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David Poland

By David Poland

Give It A Name: Media Shakeout, 2011 – 2015 (Part One)

I’ve been in France for the last 10 days and while I was gone, the news flashes around the media business piled up… all of which continue to point to what I consider the biggest problem for the media business as it continues to transition to the future. No one seems to know what their business actually is anymore.

Facebook’s IPO was the biggest story. Clumsily handled, the offering seems to have served as a wake-up call for… well… everyone. Facebook is an amazing story and still offers lots of potential success, but the valuation on the company seems to confuse it for a Growth Business, instead of what it is, a Utility company.

As anyone who’s played Monopoly before knows, a Utility can be a very good business indeed. But when you run Utilities as though they were Growth Businesses – chasing after quarterly profit and revenue growth and suffering in the market when that’s not delivered – you end up with Enron.

Or in a case like Facebook, where there is not as much at stake, financially or as a nation, you end up with a company puffed up by media hype then being torn down by the very same media, which in its own arrogance feels – irrationally, like a women who sleeps with a married man and then is shocked to find he is sleeping with yet another woman – betrayed.

Or you get an AOL, which materially damages a realistically bigger company (Time-Warner), then subsists as an individual entity in great part by taking advantage of customers who aren’t aware that they are still being charged for free services. This has been a revenue stream of over $200 million a year for the six years since AOL stopped charging for having an AOL e-mail address or Instant Messaging services or any content, etc. That’s just under 10% of annual revenues for the company, down from about 15% in 2008.

This phenomenon also occurs at companies like Netflix, which one MCN staffer with a credit card continues to pay $25.39 a month for, while I can find no pricing option currently available for over 16 bucks. How many other subscribers are paying more than they need to pay simply because the credit card is on file? We also have one LA Times subscription, now $4 a week for the most complete delivery/online option, for $6 a week.

Yes, I have some obligation as the consumer to keep a vigilant eye on my spending. And yes, there are special prices offered in all kinds of subscription situations to draw new customers. But when these companies make fundamental changes to their pricing structures, yet continue to take revenue from their most loyal, reliable customers, it seems especially wrong. But the bottom line is more important than the consumer experience now. Churn is expected and this gouging is a considered, analyzed, intentional revenue producer. Besides being somewhat dishonest, this also creates another bubble inside of companies that can pop at any time when latent spenders are suddenly activated. That, in my opinion, is more of the problem with Netflix in the last year than pricing. And once you wake your loyal base of customers to a reconsideration of the product, everything goes into play… which is why Netflix has spend the last 3 quarters trying to lull its subscribers back to sleep.

Of course, one of the other major stories in the last few weeks is DISH Network, whose new commercial skipping feature has been and announced and aggressively challenged in recent weeks, led by the broadcast networks. Also in the courts is Barry Diller’s Aereo, which has made a calculated gamble on the US judiciary still being conservative (aka pro-business, anti-consumer) enough to allow his new company to steal broadcast signals and to stream them at no cost to his venture.

These are two businesses that are pissing off the networks and are presenting themselves as Disrupters, as though disrupting itself was worthwhile. Of course, what is interesting is that the two companies are going in completely different directions.

DISH is an existing, successful business. With 14 million subscribers, they have more customers than any cable provider other than Comcast… pretty much equal to all the other cable providers combined, including Time-Warner. But they have remained perpetually behind DirecTV, which has about 20 million subscribers.

The offering of The Hopper, which automatically skips commercials via the DVR, is about breaking the glass ceiling that DISH has been sitting behind for years now. DirecTV has the NFL Sunday Ticket (see sidebar) and after acquiring Tivo, is about to roll out a new group of more complex DVR products. So in response, DISH is offering this “disrupter.”

Of course, The Hopper is just one more form of pushback against the most significant media disruption of this decade, which is changing the media playing field for the future… the end of free television. And when I say “free television,” I mean the idea that it is free at any step of the process.

Broadcast networks, which aired programming for free from the beginning of television, have shifted from the last 35 years or so of cable, in which cable providers were required to carry the broadcast nets and full array of local channels, both by the FCC (in the name of the consumer) and as part of their local deals to wire cities to charging those cable/satellite providers for carriage of broadcast signals, using retransmission consent. In other words, the game has turned upside down, in favor of the networks.

Both the Fox TV network and the entire Turner empire (now long part of Time-Warner), amongst others, were built on the idea of offering content of so much value that it demanded a cable slot. For WGN and TBS, it was gaining access to cities other than the independent local channels they were broadcast on. For Fox, it was building a network of independent stations that led to many different kinds of growth with the success of the network.
TBS and WGN became “superstations” by using the leverage of local stations that had baseball broadcast rights to the Braves and Cubs. In an era where not all teams had every game on TV and local cable was feeling its way around, these two stations offered access to live national sports at no cost. Fox’s big move was buying into the NFL as a loss leader. Markets that Fox had a hard time cracking cracked. And small stations, often UHF, that were the Fox affiliates had to fight to keep the fledgling network.

Turner would go on to use pro wrestling and then the NBA to build TBS and then TNT. That’s why, even as TBS and TNT both know drama and comedy, they still know the NBA, which guarantees them cable and satellite placement.

The reason why TBS and TNT had to learn drama and comedy – aka original programming – is the growth of home entertainment, starting with VHS and accelerating with the DVD. The value of showing movies on a cable net has decreased in a big way in the last 15 years. The broadcast networks have gotten out of that business entirely, leaving “broadcast premieres” to TNT, TBS, FX, Disney Channel, and a few others. Even cable nets like Home Box Office, Showtime, and USA have turned into original programming outlets, with movies as a secondary content source. HBO and Showtime have both added an array of added channels that are loaded with feature films… more than “added value,” but not the subscription driver the way they used to be.

This is why another major “Disrupter,” Netflix, seems to feel comfortable moving towards the current HBO model. They would love to have a cable/satellite presence as well, even though it’s not clear that they have the rights to show any of their programming through a medium other than streaming. In fact, all of their major studio deals in the past were with cable/satellite channels with streaming rights. Currently, their only ongoing major studio deal is via EPIX, which is a still-struggling cable/satellite net, and includes Paramount amongst its owners. Viacom and network co-owner Lionsgate buying Netflix would make perfect sense for both sides about now, though it is only the Netflix deal that has put EPIX into black ink in these early years. Both companies are trying to leverage Paramount’s remarkable 2011 output to grow their companies right now… as that high-profile content as a product block will mostly run its course by October.

Going in the other direction from DISH is Aereo, the new company from Barry Diller, which seeks to stream local TV programming for $12 a month… without paying anyone for the content. The company must know that it is a con game, as it offers the scam of a “personal antennae,” for each subscriber, claiming that they are simply providing a private service for each private customer. Oy. At a time when cable operators have been forced to start paying broadcast networks and others for retransmission, this company is EVERYONE’s enemy at once. It is flying directly into the face of the central notion of this era… everyone will pay for the right to sell content.

Ironically, the argument that Aereo is a progressive distrupter is ass backwards. It is actually quite an old-fashioned idea. When they use Betamax as a plank of their legal argument, it’s not just because it fits the business model, but because the idea they are trying to take advantage of is just about that ancient (in media terms). Aereo is going back to the start of the cable business, when the networks wanted desperately to be on all the cable networks and cost the cablers nothing. If this technology was available 30 years ago, Aereo might have won in court… because there were no material damages to the content distributors that they are re-broadcasting via the internet. But in 2012, there are clear material damages, as retransmission is now paid for by cablers and satelliters. Even HBO Go and ESPN’s streaming program are, quite specifically, available only to subscribers to cable/satellite companies that have made deals with those companies.

The model has changed forever… and Barry Diller is living back in 1995.

(Coming – Part Two: The Movies – Who Is Paying For What?)

4 Responses to “Give It A Name: Media Shakeout, 2011 – 2015 (Part One)”

  1. Think says:

    There are like a dozen pricing options on Netflix for more than 16 bucks. I pay 29.72 a month.

  2. Krillian says:

    I pay the $8 for streaming and then about $6 a month for my Redbox rentals.

  3. movieman says:

    I pay what Think pays for my Netflix, but the service I’m getting isn’t the same it was pre-2012.
    For years I could count on pretty much having first dibs on the week’s new releases if my dvds were returned by Monday A.M.–and if Netflix acknowledged receipt of said discs.
    Not anymore.
    I’m guessing they must be buying fewer copies of “esoteric” titles (the stuff I’m interested in), since now it’s become a virtual lottery at each distribution center to see who gets the few (or only) copies/copy of “Young Goethe in Love,” “The Return,” “Chasing Madoff,” etc.
    Queue placement has nothing to do with it.
    In addition to my monthly Netflix bill, I’m now spending $20 (sometimes more) a month for PPV to pick up the slack.
    If I’m learned one thing from Netflix, it’s that if you don’t receive a movie the week it’s released chances are it will become a “very long wait” for months (and months and months).
    And once the “wait” is over, the title may suddenly become “unavailable” because their only copy was never returned by the subscriber who had it last.
    If I didn’t hate watching movies on my laptop–and if Netflix had more of the type of new releases I’m interested in available online–I’d drop the mail-to-you dvds and just use their streaming service.
    And save a helluva lot of money in the process.

  4. eleventyfirst says:

    Movieman is right. “VERY LONG WAIT” is now the norm for all new releases and many older titles, too. Naturally, most of these titles are NOT available for streaming. Not from Netflix, anyway.

    Clearly, Netflix wants out of the dvd business but is no longer risking bold changes that might (further) alienate its customers. Instead, it seems that they want to drive their current dvd customers away. I’ve already reduced my plan from 7 disks to 5 and now 3.

    Netflix was a great service while it lasted. It no longer is.

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