Let’s take a look at the revenue flow document and see if there are any clues as to who will win and who will lose:

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

Once again, just as we saw subscription revenue leaking over to the OTT companies, we see the beginnings of advertising revenue leaking as well.  Who loses in this situation?  Big cable?  Big media?

Well, there is a small chance big cable could REALLY lose.  If the media companies decided to release their content for free over the internet and support it solely with advertising revenues, the cable companies would cease to exist.  Given the fact that this would be suicide for the media companies, this seems unlikely (particularly in a global advertising recession).

The MSOs stand to lose advertising revenue only in so far as they lose subscribers to the various OTT companies.  Although big media hasn’t emulated the joint subscription/advertising deals they have with MSO with the OTT players, they likely will, and MSOs will suffer.

But what about the media companies themselves?  Once again, the news isn’t as bad for them as it is for the MSOs.  Although they are likely to have to share advertising revenues with websites that distribute their content for them, they are likely to have to pay LESS than they did to the MSOs.  There are a number of reasons for this:

1. These websites will have to compete directly with each other (unlike the MSO’s who often have regional monopolies or duopolies), so they won’t be able to demand premium revenue shares.
2. Their cost structures are decreasing more quickly than those of the MSO’s (or the affiliates for that matter), so they will need less of the advertising dollars to be profitable.
3. Just like the media companies own many of their affiliate networks, they have made sure they own web distribution as well with network branded websites, and more importantly with Hulu, which is owned jointly by 3 of the 5 big media companies (NBC Universal, Disney, and News Corp).

So big media is likely to maintain a larger percentage of the advertising dollars than they did under the old model, but just like with the transition from cable subscribers to OTT subscribers, there is a risk:  Will advertising revenues for online distribution be as big as they were with broadcast and cable?

The news is both good and bad.  First the good news: CPMs are currently higher for online distribution than they are for broadcast.  The number currently floating around the industry is that Fox gets a $30 CPM for the Simpsons during broadcast and a $60 CPM for the Simpsons on Hulu.  The reason for this is that Hulu can make you watch the ad, whereas most households with DVRs will skip the ad.

So what’s the bad news?  Well, while broadcasting that episode of the Simpsons, Fox shows 18 ads; whereas on Hulu, it shows only 3.  That means that overall, Fox gets 1/3 of the revenues.  Of course, this if Fox’s choice.  There is no RULE that internet users must be shown fewer ads than broadcast users.

This means that if big media can show the same number of commercials, get a higher CPM, AND have to share less of the revenue with their distributors, it could be sitting very pretty during the switch from broadcast to internet distribution.  There are certain realities about the new consumer, however, that this optimistic picture belies.

I’ll save that for my next post,  when I discuss the real issues advertisers are facing and how they aren’t unique to New TV at all.

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.

As usual, I’d like to start with one of my big ugly diagrams:

This diagram shows how the money flows in the Media Industry.  Red represents money that end-users pay directly for content and the blue represents money that advertisers pay.  The thickness of the arrows give some indication of how much money is spent.

Let me explain a couple of the media industry terms:

1. MSO: An MSO or “Multi-Service Operator” is a cable company (the ones that run the lines to your house and you pay a monthly subscription to.  They’re called Multi-Service Operators because according the the FCC each cable office is a single operator, so these giant cable companies (Comcast, Time Warner, Cox, Cable Vision) that have 100s of local cable offices are MSOs.  Dumb industry jargan really.

2. OTT: OTT or Over-The-Top refers to anyone who tries to deliver you video content outside of (or over the top of) the services run by the MSOs.  Not long ago, the only companies doing this were over-the-air broadcasters.  Today we’ve got a whole slew of companies trying to do this.  Some for direct advertising dollars (Hulu, YouTube, etc), others on a subscription basis (Netflix), and still others on a pay-per-view basis (iTunes, Amazon).  As you can imagine the MSOs hate all of them.

So who are the Media Companies?  In some way you can think of them as the content providers, but more accurately, they are the content owners, or more accurately still, they are the deal makers.  As you can see from the diagram, all the money ultimately flows through the Media Companies.  They have the direct relationships with the money providers (both advertisers and MSOs) as well as with the content providers (the Studios).

Given their central role, they ultimately decide what content gets made.  Studios pitch them concepts for new shows, the media companies decide if they can sell the new concept to their advertisers and subscribers, and then make the call whether they’ll finance the concept.  Without the backing of the major media companies, very little full-length video content is made.

Amazingly (or perhaps not surprisingly) given the power these organizations have in determining what we see, there are only 5 companies that really matter for the US:

Time Warner: Really a holding company for HBO, Turner Broadcasting, Warner Brothers, and Time.  In video they control: HBO, Cinemax, Cartoon Network, CNN, TBS, TNT, Tru TV, Turner Classic Movies, and Warner (TV, Movies, and Home Video).

Viacom/CBS: Officially they are two separate companies but Sumner Redstone has controlling interests in both.  They own such brands as BET, Comedy Central, MTV, Nickelodeon, Spike, The Movie Channel, TV Land, Showtime, and CBS.

News Corporation: Besides their huge news paper holdings, in video they control all of Fox (TV, news, sports, kids, business), My Network TV, and FX.  Internationally they control all the Sky and STAR properties and they also own MySpace.

NBC Universal:  Owned by GE, in video they control NBC (TV, sports, news), Bravo, CNBC, Oxygen, SyFy, Telemundo, USA, and the Weather Channel.

Walt Disney Company:  In video they control ABC, ESPN, and Disney (studios and channel).

Wow… and in Identity I thought I was walking amongst giants!  In my next posts I’ll explain which companies are likely to win and lose from new technologies, and how identity and SetJam are going to play a role.