6. Digital Disruption

Digital technology has created gigantic shifts throughout the business world. The full impact has yet to be seen, as it is still morphing—by the minute. In this chapter, we start our discussion of the challenges rattling the entertainment ecosystem by examining the impact on film, broadcast, and cable television. Although the disruption is not limited to these platforms—as you will clearly see in the following chapters—much of the new technology is taking aim at these major content providers, warranting this singular discussion.

Exhibit 6-1 gives a visual representation of how this fall-off may occur.

Although the current cable business model still has television—as opposed to Internet or telephony—as the top consumer buy from cable companies, Internet access is quickly moving toward the top of the charts. As of early 2013, more than 81% percent of households have access to broadband Internet.¹ But the rising tide of Internet growth might have a huge impact on the current cable business model in the coming years. If certain shifts in viewing continue to happen, multiple system operators (MSOs) could be sowing the seeds of their own demise—though said demise won’t be happening in the in the next five minutes.

¹ Nielsen, Cross Platform Report Q3 2011.

Exhibit 6-2 demonstrates the explosive growth of the broadband buy over the last ten years.

The cable companies that provide Internet service to their subscribers should erect a monument to whomever created that strategy, for if cord-cutting becomes the norm, that Internet attachment could be the saving grace of the business.

Building a nationwide broadband network will strengthen our economy and put more Americans back to work. By connecting every corner of our country to the digital age, we can help our businesses become more competitive, our students become more informed, and our citizens become more engaged.²

² “We Can’t Wait: President Obama Signs Executive Order to Make Broadband Construction Faster and Cheaper,” The White House, Office of the Press Secretary.

We might also add, create a wider audience for the products and services we discuss in this book.

Government influence had already entered the scene in 2011. Following the $13.75 billion takeover of NBCUniversal by Comcast, the country’s largest Internet and cable provider, Comcast began a program called Internet Essentials in Chicago. The program is focused on underprivileged families, giving them access to the Internet for $10 per month. This was not entirely altruistic; the FCC had made access for the poor one of the requirements for approval of the deal.

The program offers slow access—3 Mbps, nothing that will allow for speedy download of the latest HD movie—but it does address an interesting issue facing the future growth of full-price Internet subscriptions: saturation in higher income households. Access in poorer households is one of the few growth areas left to providers. And in the classic camel’s-nose-under-the-tent strategy, a little access may lead to a lot later.

There are some who view access to the Internet as a “natural monopoly,”³ one that stands in the way of equal opportunity, one that demands government subsidization. In September of 2012, the FCC helped set up Connect2Compete, which gathers pledges from broadband providers and software companies, all directed at getting computers and access into the hands of the underserved.

³ “Mixed Response to Comcast Expanding Net Access,” The New York Times, January 21, 2013.

But what if you, the consumer, didn’t need cable to watch the content provided by cable channels and networks? Didn’t need to have that set-top box winking at you? Could decide what and when you watched?

Well, you can. And that’s what’s giving the cable industry the chills.

Just like cable now delivers to you—but with no subscription fee.

“Ah!” you say, “but you’ll still pay a fee for the content you’re downloading to the mobile device, won’t you?” Of course; this is still America, after all. Land of the free, home of the business. What will become possible is a choice that many cable subscribers are already clamoring for: the ability to pick and choose their content without paying for a whole package.

Cable operators claim they must do this in order to pay for the stations that don’t have as many viewers (but create better packages for the operator to sell to advertisers, reaching all those niches we spoke of in the last chapter). Because of carriage fees, the cable provider’s cost of content offerings does vary. HBO costs Comcast more to carry than, say, the Iguana Channel. Cable providers argue that if they were to offer a la carte pricing, allowing subscribers to simply put together their own list of channels, the operator’s ability to average the cost of all these offerings into reasonable subscription fees would be severely limited. There wouldn’t be enough subscribers to HBO and Showtime to spread the carriage cost over all subscribers. Prices would shoot through the roof.

Or so say the operators.

But this inability—or perhaps, plain stubbornness—to provide more flexible subscription plans could actually push the disruption of the cable business model over the edge sooner than later. Economics work in all directions, and it is feasible that enough potential subscribers, simply unable or unwilling to shell out, could eventually walk away. The cable companies would be left with pretty shaky ground under their feet. The golden goose could eventually wind up cooked.

Throughout this book, you have heard us say that content is king—that people will find a way to pay for the content they want to watch, listen to, or read. As long as the content is good enough to appeal to enough consumers and can be limited to as few access points as possible, the market stays steady.

But as Harold L. Vogel so succinctly points out in his book, Entertainment Industry Economics, the Internet is fundamentally changing and transforming many industries—not the least of which is entertainment—and certainly cable.

Vogel states that the Internet

Redefines and rearranges (but does not wholly eliminate) the functions of the middleman or wholesale distributor.

Changes the nature of customer relationships by altering the proportion of total revenue derived by advertising, subscriptions, and sales.

Increases the amount, variety, and accessibility of entertainment program content and related products and services.

Opens the way for new forms of entertainment products and services to be developed.⁴

⁴ Vogel, Harold L., Entertainment Industry Economics, 8th Edition, Cambridge University Press, 2011.

This, then, is the crux of our discussion. How are the delivery systems changing? Where is the content coming from? And when do we hit the tipping point? This is a $150 billion industry. We’re talking a significant disruption in the world of entertainment marketing.

Like the technology that drives this disruption, this is a highly complex transformation that is taking place. It is impossible to provide every last detail in this discussion with the speed at which things are changing. As before, we urge you to stay on top of this seismic shift. It is critical to your career in entertainment marketing.

That being said, let’s at least start the conversation.

This provides opportunities for both the consumer and the providers. While consumers have more freedom to find much of the content they desire, content providers benefit through both transactional- (you pay only for the one-time content you want) and subscription-based (you pay a monthly fee) models.

But some of this creates odd gray areas. Case in point, HBO GO. HBO did a very smart thing when it began expanding its content offering: It made a decision to be its own production house. HBO owns its original programming, which gives it the ability to reuse it as it sees fit without having to worry about working any deals with any outside production houses, as we discussed earlier in Chapter 4, “The Business of Broadcasting: Network TV, Syndication, and Radio.”

In 2012, HBO launched HBO GO, which allows subscribers to the premium service to access HBO’s original programming on all devices, anywhere in the U.S. It’s a great service for HBO subscribers, but what impact does it have on the cable companies?

Consider this: A Comcast customer in Florida subscribes to HBO. But that customer may be a “snowbird,” someone who has a home up north for the hot summer months. Instead of paying Time Warner Cable or Cablevision a fee to watch HBO in New York, the customer simply accesses it through HBO GO. Have these other cable companies lost access to a possible customer?

And while we’re on the subject of this very popular premium service, why doesn’t HBO simply offer its content for a fee separate and apart from cable companies? Does it need the cable cord any longer? It’s an interesting question, given, as we said in the last chapter, that Time Warner Cable and Time Warner have been two separate companies since 2009.

Here’s the thing: For the time being, HBO can still reach far more viewers/subscribers via traditional cable than it can via the Internet. The percentage and demographics of cord cutters simply haven’t moved far enough in that direction.

Yet.

Like we said, it’s all a part of a complex conversation. Let’s keep going, looking at some of the hardware that’s driving this potentially game-changing shift.

There are three primary forms of hardware that are driving disruption.

These TVs deliver the traditional broadcast media you may be watching via your cable provider. However, they also allow the viewer to consume a variety of products that are not managed by the Internet service provider (which in most homes typically the cable provider). In short, the cable provider, in selling you broadband service, is giving you a way to work around the television service it would like to sell to you. (How long do we think that is going to last?)

If you’re not interested in trading up to a smart TV, you can accomplish the same reception goal by purchasing a game console. Xbox and Wii both utilize Ethernet connections to deliver content to owners. Or you can use an Internet-enabled Blu-ray player, which also delivers content.

An interesting outgrowth of this technology leap is a movement in the hardware—specifically television—world to actually become the conduit. After all, if all the technology is built into the box you’re selling to consumers, why not get a piece of the content delivery yourself? Again, an exceedingly complex discussion, with no real footholds to date, but a subject of much discussion in 2012. Keep an eye on companies such as Intel, Sony, and LG, who produce a huge percentage of the smart televisions now available.

Apple, being the tech genius that it is, offers an easier solution, if you’re already invested in the Apple environment. Connecting your iPad or iPhone to your television via an Apple TV receiver by way of the AirPlay network bypasses that cable. More on Apple in a moment.

Netflix has put more than one provider’s nose out of joint. HBO refuses to license any of its content to the service. Cable networks have put together huge deals with studios to keep first run movies from appearing in the Netflix library before the premium services have had a go at them. This has left Netflix’s library with more holes than their marketing might suggest, but the company continues to chip away, doing deals with television content providers such as Disney-ABC, CBS, and 20^th Century Fox Television. Movie studios providing content to Netflix include DreamWorks Animation, The Weinstein Company, Open Road Films, and Relativity Media.

In late 2012, Netflix announced an alliance that stunned many onlookers, wresting Disney away from Starz, the cable channel that previously had an exclusive deal with the Mouse. Netflix now has the exclusive, gaining access to Disney’s vast library of classics and new releases—as Disney sees fit to release them. Remember, Disney carefully strategizes the release of its classic content.

Even more important, Netflix has made sure that ease of access remains supreme. It provides free applications for smartphones and tablets and integrates click-through with peripherals such as Blu-ray players and smart TVs, where that familiar red icon shows up nicely on the home screen, and in some cases, right on the remote.

But Netflix also provides a word of caution to those who might believe that streaming is supreme. In 2012, Netflix suffered severe customer backlash when it tried to spin off its DVD line into a new brand, Qwikster. The plan was dropped like a hot potato when subscribers who wanted access to both streaming and DVDs howled. The company recovered and then some, beating growth projections by a mile in late 2102 and now serving 27.15 million subscribing households.⁵

⁵ “A Resurgent Netflix Beats Projections, Even Its Own,” New York Times, January 24, 2013.

⁶ “How Much Extra Cash Does Apple Really Have?” Forbes, December 12, 2012.

Hulu Plus is a premium version of Hulu, streamed to any device, with limited advertising, for a subscription fee of $7.99 per month.

An interesting element of both Netflix and Hulu is what has come to be known as recommendation TV. Because both services know exactly what you’re viewing, they can utilize an algorithm to suggest other shows or movies you might enjoy, driving additional purchases.

Vudu: Owned by Walmart, allows users to rent or purchase films as well as watch streamed content.

Boxee: Allows users to view, rate, and recommend content to their friends through included social platform applications.

Roku: A digital media receiver that allows users to view streamed content through high definition TVs.

And while we’re on the subject...

But wait: there’s (potentially) more. The early 2013 rumor mills have been heating up with conversation regarding Apple actually producing a television, not just a digital media receiver. Some say that it will help Apple lock consumers into other iOS-based devices (iPads, iPhones), even as competition from other tablet and phone providers heats up. After all, people replace their televisions an average of every eight years, while other devices, such as phones, may be changed out every two years. If that little device in the palm of your hand allows you to seamlessly interact with content in your living room, you might be less willing to move out of the iUniverse.

Apple is an 800-pound gorilla lurking in the background of the entertainment business, and not just because it launched the smartphone revolution with the sleek and stunning iPhone. Apple is a company that could forever change the hardware/content game in a few simple moves. The company is sitting on a pile of cash that could be worth as much as $158 billion by September of 2013.⁷ That is a lot of buying power.

Apple already has a stake in content. It certainly has a stake in hardware and software. So what if it used a bit of that cash and purchased Disney—who has made several stunning moves of its own, purchasing LucasFilm (Star Wars, et al.) and Marvel? Or Time Warner (HBO, Cinemax, Turner Broadcasting, CNN, and much, much more)? What if Apple suddenly locked up all of it, together? They could do that with less than half of that pile.

Don’t laugh. Stranger things have happened.

Launched in 2012, backed by Barry Diller’s IAC/InterActiveCorp, Aereo allows subscribers to watch both live and time-shifted over-the-air broadcast content on Internet-connected devices. Aereo launched its service in New York City in 2012 and was immediately the target of a pile of lawsuits, from both broadcast networks and cable providers.

Aereo sits in a strange gray area. It is perfectly legal for any person to purchase an HD antenna and capture broadcast signal at no cost—but that antenna is a fixed device. Aereo has set themselves up as the middleman, capturing those broadcast signals on antennas that are leased to each subscriber, then delivering that content to the subscriber via the Internet. Voila! The subscriber no longer needs to be near their fixed antenna.

Broadcasters are screaming because Aereo circumvents the very healthy retransmission fees cable pays to broadcasters—estimated at 10% of broadcast’s yearly revenue. Cable companies are screaming because consumers can receive and time-shift content without paying cable fees. In an interesting “Huh?” moment, Federal Judge Alison Nathan tossed out a preliminary request for injunction, filed by a consortium of network broadcasters, with the decision based on a case that had established Cablevision’s right to cloud-based streaming and DVR services—in effect, also undercutting any argument cable might have against the service.

In early 2013, at the yearly Consumer Electronics show, Aereo announced that it would be launching service in 22 American cities in 2013. This is about to get really interesting.

This sets up an intriguing opportunity for content providers to create highly interactive programming. Imagine watching the Masters Golf tournament while simultaneously clicking through to order that new set of Ping clubs. This gives the term “recommendation TV” a whole new—and to marketers, exciting—angle. It could take product placement to a hugely profitable new level.

The multilayer function of Google TV allows for personalized viewing experiences, where viewers can put together their own “home screens”—particularly advantageous for parents who might want to set up a lock-out for their children, keeping little Justin and Tiffany from channels that aren’t allowed.

HBO, of course, is the reigning champ of original content, showing up at the Emmys, Golden Globes, and Cable ACE awards with a wheelbarrow, every year. But what used to be the also-rans—Showtime, Starz—have been launching their own media missiles of late, with great success. Content comes from everywhere. A small example: Bomb Girls, a program dealing with the lives of World War II Canadian factory workers, originally aired on Global TV, a Canadian broadcast network with 12 outlets in Canada. The original season of six episodes was picked up by Reelz, making the program available to American viewers. The show has developed a loyal and growing following, crossing international lines.

It seems that nearly every outlet with an eye toward eyeball-grabbing is in the hunt now. It isn’t enough to stream just anything anymore. It has to be something unique, something that will sway the consumers to your site, to your subscription package, and original programming is the answer du jour.

Part of what’s moving this forward is the leap in digital technology. It is estimated that the cost of a typical television pilot runs in the neighborhood of $3 million for a 30-minute show. The traditional system gets that pilot on the air for one viewing. If it sticks, great. If it doesn’t, it’s gone.

But the digital universe has delivered both the hardware and the software to the masses. A 30-minute show can be produced for $5,000. It can be launched on the Internet, where it can be viewed, reviewed, tweaked, and relaunched for less than nothing. It can be allowed to grow, gain viewers and traction, and turn into a modest hit on a not-so-modest medium. Are we talking broadcast television numbers? Of course not. But we’re at the root of the revolution, the very start of the seedling.

That nursery is being fertilized by some very large dollars. Hulu now has original programming. YouTube has launched original programming, courtesy of the $100 million YouTube Original Channel Initiative. Why the push? YouTube is now owned by Google—and those original channels will kickstart that same Google TV we just discussed.

Even Netflix has joined the revolution and may have started a new one. In February of 2013, Netflix launched its own House of Cards, a 12-chapter series dealing with skullduggery in Washington (talk about your easy targets). What sets the series aside from the typical launch is this: They made all 12 episodes available immediately.

This is potentially game-changing. Netflix recognized a trend in consumer behavior: marathoning. With all the content now available on the stream, many consumers will simply wait until a series—from any of the networks, broadcast or cable—is available as a whole and then watch it all at once. No commercials, no annoying wait at the end of the cliffhanger—just a straight-through “read,” like a novel. Another interesting feature of the launch is the episodes have no opening flashbacks—those bits and pieces of the previous episode supposed to bring viewers up to date. Marathoners don’t need them, don’t want them, and can give their fast-forwarding thumbs a break.

This might turn out to be the golden age of viewing. As each network ups the ante with new content, every other competitor must rise to the occasion, pumping out even more and faster. The consumer is being treated to a fresh content buffet unlike anything we’ve ever seen.

Before we explore the marketing of some very important entertainment content, sports and music, let’s examine the first mass media: publishing.

Vivian, John, The Media of Mass Communication, 11^th Edition, Pearson, 2012.