What is happening to the entertainment industry?

I wanted to write an article about what everyone knows in the entertainment industry, but no one talks about. I made a home in this industry, I want it to succeed. It is my duty to write this.

Who am I?

I started programming when I was 8, got my first job with CNN in 2000, started my own company Dreamsocket in 2005, and have been trying to revolutionize the industry the entire time. At one point or another, myself and my company have been responsible for bringing shows and movies online for entities like Disney, ESPN, Cartoon Network, CBS, and others whether it be for web or mobile. This is what I live and breathe. Hence, I get asked what I think or what should be done constantly. 

The stock crisis

First off, let's talk about stocks. Stocks really shed light on the industry's situation for the masses. A few weeks back, something that I've been anticipating for years became headlines. Entertainment stocks were downgraded due to lowered expectations. This caused them to take a plunge and the future of the entertainment industry began to be questioned. The root cause noted for the downgrade was that entertainment content companies (Viacom, Disney, Turner, etc.) make a large percentage of their income from providers (Comcast, Dish, etc.), and that income has been steadily decreasing with the potential for no replacement. For those outside of the industry, this may be a bit of a surprise since most typically equate advertisements as the revenue driver for networks. In actuality that is a small fraction. The numbers fluctuate from entity to entity, but the amounts that come from a provider can make the ad dollars seem insignificant. If you break down the deals to a simplistic level, a content company goes to a provider every (N) number of years and negotiates the rights for that provider to carry their content/network. The provider pays for those rights over that period. Content creators typically bundle multiple channels or offerings in attempt to request more from the deal. At times they lump smaller brands with heavy weights. This is done so the heavy weights carry the smaller brands that couldn't warrant price alone. The more a provider's subscriber is willing to pay for a package just to get the content created by a company, the higher the premium the provider will pay to them. In turn, a content creator may dictate you can't have X if you don't buy Y too. Cable is composed of a few heavy weights and a lot of coat tail riders. Some people only hold on to cable to get live sports from ESPN, but there are 100s of channels they don't care about.

Why is this happening

So what happened to cable? Why has the income related to providers been steadily decreasing. Let's spell out the obvious. People are "cutting the cord" and deciding they no longer need cable. If you look at cable companies, they are bloated with 100s if not 1000s of channels. Historically, the additional choice of more content was actually the main driver from providers to acquire subscribers. The problem is that all of these channels get factored in to the cost of subscriptions. As content companies continued to ask for more money and providers continued to add channels, the cost of "choice" began to become a deterrant rather than a driver. Cost has now come to a breaking point for the consumer. Looking at a bill that ballons upwards of $200/month, consumers ask, is this worth it? This has been amplified as distribution channels like Netflix offer mass amounts of content for $7.99/month.

Consumers look at choice for cable and see it as a bunch of useless options that they don't care about, but still have to pay for. In contrast, with content rapidly moving to an online/ondemand format, they are presented with endless choices to watch exactly what they want, when they want it. There is no perceived cost for distribution, other than the cost of delivering exactly what they want. 

A first response with TV Everywhere (TVE)

Content companies and providers have known for years that there would be a massive shift to watching content on-demand. However, traditional tv has been so engrained in our culture, the thought of not having it didn't seem like an option to the consumer. Knowing this psychology, neither content creators or providers were going to give up on the golden goose that they created together immediately. In attempt to adapt what existed, providers began structuring their deals with content companies to include digital rights. In order for the content companies to get their big pay outs, they had to turn over digital rights to the providers. This created the age of TV Everywhere (TVE) from around 2010 to the present. If you look at wikipedia, it defines TVE as "a business model wherein television broadcasters—particularly cable networks, allow their customers to access content from their network through internet-based services—either live or on-demand, as an aspect of their subscription to the service. TV Everywhere systems utilize accounts provided by a user's respective television provider—which are used to verify whether the user is a subscriber to a particular channel, thus allowing or denying access to the content."

The biggest problem with this model seems obvious. As a consumer in the digital age, if I perceive that I should only have to pay for what I want, just merely extending my abilities to consume the content at any time or any where ignores my changing perception of what the content is worth. The issue for "cord cutters" is less about access and more about cost vs worth. TVE doesn't solve that.

As time has progressed, content companies have been locked into these deals and providers have watched their subscriber numbers start to dwindle. The content companies who once held large bargaining power in their negotiations for being able to drive and retain subscribers are now being brokered down by providers. In some cases, providers have gone as far as to cease carrying a content company as a channel since the perceived worth wasn't there. As I mentioned worth can be translated to how badly a subscriber wants a service just to get that content. This is where the content companies should take note. Regardless of providers they should always be asking how much is my content worth?

How important is content?

Outside of sports, when we talk about worth, all the networks seem to have HBO envy. I can't tell you how many times I hear people refer to what HBO is doing and how they want to emulate them. The problem is a lot of those discussions revolve around what HBO is doing technically. Yes, HBO has been very progressive about getting their content online and accessible, yes they've created great mobile apps, but that's not their key to success. It adds to it, but if you want to emulate their success, you have to realize their original programming is their key. They've knocked it out of the park with shows like True Blood, The Sopranos, Game of Thrones, Silicon Valley, and more. Viewers are obsessive about their content. It is everything for them. When I look at a lot of the channels on cable, they are filler content. The worst case is non original content that is just re-broadcast. In this day and age, original content is your saviour. Amazon and Netflix get it, just look at House of Cards and Orange is the New Black.

If you are a content creator, you are going to die without strong original content. So there, I said it, content is king. Is it going to continue to drive those old provider deals? Not a chance. Those are fading. So what's next?

The buzz of Over the Top (OTT)

A common acronymn thrown around in the industry these days is OTT. If you look at wikipedia, it defines OTT as "In broadcasting, over-the-top content (OTT) refers to delivery of audio, video, and other media over the Internet without the involvement of a multiple-system operator in the control or distribution of the content.". In our discussion, multiple-system operator (MSO) is what we've referred to as the provider. I'll also point out that I have heard people use OTT to describe the experiences you create outside of traditional TV. I feel those definitions should be grouped under a different labeling like next gen TV. For me OTT describes, the distribution and monetization of content online rather than thru the traditional TV model.

Definitions aside, it seems like the industry is completely consumed with trying to figure out how OTT applies to them at the moment. With the fear that the provider model is disappearing and TVE isn't helping sustain it, these companies are in a panic of what is next and asking themselves what they need to do. If you have been paying attention AND/OR you are not a brain dead vegetable, you are probably screaming if you apply OTT at an individual network or content level, it only works for content that people really want. If your content isn't something people are dying to have, why would they pay for it by itself? Places where OTT has and can be extremely successful are first run movies, sports, original shows with strong fanbases, and content in general that people are willing to pay for. Just like traditional pay for view, this represents a subset of your viewers. You can't just turn every single network that you have today into an OTT option. That isn't going to work.

So what works?

If we know content is king, traditional cable models are dying and individual OTT networks aren't going to be the answer, what is the solution? Is there a solution? Let's restate things we know and look at them now holistically. Let's see what works and what doesn't. We know that people are willing to pay for content they really want. At the same time, we know they don't want to pay a fortune for it. We also know that consumption behaviors have changed. Viewers now expect what they want, when they want it. Time is no longer relevant. A viewer could binge watch an entire season or even series within a very short period of time. They have and expect endless choices. The cable model worked for a long time, but it is dying. Its perceived value came into strong contrast with its cost. That is where it fell down.

Taking all these points together, we can now make a few judgements. Content companies need to do what they do best. They need to focus on creating original content. If they lose sight of being a content company, their days will be numbered. With stronger content, more users will be willing to pay for their content. The quirk being that if you have to pay for every piece of content you are interested in, at a point that becomes the same problem as the bloated cable bill. Consumers will end up feeling that you are paying too much. As I mentioned, the cable model did work, it just got pushed to its breaking point. There is definitely a perceived value in having access to a lot of premium content that consumers desire. Given the modern age is all about choice, why not work that into the equation? Cable provides packages, but their costs are insane, and the bundles carry a ton of things you don't care about. What if you could pick exactly what you wanted, pay for only your choices, but could have it generalized? Imagine it like a completely customized bundle. You could pay X dollars for an option to chose X number of channels, shows or movies. This payment could be done on a binge basis or on a subscription basis, where subscription came with cost benefits. In a scenario like this, the old notion of an available base works, too. Hulu and NetFlix are good examples of a solid base at an affordable price. The base gives the content providers the ability to create hooks for their content, providing a few free episodes of a show. They could be time limited, ad supported, etc. These basically become upsells to full depth of that content.

An approach like this starts to solve various problems. A constant argument is NetFlix has tons of content, but its hard to find really high quality content. If they followed this approach, it opens up that option. Cable produces incredible content that people want, but in total it cost too much. This approach makes it more accessible in the end. In a time of choice, you just have to approach it from the purchaser's view point.

Summary

The future is uncertain for the entertainment industry. I know it's not going away. I know the providers pushed their costs to the breaking point and their days of $200/month subscriptions are gone. At the end of the day, some content creators may actually find the new model extremely profitable, while others may shrink or disappear. Time will tell.

In closing, let me leave you with my own perception of this shift. I think it started in the mid 90's on a weekend sitting in a computer lab in California with 2 twisted ankles watching an animated sequence of images. I had been looking all over the web to see what people were figuring out how to do with the technology of the time. Someone had the simple idea of having a page automatically refresh to the next page which had an image on it. It was essentially the first time I saw video on the web. I was floored. I watched it over and over again. I don't even remember what the content was, I just remember I was enthralled that it worked. At that moment I realized content was going to be liberated. It felt empowering. I wanted to do the same thing, to be able to show anyone in the world things that I had filmed. That is what this shift is for viewers and content creators, it is empowering. It should be embraced, and I'm sure those who do will be rewarded.