The Internet is finally upending the mother of all content markets, the $500 billion TV market. Cigar-chomping East Coast incumbents like Comcast (NYSE:CMCSA) and Time Warner Cable (NYSE:TWX) pitted against left coast tech giants like Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL) and intrepid TV mogul wannabes. We’ve seen this in other content markets (see books and music). Distribution usually dies first. Borders and Tower Records died in the books and music battles. However the stakes in this battle are bigger, a lot bigger. Incumbents are better prepared, bring more to the table, and are more aggressive. It’s unclear that if or which distributors in the TV battle will be victimized as easily. Yet clearly companies are going to die. People are going to get hurt. It’s going to be great.
Couch potatoes now watch 5 hours of TV a day. $500 billion worth of staring. Sure Facebook and the Internet are making inroads but TV viewing just keeps growing. And now it’s going digital.
- By What Percentage Can Alphabet’s Revenues And EBITDA Grow In The Next 3 Years?
- How Has Alphabet’s Revenue Composition Changed Over The Last 5 Years?
- What’s Alphabet’s Fundamental Value Based On 2015 Results?
- Alphabet Earnings: Revenue Grows, But EPS Growth Fails To Beat Market Estimates
- Why Is Google Redesigning AdWords?
- Alphabet Earnings Preview: Google Revenues Set To Grow Due To More Ads From Smartphones And YouTube
Digital means distribution becomes diffused. You can get a drink of True Blood on your computer, through a game box, on your tablet, through a satellite, from the phone company (they just won’t die), and of course from the cable guys. Cable guys had a lock but their choke hold is breaking. (The fact that the cable and telco guys are also now your ISP might extend the choke hold through the rest of the decade via control of data.) This diffusion of distribution gives players like Google and Netflix a shot at the market and the customer relationship.
The TV business is getting upended due to a number of trends. Here are a few big ones.
1. Users are acclimating to movies and television outside of their cable box as distribution of digital video breaks out.
2. Tablets and Internet connected TV do a better job of merging traditional video and the Internet. Watching movies at your desk wasnâ t cool or fun. Web-based movies really didnâ t take off until Netflix broke into the living room via game boxes. But now that Netflix has blazed a trail the big guys will pile on.
3. With multiple sources and modes of viewing, consumers will expect a unified experience across TV, mobile, and the web. This puts Verizon, AT&T, Google, and Apple in interesting if slightly different positions. They are the only players who span all three arenas.
4. The content guys are playing the field to maintain hold of ad and affiliate fee revenues but will go with whomever controls eyeballs. They could play king maker but are more likely waiting for proof that the likes of Google, Apple, and Amazon arenâ t going to eat into their $200 billion in ad and affiliate fee revenue.
5. If the big content guys donâ t play ball, challengers might look to alternative sources, as seen by Netflix and YouTube moves toward original content.
Apple has proven it’s not just subscription and ad revenues at stake in this battle. It includes hardware as well. If you add those three markets up you get $500 billion in annual global revenue direct from TV consumers.
The television market hasn’t really changed since cable came on the scene in the 1970s. Penetration of pay TV has continued to grow and is around 85% in the U.S. However this has been showing signs of slowing. The Internet is poised to fundamentally change the market. As Eric Schmidt recently put it, “…you ignore the Internet at your peril. The Internet is fundamental to the future of Television for one simple reason: because it’s what people want.”
The folks in the distribution part of the chain are going to lose their shirts. If your job is to deliver digital bits based on a walled garden platform start looking for a new job. It’s unclear exactly who is the television equivalent of Borders and who stands to lose the most out of that $500 billion pie, but the cable companies clearly are at serious risk. For more check out this breakout of the TV market.
As for players in the TV battle, first we’ve got the incumbents: Time Warner, Comcast, Cablevision, Dish, DirectTV, Verizon, AT&T. In the other corner we’ve got the challengers: Netflix, Google (despite the friendly positioning), Amazon, Apple, probably Facebook, whoever acquires Hulu, and a slew of other guys.
The incumbent strategy is simple: block new players until their own strategy is fully formed. Keep Google and Apple out of the set top box. Bundle more services like phone calls. Build iPad apps. This has been the cable strategy to date anyway. The telco strategies are more substantial with a strong mobile component. The key for both types of incumbents is to keep the customer relationship at all costs. The real ace in the hole is pipe ownership. Until Google or someone else comes up with an alternative last mile solution, cable companies and telcos aren’t going anywhere. They will just look different over time.
The most interesting guys are Verizon and AT&T. They are the de facto ISPs for both the home and mobile. For Google and Apple, mobile OS dominance could’ve been an interesting trump card. But the same telcos they are battling in TV are partners on mobile. Instead of just disintermediating the telcos, Google and Apple will have to cut deals to share customers. What about cable and satellite companies? Not so lucky. They want to become the data pipe to the home. However they only have part of the consumer solution, i.e. no mobile footprint, so things don’ t look so hot for them long term.
The challenger strategy: ubiquity and leveraging other key customer relationships
The challengers bring a strong hand or else they wouldn’t have a chance against the data lock the telcos are developing. Netflix is mentioned frequently but the real challengers are Google and Apple, maybe Amazon. Google owns search/web and is capturing mobile. Apple owns a good piece of mobile, digital downloads, and a nice chunk of the home hardware market. So the strategy is simple: a seamless experience. Combine existing customer relationships in other areas with the diffusion of digital content access to capture the television ad, subscriber, and hardware business. Google would like to position itself as non-threatening as possible. One executive called Google TV just “search and Android.” Competitors are suppose to fall for a Trojan horse and just ignore the billion-dollar YouTube business and its recently launched movie/TV download business. Who are they kidding? It’s a death match.
The wildcard players are the content folks. They own the core product and therefore automatically get a seat at the table. They get billions in affiliate fees, hundreds of billions in subscriptions, and hundreds of billions in advertising. They don’t care who pays them as long as they get paid (more if possible). Right now the cable guys are the one paying them billions. So it’s not surprising the content guys have thrown their hat in with the cable guys, for now. But the content folks are going to play both sides against the middle. Apple, Amazon, Google, Netflix are making stuttered but steady strides. The content guys will hedge while they see who wins the eyeballs and subscriptions. Likely they’ll end up with simply more distribution points and higher margins.
Each camp is developing slightly different weapons for the coming battle. The cable companies have created a half-hearted rebranding of triple-play bundles. Time Warner hasn’t even rebranded. Comcast has Xfinity. I’m sure some cable executive positioned it as a play-anywhere platform to rival the tech guys and keep the customer relationship. But with the landscape being TV, mobile, and the web, if don’t have an OS or browser with an integrated app store you’re not going to get traction long term.
The telco play is more legitimate but still vulnerable. Verizon has FiOS. AT&T has U-verse. You can tell from their commercials that there was some plan to create a walled garden. Verizon has been pushing music downloads for years. It would be natural to blend those plans with video on-demand products. But these platforms will be no match for Apple and Android (possibly Microsoft) super-platforms. Brass tacks: the cable/telco strategy will live or die based on their ownership of pipes into the home and mobile devices.
The challengers bring newly burgeoning super-platforms. The weapon for Google and Apple is not Google TV or Apple TV. It’s Android and iOS respectively. Vibrant app stores, integrated self-serve ad platforms, Google Analytics for TV, software/hardware integration. Also Google buying the second largest set top box manufacturer doesn’t hurt either. It’s simple embrace and extend.
Things to Watch
The battle for the television industry is going to be great sport. Here are some things to watch out for in the coming months.
– Who buys Hulu? Both Google and Apple have struggled to get significant content deals cut. Hulu gives them, or some other player, a quick path to critical mass of content. The price is more than the acquisition cost though. Itâ ll require a believable story that theyâ re only after a small slice of the $500 billion market, not a big slice.
– Can Netflix build a content library and expand? Can it actually find some competitive advantage? Netflix brings none of the natural competitive advantages of a Google, Apple, Microsoft (Xbox), Amazon (reach), or Facebook. Unless Netflix gets some key asset in a hurry, they are going to get crushed by competitors who already have relationships with Netflix. My money would be on Netflix selling out for a low price in the next 12 months.
– What the heck is Apple going to do? Rumors have been flying about a real Apple TV. One with a screen and a native Internet connectivity. What could they do with a 4G TV and their platform?
– Traction for cable/telco media platforms. Verizon and AT&T have a ton of muscle. They forced Google to back down on offering phones online and on net neutrality. What can they do on the pay TV front?
– Internet connected TVs. Right now over 30% of TVs have an Internet connection. Wire those things up to a web-based content platform and what do you need a cable company for?
– Tablet penetration. Tablets are a cool way to watch movies on the go and break the cable monopoly. Their penetration is a forcing function on television convergence.