The 1993 American dystopian action film Demolition Man, written by Daniel Waters, Peter M. Lenkov, and Robert Reneau, forecasted that, in 2032, all restaurants will have merged into Taco Bell. As we look at the “too big to fail” narrative surrounding the banks and financial institutions, isn’t the same process occurring with media? American business schools are cranking out ambitious MBAs who increasingly believe in the inorganic consolidation growth model. An organic growth model would emphasize good products and services to build a brand promise and grow a loyal consumer base. That takes way to long. To succeed in the corporate culture of today, one must produce rapid cycles of business growth and profitability directly tied to one’s own performance. Any benefits of resourcefulness or ingenuity that take two years, four years, or more to deliver ROI, risks the associative connection—the glory, if you will—to the innovator.
So the goals are better met through Mergers and Acquisitions (M&A) whereby the company lowers the quality and standards of their products and services as much as the they possibly can in order to harvest cash for buying increased market share through M&A. Much faster growth model than organic.
Let’s take the example of the cable giant Comcast that, after an unsuccessful bid to buy Disney for $54 billion in 2004, came back to the table with another plan for world domination. According to Suman Chatterjee, Financial analyst and contributor to Motley Fool "In December 2009, Comcast announced that it was buying NBC Universal from General Electric at a total price of $30 billion."
This fits the consolidation model well, a massive content and delivery platform that spans theatrical movie distribution, cable, Internet, and other delivery methods. We saw this back in 2001 when Time Warner was purchased by AOL, combining the Time Warner content channels (e.g., CNN, HBO, Cartoon Network) with the Warner Brothers movie studio content, distributed via the Time Warner cable system and AOL’s Internet distribution.
So why, then, did Time Warner recently dump AOL and Time Warner Cable operations? On one hand, Comcast consolidates content and distribution, while Time Warner divests into a pure content model.
The answer is the same for both companies; content is king and distribution is a loser, or at least perceived as a loser. Don’t be surprised if you see Comcast divest the cable operations to become a pure content player. The cable giant is transforming itself, evolving, if you will, into a pure content company, whereas Time Warner has now completed the evolution into a pure content company.
How might you ask did harvesting billions of dollars for M&A create a better consumer experience for the customers of Comcast trapped in the forced monopoly of cable distribution? Ask one of them.
Recent fights between Viacom and Time Warner Cable illustrate the sea change of power. Viacom demanded fee increases for cable carriage of its channels, such as MTV, but Time Warner Cable argued that Viacom was eroding MTV’s value by releasing MTV’s shows direct to web. With few exceptions such as the TV Everywhere initiative, cable companies are losing their gatekeeper status and are rapidly becoming “dumb pipes” of Internet connectivity.
Dumb pipes are a commodity and require expensive infrastructure. Additionally, cable companies face stiff competition from wireless services, such as 4G, as well as fiber to the home by telecoms, such as Verizon and AT&T. While cable companies have diversified their television operations to include data and voice over Internet protocol (VoIP) services, the promise of expanded offerings is limited to the three services: TV, voice, and data, or the “triple play” that are ultimately available from any dumb pipe.
The cable company’s only hope of survival is based in providing robust network infrastructure and fast broadband services, which, to date, have been its enemy; high infrastructure cost and decreasing revenue through competition have created a climate of stalling, obfuscating, and resisting the ultimate outcome.
Many cable companies have imposed bandwidth shaping, also known as traffic throttling (prioritizing the quality and speed of Internet traffic in an effort to force users to their own proprietary broadband services), which has led to regulatory efforts known as net neutrality that will require equal access to all Internet broadband offerings.
Here’s the deal: Comcast was a pioneer in creating a branded, Internet content portal called Fancast Xfinity TV and here's how they want to monetize it.
Fancast is a website offering limited video content to anyone; however, Comcast cable subscribers can watch additional full-length network television shows, feature films, trailers, and clips, as well as specialty programming. Fancast gets its revenue from advertising, so more is more when it comes to audience. The theory goes like this: You are a Comcast broadband subscriber and want to watch a Family Guy episode online. You prefer to go to Yahoo! Screen for your online content, but the connection is so bad that it’s difficult to watch the video due to the stalls and stops, so you give up and head to Fancast to watch your show. Comcast has now hijacked the Internet in an effort to grab the advertising dollars. This is only an example, not a reality—at least not yet, or for a lack of trying.
Network neutrality is a regulation scheme proposed for user access through provider networks that advocates no restrictions on content, sites, or platforms, or the kinds of equipment that might be attached, or the modes of communication allowed. It would prevent Internet service providers (ISPs) from arbitrarily controlling the digital pipeline and thereby removing competition by creating artificial scarcity (of bandwidth) and consequently oblige subscribers to purchase their otherwise-uncompetitive services. Pretty much every telecom company, from Comcast, Time Warner Cable, and AT&T, to Verizon, is fighting this zombie (won't die) kind of regulation in an effort to limit their infrastructure costs and further monetize its subscriber base.
So companies, such as Comcast, are potentially fighting to limit bandwidth and maintain uncompetitive practices on their own sites (e.g., Fancast), but, as content owners of programming from broadcast networks (e.g., NBC), they also seek to have audience access available to their owned content properties from outside competing ISP subscribers. Aren’t they just arguing both sides of the same issue?
Not exactly. Content companies routinely syndicate content to multiple distributors, and, one way or the other, they get paid. Let’s take an example of the recent over-the-top (OTT) TV craze.
Starting (in earnest) somewhere around 2005, content channels, such as MTV, saw opportunity in creating branded websites that made programming available to their audience directly, OTT of the cable and satellite companies and other interlopers to create a direct one-to-one relationship between the TV shows and the viewers. OTT portals sprung up overnight, including MTV’s Overdrive, Comedy Central’s Motherload, CBS’s Innertube, Discovery’s Turbo, CNN Interactive, and others.
Audiences didn’t rush in quite the way the media brands had hoped. The truth is that viewers were used to aggregation. Audiences have been trained through tens of thousands of hours of watching TV and using a simple navigation feature called a TV remote. Having to go to multiple websites, learn the idiosyncrasies for navigating each site, subscribe, log in and search for content on the site, launch a media player, and wait for the content to arrive is far too complicated and frustrating to an audience routinely used to the simplicity of a channel up/channel down button. Additionally, few audience members had adequate bandwidth or video connections to their TV via their PC.
A few short years later, we found a different model emerging. It’s called TV—yup, the same old TV you know and love—but available through new distribution methods. After all the hand wringing, focus groups, high-paid strategists, pilot projects, and other desperate measures to reinvent television, we’ve come full circle. Television has evolved for eighty years into a sustainable business model, and, even with the current challenges, TV as we define it is a proven experiment. The only thing that is different is the pipe or, more accurately, the pipes that will deliver these aggregated experiences to the many devices in your life.
MTV’s efforts to capture OTT viewers flies in direct opposition to the traditional model for its revenue: syndication. If you’re the CEO of MTV, your objective is to be in front of 100 percent of every set of eyeballs in the country, not just Comcast Cable, or DirecTV, but everyone, everywhere. The same is true with the Internet; does it really make sense to limit the distribution of popular shows to MTV.com, or to syndicate the content to Hulu, Fancast, and frankly every aggregation point for Internet-based distribution? Every eyeball, everywhere, and yes, on every device. Netflix understands this better than anyone. The question is, will HBO figure it out on their inevitable direct-to-consumer offering of HBOGO, more on that in a future blog post.
TV is based on tiers: so-called free-to-air content paid for by advertising revenue; subscription tiers, such as HBO; and, finally, pay-per-view for high-ticket and first-run movies. The Internet is no different.
Viewers increasingly have PCs connected to their TVs, and many new TVs and connected devices, such as DVD players and game systems, connect directly to the Internet for watching IP-based video directly on the television. Despite the resistance of cable ISPs, levels of bandwidth are now routinely acceptable for viewing IP-based video content that has parity with broadcast and cable.
So, at the end of the first millennial decade, what exactly is TV? The answer is, it’s still just TV. The only difference is that it might come from a cable or satellite source or an IP source, it might be on your phone and your PC, but the content and tiers of service will likely be the same. The content owners will still be paid through ads and subscriptions, and the only losers, so to speak, are the cable monopolies-turned-dumb pipes charging you for access in the low-margin, high-cost business of pushing bits.
Comcast is now a content company; AOL Time Warner is now a content company; Disney is a content company; Viacom is a content company; and Time Warner Cable, AT&T, Verizon, and others are fighting it out over network infrastructure and service fees. With the inevitable end game of net neutrality and open wireless service networks, such as 4G (thanks to Google), we can finally expect to someday connect any device to any network and watch any content. We’ll pay for the device; we’ll pay for the network access; and we’ll watch some content with ads, subscribe to HBO, and rent movies just like we do now. So what was all the fuss about?