The Digital Revolution Is Disrupting the TV Industry

The Digital Revolution Is Disrupting the TV Industry

Title image

The Digital Revolution Is Disrupting the TV Industry

  • Add To Interests
  • PDF

  • The Disruptive Impact of the Online-Video Value Chain

    The significant advances in technology and high quality of content available online have led to enormous increases in audience numbers and, as a further result, fundamental changes in industry dynamics. Market structures, relationships among companies, and distribution of value are all in flux. Viewers are gaining access to a massive amount of nonlinear online content, and, as a result, business models are shifting rapidly to capture value through these new channels.

    As more and more consumers choose to watch streaming video rather than traditional TV, their appetite for serialized entertainment has grown, and industry companies have also scrambled to create or buy the rights to top-tier entertainment content. We have identified several core trends fueling the disruption.

    Online and mobile viewing will exceed facilities-based video viewing. In the US, the amount of time people spent watching television shows on a television set dropped marginally (1%) from 2013 through 2014. However, an increasing amount of content is being delivered online, leaving video-only distributors (for example, satellite service providers) with an asset—facilities-based video distribution—that is quickly declining in relevance. Online viewership, on the other hand, is growing quickly. The amount of time people spent watching television shows online jumped 50% from 2013 through 2014. By 2018, online video will likely account for nearly 80% of fixed-data traffic and close to 70% of mobile traffic.

    This rise of online and mobile viewing has had important implications for the traditional subscription-TV business. It has shaken the price-to-value relationship of the bundle, because less traditional viewing equals less value for the bundle. This has created an incentive for consumers to drop pay TV altogether (these are the “cutters”) or actively manage their cable bills downward (“thinners”). For many years, as consumers purchased more and larger video packages, average revenues per user rose. Now, however, consumers are disaggregating their video bundles. Our research suggests that the compounded effect of cord cutters, thinners, and “nevers” (people who never subscribe to cable) will not be just a few percentage points. Rather, it will be a few dozen percentage points. Nevertheless, we expect the decline to occur slowly over time—not unlike the drop in newspaper readership and magazine circulation and the demand for CDs. (See Exhibit 4.)


    On-demand viewing will exceed live, linear viewing. The other fundamental shift in consumer behavior is the mass exodus of audiences away from live, linear viewing. The DVR, the first disruptive force, started driving this change more than 15 years ago, and now online and mobile-video-on-demand-only services have accelerated the shift. The model has clearly changed from “watching what is on” to “watching what I want, where and when I want it.”

    The share of nonlinear viewing is currently reported to be just over 20% in the US, but this number is expected to double to more than 40% by 2018. And many European markets are not far behind. These figures also massively understate the share of entertainment that viewers already watch in a time-shifted fashion. In the US and the UK, some 40% of serialized TV-show content is viewed in nonlinear formats. We are quickly approaching the point at which more entertainment programming will be viewed in nonlinear formats than live.

    Not all video content follows this shift toward nonlinear viewing, of course. News, live sports events, and live blockbuster events (for example, the Grammy Awards and the Academy Awards) remain primarily live viewing experiences with a short shelf life. But entertainment is closing in on 50% of nonlive viewing, and live online streaming of major events is becoming commonplace. (We saw this in the first-ever free global live streaming of a National Football League [NFL] game between the Jacksonville Jaguars and the Buffalo Bills in the fall of 2015.) Linear programming for TV is already becoming an archaic medium.

    New companies and business models are capturing value online. The online and mobile ecosystem is structured around three business models: advertising-supported video on demand, which provides viewers with free access to a large library of video content supported by advertising revenues; transaction-based video on demand (TVOD), which allows consumers to own or rent content for a one-off fee; and subscription-based video on demand (SVOD), which allows consumers to access a large library of content for a monthly fee. For each of these models, the online economics are scaling up quickly. (See Exhibit 5.) In the US, online-advertising revenues increased sevenfold from 2010 through 2015, and growth shows no signs of slowing down. Taking the global view, we expect TVOD and SVOD revenues to nearly double over the next four years.


    Furthermore, advertising never keeps pace with changes in consumers’ media-consumption patterns. This was true for the development of Internet display advertising, it was true during the early days of cable network programming, and it will be true for video streaming and nonlinear viewing. But that advertising will catch up is inevitable. We believe that the tipping point will occur when online media companies can replicate the time-sensitive reach that big-event TV networks can offer. Advertising technology is quickly advancing toward this endgame.

    Networks are experiencing a collapse of the middle and a rise of the “long tail.” Online, time-shifted video has altered the types of content that viewers consider valuable. Top-rated, unique content has become essential in the online and mobile ecosystem, and midtier programming is losing ground. (See Exhibit 6.) Viewership of such “water cooler programs” as the NFL’s broadcast of the Super Bowl, AMC’s Breaking Bad, and NBC’s The Voice has increased as second screens and parallel social media lead to greater engagement. Niche content shows—such as FX’s Louie, Amazon Studios’ Transparent, and the Food Network’s Chopped—have passionate but small audiences, and nonlinear viewing provides them with increased access.


    Content creators and rights holders are capturing a greater share of value. Content creators and rights holders are gradually gaining share—up from 33% in 2010 to 36% in 2014. Although these changes have been subtle on a global level, in mature video markets, such as the US and the UK, where competition for top-tier programming is robust, the trends are more pronounced. Naturally, media rights for top sports events have seen the biggest cost inflation, because they provide “exclusive” and predictable hit programming. In the UK, the costs for sports content nearly doubled from 2008 through 2013. The competition to create original series has also led to original programming’s representing a larger share of total costs for traditional TV networks and online companies alike. In the past two years, companies as varied as Amazon, BBC, Microsoft, and YouTube have all commissioned original programming. A small percentage of these companies produce movies, but most are focused on serialized—scripted and unscripted—drama series, the leading drivers of nonlinear, online viewing. Netflix’s licensing costs are projected to rise from $2.3 billion in 2013 to $3.8 billion in 2017.