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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  • Staying Relevant in the New Ecosystem

    The questions for all video industry companies are: What steps should we take—and when? What should we defend, and what should we actively disrupt? To thrive amid these changes, companies must determine how to make more strategic use of their content assets, seize the opportunities that can grow value, and tackle the challenges that can put their business models at risk.

    Content Creators and Rights Holders. Content creators and rights holders are well positioned to thrive in virtually all scenarios—evolutionary and disruptive. Holders of sports rights have serious leverage to negotiate with aggregators and distributors, thanks to the unique value of their content. Entertainment content creators and owners, too, have excellent leverage across all scenarios, particularly with serialized dramas. Sports and entertainment content owners with strong brands and rich programming should consider direct-to-consumer opportunities, while those with less compelling brands can maximize value from “windowing” (selling and reselling video content through multiple distribution platforms at different prices over time, in accord with viewer demand). Low-value content used to fill time slots will continue to lose ground in an increasingly nonlinear world.

    FTA and Subscription-TV Broadcast Networks. Networks need to get out of the middle. For individual networks, this means building a strong lineup of top-tier or niche content. Few FTA networks have enough unique content to develop direct-to-consumer offerings. They should instead focus on disseminating their branded content as widely as possible through multiple distribution platforms. For them, online is the new spectrum. Pay TV networks with strong brands and compelling sports or entertainment content are well positioned to pursue direct-to-consumer offerings (in addition to their partnerships with infrastructure-based and digital-only aggregators). Pay TV networks with little or no top-tier or niche content, however, are poorly suited to thrive in the digital age. For both FTA and pay TV, the middle will be a certain path to decline.

    Infrastructure-Based Distributors. Infrastructure-based distributors can be divided into two camps—those with a robust broadband capability and those without—and their optimal strategies are very different. Large pay-TV distributors with high-quality broadband should make aggressive moves to become the single point of navigation for all video content—across pathways and devices. This will require a significant change in the mindsets of distributors, whose business model has thrived on direct and proprietary relationships with subscribers. They will need to disrupt the walled garden to become an integrated curator of all video, including streaming-video content. The move will generate friction with key companies in the value chain, particularly networks and set-top-box providers, and regulatory issues may arise in certain markets. Nevertheless, large pay-TV distributors that have established strong relationships with consumers are well positioned to make this pivot. Small pay-TV distributors do not have the scale necessary to develop a comprehensive navigation platform for subscribers, so their best hope for survival is the gradual-evolution scenario. Video-only distributors are perhaps the most vulnerable should any of the disruptive scenarios come to pass. With little or no access to broadband, they are highly susceptible to cord cutting and thinning, and their margins are eroding as content costs eat up a growing share of video revenues. Given their endangered status, this cohort should either build or acquire broadband capabilities to supplement existing services, compete on exclusive content, or strategically align with broadband players.

    Online-Content Aggregators. Online aggregators, such as Netflix, Hulu, and YouTube, must continue to leverage their advantages—broad distribution, unbundled access, and strong brand equity—to compete with incumbents. They should continue to invest in original content and leverage data to achieve a better hit rate. Online aggregators must also make a choice: to stay in their own lanes or attack. An online aggregator that stays in its own lane will protect its position and pursue an incremental share of the nonlinear online and mobile ecosystem. An attacker will license linear FTA and pay-TV channels to become a double threat, offering both linear and nonlinear programming. The right choice will vary depending on the digital aggregator’s competitive and financial position, the pay-TV aggregator’s penetration and strength in the market, and regulatory restrictions.

    As companies move deeper into the online and mobile landscape, their mindset should not be that they are making a transition from physical to digital. They will have to understand where the business provides unique value and build new business models that deliver on this value. This may well mean that some aspects of the business will contract and die, and it may mean that companies will actively cannibalize themselves. But online, mobile, and nonlinear viewing are here to stay, and companies that can successfully restructure their business models to keep pace with evolving viewer preferences have much to gain. And, if history is any indicator, the many that do not restructure their business models will face the consequences of value destruction.

    This report, the first in a series, takes a global view of the critical trends affecting the broader TV ecosystem. Next, we will detail the implications of this marketplace change for such major incumbents as FTA networks, cable TV networks, and the traditional distributors and aggregators of pay TV bundles. Subsequent reports will have a regional focus, the first of which will be the US market. It will also tackle the strategic choices of US industry participants as they prepare to maintain and create value in the new world order.