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stratechery

Why TV has resisted disruption

This is Part 2 of an exploration of what changes, if any, may be coming to TV. Yesterday I examined why cutting the cord yet keeping the shows you watch (i.e. unbundling) was a fantasy. Also, I should note that yesterday and today’s post are very US-centric; more on the international potential in Part 3

Pay-TV is a good deal for networks, cable companies, and users. It’s socialism that works.

But what about the content? Isn’t that the point? Free the content from the networks, and at last we can pay a nominal fee to watch what we want on any Internet-connected device.

Well, yes, it is about the content; in fact, it’s the content that, in my mind, protects the current system from being significantly disrupted.

Great content has low elasticity of substitution

Not all Pay-TV is created equal; while filler content is everywhere, it’s truly great content that drives affiliate fees. Look at the most expensive networks on a per-subscriber basis:

Affiliate fees and CPMs

Affiliate fees and CPMs

  • Sports is obviously huge here. There is no substitute, and the affiliate fees reflect that
  • Disney Channel and Nickelodeon have fantastic brands; Dora, Mickey Mouse Clubhouse, and Phineas and Ferb1 are the Lakers, Yankees and Cowboys of kids programming
  • TNT, USA, TBS and FX all have original programming with sizable fan bases, and TNT has the NBA
  • FOX News has highly differentiated itself. I’ll leave it at that.

None of this content is easily substituted, which allows networks to increase affiliate fees, which serves to preserve the current system.

Great content production has a high barrier to entry

Sports is, once again, the obvious story here. There is a finite supply of programming, it is rarely time-shifted (which drives advertising dollars – see the right-side of the chart above), and it’s incredibly expensive. At the national level:

  • $4.4 billion a year for NFL rights (beginning in 2014) link
  • $930 million a year for NBA rights (contract ends in 2016) link
  • $800 million a year for MLB rights (beginning in 2014) link

This doesn’t include the myriad of college sports, nor regional deals. It’s a lot of money that is directly connected to rising affiliate fees.

But great scripted programming is expensive as well. AMC pays an estimated $2.71 million for an episode of Mad Men, and Netflix paid $100 million for two 13-episode seasons of House of Cards (more on Netflix in a moment).

Anything that conceivably draws customers away from the pay-TV model will need to have compelling content, and said content has a very stiff price of entry.

Networks matter just as much as content

Several folks noted that yesterday’s post focused on networks, not shows.

I think it does hold water, and I’d actually use Silicon Valley as the analogy: what makes Silicon Valley possible, and so hard to replicate, is not just the presence of startups or willing entrepreneurs; rather, the critical factor is Sand Hill Road. Angels and VCs with substantial war chests and the willingness to make ten deals knowing that nine will fail are essential to what makes the Valley go.

In the case of TV, networks are the VCs. They pay for expensive pilots and concepts, many of which don’t turn out, and bank on making money on the ones that do. They’re just as critical to great content creation as are the producers, directors, actors, etc. And networks love the affiliate system.

Netflix is just another network

Netflix famously pivoted from DVDs-by-mail to streaming, but that was only pivot number one. Pivot number two was their transformation from a content delivery provider to simply another network.

Think about it: Netflix invests millions of dollars in new TV shows to drive growth, and has reruns and old movies as filler. They’re HBO with a unique delivery system. Or, to fit the analogy, Netflix is just another VC, with a war chest built by a completely different business (the aforementioned discs-by-mail).

Netflix is unique, but ultimately uninteresting, and unlikely to be replicated.

YouTube is Kickstarter

One final analogy: just as Kickstarter lets entrepreneurs forego VCs, YouTube lets content creators forego networks. That’s fine as far as it goes, but the likelihood of a breakthrough hit is low, and if one were to occur, it would likely be snapped up by a network.


This is a three-part series.

  • Part 1: The Cord-Cutting Fantasy. Getting only the content you want without paying for everything is a fantasy. Pay TV is socialism that works.
  • Part 2: Why TV has resisted disruption. Great content is differentiated, has high barriers to entry, and depends on networks.
  • Part 3: The Jobs TV Does. The key question is attention, not set top boxes. What jobs do we hire TV to do?

Also see Steve Jobs on TV, my Apple TV prediction, and my Additional Notes on TV

  1. This originally said Phineas and Herb. Oops. Thanks to Mike Byrne for the correction