Cable television is a dead industry walking.
Sure, there’s a certain engrained nature to the business that allows it to lumber forward for a while, but it doesn’t actually provide a service of any real value anymore. Instead, it manufactures value through a collaboration of media conglomerates that control the flow of content. In essence, cable companies force people into using their service despite the fact that we could just as easily access all of that content through the other service they provide. You know…the Internet.
And hey, it works! For now. It’s just that, historically, the Internet has always had a way of completely destroying business models built around that very principle, and I don’t see how this could play out any differently.
The Cable Business Model: Inefficiency Masked as Service
When cable was the only way to watch most television, it was pretty obvious why you would spend $50 a month on their services. Content creators made content, you wanted to consume content, and cable was the vessel through which you got to that content. Thus, there was a need.
Now? Content creators make content…and they can just as easily send it directly to you. The Internet is essentially the only conduit that’s really needed. That basically makes cable an increasingly obsolete middle man for your television content. Except that it’s really more frustrating than that, given that Time Warner (TWC) and Comcast (CMCSA) are also providing Internet services. So, essentially, they’re fighting really hard to prevent you from using their one service to access content just so they can maintain the existence of a second, unnecessary service in order to double the size of your monthly bill. Just another way that cable companies are really, really terrible. Precisely the sort of inefficiency a free and open market would likely stamp out if we actually had a free market with regard to cable services. We. Do. Not.
So why DON’T more content creators skip cable and go straight to the source? What’s stopping NBC, for instance, from just offering up its content on its website?
Well, the fact that NBC is owned by Comcast is likely a pretty significant factor. It’s also still a lot more convenient for some large content creators to use cable to effectively outsource their efforts to collect fees and/or handle subscriber information. Getting one big check from Comcast and Time Warner beats dealing with millions of individual, tiny checks from consumers. But that’s all built around outdated content delivery systems in much the same way newspapers, magazines, and record companies were right up until their near-complete collapse in the last decade or so.
Cable television seems ripe for death by a thousand cuts. Or a thousand websites, as it were.
In fact, said death has already started.
The Growing Power of the Cord Cutters
I likely overstated the degree to which cable companies have successfully limited access to content online. There are plenty of options out there for cord cutters like myself. Between Hulu and perhaps some, ahem, legally creative alternative options, one can watch pretty much everything online that the more traditional couch potato gets on their TV.
There’s still plenty of traditional television programming that’s only available online if you can provide the streaming site with proof that you have a cable subscription. You know, the ol’ “we could let you watch this on this service but we won’t unless you’re already paying for this other service that you obviously wouldn’t need if we would just let you watch this on the first service” strategy that has such a long, glorious history in business.
Live sports, most notably. NBC’s Olympic coverage is available online six ways to Sunday…provided you’re already paying for cable. You can stream ESPN from its website…provided you’re already paying for cable. Even outside of live sports, there was HBO Go, the online service that could stream HBO content…provided you’re already paying for cable.
But, as Bob Dylan once sang, “You better start swimming or you’ll sink like a stone, for the times they are a-changin’.” What could potentially have been written off as relatively unimportant fissures may be progressing into wholesale cracks in the armor that could be harbingers of the end.
Increasingly, we’re seeing companies that create content but lack the direct connection to cable companies of a network (like NBC) are not so willing to toe the party line indefinitely. In mid-October, HBO1 (TWX) announced that it would be offering some version of its HBO Go service to online-only subscribers, allowing cord-cutters another way to circumvent cable aside from their parents’ password.
And that likely pales in comparison to the bomb that dropped on Monday when satellite television company DISH Network (DISH) announced that it would be offering a new online subscription package of eleven cable channels available to stream live for a mere $20 a month. Why such a big deal? Because that package includes ESPN. Live sports have long been cited as the last bastion of event television, one of the only things left where people will actually sit through live commercials rather than use their DVR. It’s why the Los Angeles Dodgers saw a price tag north of $2 billion when they sold in 2013.
Streaming is the Future (But Reed Hastings Already Knew That)
This was all just a rather long-winded way to get around to picking horses in the battle for market share in online streaming that’s starting to take shape.
I should begin by saying that a lot of us may owe Reed Hastings an apology. A big one. I know I do. In 2011, Hastings tried to make some pretty bold moves. He tried to split Netflix’s (NFLX) streaming and DVD services, boosting the cost of having both significantly, and lost a lot of subscribers in the process.
The company’s stock cratered, and a lot of critics (like myself) were lampooning silly Reed Hastings who didn’t understand that he was running a mail service DVD rental company. Here he is talking about how “we consider HBO to be our biggest competitor” and “the future of the industry is online streaming” and “we’re going to start making our own content.” Such grand ambitions! What a dolt!
Well, lesson learned. I am the dolt.
Turns out Reed Hastings was utterly prophetic in anticipating the next three years (at least) of market trends and in seeing how his company could and would transform itself to stay ahead of the curve. This is why I’m a critic and not a CEO, folks.
Either way, for all of the potential that exists in old-school media empires starting to break ranks and offer content to consumers, the trail Netflix has blazed in terms of building a streaming-only content company from the ground up is equally important. Today, Netflix has Emmy-winning television shows that appear exclusively on its service. Some people are more than willing to subscribe to their service just to get the chance to watch Orange is the New Black or House of Cards.
What’s more, Netflix may be playing a crucial part in winning the hearts and minds of the average consumer over to Team Streaming. Cable might be able to count on a certain amount of consumer inertia in people unfamiliar with streaming not wanting to go to the effort of making the big change of cord cutting.
Now? Netflix is hanging a big juicy carrot out there to tempt people across the divide. Plenty of people may be signing up for Netflix just to watch a few movies and a gripping political drama without any intent of seriously reconsidering their cable package – only to find that Netflix is effectively the Trojan Horse that shows them a world without their cable box that they may even prefer.
So Netflix has positioned itself pretty well as the first-in/(arguably) best-of-breed for your dedicated streaming platforms. But that is not to say that the race is over. There are a variety of players geared up and ready to make their own play to control this space, which appears to be the next big battleground in corporate media. So, here’s a quick look at each of the players:
As noted above, Netflix has done a lot to reshape how people think about this industry. By combining large-scale purchases of the rights to a huge library of content, delving into really innovative techniques for giving consumers precisely what they want even if they didn’t know that was what they wanted (as is outlined in this positively fascinating piece in The Atlantic written by Alex Madrigal), and producing original content that is enough of a draw to attract a large swath of new customers all on its own. All for under $10 a month.
Amazon is an intriguing player in this regard in that it’s integrated a streaming service that can at least rival Netflix into its broader Amazon Prime service.
Let me go ahead and say that Amazon Prime has changed my life. It’s wonderful. Nearly everything is available, has customer reviews, is offered at competitive prices, and gets shipped for free. The ability to buy a toaster online may not appeal to some, but trust me when I tell you that going to a Target (TGT) in Los Angeles on a Saturday is enough to make you seriously reconsider the potential benefits of China’s one child policy.
And that was before I even realized that my membership came with a robust library of streaming content. Amazon Prime appears to be here to play and here to stay. It certainly hasn’t generated as much clout as Netflix with its original programming, but shows like Orphan Black and Transparent are both getting a lot of attention. The company could arguably take a loss on original programming if it’s effectively leveraging those shows into more Prime subscribers.
And in terms of licensed content, Amazon Prime is no slouch. One surprising aspect of HBO Go offering direct streaming is that HBO had already cut a deal to offer most of its old programming to Amazon Prime members, something that would seem to indicate the network’s intent to continue outsourcing that part of its business. Prime members can also stream a large portion of Viacom television properties, including most of Comedy Central’s original programming.
All told, the fact that Amazon has built this out as an offshoot of its online shopping empire makes it an interesting play. It’s almost as if Wal-Mart (WMT) had bought Netflix outright as a companion/marketing tool for its broader footprint. And again, in much the same way that Best Buy (BBY) used to use cheap CDs as a loss leader to draw customers into its stores with an eye towards larger purchases of televisions or stereos down the line, Amazon could just as easily have a distinct advantage in the streaming space because of its presence as the dominant player in the online shopping industry.
HBO Go (TWX)
As stated above, Netflix and HBO Go are chief competitors. However, you have to hand it to HBO. HBO doesn’t offer nearly as large a library of licensed content, really just a handful of movies. HBO is making hay almost entirely on its massive catalog of award-winning original content amassed over a 20-year hot streak in making ground-breaking television.
At the very least, as long as HBO keeps pumping out hits like The Sopranos, The Wire, and Game of Thrones, it’s always going to have a place at the table. That said, string together a series of misses and things could change quickly, especially given the stakes created by the high cost of these series.
The other major difference here is HBO’s place in the larger Time Warner media empire. That’s something that simultaneously gives it a lot more and a lot less flexibility than a stand-alone company like Netflix. All told, if we the consumers are about to encounter a decade of these two companies trading body blows in the form of edgy, engaging, and entertaining shows, I’m not sure it matters who wins out.
Hulu offers up all of the network television you could want for free, making money by showing ads. It only offers up access to new episodes on a weekly schedule as opposed to the group dumping you see on Netflix. Basically, it’s just like television, but online. That’s by design – it’s an (almost)2 equal partnership between NBC, ABC (DIS) , and Fox (FOXA) .
It offers HuluPlus, a pay service that includes access to certain new episodes ahead of the free service, not to mention a decent-sized library of older television content. It also has the gall to continue running ads even when you’re a paying subscriber, which is infuriating.
CBS has long been the lone surviving independent television network, remaining its own company long after essentially everything else on cable became a part of one or the other major media conglomerates. CBS already offers content directly on its website and not on Hulu. It also announced the launch of its own subscription streaming service, news that appeared to get lost in the ether given that they did so just a day after HBO made its big announcement in October.
Okay, this may SEEM like an odd one to include on this list, but I think it may not be as odd as you’re thinking.
YouTube is its own thing, competing for a different demographic using a different type of content. Your cat videos and vlogs as opposed to your scripted, episodic series. However, YouTube’s structure is such that it offers any and all comers a shot to get paid for their video content provided they get the views. For the time being, that has translated to mainly low-budget, DIY-types taking advantage. But could the next evolution be one where YouTube provides the platform for shows that couldn’t find a home elsewhere to thrive? Hard to say at this point, but YouTube is already a big business and has a lot of potential to keep building on its success.
What Streams May Come…
At the end of the day, I would hate to be handicapping this race as an actual investor because that might ruin some of the fun that will come out of watching how things play out. As it stands now, there’s a seemingly inevitable upheaval of everything we understand about consuming television content right on the horizon and a wide swath of possible outcomes.
Say, for instance, that those companies in possession of the rights to massive backlogs of movie and television content (CBS, Disney, and Fox to name a few) ultimately decide that launching their own stand-alone services with exclusive access to their content library is the way to go? You pay $10 a month and get access to Disney’s entire empire, say. All of the sudden Netflix and Amazon Prime are out in the cold, unable to buy most of their current licensed content they currently rely on because the companies holding those rights are keeping them for their own service. Hulu, in that scenario, probably disappears entirely.
Imagine a marketplace where the consumer has to decide which of the five or six major content distributers to subscribe to? Some version of the a la carte option that cable long held out against. Maybe that leads to a series of mergers and consolidation to bulk up libraries. And maybe it goes the other way, with a number of smaller, independent content creators offering up niche content for low-cost subscriptions.
Push comes to shove, the future seems wide open. We’re now about two decades out from the Internet initially getting injected into popular culture and it’s still finding new ways to be incredibly disruptive to old business models. At the end of the day, even if the content these companies churn out doesn’t wind up being particularly entertaining, their competition for the streaming dollar should be.
1 For those of you thinking “Wait, isn’t HBO one of those companies with a direct tie to a cable company, namely Time Warner?” you’re right…and wrong. HBO IS owned by Time Warner, but Time Warner, Inc. (TWX). Time Warner Cable (TWC) is an entirely separate company that was spun off of the larger Time Warner during a 2009 restructuring. That said, they still share their name and an office space, which likely made for some pretty awkward elevator rides the day HBO announced it was offering a cable-less HBO Go option.
2 Fox actually owns 36% of Hulu to the 32% owned by ABC and NBC.
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