Cable TV – Doomed Like Dinosaurs


dinosaur skullHere at Cable Tech Talk, I generally try to keep it civil. I believe in a discourse based on facts, not emotion. I think that the best ideas win.

But I’m going to come right out and say it: The Atlantic‘s Max Fisher has written one of the most uninformed articles I’ve ever seen on the cable industry. (It feels like he has inserted a vague reference to the just-released National Broadband Plan to increase his likelihood of getting page views.)

His thesis is “Cable TV Is Doomed,” which is fine. One could make a rational case that other competitors will eventually overtake cable or you could argue that consumers will eventually seek other entertainment choices over television. But I got as far as the second paragraph before the thing fell apart.

Cable TV was always a bad model for the consumer because, in a sense, you’re paying twice. When you watch The Daily Show, for example, you pay the cable company to bring Comedy Central’s programming into your home. But you also contribute to Comedy Central’s bottom line by watching its ads. However, the Internet allows you to connect directly to Comedy Central without the cable company go-between. You only pay once — either with your eyeballs on, or with your wallet on iTunes. (Sure, you have to pay for Internet access, but if you consider it a necessary utility rather than an optional luxury, as the FCC’s national broadband plan clearly does, then that cost is incidental. That is, access to streaming TV shows isn’t the primary reason you buy Internet access. It’s a bonus.)

For thirty years, cable (and, more recently, satellite and telco providers) has been based on a dual revenue model. Currently, just over 100 million Americans are making a conscious choice every month to subscribe.  And the evidence shows that subscriptions keep increasing (300,000 new multichannel video subscribers were added in the last quarter) and the number of hours that people watch cable programming continues to climb.

Broadcasting is, by definition, “broad.” It reaches a lot of people and makes money from advertising, but now even broadcasters are looking at generating revenue from distributors since the ad market has been suffering.

Cable programmers are able to target niche audiences and collect carriage fees from operators for the distribution rights and advertising for delivering desirable viewers. Without the advertising, consumers would have to pay a larger fee for access. If a programmer went ad-free, (a few basic cable nets don’t have advertising) it would be tougher to produce compelling new content. Fisher seems to see this as some sort of scam, but then he goes on to immediately note that you don’t really get Internet content for free either, since you’ll first have to pay for broadband access.

Fisher thinks that Hulu (ad-supported) and iTunes (which he calls a form of “micro-payment,” which it isn’t) are “more cost-effective,” because you only pay for what you watch. Of course, content on Hulu has already made its money elsewhere and is being offered on a secondary basis; even with that, Hulu is not proving to be profitable and the company has already indicated it is considering moving to a subscription model. And as for iTunes, I recently pointed out on this blog, that you might pay $40 for a season of a single cable program. Fisher buries down in a footnote this admission: “Five hours of TV a day multiplied by $2 per hour-long show would means $300 a month on cable. That’s too much.”

But back to the programmers’ dual revenue approach. That’s how they can afford to produce the programming. Fisher says that the goal is to eliminate the “cable-bill middle-man,” and instead pay Hulu a subscription fee. But Hulu would then have to turn around and pay the programmer a fee for distribution rights and you end right back up with the cable model.

Mari Silbey at the MediaExperiences2Go blog addressed the issue that it’s a lot easier for cable operators to add Internet content than for over-the-top video providers (such as Hulu) to add “a full slate of premium TV content to their services.” She also hits the other key point: the “model is moving toward IP (not Internet) delivery.” A cable operator could use Internet Protocol to move the bits that make up your favorite TV show; that’s not the same as Internet content. What makes the difference between services like Hulu & iTunes versus cable is about what content you can offer. You either have to produce the content yourself or you have to be willing to pay for it.

Take a look back at my write-up of the Cuban-Ronen debate. You might also want to take a look at an article Fisher’s own Atlantic colleague Derek Thompson, who made the case against paying for individual shows.

I’m happy to discuss the future of video entertainment and how it will reach the home in the future. But the sticking point is almost always in how to recover the production costs.

(Even Lauren Weinstein, at the Network Neutrality Squad forum, acknowledges that “the concept of purely ‘a la carte’ programming (regardless of the delivery mechanism) carries with it the risk of a ‘race to the bottom’ of lowest common denominator programming that will appeal to the most people.”)

Consequently, I have a knee-jerk visceral reaction when I read things like this: “I’m thinking something bigger — like tens of thousands, maybe hundreds of thousands, or even millions of customers canceling their subscriptions or deciding not to pay their cable bill, meanwhile educating each other on how to find other ways to get the same programming.”

But you can’t duplicate your cable line-up online for free. Not yet. And I have difficulty seeing a future in which you will.

  • Ben

    I agree that Internet content isn’t going to replace cable, but there is plenty of potential to cut out the middle men which would reduce the costs for consumers and increase revenue for the ones who actually create something — not saying there is anything wrong with being the middle man.

    The fact is being a big cable company is very profitable and most of their infrastructure is very redundant. There is lots of room here to improve efficiency. But unlike Max, I believe that true competition in the market place will be the tide changing factor. As soon as every consumer has more than one real wired option, the race to the bottom can start. This will force the providers to become lean or go out of business.

    Bottom line is that there is no more economical way than broadcast to deliver TV, but that doesn’t mean there isn’t money to be saved by the consumer.

  • Paul Rodriguez

    I feel like I’ve been harping on a key point lately, but it’s worth stating again. Almost every single time I see this discussion, it focuses on technical approaches and delivery methods. But that’s not the issue. Instead, you should be looking at content owners and producers. And you should be making a distinction between indie producers and the bigger players that produce the hits that audiences love.

    Over at The Hot Blog, David Poland has been zeroing in on the issue of windows for theatrical films (See here, here, here, and here.). If I understand him correctly, Poland is arguing that the theatrical window is making so much money (and actually rising slightly in recent years), that it makes no sense to move to DVDs, VOD or Internet delivery as a replacement. One of the key points he makes is that "limited release indies" are in a very different position.

    Box Office Mojo says the Oscar-winning film The Hurt Locker cost $15 million produce and has made a little more than $16 million at the box office. Compare that to Avatar, which reportedly cost somewhere around $280 million to produce (which doesn’t include significant marketing expenses). So, if you and your buddies can make a film on a digital camera and edit it on your laptop, then the Internet will work for you.

    Look at television. Discovery’s new series Life was "Four years in the making on a production budget of $22 million…" We can "cut out the middle men," but how would that "reduce the costs for consumers" of watching Life? One of my favorite cable shows, Burn Notice, returns in June. How does the Internet make the show more profitable? Networks need to recover the costs of production in order to bring you this great programming in the first place.

    I think what you’re arguing is that if there was more competition on the provider side – more than two DBS companies and two telco providers, if every customer could choose between 3 or 4 companies to get multichannel video – than costs to consumers would go down. But the thesis that “Cable TV Is Doomed,” means that the model is doomed. My post tried to argue that Max Fisher does not successfully make that case.

  • Ben

    I agree with the main premise of your post the model is not doomed like dinosaurs — maybe like alligators though.

    Right now I pay Verizon about $60 a month for cable TV which I admit is a great value. But my point is how much of that actually goes to the creators of Life or Burn Notice? What I’m suggesting is that less money will go to Verizon and more to Discovery and USA.

    I don’t think consumers need 3 or 4 choices, just two real ones. Sure some consumers have access to more than one provider today, but it is far from the norm. Some live where they can’t install a dish, others where the telco doesn’t offer video. Eventually more people will have choices than not. At some point the “great channel expansion” will end and on demand content will become the norm (delivered via RF or IPTV, not the Internet). This is the point we’ll start to see a race to zero where the providers service is commoditized. Then as a result, the consumer will pay less while the creators will get the same or more than they do now — the funny thing is that it won’t be the Internet that changes the business.

  • great stuff. keep the reality coming. Here is an old blog post of mine

    Blog Maverick
    The Ala Carting of Video on the Net – Will it lead to disaster ?

    May 4th 2008 9:53PM

    Craig Moffett of Bernstein Research wrote an amazing report entitled And Now for the News…The Emperor Has No Clothes”. If you can get a copy, read it. Starting with the disappointing but expected news that journalism is no longer a service consumers desire to pay for, he moves on to the problems facing Internet video. He does a far better job than I ever did explaining the failings of Internet video and the expectation of free content. This is the report I wish I had blogged.

    From the report:
    Ironically, we are headed down the same self-destructive road for other kinds of traditional media,as well. Five years into the video-over-the-Internet revolution, we have learned two things. First; consumers won’t pay for content on the web, so it will have to be ad supported. And second; it won’t be ad supported.

    In the cable TV network world, half of all revenues come from affiliate (carriage) fees paid by the Comcasts and
    DirecTVs of the world. The other half comes from advertising. But in the TV world, a typical half hour show supports an ad load of about 8 minutes.

    On the web, early evidence suggests that consumers will tune out – click away – if they are forced to watch more than 30 seconds or so of advertising up front, and maybe another 90 seconds of advertising over the next thirty minutes., for example, which has already been lionized by many as the future of TV, serves two minutes of advertising for every 22 minutes of programming(i.e. the programming duration of a typical half hour show from television). Assuming identical CPMs for web video and TV, and after accounting for lost affiliate fees, a 30 minute program on the web with two minutes of advertising yields approximately 1/8th as much revenue per viewer.

    Are content producers prepared to reduce production costs…by 88%?

    In fact, the actual economics of web-based video are far, far worse than this. Our 88% decline ignores the corrosive impact of à la carte on traditional video economics. In the public debate in Washington, the phrase à la carte refers to the idea that a few strong networks demand the carriage of a host of weaker ones, effectively subsidizing a much larger family of channels.(From MC: This is something HDNet vehemently opposes and is working towards ending) But there’s a much more important aspect of web-based àla carte that is rarely mentioned–that is, the “à la carting” of the few best shows from the rest of the day’s schedule. Or even worse, of the best few moments (news stories?) from the rest of the show. On the web, watching SportsCenter not only robs ESPN of its ability to pull through carriage fees for ESPN Classic and ESPN U (and SoapNet and Toon Disney), it also, and much more importantly, robs ESPN of its ability to use SportsCenter to support the economics of the rest of the 24-hour ESPN schedule. And watching just the best 30 seconds of SportsCenter robs ESPN of its ability to support the economics of… well, you get the idea. Expecting a few ad supported shortclips on the web to substitute for the affiliate fee revenues lost by multiple networks 24 hours a day is lunacy. “

    Great job Craig.

    The concept he defines as the “ala carting” of the best from the rest is the web video consumers favorite feature, but it’s also the biggest risk to professional video content producers everywhere. On the Internet, the producers of the most popular content don’t have the promotional platforms that traditional media does. There are no lead ins for Internet shows. So there is 100 pct uncertainty as to how many people will watch any given video. For those videos that do become popular, much of the popularity is viral, limiting the producers ability to monetize the escalation in popularity.

    The Darwinian response to this problem has been to serialize shows. The hope is that if a viewer liked a show, they will come back for more. Which of course means they are copying traditional TV’s approach to content presentation and absorbing all of the same problems. The constant need to refresh a show is not only difficult, its expensive. The constant need to promote the show to stand out in an ala carte universe of an unlimited number of shows is even more difficult than it is expensive.

    So where does this leave independent video content on the Internet ? Right in the hands of Google and Youtube and black and white hat SEOs.

    The ala carting of video on the net will benefit those who enable the search for content and can monetize that search. The economics of supporting content will force independently produced Internet content to be dumbed down to levels that create a perfect match for Youtube. There will be SEOs that come up with arbitrage solutions that will drive traffic to parked videos. Content creators will partner with SEOs and create budgets that reflect the CPMs they can earn in and around the video hosted on Youtube against the costs of the SEO driving traffic to the video. SEO support will be the only even marginally effective way to create baseline traffic to a video/show.

    Who could have guessed that creating financially succesful video on the net would require the same marketing skills as driving traffic to parked domains ?

    Content created by and for TV networks will have to make some important decisions. Why wouldn’t advertisers want to be one of only 2 minutes of ads in a 30 minute TV show rather than one of 8 mins of ads on traditional TV ? Will they pay correspondingly larger CPMs to be online ?

    Are TV networks making a huge mistake by putting their current TV schedules online for free ? If a streamed TV show only has 2 mins of commercials, will that drive some viewers to prefer watching online ? Will it force networks to reduce their TV show ad load ? If so, by how much ? Particularly if and when over the top video enables Internet video to be presented right on TVs. Will shows be forced to introduce different versions of shows, say with different ratings as a means of differentiating TV from streamed shows ? The R rated version of Friday Night Lights online and the PG version on TV ?

    Bottom line is that something has got to give. Business as usual is not going to cut it. The question is whether the dollars the big TV and media companies are creating online from the streaming of their current TV lineups are sustainable incremental dollars ? Or is streaming the video a collateralized video obligation ? The video equivalent of the collateralized debt behind the sub prime mess. Money that looks good while its coming in, but could lead to far, far bigger problems ?

  • Michael C

    “Cable TV was always a bad model for the consumer…”

    This statement alone debases his whole article. I am actually of the camp that believes that over-the-top video viewing will eventually win out over the proprietary TV and phone services offered by cablecos and telcos, but to say that cable TV has always been a bad model for consumers is just plain wrong and disingenuous. As a child, I remember when my family first got cable TV…the clunky black box with a rotary-dial knob. This was revolutionary to us. It opened up a whole knew world of entertainment and information. I remember the very first time MTV aired, NASA coverage of shuttle missions, educational shows on the Discovery Channel that ultimately lead to my engineering degree, and it was cable TV news I was watching on 9/11. Cable TV is party responsible for shaping the person that I am today, and I’m thankful for the business model that made that possible.

    But times change, technology changes, and what once was a brave business undertaking to transform the lives of all American, is now showing its age. It is now holding Americans back from the next big revolutionary change, where we have instant access to ANY content we choose, TV, film, music or otherwise and only pay for the content that we choose to consume and the services we want.

    I will always remember what cable TV has given me, but I welcome the next era of communication and entertainment. For the MSOs’ sake, I hope they embrace it too, or else someone else will step in to help facilitate it, like Google or municipalities.

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  • john

    Bundling can be efficient for consumers (and has the secondary positive effect of cross-subsidizing worthy content that might not be able to make it in a pure a la carte world), and one-to-many distribution is very efficient. And while I normally don’t assume that my personal preferences are “normal,” the fact is that because I have a computer hooked up to my TV, I find myself quite willing to pay good money for over-the-top video. (Netflix and, specifically–both of which are “bundles.”)

    Both of these services are worth it to me because they have content and convenience at a reasonable price.

    There’s nothing magic about current distribution models that makes them the only possible way to make money. And there’s nothing corrosive about the Internet that makes it impossible to make money supplying content over it. People do it all the time.

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  • James jones

    With all due respect to a figure such as Lauren Weinstein, I submit that the race to the bottom started long ago, with A&E carrying police procedural reruns and reality shows, and the History Channel featuring pseudoscientific and cryptozoological claptrap.

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