The first wave of commercialization on the Internet had a tremendous impact on our lives and has disrupted most — if not all — industry value chains. The print industry was in the eye of the storm, with decline in readers and advertising budgets forcing many major magazines and newspapers to shut down, while the survivors continue to scramble to deal with the disruption. The primary reasons for the debacle of the print industry were:
- High fixed cost structures left incumbents unable to match the niche segmentation requirement and accountability benefits of online advertising
- Professional publishers denied consumers’ appetite for short form and user-generated content
- High debt loads on the legacy businesses created an inability to cannibalize core revenues
Content was still in demand, of course, but consumers were increasingly turning to blogs and websites for access to on-demand, personalized information. Soon websites from iVillage, WebMD and CNET to the Huffington Post became household names, not to mention lucrative business models and attractive acquisition targets for the likes of AOL.
But print media is only one example of the inevitable generational shift that is unfolding in the way we consume content. It is more than a trend; it is a fundamental change in consumer behavior that will impact businesses across all industries. The next frontier is TV. But will the disruption in the TV world be similar or different than the downslide of print media?
A 2010 Forrester study showed that for the first time, Americans now spend as much time on the Internet as they do in front of the TV. Is it inevitable that like print media, consumers will turn to the Internet for their TV and video content and eventually drain the profits from TV’s ad-driven business model? According to Pew’s annual State of the Media report, local TV news is still the No. 1 news source for the majority of people, and it still leads in revenues. The Web came in second. While safe for now, the TV industry is on high alert, dragging its feet, but substantially better prepared to protect its turf than its print brethren were.
It is now widely accepted by the major industry stakeholders, content owners, MSOs, CE manufacturers and new startups that the following trends are unavoidable:
- Consumers will demand linear and on demand, short-form and user generated videos, to be viewed anytime, anywhere and on multiple devices. I believe that companies that build models to meet that demand will win. Those that deny it will go on life support.
- TV rooms in homes will have multiple screens running simultaneously, presenting a much better form factor to interface with the TV set than the traditional remote control. Most new TV-viewing devices will be Internet connected in 10 years.
- A substantial percentage of programming will have on demand, time shifted and interactive capabilities. New formats of programming with embedded interactive applications will emerge, and social TV will take off.
- Advertising will be targeted and personalized, at the individual and household levels, using legacy data from the settop box as well as ongoing rich data being generated every day, unless regulators step in to over restrict that. Smart marketers are already challenging the convention of TV time buying by demanding the same accountability that they are getting in their online buys.
This is going to be a much tougher fight than the last round of disruption, and here’s why:
- The stakes are enormous. Both in capitalizing on new opportunities (e.g., building high margin, recurring service revenues for the CE manufacturers), as well as protecting legacy lucrative revenues (e.g., CATV subscriptions).
- Content owners are positioned to benefit. The distribution fight emerging between the MSOs, IPTV service providers and over-the-top newcomers is poised to benefit content owners. While they might facilitate the newcomers’ emergence, make no mistake, they will ultimately require payment for viewing their content. The more competition emerges among the distributors of content, the better the programmers’ negotiating position will be. They also stand to potentially build direct relationships with consumers through the interactive programming features. This will strengthen their position even further, particularly as they start generating direct billing (e.g., the iTunes model). While quality content will continue to be king, its owners are nevertheless worried about piracy and the loss of viewing time to free content. Content owners with the most to lose, however, are those with low ratings and viewers today, heavily relying on the sacred “bundling” distribution structure of the CATV industry. On-demand viewing will severely challenge the bundling model.
- MSOs are frienemies. The MSOs are everyone’s “friend wannabe” and simultaneously “enemy No. 1.” Today, they hold the key to the house through the coax cable. In addition, they have many weapons in storage, including the historical viewing habits data, the connectivity business that will continue to thrive as the over-the-top vendors grow, and most importantly, the substantial checks they send to the programmers every month. But whereby the old print industry went on the defensive of their legacy business in the 90s, and ultimately lost to consumer preferences, the MSOs are pursuing a dual strategy of protecting their turf while simultaneously aggressively pursuing new opportunities such as buying and owning traditional content (Comcast-NBC) as well as emerging interactive content (Comcast-Daily Candy), using set-top data for targetable advertising, and promoting TV everywhere with tiered pricing. In other words, they are hedging their bets across the board in the event their tight grip is loosened.
- TV Manufacturers See Opportunity with Embedded Software. TV manufacturers have been fighting low margin business models for decades and finally see an opportunity to build recurring, more profitable business models by bundling Internet services onto the devices. But if the PC industry provides any guidance, one can conclude that this strategy will be very tough to pull off unless they actually decide to own and operate the content and service companies. Contrary to the MSOs, this will be a fundamental culture shock for the CE industry.
- New Entrants Ignition for the Entire Disruption. These new entrants range from companies (i.) providing the physical bridge between the Internet and the TV set to (ii.) those providing navigation portals, (iii.) to those offering overlay services to enable interactivity, consumption and payment, and (iv.) to those who will own and provide the content. These include tech giants as well as startups that VCs like me are looking to back. The TV industry is historically known for having an extremely high barrier to entry, but tech giants including Google, Apple and Netflix have positioned themselves to pose real threats to industry incumbents. Netflix, once an unknown upstart, successfully displaced well-known players such as Blockbuster in an already crowded and established market. The company launched in a downturn economy, stayed dormant for some time and then transformed into one of the emerging on-demand media giants. It is a fixture in the mail, online and through mobile channels. Netflix now has as many subscribers in the U.S. as Comcast does.
The question is not if a market disruption is looming. It is. The question is who will lead the charge and end up on top? Will the MSOs be able to innovate and keep consumers tuning in on their terms? Will the digital media houses continue successfully on their transition into the market? Or will smaller players find a way to fill the gap and create the next generation dynasty?
My bet is on companies that will embrace rather than fight the trends, control at least one end of the value chain (content or consumer interface) and build sticky or proprietary assets such as viewing data and recommendation engines, billing or storage of personal content. Only time will tell, but one thing is for sure, we’ll all be tuning in (on multiple devices) to find out.
Habib Kairouz is a managing partner of Rho Capital Partners and Rho Ventures as well as a member of the Investment Committees of Rho Canada and Rho Fund Investors.