Disintermediation and Cord Cutting

During the fall of 1985 I was leaning into my first post-college job heading up the purchasing group for what was then known as Ingram Software (today split into Ingram Entertainment and  Ingram Micro). At the time, Ingram Software was in the video distribution business wholesaling VHS and Betamax cassettes from major Hollywood studios to independent video rental stores across the U.S.

As some will remember, those were days of families making the weekly Thursday or Friday night trek to their local video store to grab a weekend’s worth of entertainment, only to return the videos on Sunday to avoid late fees.

Quaint times.

That same year, a new player emerged in Dallas, Texas promising an entirely new experience to renting videos: Blockbuster Entertainment. When Ingram signed Blockbuster as a customer (also propelling me to my first National Sales Manager role), sales jumped dramatically.

Coincidentally, 1985 also saw fledgling Cable channel Home Box Office (HBO) introduce the first use of satellite-delivered network encryption, opening the next evolution in the business and economic model for content distribution. Soon after, American Online’s predecessor was established, heralding the introduction of online computing capabilities for the average consumer.

During an animated exchange with colleagues at the time, I commented how eventually the distribution of videos would be displaced by cable companies delivering content directly on demand, perhaps even across an online channel of some sort. “Our business model will be disintermediated,” I said, tossing out a term I learned in school as eager early 20-somethings do.

My companions looked momentarily puzzled and then laughed, commenting there would “never be enough bandwidth in our lifetimes” available to replace physical media.

Quaint notion.

Fast forward to August of 1997. Reed Hastings and Marc Randolph create an alternative to now-dominant Blockbuster called Netflix after Hastings was reportedly charged a $40 fine for returning a video of Apollo 13 late. The writing was on the wall for Blockbuster the first time consumers could order DVDs from Netflix, have them delivered in the mail, and never be charged late fees. In 2007 Netflix introduced its video on demand service (VOD), the very offering my friends laughed at 22 years earlier.

Which brings us to 2019. ATT’s recent acquisition of Time Warner, combined with Disney’s continued expansion by acquisition to become the world’s largest media company, is leading to another pivotal moment of disintermediation: the ascendance of Direct to Consumer (D2C).

Netflix will spend $15 billion this year on creating and acquiring content

Netflix will spend $15 billion this year on creating and acquiring content to be delivered outside traditional distribution channels (for those not steeped in the telco and cable industries this is also known as “Over-the-Top” or “OTT” delivered as “streaming” services). Netflix’s subscriber base now stands at 148 million and is growing. At this year's Academy Awards, Netflix-produced Roma won top awards for Best Director, Best Cinematography, and Best Foreign Film. While falling short of Best Motion Picture, Netflix's 15 nominations marks a milestone for D2C contenders in breaking through the walls of Hollywood.

The behemoth media companies are all creating their own streaming OTT offerings (e.g. HBO Now, Disney+, WarnerMedia SVOD, Amazon Prime Video, Apple TV Streaming, NOW TV, NBCUniversal Streaming, etc.), essentially relegating the traditional roles of wireline cable distribution services to commodity status.

Unfolding in full view is nothing less than the dismantling and reordering of the media entertainment economic model. The traditional structure works something like this: movie and television studios partner with production companies to create content, arranging distribution deals, pushing release of content through controlled, well-timed, and established channels such as movie theaters and DVD release, eventually making its way to cable channels and finally to streaming services such as Netflix and Hulu. Profits are carefully calculated to be front-loaded for the earliest players in the chain while last-mile providers scramble to retain subscribers and stay viable.

Impact of a new economic model

The new model turns this structure on its head. Streaming opens distribution directly to consumers anywhere they are – smartphone, tablet, laptop, airplane, and yes, even at home on their flat-screen TVs. Traditional Network and Hollywood Studio budgets are being slashed to make room for attracting guaranteed writers and actors to bring unique programming directly to these consumers. Streaming/D2C is a boon to top writers, producers, and bankable box office actors, but it also means little or no money available money for middle-men and intermediate channels.

Hence, every media company of any size now aggressively looks for ways to reach their audiences directly because this funnels profits formerly given to distributors back to the content producers.

The upshot? Knowing and understanding the specific viewing habits and preferences of consumers will be more important to media creators than ever before. As D2C grows, the importance of data, predictive analytics, and deep insight will drive media companies to leverage distribution technology in ways unimagined thirty years ago, creating ever more diverse categories content that can profitably be distributed for consumption to an increasingly highly-targeted and modeled audiences.

We’ve come a long way since the days video cassettes first began threatening the local movie theater and my friends scoffed at the notion of viewing movies on demand. The future, ever indeterminate, holds one certainty: change happens. Get in front of it or get eliminated.