Days of Future Past
Walking the floor of the INTX convention held in Boston 16-18 May left me with an overwhelming sense of nostalgia and an even larger sense of disappointment. For decades, this was known as the Cable Show. The new moniker stands for the Internet & Television Expo and is clearly an attempt by the National Cable and Telecommunications
Association to reposition the industry to reflect the fundamental changes that have turned the business upside down. The fact that the first word is now‘ Internet’ is a stark reminder that it is highspeed data subscriptions that drives industry profits, not the traditional video business.
It’ s not that the industry is in trouble, though booming OTT services and changing TV consumption habits, especially among millennials, poses continuing challenges, especially on the video side of the business. The biggest challenge is that between traditional cable, DTH satellite and wireline telco; virtually the entire country can choose between several providers of multi-channel programming and the only households that don’ t subscribe are either very light users of television or are economically
Television industry veteran Larry Gerbrandt reflects on how the cable TV sector has changed over the years.
challenged and cannot afford even a basic service.
Organic growth from new household formation is offset by cord-cutters using OTT. So part of what I saw in Boston was simple industry maturity and consolidation, with only a
handful of players controlling large numbers of geographically concentrated systems. And the largest cable operator in the industry— Comcast— has hedged its bets by owning basic and sports networks, the NBC broadcast network, the Universal studio and has just struck a deal to add Dreamworks Animation to its asset portfolio.
The sense of loss I felt walking the INTX floor was for opportunities missed. The fact that Netflix has a market capitalisation of $ 38 billion and Time Warner( which owns not only HBO but bundles of cable networks and the Warner TV and movie studio) is valued at $ 56 billion underscores my central thesis that the cable industry let the transactional video business— VoD— slip through its fingers. Cable operators will note— with some justification— that bandwidth hogs like Netflix benefit operators through greater retention of their high profit margin data services, even if OTT leads to some cord cutting of lower margin video services. But there is nothing that Netflix does that cable operators could not have done … and possibly have done it cheaper.
But the real question is how did a sophisticated and powerful industry let an upstart like Netflix come to effectively own the VoD business that cable operators had spent billions pioneering in the first place? There is no one big reason for why cable failed to dominate VoD. Part of it was failing to market VoD effectively to subscribers. The margin on high speed data and telephony was far larger than that for VoD and took most of the marketing budgets.
Another reason is that premium services such as HBO, Showtime, Starz and Epix had become increasingly expensive, costing $ 15 / month or more and the way operators packaged them it could cost a subscriber $ 150 a month or more to get the full bundle. These premium channels did have a much better movie window than Netflix and also had critically lauded original series( like Sopranos and now Game of Thrones). Even with recent price increases
Netflix still costs less than $ 10 / month and offers movies and TV series from all the studios, even if many of them are in older windows.
The regional nature of cable franchises did place them at a marketing disadvantage. From its start, Netflix was a service nationally available and with a national brand that could be promoted on network TV. Even after many rounds of consolidation, the cable industry is still a pastiche of regional fiefdoms and some major markets have multiple operators in the region.
Ultimately, what may have dimmed cable’ s VoD future was an on-screen guide that was consistently difficult and confusing for customers to use. Even worse, most of the industry’ s digital set-tops didn’ t have enough onboard memory for anything other than a fairly rudimentary interface that is nearly impossible to upgrade.
There is a glimmer of hope embodied in Comcast’ s slick new Xfinity set top box and service but one of the innovations is that OTT services like Netflix, Hulu, Amazon Prime and others are also accessible as separate virtual channels. I suppose in the end it is what cable operators have always done best: bundle channels and services into one bill and into a single wire … but it still feels like settling for squeezing life out of a legacy platform rather than reinventing the medium.
Larry Gerbrandt
larry @ mediavaluation. com has been a media analyst for more than 25 years with companies such as Kagan and Nielsen. He is a principal at Media Valuation Partners, which provides strategic consulting, research, valuation and expert witness services and is a managing director of Janas Consulting, which provides management consulting, valuation and investment banking services.
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