When Charlie Brooker, creator of Black Mirror, a television series about the social impact of new technology, goes away for the weekend with his family, his young son occasionally encounters something perhaps too barbaric even for his father’s dystopian show: an old-fashioned television set with channels and a fixed schedule of programs. Instead of being able to watch whatever he wants at any time, he has to wait until a certain hour on a certain day on a certain channel.
“It just strikes him as terrifyingly antiquated,” Brooker said.
That kind of television eventually will be consigned to oblivion. People will be able to pick any show at any time from a few favorite platforms, such as Netflix—where Black Mirror resides—or Amazon, as well as Facebook and Snapchat for videos shared by friends and celebrities. Everything from Fox, say, will be on one channel instead of many. The younger Brooker will easily be able to search an army of brands: a Lego channel, a Harry Potter channel, a Star Wars channel.
That moment may be drawing nearer, but there are still plenty of obstacles in the way.
The internet already has changed what viewers watch, what kind of video programming is produced for them and how they watch it, and it is beginning to disrupt the television schedules of hundreds of channels. All this is happening in slow motion, though, because during the past few decades television has developed one of the most lucrative business models in entertainment history, and distributors and networks alike have a deeply vested interest in retaining it.
Pay and broadcast television, still the foundation of video entertainment at home in much of the world, is being eroded from two sides. At one end people are watching videos free on large social platforms such as Facebook, Instagram, Snapchat and YouTube. Each of these platforms now claims billions of views a day.
Free videos are supported by advertising, which will begin to eat into the television-advertising market, currently worth $185 billion. Many of these videos may be disposable—literally so in the case of Snapchat, whose stories usually disappear after 24 hours—but social platforms such as Facebook have excellent information on who is watching and for how long, enabling them to sell highly targeted advertising.
Facebook, Snapchat and YouTube also have the scale needed to keep users on their platforms for long periods at a time. On average Facebook users spend nearly an hour a day using Facebook itself, Instagram and Messenger, in addition to the time they spend on Whatsapp.
At the other end people are consuming premium-quality video on subscription services such as Netflix, Amazon and Hulu in America, and on many other streaming services around the world. Netflix’s 94 million subscribers watch the service for nearly two hours a day and rising. Netflix and Amazon are amassing big user bases by charging a low subscription—$8 to $12 a month—and investing heavily in ad-free content. That spending spree is driving up the cost of producing quality television for everyone else. Thus internet economics gradually is strangling a well-established business model: cable television.
The shift from broadcast to cable television in the late 20th century was something of a long-tail event. Media companies delivered a large package of channels that contained something for everyone, initially at a reasonable price. The total audience for television kept growing as customers were offered more channels to choose from, and the distributors and makers of video content reaped rewards from subscriptions and advertising. The number of channels proliferated as media companies discovered that serving niche audiences could generate big revenues: Fox News, created in 1996, contributes more profit than any other asset in Rupert Murdoch’s empire, much as ESPN, an all-sports network, remains the most lucrative part of Disney and the most profitable channel of them all.
As media companies kept adding channels, however, pay television stopped being a good deal for viewers. Back in 1995 Americans had an average of only 41 channels to choose from, and watched 10 of them a week. By 2008 cable subscribers had an average of 129 channels to choose from and watched 17.3 of them a week, according to Nielsen, a market-research company. Five years later they had access to 189 channels, but were still watching only 17.5 of them each week, almost the same as before. There is a limit to how much of the tail consumers can eat.
At the same time they are paying much more for so many options, and schedules are inflexible. In America the typical pay-television bill has nearly doubled in a decade, to more than $100 a month, according to Leichtman Research Group, whereas disposable incomes have mostly remained flat.
That created an opportunity for internet video providers. Netflix could give viewers lots of programs in one place, to watch whenever they wanted, for less than $10 a month. Social networks were offering video on demand free.
Thus regular television-watching is in decline. In America, the most developed market, viewing of broadcast and cable television by all age groups fell by 11 percent in the six years to the autumn of 2016, to slightly more than four hours per day, according to Nielsen data compiled by Redef, a media newsletter. During the same period viewing by those between 12 and 24 dropped by a staggering 40 percent. Market penetration of pay television in America has slipped from nearly 90 percent in 2010 to slightly more than 80 percent as people abandon cable altogether, switch to less expensive packages or never sign up for pay-television bundles in the first place—people known respectively, in the trade, as cord-cutters, cord-shavers and cord-nevers.
Cord-cutting is only beginning in America, and as yet plays no part in less-developed markets, where both penetration and prices are much lower. If it goes on, though, it will be devastating to the content companies, which have been enjoying gross profit margins on cable of 30 percent to 60 percent.
Somewhat ironically, these trends help explain why today television is the best it has ever been. In the new age of premium television, networks and streaming services are competing for subscribers. Television used to rely on broad, formulaic programming in its quest for advertising dollars, but that began to change in the 1990s when HBO, a premium cable channel without advertising, began offering high-quality programs in order to win subscribers. Cable channels such as Fox’s FX followed, building passionate fan bases for great shows to justify higher cable fees and to keep subscribers on board.
Streaming services have sharpened the competition for viewers’ attention. Netflix, Amazon and Hulu between them will spend more than $10 billion on television content this year. HBO has responded by raising its budget to more than $2 billion a year. This contest has given viewers Game of Thrones and Westworld on HBO and The Crown on Netflix—shows that cost $10 million or more an episode to make, three or four times as much as the television dramas of old. It also has caused Netflix to pay tens of millions of dollars for a third season of Brooker’s show Black Mirror, prying it away from Britain’s Channel 4.
Not everyone will be a winner. Last year more than 450 scripted original shows were available on American television, more than twice as many as six years earlier. This year there may be 500, signaling the approach of what John Landgraf of FX calls “Peak TV,” the point at which there is more television than the media economy can sustain. In its study of the future of video, Redef noted that programming executives are canceling far more scripted shows than they used to.
Traditional media companies are trying to defend the pay-television system that made them rich. Hulu, co-owned by Disney, Fox, Comcast and Time Warner, and AT&T, a pay-television and telecommunications giant, are among those offering a cheaper version of pay television—a “skinny bundle”—streamed over the internet. AT&T made an even bolder, if riskier, move last autumn by bidding for Time Warner. If approved by regulators, the $109-billion acquisition would give AT&T vertical integration to protect it if and when the current pay-television system crumbles.
That day of reckoning is still some way off, however. The last remaining stronghold of the pay-television oligopoly is live programming, especially sports, which traditional networks do very well. Sports events are among the few remaining true “mass” experiences: The entire audience watches the same thing at the same time, which big advertisers find irresistible.
At a “sports summit” in December hosted by Moffett Nathanson, a research firm, Nielsen produced a chart showing exactly how much sports has come to dominate traditional television. Sports programs accounted for 93 of the 100 most-viewed broadcasts in 2015, compared with only 14 a decade earlier.
Advertising rates in general have been flat or declining in most of the industry, but spending on ads for sports has risen rapidly, by 50 percent in the decade to 2015, according to Nielsen and Moffett Nathanson. This remains true even as the number of viewers has begun to decline, because programs that can attract large audiences are so scarce.
Live sports also are an important selling point for pay-television customers, allowing sports channels to charge cable and satellite distributors more for carrying their networks. ESPN, owned by Disney, has about 90 million subscribers and enjoys fee revenues of nearly $8 billion a year, making it by far the highest-grossing cable channel anywhere.
The cost of sports rights also has been rising dramatically around the world, as sports leagues exploit the traditional television system’s desperate need for them. In America the annual fees that ESPN and three of the four big broadcast networks are paying for the rights to broadcast the National Football League until early next decade have nearly doubled in 10 years, to an average of about $5.5 billion a year. ESPN and TNT, owned by Time Warner, are paying a combined $24 billion for the rights to broadcast National Basketball Association games for the next nine years, almost three times as much as they paid under their previous deal.
Investors are asking how long this can go on. ESPN has lost millions of subscribers in recent years, but says that the network’s value will continue to grow—though Disney does not report ESPN’s profits separately. The escalating fees charged for sports channels will put off more pay-television customers off.
Viewers also will turn to other options, especially on mobile phones and tablets, for which the streaming rights are sold separately. Telecommunications companies around the world are likely to offer increasingly large fees to stream sports over their data networks. Streaming of live sports will become more common, initially on a limited scale, but the technology for concurrent streaming of a big sporting event to tens of millions of fans is still some way off.
More important, the existing business model remains too lucrative to abandon so soon. Eventually, however, fans may find themselves watching sports on screens in a completely different way: in alternative realities.
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© 2017 Economist Newspaper Ltd., London (February 11). All rights reserved. Reprinted with permission.
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