Lots of recent discussion on TV and Hollywood. Ari Emmanuel accuses Google (again) of aiding and abetting pirates. Henry Blodget writes a nice piece on the changing TV viewing habits of consumers. Dan Frommer says those changing habits won’t really affect the MSOs and Networks anytime soon. And Jeremie Allaire seems to claim that Apple’s next move in TV will be to emulate TiVo’s (largely failed) box/cable-card strategy (but correctly points out the disruptive power of AirPlay). Oh, and Sean Parker launched version one of AirTime.

I wanted to add a few points to the discussion about the pressures on the TV industry. First, some basic observations:

TV programming is not homogenous

The uber-bright Hunter Walk provided me with a fascinating view into his opinion of the real tiers of TV programming. Out of the 4-5 hours of TV the average household watches each day, there are essentially three tiers:

  • Hour 1 (No Substitute) – This is the never-miss-an-episode, live-sports, must-see-TV that exists across many networks. The Sopranos, Mad Men, Yankees/Red Sox, French Open, Homeland, etc. When we watch TV, this is the first hour we watch. We watch this stuff live or DVR it and try never to miss it. We will pay for it any way we can and even endure roadblocks to watch it (like when networks won’t make it available on our preferred viewing device, or expire old episodes, etc.) While the networks believe 80% of their content fits this description, it is probably more like 20% of all shows currently on the air, at most.
  • Hours 2-3 (Nice to see) – This is stuff that we have an allegiance to, but are comfortable missing an episode and won’t really endure friction to see it. Many comedies fit this category, from 30 Rock to The Simpsons, as well as the countless procedural crime dramas like CSI, etc. The networks think all of this content is in the category above, but it really isn’t. And probably another 30% of all shows on the air fit this category.
  • Hours 4-5 (Filler) – This is the low-budget, mostly reality show programming that networks use to fill the time between their one or two hit shows. Think Kate Plus 8 or Let’s Make a Deal re-runs. The only time you watch this stuff is when you are couch-surfing. This is probably 50% of all programming on air.

When Ari insists that Facebook, Google, Twitter and everyone else in tech will have to “pay for Aaron Sorkin”, he is really talking about the “Hour 1″ category of programming. That stuff is really high-value and is not in a lot of danger of being disrupted any time soon (although the rising production costs and off-the-charts no-risk fees paid to talent are surely to be reconsidered in the future.) But as for the other two categories…

Our attention is shifting away from TV

All media operates in an attention economy. They compete for our attention against the backdrop of thousands of choices as to how we spend our time: email, video games, Facebook, Twitter, Flipboard, Instagram, etc. The latest numbers show those choices are finally catching up with TV; we are watching less of it, whether DVR’d or not. We aren’t watching less of that incredible No Substitute programming, but we are watching less of the 80% of the other stuff. And by the way, those big “hit” shows that Ari talks about have relatively small audiences. Only about 3 million people “tune in” for an episode of “Game of Thrones” and over the course of a week about 9 million people have seen it through various means. Same for Mad Men (3 million), Desperate Housewives (9 million) and The Good Wife (9 million). That’s a pretty small audience compared to, say, the 450 million on Facebook every day, the 800 million who watch YouTube videos every month, or the more than 100M people who watched the final episode of M*A*S*H. As TV and other entertainment choices proliferate, “hit” audience sizes have decreased. So, one of the immediate threats to network/cable television is that we are likely to watch less and less of the “Hours 2-5″ programming that fills so much of their programming grids. (The smart production companies know this and are already producing much lower-cost, quality programming for YouTube and other online-only outlets.) And where will that lead us?

The pressure will first come from the advertisers

If Nielsen didn’t lie and try to convince TV advertisers that the 50% of people with DVRs still watch commercials (hint: that is utterly ridiculous. We don’t watch any commercials anymore unless we watch a live sports event), I believe advertisers would appreciate that we aren’t seeing their commercials anymore. While the PC and mobile web still don’t offer nearly the great story-telling opportunities for advertisers as TV commercials do, it just doesn’t make sense to continue to buy very expensive TV media when no one sees your commercials. Certainly live sports TV CPMs will go up, but the rest has to fall as advertisers figure this out. And reports detailing that we are watching less TV has to start to sink in. Advertisers would love to try to buy only the hit stuff, but networks are good at bundling to force them to buy the filler programming too. But the whole bundle will start to feel more and more pressure.

The dual revenue stream model of the cable networks provides lots of air cover against decreased ad revenue. The affiliate fees they get for carriage will sustain them for a while. Brand advertisers are looking elsewhere to find places to tell their stories and to reach their audience. And online, we can target viewers and assemble audiences with drastically better efficiency (and reliability) than on TV. Online video is becoming so performance-based, that advertisers now can pay only when someone has actually watched the commercial and not pressed the “skip this ad” button. If you really care about making sure someone sees your commercial, online is the only place to show it. And more and more, we just aren’t seeing the ad on TV anymore.

What’s This Mean?

  • Advertisers will begin to spend less on TV and that will be the canary in the coal mine that big changes are afoot
  • We will continue our shift away from viewing traditional TV and towards IP-delivered unbundled shows, some which will have migrated from traditional TV, but many that will be organic and native to internet programming (the made for YouTube stuff is a prime example here.)
  • Ari will continue to demand high prices for the “Hour 1″ shows created by his elite clients, but the audiences for those shows will grow smaller and smaller.
  • As a result, networks will begin to feel the pinch of decreased advertiser spending, and they will try to raise carriage prices to the MSOs more aggressively
  • MSOs will keep trying to push our bundled TV prices up higher as a result of this, pushing more and more of us away and into other IP-delivered options
  • Finally, I believe the as more of us watch IP-delivered programming, the lure of certainty that the audience you really care about is seeing your ads will prove appealing to more and more advertisers, and online video ad revenues will continue a dramatic ascent
  • And so the cycle will go

(Update: this report from Pivotal Research refutes all of Henry’s points…but bases all of its observations on data provided from a single and biased vendor: Nielsen – a panel-based research method that looks at activities of only 25,000 households – and has concluded, for one, that those of us with DVRs still watch ads. Go figure. Oh, they make their money from the TV industry.)