It’s finally happening. The Internet is taking over TV. It’s just happening differently than many of us imagined. There are two major transformations underway.
- The Rise of The Internet Distributors. Led by Netflix, the group of new distributors includes Amazon and Microsoft now, but maybe Apple and Google later. They are largely distributing traditional TV shows in a non-traditional way. All the content is delivered over IP and usually as part of a paid subscription or per-episode EST (electronic sell-through). Important to note that all of this content contains no advertising and is available entirely on-demand. This content falls into the “non-substitutional” cotent bucket. To watch it, you don’t need to be a cable TV subscriber.
- The Rise of Alternative Content Producers. Thanks to YouTube’s Channel strategy and investment in hundreds of content providers, new producers of content are emerging and offering non-traditional programming, usually in shorter form. This content is marked by dramatically different production economics than traditional TV content, taking advantage of an expanded labor pool and low-cost cameras and computer editing. This alternative content is chipping away at long- and mid-tail viewership on traditional networks (the “filler” and “nice-to-see” buckets.)
Both of these transformations are successful to date and will only become more-so. Rich Greenfield has a nice summary of why the TV industry suddenly loves Netflix. (Disclosure: I am long NFLX and have been a stockholder for some time.) The first transformation takes advantage of the massive pressure MVPDs place on traditional cable nets to not offer their programming direct-to-consumer. In this case, the HBO’s and AMC’s requirement that you authenticate your existing cable subscription in order to watch their programming over IP successfully persuades the cord-nevers to just avoid the programming on those networks until the hit shows are offered through Netflix or EST. Netflix, once again, looks like the hero. Those empty threats by Jeff Bewkes that he will never work with Netflix turned out to be, well, empty. The second transformation will take longer to fully prove out, but I believe it will happen. As more of our viewership takes place over IP, we lose our allegiance to networks as the point of distribution and allow new distributors to guide us towards content choice.
There is a third budding area of transformation, but I don’t yet see evidence that a business exists: trying to re-package cable TV bundles and sell them over IP. Companies like Aereo and Nimble.TV offer versions of this. I believe we live in a show-based world. Consumers aren’t looking for networks (with the exception of ESPN and regional sports nets) so much as they are looking for shows. Shows delivered over IP allow for the slow unbundling of television. One of the many challenges about this model for traditional broadcasters is that there is no advertising in this world. The traditional cable net business model enjoys two great revenue streams: affiliate fees and ad dollars. In IP-delivered shows, there are no ads.
Who are the winners and losers in this model? Well, show creators continue to flourish. The new distributors enjoy great success. Of course, ISPs, who are often the same companies as the MVPDs, do fine in the ISP business, but I believe the decline in total cable subs will continue. In a world where shows do not contain advertising, why do we need Nielsen? They have been a measurement standard for decades largely because advertisers needed a third-party validator of viewership. You can see why they have a vested interest in insisting TV ad viewership is not on the decline (despite everyone’s experience to the contrary.) I don’t think cable nets are in immediate trouble. They enjoy a great business model now, and also get to reap EST or licensing benefits after the shows air. But the Netflix House of Cards effort shows that consumers will now expect to be able to watch shows whenever they want and not be bothered by inconvenient broadcast schedules. The day is coming when the cable nets will have to respond.
For startups, one of the wide open spaces seems to be in cross-provider discovery. Now that my shows are spread among Netflix, Amazon, YouTube and on my DVR, I would prefer one interface to reach them all. Companies like Dijit’s NextGuide, Peel, Squrl, and Telly are taking cracks at this important space.
Interesting and exciting! Will be thrill to get rid of TW and the ever-elusive creepy cable guy! Wonder though if artists are biggest losers here. Can’t imagine the YouTube scenario paying much. Tho definitely gives them more exposure and power to create work that will be seen.
Great post. How do you see sports fitting into this? Seems like the last piece of content protecting live TV and the cable bundle. Also, you mention above that ISPs are doing fine but cable subs are likely to decline. Do you think in a scenario where pay TV is disrupted the ISPs / MVPDs just increase pricing on internet access? Seems that as long as connectivity is required the gatekeeper will remain in place
Thanks for your comments, David. I think sports is an enduring edge case that demands live attention. As such, it is a great place for advertising and is DVR-proof. People pay for it and that’s not going away. The ISPs, in many cases, are the MVPDs, so I don’t think they are forever imperiled. Predictably, these same ISPs are the ones trying to disadvantage Netflix in the movement of their bits.
Thanks for your reply. I agree that TV (outside of sports) is being disrupted by the internet and that disruption will likely accelerate. At what point do you think this benefits the consumer economically? The concern I was trying to raise above is that because the ISPs and MVPDs are in most cases the same company, does an expensive cable bill just get replaced by an expensive broadband bill? Seems like they’re already moving that direction with usage-based pricing schemes (and the throttling of Netflix you mention). How do you see this playing out?
I think the consumer is already benefitting economically. The cord-nevers, I believe, spend less total dollars on TV programming than a full cable package yet see what they want to see. I think maintaining ISP neutrality and preventing egregious bandwidth caps are more policy issues that the FCC and others follow very closely. It is interesting that the biggest ISPs who are also MVPDs are the ones least supportive of Netflix and some of that is playing out here. Look at Charter, Verizon, Comcast and Time Warner.
[...] David Pakman is a partner at Venrock, focusing on ad tech, social/mobile media, consumer services, Web services, ecommerce, big data, SaaS and anything else hugely exciting and disruptive. This post is also live on his blog. [...]
Nice thoughts; I really enjoyed reading.
In “The Rise of The Internet Distributors” category there is one more layer that’s not discussed in my opinion. While Netflix and Amazon are leading and it make sense that Apple and Google will benefit . I feel that some of the winners will not be larger companies, but smaller niche players. I’m a huge music junkie and there is a company called Qello that I subscribe to; it gives me HD concert content “anytime, anywhere” like Netflix, but it’s a more immersive experience; I get video streaming, audio, editorial and Q/A with bands all in one services. We could see more companies like this popping up over time; its like Netflix and Amazon are NBC, ABC, and CBS and the Qello’s of the world are MTV (the old MTV of course), food network, etc.
In the “Third Budding Area” I 100% agree that a business does not exist yet. That said, I think Intel has a real chance of making a dent in this market. I’m not sure if you have seen what they are doing close up, but trust me it’s super cool and I think they have a shot at making a run for sure.
Would love to hear your thoughts.
Great thoughts, thanks. Both points of view you mention sound perfectly reasonable. I have only read about Intel’s offering. I can’t help but feel that they care more about chips into TVs than about being a leading consumer-focused subscription provided of cable nets over IP, so it’s hard to take the effort too seriously. HBO has a hard enough time deciding whether to be a direct-t-consumer company. Intel, even less so.
Interesting discussion. I live in NYC and don’t have cable but I do use Netlfix, Hulu, iTunes, and Amazon Prime. Also, I subscribe to Aereo and I think they may have something there. It comes with a DVR so I can time-shift and it gives two things you can’t find elsewhere; local news and bit ticket sports (Superbowl). With a mac mini connected to my HD projector it is all pretty seamless to boot. The only value it seems to me that traditional broadcast delivery systems are providing are “Live” content be it news or sports.
This is going to be really interesting to see where this takes us in the next five years! My kids already prefer to watch Netflix over cable, and choose to use it with a variety of different devices including iPad, iPod and iPhone. The fact that the TV is so much bigger to view just doesn’t seem to enter into their minds. I think a lot of it is about using their own personal devices which they have become so comfortable with. David also posted an article on this subject at http://allthingsd.com/20130306/tv-is-changing-before-our-eyes/ – I couldn’t help but post a reply there as well!
Hi David. Nice blog. I’m a media buyer (nobody’s perfect) and can’t help to think that this ad free paid sub world will slowly work its way aroun to the dark side (ads in program’s delivered via Netflix or others who follow). I can visualise advertisers louring eyeballs by subsidising the subscription fee in return for watching their ads. The media market has fragmented so much over the past ten years to such an extent that a Multi media strategy will shortly become the only way to build reach. I already know how difficult it is to reach teens as I have two myself And their consumption of media is frightening for advertisers as they spend so little time in media environments with ads. Perhaps a subsidised model would lure them and other demographics back to watching or reading our very important messages