Ten years ago, music consumers went on strike. They decided en masse that they no longer wished to consume music bundled in the form of albums. The result: sales of recorded music today are 64% lower than their peak in 2000.
The leaders of the television industry should take a long careful look at this analysis of the music industry’s demise on Business Insider.
It’s hard to get rich selling one item at a time. The entertainment industry always makes its fattest margins when entertainment titles are packaged into a bundle: songs are bundled into albums, TV shows are bundled into channels, and cable channels are bundled into bouquets when they are sold into cable systems. Even movies are packaged into bundles that are force fed to distributors.
But consumers hate it. They hate paying for content that they don’t want. Their resentment has been smoldering for decades.
When the CD format was introduced in the early 1980s, the music industry lied to its customers, insisting that the price of an album would come down from $16.99 to $4.99 as soon as the format reached mass adoption. It never did. Prices for CDs remained high, and the labels got rich as an entire generation repurchased their Rolling Stones, Who and Beatles collections for four times more than they paid for the vinyl editions a decade earlier.
This was highly profitable for the labels. By the late 1980s, the music industry was awash in cash. I recall that it was not unusual to see music executives blowing lines of coke off their desktops when I was starting my career as a young director in late 1980s. Wretched excess. Music industry accountants drove Ferraris.
But they failed to heed the signals from their customers. Hooked on fat profit margins, the music labels were simply unable to adapt to the digital era. They couldn’t re-imagine their business catering to their consumers who demanded more flexibility in format and pricing. They couldn’t face the prospect of unbundling.
And so it was left to the consumers to do something about it. By the mid 1990s, a group of software programmers took the steps that unbundled the CD ablum. The MP3 format had been around for most of the 1990s but it was complicated for the average person to convert CDs into MP3s until WinAmp, developed by Justin Frankel, Ian Rogers and Rob Lord, made it possible for the average PC user to “unzip” their CDs and turn them into a collection of singles that could be traded and exchanged. Overnight, “rip, burn, mix” became the mantra for a generation. When Napster got shut down by the record industry, Frankel created Gnutella and then the music industry began its decade-long collapse.
That’s not the end of the story. Consumers still hate paying for bundles of content that they don’t want. And technology caters to that urge. Nowadays, consumer technology provides lots of ways for audiences to unbundle packaged content into smaller chunks that the end user can manage and play back in the sequence they prefer.
As usual, music is just the first to go. Where music goes, TV and video soon follow. And already, consumers have demonstrated that they prefer to unbundle TV shows from the channels where they are presented in at a certain tune-in time as part of a schedule: increasingly, consumers take charge of their TV programming, timeshifting programs via DVRs, or playing them on demand, or purchasing them as singles from the iTunes store. All of these modes of consumption are growing fast, and none of them are likely to monetize as profitably as channels.
The unbundling of TV channels will be the sequel to the demise of the music industry.
We are at the beginning of the “unbundling of television”. The shift will be gradual at first, and the incumbent TV providers will probably scoff and dismiss the trend until it’s too late for them to change course.
The signs are unmistakeable: cable is no longer growing, and alternative platforms have gained significant momentum. Last quarter, the cable MSOs lost a record number of subscribers; yet at the same time, Netflix gained 4.6M new subscribers. With a total of 20 million subscribers, Netflix now reaches a bigger audience than the premium cable channels Showtime or Epix, and they are closing in rapidly on HBO. Netflix also has more subscribers than most cable systems.
And Netflix isn’t the whole story. Innovation is coming from many more players than Netflix, just not from cable MSOs. Now both Apple and Google are making big progress with their own version of the future of television: in the case of Apple it will be iTunes on TV (but not the world wide web), whereas Google seems intent on bringing consumers the full diversity of online streaming video directly to the TV.
In a related development, Ivi.tv is challenging cable operators in a new way, by offering a “virtual cable system” via broadband. The big TV companies are attacking this new venture with every legal weapon available, but according to CEO Todd Weaver, the cable operators are the ones who have the most to lose. It’s far from clear that ivi.tv will be stopped. Even Hulu is watching carefully to determine whether or not they should follow suit and turn themselves into a virtual cable system.
It’s a matter of time before consumers migrate en masse away from the closed world of the cable MSO, where they must pay for packages of channels that they never watch, to a world where every show is available on demand.
The economics of this new world are scary. Imagine how much harder the TV industry will have to work when they must operate with thin margins and no leverage to bundle their programs into channels. Undoubtedly, the industry will shrink, and the number of original programs will diminish, and entire channels will go away.
This collapse may not be as far away as industry insiders would suggest. If cable operators continue to lose subscribers, then it won’t take long for Wall Street to drop their stock like a hot potato. Most cable MSOs have a huge debt load to service, and they rely on the recurring revenue from subscribers to make those debt payments. Once a big segment of subscribers cancel basic cable, then the MSOs will slash the affiliate fees paid to the cable channels.
And that will spell the end of a golden era of TV production. Edgy, provocative and intelligent shows will probably be the first to go.
Does it mean the end of video? Or course not. In fact it might mean the beginning of something entirely new. And that might be a good thing. At present, broadcast TV plays it safe with unprovocative middle-of-the-road fare punctuated by six commercial breaks each hour. And cable network programmers seem unable to come up with an original idea, preferring instead to copy every successful idea from rival channels in an endless iterative cycle of real housewives, scripted reality shows, dysfunctional families, makeovers and clutter-busters.
Established players like HBO and Showtime have already cultivated a reputation for providing high quality fare, and their brands would likely continue to attract lots of buyers in a fully on-demand environment. But run-of-the-mill cable channels with weak brand loyalty and lookalike programming will certainly be the first victims of this downturn. Just like the music labels, they appear to be indifferent to their audiences.
In the meantime, new brands are emerging. A few pundits have noted the rise of specialty programmers on the web, whose quality and audiences have increased in lockstep. Check out Machinima for example, whose January numbers are staggering: 45 million unique visitors and 440 million videos streamed. When cable channels collapse, the established online video providers may be well positioned to garner additional audience.
Ironically, the established cable TV brands are thwarted from establishing an early beach head in the online market, because their distribution agreements with cable systems preclude them from offering free video online. The old mainstream over-the-air broadcasters are in a better position to pursue their online ambitions, and many of them have been leading the charge for online innovation.
We’re still in the early rounds, but I expect 2011 to be an exciting year of new developments in the evolution of TV.