The economics of TV have largely remained the same since the quiz show scandals of the 1950’s. Just as the internet disrupted the music industry, television is entering a murky transition period. Nobody seems to know how to charge for and distribute content to a generation who has grown up online. All the proponents shouting “just put it on the web!” haven’t followed up with “…and here’s how it makes fiscal sense for the networks.” Some of the most forward thinking offerings like HBO GO and ESPN 3 are still tied to stagnant, buffet style, cable subscriptions.
If we’re going to have a serious conversation about cutting the cord, we need cost effective solutions that compensate content producers. Going direct to consumer is possible, and it opens the door for unique opportunities in process.
According to the National Cable & Telecommunications Association, as of March 2012, there are 114.3 million cable subscribers* in the US. You know the drill; each subscriber pays a base fee for content and networks heavily negotiate their cut.
*While many estimates place the number of US cable subscribers below 100 Million, I’m going to be giving NCTA the benefit of the doubt and referencing 114.3 Million for the duration of this editorial.
If you’ve ever wondered where your subscription money goes each month, allow me to pull back the curtain. I enter into the record, Exhibit A: Cable’s Crux
Sure, these are wholesale figures from 2009, but they illustrate the point. You’re paying for what you don’t use, and the networks all profit.
In 2012, operators are paying ESPN $4.69 a month per subscriber, or roughly 6.432 billion dollars a year in the US alone. It’s estimated that 25% of cable subscribers actually watch ESPN. Switching to an a la carte network subscription spells out a 75% shortfall in ESPN’s budget. To compensate, the network would have to charge each subscriber at least $18.76 a month. That’s a steep price to swallow for consumers, especially when they’re still subject to advertisements. Not only that, but now ESPN would be in the business of running a massive CDN, which requires a large infrastructure investment and another hike in subscription rates to cover bandwidth costs. To be fair, many networks, including ESPN, have the foundation to go direct to consumer today, and many do in smaller scales.
ESPN’s cut is at the extreme end of the spectrum thanks in part to the payments they owe for broadcast rights to global sports franchises. When inspecting a group closer to center like A&E, their 25 cent cut a month adds up in a huge way. (114,300,000 US Cable Subscribers * $0.25) * 12 Months = $342,900,000 annually, not including ad revenue. Any proposed move away from cable’s model has to at least be cognizant of the funds currently on the table. It’s hard to walk away from a sure thing.
Look around the room. Survey anyone under 35 and you’ll learn a lot about our future viewing habits. My favorite anecdote comes from Anne Sweeney, President of the Disney-ABC Television Group. When her college bound daughter protested a TV for the dorm room, Anne insisted. “You’re going to have a television if I have to nail it to your wall.”
Pre-recorded content is static. The connected generation have long since moved on from the days when one had to be sitting in front of a set at a certain time waiting for the show to start. TiVO and other place shifting devices got us going, but it was the rushed reaction from the networks themselves that had us sold. The flood of online viewing options is growing every day, but the models they use don’t address the money on the table from cable companies. Executives are only seeing red flags, when they should be seeing opportunity. We all still love and watch their content. Now is the time to make a smart decision for the medium and move towards a stable web based ecosystem.
Truth is, not all shows are created equal. Cost per episode varies significantly between genres, name brand attachment and level of success. Episodes can cost in the low hundreds of thousands, to the millions for an ensemble cast on a popular show. The common rule of thumb is that as shows are renewed, their budgets increase to retain talent and expand scope.
When you look at the breakdown of distribution, things get even more complicated. Terrestrial giants like ABC, CBS, NBC and FOX all reach over 97% of US households, and produce rosters of over 30 shows each, not including local sports, news and weather. Basic cable networks like AMC, Discovery and FX fluctuate in their amount of original programming depending on their audience and genre. Many balance a mix of syndicated and original content. Premium cable networks forego advertising by charging a monthly subscription on top of your cable subscription. They often have less content in production, and rely on first run movies and a back catalogue of critically acclaimed series and mini-series.
Live events are where the medium really shine, which is why you see a heavy sports bias in cable payouts. Static storytelling in the form of weekly recorded episodes can be watched at any time without losing their power, but watching a live broadcast is an experience to be lived in the moment. All of its value comes from relevancy and the knowledge gleaned from what’s happening right now.
These systemic production differences prohibit a one size fits all approach to the sale of a la carte network and show subscriptions. In a collusion free environment, this could prove a healthier alternative for the industry, forcing increased competition, unique bets and market driven pricing.
HBO GO, in a scenario devoid of its attachment to the cable companies, is being lauded as the future model of television and other media. It was the first major network to offer freedom of platform. HBO embraced mobile phones and tablets with open arms, and have even gone so far as to bring the promise of realtime interactive features to life. Their adoption of technology is quite literally pushing the industry forward, and HBO remains at the forefront of the great TV transition. Let’s take a look at the numbers to get a clearer picture.
HBO has 29 Million Subscribers in the United States as of January 2012, each paying roughly $18 a month, from which HBO sees about $8, or $96 a year per household, equating to 2.874 billion dollars in annual revenue. The lost $10 from each subscription goes to the cable companies, who as part of the deal handle sales, marketing and support of the premium channel to each cable subscriber.
Game of Thrones, HBO’s most ambitious and expensive series, averaged 10.4 Million viewers across all platforms in its second season. The production budget was estimated at almost 70 million dollars, a 15% increase from season 1’s estimated 50-60 million dollars, and its marketing campaign neared 100 million. Doing the math, 10,400,000 distributed between $170,000,000 puts each paid viewer’s contribution towards HBO breaking even at $16.34, or just over two full months of an HBO subscription.
Mind you, none of this factors in the millions of fans who pirate the show because they don’t have a cable subscription and can’t purchase HBO GO.
How can HBO monetize this massive audience? If the aptly titled “Take My Money, HBO!” is any indication: easily, but they have to navigate the loss of big marketing dollars from the cable giants. Is there a solution that combats the lost visibility? There are a few models I’d like to explore, which can be translated to other content types and network offerings.
Paying For Convenience
People want their content everywhere, they want it now and they’re willing to pay for the privilege. When you look at what the digital transition did to the music industry, the most impactful shift was the decoupling of singles from albums. Why buy an album full of tracks you don’t want, to get the one you do? Television will face a similar shift in the decoupling of shows from networks. I see four choices going forward: free to play, season a la carte, up sell to own, and network subscription.
Before we explore our options, we need to define a cable company surrogate in the form of an industry standard OAuth style login. For all the endless downsides, the cable companies get one thing right: you pay one bill. When the diaspora comes, and content creators and networks launch their lifeboats from the Titanic, it’s going to be chaos unless people can manage their subscriptions and discover new content from a central hub. The film industry has taken curious steps with the UltraViolet cloud locker consortium, but the approach has been confusing and off putting to customers. Viewers do not want to micro manage each entertainment decision on a separate portal with unique login details. A simple, socially connected standard will funnel your payments and subscriptions to multiple networks. This is not intended to end competition and stifle innovation, in fact, with a unified login being the only standard tie, content is elevated, and creators outside of the network system have an opportunity to play ball. Importantly, it would allow for APIs to access and manage your content from any preferred service, device or application. Developers can create fresh viewing experiences when they have access to every show and its metadata. Ad supported subscriptions, one time payments, monthly subscriptions and annual subscriptions will make up the payment page and present you with a breakdown of your viewing habits.
Free to play will work similarly to the OTA broadcasts or early online video hubs we’re used to now. In the old model, advertisers and networks are beholden to Nielsen Ratings for the over 100 million americans with television. The 68.1 Billion dollars spent on TV advertising in 2011 was appropriated by stats collected in just 20,000 representative households. It doesn’t necessarily scream accuracy.
In the move to digital distribution, TV viewers will use the aforementioned industry standard OAuth account to access their content. Connection with the social graph will grant networks an unprecedented look at their audience. Finally, content creators and advertisers will have exact viewership numbers they can segment into manageable pockets of highly valuable demographics. Drawing on interest data from social networking accounts and incentivized surveys, the value of online advertisements for television programming can grow to surpass standard TV ad buys. Why throw money at the wall with a one size fits all ad, when you can customize your marketing to different groups? Intelligent ad systems let companies tailor their messaging with real time analytics on how their campaigns are performing. As the platforms we watch TV on get smarter, so can the ads, with more engaging interaction. I eagerly anticipate the first personalized Super Bowl ad from the Old Spice guy. Get cracking, Wieden & Kennedy!
In today’s climate, television is cold blooded. Networks spark a fire as they get closer to a premiere, maintain a toasty 80 degrees during the season, and then switch off the heat lamp a week after the finale. Going forward, the fervor of a finale wil be funneled into momentum for the next season. Selling seasons a la carte allows channels to mitigate risk and cover production costs before episodes begin shooting. Free to play content creation costs can be offset by fans who want the ad free experience. With a new level of open dialogue and transparency from the show runners, cast, and crew, fans can invest with confidence and zeal. Prices per season will vary depending on budget and audience metrics.
For those who want more access, networks will offer tiers with unlockable digital rewards, not unlike special edition boxed product releases. Using HBO as a hypothetical, let’s say pre-sale access to Game of Thrones Season 3 opens today.
$20 | Unlocks streaming rights for 12 months.
$35 | All of the above + downloadable 1080p versions of each episode and permanent streaming rights.
$50 | All of the above + Ramin Djawadi’s score, ringtones, director commentary, $5 in virtual currency towards Disruptor Beam’s ‘Game of Thrones Ascent’ and more.
If the existing 10.4 million subscription audience expands to 15 million, HBO could be hauling in somewhere between $300M and $750M on a single show, which would cover the costs of an increased production budget, marketing spend and infrastructure.
For customers interested in an entire network’s slate, monthly and annual subscriptions would be available. Factoring in lost revenues from cable residuals, network subscriptions will vary greatly depending on content and consumer expectation. Most channels will offer an ad free experience with all of their content on demand. For sports and other ad hoc outlets, subscription will be the only way to access your favorite live events. In those instances, users will remain subject to targeted advertising.
Annual subscribers will have the option of additionally purchasing season upgrade tiers with the a la carte fee waived. Using the previous example, an annual HBO subscription would offer you the ability to buy Game of Thrones Season 3 at…
$10 | Downloadable 1080p versions of each episode and permanent streaming rights.
$15 | All of the above + Ramin Djawadi’s score, ringtones, director commentary, $5 in virtual currency towards Disruptor Beam’s ‘Game of Thrones Ascent’ and more.
Networks can incentivize 12 month commitments through deep a la carte discounts that pay for themselves over the course of a year.
The Landscape Evolves
The modern TV pitch is a rough, risk addled ordeal, with the potential for failure on both sides of the table. Networks are on the hunt for content targeted towards a certain demographic, sometimes to shore up lost opportunities in the roster, or to bolster existing eyeballs. Writers, working through their agents, attempt to get a brief synopsis of their concept up the ladder at the right channels. If it passes muster, the writer has a chance to pitch for around 10 minutes to a network executive, where at that point the show is either optioned or shit canned. Of the shows whose rights are optioned, half might become pilots, and only a fraction of those actually make it to air. TV is an ad driven business, so often decisions err on the side of safety, not creativity. Writers risk not having their show picked up or even passed over once it’s optioned, and executives risk betting wrong, which is a costly mistake. There has to be a better way!
It’s time to let the audience decide what they want to see, by voting with their wallets. Networks will curate a crowdfunding based pitch page, where the shows with the most money earn the hotly contested slots. Crowdfunding content builds virality, hype and visibility. Personal investment from future fans can establish an audience before any episodes have been shot. Creatives whose pitches are on the line will record a short 5-10 minute video showcasing the concept, involved parties, scope, and test footage. As a consumer, supporting the show before it reaches the air nets you a discounted a la carte subscription and timed exclusivity of behind the scenes extras.
The antiquated TV format we’ve come to know, featuring a rotating content lineup on each channel, can be emulated and improved through personalized auto-play functionality. Each user can selectively remove shows they don’t like, filling the slot with a show they do. Live local broadcasts will continue to exist in this new format, and can be fed into the stream. Established players can now fine tune their offerings vertically and horizontally, producing multiple shows for the same time slot, targeted to different audiences. Lower budget experiments can join high budget dramas as we see a renaissance in atypical programming.
Independent creators will have an opportunity to publish content through their own production companies outside of the network system, in collaboration with 3rd party technology partners. White label middleware solutions will emerge to deliver on distribution, content interactivity and advanced ad networks. Initially, most success will come to known personalities from the film, TV and YouTube world. Pioneers like Joss Whedon and Louis CK will be some of the first to profit from the expanded marketplace. Green talent will find their first homes on these independent channels.
Investment in social networking hubs and the release of short form side content will keep an open dialogue between the cast, crew and the audience. Early examples like HBO Connect illustrate how the conversation won’t end once a show hits the cloud. Studios that make the investment in this area will see higher retention rates and increased subscriptions / a la carte sales.
As the industry gets up to speed and begins to offer first run content at a stable price point, all you can eat solutions will be hit hard by network imposed sanctions. VOD services like Netflix and Amazon Prime won’t be sustainable, and will start to see lengthly delays on content going forward. They will no longer be relevant outlets of content for consumers. Already, Netflix is feeling the heat from distributors, and losing thousands of pieces of valuable content.
Today, I watch the following shows:
If I were to buy a la carte seasons for each show, my assumed estimate would be…
$10* | Archer
$20 | The Borgias
$20 | Breaking Bad
$30* | The Colbert Report
$10* | Community
$30* | The Daily Show
$10* | Futurama
$20 | Game of Thrones
$10* | The League
$10* | The Legend of Korra
$10* | Louie
$20 | Mad Men
$10* | MythBusters
$10* | The Newsroom
$10* | Parks & Recreation
$10* | South Park
$20 | Spartacus
$20* | Star Wars: The Clone Wars
$10 | Veep
$20 | The Walking Dead
* Alt Ad Supported Model
Annually, I would be spending anywhere between $145 with advertisements and $310 without, a far cry from $900 and an ad bombardment.
If I were to factor in my potential network subscriptions and do the math again…
$5 Monthly | AMC
$5 Monthly | Comedy Central
$5 Monthly | FX
$20 Monthly | HBO
$20 | The Borgias
$10* | Community
$10* | The Legend of Korra
$10* | MythBusters
$10* | Parks & Recreation
$20 | Spartacus
$20* | Star Wars: The Clone Wars
* Alt Ad Supported Model
Annually, I would be spending anywhere between $460 with advertisements (on a la carte subscriptions) and $520 without, still well below $900.
In both scenarios, the above networks would be seeing a huge uptick in the amount of value I bring in. Each of them will have to crunch the numbers to find the happy median on price given their reach and budgets, but I’m confident the proposed methods of release and monetization will keep the content profitable.
Apple is entering the TV market full force in the coming months. Microsoft is reportedly in talks to subsidize next generation Xbox hardware with cable subscriptions. Google TV might see a big revision tomorrow at Google I/O. It’s time for content creators to get smart and look long term. Give people what they want in a responsible way before theft becomes the norm.