One of our contentions in our recent report, The Faultline Revisited, is that channels will tend towards being unbundled over time. We said that we doubted that a single Act could be passed that would get the job done, because it might harm an industry seen to heavily lobby US leaders. But perhaps a legal challenge might push us closer, and given that right now we have cable companies calling for unbundling from their content providers, that legal challenge may be on the near horizon.
But a highly thought of US investment analyst this week, Laura Martin, working for Needham & Co, does at least agree with our numbers of what happens if (or when) unbundling does occur, some 50% of revenues fall away from the existing channel providers, resulting in large redundancies and spare program making capacity at studios, which we conclude would be put to use making niche, internet delivered content, revolutionizing choice in TV. She only bemoans their loss form TV.
Her logic appears immensely fogged. She says it’s not a good idea and nobody wins, with $70 billion coming out of the industry, and niche programming dropped from the schedules.
She is quoted in US papers this week as saying ‘Our calculations suggest that if the TV bundle starts to degrade, $400 million of market capitalization will turn into $200 million over 10 years, based on the data points from music and newspapers.’ We’re pretty sure those millions were supposed to be billions, but we take her point. The entire industry would make less programming if people could choose what they watched, she says that only 20 channels would survive.
But we don’t think she has done her numbers properly. More like 50 or 60 channels would survive intact and the rest would find their new niche audiences over the web. The longer that traditional TV resists web distribution, the more out of kilter it will be with the new online, watch anything anytime world that new technology has created. And that means the more sudden its demise.
Martin’s entire argument is that ESPN would cost $30 so hardly anyone could afford it and that the woman of the household would want one set of programs and the man another and that since they could not afford both, they would take neither.
‘I may feel that Bravo, A&E, History Channel and Food Network justify the $70 a month fee, while my husband attributes more value to the sports channels,’ Martin said. ‘In each case, the price/value relationship is intact, but predicated on different channels for each person in the household,’ she is quoted as saying.
‘The best solution to this hard problem is to find a negotiated compromise that allows both content and distribution to win and the bundle to stay intact, or grow,’ she said. ‘We can find no math where un-bundling is the best economic answer.’
So in the end she calls for a compromise, both to save a wider variety of programming and to get us away from a point where consumers cannot find anything worth watching in a maze of channels.
Outside of the US, sports channels do cost $15 or $16 extra per month, not $3 or $5, and that is a compromise which has already been widely reached. But there is a different dynamic here, the local broadcasters in Europe and Asia own the rights to the sports, but buy the other channels in from the US (mostly). So there is an incentive to unbundle sports, because they keep all the money, and to put the other channels in smaller bundles to be more consumer friendly, and that’s a position that’s very hard for someone like Disney to swallow in the US. But if it doesn’t accept a compromise position and close down those legal actions, it will find itself in a far worse position. It needs to move now, and reach the type of compromise that Martin is talking about.
But we contend that even this will be temporary. Internet requests do not lie, and when you view over the internet in catch-up mode and only choose a handful of channels to watch, then the advertising on those channels strengthens, so that the other channels look like they are not worth making and waste away.
Bundling will be with us for a while, but over a ten year period we will see its influence naturally decline as an economic force until the unbundling or a la carte argument is no longer relevant.
However you do get a feeling that Martin feels that she has to speak about this in terms of what’s good for the market she writes about. Like so many analysts, predicting doom and gloom for her sector doesn’t serve her. She doesn’t want half the US TV channels to go away. At Faultline we welcome this, because it is a natural evolution of programming to suit the internet, and that’s not a tide you can swim against.