As the digital era has developed, the major television networks have come to terms with many key ideas: the importance of TV Everywhere and SVOD availability, the frailty of the cable bundle and inevitable fragmentation of audiences across services and windows. But these are far from enough.
In my experience, there are seven key threats and changes that continue to be overlooked by the major and minor television networks. Of course, not all apply to every player, nor are they equally menacing – but as a whole, they’re critical to both understanding and planning for the future of television.
1. By the Time You’re Ready for OTT, You’ve Already Been Supplanted
For years, executives at the major television networks have repeated the same refrain: “We’re aware of the over-the-top and direct-to-consumer opportunities… When it makes [economic] sense, we’ll do it.” And to point, nearly every network has a team of analysts obsessing over statistics such as the number of US broadband homes or annual authenticated video streams – all in the hope of discovering when, exactly, is the “right time” to disrupt their current Pay TV model.
What makes this strategy so dangerous is its tunnel vision: Every network assumes that when the OTT economics finally “make sense”, they’ll be as relevant to their audiences as they are today (or, more accurately, as they were yesterday). While Big TV waits, the major digital video providers and platforms will continue developing deep, routine and lucrative audience relationships. By the end of the decade, many traditional networks will be shocked to find they’ve been supplanted in the minds of many Millennials and Generation Zs. But this should come as no surprise:
- The largest YouTube Multi-Channel networks (Maker, Fullscreen and Machinima) are already delivering enough minutes to US audiences to challenge major TV networks such as CNBC, FXX and Fox Sports 1. And while traditional television ratings erode, the three MCNs (and many others) are doubling year over year
- In the first quarter of 2015, Netflix’s 41M US accounts averaged nearly 2 hours of video on the service each day – making the “network” bigger than two of the four major US broadcasters and twice as large as the largest cable network. At its current pace, the OTT giant will become the most popular video provider in the US by the end of 2015. Not to be forgotten, Amazon Instant Video and Hulu are roughly 75th and 100th largest respectively, and continue to grow quarter over quarter
- Amazon’s Twitch would be another Top 75 network, with its 13M US monthly viewers watching an average of 14 hours a month. Furthermore, the service has grown US minutes delivered by an astounding 7% each month for the past three years. By this time next year, it could be contesting Top 25 networks such as AMC and FX
In the coming years (if not months), many more services will begin chipping away at TV’s video dominance. YouNow, which enables users to broadcast their everyday lives (minutiae and all), now counts more than 50M monthly streams in the United States. SnapChat’s Discover feature includes original series (which are created by Snapchat and/or digital-first production companies) that are amassing tens of millions of views – even though they disappear only 24 hours after release. Several major television networks, such as ESPN, CNN and Comedy Central, do have a presence on Discover, but they’ve yet to treat the service as much more than a dumping ground for previously aired television clips. BuzzFeed, which counts nearly 110M unique visitors in the US each month, is also pursuing short, long and feature length video content – and Reddit announced its original video initiative less than a month ago. Vice, which began its digital video efforts in 2006, has become so successful that it now supplies branded content to cable giant HBO and will soon take over and rebrand a cable network owned by one of its minority shareholders, A+E Networks (which is also the 7th largest cable group).
It’s important to recognize that these content forms and services threaten Big TV in more ways than by simply cannibalizing time or ad spend. They are now beating the industry across numerous key metrics: audience engagement, authenticity and “trust”, ratings growth and cost efficiency (by orders of magnitude). No matter how well one’s traditional assets are adapting to the digital era – or how bizarre, unpolished and “low value” digital-first content may appear – no major media company can afford to ignore the likes of eSports, ultra-short form video and “user generated content”. Though many claim that these content forms and distributors remain unprofitable, it’s important to remember that the first wave of cable networks took more than five years to become cash flow positive and nearly a decade to pay back. This was despite significant resource sharing with their corporate parents (and broadcast siblings) and a clear path to monetization: ratings. Even Fox News, which launched as late as 1996, took until 2001 to stop the bleeding – at which point 20th Century Fox was down nearly $575M in inflation adjusted 2014 dollars.
2. The Future of Millennials and Pay TV
What makes the rise of non-traditional video content particularly threatening is that many in Hollywood continue to believe that when millennials make enough money, buy a home or start a family, they’ll finally see the value in Pay TV services and subscribe. Vine, YouTube, Twitch, Netflix and other “low quality” or “late window” entertainment is just a stopgap until that epiphanic point.
The problem with this hypothesis is that it’s rooted in the fact that every modern generation eventually adopted Pay TV (during the 2000s, the service penetrated nearly 90% of US households). However, Millennials and Gen-Z’s are first generations to have these non-traditional substitutes available – and they show levels of engagement with this content that far exceeds that of traditional TV. As a result, we truly cannot know what the future holds. What we do know is that young audiences love these substitutes today. A lot. With age and added income, many may feel the pull of traditional Pay TV subscriptions (via cable or OTT). But to belittle their affinity and affection for non-traditional content is dangerous; to assume that they’ll eventually want to pay for yours could be lethal.
3. Outdated Organization Model and Priorities
Since its creation, the linear TV business has been defined by the medium’s constraints. As each channel can air only one video feed at a time, linear networks typically have typically focused on specific demographics and/or taste profiles – a choice that affects everything from greenlights, branding and scheduling, to advertising and even potential viewership. However, no major media company is ever satisfied with only a portion of the total TV audience. As a result, the Pay TV industry eventually experienced an unprecedented surge in the number of available, 24-hour channels – each targeting a smaller niche or genre, be it music videos, game shows, or Oprah fans. Though this channel proliferation was much ridiculed at the time, it’s directly responsible for today’s “Golden Age of Television”, as well as the industry’s record profits.
In recent years, however, this model has begun to both undermine the traditional Pay TV ecosystem and impede its evolution. Since 2005 alone, the average Pay TV household has more than doubled the number of channels it receives (to ~200), while the number of channels they actually watch has increased by only one (from ~16.5 to 17.5). This, combined with the price increases needed to pay for this content, has not only antagonized tens of millions of households – it has driven nearly 10M to abandon Pay TV entirely. Similarly, the addiction to channel empires has resulted in a disastrous online user experience (and one that hasn’t changed in years):
Rather than rethink the structure of their linear television business, the major network groups have chosen to simply recreate it online. As a result, users end up with a handful of different network apps and websites, each with its own UI/X, settings, content windows and capabilities. The shift to direct-to-consumer OTT distribution, which creates the additional complexity of managing multiple log-in credentials and billing relationships, will only make this worse.
In a digital environment, “TV networks” face none of the limits of the linear television model. There’s no limit to the amount of programming a network can offer, no cap to the number of genres and demographics it can serve, “no one size fits all” lead in show and no single performance metric. Netflix, for example, is targeting TV and film viewers of all kinds – even kids – under a single brand. This not only creates a simpler consumer offering, but provides Netflix with numerous strategic benefits,such as the ability to program for the individual, rather than a specific channel or genre. Though this approach defies years of industry beliefs around building audiences and launching series, the results speak for themselves. In the first quarter of 2015, Netflix delivered more minutes of video in the United States than two of the four broadcast networks, twice as many as the industry’s largest cable network (The Disney Channel) and more than the bottom 117 (of some 200) cable networks combined. What’s more, this figure is up an estimated 45% (or 38 billion minutes) year over year.
While the traditional network strategy still makes sense (it does optimize short-term affiliate fees and advertising revenue), it also prevents these groups from leveraging their entire portfolio in order to create better consumer experience or offering. Furthermore, it is this very tunnel vision that allows Netflix to rebundle this same network content to create such a cross-network service. To make matters worse, Netflix is pursuing a much more powerful end goal than channel empires: owning the full extent of a consumer’s premium video experience. And for many subscribers, it already does.
Netflix may be twice the size of largest “cable channel”, but it ranks 7th among cable television groups. It may be that no single channel has the breadth of content and scale to be a serious Netflix competitor, but their parents certainly do. The future of television is not a la carte networks, but a la carte network groups (i.e. a rebundled cable package). To that end, many viewers may balk at paying $6 to $9 a month for an individual network such as CBS All Access – but at $15 to $20 for an entire network group, the value equation becomes far more favorable.
This isn’t just about competing with or defending territory from Netflix. As cable unbundles, access moves online and on-demand consumption proliferates, every aspect of the TV business is being challenged (#1, #4, #7). Individual channel empires, however sensible in a linear delivery environment, will undermine the user experience, profitability and differentiation. And only a consolidated view to programming will allow networks to resolve the original series crunch (#7).
4. “Winner Takes Most” Competition
One of the more under-recognized perks of the traditional Pay TV model is the fact that no network group can “own” the entirety of a household’s video time or spend. No subscriber, after all, can order only Viacom networks or just Time Warner channels – no matter the package, tier, or price. As a result, each of the major network groups profits from every Pay TV subscriber (via affiliate fees) and benefits from the fact their channels can be discovered and watched without that subscriber needing to call their cable company or enter their credit card information.
Online, however, this communitarian utopia will be replaced by a whole new competitive dynamic – one that challenges the idea of “shared subscribers” and makes it harder than ever to acquire new ones.
Though the future of television depends on the major network groups collapsing their channel portfolios into a single consolidated offering (#3), the consequences of this shift are far more destabilizing than simply offering networks a la carte. The average Pay TV household today watches roughly 300 unique hours of television each month, spread across only 17.5 of the roughly 200 channels it receives. Given the surplus of content available and the breadth of content offered by each of the major network groups (which count 13 to 25 24-hour channels apiece), many households will likely find they need only 2-3 consolidated offerings to meet their video needs. What’s more, the friction involved in paying for and managing multiple apps will give subscribers an incentive to watch more of the content they’ve already paid for instead of adding a third or fourth network for another $10 or $20 each.
True media lovers may still pick up five or six different consolidated services, but how many will include the smaller network groups? And how will these companies price their services given their relatively limited offerings? How is this price affected by any one hit show? Is one stellar show enough? Are three? How do you incent new subscribers? How does this model affect the minimum amount of original programming needed? How do you ensure ongoing subscriptions, rather than single-month content binges? What’s the consequence of licensing prior seasons of content to the major SVOD services such as Netflix? The top 100 networks today are available in 8 of 10 Pay TV homes; how will reduced access penetration affect a Tier 2 network group’s ability to compete for content?
The current Pay TV model is effectively a safety net for the network programming industry. Though ad revenue ebbs and flows based on audience demographics and ratings, networks can always rely on multi-year affiliate agreements during the inevitable slumps and find relief in the fact that audiences are but a channel change away. As a result, the shift from linear cable bundles to digital a la carte distribution (whether on a per network or a per network group basis) will not only bring about the death of weaker Tier 2 and Tier 3 cable channels, it will fundamentally destabilize the industry playing field.
5. The New TV Bundle
As the cable bundle erodes, “TV” content is beginning to be rebundled with other forms of media. Sony’s PlayStation Network and Amazon’s Prime program now offer free, high-quality TV content as part of their broader subscription services (though Microsoft’s Xbox Live abandoned the same strategy last year). Yahoo, BuzzFeed, SnapChat and Vox Media have all begun efforts to bundle short and longform original scripted series into their expansive multimedia offerings.
Not all of these endeavors will succeed, but they will nevertheless have a strong effect on the role of TV content in the media ecosystem. Historically, the TV business has been an end in and of itself, but as Disney’s Marvel Cinematic Universe has demonstrated, video can also play a far more lucrative role: establishing or supporting a broader storytelling platform. In fact, many digital-first content companies already depend on brand extensions (e.g. events and apparel) to make video ends meet. As the TV bundle is reconstituted and diversified, what role will pureplay TV networks (as opposed to production companies) play? How much value will they be able to capture? How many can survive?
6. Loss of the “Middle”
One of the most transformative shifts in the television landscape stems from the way digital audiences choose content. Even as we moved into the era of appointment TV in the late 2000s, most television consumption was passive. Viewers would either hire a particular channel/network to entertain them for a few hours or channel surf until they found something that would. In an online environment (or where free TVOD is available) content is “on-demand” – and thus actively selected by the user. As Amazon Studios head Roy Price told The Hollywood Reporter last year, this fundamentally rewrites the programming playbook:
“Let’s say you had a show where 80 percent of the people you show it to think it’s pretty good. They might watch it, but none of those people think it’s a great show nor is it their favorite show. But then you have another show where only 30 percent of people like it. For every single one of them, they’re going to watch every single episode and they love it. Well, in an on-demand world, show No. 2 is more valuable.”
This shift has profound consequences for content monetization – and not just because it challenges decades of network television performance metrics (i.e. ratings). First, true hits will be more valuable than ever before (and thanks to OTT distribution, they’ll be bigger, too). Second, content that connects with a passionate but niche audience becomes an asset – not a missed opportunity or failure that needs to “broaden its base” to be renewed. However, the remaining content (shows people watch “if it’s on”, but never specifically look for or plan around; broadly targeted but “well-rated” series) will be severely squeezed. Not only does this “middle” content represent the majority of programming today, it dominates the industry’s most lucrative revenue stream: syndication. Similarly, the shift to on-demand consumption means that middling content can no longer rely on a strong lead-in program to boost or incubate its ratings. Finally, this tightening will also make select genres particularly hard to program. Much has been said about the death of the sitcom, but comedy tends to be the most particular of tastes. In the on-demand era, comedy lovers no longer need to settle for “I guess that’s funny” – making sitcom audiences inevitably small in size.
These changes will (continue to) distort programming economics and require a fundamentally different set of metrics and business models (#3). Television networks today aren’t ready. And the problem isn’t just Nielsen measurements.
7. The Original Series Crash
In 2014, there were roughly 400 original scripted series on television, up from only 125 at the turn of the century. Though this growth is often attributed to the proliferation of television networks, the majority has stemmed from what might be called the “AMC Effect”. For nearly 25 years, AMC was existed as stable, if unambitious Tier 2 cable network. Ratings were reliable, but unexciting; content was strong, but also old; profits reliable, but far from lucrative. With the start of its original series (Mad Men in July 2007, Breaking Bad in January 2008), the network began a rapid turnaround that transformed it into one of the strongest, most prestigious brands in cable. With this newfound fame came increased ratings and added MVPD negotiating power that helped the network grow ad revenue by nearly 200% and affiliate fees by more than 100% over the next eight years.
What’s more, AMC now has the most-watched scripted series across broadcast, basic cable and premium cable, The Walking Dead. As one might expect, this success has prompted all networks – new and old, linear and digital – to view originals as essential to driving awareness, building a brand, retaining users and generating profits.
Yet this growth has not come without consequences. As a perfect illustration of microeconomic theory, the heightened competition in original series has increased both the risk and the costs involved with the content form. When Mad Men debuted, only 20% of original series were cancelled each year. Seven years later, that figure has climbed to more than 50%. To combat such stark odds, networks are now pursuing whatever means possible to differentiate and bolster their original series: casting Hollywood stars (and hiring celebrity directors and producers) has rapidly moved from “game-changer” to necessity; production quality has surged to nearly feature-film levels; and marketing/promotional expenses have skyrocketed. To secure the best series, networks have also been forced to significantly increase their bids and commitments: Put pilots, straight-to-series orders and full season commitments are simply the new cost of doing business. Furthermore, rising cancellation rates have prompted many viewers to avoid new shows until they’ve hit their second or third season. As a result, it’s not uncommon for networks to renew shows before their pilot has even aired – thereby increasing downside risk considerably.
Over the past decade and a half, the TV industry has seen not just escalating failure rates, but also increased costs of failure. To make matters worse, ongoing audience fragmentation and oversupply of “quality TV” eliminated much of the upside of a hit original. As individual players stumble, economics continue to compress and the cable bundled is slimmed, many networks (OTT or linear) will be forced out of the original series space. Still, the number of active original series is likely to keep rising. In an era where hundreds of video providers are available at a moment’s notice, original content is essential to driving awareness, ensuring consumption and retaining viewers.
Solving the original series crunch will therefore require a profound change to the television business model, as well as its key performance metrics (not that this isn’t already overdue #3). Consider the programming model today. For most of the major networks, programming efforts and spend focus on the “primetime” window, during which the US television audience typically peaks. Though the duration and type (scripted v. unscripted) of content varies, it’s the timeslot that defines the number of original series. For digital video providers such as Netflix or Amazon, however, there is no “right” or “required” amount of programming. Are 12 series enough? 13? 20? 40?
This may be of little solace to linear networks, but with such a surplus of content available today (and on demand), audiences will always be in short supply. As a result, the classic television model – where a show’s “value” is how many people watch it – provides only a rudimentary view to its ROI. Instead, networks need to investigate more meaningful metrics. For example: How did an individual show affect a subscriber’s likelihood to watch other programming on the network? How much more likely are they to remain a subscriber? Or to share the show? If Netflix “needs” only 15 shows, then a 16th – no matter how good the ratings are – may actually destroy value. Is it “better” for top 50 network to have two shows with 1.0 ratings, or one with a 2.5? Two shows with the same audience – or two shows with different ones? The answer isn’t a singular value for all networks, nor is it a rating point.
Many of today’s original series are being cancelled not because they aren’t good enough or because there’s too much out there, but because the industry’s business models and metrics haven’t been updated to the on-demand, non-linear era. Until that changes, cancellation rates will only get worse.
Matthew Ball is a Director of Strategy & Business Development at Otter Media and leads Strategy & Originals at REDEF.
This piece was updated on 9 June 2015 to include Nielsen’s finalized 2014 network ratings. Given the unprecedented drop in cable ratings in the fall of 2014, some networks and network groups have seen material changes in their total minutes delivered.
 For example, three members of the same household watching the same live airing of Criminal Minds for an hour is one unique hour. Three people watching different episodes would be three unique hours. The distinction is made in order to better identify how frequently individual networks are “hired” to entertain.