The Digital TV Endgame: 10-Year Transition to All Things IP
While Internet TV is already technically feasible, commercial challenges are keeping it from becoming a mass-market reality. Services like Hulu, YouTube and Netflix are helping turn online video into a viable substitute for broadcast television, but the Internet still has a long way to go. Industry insiders often talk about being four years into a 10-year transition, so what will the next six years look like as online distribution increasingly eats away at the broadcast TV market? Who will be the winners and losers in this new world? What technology needs to be invented, what deals need to be struck, and what existing commercial relationships need to be upended?
Then and Now
Everyone remembers how Napster sparked a collision between the music industry and the Internet that forever changed how people consume music. Buying a physical CD in-store quickly became a thing of the past, and today we stream music on-demand, over the air, from digital services like Spotify or Songza. A similar transition is happening in television. Platforms like Hulu and Roku are melding video with online distribution, disrupting traditional cable/broadcast consumption and making it faster and more convenient than ever before for viewers to watch their favorite shows. Most importantly, consumers are increasingly taking advantage of these new platforms. In the last 12 months, 1.8 million Americans have cut the cord and unsubscribed from cable TV, according to a recent study by research firm SNL Kagan. This represents a 3.1 percent drop in cable subscribers, and the trend continues to gain momentum despite the limited availability of premium sports or prime-time entertainment shows on digital platforms. As more of this content becomes available online, expect to see cable subscriber losses accelerate as consumers enjoy the benefits of a digital user experience combined with full access to their favorite shows and sports.
But it’s not just a question of content availability. Online distribution actually represents a superior product from a user-experience standpoint. With content parity, there seems little doubt users would migrate to digital TV even faster. Traditionally, television has been a broadcast (one-to-many) medium. A station broadcasts a single show, at a specific time, with all viewers seeing the same content and ads simultaneously. By contrast, online video is a one-to-one medium. Each user connects individually; pulling in the specific content they want, where they want, when they want. Digital platforms enjoy far richer user interfaces, robust search, on-demand content accessibility and multi-device on-the-go access. As well as personalizing content, advertisers are also embracing this one-to-one relationship with viewers. This new, individualized experience enables ads to be delivered based on user preferences, search history and interests, enabling advertisers to reach consumers in a far more targeted (and hence relevant/effective) way. Eventually, this may even reduce the numbers of ads viewers are subjected to, as advertisers get more efficient at targeting only the most relevant audiences for their products. All this was impossible in the old broadcast world.
With so many benefits to Internet delivery, one would wonder why all TV isn’t delivered this way. The challenge has far less to do with technology, and far more to do with existing business relationships and commercial interests. Existing broadcasters, cable companies and content producers enjoy the status quo … the TV business is good, why rock the boat? Affiliate fees (the revenue share on viewer subscriptions paid by cable companies to the content owners) are a $32 billion income source, and are the primary revenue stream that funds TV content development. Thanks to bundling, content owners like Disney and Viacom are able to make more money than if consumers cherry-picked individual channels or shows. The TV industry, at all costs, wants to avoid a repeat of the iTunes model — one in which consumers can purchase individual songs a la carte, eliminating the need to purchase the full album.
Additionally, because of the scale of these relationships, it’s almost impossible for new companies to enter the market with competing services. Each year, DirecTV pays the NFL $1 billion for exclusive rights needed for its NFL Sunday Ticket package. But, with more than 20 million subscribers and $30 billion of annual revenue, it’s a price DirecTV can afford to keep its subscribers loyal. The fact that it also erects a substantial barrier to entry for any new digital-MSO competitor is a much-appreciated secondary consequence. Even if a startup could create a more intuitive, on-demand IP-based service, would subscribers migrate if the content they wanted were not available? A handful of digital-native companies have the deep pockets needed to take the plunge and buy the content rights needed, but they will face many years of substantial losses on content as they build their subscriber bases.
The prize will be substantial for the company that can overcome these challenges and launch a successful IP television business. By combining the world’s best content with an intuitive digital user experience, companies will bring television into the 21st century. In the last month alone, we’ve seen more than a dozen major steps taken by large media companies to fulfill this vision:
- Time Warner Cable just announced that over the next year it would be eliminating the need for its 15 million deployed set-top-boxes to move toward a software solution that can be licensed to third-party devices like Roku and Xbox.
- ESPN president John Skipper was quoted as being open to deals with IP video services — so long as they bought/paid for packages comparable to those offered by traditional MSOs.
- Companies like Intel, Apple and Google are actively working on connected-TV offerings, in addition to their current robust set-top boxes. These companies not only have the best resources to produce these smart devices, but also have the user base and, most importantly, the money to make exclusive partnerships happen.
- Dish recently announced Dish Digital, an IP-only subscription package, similar to Aereo, Netflix and Hulu, that essentially competes against its core business. A bold/risky yet perhaps insightful move in understanding how real this shift to digital consumption truly is.
Each week, there appears to be a new story hitting the press about the ways in which the Internet is reshaping the future of television; making it one of the most exciting, but potentially challenging, periods in the history of the TV industry. Unlike music and newspapers before it, the television industry has been able to benefit from the lessons learned by those who faced the Internet challenge. While those lessons from history may ease the transition, they don’t lessen the deep impact that IP distribution is having. TV networks are faced with the challenge of adapting to new ways of distributing content to their consumers and building new, more direct relationships with their viewers; all without destroying strategic business relationships that provide the essential revenue they need to operate and invest in new content development. While this challenge is no doubt fraught with risk and complexity, the outcome at this point seems inevitable. Consumers want the benefit of access to content on demand anytime and anywhere, advertisers value the precision targeting and measurement of digital, and even MSOs are beginning to see the benefit of delivering more interactive, engaging experiences to their subscribers. The digital endgame has taken a long time to arrive, but it’s now closer to a reality than ever before.
Mark Trefgarne is chief executive officer and co-founder of LiveRail.