A few weeks ago, the major TV networks held several events catering to advertising, expecting to sell some advertising for the fall TV season. This period, called the upfronts, is generally a good time for TV stations to attempt to scare advertisers into paying a lot of money for advertising, riding on the fear that their competitors might pick the best spot. However, something different happened this time: some advertisers decided to not join the dance.
The reason I’m looking into this effect is that there seems to be a major shift under way in the traditional media business and it is one that gives only two choices to traditional media company: adapt or die.
How TV works
The interesting thing about traditional broadcast television is that its model is based on large market inefficiencies. Let me explain: When a new TV show is created, the creator generally has to pitch the TV network, in an attempt to get the network to pick it up. The network then goes through some analysis in trying to figure out how the show might fare with its audience and whether the audience it attracts is one advertisers is willing to pay for. If they determine that the show could make them some money, they agree to fund a pilot, which is essentially one show that they can take around to test. If that pilot looks like it has potential, the TV station then orders up a few episodes of the show to put it on the air. In the process, they also make their affiliates, who own a geographical monopoly on distributing that content, that the show will be coming up.Â
TV networks make money from two sources: advertisers and fees from affiliates. They use some of that money to buy the rights to a TV show, which is often produced by a separate company. While the separate company may make a relatively small margin on the initial run of the show, a success can enable it to sell the show rights to other companies after the initial run. This is why some non-network TV station can run re-runs of older shows long after those shows are no longer producing new episodes.
TV is imploding
Jeff Jarvis uses the the term exploding TV to talk about the current changes in the TV industry. I believe is contention is wrong: TV is not exploding but rather, it is imploding. The current model is predicated on inefficiencies in the way content is distributed. However, in a future where IPzation rules, TV is trying to reform itself into something new and here, it runs into some problems.
The first problem that TV networks are going to encounter is that their whole living is predicated on something being big: big shows, big audiences, big money from advertisers. But the new model is about small: single episodes, smaller audiences, and less consumption at a single time. As a result, what was once the sweet spot of 8pm to 10pm, when most people had a limited choice in terms of what show they could watch, no longer exist. This happened as a result of both external and self-inflicted factors.
The first external impact was the introduction of the VCR, which allowed people to start shifting the time at which they watch a TV show. Technology constraints, however, made it difficult for the general population to figure out how to properly set up recording of TV shows. However, enough of a critical mass was formed to give people a taste of the concept. When digital video recorders like Tivo were introduced, they simplified the process and made it very easy for people to start shifting their schedule. However, this still gave the TV an hedge: while most people could shift schedule, they were still tied to the device and didn’t know how to get the content of that box.Â
Enter companies like slingbox, which created a device that took the concept one step further by allowing people to shift WHERE they’re watching TV. The second barrier to content being available anywhere anytime shifted, making it very difficult for TV stations to figure out who is watching their shows, when are they watching them and where are they watching them. As a result, they can no longer guarantee their TV affiliates an audience and are therefore finding some pressure in terms of the fees they charge those affiliates.
In an attempt to recover some of their lost revenue, TV networks are now experimenting with putting their shows online, either via their own sites (as ABC did) or through pay mechanisms like the iTunes store (which, surprisingly, Apple still calls the iTunes music store, even though it sells much more than music now). I’d venture that this creates another potential danger for the networks. Why? Because, at the end of the day, TV networks are just re-packagers, using other people’s content to support themselves. What value do they add? At the current time, they can claim that they have the audience, and they have the relationship with the advertisers: it’s a strong advantage in the short run but what about the longer timeline?
Organizations like myspace and the web 2.0 video hosting company of the week are similarly packagers and, while the quality of the video on their systems is still relatively week, one can envision a future where they could easily compete with the TV networks for audience. In some critical audience segments (for example, the much coveted 18-25 male audience), those distinctions no longer exist and, if you extend that trend out for a decade, ABC and youtube are on the same footing. The only difference is that ABC has contacts with the advertisers, where youtube doesn’t really. One can venture that something like Google AdSense is coming for the video space and this is bad news for packagers in general as it will relegate them into the space of just being bandwidth providers (and recent technology development point to P2P networks as not being far from being able to deliver TV quality video at a percentage of the bandwidth cost)
The reason I’m thinking that the new model is bad for packagers is that the brand identification is now going to shows, not to TV networks. Most people think and talk about shows, not about a network lineup so conversations are relating to Lost, the Simpsons, or American Idol, each of which is produced by an outside company. What happens when the creators find that advertising is good enough to support their effort outside of the network system. As TV and the Internet merge (an effort furthered by the recent announcement that Tivo will put web content on your TV), the control is going into the hands of the content producers, not into the hands of the packagers: in a future where the boundaries no longer exist, what happens if the producers of the Lost TV series, seeing that they have a large enough following, decide that they are going to distribute their show on their own and use an adsense-for-video system for ad insertions.
So what’s a network to do?
Under this model, networks are headed for the trashbin of history but they may have a way to keep themselves relevant. In order to do so, they need to :
- Recognize that audiences will be smaller
- Focus on a core audience
- Produce your own content
- Give a platform to newcomers
The first item is probably the harder one for them to deal with. Recognizing that audiences are going to be smaller, means that they will have to go through painful reorganizations and shrink themselves to fit the new reality. Such reorganization are always painful but will give them a chance to move to step two: focus on a core audience.
That focus will put them, however, in head to head competition with some cable TV channels, which have taken than approach and have successfully mined their audience. For example, Fox News is known as the news channel for right-leaning people, or lifetime is known as the network for women. And so on and so forth. This may mean jettisoning some existing fares like, for example, the presentation of a particular sport (or going to extreme, the presentation of all sports as the sports leagues are generally the content producers, getting paid large fees for their offerings).
Another tack is one where convergence, that much used but seldom implemented word, comes in. Most, if not all, networks are part of large media conglomerate. This gives them access to production resources to build up their own content. Some of the networks have already smartly moved in that direction, giving them more control of their destiny.
Last, but not least is establishing your network as a platform for newcomers. Fox, now considered the fourth network, managed to establish itself by presenting fares that were edgier and different enough in a world where triangulation to get a portion of the middle of the road audience had driven shows that were mostly bland. One interesting challenge, when building up on such a strategy is how one chooses their battles. In the United States, the FCC has made it difficult and sometimes expensive to produce more risque shows. But what if, using their new internet platform, TV networks were to offer two versions of their shows: one that is cleaned-up for television, falling under the proper guidelines for “acceptable” content, and one that is produced for the freer, more unregulated internet. Edgier content is, after all, how some cable channels like HBO have established themselves as powerhouses in the content space.Â
One interesting approach in terms of providing a new platform is that of current.tv. I initially wasn’t sure of what to make of it but I think it goes to the same impulse that has driven youtube to become such a phenomenon: users love to create content and, while most of it is probably not that compelling, such systems break down the stranglehold than TV networks programmers have on distribution.
So why this long piece?
There doesn’t seem to be much new in that piece to people who are interested in that space but I would contend that, when you look at it in perspective, it explains a lot about why TV stations are so interested in ending net neutrality. The fight over net neutrality is about imposing artificial barriers in order to protect monopolies. However, the new threats presented by upstarts like youtube are upsetting the apple cart and traditional companies are now trying to find a way to ensure that their monopolies are protected. Of course, they’re never going to say it that way but, ultimately, the fight over net neutrality is a fight over what content will be available. As I’ve mentioned in my earlier piece on net neutrality, the battle is primarily one happening around the future of the internet in the United States. And, in thinking some more about it, I’ve come to the realization that, at the end of the day, the US companies opposing net neutrality may be fighting not only for the benefits of the telco providers but also for the benefits of the large content producers.