Three Minds On Digital Marketing @ Organic

As I have just read at http://www.aaronsw.com/weblog/books2009 "The average person spends 1704 hours a year watching TV. If the average reading rate is 250 words per minute and the average book is 180,000 words then that’s 142 books a year. So I guess the answer is: not enough."....So I guess this year its near enough 0 channels for me!

Hi Jonathan -

To achieve what you are suggesting would require a broad-sweeping shift in the economic structure of the television production and distribution model. With advertising rates stagnating/declining and more marketing dollars migrating toward digital media, there is increasing pressure on entertainment content creators to negotiate higher rates with cable service providers. One negotiating tactic that continues to be quite popular is bundling mainstream and highly popular channels (e.g. MSG Network here in the NYC area) with affinity and niche channels (Fuse, IFC, Sundance) to "force" cable providers to accept the entire portfolio. There has been several articles written recently about Time Warner's last minute agreements with MSG/Rainbow Media and Viacom/Fox that avoided losing those networks. The entertaiment companies try to extract the highest possible price per subscriber from the cable providers, regardless of the percent of subscribers that actually watch the niche content. Because of this, subscribers that love music but are not NY sports fans subsidize the real cost of providing coverage of the Rangers and Knicks for the benefit of Fuse's music content. Content production has meaningful scale based cost efficiencies so the economics work best when you are putting out lots of channels with varied and re-useable content.

On the cable networks side, their core competitive differentiators are 1) market penetration and 2) content available. The second differentiator is important because most of the major players have already stretched their infrastructure capabilities to provide additional services, such as voice and data services along side video. Providing these services seem to be somewhat price inelastic due to available competition (in many areas) and switching costs. So they are also raising prices: cable prices are expected to rise approximately 5% per year for the next several years to pay for necessary investments in new technologies and network.infrastructure maintenence. To raise prices while reducing content choice would erode that competitive position. Giving consumers an opt-out choice, while being a good thing for consumers, would have the effect of reducing the "real subscriber base" for certain kinds of content. This would end up putting upward pressure on price per subscriber demanded by content creators (since production is a high-fixed cost business) to offset what they can charge to advertisers.

I agree that the industry's economic model is due for an update, if not a complete re-design. With so much legacy investment, however, this is not likely going to be a fast or comfortable re/evolution. It is yet one more example of a "zombie-conomy".

So what is the solution? It seems to me that both sides have to get more efficient in their investment allocation and operations practices. Cable companies are paranoid that they are losing power in the relationship since its inevitable that consumers will soon be able to access more content through internet enabled televisions. That was probably a driving factor in Comcasts recent acquisition bid for NBC Universal. In the end, though, thats not their core competency. They are really good at transmitting signals, and so I see them (long term) as a utility.

Content creators need to accept that distribution is no longer the most limited resource -- it's consumer's attention. Organizing their resources and other cost structure components to to deliver attention-capturing content will be rewarded with attention, affinity and revenue.

All the best,
Tom

Thanks all for your comments.

Tom-Definitely appreciate your thoughtful, cogent response. Interestingly, such (re)volution might not necessarily be the choice of the cable companies or the "content providers", but might nevertheless come to pass, to some degree.

At some point, it might happen that many consumers will cry "uncle" to price increases...simply because they can't afford the additional expense alongside their other media-esque expenses, which are increasing at a similar or faster rate. It's unclear what the ceiling is, but there has to be a limit to what many consumers can pay for such things, though, remarkably, we seem to not yet have hit the limit.

With regards to the viability of an a la carte model, it might not behoove the cable companies or content providers, but anecdotally, I know plenty of consumers who are doing their own version of it: subscribe to Netflix, purchase Roku, buy season passes via iTunes or whatever...even someone who subscribes to European football online...all without subscribing and paying for a cable bundle. Fascinatingly, many of these people are not "early adopters".

Whether this segment will overthrow the apple cart (Apple cart?) remains to be seen, but I'd venture to guess it will gain considerable momentum and moss over time.

Jonathan