Television makes no sense. I’m not talking about the programming, which remains a delightfully eclectic mixture of smart scripted dramas and awesomely lowbrow voyeuristic reality junk. What I am referring to is the way those programs are presented to audiences. Think about it this way: in the future grandchildren are going to ask, “Is it really true that there was once a time when the entire country had to sit down in front of the TV at 8:00 to watch a show?”
It sounds funny when we put it like that, but that’s how watching broadcast TV live still works. That fact has not changed in sixty years, although today more than half of all viewers have taken matters into their own hands by using digital video recorders or video-on-demand services to timeshift their favorite programs and skip the commercials. The activated audience is willing to pay extra for the privilege of evading the constraints of the television schedule.
Even when a show can be accessed on demand via a cable or satellite operator, the full series is often not available, or episodes sometimes randomly disappear from the menu. This makes no sense at a time when a thoroughly vaporized video service like Netflix has conditioned us to binge viewing.
And when consumers say, “I want out of this crazy system. I want to watch programs on my own terms on the screen I prefer at a time that I would like to watch,” they get penalized. The most
energetic members of the activated audience are branded criminals for infringing copyright. And then the broadcast industry sues them. The broadcast schedule has become the object of a tug-of-war for control between centralized programmers and decentralized audiences.
If we invented TV from scratch today, at a time when nearly every person in the audience has a smartphone or a tablet and is fully capable of responding and engaging and setting up their own playlists and recommendations, no sane person would propose anything like the current system. It’s no longer a question of “Will television be disrupted?” Of course TV is getting disrupted. Every
single inconvenience that the television industry insists upon imposing on audiences presents a golden opportunity for a challenge by a host of innovative startup companies. The startups didn’t create these absurd conditions: the TV industry did, by forcing consumers to comply to its arbitrary programming schedule and adhere to an old-fashioned business model.
At the same time, new video aggregators have emerged on the Internet. YouTube now reaches a billion viewers a month offering more than a million niche video channels provided by a million content providers. Netflix blazed a trail by investing in original programming, thereby upping the ante for rivals Amazon, Hulu, and even Microsoft Xbox Video, all of whom followed suit. New channels are created every day, in every language on Earth, and they are available on any device that can display video. These Internet video “channels” cheerfully erase the old distinction between
professional shows on the TV set and supposedly lower-grade fare on the Web. Netflix put an end to derisive comments about low-quality Internet video in 2013 by garnering sixteen Primetime Emmy nominations and two awards.
Today half of the TV sets in the United States are connected to the Internet to access “over the top”
Internet video services like YouTube, Netflix, Vimeo, Break TV, MLB.com, Twitch, and many more. A geyser of video programming simply bypasses the convoluted mess of pay television and flows
directly from the producer to the audience via the Web. As a result, the TV industry now must face something it has never confronted in the past—real competition. For six decades TV dominated the living room. Now, increasingly, there’s an alternative that is bigger, faster, cheaper, and everywhere at once.
Unencumbered by legacy business models, infrastructure designed for a single purpose, and long- term contracts, the new video distributors are free to cater to consumer predilections in ways that old distributors never could. They facilitate new habits of consumption: binge viewing and season
passes, like an unlimited all-you-can-eat smorgasbord with no linear channels or fixed schedules to constrain viewers. They’ve established new revenue models that rethink advertising and direct-to- consumer sales and subscription. No middlemen like cable or satellite companies are involved. They operate profitably in a strange, new, lean financial model, balancing low margins with low overheads and low marketing outlay. Fans and talent do most of the marketing themselves. And these new video giants prioritize immediate delivery to all devices instead of being bound by the old rule of TV-first, followed by a slow sequential release over months to other screens.
The reaction among TV networks has been a kind of gobsmacked denial, pretending that digital alternatives are not valid substitutes and dismissing them as cheap and inadequate. Denial is dangerous. Instead of studying the economics of the new platforms and making the adjustments necessary to meet them head-on as competition, the TV industry has squandered the past decade in denial. Its inaction left the category wide open, which enabled newcomers to gain a strategic foothold among digitally savvy consumers and earn some early revenue. By hesitating, the TV companies
created the gap in the market that permitted alternatives to thrive.
In 2014 the big TV giants finally snapped out of their stupor when they realized that Internet distribution is a real business that they don’t own or control. In October 2014 Home Box Office (HBO) announced plans to offer a direct-to-consumer subscription service over the Internet. The next day, CBS announced a similar plan, followed by Spanish-language giant Univision. Suddenly every channel is scrambling to work out the logistics of delivering its programs directly, outside of the pay
TV system.
They’ll find plenty of competition waiting for them. Quietly a new digital distribution business has emerged on the Internet, and it’s nothing like traditional TV. None of the big new digital distribution systems are owned by traditional media companies: Apple owns iTunes, Google owns YouTube, Amazon owns Prime, and Netflix stands alone. Facebook video views are surging, Twitch is
booming. Collectively these companies reach billions of viewers who account for the vast majority of video consumed on the Internet, and that’s why they garner the lion’s share of the revenue generated.
WHO’S IN CHARGE OF REINVENTION?
Despite the competitive pressure, television has managed to resist the Internet. In fact, we might say that TV has been too well defended. In the desire to maintain control and preserve the business model of the past, TV has lost the ability to innovate and adapt to the future.
In 2013 I ran a series of workshops at Turner Broadcasting in Atlanta, Georgia, and I asked the attendees to raise their hands if they worked in digital media. Half the people in the room raised their hands. I then asked, “What do the rest of you do?” They told me they worked on “traditional TV” in programming, marketing, and distribution. I asked them to consider that every step of the TV
production process is now digital, from the scripts and budgets written on computers in the very beginning, to principal photography on high-definition cameras, to digital post-production in state-of- the-art editing bays, and finally to the signal that is sent to a digital uplink and transmitted digitally to a satellite. Even the home equipment is digital.
All of television is now digital media. While the executives weren’t looking, digital media snuck up and infiltrated their stronghold. The main problem inside the old television companies is that there is no one in charge of the innovation process. In every TV network, development and programming executives create and manage the shows while sales and marketing people sell the stuff on the truck and build up the audience. Not one of these people has the responsibility of doing something different.
Sure, they launch plenty of new shows each year (and most of those new shows fail). But there is no one in the entire organization tasked with the job of rethinking its business from scratch.
Instead, most television executives are incentivized to do the same thing year after year, which is the old formula of driving up ratings and raising advertising rates. If they succeed, they get a bonus. If they fail, they will probably get fired. Fear is a factor. Few are willing to make a mistake or try
something different. The stakes are too high, the consequences of failure far too great. And there’s no reward for changing the formula. As one senior vice president told me confidentially: “In the TV
business today, we’re all playing musical chairs. There are fewer chairs every year. Nobody wants to lose their seat when the music stops.”
We might expect that task of innovation to fall to the Internet department or digital media team at the big TV companies. After all, they are the people on the front line of change, competing against the bold Internet companies. But no, reinvention is not really their job either. Until 2009 the primary mission of most digital departments was to drive viewers back to television! Today they do have a mandate to build a business on the Web and in mobile, but never at the expense of the television business. They are allowed to experiment around the margins but they cannot mess with the core. The one thing that the digital departments of TV networks are never, ever permitted to do is to rethink the primary business model of television. This is true of the digital mobile teams in every company. In banking, retail, publishing, and even major universities, the digital teams dance in an awkward waltz with the legacy business, looking down, not up, to make sure they don’t step on any toes.
The old guard is not wrong to be wary. Given the unpredictable nature of Internet businesses and the high rate of failure for new ventures of any type, compounded with the high rate of failure for TV
shows in particular, the odds of failing to finesse the transition are very high indeed.
THE PERILS OF DEFENSIVE INNOVATION
Actually, it’s not entirely accurate to say that the TV industry doesn’t innovate. During the formative years of the Internet and mobile industries, the pay TV industry did quite a lot of innovation in one particular area: packaging and pricing. What cable TV innovated was bundles.
First, a number of TV channels were offered together. This bundle grew from 50 channels to 100 to 200 to several hundreds. Then video on demand was added to the bundle. And then residential
telephony was added, and broadband too. The bundle kept getting bigger and more expensive. Yet, nobody really needs or wants the bigger bundle. It’s just like buying a supersized Big Mac that comes with too many fries: the big bundle sounds great until you eat it, and then you feel bloated and
nauseous.
The cable TV business is the greatest supersizer in the history of consumer products. It figured out a way to get 50 million households to pay $100 a month for something nobody demanded. Bundling is a great way to prevent customers from downsizing or cutting the cord with the company. Asking the cable provider to disconnect the TV subscription service usually results in the price of residential broadband being doubled. Huh? Why are these two things connected? The bundle makes no sense to consumers, but from the cable operator’s perspective it’s a superb way to lock the customer in.
Television is pursuing a classic strategy. Described by Harvard Business School professor
Clayton Christensen in his book The Innovator’s Dilemma, sustaining innovation, as he called it, is the process of making incremental tweaks to an existing and well-known business model. Every
company in the world practices sustaining innovation as part of its ongoing marketing efforts. But then there’s the other flavor of innovation, which Christensen called disruptive innovation, that renders the old business model irrelevant by offering a stripped-down version that costs far less and thereby connects with an enormous underserved audience. It’s a formidable threat. I describe this contrast as defensive innovation versus offensive innovation. No team has ever won a game by playing defense.
In other words, sustaining innovation can never trump disruptive innovation.
One of television’s bolder attempts at innovation was Hulu, the television industry’s own attempt to build a competitor to video channels YouTube and Netflix. At first it seemed like a smart move. A joint venture of the big networks, Fox (owned by 21st Century Fox), ABC (owned by The Walt Disney Company), and NBC (owned by Comcast), and a private equity firm, Hulu was a great product built by a visionary launch team. The studios provided a broad selection of television content not available elsewhere. But the tension between the three TV companies made it impossible for Hulu to achieve its full potential. Each partner imposed arbitrary and inconsistent restrictions on its content: some shows were available the day after they aired on broadcast TV, others were available after a one-week delay, and still others were not available at all. The result was utterly bewildering to TV fans. In spite of offering high-quality video, Hulu remains an also-ran compared to nimbler rivals, even those with inferior technology.
Apart from Hulu, not one US television company has managed to launch a successful digital
business from scratch. It’s no accident that YouTube, Snapchat, Vimeo, Instagram, Pinterest, and Vine were all developed outside the traditional media industry.
A concise example of defensive innovation in TV is the scheme called TV Everywhere. Developed cooperatively between the channels and the cable and satellite distributors, TV Everywhere was announced with great fanfare in 2009 as the TV industry’s plan to migrate programming to every digital device while preserving the subscription TV business model.
The reality falls far short of that goal. The program selection in TV Everywhere is spotty and
inconsistent because some networks can’t obtain the Internet rights from the companies that supply the programs. Some sports leagues refuse to sell digital rights because they want to compete by selling digital subscription services direct to consumers.
TV Everywhere apps are a pain to use. Each channel relies upon a completely different interface, which is a headache for consumers. And users must log in twice, once with the channel and once with their cable or satellite company.
Worst of all, TV Everywhere does not generate much revenue. It costs the channels millions to produce and operate the service, but they offer it for free just to keep their customers subscribing to television. And TV Everywhere actually reduces advertising revenue for the channel websites because it siphons audiences away from video on the Web, where it can be monetized with advertising. It is a money-losing sinkhole.
An obligatory loss leader with a feeble revenue model, TV Everywhere must represent the worst fears of all companies wary of wading into digital initiatives—that they will be both costly and ineffective—a terrible double whammy.
HOW THE TELEVISION INDUSTRY IS DEFENDED
The US television industry consists of two cozy interlocking oligopolies:
> the six big media giants that own 90 percent of the electronic mass media in the United States.
Comcast (which owns NBCUniversal), 21st Century Fox (which recently split off from News Corporation), The Walt Disney Company, Time Warner, Viacom, and CBS operate most broadcast and cable channels, plus the major movie television and film studios.
> the telecommunications giants such as Time Warner Cable, DirecTV, AT&T, and, again, Comcast, that distribute the TV signal. These include cable system operators, satellite broadcasters, and telephone companies that distribute TV programming through fiber-optic cable.
There’s plenty of friction between these two groups, as evidenced by the frequently acrimonious negotiations between programmers and distributors, but they have an overriding common interest to preserve their proven business model. These companies have so much at stake that they usually set aside their differences in order to defend the entire business from interlopers. Just like old-time pioneers circling the wagons in the face of an onslaught, these companies rely upon a combination of proprietary technology and legal defenses to protect their industry.
Technology barriers
> An exclusive broadcast spectrum owned by the television networks.
> Signal-decryption devices required by all viewers but owned by the cable or satellite providers.
> Proprietary billing systems that control the customer relationship.
> Closed distribution networks that block newcomers.
Legal barriers
> Intellectual property laws that keep content out of the public domain.
> Legislation and regulation that favor incumbent companies.
> Litigation that can cripple a startup venture with huge expenses.
All of this defensive action has a weird side effect. It paralyzes the TV companies. Instead of innovating, they pour all their energy into defending an outmoded service that no longer conforms to consumer behavior. TV has failed to adapt to the preferences of an evolving consumer.