Many think of TV as a dinosaur of the past. With the rise of social media and other new technology platforms, new media types predict that its days are numbered, soon to be buried under an avalanche of disruptive change. Yet it lives on, despite the sceptics.
In fact, it thrives. TV programming has never been more diverse or of higher quality. My 3-year old learns maths concepts on Team Umizoomi while I never miss an episode of Game of Thrones. From scripted shows to talent shows to reality shows, we remain riveted.
For all the talk about cord cutting, viewership remains strong and TV’s share of the ad market is actually higher than it was a decade ago. In fact, the industry is going through a renaissance of sorts, where old models are mixing with new ones to create a vibrant new marketplace for content. For sure, the economics of TV are changing, but for the better.
Why Ted Turner Is A Billionaire
Historically the primary revenue model for TV has been advertising. Yet there’s something about it that just rubs people the wrong way. The notion of making money by offering consumers content for free is counterintuitive. Critics also point out that ads interrupt the content experience, which detracts from the value of the medium.
However, a basic principle of media economics is that marketers are willing to pay more for consumers than consumers will pay for content. So the ad market, while it can be volatile, will rise on a per capita basis as economic productivity grows. Consequently, it becomes possible to support bigger production budgets with smaller audiences over time.
In the 1950’s, The Ed Sullivan Show would reach as much as 50% of the American public and over 30% watched Happy Days in the 1970’s, but it only takes a 6 or 7 rating to be considered a hit now. Today’s content is more niche not because tastes have changed, but because small audiences are more financially viable today than they were in the past.
Ted Turner was the first to see the potential of niche content and in the 1980’s acquired vast film libraries to support thematic channels. Although, at the time the deals seemed overly aggressive, in retrospect, he paid pennies on the dollar because he understood that he was paying less for the content than what the audience would be worth in a few years.
As long as content has the power to sell goods and services, the ad model will continue to thrive.
How Tony Soprano Came To Rule North Jersey (and the ratings)
The rise of cable TV led to an abundance of channels. With a relative scarcity of content on air, well-heeled consumers were happy to pay a little bit more for recent movies and live sporting events not available on broadcast TV. By the 90’s, premium cable channels like HBO and Showtime had built up large subscriber bases.
As competition heated up, HBO began to invest heavily into original programming. As a paid service, it wasn’t subject to the same regulations as regular channels and that freedom, along with big budgets, attracted top talent and hit shows like The Sopranos, which regularly led the ratings even though only half of the population could access it.
However, as Rebecca Greenfield recently explained in The Atlantic, the economics of premium cable channels might be breaking down. Streaming services like Netflix don’t have to split fees with cable companies, so can earn more revenue while charging the consumer less, which will allow them to outbid their incumbent rivals in the years to come.
The success of Netflix’s House of Cards should be a wakeup call (their recent long-term view document states that they plan to spend $2 billion per year on programming), but it’s not the whole story, not by a longshot. There is a storm brewing in Hollywood, with a variety of players looking to create the next great model for financing and distributing content.
A New Ecosystem of Emerging Platforms
Probably the biggest change in the economics of TV has to do with distribution. In the era of the big three networks and one screen (literally – few homes had more than one TV), programming needed to appeal to a wide audience. The rise of cable, brought niche content to the fore, but development executives remained formidable gatekeepers.
These days, anyone with a smartphone can shoot a video and put it online, but with the price of cinematic quality cameras falling tenfold, even high quality production is not out of the reach of dedicated hobbyists. This is enabling an entire new ecosystem of players who can produce, distribute and compete for advertising and subscription dollars.
YouTube: Probably the most pervasive new platform is YouTube, which, although it became famous for cat videos and other pranks, is evolving into a surprisingly effective distribution channel for high quality video content.
Part of the secret to YouTube’s success is its open approach. A large percentage of YouTube videos are embedded and watched on other sites and, although it invested in its own studios, it has encouraged a thriving new industry of online video companies, such as Maker Studios, Fullscreen, Vuguru, and others to produce content on favourable terms.
YouTube has also become a fertile platform for marketers, who can create their own channels and networks to deliver content to their consumers, like how-to videos from Home Depot or beauty secrets from L’Oreal’s Destination Beauty channel or cool surfing videos from apparel maker Quicksilver.
BiteSize Networks: Silicon Valley veteran Ron Bloom thinks he can offer an alternative to YouTube by developing an online network dedicated to professional content. His company, Bitesize Networks, produces hundreds of snack size videos every month. While it may seem like a quixotic idea, Bloom is pretty happy with the way things are going.
Since starting in 2006 and investing $40 million (much of it his own money), he’s been profitable for 4 years, growing 30%-50% annually and hopes revenues will near $100 million this year. He’s recently even built a showcase studio right on the “Walk of Fame” in Hollywood in much the same style that NBC made famous with the “Today” show.
Amazon: Possibly the most innovative new model is Amazon Studios, which crowdsources content ideas and then professionally produces ones that look promising. They recently announced 14 pilots, including the comedy Alpha House starring John Goodman and written by Doonesbury creator Garry Trudeau.
What’s really interesting is that Amazon doesn’t seem to have any big plans to sell ads or even to charge for content only subscriptions, but will allow consumers to view content with an ordinary prime subscription. In a sense, Amazon Studios serves an incredibly elaborate form of content marketing to sell books, electronics and household goods.
And Amazon is not alone. Microsoft recently launched Xbox Interactive studios which will produce content designed to fully leverage the interactive capabilities of Kinect and Intel announced a partnership with Ashton Kutcher. It’s not ads or even content subscriptions they’re after, but to entice consumers to adopt their technology platform.
This is potentially a real game changer. In the old days, networks only competed with other networks to lure top-notch talent to produce for them. Then premium channels like HBO raised the bar. In a few years, their ability to procure top quality content might hinge on the profitability of completely separate businesses, like books and video games.
A Brave New World of Disruptive Media Models
One thing that I learned running media businesses in a variety of markets and contexts is that business models are not set in stone. What are often seen as concrete principles are often merely arbitrary manifestations of time, place and accident.
In the early days of TV, marketers produced a lot of content (which is where the term “soap opera” comes from). Later, as the advertising market became more stable and predictable, networks gained the confidence to finance programming themselves. Cable TV then made it possible to go outside the ad market by selling premium subscriptions.
Now, digital technology has changed the economics of TV once again. The democratization of production resources, near zero-cost distribution and crowdsourcing (along with crowdfunding) means that the supply of video content is exploding. On the other side of the ledger, a multiple screens environment is helping to maintain robust consumer demand.
As screens continue to proliferate, production democratizes and distribution becomes frictionless we’re likely to see a multitude of new media business models emerge, mix and recombine.
YouTube is allowing professionals to benefit from an enormous audience built by user generated content. Ron Bloom is developing “bite size” fare that caters to our need to be entertained during small breaks in the day and Amazon, Microsoft and Intel are developing content to support their technology platforms.
This is only the beginning. We have an almost insatiable need for content that informs, excites and inspires us and TV, in all its forms, is entering a new golden age.
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