The Inevitable Disruption of Television
August 28, 2012 Editor 0
It’s easy to get caught up in the magic of Hollywood. I often find myself immersed in the perfect pacing of a well-constructed mystery, the flawless delivery of that once-in-a-lifetime monologue, the scale and grandeur of the next big blockbuster — I get so caught up in all of it, sometimes I forget that I generally go there to tell companies their businesses are in trouble. Last week was one of those times. By the time I boarded the plane back to Boston, somehow I’d been convinced that the television industry was safe from destruction — luckily, it only lasted about 10 minutes… then I regained my sanity.
Now, I am not one to argue that TV is going away. Television is a staple of the American experience. According to a recent Nielsen publication, the average American watches around 40 hours of television a week. That means, if you’re awake 18 hours a day, eating and grooming yourself 3 of those 18 hours a day, you’re spending more than one third of your available life in front of the television.
But even the largest industries enter periods of transformation — think of once-dominant railroads, wired phone lines, the postal service. The fact of the matter is that periodically, technologies or business model innovations allow start-ups to enter industries offering services that are generally cheaper and more accessible, but of far lower quality. Initially, these innovations are adopted only by the least demanding industry consumers or those who couldn’t afford to participate in existing markets (like the college students who use Reddit to find entertaining Youtube videos instead of paying for HBO). However, over time, these start-ups tend to invest in performance improvements in such a way that allows them to displace industry incumbents (the professionals who are cutting the proverbial cord in favor of Netflix, Hulu Plus, and Amazon Instant Video). This is the essence of what we call “disruptive innovation.” It’s transformed a number of industries and is starting to do the same in the world of television.
Youtube, Hulu, and Amazon may not offer good enough content to satisfy the majority of Americans. But for millions of Americans fed up with outrageous fees provided to COX, Time Warner, and Comcast, these internet video portals are slowly becoming “good enough.” Hulu Plus and Netflix can be procured for just $17 per month, roughly 1/3rd the cost of basic cable according to the MACC. So, according to the theory, disruption is coming and there will be a new set of distributors leveraging fundamentally different cost structures to the old regime.
It’s the perfect storm. As people opt into these disruptive services, the big studios and distribution companies, armed with their outrageous overhead structures, will be unable to compete with small production studios designed to leverage novel distribution channels at much lower cost. As the oligopolies of the old are toppled, an entirely new ecosystem may rise up in its place.
At least, that will be the story if Hollywood execs don’t heed the call of disruption and make some changes. And that’s the story I sling every time I walk into a meeting with film and TV executives. (Needless to say, I tend not to be the most popular guy on the lot).
But then that Hollywood magic starts to kick in. At some point during each of my trips to LA, I’m reminded that with shows like Game of Thrones, Breaking Bad, and Mad Men, quality is better than ever. The executives I’m meeting are quick to point out that people are clamoring for more. I know… I am one of those people. All things equal, I want better content. All things equal, content is never good enough. And inevitably one of the Hollywood execs will put the last nail in my coffin: “Besides, you’re going to have to pay Comcast for internet anyways.”
It’s that last comment that reminds me that I’m stuck. Comcast, Time Warner, and Cox have leveraged their natural monopolies to hook me. As long as I have to pay 70 bucks a month for high speed internet, is the additional cost of cable really that much?
Despite my proclivity to fall for their argument, the problem with this excuse can be found in what today would be considered an ancient innovation text. In 1962, an academic by the name of Everett Rogers released a book called The Diffusion of Innovations. It was one of the first comprehensive studies of the innovation process. Though it didn’t deal explicitly with the concept of disruption, it did bring up a concept very important to the disruption of the television industry: ecosystem development. Rogers, who spent much of his early career studying the adoption of agricultural innovation, aptly pointed out that many innovations are slow to see adoption not for lack of appeal but for lack of an appropriate ecosystem. While Rogers’ examples all centered around innovation in agricultural production, his ideas are just as relevant in media and telecommunications.
Over the past decade we’ve witnessed disruptive content portals emerge on the internet. Some prime examples include Hulu, Youtube, Netflix, Funny or Die, and SnagFilms. Each can operate profitably without the enormous cost structure maintained throughout the traditional television ecosystem (content production & distribution). The problem is that if consumers to opt away from expensive cable packages in favor of these cheaper, more accessible, content portals, they still are subject to excessive home broadband fees. A savings of 20-30% off the total bill just isn’t enough of an incentive to opt-out.
Fortunately for the consumers of the world, ecosystems can change; even ecosystems in industries with the largest barriers to entry (like those that are built around multi-billion dollar wire infrastructures).
For about a year now, I’ve been warning producers that disruption is coming. And for about a year now, the conversation has ended the same way. Bundling good. Internet expensive. Studios infallible. If I can pull myself together before boarding a plane, I always respond with Rogers’ observation. The ecosystem will develop. But after this last trip, the standard response wasn’t enough. I felt compelled to not only to speak in generalities, but to find an actual solution. So I did.
As soon as I landed in Boston, I committed to finding a substitute for my bundled internet / television package. Something that would break away from the overpriced value chain. And in just one evening, I found my solution in the form of 4G wireless connectivity.
With a little bit of research, I found that I could subscribe to Clear — a disruptive internet service provider that leverages 4G technology instead of an expensive fiber-optic network — for just $49 a month. They would send me a small device (1/2 the size of a dollar bill) that would create a small wifi network wherever I took it. It would provide me with unlimited internet, allowing me to both cut the Comcast cord and reduce my monthly bill with my smartphone carrier. It wouldn’t be as fast as my Comcast subscription, promising about one third the speed of my existing connection, but it would theoretically be fast enough. So I ordered it.
In two days, I had a broadband connection and no Comcast bill. I can stream television shows wherever I am, take my high speed internet with me when I walk out of the door in the morning, and pay about half of what I did before (even including the cost of Hulu Plus).
For most people, this solution probably isn’t quite good enough. 4G internet speed is noticeably slower than wired broadband and there isn’t nearly as much content available through Hulu, Netflix, and Amazon as there is housed within a 150 channel Comcast bundle. But as compression technology improves, the 4G infrastructure is expanded, and the quality of internet video improves, my guess is the solution will appeal to more and more consumers. It’s disruption in its most basic form. And it doesn’t hurt my thesis that Time Warner, Comcast, Cox, and the Dish Network represent four of America’s 19 Most Hated Companies. People are primed to embrace disruption in telecommunications.
And, if I’m right (or even remotely close to right) that’s not good for legacy television.
But destruction will come slowly. Academics have noted that disruptive cycles take place over periods of 15-30 years. Even if those cycles are faster than ever with the ever-falling costs of distributing information, educating the public about new ideas, and producing innovative products, it will still be a number of years before we see meaningful change. In the short term, it might appear that everything is stable in Hollywood. The key is to remember that no industry is invulnerable to disruption. Barriers to entry be damned. Innovation always finds a way to drive cost down and bring people into the market. Some industries are harder to penetrate than others, but change is inevitable. Even in television, “winter is coming.”
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