There are three major sets of events that happened recently, which together help predict the future of TV content and distribution:
A move towards à la carte: The attempt of distributors to shake up the price and structure of the base bundles of TV content they offer, like Dish’s stand-alone Sling TV and Verizon Fios’ Custom TV.
Over-The-Top (OTT) distributors as content creators: The moves of OTT distributors to produce their own content, like Amazon’s Transparent or the Netflix exclusive series Grace and Frankie with Jane Fonda, released today!
Direct-to-consumer streaming services: The decision of mainstream TV networks to go direct to the consumer with a stand-alone digital subscription that is not tied to a pay-TV (cable, telco, or satellite) subscription, like HBO Now and CBS All Access.
Can we assert that these developments are structural trends and not just the product of isolated business ventures that may or may not succeed? What other trends will emerge that we don’t see yet? Since the answers to these questions have serious implications for TV executives and for the welfare of consumers, big data analytics, economic modeling, and cross-industry case studies can help us predict the answers.
The move towards a la carte
Based on econometric analyses of large data sets of sales in the travel sector, I studied how consumers value the transparency of bundles that can be customized, and showed evidence that they are willing to pay for them. You can extrapolate this to what’s happening with TV content. Consumers can now combine a direct-to-consumer streaming service like HBO Now with a convenient pay-TV package like Verizon’s Custom TV, and complement them with a Netflix subscription. The problem is that there is not enough evidence yet as there is in other more mature transformations to see if and how well these bundle combinations will sell. So there may be no big data in the first place to construct evidence, and despite the comparable evidence in other industries, skeptics will remain, reasonably so.
One alternative is to leverage mathematical modeling, which can provide strong predictive power when there is little or no data. Hemant Bhargava, a Wharton Ph.D. graduate and professor at University of California, Davis, has developed sophisticated mathematical models on the economics of bundling in media and entertainment. Based on his work, he supports the view that TV bundles are bound to become smaller and more convenient for consumers:
“Pay-TV distributors own the fat pipe (cable, telephone, and satellite), hence they have been vital to both consumers and content producers. These distributors have leveraged the wonderful economics of bundling – aggregating content from multiple producers, and selling it in packages or bundles. Consumers have had little option but to pay a premium price for a large bundle of aggregated content, and both content producers and distributors split the healthy margins. But now, with consumers having more options via the internet, distributors are losing market power, so they will need to compete with smaller, more attractive bundles. Some consumers will become brand-loyal to a bundle or service. Others may have broader preferences so they will need to pay for multiple subscriptions, not just one.”
This helps explain why the emergence of digital distribution leads to an industry-level redesign of bundles that is more convenient for consumers. You can see it empirically as a move towards à la carte, or from an economic modeling view, as back to the basics of bundling, where large, fixed bundles don’t make sense anymore economically. It’s not that bundles disappear, they just need to be more appealing to consumers.
OTT distributors as content creators
Why would OTT distributors like Netflix feel the need to produce their own content (like House of Cards) or license it exclusively? Online travel agencies are not launching airlines or hotel chains, so what’s different about TV content? The answer also lies in the more competitive distribution environment, where distributors not only need to attract the consumer with quality content, but also with exclusive content. OTT services may be technically unfit or financially outbid to offer exclusive, live, prime time content (e.g. Pacquiao-Mayweather fight was only available on pay-TV), but they do have the option to produce, acquire, or license content. Hemant actually modeled and predicted this phenomenon back in 2010:
“Bundling is most attractive economically when you make bundles from content that is your own. If you are distributing content created by others – then it is harder to reap the benefits, unless you have some distinctive market power. Since new digital entrants diffuse distributors’ market power, we return to the basics of bundling economics: ownership of content is necessary for distributors to offset this more competitive environment. This is why the new distributors – Netflix, Amazon Video and others – find it so vital to develop exclusive content.”
Direct-to-consumer streaming services
If it makes sense for distributors to create their own content, it should make sense for producers to capitalize on the internet to distribute their own content. That way they have a direct outlet to compete with the vertically integrated distributors. Also, I have made the case that HBO, as an early mover, has opened the floodgates for these stand-alone services to satisfy the demand for content anywhere and anytime. Hemant adds: “Together, the quest of OTT distributors to have exclusive content and of producers to go direct, will contribute to narrower offerings and hence, smaller bundles.” And pay-TV distributors will have to compete accordingly either through the fat pipe (like Verizon’s new skinny bundles) or online (like Dish’s Sling TV). Notice that to navigate all these smaller bundle offerings by distributors and content creators, meta-search sites are emerging, which provide automated search across distributors. Current examples are www.wheretowatch.com and www.buddytv.com.
The future picture, then, will have more instances of distributors owning their content, more producers with direct-to-consumer services, and smaller, more convenient bundles. Most services will offer both exclusive and non-exclusive content. Meta-search sites will become mainstream, just like Kayak and Trivago did in the travel sector. Hemant agrees, and adds that meta-search sites will evolve to personalize services by knowing which subscriptions a consumer belongs to, and then helping to complete the transaction.
If these predictions are correct, then there is an even more fundamental one based on my observations of digital transformations in other industries. Those who jab and punch early will more likely win a strong market position. If established players try to maintain the status quo, disruptors will punch them to the ropes. As opposed to the Pacquiao-Mayweather fight, I predict this one won’t be boring!
This article was written by Nelson Granados from Forbes and was legally licensed through the NewsCred publisher network.
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