Saturday, December 01, 2012

Early Indications November 2012: How will TV be disrupted?

No sector has been more transformed by the internet than audience aggregators. These content companies, through various means, make money from assembling viewers, readers, and listeners for artifacts that in the past 20 years have increasingly become digital rather than analog. Whether it is Kindle with books, iTunes for music, Google news vs. newspapers, or Netflix for movies, Internet-based content has disrupted whole sectors, eliminating such brands as Borders, Newsweek, Tower Records, Blockbuster, and Virgin Megastores.

The pattern seems to be based on relative simultaneity: Columbia sold more than 100 million copies of Michael Jackson's Thriller LP/CD, but that audience doesn't all listen at the same time. The New York Times company moves many copies of its flagship newspaper, and while readers will pick it up to read their selected articles during the day it's distributed, again, the audience is asynchronous. Harry Potter books are even more distributed in time than printed news. Television, by contrast, assembles mass audiences at a particular time: more than 100 million US viewers saw the 2011 Super Bowl, the vast majority of them in real time. But: every content bundling model, from the record album to financial advising/stock purchasing to the newspaper, has come under attack in the Internet era. (University degrees might be next, a topic for another time.)

A number of signals are suggesting that TV's time of reckoning is coming. Tablet sales are soaring: 20% of US adults now own the devices only two years after launch, and the intimacy of the tablet form changes viewing habits: social interaction, for example, is facilitated in ways that traditional TV does not allow. Time shifting, whether through Hulu, BitTorrent, or DVR, is becoming predominant among those in their 20s. Games, online shopping, social networking, and other new tasks threaten to shrink the staggering five hours per day the average American spends watching TV, if Nielsen's numbers are to be believed. Bottom line: as the Wall Street Journal put it on November 30,

"Television viewership is declining across the board. Although CBS remains the most-watched network in prime time, its average overall audience of 11.5 million in that time period is down 10% in the fall season so far, compared with the same time the year before, according to Nielsen. Its audience among 18-to-49-year-olds, the demographic most prized by advertisers, has tumbled 20%."

Two questions thus emerge: what will Internet video look like in terms of markets, business models, and financial attractiveness, and how will today's incumbents respond?

I use the term "Internet video" deliberately: just as all sparrows are birds but not all birds are sparrows, television is just one of many categories of Internet video. Without the constraints of 30-minute multiples, we are seeing a proliferation of new content forms. TED talks, for example, have been viewed about a billion times, and many of those are presumably in front of room-size audiences. YouTube served eight million simultaneous streams of Felix Baumgartner's Red Bull space jump, something no earthly TV network could have done, given the global composition of the audience. Jerry Seinfeld's Web series, "Comedians in Cars Getting Coffee," focuses on exactly that scenario, but episodes are only as long as they are: 7 minutes, 13 minutes, whatever. TV ads, particularly global ones pulled out of context to fascinating effect, have long been prime YouTube material.

Going forward, every aspect of the video experience may be contested. Apple TV, whatever it turns out to be, should improve on the remote by substituting a tablet/smartphone for the dumb infrared devices we all currently use. As for the viewing device, a big smartphone is only slightly smaller than a small tablet. As the fates of Sharp, Panasonic, and Sony illustrate, global consumers aren't as infatuated with 3D television and other innovations as they are with these smaller devices: Panasonic lost $9 billion -- $9 billion -- in its last quarter. Transport, meanwhile, is "obviously" over cable, but as mobile bandwidth gets faster and faster (is 4G as fast as we can go? There's no reason to believe so), that wire infrastructure may no longer be a monopoly. Finally, content creation used to be the private province of a small number of studios, but barriers to entry have dropped so literally anyone can produce viewable material, which then of course costs precisely zero to distribute.

In the current model for TV, big audiences equate to big ad revenues and big salaries: last season Ashton Kutcher earned $24 million for his role on "Two and a Half Men." Apart from sports, however, "big" is smaller than it used to be. Because of channel proliferation, audience fragmentation, and other factors, the top-rated non-sports shows currently running -- "60 Minutes" and "NCIS" -- earned only an 8.0 and 10.5 rating respectively (depending on week), meaning 8-11% of households are watching. Compare today's picture to that of past decades, when "I Love Lucy" pulled numbers in the 60s; the farewell episode of M*A*S*H in 1983 also drew 60.2% of households.

On one hand, the fragmentation of cable that spawns such critical successes as "Mad Men," "The Sopranos," "Breaking Bad," and "Homeland" is extending into web video. That is, quality work with niche audiences might be better addressed via YouTube or other distribution models, particularly because interactive advertising can be measured so much more precisely than broadcast or even cable numbers. At the same time, the networks' cost structure has already been reset, beginning about 15 years ago: reality and other non-scripted programming proved to be a convenient way around the Hollywood writers' strike in 2007 and also kept talent costs to a minimum. Even today, such shows as American Idol, X Factor, Survivor, and Dancing with the Stars score well while being relatively cheap to produce.

The energy drink/adventure sports sector has discovered this fact of online behavior and exploited it aggressively. Ken Block's driving stunts, the aforementioned Red Bull oeuvre (including non-ad programming such as "Jackson's Hole"), and Monster (with more than 34 million views) offer programming that would be ill-suited for even niche cable channels but perfectly situated for viral distribution, repeated viewing, and powerful branding opportunities.

Because of the sheer volume of material -- 72 hours of YouTube video are uploaded every MINUTE -- viewers confront a classic long-tail scenario: every niche of interest, taste, culture, and video quality is addressed, including some that haven't been invented yet. Cable television solves this problem with brand identity: viewers who tune in to HGTV, Food Network, or Fox Soccer Channel have a pretty good idea of what they'll see. While YouTube, TED, and other outlets have adopted some variation of the "channel" philosophy, it doesn't scale. Neither does search work very well: if you didn't know what Gangnam Style was, how on earth could you phrase the search to find that video?  Social networking is, to date, the best option for finding this stuff, raising the prospect of more formal varieties of trusted filters who watch thousands of hours of bad video to snare the treasures.

To give just one example of such valuable artifacts, there are a multitude of black-and-white clips of musical, stand-up comedy, and other performances from the 1950s and '60s. Seeing Thelonius Monk on Swedish television can be wonderful, surreal, and dazzling all at the same time. Again, television, even of the cable variety, is a poor distribution mechanism for such work, but the planet's artistic inheritance is far richer than it was just a decade ago: it's one thing to dust off a Wes Montgomery LP and play it for the budding musician and something else entirely for her to see the genius himself, often explaining the music between takes. There are doubtless thousands of other examples (university lectures are one - reading Richard Feynman and seeing him are two very different experiences).

How will the incumbents respond to these and the many other changes ahead? Hulu is trying to impose cable economics on web video, and it might be able to do so for a few years. As cable subscription prices rise relentlessly, however, cord-cutting will increase, I predict. The fact that cable operators control the majority of high-speed home connections complicates this switchover somewhat, but as mentioned above, wireless broadband and tablets could lead to a different economic model in the future. At what point could AT&T/Verizon supplant Comcast?

Sports, particularly football, appear to be immune to time-shifting, so much so that multi-billion dollar bets are being made on this assumption. ESPN paid $1.1 billion in 2010 for 18 games of Monday Night Football; the rate nearly doubles, to $1.9 billion, only three years later. The Big Ten cable network (half owned by Fox) generated $7 million per school in 2009; Maryland joined the conference last month in part because the school was reportedly promised $43 million (along with all other members) in 2017.

Big Ten commissioner Jim Delany is reported to be a student of demographics, and the athletic conference's core states in the Rust Belt are indeed losing population to the American West and South. But Delany is, I believe, falling victim to linear projections of cable access fees paid by households that, in the main, are not seeing big jumps in income. As the NFL, college football, the Olympics, the World Cup, and other sports bodies continue to rely on heavier funding from their television partners, this technological sea change threatens to undermine that rising tide of non-advertising revenue. When might the golden goose stop laying so many eggs? Delany's math is reminiscent of that of the financial industry in 2005-6, when it was believed that housing prices could never go down.

What might happen next? Pay-as-you-go for cable channels may become a reality at some point, the global audiences for web video could become a factor in ways broadcast cannot reach, and new advertising technologies could alter the landscape. Might brand loyalists get more, better ads, and subsidized cable subscriptions, for example? Will overlays, quizzes, games, and even biological sensors augment the 30-second spot?

Who should we be watching for signs of business model change? Clearly the current rights holders are not standing still, and ventures such as Hulu will evolve. Given Apple's past relationships with Hollywood content companies, iTunes could turn into a new kind of cable TV experience.  Startups such as GetGlue, Showyou, Vimeo, and Yahoo's IntoNow provide a variety of social layers for video production, distribution, and consumption. Amazon has lots of digital assets, a hardware platform in the Kindle Fire, and a history of surprise moves.

Whatever its future, broadcast TV had a good run, and will of course deliver value in certain circumstances in the future. But the monopoly that television has had over video audience aggregation for the past 70 years is being broken. As a result, the possibilities for the future are both exciting (for content producers and consumers) and potentially expensive for incumbents. In any case, creativity should flourish as it has in every other technology revolution that empowered artists, whether printing, paint chemistry, or photography.