Category Archives: Internet Tv

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.


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.


Rethinking Ratings

Last week the NY Times reported in its Media Decoder blog that Nielsen is rejiggering the way it tabulates ratings to include Internet connected TVs. Of course media executives are in favor of any upwards pointing tweak to the algorithm, but how much closer to reality is this making the ever dubious ratings game?

I think not much. Nielsen still isn’t counting laptops, tablets, and phones. Just big, old flat screen TVs.

The new definition “will include those households who are receiving broadband Internet and putting it onto a television set,” said Pat McDonough, the senior vice president for insights and analysis at Nielsen. Currently a “television set” is the flat-screen kind…

…just 0.6 percent of households in the United States meet the new description.

It’s a start, but for how long are advertisers going to care about the aggregate? If everyone isn’t seeing the same ads, what good is the data? And don’t we already have good numbers on ads that reach viewers via IP?

To an advertiser a ratings point equals 1.1 million or so households viewing its ad. Advertisers don’t really care about who viewing the surrounding content. In the age of the DVR, VOD, and TV over IP, that’s not just semantics. The discrepancy between eyes on the content and eyes on the ad can be significant.

According to Wikipedia, the number of homes with televisions dropped by 500,000 form the previous year. A cynic might argue that a mere 0.6% upwards adjustment was concocted to maintain the value of a rating point, not the value of the data. It’s time for a fundamental overhaul of the ratings system. Television might be the first case in the modern media era where the IP-delivered ad has greater value than the traditionally delivered ad due to targeting and mandatory viewing through technologies like fast forward disabling in VOD.

Internet-enabled TVs take off

It took a lot less time for IPTV to reach its inflection point than it did for HDTV. It’s not surprising as it’s hard to imagine a consumer technology roll out as flawed as HD. iSuppli released a report last week predicting Internet-enabled television sales in 2010 will significantly outpace 3D TV sales.

Global shipments of IETVs—i.e., TV sets with built-in Internet capability—will amount to 27.7 million units in 2010. In contrast, 3-D set shipments will total only 4.2 million this year. While 3-D television shipments are set to soar in the coming years, iSuppli’s forecast shows the biggest near-term growth story is in IETV.

iSuppli expects the trend to continue through 2014. By 2014 I would expect every television sold in the developed world to be Internet enabled. Never will every TV be 3D capable — stereoscopy in the kitchen or bathroom can lead to some unexpected outcomes. But predicting IETV sales to exceed 3D set sales is like predicting tires will be a more popular accessory in motor vehicles than convertible tops. To paraphrase Seth and Amy — Really?

What is truly interesting is that by 2014 iSuppli expects there will be about a quarter of a billion IETVs in homes. That is going to be like a tsunami to the broadcast and cable industries. If you think the audience is fragmented now, just wait until the cost of starting a viable “TV network” hits the mid-four figures. Micro-pay per view and Google-like ad models will destroy traditional cable subscription models.

While the cable companies might be seriously injured, they are likely to survive. The IETV roadkill will be the set top box manufacturers — Roku, TiVo, and Apple TV (if Apple doesn’t mercy kill it first).  The standalone IPTV device will go the way of the standalone GPS. Navigation will be as common on phones in the next few years as cameras are today. Who’s going to need a Garmin? Even Steve Jobs kind of agrees.

There’s an obvious pattern emerging in consumer electronics. A market is created and validated by a single-use device, then the single-use device is pushed aside by multi-use devices delivering the same functionality. That’s why the Android platform is the death of Garmin, and the iPad will flatten the Kindle.

Of course what we don’t know yet, is Aunt Mary in Peoria going to have any idea what to do with an Internet-enabled TV.

Recommended reading

For a trip down memory lane read Joel Brinkley’s Defining Vision about the two-decade HDTV debacle in the US. Manufacturers, legislators, and regulators did just about everything they could to destroy HDTV.

Apple TV’s next moves?

Before the Christmas holiday, rumors of Apple’s overtures to the networks abounded like so many visions of sugar plums. Journalists and bloggers posited about the effect of Apple’s entrance into the subscription television market. Most of the analysis was solid. The Seeking Alpha blog featured this succinct write up. Most expect a successful Apple offering would threaten cable and satellite subscription models. Others note that an invigorated Apple TV could put the pinch on the Netflix Roku service. Light Reading’s Cable Digital News noted the following.

While cable operators likely won’t face an immediate threat from the subscription service Apple Inc. (Nasdaq: AAPL) is purportedly pitching to major content suppliers, the offering may instead put the hurt on over-the-top video service providers like Boxee and Roku Inc.

It should be noted that Apple TV employs a hard disk. Content is downloaded before it’s played. Roku receives streams, so it’s a lower cost, lower footprint device. Most importantly streaming allows more delivery flexibility. Netflix doesn’t care whether I watch my content on a PC or a TV. Apple TV is anchored to a television. While an iTunes account can be managed from multiple devices, content needs to be downloaded to each to play it. Even with improved progressive download performance, this model has its limitations. One blog noted that a full season of an HD network television series can take up to 50 GB of hard disk space. So there’s a limit to how much content can be delivered to an Apple TV.

For Apple to leverage the strong iTunes brand it has to unhitch content from the device – a fundamental change in business model for a device manufacturer. But if any company has shown the ability to adapt to the digital media marketplace of the early 21st century, it’s Apple. If Apple succeeds at getting content deals in place, I expect a next-generation Apple TV to emerge shortly thereafter.

The future of TV per Cringley

A recent post by Cringley on the future of broadcast, cable, satellite, and Internet TV trods little new ground. Admittedly, it’s pretty much what he’s been saying for the past few years. His general thesis is good, but his argument deteriorates in the details.

…we’re approaching a point where Internet service will equal and then be lower than the marginal per-viewer cost of the broadcast TV model.  This crossover will inevitably happen with the only question being when. That’s a function of bandwidth costs decreasing at 50 percent per year and processing power increasing at 50 percent per year.  My calculations suggest the crossover will happen around 2015, which used to seem like a long time away but no longer does.

Cost per viewer is an important metric from the supply side, but Cringley fails to take into consideration demand – the value placed on the service by users. Even the most aggressive estimates, don’t have reasonable bandwidth for an acceptable television viewing experience reaching 80% of the homes by 2015. Though I’m mostly pleased with Roku’s performance to my 10-megabit connection at home, I spend enough time watching the buffer reload in the middle of a movie that I don’t consider it an acceptable replacement for video on demand. What happens when everyone has a Roku box or some similar device? Five years seems like an awfully short time to solve all our bandwidth issues.

As I’ve said before, five year predictions are great. If you’re right you can link to the prediction and shout from the rooftops how smart you are. If you’re wrong, no one will remember.

Cringley makes one of his bolder five year predictions. Local TV stations will be facing the same business challenges newspapers do today. Not likely. Not only because IPTV will not be in a position to compete, but because broadcast will remain the most cost effective means of delivering live video entertainment. The Yankees and the Red Sox will keep broadcast TV viable for a bit longer than 5 years.

What spurred me to write this post wasn’t the collection of minor flaws in Cringley’s reasoning about the emergence of IPTV. It was his advice to public television executives that set me off.

When Internet TV becomes dramatically, unequivocally, and inexorably cheaper than the other three distribution models, those other models will quickly go away.  That’s why I argued in PBS meetings to forget about spending $1.8 billion to upgrade local stations for digital TV and instead sell or lease that spectrum for commercial data use and throw the resulting $3 billion (lease revenue plus the $1.8 billion savings) into rebuilding the network solely as an Internet service.

Aside from my original point that it’s far too early to ponder such a move. It’s also the wrong path for public television to take. PTV is not a for-profit enterprise. It’s mission is to serve those left unserved by the existing media marketplace. If PTV had any other mission, it would be hard pressed to justify the public funding that accounts for approximately 30% of its operating budget.  PTV makes news and public affairs programming, children’s programming, and cultural programming available to those who can’t afford satellite or cable service. How is this population, still watching TV with rabbit ears, going to make the switch to IPTV? I don’t see the political will in America to wire the inner cities and rural areas of America for robust broadband services.

We can debate the best use of public funds to meet PTV’s mission, but we can’t forget the mission. Cringley should know better. PBS gave him his original platform.

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