In my recent presentation to the Hungarian media industry, Www.mediahungary.hu, I articulated the progression on how the technology of transmitting media has dramatically changed the business model for both industries – the infrastructure providers and media (content). Internet technology has played the principal role in those changes. What the public was not aware was the way those changes impacted content origination and the infrastructure companies from the revenue models and through the content itself.
Linear programming is essentially how the FCC describes traditional media broadcasting – consistent in time. The major networks methodology to broadcast to sister stations included a systematic way to generate revenues in 30-60 second bites. The advertising model was so important that the station would house two silos of taped advertising which would be downloaded at a specific time and day. The reason behind the 2 silos was that one served as a backup in the event one tape failed.
The cable companies, after winning community based franchise, would download the signals and distribute them to the local subscribers in a clockwork fashion. And like any real estate deal, the cable company would highly leverage its investment in the infrastructure. The financing was relatively easy since the newly won franchise provided an exclusivity and the subscriber base monthly payments were fairly regular. And these cable companies valuations were all based on their consistent future cash flows. So when the cable industry went through consolidation, the key factor in the valuation models was based on the projected consistent cash flows.
With the Internet, the whole linear programming model was displaced by the non-linear one. Telecommunications companies such as Verizon also offered alternative solutions beyond the co-ax by the cable companies – fiber optic to the home and wireless. So the stable world of the linear cable TV media business had been disrupted. Now people can order on demand. They can pay by subscription for a single service – Netflix. In contrast, old style cable subscription required $106 monthly pay for less than 200 channels, of which less than 20% were being watched consistently. Now they can select to receive the signals wirelessly. And migration to wireless content has been notable at the expense of co-ax subscribers; people have selected to use their wireless smart phones or their Internet cable companies to supply them with their content.
Internet business model has one common denominator – it should be inexpensive and contain many eyeballs. Google, for example, charges very little per targeted ads but volume makes up for the cost per subscriber. The new media enterprise must adopt that model as well to survive.
And content is king. The better the content, the greater the number of eyeballs. The greater the number of eyeballs, the greater the revenues.
And remember the silos containing the advertising content? Now the advertising revenue models have changed as well. Silos are no longer needed in the digital world. Ads can be placed anywhere at anytime. Some media still come with ads posted periodically such as Youtube. Others require a subscription model like Netflix to avoid the ads. While some, when everything else fails to generate revenues from Over the Top content (OTT), rely on product placements embedded in the programs. The Internet provides a flexible platform to generate revenues throughout OTT programming with the ability to insert advertisement or overlay them on the screen. And timing of the day could no longer be a factor in the non-linear world as ads can be inserted at anytime. Youtube overlays them. HBO Go or CBS.com inserts them at any time.
But for advertising to be effective the ad must match the demographics of the subscriber. And here the Internet plays a substantial role by providing profiles from each subscriber depending on what they search, see or visit – measured in seconds or in viewed pages.
With declining cable subscribers, the cable companies encountered a dilemma. They made money off the Internet service but no longer see growth from the content. Meanwhile, unicorn companies with crazy valuations were using the very same infrastructures – such as Netflix, Facebook. Yet one market sector can not exist without the other.
Docomo, the leading Japanese wireless telecommunications carrier, solved this dilemma by sharing the revenue with the content subscribers. And here each subscriber benefited from this alliance as Docomo charged very moderate recurring subscriber fees, knowing that the upside from content would make up for the shortfall.
The U.S. market behaved differently, as the Verizon acquisition of AOL attests. Other infrastructure providers are playing hardball by blocking ads in the Internet service pipes to demonstrate to the content makers that whoever owns the roads, control the traffic. So this conflict clearly shows the dilemma infrastructure providers are facing – they want a piece of the pie of the content providers.
One cannot help but witness the progression of changes in the media/infratructure world. Comcast grew by acquiring smaller players at their expected valuations based on continuous cash flows. That changed as well when subscribers are dropping like flies. Content through OTT media has exploded with great valuations and easy cash flows Sooner or later one cannot help to see that the infrastructure players would approach content/media companies to bolster their revenue models.