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The Changing Video Business
The way Americans watch TV is fundamentally and irreversibly changing. This change in video viewing is having two significant consequences, one corporate, the other cultural.
First, changes in viewing habits are reverberating throughout one of the largest and most critical business sectors, media communications; they are leading to both increased competition and consolidation occurring simultaneously. Second, these changes are leading to the further fragmentation of the cultural industry, with an unprecedented increase in the availability of both professional produced media and DIY content.
These consequences are the result of what economist Joseph Schumpeter dubbed some 70 years ago “creative destruction,” a concept to explain the disruptive role of technological innovation under capitalism.
Over the last decade, digital disruption has wrought havoc to the publishing industry (i.e., magazines, newspapers and books) and the record business. Now, it is upsetting the broadcast and cable TV apple cart.
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There are three basic features to the digital disruption now remaking the TV or video industry. First, media production costs have dropped, including for higher-quality digital cameras and Apple’s Final Cut Pro editing software. Second, media distribution has enormously expanded access to content, most notably through the Internet and wireless connectivity. Third, handheld display devices are becoming ubiquitous, transforming video viewing from a fixed, stationary position (i.e., the TV set) to a mobile experience, most notably via a 3G or 4G wireless smartphone and tablet computer. The combined impact of these developments is shaking up the video business.
Part of the reason for the structural problems besetting the TV business is a consequence of the deep economic crisis many Americans continue to face. As the Great Recession drags on, people look for ways to economize. “Cord-cutting” (i.e., ending cable services) and “cord-shaving” (i.e., service cut-backs) are but two signs of the imposition of parsimonious spending habits. People are looking for cheaper or free programming sources.
This partly explains the growing popularity of streaming video services, particularly free, inexpensive and/or advertising-supported programming available online from Google’s YouTube, Amazon, Netflix, iTunes and Hulu. In addition, there has been an enormous increase in the availability of still other original content, whether downloaded from some three-dozen indie movie sites to some 25 million porn sites.
Last year, a Wall Street Journal article noted that the audience for 11 of the top 15 most-watched cable channels, including Nickelodeon, TNT and FX, was shrinking. Reuters reported that a Citigroup analyst, Jason Bazinet, found: “Beginning late last year  we began to notice that the aggregate cable network ratings were falling. And, as the months progressed, the magnitude of the decline kept getting larger.” Over the last two years, things have only gotten worse.
Viewer erosion is one factor contributing to commercial cable TV’s woes. As reported by the NCTA, the industry’s trade association, over the last decade, basic subscribers have declined by nearly 16 percent, to 56.4 million in 2012 from 66.9 million in 2001. This has contributed to the slowing of advertising dollars. (In fact, ad dollars are fleeing traditional TV buys to web-video through sophisticated ad-insert technologies.)
In 2001 video services accounted for 78 percent the cable industry’s revenue whereas in 2011 it had eroded to for 58 percent, a 25 percent shrinkage. Most illuminating, the NCTA reports that the rapid growth of broadband Internet and phone subscriptions have made up the TV revenue shortfall; over the 2001-2011 decade, cable Internet subscribers have jumped nearly 7-fold, to 47.3 million from 7.3 million. Such is the power of digital disruption.
A 2012 Wall Street Journal article reported that the investor research firm, Sanford C. Bernstein, found that 400,000 pay-TV subscribers cut the cord during the same period. It noted that since 2010, “the pay-TV industry has experienced five different quarters when the number of subscribers declined.” (It warned that the April-June quarter is “traditionally a weak period for pay-TV operators, as college students disconnect their service, typically returning in the fall.”)
In the face of these structural challenges, the cable industry is aggressively milking its cash cow, the cable subscriber. According to a very insightful study from Free Press, “Combating the Cable Cabal,” “since the 2008 recession, the average annual rate of inflation has been 1.4 percent, but the price of expanded basic cable service has increased by an annual average of 5 percent.” Adding insult to injury, “these figures don’t include mandatory equipment-rental costs, which continue to skyrocket.”
There are two alternative ways to distribute video over the Internet. One is known as IPTV (Internet Protocol TV) and includes managed video services delivered in a secure manner over a closed or private Internet Service Provider (ISP) network; this is provided by a telco (e.g., AT&T) or a cable operator (e.g., Comcast) and is part of cable’s “TV Everywhere” campaign. The second, OTT (Over-the-Top, refers to an open or unmanaged video data stream that rides “over the top” of an ISP’s Internet signal. With OTT, assuming one has the right TV-Internet converter box (e.g., Roku Box, Google TV, Apple TV or videogame player), a viewer can access Netflix’s archive, Hulu TV programs, Apple TV’s selections, Amazon Prime and Google’s YouTube.
This situation is compounded by the growing popularity of what is known as “multi-screen” TV viewing. While watching a TV show, an increasing number of viewers interact either with others watching the same show, with friends or engage in other online activities through their smartphone or tablet. In the years between 2000 and 2012, Americans have become “multi-screen” TV viewers with consumer ownership of video-playing devices nearly doubling. In 2000, per-person video devices stood at 1.97 devices; by 2012 it had jumped to 3.96 per person. A 2012 comScore report found that 17 percent of Americans identify themselves as “multi-screen” TV viewers. In addition, 11 percent of Americans watch TV exclusively over PCs, laptops, tablets and/or smartphones.
This phenomenon is driven by the rapid adoption of smartphones and tablets. Michael Degusta, writing in MIT’s Technology Review, noted that smartphones adoption, after taking the better part of a decade to reach 10 percent, has jumped to 40 percent ownership in just two and a half years, faster than any technology except television. As of January 2013, comScore reports that 129.4 million people in the U.S. owned smartphones, accounting for more than half (55%) of mobile devices.
A recent study by Harris Interactive for Telly, a social networking video service and conducted with 2,000 smartphone users, projects that 78 million mobile device owners watch videos on their smartphones. The study found that people 18 to 44 years are three times more likely to watch mobile video than people over 45 years. However, it found that only 10 percent of men are more likely to watch mobile video than women. In the U.S., most mobile video watchers were in the South (37%), followed the Northeast (21%) and then came the West (22%) and Midwest (20%). And households with children are more likely (48%) to watch mobile videos than households without children (30%). The Consumer Electronics Association, a trade association, reports that as of July 2013, tablet ownership among online American households was at 40 percent and its adoption rate was second only to TV set adoption of a half-century ago.
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The battle over the future of web-distributed video is destabilizing the long-established and well-structured original video content business. Perhaps most surprising, it is being driven by the some of the world’s leading high-tech companies, including Apple, Google, Amazon and even Intel.
Apple effectively exploited the phenomenal success of its iPod and iPhone devices (and now the iPad) to fashion what is known as a proprietary “walled garden” to sell content, first music and now videos. It does this through its iTunes service and Apple TV converter box. Rumors about its impending introduction of a proprietary TV set, the iTV, regularly appear in the tech press.
Google bought YouTube in 2010 for $1.65 billion in stock and, since then, YouTube viewing patterns have both increased and shifted. Google’s YouTube is the largest single source of video distributed content on the web; according to comScore, “Google Sites” captured 192 million unique viewers in the month of March 2013. In 2011, it began funding an estimated 160 ventures to feed a streaming OTT original content programming service. It backed ventures involving Tom Hanks, Amy Poehler and others to produce new programs and sign-up big-name talent like Madonna, Jay-Z and Ashton Kutcher to “curate” branded channels. It also supported dozens of start-ups run by established indie makers and others.
Google’s Android operating system (OS) drives many smartphones and tablets, most notably by Samsung. The Harris study notes that Android devices now account for nearly one-half (46%) of video viewing on mobile platforms, having eclipsed Apple at just over a third (36%) of viewing; while Windows devices account for 12 percent and Blackberry just 3 percent.
Going further then others, Google built and operates a high-performance fiber optic network in Kansas City, MO, Kansas City, KS, and Olathe, KS. It’s an advanced, symmetric (i.e., two-way) 1 Gigabit per second (Gbps) network reaching households as well as schools, libraries and hospitals. The network operates at about 20 times faster than most current residential broadband services operating across the country.
Amazon, the nation’s largest online retailer, entered the film business in 2008 when it acquired Without A Box, an indie content aggregator. It expanded its commitment in 2010 with a $2.7 million “first-look” deal with Warner Bros. On June 27th, its movie group, Amazon Studios, started accepting 2-15 minute “sizzle reels” or pitches for feature-length films. Its Hollywonk blog said it was seeking projects that “express an idea that’s begging to be seen on the big-screen, in full-length, full-budget form.” Amazon Studios currently has five movies on its development slate includes a mixed bag of movies: the horror flick, “ZvG: Zombies Vs Gladiators,” a thriller, “Burma Rising,” a sci-fi, “Hiber,” and family comedy, “It Came in the Mail.”
Amazon is also seeking original concepts for primetime television comedies and children’s shows. It will option one new project each month and pay developers $10,000. If the concept is produced, the developer will receive a $55,000 payment, plus 5 percent of Amazon’s net receipts from ancillary sales (e.g., toy and T-shirt licenses) as well as other revenue.
Intel, the giant computer chip manufacturer, is joining the growing roster of tech companies entering the web-delivered video jamboree. It is proposing to establish an OTT cable service. According to Variety, it has committed $2 billion to “pay a 50% to 75% premium over industry-average rates” and has struck deals with CBS, News Corp. and Viacom for web video rights.
Intel provides computer chips for cable-industry set-top boxes. Nevertheless, it is expected to introduce a proprietary set-top box that will offer new features and functions. The box is reported to be equipped with a high-definition (HD) video camera and microphone that will enable several novel applications including a TV-based form of videoconferencing. It is also expected to include facial-recognition software that will create “smart” programming, enabling Intel to identify the viewer(s) and customize programming accordingly; it could block “adult” shows from children. (The civil liberties or privacy consequences of this feature are significant.) CNET reported that Intel is testing the new service with employees in three locations.
* * *
These changes are contributing to market destabilization that take a number of different expressions. For example, old-line cable companies, are under threat and, to possibly block OTT competition, are taking advantage of restrictions in their licensing agreements with program supplies to prohibit them from making content available to new distributors. The New York Times recently reported “the antitrust division of the Justice Department is looking into the issue as part of a broad investigation into cable and satellite company practices ….”
A second expression is an apparent increased in the number of acquisitions and mergers reshaping the media industry. The local broadcast TV station market is consolidating with the Tribune Company cutting a deal for $2.73 to acquired Local TV Holdings and Gannett Co. will buy Belo Corp. for about $1.5 billion. The Columbia Journalism Review also revealed that Sinclair Broadcast, LIN Television and Nexstar Broadcasting are on the prowl for new acquisitions. In addition, cable mogul John Malone, head of Liberty Global and with a 27 percent piece of Charter Communications, is apparently planning a move to take a controlling interest in Time Warner Cable.
Digital disruption is not only changing how people watch video and the TV business, but the available “content” or programming. According to one estimate, there are nearly 25 million porn sites worldwide and they make up 12 percent of all websites. Sebastian Anthony, writing for ExtremeTech, reports that Xvideos is the biggest porn site on the web, receiving 4.4 billion page views (pvs) and 350 million unique visits per month. He claims porn accounts for 30 percent of all web traffic. Based on Google data, the other four of the top five porn sites — and their monthly page views (pvs) — are: PornHub, 2.5 billion pvs; YouPorn, 2.1 billion pvs; Tube8, 970 million pvs; and LiveJasmin, 710 million pvs. In comparison, Wikipedia gets about 8 billion pvs.
Anthony also reports, as expected, that males make up more than four-fifths (82%) of porn viewers while females consist of less the one-fifth (18%). He estimates the average length of time spent on Xvideo at 15 minutes. From an aesthetic perspective, sadly, he notes that most people receive their digital video feeds using low resolution streaming.
How do you watch TV and what do you watch?
David Rosen writes the “Media Current” column for Filmmaker and regularly contributes to AlterNet, Huffington Post and the Brooklyn Rail. Check out www.DavidRosenWrites.com; he can be reached at firstname.lastname@example.org.