We have made two clear observations in the past about broadcast US TV – and by that we mean global content owners, because they all get their lead from how the US behaves – which is that broadcasters, who so often control content rights, will want to charge more in the current recession, to compensate for advertising shortfalls, and that gradually, as there is more TV fragmentation, they will have the power to get away with this.
The US market is not precisely reflected elsewhere, for instance much European content is American, so is imported, so content creators such as studios are weaker in the European equation, but overseas broadcasters are stronger. Overall, by and large, this is a shift that will continue for some years ‘ those who control content will be able to hold everyone to ransom.
In the US the content eco-system is complex, and yet well understood. Studios make programming and tend to get the best payoff by offering it to the four major broadcast networks. If the networks sponsor the programming they take full, long term, exploitation rights, for which they pay a fortune, and this used to extend to all mediums, although online is becoming increasingly blurred. The content is marketed as if it belonged to the Broadcast Network, and the money is split, save only that the Studio has a veto to prevent any exploitations that it finds unsavoury, or where it has made other arrangements. Otherwise it feels like the broadcasters own the content.
For cable this varies, but once again the content company that can put together an entire channel ‘ a cable network ‘ behaves like the broadcaster and owns exploitation rights, and often this company is also a studio, but not always (consider Comcast for instance prior to its NBC merger).
Cable already pays a fee to carry these networks, the networks pay the content creators in the same way the broadcast networks pay them, and the network gets to keep all, or at least most of, the advertising that comes from these networks rather than let cable have any share in it. Over the past five years the advertising grew to be the bigger chunk of the revenues for both broadcast and cable networks, but since last year it has been shrinking dramatically. Where once it was 60:40 it is now on the way to 40:60.
As broadcast and cable networks witness more and more fragmentation ‘ as video goes out over the internet, over handsets, over satellite and IPTV, and a variety of other services (such as satellite radio networks in the US) content has more customers. When you have more customers, you cannot be held to ransom so often by your one big customer. It becomes a sellers market, and that is where we are today, in a sellers market where the current TV channels don’t feel they are appreciated enough, under pressure to shift away from reliance on advertising to increasing reliance on direct payments, which may take the form of carriage fees for affiliates, or cable carriage fees.
This is the explanation for a number of events we are witnessing in the US market, and this will continue to reverberate throughout the global content system. For instance over the Christmas period, as the contract between News Corporation and Time Warner Cable, for the carriage of its Fox national broadcast network, came up for renewal.
A war of words was conducted in the media, the usual hackneyed platitudes were rolled out about keeping costs down in a time when people are spending less, and how on the other hand content creators were charging more and more and broadcasters have to recoup their costs.
In its last quarter Fox ‘other revenues,’ which including advertising on its properties, fell from $719 million last year to $400 million, and Newspaper revenues, mostly down to advertising again, fell by a similar $300 million amount. Meanwhile cable network revenues jumped $152 million in the same period. So we can see very clearly that on an annualized basis, just for Fox alone this is a change which could represent a $2.4 billion shift in advertising revenues this year alone. Across the whole market we are talking about considerably more than $10 billion. This is a wake up call which has been heard for the past year among content companies, and they are increasingly desperate. It is an across the board recalibration of eco-system relationships and costs, and the losers are the Pay TV services.
What is odd about this transaction is that the Fox Channels are a set of TV channels which cost nothing to the end user if they pick it up on a free to air antenna. Cable clearly wanted to resist the idea of paying for free content and the fact that it couldn’t, is a clear reflection of the increasing power of the networks, and the waning power of cable, and pay TV in general, within these negotiations.
The New York Times bemoaned the fact that consequent to agreement being reached, Time Warner Cable immediately put up its cable prices for end users, passing the costs down the line. How much sense, exactly does that make? Well cable costs have gone up every year since the term was invented, but so far it has proved to be inelastic demand ‘ in other words no-one has thrown away cable because of annual price increases. But as further dramatic fragmentation of video continues, and content is both available on the internet and secondly that internet content can find its way into the living room for viewing on the TV, then the potential to survive without cable begins to emerge.
This backdrop makes the shift to TV Everywhere, the process whereby a cable subscription also gains you rights to view content on the internet, look increasingly vital for the survival of cable. It will have the best content, without any advertising, or at least no different advertising from the TV. But if there are obstacles placed in the way of TV Everywhere, then cable operators everywhere are going to look increasingly desperate to find a way to justify higher and higher cable subscription prices.
Remember during 2009, cable in the US, added a huge number of low end subscribers on the back of the confusion around digital switchover. These new customers can just as easily, a year later, cancel their subscriptions, once they have had time to get their heads around receiving digital broadcasts, so the potential for a 2010 reversal in fortunes is there.
So it must be with some trepidation that this week’s news that Civil Liberties and other groups have launched a concerted effort to prevent TV Everywhere from becoming legal, despite the fact that Comcast has already begun rollout in some states and other operators are not far behind.
Accordingly advocacy groups have been asking the US Department of Justice and the Federal Trade Commission to go ahead and undertake a lengthy investigation, says a story put together this week by the Washington Post.
The argument goes, and we have said this many times and agree with it, that TV Everywhere is an unfair effort to block new ideas such as Hulu, Apple iTunes and other new video services.
This is straightforward bundling, and we reckon it will be stopped. Cable has been raising prices for years ‘ evidence that it has monopolistic control, and too few rivals ‘ and here it is about to annex a new frontier without charging for it. It is as straightforward a case of anti-trust since we saw Microsoft offer a browser for free, underwritten by its operating system revenues, just to close down Netscape.
The principles which underlie US anti-trust law say that you cannot offer something for less than it cost to create, while using an existing monopoly to pay for the service, in order to control a new market.
Consumers would like TV Everywhere, because it’s straightforward ‘ they already have a cable subscription, or at last 70 million out of 111 million US homes do, and many of the others have a satellite or IPTV subscription, so nothing changes and they get internet TV for free. But anti-trust decisions are all about how markets end up, not what consumers want and TV Everywhere is an unnatural answer to ‘What should the internet do with video?’
TV Everywhere is also a cartel decision ‘ because it involves collaboration between Comcast, Time Warner Cable, DirecTV and AT&T, who ALL think it is a good idea, simply because it helps all of them.
But what it does is prevent a key change that could have/should have been coming. Content creators ‘ studios if you like ‘ whose natural customers were broadcast and cable networks in the past (except for movies), would have been given another opportunity to develop a new business model either on their own or by working with new internet companies.
But it is tough to make multiple millions of dollars on a single film by developing a new business model on the internet, and instead it makes more sense for content creators to put pressure on broadcasters to find MORE money for the content, just so long as they grant them internet rights.
So then Broadcasters are supposed to offer content both to pay TV companies and also over the internet, for instance working with properties like Facebook and YouTube, and develop two different revenues streams, the old Cable streams and the new internet streams.
The whole idea is that there are two ALTERNATIVE ways of consuming media, not one way that has two alternative methods of delivery.
New markets, according to anti-trust law, are supposed to emerge on their own, so what we should have is content creators try new methods to take content directly to market over the internet, then perhaps encouraged by merging together with other content creators, they offload this task to a TV channel or TV network, which can throw more resources at it because it represents more content (aggregation). But of course it charges more for the content because now there are more ways it can be consumed.
The TV networks in turn should try to develop their own internet exploitation model, for instance free to air but with internet advertising, which is a new revenue, which is additional to existing revenues.
This is pretty much what happened when the DVD of the TV series was invented. Broadcast already owned the rights, gave none of the new revenues to actors, directors or cameramen (not included in their royalties) but some of it to the studios, diluting the value of cable (because I can watch it later on DVD) and creating a huge improvement in what Broadcasters took home.
On the internet that may fail, because everyone is wary of that outcome and when it fails or when no agreements can be reached, TV networks turn to pay TV operators, ask for more money and wash their hands of new business models. That then emerges as TV Everywhere, and everything stays the same.
At no stage does anyone work out that there is already too much content out there, and that creating new routes to market actually makes good content more widely available, meaning that less well thought of content is no longer needed (all those unwatched TV channels all those movies that went straight to DVD).
The entire game continues to assume that there is more pie to share out, and the best way to force this to happen is to put it all in one basket, like cable, and tell the consumer, you can either have content or not have content ‘ we control every way it can get to you.
In this way new, innovative competition is starved because they have to get content permissions from the groups they plan to compete with or replace.
So all over the market there will be more and more of these content wars like the one between News Corp and Time Warner Cable and this week the New York Times reported a few, including a stand off between the Comcast owned sports network Versus and DirecTV; and one between Scripps Food Network and Cablevision.
This is as much about the most powerful network owners, having in the past used the lure of their top programming to bully their way into getting cable carriage for their worst programming, now competing with other smaller content providers who see that cheaply produced ‘never watched’ programming, is getting a bigger Pay TV pay out than their desirable programming. Where these companies have an internet offering, the internet is creating a level playing field, showing them how popular their content is with consumers, and making them gamble in a carriage dispute that should right the wrongs of the past.