In the past we have likened the digital switchover to a Tsunami, and pointed at that everyone will get wet. The trick is working out which businesses will drown. And now, on the dawn of the US digital switchover, one of the most aggressively marketed events in the history of media, it’s worth just having another think about who will take on water.
It is worth noting that the US switchover will have the LEAST negative effect of any switchover, for the simple reason that in the US people watching transmitted TV makes up such a small portion of the TV audience.
We can talk about the rest of the world as ‘less developed’ but like all systems around the world, Europe and the highly developed Asia Pacific nations are just ‘differently developed’ not further behind in the same track that the US is traveling down, and much the same can be said for the rest of the Americas.
One estimate we have seen says that as few as 28 million homes in the US rely on broadcast TV. Given around 111 million homes there, with around 70 million taking cable and 30 million taking satellite, there would need to be an overlaps between cable and satellite of about 17 million homes for that to be right, which it may be given that 66% of US homes have three TVs.
If those numbers are not exactly right, they are the right order of magnitude. It no longer matters in the US how far your transmitter reaches, it matters instead how far your programming reaches, and each of the major broadcast networks in the US, CBS, NBC, ABC and Fox, are now all must carries on cable and satellite, so to them the existence of broadcast transmission is less and less important every day. The BBC in the UK would still reach 50% of homes if cable and satellite signals didn’t carry it, and the percentage is higher in most European countries.
What that means is that the disruption of switching off analog transmission only applies to around 25% of homes in the US, and these are self selected as mostly being low income homes. So while people moan constantly about the cost of switchover, and the subsidies required for adaptors, and the overall market disruption, the switchover will have little effect on the distribution of TV channels, and it is the other half of the equation, what happens to the spectrum that is freed up, which will have an effect on both the entertainment world and the mobile world.
But even if the digital switchover has been over-hyped and cannot threaten the stability of US TV broadcasting, the changes can have an effect on these companies.
This is because the United States, unlike any other modern economy, has a decentralized, market-oriented television system with no national broadcast network. Instead it has over 200 local media markets which each have their own TV stations. Because of US regulations, for instance the rule that says that no broadcaster can own more than 30 odd % of broadcast rights into US homes, there has emerged the idea that these TV markets can be owned by companies that are ‘affiliated’ to other network groups.
So in the US, broadcasters grew until they got too big and too politically powerful (worried about unified TV programming swaying the presidential vote) and then had to grow by affiliation. That is the process of lending your programming to a neighboring TV station and then either letting them sell some of the adverts and pay you, or sharing advertising revenues on those homes.
To ensure local presences in television broadcasting, federal law restricts the amount of network programming local stations can run. But over the 1970s and 1980s the amount of locally produced programming fell further and further until broadcasting has become simply an affiliation of the major networks, which bring in the top TV series, sports programming and films, and the rest is taken from re-runs of old favorites, although local news, weather and politics shows are all healthy. Some independently produced material gets in there somehow, but really these markets are moribund in terms of innovation. And yet broadcast TV companies bring in the majority of a national TV advertising spend approaching $60 billion, dominating perhaps a 60:40 split with pay TV.
The point here is that the broadcast networks are protected from digital switchover and are instead more threatened by the increasing use of games consoles, DVD players and DVRs in taking away TV hours supporting advertising; its old enemy of pay TV networks, and the anticipated increase in the use of video over the web, but also video on mobile or over the mobile web. The past five years have been a constant fight to hold ground here and this has been achieved not by doing anything to support the physical distribution of content at the transmission level, but instead by moving programming to all of those other formats. So broadcast networks sell tons of DVDs, they have taken advertising and paid delivery models to the internet, they have mobile streaming channels. This is a fundamental shift. They have moved from broadcast networks they own, to those which they partner with, to physical delivery channels that they have little or no control over.
But the very best content is still reserved for the pay TV channels, especially sport. And this fragmented situation still threatens that.
If Major League Baseball, the NFL or the NBA ever works out that they can get more money by marketing themselves over the internet, than they can get by selling exclusive programming to one of the major cable channels, and if other sports follow, then cable especially, and broadcast as well, would lose one leg of their powerful grips on media. Of course there is no reason why one major sports should choose to stop broadcasting, only the idea of it being an exclusive.
So perhaps there would be a first show cable license, a broadcast license, a separate license for say mobile TV, another for the internet, and another for a games console owner to download games and so on.
At present there is a single exploitation exclusive, but as there is more and more video fragmentation into more and more forms of video, that means that a single organization is expected to master ALL the formats of video. Eventually sport has to take control of its own channel. This will be helped as ‘small’ sport, local teams and junior teams, go to the trouble of finding ways to monetize and popularize themselves.
One common sporting tactic among networks around the world has been not to bid for the local TV franchise, but to bid for a foreign similar sport that uses perhaps some local heroes. UK TV bought the Italian soccer league, Hong Kong bought the UK league, mobile TV in Korea bought US baseball, and so on. So there are a number of precedents here. Small sport can go the same way. If I cannot watch a premier soccer game on the TV, perhaps I’ll watch a local game on the internet. If these are then clustered together so that ALL local games are viewable through the same organization and this is then monetized through advertising support, suddenly we have the birth of a new channel which might attract ‘big’ sport. And since most big sport is allied to pay TV networks (in the US that’s ESPN), then this will slowly dent their revenues, and thereafter their ability to afford to pay for exclusives. You can see this eroding.
This is the same for each of the other legs upon which stand cable and broadcast networks. Film has been widely fragmented already. A Friday Night Film Premiere on TV can no longer stand up to DVD sales and rental, online downloads, VoD on cable and IPTV. Neither can a fully fledged film channel or multiple premium film channels. Netflix and similar services take this away or at least mean that it is not worth paying for an entire pay TV subscription just for film any more.
However you would think that the TV series which are commissioned by both broadcast and cable networks would remain their mainstay. But as the internet volumes in video rise there is a danger here.
Over the past five years, the fall in the number of viewing hours has led to an acceleration in the battle for viewers eyeballs. This has meant that TV pilots are often commissioned and then the series dropped just three or four episodes in. If a new TV series doesn’t bring in something over 10 million viewers, depending upon costs of production and time of day, that series is considered a failure. Already a number of these failures have been dropped and found their way to profitability via the internet. In the past huge TV series such as Baywatch were dropped by US networks only to be revived by foreign networks. Now they are being revived by smaller audiences on the internet.
Changes in exploitation sequences are slow to take hold, but take hold they will. Just as films have shifted their early revenues into smaller and smaller time windows and brought forward DVD revenues, and this in turn has begun to savage the cinema industry, and make it safe for earlier online delivery, so similar changes to the exploitation chain of TV series will affect this last mainstay of broadcast and pay TV networks.
Eventually both forms of TV lose some of their grip on sport, film and TV drama, and that is potentially disastrous. However we have to remember the timescales here are long, and 5 to 10 years is where most of this will happen, it won’t be triggered overnight during 2009
The internet and potentially downloads and mobile TV will all play their part in offering a separate channel to ‘failed’ or smaller audience stories and these will in some cases become more successful than TV series. In the end they all currently dream of reverting back onto the TV screen. Later as exploitation revenues from the internet rise (video advertising accompanying internet delivered video last quarter jumped 245% over last year) TV series can start there and stay there undermining all forms of TV, free and paid.
There are any number of things which can then happen. Cable TV will perhaps take on more premium channels with lower or no advertising. But if it does this, it will have to offer more granular channel purchasing.
Unbundling channels today would kill about 66% of TV channels out there and in US pay TV, instead of being 300 channels with nothing on, this might eventually consolidate down to 50 or 60 channels services where everything on TV draws a significant number of TV viewers.
This would be a huge body blow to companies like Viacom, and its Paramount studio; Disney; Sony Pictures, Warner Brothers and NBC Universal. Because their ability to absorb the great majority of video advertising into their cable channels would disappear, in turn creating new favorites which are more used to the modern idiom of multi-platform programming and the internet.
This sets the context within which the redeployment of analog TV into digital channels and the re-harvesting of that bandwidth, must be seen.
On the mobile TV front, suddenly for the small expenditure of around $100,000 to $150,000 a single TV market can buy a new digital exciter and the equipment to put together more channels. That will give them ATSC broadcasting with additional channels for mobile TV, perhaps as many as 6 new mobile channels, along with their own existing SD channels in substantially less spectrum than their previous analog holding. So while this may address 28 million TV sets, it could then address 280 million handsets, using the ATSC M/H services.
So the moribund local broadcaster can, if suitable funded and motivated, become an innovator again and radically change the media equation in the US. All they have to do is collectively make a case to one of the major cellular operators to get them to allow devices which have ATSC M/H chips in them connect to their networks.
Well that’s a bit like asking the cable operators to take existing terrestrial programming. Would that ever have happened without ‘must carry’ provisions which were regulator enforced to protect broadcast markets? AT&T, Verizon and Sprint all have major investments in (inferior) streamed mobile TV and AT&T and Verizon have a commitment to MediaFLO, offered by Qualcomm. So why would they?
At the same time video is one of the deliverables of the new spectrum AT&T and Verizon have bought. This will slowly (very slowly) be brought to bear on cellular networks. We know it is likely they will offer LTE networks in about five years. LTE will offer much better streaming, it will have enhanced multicast enablement so that a small bouquet of TV channels can be broadcast from each base station. But what are they going to do for the next five years. Can they herald in an era of mobile TV with an inflexible paid model, as has been adopted by MediaFLO, which has substandard short form content, controlled entirely by the major broadcast networks? No they will need to support ATSC M/H, especially now that they are so many devices with larger, video capable screens.
What needs to happen and what we think will happen, is that those same TV networks will worry that they will not get their fair share of mobile viewers, and they will push AT&T and Verizon towards embracing ATSC M/H. One way they will do that is by making deals with unaffiliated handset retailers (not many in the US) and with smaller operators like T-Mobile, and MVNOs like Virgin Mobile. If these have ‘free to air’ TV on their networks, it will have a high uptake and create significant churn at AT&T and Verizon. This could be their answer to the iPhone, as it were, forcing the majors to join in.
And this could be facilitated by companies like Qualcomm embracing ATSC M/H. Qualcomm has repeatedly shown it can accommodate new protocols on its existing chips, driving down the cost of any such move. It is also a long time partner of LG Electronics and Samsung which are the driving technological force behind
Again why would it sabotage its own MediaFLO pay TV service by stimulating a free to air TV regime? We think that’s fairly obvious. If Qualcomm doesn’t do it, one of its rivals will and because pay TV would never have taken off if free to air had not initially proved the case for TV. Mobile TV is the same, broadcast free TV will make the case for mobile TV, and then and only then will pay TV versions emerge. Since Qualcomm is in the business of selling chips, it will have a stake in both the cable equivalent of Mobile TV and the free to air Broadcast version.
Mobile TV adds just another form of video fragmentation on top of the other that are already operating ‘ online download, streaming, DVDs, DVRs ‘ but there are more mobile handsets in the world than there are DVDs or DVRs, where video is viewed on the handset on an internet model or on a broadcast model.
Cable TV operators meanwhile, currently and recently considered the most powerful media companies in all of America, turn out only to have physical control over one delivery channel of media, which is why they have to turn to triple and quadruple plays to thrive, because they have no intrinsic control over media. Already they are moving too late to try to control social networks and user generated content on the internet, and content downloading sites, way behind the Broadcast networks.
And cable TV networks, will have to begin to court each of these new fragmented types of route to market, and perhaps change their names to multi-format TV networks and will lean less on the cable operators, leaving cable with less power.
Outside of US, broadcast networks have become separated from the TV channels by one company specializing in efficiently getting TV channels into the air, and other companies creating channels. Pay TV does not quite have the grip that it has in the US, so these channels are collectively getting together to stimulate more free to air networks ‘ DVB-T and DVB-H are just a few, along with collective efforts in P2P networking to send content over the internet.
This has several effects. The broadcast (or transmission) operator has a vested interest in getting new broadcast networks working such as mobile TV, and goes around trying to bring all the relevant forces together to get such a service off the ground. And TV channels form into consortia which try to ‘own’ or control the new formats and make them have a free to air components ‘ such as DTT and Free to air satellites. In the US Hulu is an attempt by a consortia to own the route to market for media over the internet, and the fact that it has no cable counterpart is worrying for cable.
Next week we will look at the other half of the equation, what new services might emerge, and what effect this will have on the media eco-system.