The Digital Revolution Is Disrupting the TV Industry

The Digital Revolution Is Disrupting the TV Industry

          
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The Digital Revolution Is Disrupting the TV Industry

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  • Where Is the Industry Headed?

    Until recently, the video content industry’s evolution has been gradual. Some consumers are canceling TV subscriptions, but most use online and mobile services in addition to, not instead of, their existing TV service. In response to the growth of online and mobile services—and consumers’ preferences for nonlinear and streaming video—incumbents are gradually developing new offerings to compete.

    Content creators, networks, and distributors have collaborated to deliver their traditional, facilities-based services over the Internet through “TV everywhere.” Cable and satellite operators are creating on-demand services, building navigation layers, and enabling consumers to view content on multiple devices. Networks are spending more for premium sports and entertainment content. The three video-on-demand business models—advertising supported, TVOD, and SVOD—continue to earn healthy returns.

    In other words, while online-content networks and aggregators have assumed an increasingly important role in the value chain, many traditional content providers have made investments to stay in the game. And the symbiotic relationships among content creators, aggregators, and distributors remain largely intact.

    It is surprising that a number of industry executives still believe that we will continue along the path of gradual evolution. To be fair, executives in the industry have spoken about ways to achieve this low-risk scenario: cutting off Netflix deals, aligning multiplatform rights and downstream syndication rights with multichannel-video-programming distributors’ on-demand and TV-everywhere solutions (in exchange for higher rates, of course), and continuing down the evolutionary, structured, and safe path. Others in the industry, however, believe in the coming disruption, citing the strength of new participants, disruptive content models, and the shift of consumer demand from one-size-fits-all video solutions. We are in the second camp: industry shifts have been gradual thus far, but it is highly unlikely that the situation will not change.

    We see four disruptive scenarios in the making, and who the winners will be will depend on which industry participants seize the advantage in the battle for market share. These scenarios are not mutually exclusive, and more than one may shape a given market. But this much we know: all participants whose businesses are built on traditional TV and streaming video do need clear strategies to prepare for the changes to come and—where possible—to influence outcomes in their favor.

    The universal remote: global, all-inclusive navigation solves the discovery problem. As viewers embrace new ways to access video, they are challenged to find the specific content they want to watch. A wealth of compelling content exists in the fragmented mosaic of FTA programming, pay TV, and Internet-based offerings, but nobody has yet solved the discovery problem. That is, consumers can’t access and stream all video content across pathways and devices using a single point of navigation. The business that can integrate these ecosystems and become the go-to, anytime-anywhere access point for living-room TV, smartphone, and tablet viewing will create a huge competitive advantage. Cable service providers with broadband infrastructure are especially well positioned to develop such global navigation. By partnering with or acquiring online providers (such as video-on-demand services) and gaining access to a broad set of online and nonlinear content rights, they can provide one-stop shopping for a comprehensive array of video programming.

    The walled garden: exclusive entertainment becomes the critical strategic asset. Certain types of content, such as serialized dramas and top-tier sports events, are becoming increasingly popular with viewers, and distributors and aggregators can capitalize on this trend by locking up exclusive entertainment content. Large online aggregators such as Amazon and Netflix are already making big bets on exclusives—not just buying rights but also creating and distributing their own original series. Netflix’s spending on original programming will skyrocket from $5 million in 2012 to $550 million in 2017. Cable providers, too, are locking up exclusive entertainment—especially top sports content. DirecTV paid for the rights to broadcast every out-of-market NFL game, and though the cost of purchase exceeds its direct revenues, the company won big with customer acquisition and retention. With subscribers choosing distributors on the basis of content preferences, exclusive entertainment content can be a critical strategic asset and differentiator in the competition among aggregators and distributors.

    Distribution disintermediation: direct-to-consumer takes on traditional TV bundles. For networks with strong brands and top-tier programming—and for those that own the rights to hit content—the ability to reach consumers over the Internet opens the door to new monetization opportunities: networks that can deliver content directly to consumers. Networks don’t have to share revenues with cable and satellite partners. Studios and sports leagues can reach fans directly, no longer relying on a TV bundle to carry their content. But when studios, networks, and other players go direct to consumers, without the benefit of the cable or satellite provider’s customer base, they face a challenge: they must attract enough subscribers to make it profitable. And à la carte offers facilitate cord cutting, which means pricing must both woo subscribers and compensate for likely losses in traditional subscriptions. The prognosis for this scenario is related to how successfully content owners and networks tackle the challenge of attracting viewers without the benefit of traditional TV bundles. Although it might seem counterintuitive, brands will be more critical than ever in this scenario. TV networks with name recognition and top-rated sports and entertainment content will be the most likely to gain the requisite subscriber numbers and price points to succeed. If this scenario takes off, traditional TV-service providers could suffer, because successful direct-to-consumer offers enable TV networks and owners of content rights to leapfrog their traditional distribution partners.

    Live TV online: online players stream live water-cooler programming. One of the main reasons viewers do not cut the cord is that traditional TV-service providers still offer live programming and content across all categories (not just entertainment, but news and sports as well). Online aggregators that can integrate live content with their own on-demand offerings—and price the package right—will transform their value proposition for consumers, in effect offering the advantages of traditional TV bundles combined with the advantages of a nonlinear online provider. A growing list of companies—for example, Sony, Dish Network, Zattoo, and Magine TV—already deliver live linear channels online, bypassing traditional cable and satellite providers. But the channel selection each of them provides is more limited than a traditional TV bundle. For this scenario to take hold, online companies need many networks and content owners to license them the rights to live linear programming, but these rights will not come easy—or cheap. What we are seeing now—online aggregators making content available faster and a growing number of companies delivering live TV over the Internet—makes this scenario one to watch.