Special Report: Another Pillar of Mass Media Collapses
By: SumZero Staff | Published: December 18, 2012 | Be the First to Comment
Changes in technology have destroyed the profitability of multiple industries in recent years, including the newspaper and music businesses.
In the media space, the next business that will be reinvented by technology is television. The profitability of owning TV networks is being undermined by digital video recorders, internet-enabled on-demand viewing, Netflix, Hulu, YouTube, and piracy/theft. Further, amateur content is taking up an increasing portion of viewers’ attention.
Consumption of network and cable content is taking place in ways that allow viewers to circumvent high monthly cable bills, avoid watching commercials, or both. Every single one of these changes represents a move to a revenue model that is less profitable than the one currently enjoyed by TV networks. It is only a matter of time before the revenue and profitability of the networks begins to fall.
The dramatic and accelerating evolution of technology is, however, quickly turning the prospects of investing in a historically great business into something more akin to sleeping on top of a ticking time bomb. You don’t know when it’s going to go off, but sooner or later, it will. Owners of these businesses are underestimating the probability that the move toward commercial-free, commercial-skipping, and commercial-light alternatives will cause cash flow to plummet instead of grow.
Yes, the threat to the traditional advertising-driven model has been around for almost 40 years, and investors have heard it all before. So perhaps they have been conditioned to ignore the risk. But today, we are at a point where demographic and technological forces are coming together to create a worrisome trend. The decline is likely to follow a parabolic path. It might be a number of years before the traditional model implodes, but the demographic shifts are seismic and unavoidable. The Summer Olympics and the presidential election will act as insulation over the next couple of quarters, but long-term, the business of selling a TV audience to advertisers 30 seconds at a time is dying.
Over the past 10 years, there has been a generational change in how we view media. If you’re in your 40s or older, you remember a time when people would gather at a specific time to watch a network TV show, and would sit through the commercials, or at least leave them on while they visited the kitchen. If you have children, that experience is foreign to them. We now live in an on-demand world where we watch the shows we want on our schedule, not the networks’. DVR technology is ubiquitous and many of these devices have 30-second skip buttons. The choice of that time increment is not accidental, and is designed to help the viewer avoid commercials. Time-shifting and commercial-skipping have become the norm for television watching, and both reduce the value of owning a network.
The force of these new technologies has already been felt in other industries. From 1999 to 2011, newspaper ad sales and sales of recorded music each fell by over 50% in nominal dollars. Adjusting for inflation, the carnage was even worse. The specific issues that affected these industries will be explored later in this report, but the key finding was that business models that were once highly profitable due to an ability to bundle content to customers became unprofitable when technology enabled consumers to choose individual pieces of content, or to receive content for free. As TV viewers start to watch more shows in an on-demand format, it will become increasingly more difficult to charge those viewers for channels they don’t want, or to get them to watch advertisements they can avoid.
The timing is instructive as well. In its early years, the internet was a text-based medium as is the newspaper business. There was still approximately a decade of growth before the news business moved online and ad revenue plummeted. The internet has become a rich media experience featuring streaming video. This is a threat to the media companies and internet technology is about to do to the TV business what it did to the newspaper business in the last decade. TV is next.
A few years ago, I had dinner with a senior executive at CBS. When I asked her if she was concerned about the ability of a growing number of DVR owners to skip commercials, she seemed flummoxed and irritated. She snapped that if people skipped the commercials, the network would no longer be able to fund great shows like Two and a Half Men. I think she vastly overrated the importance of Two and a Half Men to an evolving audience, and in general, overestimated the willingness of the American public to watch commercials just because it was CBS’s business model..................
***Click Here to Read the Full, 50-Page White Paper TV Is Next Free of Charge.***
Please sign in or create an account on SumZero to post a comment.