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January 18, 2013

Thought Leadership for the Wireless Industry
Hello all,
There are many who predict that TV is the next industry to be "disrupted". Certainly there has been a proliferation of over-the-top solutions, expansion of content to mobile devices, and attempts to modernize the user interface. And of course there is ongoing speculation with regards to Apple's next move.

But I believe it is likelier that the current framework is likelier to be complemented, rather than disrupted, in the near- to medium- term. Rights issues and money flows are very different in TV than in other industries in digital media that have been 'disrupted'. Cable and satellite providers and other network operators such as Verizon and AT&T will have to adapt and evolve, but they continue to be in a strong position. See my full column, below.

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TV Will Be Complemented, Not Disrupted  
There has been a lot of discussion about the future of television given the plethora of over-the-top options such as Netflix and Amazon, plus the prognostications of Apple's next move in the TV business. Television might be next in line to be "disrupted", since many cable subscribers are not enamored with the rate structure, forced bundling, and aspects of the user experience. I believe that a major disruption to the current content delivery model for TV (mainly cable/satellite, in 85% of homes) - a la cord cutting, or like iTunes disrupted the music business - is going to be a lot harder than many people think, and is unlikely in the near to medium term. It is likelier that OTT, mobile devices, and an evolving mindset with regards to digital rights will complement today's structure. "TV Everywhere" will come to mean the ability to watch what, when, where, and on the device you want, rather than a wholesale reshaping of the current distribution structure or money flows. The playbook for TV and premium video content will be very different than what we've seen with music, print journalism (magazines, newspapers), and other digital media.


Cable Is Not 'The Villain'


People love complaining about their escalating cable bills, but they fail to understand that this is primarily the downstream result of significant increases in rights fees for programming such as live sports, and the increases in per-subscriber fees being charged to the cable companies by popular networks such as ESPN. When you read about the NFL negotiating a new long-term TV contract for nearly double the price of the last one, this will naturally be reflected in higher cable bills, more expensive ad rates, and the lower likelihood of an over-the-top option. This is why you were able to watch

every event, of the Summer Olympics, live, on your iPad but when it came to the big screen in your family room, NBC, which had paid billions for the broadcast rights, still got to dictate the viewing terms.     

Another good example here is HBO. Good content costs a lot of money to produce. This is why, despite the "Take My Money HBO" petition that garnered nearly 200,000 signatures, HBO, which has 30 million subscribers, is not prepared to depart from the cable distribution model. Instead, it is leveraging the cable relationship and the explosion of mobile devices to give subscribers more for their money, in the form of the free and fabulous HBO GO app.


Yes, the number of "over-the-top" options continues to multiply: Netflix, Amazon Prime/Kindle, Apple TV, Hulu, Roku, Boxee, Redbox (and it's recent deal with Verizon), streaming content that can be accessed from Blue Ray players and game consoles, and even live TV options for mobile devices such as Aereo. But each of these alternatives involves some major compromise when compared to the "all you can eat", or "bundled" option of cable. Going OTT means giving up live sports, news, and a good bit of the most popular content, especially at the time of its original airing. Even for consumers making the OTT commitment, the choice of which option involves a mind-boggling array of check-boxes: Netflix has this movie but Amazon has that one. You can watch recent episodes of X show on Hulu but not Y show. Major League Baseball's online and mobile options are different than the NFL's or the NHL's. And so on.


Those looking for a la carte options from cable need to both do the math and also be more cognizant about what's happening downstream. Approximately half of the $80 average cable bill goes to the content owners (media companies such as Viacom and NBC Universal). So if you were to think of a reasonable a la carte fee that you might pay for your preferred "package" of basic and premium channels, plus fees for some individual shows or movies...you'd get to $40 pretty quickly. Additionally, for those who like to vilify the cable companies, it is actually some of the media companies who prevent the cable companies to "unbundle". A terrific article in November's

The Atlantic used the example of Viacom requiring the cable companies to take the less popular MTV2 in order to be able to carry Comedy Central. Time Warner and Cablevision have both, recently, fought fierce and highly public battles with media companies over escalating per-subscriber fees and bundling and, essentially, lost. Which means those fees will be passed down, at least in part, to subscribers.  

For those who think that this piece has so far read like a shill for the cablecos, I'd be the first to point out that they still engage in "Ticketmaster"-esque practices guaranteed to annoy customers. Such as gaming the price of its services in a way that discourages the purchase of broadband on an unbundled basis. Or charging $7.00/month for a cable modem, which is sort of like the oil company charging you for the burner to deliver heat. Expect even more behavior like this, such as more stringent data caps for broadband service, so as to discourage going OTT.  


So, What's Next?


Even with the threat of OTT, cable operators have been reluctant to reduce fees, given escalating content and network investment costs. They have boosted broadband speeds, improved DVR functionality, and have vastly increased their OnDemand offerings (much of it free). They have also launched - at no additional charge - terrific mobile applications, which allow subscribers to program their DVRs remotely and view much of the OnDemand library on any mobile device. In fact, due to the quirks of content rights, apps such as HBO GO offer subscribers a much larger library of content on the app than they do on their home TV.


As a result, much of the effort over the next few years will be focused on improving the experience in and complementing the 'living room', rather than disrupting it. These activities will include: 
  • Expansion of mobile applications and content to mobile devices. Those with a cable or satellite subscription will see steady expansion in the range of applications and content that they can get on their mobile devices. Mobile applications from cable companies such as Comcast's Xfinity TV and from individual channels such as ABC Player and WatchESPN deliver a pretty terrific, and comprehensive, "TV Everywhere" experience to smartphones, PCs, and tablets. The library will continue to expand as rights fees will increasingly incorporate mobile.      
  • New models for mobile broadband pricing. Most downloading or streaming of longer form rich media content on mobile devices happens over Wi-Fi. Current 4G data plans discourage, for the most part, extensive video consumption. Even with the expansion of LTE, more spectrum, and so on, I don't expect wireless operators to permit significant expansion of data allowances at prevailing prices. I do believe we will see some dynamic and experimental pricing offers for those who really want to stream Homeland on cellular. Examples include paying a "premium" ($1-2) for mobile streaming, not unlike the surcharge paid in iTunes for the HD version of content. Or, content providers or advertisers might subsidize or support a mobile viewing option. Operators have been putting in place the type of service delivery architecture, billing and network management capabilities to enable a more dynamic and flexible pricing relationship with respect to video content.
  • Buy Once, View Anywhere. For those who purchase programs or movies a la carte, such as on iTunes or in physical form, expect that content to increasingly include "rights" to that content on any device. iCloud and Amazon's Cloud Drive/Whispersync are examples. Also keep your eye on UltraViolet, an initiative of several of the largest studios and media companies, which allows viewers to watch movies and TV programs that they have purchased on any device, anywhere.         
  • Cloud DVR. This is an area of huge effort, and some controversy, in the cable industry. Comcast has talked up the cloud-based capabilities of the X2 box, expected this summer. But a fully cloud-based content service from cable companies will take some time to develop. There are rights fees for certain types of programming. And it's a pretty gargantuan effort to build the data center, security, and storage required to store that content in the cloud or even operate a hybrid service.      
  • User Interface. The user interface offered by the cable companies leaves a lot to be desired. I recently upgraded to Comcast's much hyped X1 box, and it is in many ways a step backwards. I'll spare you the details, but elegant UI is not in operators' or set top box providers' DNA. OTT providers will continue to promote their superior UI, and there will be UI overlays onto existing on screen guides, similar to what TiVo has tried to do.          
  • Rights expansion. We will see the expansion of rights for the type of programming that has so far escaped "TV Everywhere", such as sports, marquee live programming, and certain popular content. But this will happen on a piecemeal, and unpredictable basis, and there won't be a standard template for it.


For those who are hoping for Apple to be a White Knight - either to rescue consumers from their frustration with cable or as the next "big thing" to reinvigorate Apple's sagging stock price - I land on the pessimistic side. Maybe Apple will introduce a gorgeous new TV and a next generation Apple TV with an even great UI that incorporates apps and all sorts of other content in addition to movies and TV shows. But Tim Cook isn't marching into the offices of the NFL, Viacom, or News Corp. the way Steve Jobs dictated the new terms for music to Universal, Warner, and Sony.


So, the name of the game for the next couple of years will be about: expanding content that subscribers are already paying for to alternative devices; moving content to an on-demand, "buy once and own forever and everywhere", increasingly cloud-based framework; and steady improvements to the user experience. But a wholesale disruption to the current model, without substantial compromises with regard to available content is not likely, in my view.
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