The Internet Didn't Start The Fire, TV Did
Happy merciful Friday War & Peaceniks - let’s light this fire!
In her important book Media Disrupted, one of my favorite media thinkers, Amanda Lotz, identifies and dismantles our collectively shared “mistruths” about how and why different segments the media industry has been disrupted.
“Over the past two decades, a mythology about the implications of the internet has established itself as truth. In [the media] substantial fables endure about what transpired and why. In many cases the persistent belief in these myths handicaps decision makers who act in fear based on imprecise understanding of why internet communication challenged different businesses in different ways.”
Blaming “disruption” for the woes of an industry, Lotz argues, miscategorizes the self-inflicted problems the industry created; sends companies and executives on wild geese chases; and, perhaps worst of all, allows us to misinterpret or miss new warning signs when they emerge. As an industry, media tends to blame “that darned internet” for everything, rather than actually trying to understand why our business was so vulnerable to disruption in the first place.
“For much of this disruption, so-called ‘digital media’ has been seen as a separate industry that would conquer those that predated the internet. Rather than introducing ‘new media’ the internet turned out to be a new – and often superior – way to distribute media to consumers.”
Newspapers, Lotz explains, were losing readership long before we created the myth that the “internet killed them.” The conglomerization of local, family-owned Newspapers eroded the strong relationships between publications and their communities; put “efficiency” and profit ahead of “journalism;” and cheapened the “news.” Incumbents incubated customer dissatisfaction for decades, smoothly pathing the way for social media to unbundle news from newspapers, give everything away for free, and take the ads for themselves. By the time social media started to dismantle the newspaper business, the newspaper business had already gutted itself.
“Napster and iTunes killed the music business” is another popular myth Lotz unravels. Before Jobs or Parker ever launched their platforms, the music business had long bled their best consumers dry by overcharging them to replace their entire cassette library with CDs.
“The high price at which labels introduced the CD – commonly 1.5X the cost of cassettes – produced a significant layer of kindling in the form of music buyer dissatisfaction. The recording industry sought to capitalize [on demand for] the new format, but it maintained high prices for a decade after the CD’s arrival… even though the CD was a cheaper format for them to produce.”
Kindling. What a great term. Lotz introduces the term kindling to describe underlying, and often unseen conditions of risk present in an industry. She attributes the concept to Bharat Anand from Harvard, who says that looking for the metaphorical lightning strike or allegorical errant cigarette which causes a fabled wildfire within an industry ignores the true problems: Preexisting conditions in the industry which allow for ignition and cause a chain reaction to spread destruction. It’s the kindling on the forest floor that enables the wildfire, and which can be removed before it another fire starts elsewhere – if we look for it.
Prior to Netflix, the TV industry was all kindling and no rain. Cable companies and distributors raked in humongous margins, forced useless unwatched channels on subscribers, raised prices with abandon, and STILL made people watch ads – so many ads. How did they get away with it? Oligopolies be whack, yo.
Netflix is a great company. But let’s be honest, people hated their cable companies SO MUCH by the time they came along, Netflix had a very low bar to win them over. The Pay TV industry was a metaphorical pile of dried newspapers, soaked in diesel when Hastings and Sarandos walked in with a book of matches. And while Netflix is an awesome tech company with a great platform, their true, BIG disruption had nothing at all to do with tech. Netflix understood customers’ dissatisfaction and gave them what they wanted: TV at a very low price – WITH NO FUCKING ADS. That is not tech. It’s packaging. What’s more, Netflix convinced Pay TV market leaders to hand over their best product, so that they could run it, without ads, at < 10% the cost of cable. Addiction to ridiculous margins kept cable blind to the risk. Kindling.
As it turns out, low-price subscriptions without ads are not necessarily a sustainable long-term business. Netflix’s own kindling seemed obvious to many for some time. Their historically huge investment in content and marketing could not be sustainable once they had true competition in the space, at least not without increased revenue sources. Hence their now rushed transformation into the very thing they disrupted – an increasingly expensive pay TV service, with ads.
But “Netflix needs to add ads now” is one more oversimplified TV myth, built around today’s state of TV affairs. Netflix’s current shift is part of a much larger chain reaction of change in streaming. The TV industry thinks of streaming as a new thing, but it’s fifteen years old. The pandemic aged streaming an additional decade, in the last two years. So, streaming is now about the same age Cable was when it “got disrupted.” Today, premium streaming TV is as disrupt-able as the cable bundle was when House of Cards premiered. Users don't hate streamers as much as they did cable companies. Yet. But they are enormously fatigued and frustrated with the current chaotic TV experience and are reexamining all their subscription and consumption options, daily.
In the next two years: Disney+ and Netflix will add ads; HBOMax and Discovery+ will become Disco Brothers (if there is a God that’s what they will name it); Hulu and ESPN will likely fold into Disney+; Comcast and Charter will launch their Flex platform; the NFL comes to Amazon and Apple; eight to ten million more homes will cut the cord; and half a billion connected TVs will be sold, each with its own free programming environment preinstalled.
Change is swirling so fast; we’re likely a year or two away from fully knowing what a “normal TV diet” might eventually look like. But, to understand what’s coming, and why, I think it’s important to, as Lotz and Anand instruct, look for today’s kindling and determine what path the coming fire may take.
There is a glut of TV. There are too many shows, trapped behind too many garden walls, for people to possibly watch. Audiences have been telling us that for a WHILE. It’s a shared cultural joke. If Pay TV does become hated, it will be because it forces unused content on consumers and then charges them for the privilege (sound familiar?). Streaming is frustrating (the precursor to hatred) because it has become an expensive pain in the ass for audiences to choose what to watch. This friction is enormously solvable, yet still unsolved. Kindling.
There is glut of ads. The average Pay TV channel has 18 minutes per hour of ads. Watch a FAST or AVOD channel for 30 minutes. You will see the same ad four times. The pendulum-swing back to ad-supported TV will only work if the experience doesn’t make our eyes bleed. Meanwhile, impressions (even “premium quality impressions”) are being commoditized in much the same way News was last decade. Viewers do not watch ads on broadcast TV, why do we think they will suddenly start watching them on streaming? Because there’s no fast forward button? The smartphone in their hands or the next tab on their browsers guarantees that even if they can’t be skipped, ads are being missed. What’s more, Disney and Netflix are about to flood the market with billions of new, high-quality impressions, at the exact time the ad market appears to be slowing. Kindling.
Consumers are restless. Streaming subscriptions have plateaued. Cancelling a TV service has never been easier. Subscription services whose hooks are its hits see subs rise and fall as quickly as linear ratings. More and more, viewers are heading for free, ungated content on FAST and AVOD, which pops up on their screen when they turn it on. Less than 60% of TV homes have cable/Pay TV. 92% of TV homes stream. After two straight years of bingeing SVOD, every generation of viewers are currently rebalancing their TV diets. Kindling.
What is the model? After a late start in streaming, traditional media’s core competency of making the customer pay to watch with ads is now back in vogue. Consequently, “SAVOD” (subscription with advertising video on demand) seems to “disrupting” SVOD. In the span of Hastings’ earnings call, Netflix went from Stream Dream to sub-par, and Peacock went from SVOD also-ran to a “oh, hello there ;)”.
Yet, it’s less clear than ever that TV’s newest model can make up for everything last year’s TV model is losing. There’s been no indication that anyone in TV yet understands the alchemy of direct-to-consumer subscription mixed with ad-supported programming enough to make it all profitable. Hulu’s never been profitable, nor does it have any international path forward. Prime Video has never been expected to be profitable. Ditto AppleTV+. Disney is years away from recouping its investment in Disney+, having lost nearly $1 billion on streaming in 1Q 2022. Sure, Netflix has 222 million subs; but they’ve had only one year in the last decade of positive free cash flow. Discovery now has $30 billion in debt to pay for HBOMax and is looking for billions and billions in savings, at the very moment competition for subscribers and viewers is at its peak. Oh, btw, there’s a recession coming. Kindling.
“Netflix disrupted TV” and then “TV disrupted Netflix back” is our newest TV fable. In truth, TV disrupted itself, took a dozen years to do something about it, clawed back into the game, and having gotten there, is now knee-deep in dry twigs and ethanol, seemingly at a loss for a way forward. But today, as back then, TV’s biggest fire hazard is itself. As mentioned above, TV’s new normal is hard to predict, and today’s dust is likely two years away from settling.
Oddly the solution for the current chaos and angst may be a big mythical villain from the last disruption: The Bundle.
“The bundle” as a cause of Pay TV’s disruption is a key myth that still leads the TV industry to make misinformed decisions. “Streaming” didn’t “disrupt the bundle,” bundle providers abused it. Bundles are not innately bad. And there’s every indication that bundling may once again be the key to TV’s long-term sustainability. Disney’s churn for its bundle is ½ or less than that of its stand-alone services. Amazon Channels is one of the best sales platforms in streaming TV. Bundling streaming services for interoperability will have the benefit of increasing discovery (addressing the kindling of TV glut) and lowering churn for everyone. The problem: this solution requires all combatants in the streaming wars to work together. Something we do badly.
Failing a reimagined, new age bundle, however, bundling is still the most likely answer for individual streamers who hope to survive long term. It’s a best practice as old as cable: the more products you bundle into one home, the harder it is for that home to quit you.
Apple’s ability to package content with their devices and services like music, gaming, fitness is an enormous advantage in the new age of TV. It gives them deep pockets to price competitors out of the market for major IP such as NFL Sunday Ticket. The same goes for Amazon. While new management may have lost its e-commerce footing post pandemic, their Prime bundle remains the world’s strongest subscription package. If Disney further bundles its entertainment, news, family and sports streaming services with its theatrical, travel and merchandise businesses; and is able to add gaming and music as well, they have the ability to be a must carry for nearly every home. Comcast’s ability to package NBCU/Peacock programming with their theme parks, TV screens, theatrical releases, broadband and cell services, will make their entire platform more competitive.
There is no doubt that technology has played and will play an important role in changing the face of TV. But, as with past eras of disruption, it’s our own risky kindling that makes the ecosystem vulnerable, and likely, now as ever, strategy, and not technology, that will again separate the disrupted from the disruptors.
I’ll be digging into all this kindling on our next Webinwar & Peace Zoom Meetup on Tuesday, May 25 at 4p ET/1p PT. If you want to join our discussion, please consider becoming a Premium Peacenik!
Enjoy the weekend - you earned it!