Blog Post

Back to the Future… for Broadcast TV

By Robert Young

Back in the 1970’s, the television industry began a long period of market realignment that was caused by the introduction of a disruptive innovation called cable TV. After decades of market incursion, cable’s impact on the TV landscape is now complete and its disruptive effect has reached its peak. The result is the emergence of hundreds of cable channels that now account for more than half of our total viewing time.

This realignment of viewer attention has been at the expense of the major broadcast networks (ABC, NBC, CBS and FOX), whose own collective share has declined from total domination of the TV screen to about 45% of viewership. Now, as the foundation of the television industry begins to tremble and crack again, this time from the disruptive forces of the Internet, the TV landscape is about to experience another tectonic shift. But in an ironic twist, a significant share of the TV industry is likely to unwind itself almost back to the days before cable, for reasons that will seem counterintuitive.

Five years from now, the TV market will no longer be segmented solely by major broadcast network vs. cable network viewership. Instead, the market will be further subdivided among viewers of linear broadcast programming vs. that of non-linear on-demand formats. Moreover, the on-demand segment will account for a steadily increasing share of total viewership. On the flip side, it’s equally important to note that the segment with traditional linear/broadcast programming (while declining) will continue to remain alive with its own significant share for quite some time. That said, within this linear/broadcast segment there will be a mini-disruption in the near term. To be specific, it is likely that most of the hundreds of channels we get today via our cable & satellite subscriptions will disappear and there will be only 10 to 20 “broadcast channels” left standing. Here’s why…

As just mentioned, overall viewership of linear/ broadcast programming will steadily decline. Such shifts in viewing patterns will cause collateral damage… that’s obvious, but here’s what may not be so obvious. The players that will get hit first and hardest will be the weakest of the cable channels. In other words, as on-demand programming takes share away from linear broadcast, it will be at the expense of all those niche-oriented channels that came into existence over the past few decades with the advent of cable… not the major broadcast & cable networks. These niche cable networks, many of which are barely treading water now, cannot afford to lose viewers for their linear/broadcast channels. If and when they do, it is highly likely that they will not be able to continue/renew their carriage on cable & satellite systems. The result: a steady procession of cable channels will start to disappear over time, at a rate that will be directly correlated to the increasing share of on-demand viewership. And the cycle will be self-fulfilling… as more and more channels go off-the-air, the lack of programming choice on broadcast will drive even more viewers to on-demand venues. And going back to my reference earlier of an “ironic twist”, the major broadcast networks will once again come to dominate the share of the linear programming schedule.

Now, this does not necessarily mean that all these cable networks will go completely out of business. Rather, many of them will be able to restructure and/or downsize, transitioning to a purely on-demand format, mostly via the Internet. The ones that already have relatively strong brands catering to specific niche audiences are the most likely to survive the transition. Even so, the shift will be painful and somewhat equivalent to a newspaper or a magazine having to give up its print distribution.

The disappearance of a large swath of cable channels will also have the secondary effect of disrupting the underlying business model of the cable & satellite providers. As cable channels are forced to shift away from linear programming, the only way cablecos will be able to preserve their content offerings will be through video-on-demand relationships. Without attractive VOD solutions, the cablecos will lose their content partnerships to the highly cost-effective and open Internet (which will be their major competitor regardless). This explains why companies like Comcast have been so aggressively pushing and deploying their VOD systems in the past year. Also noteworthy is that the changing landscape will also make the cablecos totally dependent on the major broadcast networks for their linear programming channels. Given all that, the business models of the cable/satellite providers will be subject to some very significant changes as their subscription model based on bundling channels comes under attack.

If the scenario outlined above proves to be a reasonable forecast of the future, the other set of players who are ideally positioned to win are the Internet TV ventures like Veoh and Brightcove. Unlike cable/satellite, they are not burdened with any market cannibalization or legacy programming issues. So with the freedom and ability to focus exclusively on the rapidly emerging on-demand segment of the market, particularly for branded programmers who cater to niche audiences, these startups can quickly become the lifeboats for sinking ships.

Robert Young is a serial entrepreneur who played a major role in the invention & commercialization of the world’s first consumer ISP, Internet advertising (pay-per-click ads), free email, and digital media superdistribution.

13 Responses to “Back to the Future… for Broadcast TV”

  1. Jesse Kopelman

    “Jesse, they can’t compete already, because as a practical matter, you can’t watch internet vod on your tv as a comcast subscriber.”

    What are you talking about? I’ve watched streaming Internet video over my Comcast account. It was of comparable quality to non-Internet VOD straight from Comcast. Yes, it was on my computer and not on my TV, but that is the fault of Comcast’s feature-poor implementation of the Motorola STB and has nothing to do with Net Neutrality. The idea that packet prioritization is required to do quality video is a lie.

  2. ncryptonite

    Well seems to me that people don’t have facts and figures always handy to provide when they predict how one or the other of the several choices being put forth in terms of content distribution is being discussed.
    One should note that the major costs for Cable companies was setting up the pipes initially. The Comcasts and the Time Warners of the world did not become large from the get go but were cobbled together to become what they are. As a result they carry legacy pipes that use different technologies deployed at different times and as with any business, they are trying to maximize profits at all costs.
    It should also be noted that offering VOD/MOD is a marginal cost to the existing cable behemoths and when you look at the financial statements, the revenue they generate account for less than 4% of their total revenue.
    TV over the Internet in the US is if not 10 years away probably several years away and for the average viewer, watching shows on the Computer is still not going to be the apt choice.
    The hype sorrounding Digital Homes ( Intel’s mantra) etc shall contineu to remain hype and or just a niche. For the average Joe, watching a Denver Broncos or a Yankees game or the next American Idol or HBO’s award winning shows will most likely remain on the newly bought 40 plus inch HDTV. If and when Internet streaming is reliable, fast, and effortless for use we may see a marginal shift happening.
    Until the various open ended technology questions are answered along with a true desire amongst the incumbents to provide choice to the consumers, we shall see niche markets for everything that is being thrown out there.
    With cheap money available the hope is one or a few of these will stick to the wall.

  3. Pretty bold. But highly unlikely, not just because of the time frame.

    Cable is not broadcast. If you look at the balance sheets of those tiny cable channels, it really depends on when they did launch. As a rule of thumb: the older the network, the higher it’s share from the subscriber fees. Which means: real viewership is important. But not that important. As ad revenues are dwarfed by the fees you get from the program packages the MSOs are selling …

    read more

  4. ecarr

    I would assume the smaller content channels that are being pressured today are quite aware of this industry shift and would invest most aggressively in new distribution and business models. Many of these niche focused content sources are probably going to be better off in the Internet world given the ease of distribution and ability to better target their micro customer segments. Marketing and branding will become much more important as leveraging social networks around niche content becomes critical for survival and growth.

    End of day, content will always be king. Linear / on-demand viewing is a big shift in the way content will be viewed, but it is still just a change in content distribution. Location, device and time shifting will make relevant, strong content more appealing in more places with more devices.

    The bigger question is where will the revenue models be going. Subscription vs. pay per vs. advertising vs. mix. And how does that model differ if you are talking a major vs. micro network. Traditional commercial driven networks are taking a hit in ad $s …

  5. The article is rather obvious and not a little conservative. If you had said that on-demand would account for more than 50% of all viewing within 5 years, then that would still have been a fairly conservative viewpoint (at least within this corner of the blogosphere). Perhaps it’s just how you categorise it, is viewing on a TiVo/Slingbox considered on-demand?
    I think that within a fairly short period of time every major station will be offering a ‘build your own schedule’ package, or perhaps the channel to market will change to be through Yahoo , iTunes or similar.
    The challenge for the major broadcasters is how to make the transition while still retaining some of the advertising revenue. IPTV (i.e. streamed) is not an effective way to distribute content (do I need to spell it out?) and the public have already shown their preference for the torrent approach.

  6. Jesse, they can’t compete already, because as a practical matter, you can’t watch internet vod on your tv as a comcast subscriber. So where comcast may go the route of locking your choices down (as they have always done), the rbocs may go the opposite way and open your choices up, and allow you to watch internet vod on your tv. Net neutrality prevents that from happening.

    To Marlin, I think the vast majority of consumers are going to be watching their content on their tvs for a long time to come. You and I may watch shows on our phones or pdas or ipods, but most people just want to sit down on their couch and watch a show.

  7. Jesse Kopelman

    “me” has a good, if completely backwards, point. Without Net Neutrality, what’s to stop the Comcasts of the world from throttling down the service of Internet based VOD services so that they cannot effectively compete with the cablecos’ own offerings? Net Neutrality must not be ignored in this discussion.

  8. What you fail to take into account is that the changing architecture will also bring about a fundamental shift in the cost to broadcast programming. When it is 10,000 times cheaper to multicast an SDTV source on the Internet compared to the current ways, the break-even point of these small cable channels becomes comparitively low. Broadcast becomes a much more economically viable alternative to on-demand, and so the emergence of broadcast companies that specialize in distributing indepedently created content will thrive.

    This change in economic factors could easily flip the situation posed by Robert Young upside down, and you could see hundreds of thousands of niche broadcasters, with each subscriber building their own channel list based on their interests.

    Granted, transmission is not usually the biggest expense for a broadcaster, but for the smaller broadcaster it is undoubtably a bigger percentage. With the playing field leveled on tranmission, the cost of creating the content and marketing it will probably be the main expense. As a result, we might see some decoupling of the content creators from the distributors/broadcasters.

  9. More to Robert Young’s point (because my previous post was focused on answering “me” instead of focusing on the original blog post) as those marginal cable channels are pressured, I believe that they will turn to the source of their demise, online distributors like Veoh, Brightcove, Akimbo and others.

    Wouldn’t it be interesting if, say, Current, shut down its cable tv operations, focused on being an online video source, and saw its revenues jump?

  10. Sorry “me” but I have to disagree. Where will consumers watch this content? On whatever display device they choose, whichever they deem is most appropriate to the content they’re consuming.

    I don’t know how long the traditional television hardware we’ve all grown up with will survive as a viable product. First adopters out there are already adapted to switching between watching video from the Internet or video from their cable/satellite or video from their DVR or video from their game system. I believe we’re entering the age of the generalized HD display, switched to whichever video source the end user wants, and the generalized portable display, similarly switched, or loaded for on-the-go viewing.

    The lack of net neutrality would have very interesting effects on the landscape, given the propensity of the ‘net to route around whatever is viewed as an obstacle. I posit that pricing differentials brought about by different deals between content providers and pipe owners (fictitious example: $.99 iTunes downloads for Cox subscribers, $1.05 for Comcast subs because Comcast has a relationship with Rhapsody) would prompt sophisticated end users to route whomever owns the pipe coming into their home, in an attempt to get the best price per gig of content. They will not keep their techniques to themselves.

    I can’t see this squaring with any interpretation of the DMCA.

  11. This is why ‘net neutrality’ is so bad- if this comes to pass, how are you going to watch those internet only channels- on your computer? No, on your tv, through the phone lines. If the internet tv providers can’t cut deals with the rbocs to get prioritized and into the rbocs set top boxes, they will not make it.

  12. E-mon

    Interesting. Good points, but long predicted. As with VoIP, this will take 5 years longer than anyone thinks. Control of the pipes & politicians still matters. VoIP has yet to take down any RBOCs, but they howl at times when it comes close to protected revenue streams.

    Net neutrality is the debate over what that control means in a non-regulated world. Neither of the upstarts have any political swag, but obviously can attract silicon valley attention & money b/c its the “next thing.” As to sinking ships, where’s the numbers? Nothing I see shows hulls soon to be overwhelmed by tides of innovation.