2019 Provocations #1: TV will be unrecognisable by 2024 as the next 5 years creates a radical revolution in the industry

The discourse around the future of TV is one that is generally defined by 2 points of view. One side would say the medium is thriving and adapting,,and another would say that TV is dying and has become irrelevant to audiences under 50.

Ultimately both arguments are most likely wrong as they are almost always based on the current definition of what TV is - audio visual content transmitted via a broadcast signal and commercially supported by advertising. An industry where networks buy content from others, aggregate that content and transmit it to households.

Traditional TV Ecosystem

The traditional entertainment supply chain required content pass through each stage, with delineation between links in the chain. It was very much supply generators (creators) selling works to demand generators (aggregators and distributors) Source: Author.

This is the wrong way of looking at it. We should focus on the simple idea of TV being anything that transmits audio visual content to a viewer - regardless of device, regardless of creator, regardless of method.

Once you open up the definition the possibilities become many and varied. And exciting. Under this context TV has limitless possibilities for both revenue growth and also abundant wealth creation for those who can successfully capitalise on these changes.

Modern TV Ecosystem

OTT has completed upended the need for each link to be serviced individually - a demand generator (Netflix) has now entered supply, and a supply generator (Disney) has well and truly entered demand. Even high profile talent is skipping steps 1-3 and going straight to platform (Kayla Itsines). Source: Author.

In 2019 I will be releasing a quarterly provocations series where my team and I look to explore areas we believe are significant within the media and advertising business in terms of their commercial implications and future positive possibilities. These will look at 5 future hypothetical scenarios, the thinking behind these, and then 5 moves that could result if these hypothesis became real.

TV: 5 hypothetical provocations

1. Content companies become distributors at pace and go direct to consumer

We are seeing this in limited ways in the US market through companies that have historically relied on cable companies for access (such as HBO Go) as well as sports leagues (NBA League Pass, NFL Gamepass, MLB Advanced Media) but this will accelerate. Disney will launch its service in 2019. Warner/ATT is set to do the same. CBS has All Access. Amazon is creating more original content and Netflix has truly blurred what is a content company and what is a consumer facing network.

OTT makes all this possible and removes the barriers to entry that either existed via cable infrastructure setup and maintenance costs, broadcast licence scarcity and network reliance. If you are one of the big content creation companies - Disney, CBS, Universal, Comcast, Sony, AT&T - the decision is now do you setup your own global direct to consumer entities, or do you rely on networks to distribute your product and take a cut?

The traditional supply chain is set to be radically upended as the role of the aggregator/network and the distributor becomes one that will need to reinvent to demonstrate its value to both content companies and consumers.

Netflix invested over $12b USD in content in 2018. In 2014 it invested $3b and it only entered original content in 2013. Source: Goldman Sachs, Rotten Tomatoes, The Economist, 2018

Disney has been a large M&A participant - spending over $58b on TV production, film production and OTT technology over the last 6 years. Source: Crunchbase, 2019

2. Software becomes the network and the traditional network becomes redundant

In Australia content has relied on the broadcast networks to see an audience - which has meant local broadcasters have generally become aggregators of others content, packaged it up, and sold the audience it generates to advertisers. Local broadcasters generally prefer to buy others content than to make it themselves - so formats and often entire programming is not owned by the network, it’s just rented. For decades this has been the model as the producers of content couldn’t generate an audience otherwise.

Now the world has changed and one could argue the new networks are the software that powers these set top boxes and connected TVs - Apple TV, Roku, Android TV and the like. These are the platforms that are replacing networks and are becoming the interfaces for how consumers find content, services and entertainment.

For a content creator, is it more important to have a solid relationship with Apple TV or Roku, or a network? It’s likely both in reality, but ultimately for the same reasons. But as time goes on and on-demand becomes the rule across all demos (not the exception), content companies such as the ones mentioned in point 1 will find themselves with the appealing option of owning their viewers and by-passing networks altogether. All enabled by the software powering these screens.

The other potential disruptor is content companies focus on content creation and leave the ad sales to the software companies powering the boxes and screens. For instance, Apple sells all ads for services using Apple TV units and has the data benefit of logged in data accumulated across all services, various devices and content types. This would allow for better targeting, better audience knowledge (content consumed, interests, habits related to content), more control over frequency, better measurement possibilities, and a single source of purchase. Roku could do the same, as could Google with Android. OTT services would provide a cut to these platforms in exchange for permission to use them for distribution.

The new Connected TV network is a 4 player game - with currently independent Roku predicted to be the lead in the US market. These 4 platforms are the new ‘networks’ Source: eMarketer, 2018

3. Sport transforms and broadcasters buy leagues and franchises, or vice versa

Sports right are big business globally, and in Australia and demonstrate the significant advertiser appetite to be affiliated with sport. However, the model of selling 5 year chunks of rights for large figures is now another legacy behaviour that needs to be reconsidered. For the leagues the question must be - could we realise more value from our IP if we controlled it all the way to the consumer instead of selling its presentation to a third party? If Network X can recoup on the cost of our rights, perhaps we could make more by controlling them?

It’s also a challenge for sporting codes who are heavily reliant on these broadcast licence payments, but are also finding their commercial products outside of broadcast (partnerships, in-game etc) increasingly hard to package up and sell. For sporting codes to grow they need more control of how their code is presented to people outside of the stadium.

The challenge to broadcasters is equally interesting - how do you secure sporting rights without bidding wars every few years? Do you look to invest more deeply in sporting teams? In the US this is an easier prospect to model as teams are privately owned and in many codes (NBA, MLB) the teams have their own broadcast deals. For instance, in 2011 Time Warner signed a 20 year 4 billion dollar deal with the LA Lakers for exclusive broadcast rights to their games within Los Angeles and surrounds. At the time the Lakers were projected to be worth $1.35 billion (a hypothetical amount as the Buss family have not expressed any interest in selling the franchise). Could we see in future companies like At&T (Warner owner) look to buy franchises instead of rights - giving them ownership of the experience end to end. Or could we see teams like the Lakers setup their own OTT network - giving them the same ownership?

North American sports market revenue eclipsed $71b USD in 2018 and is predicted to be an $80b industry in 2020. Media rights is predicted to increase 15% during this time, with sponsorship up 15%. Source: PwC, 2017

The valuation of sports teams has seen significant YOY increases in 2018 - these assets are tightly held and increasingly valuable. Source: Forbes, 2018

4. Advertisers data knowledge becomes more sophisticated

The current sophistication of data for most OTT players right now is extremely limited. It’s an at best one dimensional view of a small sliver of a households viewing habits, appended to borrowed and rented external data that hopes it can somehow create a meaningful tapesty of their wants and needs. It is far from a holistic view of an individual created from a singular source.

Right now OTT boxes such as Apple TV and Roku know significantly more about their users than the services running on their platforms - but as it stands right now it’s the services with their very limited data (both in depth and accuracy) that are generating the lions share of advertisers OTT investment. This feels like a short term situation that is fueled mainly by advertisers not understanding what they’re buying rather than the long term trend. Once Roku and Apple (and Google) explore this space more it will quickly change.

Advertisers will no longer be satisfied with limited understanding of their customers attached to third party info from companies they’ve never heard of. Consumers will probably rebel against this as well given recent reports around privacy and data collection. Many of the media companies happy to run scathing editorial against companies like Facebook are themselves in cahoots with data firms that collect data without citizens even knowing about it - and these companies are more than happy to sell it to whoever wants it.

5. The last few feet between screen and advertiser realises new value and prosperity

TV manufacturers have been either slow to realise the opportunity of OTT ad revenues, or not focused on the area, but surely the scale of the opportunity that now presents must make it a strategic imperative for the large manufacturers. It is a opportunity for them to move out of purely hardware and begin to explore their new position as content broadcaster.

For a Sony or Samsung, why allow others to create ad empires on your platforms. Why not seek to control a percentage of ad sales of all apps running via your platforms? Why not look at commercial ways to generate new revenue. In short, they need to leverage their position with OTT providers to ensure they are not left out of the value exchange. The large global manufacturers have enough leverage to create global deals with significant volume players in OTT to exchange access to their users in exchange for advertising.

Global Smart TV middlewear is dominated by Android and Tizen. Source: IHS Media, 2018

TV: 5 big moves that could result if these provocations became real

1. Apple/Google enters TV hardware business

Google is already moving down this path through the manufacture of hardware across mobile, speakers, chromebooks and the like … but it hasn’t yet manufactured a TV screen. With over $100bn USD in free cash and video advertising its major growth engine and a significant portion of its revenue, Google could very easily make this move as a way of shoring up its clout within the new video ecosystem. This would give it a content aggregator (YouTube), an operating platform (Android) and the hardware that transmits it to users. A Google home screen TV could be the household hub-in-one for the user and solidify Google’s prime position in the home.

Apple is another business that has some strategic upside from entering home screen manufacture. It has played on the periphery with the Homepod and Apple TV but a screen would unite these two pieces and provide Apple TV with unimpeded access to users. Slowing growth in Apple’s core business will mean at some point (barring major economic changes globally) the company will need to seek other growth engines - advertising and adjacencies would be obvious to look at, especially considering Apple’s understanding of software, manufacture and sales and distribution.

Both have the cash, resource, expertise, retail understanding and consumer knowledge to pull it off.

Apple and Alphabet have combined cash of $300b USD. Facebook’s cash pile is getting significantly larger. Source: Bloomberg, Company Reports, The Economist 2018

2. LG/Samsung/Sony/TCL/Hisense/Sharp band together to create an alliance to control their o/s and platforms

One handbrake that could be stopping a Google or Apple moving into TV screen production could be the relatively flat sales over the last 4 years as well as the fierce competition within existing manufacturers. For these existing manufacturers it demonstrates the need for them to find new ways to generate revenue in a low margin, high competition, flat sales environment.

TV o/s is a relatively standardless environment where there’s a mix of turnkey o/s used (Roku, Android) by some manufacturers, and more tailored o/s used by others (Tizen for instance). No one would argue that TV o/s is embryonic at best and a long way from the slick mobile operating systems or the experience of a browser. Mobile was the same only a decade ago but it developed quickly and ultimately created two winners in Apple and Android.

LG, Samsung, Sony, TCL, Hisense and Sharp collectively account for 60% of current TV sales but all are using external middlewear to power their screens. Many have claimed that proprietary middlewear will be extinct in 10 years (such as https://resources.irdeto.com/home-page/will-android-kill-middleware-as-we-know-it) but this would leave the manufacturers less ability to leverage the revenue transmitting on their manufactured screens.

Working together, the controlling six could develop their own middlewear which gives them more control over the value created through their screens and a position within the software that powers these screens. The revenue running through the TV - via advertisements, OTT services - far exceeds the gross revenue from the sale of the hardware.

2018 TV sales by unit are down - with the top 6 players representing 60%+ of total market. Source: Sound&Vision

3. Facebook buys Roku and brings its data layer to television

To me this feels like a non-brainer. Facebook is currently playing at the periphery of OTT but clearly has goals in the space. It has also as a company shown it is willing to take large strategic bets to bed down future advantage - the purchase of Instagram, the purchase of WhatsApp, the purchase of Atlas.

Roku is in a position where it has a large data store on the viewing habits of its users, but it lacks the breadth of data outside of this area. Facebook doesn’t lack data but presently it has no facility in which to use this within an OTT context. OTT and the big home screen are areas it has no real land in - no o/s and no service.

Roku presently is trading at a valuation around $9b USD. It was trading close to $20b USD in October of 2018 prior to being hit by investors wary of a macro economic slowdown. Regardless, Roku is an attractive acquisition for anyone wanting to play in this space in a serious way. It makes a lot of sense for Amazon as a way of broadening out their current Fire TV base, for Google for the same reason; for a AT&T, CBS  or WarnerMedia to move closer to the customer and seek to control the device not just the content, and Facebook as a way of plugging in an established userbase with a rapidly growing ad business into the Facebook ecosystem.

And it suits Facebook DNA. It’s lean (800 staff), laser focused, global, dominant in an emerging area, connects to their core product and would provide additional valuable data particularly around viewing nuance. It also has the cash to buy it outright if need be.

Roku had a turbulent 2018, up almost 300% through October, but ended the year down. Source: Yahoo Finance, Roku Stock Price, generated 2019

4. 7/9/10 are all owned by US content companies in 5 years

We have seen this already start with CBS buying Ten for pocket change. This provides a platform for CBS to launch All Access with a local masterbrand and also provides a home for content CBS has already produced. What should result is a lowering of overhead and an acceleration of sophistication particularly around technology and commercial. CBS gets a way of ensuring its produced programming has a home in AU and revenue can be recouped via advertising, and it will hope it can apply operating principles it has in the US market to improve both revenue and efficiency in Australia.

There is no reason why the same thing won’t happen with 7 and 9 - it’s just a matter of the price for them to gain a position in the Australian market. The most likely acquirers would be Disney and NBCUniversal. Disney in particular has a large amount of portable assets for the AU market to fuel multichannels - Marvel, kids, ESPN, Fox (ex. Fox News), A&E and Lifetime - all appealing to different demographics. NBC Universal is in a similar position - NBC, Bravo, MSNBC, Syfy, Universal Channel, Universal KIds - all of which could slot into the multichannel format and offer a diverse proposition for advertisers utilising content owned by the company.

The big factor - the price. No acquirer is going to pay overs for what are ultimately broadcast reliant businesses. But if the price is right and the economics stack up - why wouldn’t these businesses want to enter what is per capita one of the most lucrative advertising markets in the world?

5. CBS/ATT/Disney buy up US sporting franchises across NBA/NFL and MLB

With sports content the most valuable content for TV, and many broadcasters owning their own production houses, why wouldn’t they look at owning the production of their most valuable content? Owning a NBA or MLB team in particular provides both an asset and significant content for the channel. Instead of Time Warner paying the Los Angeles Lakers hundreds of millions per year, could it not buy the team and in doing so provide itself with minimum 250 hours of content per year as well as additional revenue in sponsorship, merchandise as well as global syndication. It is the same for MLB - in fact, the Forbes valuation of the New York Yankees (which in 2018 was $4b USD) is lower than the proposed $6b  price Disney is asking for the YES Network (which holds most of its value in the broadcast of Yankees games into New York State). The NFL is more challenging as there are no team based broadcast deals - but it is the largest game in the largest ad market and all teams are privately owned.

If this sounds like history repeating, it is. Media companies used to own sports teams but the consensus around a 15-20 years ago was it was cheaper to just pay for the broadcasting rights than to own and operate the team (see https://www.forbes.com/sites/mikeozanian/2011/08/02/media-companies-no-longer-want-to-own-sports-teams/#69a9e9205418). The difference - TV and broadcasting wasn’t facing the same immediate threat, OTT was a concept rather than a reality, and sports leagues weren’t considering ways they could bypass the broadcasters and take their codes direct to consumers. The needs, competitive landscape and threats to all parties - broadcaster, leagues and teams - have radically changed.

The main challenge of buying up sports franchises is the scarcity of supply - owners generally don’t want to sell - which creates frenzied irrational bidding. The death of Paul Allen could put both the Portland Trailblazers and the Seattle Seahawks into market, as there are reports James Dolan could sell the New York Knicks, but wants offers in the ballpark of $5b USD (source: https://www.espn.com.au/nba/story/_/id/25556830/new-york-knicks-owner-james-dolan-consider-selling-team-bonafide-offer).

Portland is likely too small a local market to warrant too much frenzied bidding, but New York is the largest TV market in the world. If the Knicks were to truly be on the market the resultant bidding would be fascinating to observe. Ditto if teams in cities such as Chicago, Los Angeles, San Francisco, Miami, Atlanta, Dallas, Houston, Philadelphia, Boston were to become available.