The Netflix effect

Since this blog’s humble little following is consists of media and entertainment professionals, many may have bypassed Farhad Manjoo’s column, “Why Parallels Between Netflix and Amazon Should Worry Media Titans in today’s New York Times. The first couple paragraphs come straight out of 2007. But if you stick with it, you’ll find some a pretty decent presentation of the situation big media finds itself in.

The parallels between Netflix and Amazon extend beyond the ostentatious aspirations of its founders.

On paper, Mr. Hastings’s plan to take on the traditional TV industry has long sounded slightly nutty, as delusional as Jeff Bezos’s strategy at Amazon to overrun retailing once seemed.

We know how that turned out for mall owners. Manjoo presents cases for both Netflix’s eventual dominance from bullish analysts and its potential to become just another mid-tier media company from Netflix skeptics. It all comes down to who ends up with pricing power.

  • Will producers be able to limit Netflix’s ascendency by maintaining high prices, thus preventing Netflix from stealing away traditional broadcast and cable viewers because Netflix will have to raise its subscription fees significantly?
  • Or will Netflix be so dominant that content producers will have to grant it pricing concessions?

The latter will be the case. It’s only a question of when that day comes. Put simply, it’s the day that the audience values the Netflix model above the traditional broadcast and cable model. No commercials. Binge watching. No need to set the DVR or pay TiVo to do it. The scenario is illustrated below. Once the Netflix model becomes the preferred model, as it already has to the fast growing cord cutter population, along with millennials who would never lease a cord to cut in the first place, it becomes the content owners’ most valuable distribution channel.

VALUE-OF-NETFLIX

To those skeptics who believe broadcasters can go toe to toe against Netflix and come out ahead, I ask: Do you believe they will also emerge victorious against Amazon, Google, and Apple? Someone is going to break the old model.

For a much more in depth analysis of the future of television over IP, read Ken Auletta’s February 2014 New Yorker article on Netflix. In it he quotes Marc Andreessen, who co-invented Mosaic, the first commercial Internet browser.

“TV in ten years is going to be one hundred per cent streamed. On demand. Internet Protocol. Based on computers and based on software.” He said that the television industry has managed the transition to the digital age better than book publishers and music executives, but “software is going to eat television in the exact same way, ultimately, that software ate music and as it ate books.”

Even the Beatles surrendered to iTunes, and then again to Spotify because people were going to stop buying. Your content has to be where the audience wants it or they will live without. She may have crow’s feet by the time it happens, but Taylor Swift’s catalog will be available on Spotify someday.

Netflix customers may cheer this vision of the future, but as surely as night follows day when that moment comes, Netflix streaming will no longer cost them a paltry $8/month. Pricing power cuts both ways.

 

Broadcast, Broadband, and OTT

ott

Last week the Pew Research Center published its findings on Americans’ broadband consumption. The tectonic plates defining the digital divide have shifted somewhat over the past year.

..home broadband adoption seems to have plateaued. It now stands at 67% of Americans, down slightly from 70% in 2013, a small but statistically significant difference which could represent a blip or might be a more prolonged reality. This change moves home broadband adoption to where it was in 2012.

This trend has accompanied an uptick in Americans whose only broadband access is delivered via smartphone. The Pew article goes on to note pertinent demographic trends as well.

  • People still overwhelmingly prefer to watch video content on a larger screen through a standard in-home broadband connection when possible.
  • A significant proportion of smartphone-only access people cite cost as the major reason they do not have a home broadband connection

This portends several possible outcomes.

  1. Some people will shift viewing from traditional cable and OTT to IP-delivered content over LTE.
  2. These customers will often face data limits imposed by carriers, excepting the T-mobile binge plan.
  3. The LTE-only demographic may be less desirable to advertisers than other OTT viewers, and may cause content distributors to shy from advertising models to paid subscriptions when accessed via LTE.

The study also counts 15% of Americans as “cord cutters.” Not surprisingly, this market segment skews young, so it’s reasonable to assume the cord cutting trend to accelerate as the millennials start their own households. Hold that thought.

Broadcast trends

Some have spoken about the consolidation in the broadcast industry as a parallel to what happened around the turn of of the century in the newspaper business. That’s an over simplification. Broadcasters have one significant business advantage over their print media counterparts. They hold licenses for access to a very valuable and finite resource, spectrum. Local broadcasters have also fared better than print brethren at stemming the tide of disintermediation by the Internet. Broadcast TV, even when delivered via cable, is less expensive to the consumer than streaming services on a per minute basis. Further, broadcasters have done a very good job of maintaining their brands on the Internet, breaking the story online and adding depth (to the extent one can in two minutes thirty seconds or less) on air at 6 PM.

Rather than a pure play for synergies and operational efficiency, broadcast consolidation in the US is mostly a spectrum grab. Now that the FCC is planning the first Incentive Auction permitting channel sharing among broadcasters and wireless Internet providers, that spectrum is only likely to go up in value.

Make no mistake. The broadcast industry is experiencing a sea change. Less emphasis will be placed on traditional broadcast operations with more emphasis on multi-platform distribution. Everyone participating in the value chain will need to adapt.

The irony is that although more bandwidth will be available to consumers for broadband, enabling them to cut the cord, less over the air content will be there for free.

 

Illustrator HD templates

I thought I’d share these handy HDTV templates I created for Adobe Illustrator CC 2014. They probably work just fine in previous versions, though I haven’t tested them. Many video artists find the transparency grid distracting and difficult to design against. We’re used to working over solid black canvases in most NLEs and compositing apps. These templates use a dark gray background instead of black so you don’t miss that errant default black stroke outlining your text.

Just download and uncompress the zip file.

ai_doc_icon

Click to download

Drag the contents to the path below.  path

Aereo is not a Betamax moment

But pro wrestling could give us one

vcr-displayAll eyes were on the US Supreme Court this week when arguments were heard in American Broadcasting Companies, Inc. v. Aereo, Inc.  While an interesting legal exercise, it’s hard to imagine any outcome that would upend the broadcast television industry as we know it is highly unlikely. The court that gave us the Citizen’s United ruling is not predisposed to ruling against large business interests. The justices’ questions hinted they were looking for a way to rule against Aereo without affecting other cloud business models, and they appeared to find it. Don’t expect the vote will be close. It might even be unanimous.

In the unlikely event the court were to rule in favor of Aereo, the broadcasters have threatened to power down their transmitters and morph into cable networks. Virtually no one watches television over the air these days, so few prime time viewers would notice. David Carr of the New York Times explains the numbers and the disruption to local broadcasters’ business models. For viewers tuning in to local broadcasters for news, weather, and sports, the TV world will look very different. But no one seems to be concerned about that right now, though they should. Do we really want the large swaths of the populace being informed solely by cable news outlets?

Even assuming Aereo goes away, for broadcast and cable television the status quo remains untenable. The sea change has begun. “Cord cutting” and “binge viewing” are now part of the vernacular. Netflix and Amazon Prime are established players already going at it for top spot in the post cable universe, but unless each becomes a content owner in its own right, they are fighting today’s war with yesterday’s weapons. You either own the content or the infrastructure that delivers it to the end consumer, or you are relegated to a shrinking role.  This is because content owners like Major League Baseball (MLB.tv) and the WWE Network (soon to be launched)  have decided to cut out the middle man and go directly to customer.

After seriously considering launching its own cable network, WWE changed course.

From Forbes April 14, 2014:

[WWE CEO Vince McMahon] roostered onto the stage at Las Vegas’ Consumer Electronics Show in January to announce a bold new venture: the WWE Network. McMahon told the cheering audience that the WWE Network would not be broadcast on cable television, where Monday Night RAW has consistently been a top-rated program each week, nor would it be another pay-per-view (PPV) play. Rather, the WWE network will stream content 24/7 directly to viewers on the Internet or what’s known in the entertainment industry as going over the top. It’s a move that directly endangers both WWE’s PPV revenues ($82.5 million) and its potential new TV deals, a huge gamble that according to some estimates could double the size of the WWE’s business in two years–or fall flat on its face…

WWE estimates it needs a million subscribers at $10/month to reach breakeven. Considering that watching all 12 WWE pay-per-view events each year costs over $600, another $120 per year for the complete WWE archive will seem like a bargain to its rabid fanbase.

An over the top, a la carte future is what consumers have been pining for. Content owners salivate over the opportunity to sell directly to customer, letting the customer pick up the tab for a good portion of the delivery costs through wireless and broadband access fees. What’s not to like? Well, for both the content owner and the consumer it can start with the FCC’s decision to abandon the concept of net neutrality. With so many Americans receiving broadband services from the cable providers, the cable providers will have the pricing power to keep themselves in the game for a while to come. If they have to pony up for access to the Internet’s express lane, the barrier to entry into the new over the top world will be prohibitive to all but the largest content owners. Plus ça change…

For the film industry, is the glass half full or half empty?

beer2It all depends on who you ask. Just before I left for NAB I’d read two takes on the future of the motion picture industry. Though fast moving, the industry hasn’t had any tectonic shifts since early April, so these are still timely reads. The nature of a community so dependent on wildly creative storytelling is that hyperbole is the norm, so Lynda Obst‘s Sleepless in Hollywood: Tales from the New Abnormal in the Movie Business ought be taken with a grain of salt. Salon ran an excerpt here. Obst explains why we keep seeing the same Spiderman movie every ten years or so, and also explains why movies have been so blatantly dumbed down. It’s good context, but it doesn’t present much of a path forward. A lot of the standard culprits stand accused, piracy, the decline of DVD sales, and, of course, those dreaded, fast-growing international markets.

A pleasant counterweight to Obst’s state of the industry is presented in Brooks Barnes’ March 29 New York Times profile of Kevin Tsujihara, the CEO of Warner Brothers. Rather than fear Hollywood’s new rivals, Tshujihara embraces them. The Lego Movie was produced after Warner acquired the Lego video game maker. He’s increased Warner Bros. investment in reality television. And he’s emphasizing digital sales of movies to consumers – a business that could be far more profitable than the DVD business, which was largely based on the rental market. Sell the DVD once and Netflix mails it out dozens of times. Sell the digital version to all the end users, and the rental companies are disintermediated. It’s not a slam dunk, customers might just as well prefer streaming to owning, but there is an opportunity.

Tsujihara’s Warner Bros. is doubling down on the movie business. It’s releasing three more features this summer than it did last year, and only one, Godzilla is based on an existing franchise. Even when going with herd, Warner Bros. seems willing to buck trends. The theatrical release of the partially Kickstrater-funded Veronica Mars film in March coincided with on-demand release. It took a little bit of creativity to stay within the theater chains’ 90-day exclusivity window, but where there’s a will there’s a way.

I’m no better a prognosticator than a monkey with a handful of darts, but I have a hunch that things aren’t as bleak as Obst would have us believe.

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