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To understand the future of TV, look in your pocket

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The future of TV is a hotly debated topic. And while consumption of TV content has increased (Nielsen reports that the average American watches almost 34 hours each week) in many ways TV has resisted many of the technology revolutions that transformed other industries. These include the Internet, the advent of mobile and social and the “UI/UX is everything paradigm shift.” With newcomers like Google(s goog), Apple(s aapl)  and even Intel(s intc) now looking to disrupt the status quo, how can we try to model the future?

What if I said, “Just look to your pocket”? The evolution of television parallels another industry in an eerie way: the mobile phone evolution. Hear me out:

In the early days of mobile (which was not so long ago), various device manufacturers (HTC, Motorola, Nokia) and service providers (AT&T(s t), Verizon(s vz)) tried to develop their own ecosystems around their brands. Fragmentation was the name of the game: mobile developers had to develop in Symbian, Java(s orcl), Windows(s msft) Mobile and Brew, and customize apps for different screen sizes, device features and even carriers. The carriers tried to “own” the customer and sell additional services and content, using clunky technology like WAP. This was the world before iOS (and later Android) came in to create a simpler ecosystem for developers and a great user experience for the customer.

This isn’t so different from television today: We see device manufacturers sell “connected TVs” that run their own proprietary OSes with their own customized app stores. The MSOs or multiple service operators (the operators of cable or satellite television systems), like the wireless carriers of the past, try to own the customer through “TV Everywhere” solutions that tend to be subpar. It’s unlikely that these solutions will hold in the long run.

The complexity of content

The true future of TV—a meaningful revolution—will require the integration of a great user experience with painless access to content. We’ve seen it happen before, when Apple changed the music industry with the IPod, and again when it changed the mobile industry with the iPhone (the apps were the content), and one might argue that Google did the same thing for web content and Facebook for personal content. However it’s not so easy to do that with television for the following reasons:

TV content is extremely difficult to access: Six companies (Disney(s dis), Viacom(s via), Time Warner(s twx), News Corp, CBS(s cbs)  and Comcast(s cmcsa)) control 90 percent of American media. These content owners refuse to sell content a-la-carte and force the despicable pay-TV bundles.

Obtaining content rights is extremely complicated and expensive: For example, ESPN pockets $6 per cable subscriber, regardless of whether they watch sports, which adds up to $7.2 billion a year. Even tech giants like Google and Apple will struggle to pay such amounts annually (especially as a non-R&D spend.)

Creating original content isn’t easy. It’s hit driven, it’s expensive (which explains why the less-costly reality shows and talk shows rule the airwaves), and it is built one show at a time. And, while we’ve seen quality programming developed by Netflix, Amazon, and YouTube they simply can’t compete on volume.

So how will change come about? It will happen when the content owners are forced to break their existing profitable model. This will only happen when enough people abandon expensive pay TV bundles to watch content online (a behavior termed “cord cutting”) and advertisers stop paying obscene amounts for TV ads.

For cord cutting to become mainstream there needs to be a surge of quality content available outside of pay TV (This is not happening yet: while Netflix(s nflx) and Hulu are doing well, pay TV subscriptions are not declining.)

Simultaneously, the bundling of pay TV with broadband Internet would need to be less attractive (this bundling is controlled by the MSOs who own “the last mile.”) But something will trigger it. With music the trigger was the transition from discs to MP3s and the rapid rise in piracy that allowed Apple to innovate. But the important takeaway from the iPod revolution is the reminder that when these changes do happen, they happen fast.

Consumers and MSOs will win

Ultimately everything will unify around a limited number of new underlying platforms that will serve both the UI as well as the content. These platforms will be closely integrated with mobile devices, so Google and Apple (and maybe Amazon(s amzn) or Microsoft) are well positioned to play—and someone will certainly win. The MSOs will go the way of the telecom carriers and become delivery pipes. There’s no need to feel sorry for the MSOs, though: Unlike mobile carriers their geography-based monopolies will mean they enjoy a larger share of the pie.

And consumers will win. It may take some time, but eventually they will have easy access to compelling content rolled into an amazing user experience.

Amit Karp is a senior associate and Paul Lyandres is an investor at Bessemer Venture Partners. 

14 Responses to “To understand the future of TV, look in your pocket”

  1. Simultaneously, the bundling of pay TV with broadband Internet would need to be less attractive (this bundling is controlled by the MSOs who own “the last mile.”) But something will trigger it.

    Really? And what “something” would that be? Your article doesn’t mention it at all. Unless you’re referring to original content from Netflix, but even then you acknowledge that:
    (This is not happening yet: while Netflix and Hulu are doing well, pay TV subscriptions are not declining.)
    The above is very true. Heck, even Comcast reported an increase in cable subscribers in the most recent quarter.

    There are other problems you didn’t mention:
    1) TV content isn’t fungible. You can’t replace NCIS, for example, with anything else. NCIS is NCIS, period, regardless of which medium it’s being show on. Ergo, hit shows on Netflix won’t have any effect on the demand for traditionally broadcast shows.
    2) Live sports. So far broadcasters have been using their own apps which require verification of a subscriber TV account for streaming access. Given that point #1 above applies even more strongly to sports – see what happened to the XFL as an example – there’s pretty much no way around that issue.
    3) Broadband caps, explained here: Caps limit the amount of streaming content any single internet connection can consume. Currently that’s less than 4 hours/day (on average) of HD video. Broadcast TV, OTOH, is unlimited.

    In short: there’s no way around the limitations you write of, unless a legislation forcing production entities to make their content available to anyone at market value – instead of doing exclusive deals – were to pass. In this day and age of government-by-lobbying, good luck with that.

  2. omar little

    “And consumers will win. It may take some time, but eventually they will have easy access to compelling content rolled into an amazing user experience.”

    This is nonsense. If you take out a lot of money from the content creation industry, the economic incentive to create high quality content. Consumers won’t win because the amount of high quality content will decline.

  3. Lewin Edwards

    Ugh. I’d love this to be true, but the feasibility of cord cutting finally killing the incumbent model hinges on unlimited high bandwidth Internet access through a provider who is willing to be a dumb pipe and nothing more. Unfortunately, the MSOs and wireless-only providers control all the bandwidth available to consumers, and they have a vested interest in being more than a dumb pipe.

  4. the best interface for controlling a device that’s 6ft away is by one that’s in your hand. just like the evolution of the phone led to the smart phone. the evolution of the remote will lead to a smart remote. which we already have… the smart phone! Chromecast anyone

  5. I think that revolution is fast upon us for two reasons:

    The Chromecast is set to revolutionize TV viewing forever. I used to use a Roku to access content from Netflix, Hulu Plus, and Amazon Prime (still do for the last one). It worked, and compared to using the cable box we tossed, it was pretty sweet.

    The Chromecast, however, brings the experience to a whole new level. Everyone uses their smartphones to access apps every day. Suddenly, anything you find that you want to watch can be thrown up on the TV. Navigating around Netflix and Hulu has never been quicker and easier, and I still think they have a ways to go on app design. Add a low price of $35, and anyone can get setup watching Netflix on their TV. My Mom, who is not the most technologically adept, learned how to use the Chromecast in one sitting and now uses it instead of the Roku.

    The second reason the revolution is fast upon us is the appification of TV. People may have grown used to accessing Netflix and Hulu Plus through apps, but it is only in the past year that this has started to take off with competitors. The WWE just launched their network completely outside or cable. The model they are following, which includes a 24/7 linear channel with on demand access to everything ever shown previously, all for a small monthly fee, blows away what cable channels are currently offering. It’s incredibly customer friendly precisely because it is an app and not a cable box channel.

    FX has just launched their suite of apps called FX NOW, which aside from including the latest episodes of their show, will also include every episode of the Simpsons ever aired. I think this is the first time a cable channel has purchased content specifically for it’s app. That’s a huge milestone. I expect more channels to follow suit. Everyone is going to be putting their best user experiences in their apps.

    How fast that will lead to a debundling of cable channels is debatable. Certainly HBO, which already requires an add-on fee, has a high incentive to break off from cable. But the smaller and less popular a channel is, the less likely that people are going to be willing to pay extra to watch it. It’s the big players that will have to take the first leaps.

    • I’d like to add that as far as unbundling, the premium networks like HBO and Starz would likely go first, since people already have to choose to pay for them. They would simply be cutting out the middle-man.

      The second group that will unbundle is the major sports leagues. Sports fans will generally follow the content wherever it goes. If the NBA, NHL, and MLB think they can make more money charging some $10 a month rather than every cable subscriber $.50 a month, they’ll go for it. Don’t quote me on those numbers, but you get the general idea. When the WWE Network was announced, stories quoted them as being the second most watched sports league on television. The economics are probably even better for leagues with smaller audiences.

  6. Tamatura

    Dont see much happening in cord cutting/shaving until the content creation cost is solved. The only way to monetize it is the Hollywood way. If more cord cutting happens then the cost of content for online players will increase – have to increase. So the bigger question is how does the content creator get paid for their work? IF that is solved via an alternate model – then cord cutting can happen in larger proportions. Even youtube is starting to monetize via the cable tv model ie. paid channels. This all indicates that there is still only one model – paid subscriptions per channel i.e. the cable tv model. Things like Aereo are just disrupting the way to steal content!

  7. Cable subs are not a good way to measure things, it’s a matter of inertia. A lot like fixed phone lines ,just because people have them it doesn’t mean their habits haven’t changed.

    I should point out a bunch of mistakes but i’ll just mention one fundamental error. The ones lacking scale are the US TV channels not the web players. The internet is global,got to be close to 3B users by now and with plenty of room to grow while their average income is growing at a faster pace than for the US population in % – this last part is relevant even if the service would be add supported.
    Ofc having a bunch of web players creating content doesn’t make it any better for anyone,. Every work is a monopoly and consumers would be forced to subscribe to every major content creator.
    In the end a real change can only come if regulators do their job and force all content to be easily available.
    The more likely actual change ( the shift you talk about is a long ongoing process that started long ago and if regulators don’t act the finish line is far away) is about the hardware, sooner or later glasses will gain traction and they got a huge BOM advantage over TVs. Content can change in a big way (360 movies, interactive content gaining share- as in games mostly since games are just interactive media) and content delivery would need to adapt too. That change is imminent and mostly ignored so far.