Economics of the TV business
To understand the challenges Google may front in entering the cable TV business, one must first understand that TV is not a monolithic entity but an ecosystem, with players in a number of different areas. At the beginning of the chain are the show producers, who develop TV properties, either on their own or with economic participation from a distributor. Then there are distributors, what we traditionally know as TV channels, who package groups of TV shows aiming at a particular demographic segment and then offer this up to advertisers as a way to reach a particular type of audience. This is traditionally what people think when they think of TV.
But in order for those TV shows to make their way to the end users, they need to travel to consumers’ TV screens, which themselves are controlled by a different set of aggregators, who put together groups of TV shows in order to attract consumers. In order to do so, they must pay the TV channels what is known as a carry or transmission fee, which depends on the popularity of a TV station and is negotiated individually between those aggregators and the companies that own the TV channels. Those aggregators are often known as cable companies or satellite TV companies. But there are also what are know as the TV networks (the big 4 networks are ABC (owned by Disney), NBC (owner by Comcast), CBS (owned by Viacom), and Fox (owned by News Corp.)), which are aggregates of local TV stations who deliver their wares locally over the air and negotiate carrying on cable separately.
Over the years, there have been fierce battle between the content players and content carriers over such fees, leading, for example, to TV stations not being available on certain cable channels as pressuring tactics during negotiations. Part of the reason is that some of the content players are now also owned by content carriers, leading to situations where large conglomerates that own both carriers and creators look to get an advantage by forcing higher transmission fees on their competitors.
Who are the big content owners?
Outside of the big 4 TV networks, it is hard to find data about who the biggest players in the content market are. Part of the difficulty comes from the fact that most ratings are based on the concept of shows and not on the aggregation of those shows. Last year, The Daily Beast put together an interesting list of what they considered the most valuable cable properties in the USA:
| Rank | Network | Owner(s) |
|---|---|---|
| 1 | ESPN | Disney |
| 2 | Nickelodeon | Viacom |
| 3 | TNT | Time-Warner |
| 4 | Fox News | News Corp. |
| 5 | TBS | Time-Warner |
| 6 | Disney Channel | Disney |
| 7 | USA Network | Comcast |
| 8 | MTV | Viacom |
| 9 | Discovery Channel | Discovery Communications |
| 10 | ESPN 2 | Disney |
| 11 | FX Network | News Corp. |
| 12 | CNN | Time-Warner |
| 13 | HGTV | Scripps Networks Interactive |
| 14 | Food Network | Scripps Networks Interactive |
| 15 | CNBC | Comcast |
| 16 | Lifetime | Disney & Hearst |
| 17 | Cartoon Network | Time-Warner |
| 18 | AMC | Cablevision |
| 19 | ABC Family | Disney |
| 20 | TLC | Discovery Communications |
| 21 | Comedy Central | Viacom |
| 22 | Bravo | Comcast |
| 23 | BET | Viacom |
| 24 | History Channel | Disney & Hearst |
| 25 | A&E | Disney & Hearst |
Looking at this, an interesting trend emerges: it becomes pretty clear that there is a high level of concentration in the hands of a few players. Of the top 25 owners, the list looks like this:
| Owner | Number of channels in the top 25 |
|---|---|
| Disney (including partnership with Hearst) | 7 |
| Viacom | 4 |
| Time-Warner | 4 |
| Comcast | 3 |
| News Corp | 2 |
| Discovery Communications | 2 |
| Scripps Networks Interactive | 2 |
| Cablevision | 1 |
Who are the big content carriers?
The next question to ask in order to understand what other players Google would have to compete with in order to succeed in the TV ecosystem requires a look at the distributors. Outside of the big 4 networks, the list of the top 10 cable and satellite TV companies looks as follows:
| Position | Company |
|---|---|
| 1 | Comcast |
| 2 | Direct TV |
| 3 | Dish Networks |
| 4 | Time-Warner |
| 5 | Cox |
| 6 | Charter |
| 7 | Verizon |
| 8 | AT&T |
| 9 | Cablevision |
| 10 | Brighthouse Networks |
What’s interesting here is that we start seeing some overlap between some content owners and content carriers. Comcast, Time-Warner and Cablevision all have channels in the top 25.
Owner and distributors
But then you have to overlay the TV networks to get a fuller sense of where we sit in the content landscape. So we look at whether companies own networks, cable stations in the top 25 or both:
| Name | Network Type | Station Ownership |
|---|---|---|
| Disney | Cable and Broadcast | 1 Network, 7 cable stations |
| Comcast | Cable and Broadcast | 1 Network, 3 cable stations |
| News Corp. | Cable and Broadcast | 1 Network, 2 cable stations |
| Viacom | Cable and Broadcast | 1 Network, 4 cable stations |
| Cablevision | Cable | 1 cable station |
| Total | 4 networks, 17 cable stations |
So, of the top 4 national networks and top 25 TV stations, all networks are owned by large distributors who also have ownership of some of the most popular cable networks. Of the top 25 cable networks, a surprising 17 (68 percent) are owned by content carriers.
Why you can’t legally get content online
The current content carriers have been eyeing the internet with some level of worry as internet protocols tend to turn what they impact into a commodity: we’ve seen that scenario happen for landline phone service (VOIP won those out) and music (offerings like iTunes and Pandora, decimated the music industry margins); We’ve also seen many other industries get decimated by contact with the Internet. How many travel agency were closed as a result of online travel booking becoming easier? How many stock brokerage firms found themselves competing with inexpensive online brokerage accounts. The internet has become a great equalizer and many of the incumbents are seeing this as a potential problem.
This is part of the reason offerings like Hulu or Netflix do not include recent shows in their offerings. It’s also why Google may have a hard time in its negotiations with TV content owners. Their corporate owners would probably welcome Google with less than open arms. The general view in many of those companies is that they do not want to be discounted as mere pipes and they will use their hold on content to ensure that the most favored pipes the content is running on is their own. To see a new player enter the market is, to them, an unwelcome feeling.
A different approach
But that feeling is one that is largely out of touch with the times. Increasingly, content consumers are looking to the internet as the place to go for content and the bundling of pipes with content is losing some of its allure. The first level of aggregation being created there may, in the end, be a losing strategy as the price of carrying content will continue to drop and, eventually, one of the players in the market will be smart enough to realize that they can gain market share by offering a lower cost alternative to consumers. We’ve seen that scenario in other countries; For example, in France, Free has emerged as one of the dominant providers of phone, TV, and internet service, on such a strategy.
Meanwhile, the content owners (the channels) have to realize they are sitting on pretty hot properties and should start offering online streaming of their stations for a fee. Today, they charge the distributors, who pass the fee on to the customer. But learning about their end users could be valuable for them if they were to go to direct charging for online streaming.
In a world where the most expensive basic cable channels fetches $4.08 per month, a content owner could easily charge $7.50 per channel for online streaming and make as much money than they currently are.
Many people may think “how is $7.50 the same as $4.08? Where did the other $3.42 go?” In the scenario I envision, the other $3.42 would go to building out and maintaining the infrastructure required for online streaming. I deliberately went with a high number to dismiss the argument that costs are too high to justify such an offering. I suspect the number would be truly be lower and eventually could lead to a $5 per month offering (also, remember that most channels do not get as much money as ESPN does so their offering could be adjusted downwards too.
Today, customers are paying a premium for channels they may or may not watch. By offering streaming for a fee, content owner could open up a dialogue with end customers that lets the free market decide which channels live and which ones die. But today, those same companies are using near-monopoly franchises in one field (distribution) to subsidize another… and internet live streaming of their stations could threaten that monopoly.