Convulsed by a virulent Digital Disruption, the Ecosystem is an ominous environment, and its inhabitants are afraid — very afraid.
No, that’s not the opening line of a creative pitch to studio Netflix for a binge-watchable original sci-fi series. As the tectonic shift to an Internet-centered, post-linear age in television advances, a real, truly anxious mood is settling over the pay TV ecosystem that media, communications and technology companies tensely cohabit.
Since the turn of the century, eight of every 10 homes has connected to the broadband Internet, enabling the disruptive rise of streaming video from pioneering Netflix and empowering a millennial vanguard of cord-shavers, cord-cutters and cord-nevers.
The uneasy mood began to really sharpen late last year, as the shift from linear TV produced a series of jarring developments on the regulatory front and in the mainstream attractiveness of OTT.
No ecosystem CEOs worth their $30 million-minimum pay will admit to it, but buffeted by change, some are feeling the chill of fear.
PLENTY TO FEAR
Not that fear isn’t rational, least of all to the lords of the digital jungle — cable operators. The Federal Communications Commission is on the verge of turning broadband into a regulated utility, a policy shift that President Obama urged in November. Alarmed by the possibility of becoming the first broadband-utility colossus, industry leader Comcast recently signaled it could walk away from a year-old, $45 billion proposal to absorb No. 2 Time Warner Cable.
In a report just last week, influential cable analyst Craig Moffett argued the FCC would use its new powers to regulate broadband pricing, crimping cable stocks.
In October, HBO went over-the-top. Pay television’s leading premium channel and change agent is aiming to reach the 10 million and rising broadband-only consumers who shun linear pay TV. CBS followed HBO’s lead a day later, introducing CBS All Access. Others have followed, and more are in the pipeline.
Then this seismic jolt in January: Disney’s ESPN, basic cable’s stickiest and most expensive network, joined the lineup of Sling TV, an upstart over-the-top offering from satellite TV provider Dish Network.
HBO and ESPN “are the two pillars of pay TV,” said Bob Bowman, CEO of Major League Baseball Advanced Media, which operates the pioneering subscription video-streaming service MLB.tv. “They have correctly determined that they need to explore options as we sit in a new world with a different generation.”
Might the ecosystem be witnessing the first meaningful sign that the cable bundle — a linchpin of television economics for two decades — is fraying? If cable’s two marquee networks are connecting directly to viewers over the Internet, Bowman said, “then I think every media company in the world has to do it.” Not everyone believes that would be positive for the ecosystem. Blared the headline on one analyst report: “An OTT Free-For-All Would Be a Mad, Mad, Mad World.”
Once the original disruptors, cable operators and programmers after two decades of booming stock growth are acutely experiencing the unsettling impact of digital disruption, a circumstance long and harshly familiar to print media and the music industry.
Indeed, every inhabitant of the television ecosystem — MVPDs, ISPs, OTTs, programmers, audience trackers, media conglomerates — sees something in this roiling period of change to fear.
There’s frothy uncertainty surrounding disruption in advertising, due to factors ranging from anachronistic audience-measurement tools to the fickle tastes of a demo whose biggest life decision at the moment is gum flavor. Even the tiniest misstep or unforeseen event can bring big peril.
A star can retire, robbing a programming giant of leverage needed in carriage talks. Think Viacom: It was already under a cloud over its programming prospects when Jon Stewart on Feb. 10 announced his leave-taking from Comedy Central’s The Daily Show With Jon Stewart sometime later this year.
For programmers, the shift to post-linear TV boils down to a stark choice: adapt or dwindle further faster. Fully-distributed networks are less fully-distributed already. As millennials cut cords to hopscotch among IP devices to watch video, cable operators are dropping lesser-watched channels. As a result, affiliate fees have slipped by a single-digit percent in two years, analysts estimate.
According to new Nielsen data, millennials are fleeing linear-TV during the current TV season at twice the pace of past years — dropping by 10.6 million from September 2014 to January.
“The change in behavior is stunning. The use of streaming and smartphones just year-on-year is double-digit increases,” Alan Wurtzel, NBCUniversal’s audience research chief, told The New York Post. “I’ve never seen that kind of change in behavior.”
Overall, primetime viewers have fled broadcast television for two straight years, down a total 12%, while cable lost 7% of its audience last year. In tandem, television advertising dropped. How much and when, if ever, will it fully recover? How much more of it will shift to IP devices? Which of their networks must content owners protect at all cost? Which are expendable? These are cold-sweat questions that content companies are asking now.
Worse, in this Golden Age of Television, programmers are drowning in quality programming, as content companies go all out to lure and retain audiences who now have a world of choices. Every network or website or movie service seems to own a tentpole series or two — the motion picture model leaping to television. Programmers may look forward to some expensive flops. (It is however, a good time for viewers, who can binge, time-shift or sprawl in front of linear TV.)
Meanwhile, competition is surfacing everywhere. Google, the gargantuan of online advertising, is installing Google Fiber, its own turbo-speed broadband service, in major cities, pressuring cable broadband to play catch-up. Now, with Verizon in its crosshairs, Google also is reportedly poised to introduce its own wireless service, leasing the networks of Verizon rivals Sprint and T-Mobile.
Google’s intent: To drive down data-plan pricing. Lower prices could spark a boom in data usage, gaining greater consumer exposure to ads on Google. Not only could pricing disruptions potentially harm Verizon’s core business. At the same time, Google’s move also may complicate Verizon’s strategy to dominate mobile video and wrest a chunk of the online ad market now dominated by the search giant.
“There’s a fear of the unknown,” said Edward Bleier, a senior industry consultant and the retired executive who ran the Warner Bros. pay TV division in the 1980s and 1990s. “No one can analyze the changing developments and feel fairly confident that they are right — the fear is not being sure you have the right take on what will happen.”
For years, digital disruption risks have been spelled out in clear language in many annual reports, including 21st Century Fox’s: Digital technology and “enhanced Internet capabilities and other new media may reduce television viewership, the demand for DVDs and Blu-rays and the desire to see motion pictures in theaters. Failure to effectively anticipate or adapt to emerging technologies or changes in consumer behavior could have an adverse effect on our business.”
Yet the company still hasn’t figured out how to extract full value from online viewing of the company’s content. “We’ve got to catch up … in our ability to figure how we monetize and capture the value inherit in that viewership,” 21st Century Fox chairman and CEO Rupert Murdoch acknowledged during last year’s third-quarter earnings call.
‘EVERYWHERE’ GETS NOWHERE
History shows that incumbents really don’t react to disruptive products and services until it’s too late. That’s because either the market is too small or there’s a risk of cannibalizing one’s own business.
Liberty Media chairman John Malone, one of cable’s most seasoned and successful investors, has subtly chastised U.S. cable operators and programmers for not getting TV Everywhere together fast enough. “The cable industry has been very slow [which has] created a window of opportunity to the over the top guys,” he told Reuters, referring to Internet-delivered TV services such as Netflix.
Bolstering the point in an earnings call last week with analysts, Discovery Communications CEO David Zaslav warned that further delay of TV Everywhere by cable would force programmers to go OTT. “It will require all of us to go directly to the consumer, because the cable guys aren’t getting it done,” he said.
In addresses to investment analysts, Time Warner CEO Jeff Bewkes has cited a tendency by media executives to avoid being a first mover because of the risk of embarrassment. In contrast, he explained, Time Warner has moved decisively to exploit its content inside the ecosystem (on pay TV and as a supplier to broadcasters) and outside (over the Internet).
“The more options you give audiences to access video content, the greater the consumption,” Bewkes told one Wall Street gathering. “Rather than merely shifting share from one platform to another, we continue to see growth in the video universe, and that’s why we’re convinced we can effectively pursue growth in both areas.”
Time Warner’s Bewkes knows a thing or two about digital disruption and may be one of the ecosystem’s braver CEOs, having survived the corporate near-death experience of the Time Warner- AOL combination.
At Disney, fear of the consequences of inaction spurred the company to be a first mover in embracing Internet video. Also credit Disney chairman and CEO Robert Iger, who forged close ties with the late Steve Jobs of Apple. Jobs was Disney’s largest single shareholder as a result of selling Pixar Animation to the media giant. Talk about a model relationship. Together, Iger and Jobs virtually jump-started the 2.0 digital revolution by jointly introducing Apple’s paradigm-shifting video iPod with $1.99 Disney-owned TV hits at iTunes. Iger’s peers privately scoffed and accused him of harming television revenue streams.
It shouldn’t be surprising that TV executives would scoff at the notion that they are fearful, particularly based on the last few years of stock performance. And gauging the true mood of an industry at its inflection point is tricky business. In the mid-1990s, who knew DVDs would supplant videocassettes, ushering in an unprecedented period of bottom-line enrichment and value-creation in Hollywood? But divided into warring format factions, Hollywood certainly wasn’t initially in the buoyant mood that prevailed when the DVD gusher materialized.
In 2000, major music labels did recognize the existential threat of Napster. Still, it was too late to gain command of the disruptive forces Napster unleashed, and the music industry will never be the same. Then there’s the risk of misinterpreting a true shift. When AOL acquired Time Warner in 2000, the combination was hailed as fully realized convergence. In truth, the monumentally ill-fated transaction marked the bust of Internet 1.0.
If any player recognizes a tectonic shift, it’s HBO. Expanding the premium channel’s audience beyond cable “is the most exciting inflection point in HBO history,” CEO Richard Plepler declared in announcing cable-untethered HBO. “Just the threat of going over-the-top gives us additional leverage.”
How might streaming HBO impact Comcast, Verizon, DirecTV and the rest of the herd of pay TV giants? A recent Parks Associates survey found that 17% of U.S. households likely would subscribe to the standalone streaming network. Of the respondents planning to subscribe, half indicated they would drop pay TV for HBO over-the-top.
The mood of pay TV and broadcast executives would brighten considerably with audience-tracking tools suited to post-linear TV. If there’s one consensus in the ecosystem, it is that viewership isn’t measured across the universe of platforms and digital devices. The vast majority of the missing viewers are apparently millennials.
Not surprisingly, Nielsen, the dominant TV ratings service, catches plenty of flack. The ecosystem took note in January when CNBC suddenly dumped Nielsen and hired a little-known obscure market researcher, Cogent Reports, to track its daytime audiences.
“If you counted all the viewing that we know that’s not counted the traditional way” by Nielsen for The CW network, “it’s up 10%” from reported ratings, Bewkes of Time Warner, part owner of the network, recently told Wall Street analysts. Alluding to time-shifted viewing and OTT audiences, CBS CEO Leslie Moonves (the other part owner of The CW) has declared Nielsen’s overnight ratings as “basically worthless.”
But broader, more-accurate audience tracking won’t necessarily restore confidence. In fact, media executives will face decisions fraught with risk of economic miscalculation. Should they charge advertisers more to reach young-skewing mobile and digital-device audiences, a coveted demo whose preferred platforms are more dynamic? Would advertisers, in turn, give a haircut to ad rates for older-skewing linear-TV audiences? Or should the various ratings be rolled into one, with advertising rates reflecting the quality of the overall audience?
It’s an “issue that realistically we are very much in the midst of evaluating and analyzing,” 21st Century Fox chief operating officer Chase Carey said on a recent quarterly earnings call with analysts.
With indications that the cable bundle could come under greater pressure, media companies must swiftly begin contingency planning. For two decades now, pay TV has expanded its bundles and justified annual rate hikes of 4% to 5% by citing the surging number of channels. Per Nielsen, the average pay TV household has 190 channels, only 14, 15 or 17 of which are watched regularly in any given home. Meanwhile, the average monthly cable bill of about $64.41 a month, according to the FCC, is triple the amount of two decades ago, when the agency began tracking the rates. Pay TV distributors have responded with slimmed-down bundles, but so far that hasn’t been enough to staunch subscriber declines.
Consumer choice, made possible by technology, is fueling the rapid changes in the environment. Pay TV operators are certain to be more concerned over consumers’ growing appetite for a la carte channels, from which consumers could cobble their own personalized bundles. Some 41% of respondents surveyed recently by PricewaterhouseCoopers said they’d prefer the option. Given the growing number of OTT choices, personalized a la carte bundles seem to be a phenomenon on the near horizon.
In the end, though, Darwinism doesn’t seem to apply to television’s evolution. Broadcast, thought surely to be left for dead as cable emerged, has continued to thrive alongside cable, which has remained dominant next to satellite-TV, which has remained aloft since households began to plug into telecom television. (Q: What’s the state flower of West Virginia? A: Satellite dish)
For now and the foreseeable future, television will continue to thrive on the incumbent economic model of ads, retransmission fees and sizeable slices of the nation’s monthly cable subscription. Even as old-school executives like Bewkes of Time Warner and Moonves of CBS move first to embrace OTT, they remain among the most ardent defenders of the status quo.
But in repositioning their companies, and becoming examples to other cohabitants of the ecosystem, they are wisely fearful enough.