Oct 6, 2003  •  Post A Comment

About the time that media chief executives were extolling the virtues of their broadcast and cable networks at Goldman Sachs’ annual Communacopia conference Sept. 30, Bernstein Research released a compelling report on how on-demand personal video recorder technology will kill scheduled network programming.
The notion of a media landscape without ABC, CBS, NBC, Fox or any of their cable brethren would be considered sheer heresy to the media powerbrokers if it weren’t for the fact that the on-demand technology transforming consumers into master schedulers is about to explode into the mainstream.
Ironic as it seems, some of the cable and satellite operators most likely to empower viewers in a bid for subscribers are owned by the very same media conglomerates whose broadcast and cable networks are suddenly at risk.
So much for the benefits of consolidation.
A report by Bernstein analyst Craig Moffett titled “PVRs: Media’s Time-Shifted Value Chain,” while it may oversimplify certain assumptions about how consumers, content providers and distributors will respond to pervasive on-demand functionality, gets gold stars for posing the most feared question of television’s emerging interactive age: What if the networks scheduled pricey programs and commercials, and nobody showed up to view them?
“In a time-shifted world, networks rapidly lose their ability to add value through scheduling-there is no longer advantage to lead-ins and lead-outs. That way of doing business cannot survive,” Mr. Moffett said.
In a PVR-driven world, studios would provide their content directly to cable and satellite operators, which would be a primary source for consumers who want to cherry-pick their content selections, download them to a server and access them at will, Mr. Moffett said. The only surviving networks would have proprietary “live” content that could not be time-shifted, such as ESPN and CNN. Other surviving networks would be fashioned after HBO, whose paid services are supported by a studio-like structure that produces its own popular original fare for a targeted audience.
Studios and networks also are expected to scramble to “manufacture” live entertainment events, and the fight over license fee prices and terms takes on a whole new meaning.
“Content will increasingly be made with the expectation that it will be delivered `on demand’ and will be sold directly to cable and satellite operators. As the value currently created by the programmer layer [the networks] is squeezed away, it will be reallocated among talent, content developers, cable and satellite operators and consumers,” Mr. Moffett writes in his report.
Studios and other content providers will come to depend more on bankable talent and shocking bottom-feeding fare to grab consumers’ attention, especially without the promotional platform of a set schedule. Much of the niche programming available today on linear video channels and networks would switch to on-demand, eliminating the overhead cost of maintaining networks as well as the leverage of predictable placement.
Advertising also will need to reinvent itself and reshape its message into new sponsorship, informational, e-commerce and product-placement forms that suit the new consumer-friendly environment. Although the impact of this change will be felt within two years, it will take five or more years to take hold, depending upon the rollout of PVR and digital video recorder devices, and video-on-demand services.
To be sure, a world in which consumers control program access, storage and retrieval, when they want and where they want, undermines the very tenets of mainstream television. No more 30-second commercial spots, heady upfront selling markets or powerhouse Thursday night series lineups. No more concentrated prime-time seasons, ratings sweeps or high-stakes series pilot development seasons.
A doomsday scenario for broadcast and cable networks as middlemen might not seem reasonable several weeks into a new prime-time season, with PVRs in only 2 percent of all TV homes. But it becomes more imaginable if one considers the fragmentation of broadcast viewing and advertising and the rapid mainstream adoption of consumer-empowering new technology, from music downloading to Internet e-mail.
Then consider that by late 2004, Comcast Corp., the largest cable operator, intends to have a PVR device in each of its 22 million subscriber homes. While News Corp. Chairman Rupert Murdoch was admittedly carried away by his own enthusiasm for the technology when he promised a free PVR in the hands of the 11 million subscribers of leading satellite provider DirecTV, which News Corp. takes control of by year’s end, the intent is genuine. News Corp. has beat its own subscriber adoption targets in the United Kingdom by producing its own PVR device and distributing it to 7 million British Sky Broadcasting subscribers there.
Time Warner Cable has distributed in just four months the same number of PVR devices it took TiVo its first four years of existence to sell. Rival EchoStar Communications just passed the 1 million subscriber mark for passing out its own PVR-equipped set-top boxes.
Whether you embrace PVR adoption forecasts by Morgan Stanley, Bernstein, Forrester Research or The Yankee Group, such on-demand technology is expected in at least half the U.S. TV households by 2007, forcing changes in television content production and distribution in much the way that online music downloading imposed change in the value, method and logistics of recorded music. The difference is that television is getting fair warning, backed by enough evidence to suggest it will come to fruition.
Bernstein analyst Tom Wolzien last month authored a similarly provocative report suggesting government legislation may be necessary now to regulate widespread PVR use if media is to protect television’s $60 billion national and local broadcast and cable advertising base.
“All the focus on PVRs has been on the ad-skipping problem and the ability to deal with program piracy. But that has obscured a more fundamental issue, which is what happens to the entire media value chain when you put the control of content into consumers’ hands in the form of time-shifting and let them assume the role of scheduler, which has been exclusively the role of the networks,” Mr. Moffett said in an interview.
Whether on broadcast or cable, networks’ value is in scheduling specific programs and advertising spots in specific time slots to build new hit programs and ratings-dominant nights of the week. Taking away that negotiating leverage by making consumers the “schedulers” has surprising implications all up and down the linear programming value chain, Mr. Moffett contends.
While advertising comprises only about half the revenue stream of mature basic cable networks, it represents virtually all of the income for broadcast networks and stations. Undercutting any of today’s advertising revenues would jeopardize one-third of the earnings of media giants such as Viacom and The Walt Disney Co., Mr. Wolzien estimates.
“Do I think that it’s likely that our national economy will go in the direction of letting the entire media value chain go to zero? Of course not. But there is, likewise, no question that so much of this change is already under way,” Mr. Moffett said.
“The argument that it will take time for PVRs to get into the marketplace and make a difference is clearly a head-in-the-sand argument,” he said.
During Goldman Sachs’ highly charged presentations by some of the media’s powers-that-be, there was zealous talk about embracing PVR and DVR technology without a clear sense of just how fundamental the resulting changes will be to companies’ revenue and earnings apparatus.
Comcast and, significantly, News Corp. and Disney executives discussed using such consumer-centric technology as a short-term fix to subscriber defections and new service stimulus.
In the cases of News and Disney, PVR-like technology is life-threatening from their perspective as broadcasters. But it represents life-support from their perspective as conten
t producers, suppliers and movers.
Welcome to television’s brave new world.