Is this the online 'tipping point' for TV networks?

UPDATED, 30 June, 2013: Traditional media involvement with the internet is all about companies with a lot to lose and trying not to lose it; and others starting from scratch with a lot to win. The latest with ‘a lot to lose’ are the broadcast networks. They have ‘managed’ declining audiences for years but must have believed they had escaped the kind of punishing losses exacted by digital media on music, newspapers and magazines.

Just search for any statements about online TV from the chief executives of, say, ITV in the UK, Channel Nine in Australia, or CBS in the US. Virtual silence. In the face of mounting evidence that the internet will blow an almighty hole in the profitability of TV broadcasters, their strategies are elsewhere.

These traditional media titans have become accustomed to reading about the digital pain of newspapers, magazines and books, while their own businesses have been buoyed by advertising revenue bounce-back. Perhaps some complacency is understandable after a glittering, money-spinning 60 years, in four chapters:

The 1950-1990 period when broadcasters came to dominate home entertainment in many countries and could attract 90% of the available audience. The TV and advertising industries grew rich together.
The 1990s with the arrival of multi-channel cable and satellite ‘pay TV’. Free-to-air audiences started shrinking but advertising held (relatively) strong as the new “narrowcast” channels grew new revenues (from viewers).
The game-changer
The 2005 game-changer launch of YouTube by three former PayPal employees. They created a user-generated world of “Broadcast Yourself” and millions of home movies, personal clips and shaky video for a fast-growing online audience. Broadcasters were lulled by the home-spun content and by stats which showed viewers spent a few minutes per day watching YouTube while TV viewers were ‘captive’ for hours. But Google saw the promise of ‘TV meets the web’ and bought the company for $1.7bn in 2006.
The 2010+ emergence of professional programmes on YouTube, followed by wave after wave of increasingly slick channels from new-style ‘broadcasters’. Many of the channels are now attracting substantial audiences especially among young defectors from network TV. The latest milestones in the exploding online market are: YouTube’s launch of low-price subscription channels; Netflix’s screening of original drama; TV catch-up services; and mobile viewing on tablets, laptops and smartphones.

The next chapter will see broadcasters everywhere being forced to compete for audiences and revenue with focused, low-cost, online-only channels. While the high-cost, regulated broadcasters see online as a complementary route to mobile TV, many will find the eventual fight with digital insurgents as unequal as newspapers found with classified advertising. And, in the long-term, just as ruinous. Yet it is only 12 months since analysts were predicting the demise of ‘over-the-top’ (OTT) TV, delivered through set-top boxes like Roku, Apple TV and games consoles.

Suddenly, everything’s changed. Trade media across the world is full of the online plans of Netflix, YouTube, Hulu, YouView and telecos – and fears for the future of free-to-air broadcasters.

New York-based tech researcher ABI lit the touch paper by predicting that global OTT video revenue will exceed $20bn by 2015 – an increase of 150% in just three years. In the US, which accounts for almost 60% of such revenues, the last two years have each seen 50%+ growth on the back of the booming subscription models of Netflix and Hulu. But these heady numbers are driven by media players, smart TVs, streaming boxes and tablets and take no account of YouTube (which is 17% of all US web traffic).

Netflix (one-third of the US web) was not even a major brand five years ago. But now it’s on fire, with 40million worldwide subscribers (a rising 25% from outside the US) and a share price which has more than doubled in the past six months on the clear signs of seismic change in TV viewing and an aggressive international strategy. And it’s sparking all kinds of competitors into life.The latest US figures show Hulu Plus and Amazon Prime slowly starting to nibble into the huge Netflix lead in ‘subscription video on demand’. The fact is that growing bandwidth – and quality-screen gadgets like iPads and smartphones – are giving viewers increasing numbers of options on where and when they can watch TV shows or movies. It’s a level of convenience that traditional TV has not matched. It means that, once they start to move strongly into online, free-to-air broadcasters will have to be prepared for the same kind of agony that has racked newspapers and magazines: Can they really afford to compete with themselves? OR: Can they afford not to compete? But that’s the challenge for companies with a lot to lose and a mistaken belief that they can protect their profits by ‘managing’ the migration to new platforms.The early signs are that Britain’s pay TV giant BSkyB (40% owned by Murdoch’s 21st Century Fox) has learned the painful lessons of print media – and is also wary of the impending BT online challenge to its sports leadership. BSkyB’s online-only NowTV of movie and sports channels is building subscribers – in direct competition with the parent cable and satellite services. (Will NowTV become a new vehicle for kicking-her-heels Fox executive-heiress and online TV advocate Elisabeth Murdoch? See Flashes & Flames: http://wp.me/p1AJfY-1l2)

But fast-growing OTT content is still tiny compared with cable and satellite TV, with which it most directly competes. In 2012, such worldwide pay TV

BSkyB pushes into online — BSkyB gets serious about online

revenue totalled $238 billion. The biggest money is still in advertising-funded network TV. But broadcasters have been losing younger audiences at an alarming rate and the tipping point – where those ‘video’ advertising dollars start to flood from high-cost broadcast into low-cost online – may soon be reached. Goldman Sachs recently reported in the US that TV audience ratings had dropped by 50% over the last decade and that the advertising-crucial 18-49 years audience has fallen by almost 17% in the last year.

Media buyers are increasingly active in video content and now recognise online TV as a viable advertising medium, juiced up by young audiences, interactivity and data-cookies. They have also been prepared to pay premium prices for YouTube advertising which viewers have chosen not to skip – a pay-for-impact mood that is sweeping right across media, whether traditional companies like it or not.

The other factors which may drive momentum away from broadcasters include the “yellow pages factor”: the systemic shift which swept away long-established print directories was aided, in many markets, by an advertiser base which felt it had suffered too long at the hands of profiteering near-monopoly publishers. Some TV media buyers recognise the parallel with broadcasters. Further, TV airtime and production budgets are so large that a relatively small swing of revenue towards low-cost online might provide a quite disproportionate shift in the balance of power: the tipping point, in fact. It might all be pointing one way.

And the TV viewing changes are coming thick and fast.

In the US, broadcasters were rocked by a recent New York court ruling that permits digital insurgent Aereo to stream free-to-air TV over its online services. The company had been sued by TV heavyweights CBS, Comcast, NBC, ABC and Fox. It was accused of stealing broadcasters’ free over-the-air signals and reselling them to consumers online. The subscription-based service doesn’t pay any fees to rebroadcast the content so the networks argued it has no right to stream them. So far, the courts disagree.

Aereo has already expanded out of its New York base to Boston, and Atlanta comes next. Another 20 US markets are expected to follow by December.

To underline its significance, CBS and Fox have, incredibly, threatened to stop broadcasting and switch to cable if they lose the legal case against Aereo.

There are some key differences between this service and the UK’s TVCatchup app that actually lost a first-stage legal case. Aereo is received on iPads and laptops through a micro-antenna, so is said to involve viewers sharing the programmes with each other.

The legals symbolise the vulnerability of traditional broadcasters everywhere.

Another reason to watch Aereo, though, is the person behind it: Barry Diller.

Barry Diller:xxx — Barry Diller: “It’s all going online”

Diller has been at the centre of major developments in US TV and online across the past 40 years. His rags-to-riches story started in the Los Angeles postroom of the William Morris talent agency after one abortive term at university. He moved fast around tinsletown and reached spent the top of Paramount Pictures. But his biggest splash was eight momentous years with Rupert Murdoch, creating Fox (the fourth US-wide TV Network) when few insiders gave them a hope. He moved on to build shopping channel QVC and the Home Shopping Network turning it into Interactive Corp (IAC) through which he now controls more than 150 web companies including Expedia, Vimeo (a sort of junior YouTube), Match, Ask, and Dictionary.

In 2010, his Tina Brown-created Daily Beast site merged with Newsweek – which he is now selling on again, having conceded defeat in producing it as a digital-only magazine.

Last year,

Diller spun off travel review aggregator TripAdvisor from Expedia. And, then there’s Aereo winning fans for its content on subscribers’ smartphones and iPads.

He quite simply sees broadcast and cable TV as “a system that has certainly outlived itself” and predicts that programming will eventually shift to open internet-based platforms: “The wall that broadcasters and cable companies have built around their services is not long for this world. It’s not clear who will tear it down, and it’s not clear when it will actually happen, but the “centricity” of the video world is going to shift from cable and satellite to the internet. Younger folks are the ones who are going to make it happen. I don’t want to beat up broadcasters. I want to help move the centricity … from closed systems. The more you can get all forms of video over internet protocol, the better off the world will be.”

With Amazon and Apple reported to be planning set top online ‘streaming’ boxes and smart kit, the market is heating up. But YouTube claims the revolution has already occurred. Last month, Google boss Eric Schmidt claimed the switch from television viewing to internet video “has already happened”, evidenced (he said) by the YouTube milestone of 1bn monthly unique visitors: “It’s not a replacement for something that we know. It’s a new thing that we have to think about, to program, to curate and build new platforms. If you think 1bn visitors is a large number, “wait until you get to 6 or 7 billion.”

It is a shift in the YouTube language since last year when Google talked of reinventing television by funding more than 100 channels from well-known media brands and film celebrities. Now, it is focused on global reach, community engagement and monetizing that enormous audience. And Citi analyst Mark Mahaney reckons that YouTube is now soundly profitable with 2013 revenues of $3.6bn and profit of $2.4bn: “We really doubt whether most investors realize how big/important YouTube has become.”

Its global head of content Robert Kyncl puts it into context: “I thought that YouTube was like TV, but it isn’t. I was wrong. TV is one-way.

Will Simon Cowell jump next? — Is Simon Cowell ready to jump?

YouTube talks back. TV means reach, YouTube means engagement.”

Jeffery Katzenberg, CEO of DreamWorks and former chairman of Disney, has just paid $33m for the teen-focused YouTube network Awesomeness and is bullish about his new world: “This is a whole new form of content, content delivery and content consumption. It’s the medium of the future and the future has already arrived.”

Even the UK’s Simon Cowell, whose talent shows have reinvigorated network TV around the world, is rumoured to be preparing to take the online plunge: “There’ll be a point in the not-too-distant future when we’ll be able to watch TV and YouTube will be Channel 6. When we reach that point, they’re going to be serious competition.” That actually makes him sounds uncharacteristically cautious.

Either the X-factor creator is a bit behind-the-curve or he is just demonstrating support for his current broadcasting partners – and/ or distracting them from his real plans. Cowell’s “You Generation” has been a YouTube channel for almost three months, hailed as “the world’s first global audition” in which talent of all kinds from up to 26 countries competes in fortnightly heats for the year-long contest. The channel (funded by YouTube) is clearly a test for what’s coming soon.

Testing... for a worldwide online TV show — Testing.. for worldwide online TV show

There are increasingly loud rumours that Syco (Cowell’s partnership with Sony) is now planning “The World’s Got Talent”, an online-only show which might well become not only the largest ever talent show but also, perhaps, the largest online TV programme so far – and the breakthrough that broadcasters are dreading. After all, his blockbuster TV shows feature just the kind of new talent for whom the international rights issues (that seemingly restrict the scope of multinational channels) simply don’t figure.

Simon Cowell, who has built “…Got Talent” and “X-factor” into worldwide broadcast franchises, is planning to make an even bigger splash by opening up the global reach of online TV. Broadcast collaborators (like ITV in the UK, Australia’s Channel 7, and Fox in the US) know how much they have to fear from Cowell throwing the weight of his reputation and talent into online.

It’s all piling up against the networks – unless one (say, Murdoch’s Fox?) is prepared to mix it up by sharing in the online assault. Whatever kind of deal brings Cowell’s international online dream to reality, the tide is clearly going out for free-to-air broadcasters.

YouTube’s announcement of low-cost subscription channels across sports, children, and education, is the latest escalation in the war for TV viewers. Subscribers will be able to watch the paid channels from computer, phone, tablet, TV, and games consoles. Advertising will remain YouTube’s largest revenue source (by far) – and Google has little experience so far of charging consumers for anything at all. But the introduction of subscription channels shows how comprehensive a range of viewing services it intends to provide. These pay channels are just the first steps in an inevitable campaign to woo major audience-winners away from network TV. Even before that, YouTube’s advertising revenue has a long way to grow, on the back of evidence that its channels have increasing numbers of non-broadcast viewers. It has some powerful support. In France, major cosmetics advertiser L’Oreal found that no less than 16.6% of YouTube’s audience was incremental to TV – and that YouTube was pro rata less expensive. But online TV is much more than YouTube.

Netflix changes the rules — Netflix and Spacey change the rules

Netflix is now targeting US cable giants HBO and Showtime with stand-up comedy. But, first, it is capitalising on the success of its exclusive “House of Cards” drama, with launches of up to 16 more original productions in 2013 including last week’s much-anticipated return of “Arrested Development”. After a first quarter which saw revenue reach $1bn, Netflix regaled shareholders with its vision:

Future of TV: Traditional TV viewing is dying and will eventually be replaced by internet TV apps. Eventually, as linear TV is viewed less, the spectrum it now uses on cable and fibre will be reallocated to expanding data transmission. Satellite TV subscribers will be fewer, and mostly be in places where high-speed internet (cable or fibre) is not available. The importance of high-speed internet will increase.

Competition: “We don’t and can’t compete on breadth with Comcast, Sky, Amazon, Apple, Microsoft, Sony, or Google.” Netflix estimates that it will eventually grow its US subscriber base to be about 2-3 times the size of Time Warner’s HBO, i.e. some 60-90m subscribers. It believes services like Amazon Prime and Hulu will be secondary competitors unable to match Netflix content. “Behind HBO would come Amazon/Lovefilm/Prime, Hulu, NowTV, and many cable and broadcast networks in various territories. Amazon in particular is spending heavily and commissioning its own original programming, presumably because they see the same exciting big picture for internet TV that we do.”

But this battle for the hearts, minds and money of the world’s viewers will be fierce. Big bets are being placed:

Yahoo and the US satellite service DirecTV are two of the companies said to have bid $1bn+ for Hulu, the pioneering online TV service that ought by now to have built a decent US (and international) lead. But it has been hobbled by the conflicted interests of its three owners News Corp/ Fox, Disney/ABC and Comcast. Expect the eventual auction winner (which might still be one of the existing part-owners) to internationalise Hulu.
Microsoft: playing games with TV
Microsoft has been talking up its strategy to “own” home entertainment for the 10 years since it audaciously launched the X-box games console against Sony’s then all-conquering PlayStation. At last month’s launch of Xbox One, the company portrayed its third generation, voice and gesture-activated games console overtly as the centre of an interactive entertainment universe spanning live and recorded TV, sports, movies – and games: a media-platform first, games console second. A real statement from Microsoft which will now create a raft of non-games online channels.
Intel (yes!) wants to become an online TV player. No price or schedule has been announced but the company aims to “offer a full array of cable TV channels over the internet” via “a beautiful box with a front-facing camera and the kind of industrial design that makes you not want to hide it in a cabinet.”
Major cable network Discovery has just launched TestTube, its first online video network, with no-charge original series targeting younger viewers. It’s available on YouTube and Xbox.
The worst-kept secret is Apple’s late-2013 plans to launch a branded TV set, which may be called iTV. It is assumed that the curvy and clever hardware will come with a range of completely new online TV services – in a bid to create an iTunes-level of international leadership. It will also broaden Apple’s competitive offering against its nemesis Samsung whose smart TV leadership will need a response
The resurgent 28-year-old AOL (owner of Huffington Post, My Daily and TechCrunch) is relaunching its GoViral video service as Be On, to look more like a conventional online TV platform. CEO Tim Armstrong is promising new channels in 2014.
Will Malone go for ITV next?

John Malone’s Liberty Media has just completed its $23bn purchase of Virgin Media, the UK’s distant-second second pay TV network and broadband provider. The CEO, intriguingly, is former Murdoch pay TV executive Tom Mockridge. The telco BT’s YouView (with all the UK’s free-to-air TV networks) has piled up 400,000 subscribers in eight months. With BSkyB’s NowTV, the country’s online TV market is set to explode. It is assumed that either BT or Liberty will soon snap up the ITV commercial broadcaster. ITV’s own investment in production (but not in online channels) points that way. Elsewhere in the UK, Jamal Edwards’ London-based online youth channel SBTV is becoming a substantial international business. It is a sure sign that, whatever online winners emerge, many young people will not be coming back to broadcast ‘linear’ TV.
Australian is embroiled in a debate over the federal government’s running-late and over-budget plan to build a super-fast National Broadband Network (NBN) . It’s a soft political target, of course. But one interpretation of the controversy is that the nation’s leading broadcasters are desperate to kill the broadband project in order to ‘manage’ the pace towards online TV. American media coverage ofthe NBN spat is illuminating: “Those who see an NBN as an example of big government using public funds to interfere with private enterprises miss the historical precedent. The United States encouraged privately run railroads to link its shores – the first national network. When those railroads abused their power, the same country used public funds to build roads and highways to compete with, and some would say, defeat them.” Even by the standards of free-to-air broadcasting, Australia’s commercial TV networks have been insanely profitable. The three channels have traditionally made similar profits to their UK counterparts (despite the 1:3 population ratio). So this is another group of companies with a lot to lose. Now, Aussie broadcasters are considering “hybrid broadcast broadband” a pan-European initiative aimed at ‘harmonising’ the delivery of entertainment through connected TVs and set-top boxes. They can expect a lot more disruption than that.

Let’s remember that new technologies frequently have more far-reaching effects on traditional markets than expected – but over a longer time-period. However, I believe that the sheer scale of the digital disruption in music and printed media will, ultimately, panic broadcasters into action and accelerate the swing to online TV. The stakes are high and involve some of the world’s leading companies.

Here are my predictions of what will start to happen to online TV over the next 12-18 months:

Cross-over broadcast-online audience measurement will sharply boost online advertising revenue
The launch of major international online channels will challenge national broadcasters
Live coverage of some sports will be streamed exclusively on their own channels
Online and offline retail channels will become major media outlets with content and ecommerce
Some daily newspapers will become international online TV channels for news, sport and business
Some major broadcasters and cable operators will switch over to online
Political groups will start to discuss the value of the broadcasting spectrum that could be freed up – and auctioned off – as and when viewing switches predominantly to online and cable.

Some of these predictions are not that brave, of course. Almost every world sport has (or is planning to have) its own online channel, although some say that live streaming on YouTube lacks the signal quality of its video on demand. Aussie Rules Football is streaming all its matches live to international audiences on its own channel, and there are now plans for the country’s cricket to do the same. Sponsor HSBC’s YouTube coverage of the British Lions rugby tour shows how non-media companies will increasingly create ‘own brand’ channels. Will Britain’s The Guardian (already one of the world’s largest newspaper web sites) be the first daily to establish an international online TV news channel, eventually to replace its hard copy?

It is easy to believe that, having lost movie-viewing leadership to cable, satellite and online, network TV will now steadily lose its sports and news dominance. And that is added to the growing defection of so much of its young audience – and at least some Simon Cowell-inspired light entertainment. Not a very promising outlook for traditional broadcasters, many of whom must launch online channels of their own – and face the downward profits spiral familiar in other areas of traditional media.

Like all media, the online TV winners will be from among the largest (national and international) and also the smallest (local and hyper-local). The in-between majority will be fighting for their lives. Back to Barry Diller: “There’s going to be some creative destruction”.