The New TV pt. 2: Who gets the Subscription Dollars?

In my first post about understanding the Media Industry, I explained some basic terms (MSO, OTT) and explained who the media companies are and what they do.  Today I’d like to discuss who the likely winners and losers are as technology changes the industry.  To begin to answer this, I think it would be helpful to return to my big ugly diagram:

A diagram of the how the money flows in the media industry.

Once again, the blue represents advertising dollars, the red represents dollars paid directly by consumers, and the size of the line loosely indicates how much money is flowing.

Let’s start with the Red arrow that indicates subscription revenue.  If you look closely you can see there is a “leak” for the MSOs (cable companies).  A small, but ever increasing portion of people’s direct spending on video media is being diverted to the OTT (over-the-top, non-cable) companies.  People are paying money to Netflix as a subscription and to Amazon and Apple for individual purchases.  When it comes to direct payments by consumers, the MSOs are losing revenues to competitors and those losses will only increase.

What about the Media Companies?  Well if we look at the diagram, we see that as people pay less money to the MSOs, the MSOs will have less money to pay to the Media Companies.  Bad news?  Not necessarily, because if we look at the OTT companies that are taking that direct consumer revenue, we see that they TOO are paying a portion of that back to the Media Companies.  Combine this with the fact that the OTT companies have the ability to actually EXPAND distribution (other countries, mail, phone lines, mobile, ala carte), and we see that the Media Companies actually stand to at least maintain their revenues and possibly even GROW them.

Not that their aren’t risks.  Media companies are very nervous that people won’t be willing to pay as much on a per channel, per series, or god forbid, a per episode basis as they pay to their cable companies for “bundled” channels–most of which go totally unwatched.  I believe these concerns display fundamental misunderstandings about economics and their customers.  The fact is that being able to view exactly what I want, when I want, where I want is a better product than is currently being offered by MSOs.

In fearing that consumers will be unwilling to pay as much for a better product, I believe the Media Companies have overestimated how cleaver they are with their bundling strategy.  They believe that I am willing to pay so much because I perceive that I’m getting 500 channels of amazing content for one low price.  In fact, I and most of their customers believe that we are paying a large monthly fee for a bunch of garbage we don’t care about–garbage that in fact makes it very hard to find what we actually care to view.

The two biggest winners in this change are the OTT companies and low-and-behold, you and me, the lowly consumers.  OTT companies are likely to see increased use of their offerings.  Since they pay for the content through revenue-shares or flat-fees to the Media Companies, more views equal higher revenues and for libraries they can get for a flat-fee, higher profits.  We, of course, get to view what we want, when we want, where we want, which after all, is all we’ve ever really wanted.

In my next posts I’ll examine how the advertising revenue stream looks likely to hold up as well as what our friends the MSOs are likely to do in reaction to these technological changes.

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