network and the firm’s most profitable media property, a media rout ensued. Since then, shares in Disney and Fox have fallen by almost 20%.
Those that do chop the cord almost never come back, joining the ranks of millennials who avoid signing up for cable in the first place, dubbed “cord-nevers” by media executives. They are lost to the world of subscription video-on-demand: Netflix, Amazon Prime video, Hulu, HBO Now and the like, services that cost around $10 to $15 a month each.
To stanch this flow, cable operators can offer “triple-play” packages that combine broadband, television and telephone service, which gives them a pricing advantage. They can also rely on older Americans. Older viewers watch more television than any other group, they watch more of it than they used to, and more are tuning in; and they are not going anywhere. Internet services may also blunder as they go into TV-streaming. An internet service from HBO, owned by Time Warner, a media conglomerate, recently suffered a blackout just as a much-anticipated episode of its “Game of Thrones” was about to begin, enraging customers. Early adopters will sign up; others will wait and see.
But over time the changes threaten to cripple several actors that now live off the big bundle: large media companies with weak programming, like Viacom (the firm may sell a large stake in its film studio to Dalian Wanda Group, a Chinese entertainment conglomerate, to raise cash); small independent channels that have benefited from being part of the “long tail”; and satellite operators, who have little to sell but TV. The winners and survivors will be media companies who provide the most “must-see” TV and the fewest unwanted channels. Coveted content will still be king, as seen in the recent sale of a niche martial-arts league for $4 billion. Cable firms can still earn their keep selling broadband internet and, perhaps, streaming services.
The clearest winners will be consumers. In 2008, cable subscribers had 129 channels to choose from, and they watched an average of 17 channels in a given week. Five years later, they had 189 channels, and were still watching only 17.5, or just under a tenth of the available offering. Their bills, unlike disposable incomes, have doubled in this century.
The fact that more TV viewers have not switched channel to a better model is mainly the result of two factors. The first is that customers are still addicted to live TV, especially sport, and fat, pricey bundles reliably give that to them. Media firms have bid up sports rights to fantastic sums. Disney’s ESPN, and TNT, owned by Time Warner, are paying a combined $24 billion for the rights to broadcast NBA basketball games for the next nine years, almost triple the amount they were paying under their former deal. The second factor is that customers have lacked reliable, cheaper options until now. That is changing with the arrival of services like Sling TV, which now has 700,000 subscribers, reckons Michael Nathanson of MoffettNathanson, a research firm. Another new “skinny” bundle, from Sony PlayStation Vue, recently passed 100,000 subscribers.
Many more may end up going to Hulu. Its old-media parents appear to have accepted the risks of disrupting the existing model in order to keep a stake in the future through younger viewers; channel negotiations are expected to go smoothly. And Hulu’s product at least continues the highly profitable concept of the bundle. One owner, NBC Universal, is owned by Comcast, a cable firm that could lose much from cord-cutting, but it has no say in the operations of Hulu, and would probably have little choice but to participate under competition terms set by the media regulator. Time Warner is also considering joining in.
Hulu is now testing channel combinations at various prices, including around $40 to $50 a month, close to similar packages from Sling TV and Sony PlayStation Vue. That would mean a slim margin, but its chief executive, Mike Hopkins, says getting people to cut the cord is all about price. It can profit from extra services, such as options to stream on multiple devices, to record and store shows in the cloud, and to subscribe to premium channels.
Amazon and YouTube are sure to generate yet more buzz, although their plans are still under wraps. Traditional players know full well that the dominant pay-TV operators of the future could well be the internet giants. New competitors will not have things all their own way. Apple failed to launch its own live TV service last year, perhaps because it could not agree with local broadcast affiliate stations on how much they should be paid for retransmitting their feeds. But the cable networks are keenly aware of what happened to the music business after Apple’s iTunes and other streaming services disaggregated the album. They will do what they can to prevent TV from being Spotified.